September 23, 2016
On September 15, 2016, the New Brunswick Court of Appeal clarified the province’s statutory regime governing both the exercise of a lender’s rights when a borrower defaults on a mortgage and the calculation of the lender’s damages in a subsequent deficiency action. The decision also settles two divergent lines of authority on whether a lender is entitled to recover post-mortgage sale expenses in a deficiency action and addresses what’s been described as a statutory regime that’s unfriendly to borrowers. New Brunswick mortgage lenders will want to review their mortgage sale strategies and resale processes in light of this decision.
In Keough v Sandfire Capital Limited Partnership, the lender loaned $200,000 to the borrower and registered a collateral mortgage against the borrower’s property as security. The borrower didn’t make any payments and the lender exercised its power of sale right under the NB Property Act. There were no bidders at the mortgage sale other than the lender, which purchased the property for a nominal amount ($100.00). The lender started a deficiency action against the borrower and eventually obtained summary judgment. The lower court calculated the lender’s damages based on the unpaid mortgage balance as at the date the lender resold the property and determined the lender was entitled to recover its post-mortgage sale expenses. The borrower appealed the summary judgment decision and succeeded.
The New Brunswick Court of Appeal began by observing that sections 44 to 47 of the NB Property Act “create a largely mortgagor [borrower] -unfriendly bundle of powers, rights, limits on liability and immunities … unmatched elsewhere in Canada and … the rest of the common law world”. It then acknowledged that judges have been “struggling” with several issues respecting lenders’ powers under the Property Act, and there has been a “conscientious attempt at avoiding a perceived unfairness resulting from the application of statutory provisions drafted for the benefit of mortgagee [lenders]…”. The Court then clarified some of those issues:
A lender’s rights under sections 44 to 47 of the NB Property Act are distinct and treated separately. A lender has three distinct rights when a borrower defaults on a mortgage: the right of power of sale, the right to buy-in at the mortgage sale, and the right to resell properties purchased at mortgage sales. A lender owes the borrower a duty to exercise its power of sale right in an authorized, regular and proper manner, although the scope of this duty doesn’t extend to ordinary negligence. This duty doesn’t apply to a lender’s rights to buy-in or resell; in fact, the statutory regime gives lenders an “unrestricted immunity” when exercising those two rights.
A lender may be subject to a claim for damages if it exercises its power of sale right in a way that’s unauthorized, irregular or improper. If a lender exercises its power of sale right in an unauthorized, irregular or improper manner, it may be subject to a claim for damages for prejudicing the borrower’s interests.
A lender improperly exercises its power of sale right when it purchases a property for a nominal amount at a mortgage sale. A lender has improperly exercised its power of sale right when it “fraudulently, willfully or recklessly” sacrifices the borrower’s interests – such as when it purchases a property for a nominal amount at a mortgage sale. However, a lender has properly exercised this power when it purchases or sets a reserve bid at a price corresponding to the property’s forced sale value as determined by an independent and professional appraiser. So a lender isn’t required to bid up to the property’s probable market value at a mortgage sale to properly exercise its power of sale right.
If the lender acts improperly, its deficiency will be the unpaid mortgage balance less the property’s market value at the date of the mortgage sale. If a lender improperly exercises its power of sale right and proceeds with a deficiency action against the borrower, its damages will be the balance owing under the mortgage after deducting the property’s market value as at the date of the mortgage sale – both of which the lender must prove. The deficiency calculation will not take into account any charges or expenses the lender incurred after the mortgage sale on the basis that the sale terminates the borrower’s ownership of the property.
A lender who purchases a property at a mortgage sale owns the property for its own benefit and use. Once a lender has purchased a property at a mortgage sale, it has complete control over the management and resale of the property and can sell it as it sees fit. This means a lender doesn’t have a duty to account to a borrower for the resale proceeds or to take steps to obtain the property’s true market value, such as employing a real estate firm or exposing the property to the market for a sufficient period of time.
New Brunswick mortgage lenders will want to review their mortgage sale strategies and resale processes in light of this decision. Here are five steps to consider in that review:
1. Get an appraisal as close to the mortgage sale date as possible. It’s important to obtain an appraisal that accurately reflects the property’s forced sale and market values before the mortgage sale date – but as close to that date as possible – and to adjust the bidding strategy accordingly. Ideally, lenders should obtain a comprehensive appraisal of the property before the mortgage sale; if this isn’t possible, consider obtaining a drive-by appraisal before the mortgage sale and a comprehensive appraisal shortly after it. A lender might also want to consider obtaining multiple appraisals if the initial one doesn’t accurately reflect the property’s market value or is unfavourable to the lender’s position.
2. Decide whether there’s a deficiency action worth pursuing. Lenders should compare the unpaid mortgage balance with the property’s market value as at the mortgage sale date and decide whether a deficiency action is worth pursuing. It’s possible that the property’s market value exceeds the outstanding mortgage amount, for example where the borrower has made regular mortgage payments over a lengthy period; if so, the court could require the lender to pay the borrower the difference between the property’s market value and the unpaid mortgage amount.
3. Speed up the deficiency action. If there is a remaining deficiency worth pursuing, a lender doesn’t have to wait until it resells the property to start an action against the borrower; it can do so shortly after the mortgage sale.
4. Sell if you want – for what you want. Lenders should consider altering their sale strategies, such as minimizing post-mortgage sale expenses, to reflect that they are now clearly entitled to dispose of properties purchased at mortgage sales as they see fit and aren’t required to obtain a purchase price that reflects the property’s true market value.
5. Consider revising the standard mortgage contract to deal with post-mortgage sale expenses. Lenders can’t claim post-mortgage sale expenses against borrowers under the current statutory covenants, so they should consider overhauling their mortgage contracts to include a specific provision that borrowers are responsible for all reasonable post-mortgage sale expenses. Lenders should also ensure borrowers are aware of these provisions and that they will be responsible for these expenses.
Please contact your McInnes Cooper lawyer or any member of our Banking and Financial Services Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2016. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
Nov 1, 2023
On October 13, 2023, the Supreme Court of Canada issued its judicial reference opinion: a significant portion of Canada’s federal…
Sep 29, 2023
On September 21, 2023, Bill C-56, the Affordable Housing and Groceries Act, passed first reading. If passed, the Act will give developers of…
Sep 25, 2023
There’s a new scam on the web: Electronic Fund Transfer (EFT) scams. Most are familiar with established scams like phishing and ransomware and…
Apr 12, 2023
The Supreme Court of Nova Scotia has made it clear that, while the burden is high, pre-emptively vacating or discharging a builders’ lien is a…
Mar 16, 2023
We updated this publication on March 30, 2023. On January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians…
Jan 19, 2023
We updated this publication on November 1, 2023. Beginning December 31, 2022, both Canadian and non-Canadian trustees, partners of a…
May 2, 2022
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…
Nov 19, 2021
To help realtors better prepare their clients to ensure smooth real estate transactions with timely closings, here are the answers to the 10…
Nov 5, 2021
Purchasing commercial real estate as an investment, as a component of a business startup or as one asset in the share purchase of an existing…
Sep 9, 2021
We udpated this publication on March 7, 2022. The New Brunswick Construction Remedies Act, substantially came into effect on November 1,…
Aug 5, 2021
On July 28, 2021, the Supreme Court of Canada issued a decision protecting the status of the Companies’ Creditors Arrangement Act (CCAA) as a…
Jan 20, 2021
In the first update to the CCDC 2 since 2008, in December 2020 the Canadian Construction Documents Committee (CCDC) published the CCDC 2 (2020).…
Oct 5, 2020
On October 2, 2020, the Supreme Court of Canada clarified the existence and application of the anti-deprivation rule in Canadian bankruptcy law.…
Jun 12, 2020
The financial technology (Fintech) industry uses technology to support and enhance financial and banking services.
May 11, 2020
The Supreme Court of Canada recently released a much-awaited decision regarding the Companies’ Creditors Arrangement Act (CCAA). The CCAA is…
Feb 4, 2020
Canada’s construction industry is abuzz with the latest innovation in lien legislation. Prompt payment requirements are being added to…
Jun 26, 2019
Information disclosure is a key theme that emerges from Canada’s new cannabis regulatory regime: the government wants lots of information from…
May 21, 2019
We updated this publication on February 17, 2023. As of June 13, 2019, private companies incorporated under the Canada Business Corporations…
Jun 21, 2018
Lawyers regularly encourage clients to be proactive and discuss potential issues with third parties before they become real problems. But in the…
Feb 21, 2018
On February 15, 2018, the Supreme Court of Canada decided a trustee’s fiduciary duty includes an obligation to inform beneficiaries of the…
Dec 23, 2017
Parents often threaten their children that if their behaviour did not improve they will get a lump of coal in their Christmas stockings. On…
Dec 22, 2017
Blockchain technology has already been a transformative force in a number of sectors. Its most prominent use to date has been as the…
Dec 18, 2017
The answer to the question, “What’s employers’ rationale for implementing workplace drug and alcohol testing?” is pretty…
Nov 20, 2017
October 2, 2017 marked the end of the consultation period relating to the taxation of private corporation proposals the Department of Finance…
Nov 17, 2017
It’s official: as of October 31, 2017, “facilitation payments” contravene Canada’s Corruption of Foreign Public Officials Act (CFPOA).…
Oct 31, 2017
On October 27, 2017, the Supreme Court of Canada confirmed that a bank that pays out on a fraudulent cheque has the protection of section 20(5)…
Aug 28, 2017
Recently, the Federal Court of Appeal confirmed that a tax debtor’s bankruptcy does not extinguish the federal Crown’s priority to proceeds…
Aug 16, 2017
In the not-so-distant past, Canadian enforcement of its anti-corruption and anti-bribery legal regime has been relatively laid-back. But the…
Aug 4, 2017
On July 18, 2017, Canada’s Minister of Finance released proposed changes to the Income Tax Act (Canada) that, if implemented, will mark one of…
Apr 28, 2017
On April 24, 2017, the N.S. Government issued regulations that will finally allow the Builders’ Lien Act amendments permitting early release…
Apr 21, 2017
In three years (lightning speed in the law), medically assisted dying went from being illegal to being legal. A great deal has changed, a great…
Apr 17, 2017
Recreational cannabis isn’t legal yet - but much of the associated stigma is already gone, usage is up and employers are feeling the workplace…
Apr 5, 2017
NOTE: Consultants who were already lobbying and in-house lobbyists already employed by an organization when the new Act took effect were…
Jan 25, 2017
Doing business with the public sector creates an often overlooked – but very real – risk that the confidential information a business…
Dec 22, 2016
Effective January 1, 2017, the kinds of trusts that can claim the Principal Residence Exemption (PRE) will be limited. Now, the PRE allows…
Dec 19, 2016
On December 14, 2016, Bill 46 and the Newfoundland and Labrador Public Procurement Act became law. The new Act isn’t yet in effect, however,…
Dec 5, 2016
It’s been a long time coming, but Newfoundland and Labrador is finally getting new public procurement legislation. On November 29, 2016, Bill…
Nov 22, 2016
On November 17, 2016 the Supreme Court of Canada decided a mortgagee has the mortgagor’s implied consent to disclose its discharge statement…
Nov 22, 2016
There is an old expression about “selling the Brooklyn Bridge”. Recently, a bankrupt subcontractor attempted to register a lien against the…
Sep 19, 2016
On September 15, 2016, the Supreme Court of Canada decided certain damage to a building under construction was covered under the relevant…
Sep 12, 2016
On September 9, 2016, the Supreme Court of Canada decided in Musqueam Indian Band v. Musqueam Indian Band (Board of Review) that an Indian band…
Jun 30, 2016
As of June 25, 2016, provincially regulated workers and employers in Nova Scotia, Quebec, BC and Saskatchewan can participate in Pooled…
Jun 30, 2016
The condo real estate market, both retail and commercial, is hot. But condo developers and unit buyers need funding. Here’s the legal…
Jun 20, 2016
Real estate vendors and purchasers have high expectations of their realtors – and they don’t often hesitate to pursue legal action against…
Jun 17, 2016
In its June 16, 2016 decision in Rogers Communications Inc. v. Châteauguay (City), the Supreme Court of Canada decided a municipality’s…
May 24, 2016
It’s now certain: in Newfoundland & Labrador, liens can’t be placed on Crown land or holdbacks with the possible exemption allowing for…
May 10, 2016
On May 6, 2016, the Supreme Court of Canada generally affirmed the common law rule that positive covenants do not run with the land. More…
May 9, 2016
On May 6, 2016, the Supreme Court of Canada decided that a mortgage imposing a higher interest rate in the event of default and reserving a…
May 2, 2016
Amendments changing the early warning reporting system take effect on May 9, 2016, provided all necessary approvals are obtained (except in…
May 2, 2016
We updated this publication on October 4, 2023. Workplace accidents regularly lead to charges under occupational health and safety (OHS) law.…
Mar 24, 2016
When a business responds to a public sector Request for Proposal or Expression of Interest (both of which we’ll refer to as an RFP for these…
Mar 9, 2016
On January 11, 2016, the Ontario Superior Court of Justice sentenced a front-line supervisor to imprisonment for 3½ years for four counts of…
Oct 19, 2015
Access to sufficient capital to fund operations, research and development, and other costs is a key challenge for start-ups and for some small…
Jun 25, 2015
We updated this publication on October 4, 2023. Most people know a company itself has occupational health and safety (OHS) obligations and…
May 25, 2015
We updated this publication on July 21, 2022. Every party to a Right of Way has some idea of what that Right of Way is – but many times,…
Mar 30, 2015
Hindsight is 20/20. Lawyers can’t always predict the outcome of a legal claim. But when a dispute between an investment client and her…
Mar 3, 2015
Snow can be a big nuisance at this time of year, but snow load - the weight of the snow, usually measured in pounds per square foot - can be…
Dec 1, 2014
The construction industry - project owners, contractors, subcontractors and trades - might be relaxing, ignoring the hype around Canada’s…
Nov 27, 2014
Recently, the NS Court of Appeal confirmed that a union can be certified as the bargaining agent of employees based merely on their dependence…
Apr 29, 2014
Lenders are often faced with a situation where a customer (Borrower) approaches them for funds to complete an acquisition of the shares of a…
Aug 28, 2013
A general security agreement (GSA) is the most common form of personal property security used in the Atlantic Provinces to secure commercial…
Subscribe to McInnes Cooper to stay current with our leading insights on legal updates, trends, news, events, and services.