One of the major benefits of mortgage agreements is that they include a provision which enables the mortgagee (person giving the loan) to sell the mortgaged property, to recover the debt owed by the mortgagor (person who received the loan). That right is called the “power of sale”. The right provides some assurance that the mortgagee can recover the principal sums loaned, as well as interest, costs, charges, legal fees and expenses incurred in enforcing or protecting the mortgagee’s rights under the mortgage. The power of sale, once properly exercised, is one of the most powerful tools in a mortgagee’s tool kit.
The Registration of Titles Act (the “Act”) and the common law stipulate how to properly exercise the power of sale in respect of registered land. The mortgage agreement will also set out how the mortgagee should exercise the power.
The following steps must be followed to properly wield the superpower:
- If the mortgagor is in default, meaning he has not paid the mortgage payment when it is due, for one month, or any other period stipulated by the mortgage, the mortgagee will usually give notice in writing to the mortgagor requiring that the amounts owing be paid in full by a specific period after the notice is served. The Act provides that the notice may be served by giving it to the mortgagor, leaving it at some conspicuous place on the mortgaged property, or sending it by registered post at the mortgagor’s address on the Title.
- After he is served with the notice, the mortgagor should settle the arrears to avert the power of sale. If, however, the mortgagor continues to be in default for one additional month, or any other period stipulated in mortgage agreement, the mortgagee may proceed to sell the mortgaged property by public auction or private treaty.
- The law provides that the mortgagee is to take reasonable care to obtain the true market value of the mortgaged property when the power of sale is being exercised. Sale by public auction is usually attempted first in an effort to obtain the best price for the property reasonably obtainable on the open market. This does not mean that the mortgagee must sell the property for the market value stated by the valuator, or that the property must be sold for an amount greater than the mortgage debt. The law requires to mortgagee to take reasonable steps in all the circumstances to obtain the best price it can get for the property when it is being sold. The public auction steps are as follows:The mortgagee will commission a valuation to be conducted in respect of the property.
i. The mortgagee is usually entitled to add the cost of the valuation as an “add-on charge” to the debt and also charge interest on these add-on charges. Many times, the mortgagor refuses to give the mortgagee or the valuator access to the property, even after demands are made. In those cases, the mortgagee may instruct the valuator to conduct a “drive-by” valuation of the property based on external viewing only. The drive-by valuation should be used with utmost care since it is not based on an inspection of the interior of the premises. However, the case law suggests that the mortgagee will not likely be liable for a sale at an undervalue if a drive-by valuation is conducted in circumstances where the mortgagor has refused access to the valuator, and the valuator has taken reasonable steps to try to gain access.
ii. Once it has a valuation, the mortgagee will instruct the auctioneer to arrange a public auction.
iii. The auctioneer will usually advertise the auction for 2-4 weeks in a local newspaper.
iv. On the auction date, the bidders will submit bids to the auctioneer. The mortgagee is protected from a claim that it sold the property at an undervalue even if the bids are exceptionally low or the auction is poorly attended.
v. The auctioneer will then submit an auction report to the mortgagee which will indicate whether bids were made, and the amounts. The mortgagee may then accept a bid, even if the bid is below the market value stated by the valuator.
- If a bid is accepted, then the mortgagee will instruct its Attorneys-at-Law to prepare an agreement for sale with the bidder. Once the agreement for sale is executed (signed and the deposit paid by the purchaser), the mortgagor is no longer entitled to exercise his “equity of redemption” – that is, he can no longer pay the outstanding mortgage sums to stop the power of sale from being exercised.
- If there are no bidders at the auction, the mortgagee may continue to advertise the property and arrange a further public auction or sell the property by private treaty (private sale).
- After the property is sold, the mortgagee is first entitled to settle the full mortgage amounts and any costs, charges, fees or expenses it incurred in exercising the power of sale. If there is any surplus, the mortgagee must pay the surplus to the mortgagor.
- If, however, the proceeds of sale are insufficient to cover the mortgage debt, the mortgagee is entitled to sue the mortgagor to recover the deficit. The mortgagee will usually be able to get summary judgment on a claim brought against a mortgagor and can recover the deficit by proceeding against the mortgagor’s other assets such as any other properties, motor vehicles, salary etc.
Sometimes mortgagors will try to stop the power of sale from being exercised by seeking an injunction from the Court. Mortgagors may complain that the amount owing is in the dispute or that the property is being sold at an undervalue. However, the Court will not lightly interfere with the mortgagee’s exercise of the power of sale and the law is that the mortgagor must pay to Court the amount claimed by the mortgagee as due and owing, if he wants to stop the power of sale from being exercised.
Once the mortgagee acts in good faith, complies with the provisions of the mortgage and takes reasonable steps to secure a purchaser at the best price possible in the circumstances, it would be extremely difficult for a mortgagor to successfully challenge the mortgagee’s exercise of the power of sale. A mortgagee will usually have his Attorney-at-Law oversee and advise on the power of sale process. The mortgage agreement will usually include a provision that the mortgagor’s lawyers’ fees can be added to the mortgage debt as an add-on charge – which means they will ultimately be paid by the mortgagor.
Amanda Montague and Kimberley Brown are Attorneys-at-Law at Myers, Fletcher and Gordon. They may be contacted at firstname.lastname@example.org and email@example.com or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.