Selling or Buying Properties Under Power of Sale: Ensuring a Commercially Reasonable Sale Process

The Current Market Environment

Higher interest rates and unfavourable mortgage renewals have resulted in increased defaults, leading lenders to more frequently enforce their security through a power of sale proceeding.

Power of Sale: A Brief Overview

A power of sale is a contractual and statutory remedy that allows lenders to sell a mortgaged property following a borrower’s default. In Ontario, the remedy is governed by the Mortgages Act, R.S.O. 1990, c.M40 (“Mortgages Act”), and is intended to provide lenders with an efficient self-help means of recovering amounts owing under a loan.

In a power of sale, rather than taking title to the property, the lender sells the property and applies the proceeds of the sale toward the amount owing, including accrued interest and enforcement costs. Any remaining surplus is paid to the borrower and subsequent encumbrancers. That said, a power of sale is not without limits. Lenders must conduct the sale in good faith and in a commercially reasonable manner.

By contrast, a receivership involves the appointment of a court-appointed trustee, known as a “receiver”, who assumes control of a debtor’s assets following a loan default. The receiver is responsible for managing or liquidating those assets to maximize recovery for the secured creditor(s). Similarly, a receiver acting on behalf of a lender for real property is held to a standard of good faith and duty to take reasonable steps to obtain true market value, as reflected in the case law discussed below.

Improvident Sale: Lenders Take Note

An improvident sale may arise where a lender, in exercising a power of sale, conducts the sale process unreasonably in the circumstances. This commonly occurs where the property is inadequately marketed or priced in a manner that does not reflect current market conditions. A lower sale price alone does not establish an improvident sale. Courts ask whether the lender acted reasonably and in good faith throughout the process, not whether the property could have fetched more.

Improvident sales typically occur in declining or volatile markets, where lenders may feel pressure to act quickly to recover outstanding amounts. A rushed or poorly documented sale can expose lenders to significant risk. If a power of sale is found to be improvident, a lender may face a reduced or eliminated deficiency claim, or, where the mortgagor can establish that a higher price would have been obtained but for the breach, a claim for damages.

The Case Law

In Oak Orchard Developments Ltd. v. Iseman, 1987 CarswellOnt 2138 (Ont HCJ) (“Oak Orchard Developments”), the Ontario Court of Justice (the “Court”), considered whether a mortgagee breached its duty to act in good faith when selling property under a power of sale.

Following continued default under the loan, the mortgagee exercised its power of sale and listed the property for sale through a national real estate brokerage. The property was marketed at a listing price of $1.2 million but attracted limited interest in a narrow and difficult market. While several appraisals valued the property at widely varying amounts, the property sold for $550,000. The mortgagor, unable to redeem the mortgage or stop the sale, later commenced proceedings alleging the property had been sold at an undervalue.

The Court found that the mortgagee had not breached its duty. Multiple appraisals were obtained, the property was listed with a national brokerage, and it was marketed in what the Court accepted was a narrow and difficult market. The accepted sale price was lower than some appraisals, but not so low as to demonstrate a failure to take reasonable precautions—particularly given zoning uncertainties, limited buyer interest and the property’s unique characteristics.

In finding for the mortgagee, the Court held that:

1. A mortgagee selling under a power of sale is under a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which the mortgagee decides to sell it. This does not mean that the mortgagee must, in fact, obtain the true value.
2. The duty of the mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee.
3. In deciding whether a mortgagee has fallen short of their duty, the facts must be looked at broadly. A mortgagee will not be adjudged to be in default of their duties unless they are plainly on the wrong side of the line.
4. The mortgagee is entitled to exercise an accrued power of sale for their own purposes whenever they choose to do so.
5. The mortgagee can accept the best price they can obtain in an adverse market provided that none of the adverse factors are due to fault on their part.
6. Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages.

The principles articulated in Oak Orchard Developments were subsequently affirmed by the Court of Appeal for Ontario (the “Court of Appeal”) in Manufacturers Life Insurance Co. v. Granada Investments Ltd., 2001 CanLII 2708 (Ont CA) (“Manufacturers Life”). In Manufacturers Life, Granada Investments Ltd. had defaulted under its mortgage, and Manufacturers Life Insurance exercised its power of sale through a receivership, ultimately selling the property by auction. Although the sale resulted in a shortfall, the Court of Appeal reaffirmed the guiding principles set out in Oak Orchard Developments, concluding that the mortgagee had satisfied the duties imposed upon it as a mortgagee in possession and that the receiver’s management of the property was not improvident.

Further, in RCML Corp. v. 2524258 Ontario Inc., 2023 ONCA 352 (Ont CA) (“RCML”), the Court of Appeal held that the motion judge correctly applied the test for determining whether a sale pursuant to a power of sale was improvident. The appellants, 2524258 Ontario Inc. and Sina Sadeddin, sought to overturn summary judgment on the basis that RCML Corp. had failed to take reasonable precautions to obtain the property’s true market value and that the sale was therefore improvident. The Court of Appeal rejected this argument, noting that the property had been listed for approximately eleven months, attracted more than fifty showings, and ultimately sold for a price within the range of pre COVID appraisals. This decision reinforces that a mortgagee’s obligation when exercising its power of sale is to take reasonable precautions to obtain the property’s true market value, not to guarantee the best possible price.

For lenders, the RCML decision confirms that a fair, transparent and well-documented sale process is their best protection, particularly in challenging and rapidly changing market conditions.

Practical Considerations for Lenders

To minimize improvident sale risk, lenders should consider the following best practices:

1. Document the process: Maintain thorough records of all marketing efforts, appraisals, offers received, and the rationale for any sale decision. A well-documented file is a lender’s best defence against an improvident sale claim.
2. Obtain a current, independent appraisal: Before listing the property for sale, obtain an appraisal from a qualified appraiser to establish fair market value, providing an objective benchmark against which the sale price can be assessed. Additionally, although not required under the Mortgages Act, obtaining multiple appraisals may serve as evidentiary support of a reasonable sale process.
3. Allow reasonable market exposure: Ensure the property is marketed through appropriate channels for a reasonable period. Adequacy of marketing is assessed relative to the nature and complexity of the asset.
4. Consider all parties’ interests: Courts assess power of sale proceedings with reference to the interests of borrowers, guarantors and other creditors, not solely the lender. The process must be demonstrably fair to withstand scrutiny.

Potential Considerations for Buyers

Purchasers of real property under a power of sale should be aware that the process requires strict compliance with all statutory and contractual requirements. As such, it is prudent for purchasers to take the necessary steps to confirm that the seller has complied with all power of sale requirements under the Mortgages Act, such as the provisions on notice of sale and proper documented service upon all relevant parties. Any apparent irregularity in the process may give rise to court proceedings rather than a completed transaction.

As power of sale proceedings become more common, lenders must remain vigilant about their duty to conduct enforcement in a commercially reasonable manner. Wildeboer Dellelce LLP regularly advises lenders on power of sale proceedings and buyers of distressed property sales. We are here to support clients through each stage of the enforcement or purchase process to help minimize risk and protect their interests.

Should you require clarification with respect to any of the above, or wish to request a consultation, please do not hesitate to contact Paul De Francesca ([email protected]), Lovejot Bhullar ([email protected]) or Mila Simic ([email protected]). The authors gratefully acknowledge the assistance of articling student Karla Ledesma in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the contents discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.