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Mortgage Deficiencies: NB Appeal Court Clarifies Use of “Market Value” & More

Published:

May 2, 2022

Author(s):

• Tony Richardson
• Andrew Kinley

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On April 14, 2022, the New Brunswick Court of Appeal released its decision in Royal Bank of Canada v. Estate of Susan Lynn Williams, revisiting and building upon the principles regarding mortgage sales and mortgage deficiency actions in New Brunswick it developed in its 2016 decision in Keough v. Sandfire Capital Limited Partnership. The Keough decision led to some confusion about the role of “market value” in the context of mortgage deficiency actions. The Williams decision clears much of that confusion up:

• Market Value. The Williams decision confirms that where a mortgagee properly exercises the power of sale, it isn’t required to recover the market value of the mortgaged property. But where it “improperly” exercises the power of sale, the mortgagee becomes liable for the market value of the property as of the date of the mortgage sale.
• Forced Sale Value. After the Williams decision, mortgagees in New Brunswick should continue to feel safe buying in at the forced sale value for a mortgaged property during a mortgage sale, so long as the forced sale value is accurately estimated.
• Appraised Value. The decision also demonstrates the importance that a mortgagee get an accurate appraisal before, and as close as possible to, the mortgage sale. The appraisal should accurately reflect both the property’s forced sale and market values before the mortgage sale. A drive-by appraisal with a subsequent comprehensive appraisal is likely sufficient. Multiple appraisals or assessments might be advisable where there’s a significant dispute about the forced sale and market value of the property.

Here’s a look at mortgagees’ power of sale and mortgage deficiency actions in New Brunswick, and the Court of Appeal’s decision in Royal Bank of Canada v. Estate of Susan Lynn Williams.

The N.B. Power of Sale. The rights and powers of mortgagees to the real property if the borrower defaults on a mortgage over real property in New Brunswick have been described as unmatched in the rest of the Canada – and unfriendly to mortgagors. In New Brunswick, one of these powers is the power of sale. Provided for under the N.B. Property Act, the power of sale arises upon the default of a mortgage and permits the mortgagee to do all of:

• Put the mortgaged property on the market by way of auction or what is commonly referred to as a mortgage sale.
• Buy in at that auction for its own benefit and use.
• Resell the property without being answerable for any incidental loss.

The mortgagee is only responsible for voluntary losses arising from an unauthorized, irregular or improper exercise of the power of sale. For example, if the mortgagee buys the property for a nominal sum, like $1,000.00, there has been an improper exercise of the power of sale and the mortgagee is answerable in damages for all consequential losses.

Mortgage Deficiency Action. Often after a mortgage sale, there will be a mortgage deficiency action where the mortgagee sues the mortgagor for damages it alleges it suffered because of the default, the loss on the purchase and sale of the property, and some of the costs and expenses associated with this process. The mortgagee must prove the money received from the sale was the product of a proper exercise of the power of sale. However, as the decision in Williams makes clear, the N.B. Property Act and a proper exercise of the power of sale doesn’t require the mortgagee to recover or realize the property’s market value from a mortgage sale.

The Williams Case. The Williams mortgaged their home with the bank. The mortgage went into arrears and the bank demanded the Williams pay the outstanding debts or it would commence power of sale proceedings and sell the home. The bank’s residential drive-by assessment of the home estimated its value in the range of $120,000 to $135,000, with a forced sale value (an estimate of the value of the property where it’s sold through a liquidation or distressed sale process) in the range of $96,000 to $108,000. The bank bought the home at the mortgage sale for $96,000. The home was subsequently appraised at $138,500 with a forced sale value of $110,800. The bank eventually sold the home for $126,000, and commenced a mortgage deficiency action against the Williams to recover a judgment for the deficiency due after applying the $96,000 recovered from the mortgage sale.

• Trial. At the trial on damages, the Court found the bank properly complied with its obligations, but concluded the sale proceeds were less than the market value. The Court directed the debt be credited with $108,000 – not $96,000. The bank appealed, arguing the judge erred by concluding the bank was accountable for the market value of the property as of the date of the mortgage sale, despite finding it had properly complied with its obligations.
• Appeal. The Court of Appeal agreed. The Court confirmed that in the absence of finding the bank had improperly exercised the power of sale, it was an error for the trial court to credit the underlying debt with a higher amount on the basis that higher amount more accurately reflected the mortgaged property’s market value as of the date of the sale.

Please contact your McInnes Cooper lawyer or any member of our Banking & Financial Services Team @ McInnes Cooper  to talk about how to exercise the power of sale.

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