July 7th - 2006

Merv’s Column: Mortgagees must act in good faith

The owners of a Kemptville golf course sold it and took back a mortgage and other security.

The owners of a Kemptville golf course sold it and took back a mortgage and other security. There was a default and the mortgagee took proceedings under its securities including a power of sale. During the default period the mortgagee and a group prepared a "business scenario" under which they and some investors could take over the golf course. They became the eventual buyer in the power of sale process.

This lawsuit discusses the legal requirements of a mortgagee acting in a power of sale and whether this particular fact situation led to an improvident sale. The judge decided that the mortgagee had acted improperly in a number of respects and did not take "reasonable precautions" to obtain the true market value of the mortgaged property.

They had not made a serious effort to test the public market. They were aware of a recent appraisal of $720,000 but did not obtain their own appraisal before selling it for $565,000. "Nor did they seek advice from professional real estate brokers or agents to assist them in determining the market value.”

The only public advertisement of the pending sale was distributed once by broadcast fax to members of the National Golf Owners Association (Canada), a relatively small segment of the potential market. Interested purchasers were put on a strict time line: two weeks to put in an offer, two more weeks to close the transaction. No advertisements were placed in newspapers or other media in the Ottawa and Eastern Ontario market. "No professional real estate brokers or agents were retained to assist in advertising and selling the mortgaged property, which was not listed for sale."

Lay v 1222055 On. Inc. 2005 CanLII 30865(ON S.C.)

MERV'S COMMENTS 
This process requires mortgagees to act in good faith and to take reasonable steps to attempt to obtain a fair value, even though they are not acting in a fiduciary relationship to the mortgagors. The facts of this case show how not to fulfill those duties. It would have been simpler to get an appraisal, list it with a REALTOR®, and use the normal marketing activities in a timely manner.

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