Businesses which borrow from banks and other lenders for real estate and equipment purchases and operating loans provide security to their lenders over both real property and personal property. A charge/mortgage registered on title to commercial real estate and a general security agreement covering non-real estate assets, such as the borrower’s equipment and inventory, are the primary security documents.
Since the beginning of the pandemic, many lenders have been closely monitoring commercial borrowers and have been willing to provide payment deferrals and forbearance to most borrowers. When the deferrals expire, expect lenders to make demands for repayment, after which enforcement proceedings will be commenced.
There are a variety of enforcement remedies available to secured lenders contained in security documents, including court proceedings such as claims for payment against borrowers and guarantors, as well as receiverships and other insolvency proceedings. Where the immediate objective of the lender is to sell the secured asset and apply the proceeds of sale to pay off or significantly reduce the debt, the power of sale remedy is commonly used. The provisions of a power of sale are governed by the particular security instrument – such as a charge/mortgage or general security agreement – but there are also statutory and common law rules and restrictions. For a loan secured by both real estate and personal property, two separate powers of sale may be used.
Power of Sale – Personal Property
For a loan secured by personal property, a registration by the lender/secured party against the borrower/debtor is made under the Personal Property Security Act (PPSA). Based on the PPSA registration and the remedies in the general security agreement, a secured party can carry out a distress sale of all of the assets of a business or sell a single piece of equipment. The rules and procedures for taking possession of and selling the assets, and accounting for the sale proceeds, are set out in the PPSA.
The transfer of title to assets is effected by a Notice under section 63(4) of the PPSA served by the secured party’s solicitor on the debtor and all other necessary parties, together with an Affidavit of Default and Bill of Sale. Secured parties’ solicitors must review PPSA, bankruptcy and corporate searches, and notify and account to third parties with interests in the personal property, such as the Ministry of Finance, the debtor’s landlord and the debtor’s receiver or bankruptcy trustee. Disputes between creditors may arise and court proceedings may ensue as a result of the power of sale proceeding.
Power of Sale – Real Property
In a power of sale proceeding involving real property, a lender/mortgagee and its solicitor must strictly adhere to the timelines for notices served and enforcement steps taken against the borrower/mortgagor and other necessary parties. The demand letter and prescribed notices sent to the mortgagor must set out the mortgage balance owing and the period of time in which to pay, in accordance with the charge/mortgage, the Bankruptcy and Insolvency Act and, if necessary, the Farm Debt Mediation Act.
If payment is not made, a Notice of Sale under Mortgage served by the mortgagee’s solicitor gives the mortgagor (and if applicable, a subsequent mortgagee) an additional period of time to redeem the mortgage, that is to pay the mortgage arrears or the full mortgage balance owing to the mortgagee. The Notice of Sale must precisely identify the parties, property, mortgage registration details and the amounts comprising the mortgage debt (including principal, interest, mortgagee costs and legal costs) and be served on all necessary parties based on the required searches.
In addition to the Notice of Sale, another key document in a power of sale proceeding is the Agreement of Purchase and Sale (APS) for the sale of the real estate. If a mortgagor fails to redeem, the mortgagee has the right to appraise the property, list the property for sale and negotiate a sale. A properly drafted APS will exclude certain covenants and warranties and include certain provisions specific to a sale under power of sale in a schedule to the APS. Title to the real property on closing is transferred by a Transfer under Power of Sale, containing the mortgagee’s solicitor’s law statements confirming compliance with the Mortgages Act and other statutes.
A mortgagor has rights and remedies in a power of sale proceeding to try to prevent the sale of its real property. In addition to making the required payment to the mortgagee, or paying these monies into court, mortgagors may allege that a mortgagee failed to comply with the strict requirements imposed under the Mortgages Act and common law. A mortgagor may commence a court proceeding to restrain a sale and, if unsuccessful, claim that the mortgagee made an improvident sale by selling the real property for less than its fair market value and ask the court to review the mortgagee’s accounting of the sale proceeds.
The Ontario Court of Appeal decision in Logozzo v. The Toronto-Dominion Bank provides an example. The bank entered into an APS to sell real property under power of sale and the mortgagor brought a court application to set aside the Notice of Sale and stop the sale. A provision in the APS stated that purchaser agreed that the mortgagor had the right to redeem, that the APS was subject to that right and in the event of a redemption, the APS would be null and void and the deposit refunded.
Notably, the mortgagor never paid the redemption funds into court, but still tried to stop the sale based on the APS provision. The bank prevailed on appeal and completed the sale. The court held that the APS provision was for the benefit of the bank and allowed it to make the best deal possible in realizing on its security, without incurring any liability to the purchaser. Although the bank could accept the redemption monies, terminate the APS and return the deposit without incurring liability to the purchaser, this was the bank’s right under the APS, and not the mortgagor’s right.
© Morrison Brown Sosnovitch LLP, 2020. All rights reserved.