Understanding the Foreclosure Process

When a purchaser borrows funds to purchase real property (i.e. land and any buildings or structures attached to the land), most arm’s length lenders will require a personal promise to repay the funds, as well as some interest and expenses. Typically, the lender will also require some additional commitments to give that personal promise to pay some “teeth.” This additional protection for the lender will usually include the borrower granting the lender a limited interest in the purchased lands. The nature and extent of the interest in the land granted, including the borrower’s obligations to the lender and the lender’s rights if the borrower defaults on these obligations, are outlined in a legal document called a mortgage. The mortgage is registered on title to the property when the property is transferred to the borrower when the purchase completes.

Default events will usually include nonpayment of payments when due, allowing unauthorized charges to be registered on title, not paying property taxes or failing to maintain and protect the property. Upon default, the lender will send a notice of default and demand, as well as any additional appropriate notices such as notice under the Bankruptcy and Insolvency Act or the Farm Debt Mediation Act. If payment of all arrears, interest and legal expenses are not paid upon demand (or the full amount of the mortgage paid if the term has expired), then the lender will be in a position to prepare, file and serve documents to commence a foreclosure. If the borrower or any other persons with an interest in the land subsequent in priority to the lender wants to oppose any relief sought in the foreclosure, or just be notified of each Court date in the foreclosure, then that person or business will need to file a Response and serve it on the lender and other parties.

The first Court appearance in a foreclosure is the Order Nisi, which is actually considered a final order in the foreclosure. Generally, the lender will seek personal judgment against the borrower at the Order Nisi hearing, based on the personal promise to pay. The lender will also seek other terms of the Order, such as the length of the redemption period, the amount required to redeem and legal costs. Legal costs are usually ordered at the lowest level of Court costs in BC, particularly for unopposed Foreclosure proceedings.

The redemption amount is the amount of the principal, interest and expenses that the borrower will need to pay the lender to payout the mortgage and stop the foreclosure. The usual length of the redemption of a residential property will be set at six (6) months, unless the lender can show risk to its security that would warrant a shorter redemption period (such as insufficient equity in the property to repay the lender in full, abandonment or waste).

If the borrower does not redeem before the end of the redemption period set at the Order Nisi hearing, then the lender may elect to return to Court to seek either an Order Absolute or an Order for Conduct of Sale. In a relatively recent development in foreclosure practice, a lender can now actually obtain conduct of sale at the Order Nisi hearing that will be effective at the end of the redemption period without the necessity of a further court application.

An Order Absolute basically involves the property being transferred to the lender as the new owner. Usually the borrower or subsequent lenders will oppose the Order Absolute if there is convincing evidence of equity. However, if an Order Absolute is granted and there is a shortfall for the lender, then the lender will not be able to try to recover any shortfall on the personal judgment from the borrower after the Order Absolute. In addition, the lender will have to pay the property transfer tax on the transfer of the property to the lender. In many cases the lender will not elect to seek an Order Absolute.

When the lender decides not to pursue an Order Absolute, then the lender can still apply to the Court for an Order for Conduct of Sale at the end of the redemption period. An Order for Conduct of Sale allows the lender to list and market the property through a realtor. The borrower will be ordered to cooperate with the listing. The lender will be able to entertain and accept offers, subject to any accepted offer still requiring Court approval. The usual practice is for Offers to have a schedule attached to the Contract of Purchase and Sale specifying that the property is being purchased “as is” without any warranties as to the condition of the property. At an application for Court Approval of Sale, the Court will need to be satisfied that the offer before the Court reasonably represents fair market value in the current market at the time of the application. If the sale is approved, then the dates for completion and vacant possession will be set out in the order. A certified copy of the Order Approving Sale will serve as the transfer document at the Land Titles Office, as opposed to a Form A transfer signed by the borrower. After the sale completes, the lender will report to the Court on the funds recovered from the sale. If the amount of the lender’s legal costs cannot be agreed, then the lender may apply to have the Court assess legal costs owing. Any surplus will be paid into Court, unless otherwise agreed by all parties. If there is a shortfall for the lender, then the lender will be in a position to try to recover the balance of any judgment against a non-bankrupt borrower.

Foreclosures can be complicated, especially when there are competing charges registered on title or disputes about amounts owed or market value of the property. The process for competing bids on an application for Court approval of a sale can also be complex for parties not familiar with the process.

If you are involved in a situation involving default under a mortgage or a foreclosure, then you should seek legal advice to protect your interests. Book a consultation by calling 250-869-1170 or email [email protected].

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