When a borrower defaults on a mortgage, the lender must determine how to enforce its security. Mortgage enforcement in Ontario is governed by both statute and equity, and each step must be carried out in strict compliance with procedural requirements. This article outlines the primary remedies available to mortgagees following default.
What is a Mortgage Default?
A mortgage default may arise in circumstances such as failure to pay interest or principal when due, failure to repay the balance upon maturity, or breach of non-financial covenants such as non-payment of taxes, lapse of insurance, or property waste. Most mortgages include an acceleration clause, allowing the lender to declare the full outstanding balance immediately due upon default.
Formal Demand Letter
Before proceeding with enforcement, lenders typically issue a formal demand letter. This letter should specify the total amount owing, the nature of the default, a deadline to cure the default, and notice of intention to enforce remedies under the Mortgages Act, R.S.O. 1990, c. M.40. While a demand letter is not always expressly required by statute, it is considered best practice and supports recovery of enforcement costs.
Mortgage Enforcement Options Under Statute and Equity
Once a default is established and the demand is unmet, lenders may pursue one or more remedies.
1. Power of Sale
Power of sale, implied under s. 24 of the Mortgages Act, permits the lender to sell the mortgaged property without court intervention. It is frequently the fastest and least expensive method of enforcing a mortgage, as it allows recovery through sale while preserving the right to claim any deficiency. Power of sale requires strict compliance with statutory notice provisions under s. 31, including service of a Notice of Sale and expiry of the redemption period.
2. Judicial Sale
Judicial sale is pursued through an action in the Superior Court of Justice under the Rules of Civil Procedure. The court supervises the marketing and sale process. This remedy is often chosen where title issues, disputes, or equitable priorities exist.
3. Foreclosure
Foreclosure involves applying to the court to extinguish the borrower’s equity of redemption and vest title to the property in the lender. Unlike power of sale, foreclosure is generally more time-consuming and costly, as it requires judicial oversight and results in the lender assuming ownership risks. Once foreclosure is granted, the lender cannot pursue any deficiency from the borrower. For this reason, foreclosure is used infrequently and typically only where the property value exceeds the debt or where ongoing litigation makes sale impractical.
4. Receivership
Where authorised by the mortgage or by court order under s. 101 of the Courts of Justice Act or s. 243 of the Bankruptcy and Insolvency Act, a receiver or receiver-manager may be appointed to take possession of and manage the mortgaged property. Receivership is commonly used in commercial or income-producing properties where active management, rent collection, or operational oversight is required. While more structured and supervised than a power of sale, receivership may involve greater cost and longer timelines due to the involvement of court officers, reporting requirements, and the ongoing administration of the property. It is generally pursued when preservation of enterprise value or third-party management is necessary to maximise recovery.
Court Proceedings: Possession of Property and Debt Recovery
Where lenders seek both possession and monetary recovery, it is standard practice to issue a Statement of Claim in the Superior Court of Justice. Relief sought may include judgment for the full mortgage debt (principal, interest, arrears), an Order for Possession enforceable through the Sheriff, judgment for any deficiency following sale, and recovery of contractual interest and legal costs. Court proceedings ensure that all rights to debt recovery and possession are preserved and provide a forum for resolving disputes over accounting, interest, or priority.
Power of Sale: Notice of Sale and Redemption Requirements
Under s. 31 of the Mortgages Act, a mortgagee exercising a power of sale must serve a Notice of Sale on all parties with a registered interest in the property, including: the borrower; subsequent mortgagees; execution creditors; and any other encumbrancers or persons appearing on title. The Notice must strictly comply with statutory form and content requirements. Pursuant to s. 33(1) of the Mortgages Act, service by registered mail is deemed effective on the date of mailing, not on receipt. The statutory redemption period is 35 days from the date of mailing when served by registered mail. No further enforcement action, including sale, may proceed until the redemption period has expired. Failure to properly serve all required parties or to observe the statutory time periods may invalidate the sale and expose the mortgagee to liability.
Duties Upon Sale under Power of Sale
Even after default, mortgagees must act in good faith and make reasonable efforts to obtain fair market value for the property. This obligation includes obtaining appraisals or opinions of value, properly listing and marketing the property, and maintaining records of offers and sale activity. Any surplus proceeds must be remitted to entitled parties. Improper conduct may give rise to claims for breach of duty or equitable relief.
Equity of Redemption
Until foreclosure or completion of sale, the borrower retains the right to redeem the mortgage by paying the full balance, including enforcement costs. Courts may extend redemption rights where accounting or interest disputes arise.
Common Errors to Avoid
Lenders should avoid issuing informal or undocumented demands, defective service of statutory notices, accepting informal repayment without written forbearance, and neglecting to preserve deficiency rights through litigation.
Role of Legal Counsel
Effective mortgage enforcement requires precise adherence to statutory and equitable procedures. DBS LLP advises institutional and private mortgagees on demand and statutory notice preparation, power of sale, judicial sale, and receivership, issuing possession and debt recovery proceedings, and pursuit of deficiency judgments and enforcement litigation.
Conclusion
A mortgage default initiates a structured legal process. With careful execution under the Mortgages Act and the courts, lenders may protect their security, recover outstanding debt, and mitigate loss. Procedural compliance and strategic enforcement are essential to achieving full recovery.
If you require advice concerning mortgage enforcement, power of sale, possession proceedings, receivership, or recovery of a deficiency, you may contact Prabhjot Singh Badesha in the Mortgage & Loan Enforcement Group at DBS LLP.
