June 8th - 2009

Power of sale: What you should know

A power of sale is a forced sale of a property by a mortgagee due to a default of one or more of the mortgagor’s obligations under the mortgage.

A power of sale is a forced sale of a property by a mortgagee due to a default of one or more of the mortgagor’s obligations under the mortgage. These obligations include making payments including principal and interest, paying municipal realty taxes, providing adequate insurance on the buildings, and keeping the property in good repair.

The power of sale process is subject to strict requirements and time limits that have to be adhered to in order for it to be legally accomplished. Any lapse in the process or apparent lack of good faith in carrying out a power of sale could result in exposure of liability to the mortgagee.

A mortgagee will typically list a property under power of sale with a local brokerage that is skilled in selling that kind of property. However, the mortgagor may also have listed the property with another brokerage. The mortgagor, as the registered owner, has the authority to list the property for sale. The mortgagee, selling under power of sale, gains the authority either from the mortgage document (contractual power of sale) or by the provisions of the Mortgages Act (statutory power of sale).

A power of sale listing will usually contain a clause specifying that in the event the transaction does not close, commission will not be paid. When dealing directly with the mortgagor, the brokerage may not get paid and may be forced to sue for the commission if there are insufficient funds available after satisfying all debts.

Before a brokerage accepts a power of sale listing, it’s important to determine that the mortgagee is in a position to list the property. This is not usually a problem when dealing with financial organizations, but may be a concern when dealing with private lenders. In order to comply with the obligations imposed on a mortgagee to act in good faith and ensure that reasonable precautions are taken to obtain the true market value of the property, a brokerage should follow some basic guidelines when listing a power of sale property:

  • A sign should be placed on the property.
  • The property should be listed on the local MLS® system for a reasonable period (typically 90 days).
  • Fully expose the property through advertising.
  • Be cautious about frequent and significant price reductions.
  • Do not advertise the property as power of sale.
  • Ensure that any buyer is aware that they are buying a property under power of sale.

OREA forms and clauses
A Certificate of Power of Sale, Form 262, has been developed by OREA to verify certain matters in the listing and marketing of property under power of sale action. The wording of power of sale clauses in agreements of purchase and sale vary in the marketplace and many mortgagees may have their own specific clauses concerning power of sale.

OREA has developed standard Form #106, Seller Selling Under Power of Sale, for use in conjunction with Form #100, the Agreement of Purchase and Sale to confirm that the seller is entitled to sell the property, that a default of the particular mortgage has occurred and that the mortgagor has a right to redeem, and the seller is selling the property “as is” and without any guarantee as to the inclusion of any chattels or fixtures. OREA standard clauses pertaining to power of sale transactions include MORT – 8 – Condition, Overleveraged Property, and MORT/POS – 1- Power of Sale (General Provision).

OREA also offers a continuing education course called, Power of Sale that will take you through the power of sale process, the rights and obligations of the mortgagee and the mortgagor, and a registrant’s role in a power of sale transaction. The two-credit course also teaches how to protect a buyer when purchasing a power of sale property. For more information, visit www.orea.com.

Members can also review several power of sale scenario questions, asked and answered, on the Legal Forum under Topic – Mortgages and Subtopic – Selling/Buying Power of Sale.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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