Market conditions currently give buyers the upper hand. Due to rising interest rates and the overall increased cost of living, there has been a noticeable uptick in bank-owned properties entering the market. Lenders are exercising their legal remedies under the Mortgages Act by initiating the sale of properties following mortgage non-payments. Among the remedies available to lenders, the power of sale remains the most frequently exercised method to recover losses resulting from default.
How Power of Sale Works in Ontario
The Power of Sale is a legal process that allows a lender to sell a property without going to court when a borrower defaults on their mortgage payments. Following the issuance of a Notice of Default, after the statutory 15-day period has elapsed, the borrower is afforded a right of redemption. This right provides the borrower with a specified period (usually 35 + days) during which they may cure the default by paying the outstanding arrears and reinstating the mortgage to good standing. If the borrower fails to repay mortgage arrears, the bank has the right to list and sell the property through a real estate agent.
Common Myths About Power of Sale Properties
A common misconception is that power of sale properties are significantly discounted. In reality, lenders are legally obligated to make reasonable efforts to obtain fair market value for the property when exercising power of sale. They must act in good faith and cannot simply sell the property at a loss to expedite the process. Although it is possible to acquire a property under power of sale at a modest discount compared to typical market conditions, the lender is under a legal obligation to act in good faith and obtain fair market value. To demonstrate compliance with this duty, the lender may be required to obtain and retain multiple appraisals or comparative market analyses to substantiate that the sale price was fair and reasonable under the circumstances.
Another common misconception is that properties sold under power of sale are always in poor condition. While some may require repairs or maintenance, many of these homes are in livable or even good condition. If you are considering purchasing a property under power of sale, there are several critical factors that must be carefully considered before submitting an offer.
Key Contractual Limitations Buyers Must Know
Lenders will typically attach a lengthy Schedule to the Agreement of Purchase and Sale, which significantly limits their obligations to the buyer. These schedules are generally non-negotiable and include clauses that disclaim warranties, representations, and liability for the property’s condition or any defects. These factors give rise to a unique set of issues associated with purchasing a property under power of sale. In this article, we will examine the key limitations involved in such transactions and outline practical steps you can take to protect yourself. The goal is to help you make an informed decision about whether a power of sale property is the right choice for your circumstances.
Understanding the “As-Is, Where-Is” Clause
Properties sold under power of sale are typically offered strictly on an “as-is, where-is” basis. This means the lender, acting as the seller, cannot verify the state of the property and that the buyer accepts the property with all existing faults, visible or hidden, and cannot later hold the lender responsible for defects or deficiencies discovered after closing. The lender has no obligation to make repairs, provide disclosures, or ensure that the property is in habitable or functional condition. Because of these limitations, buyers should conduct thorough due diligence, including a professional home inspection, before submitting a firm offer. In addition to a standard home inspection, it is prudent to arrange for specialized inspections focusing on the property’s structural integrity and mechanical systems, such as HVAC, plumbing, and electrical. Buyers should also consider conducting a pest inspection, particularly for termites and other wood-destroying organisms, as these issues may not be apparent during a general inspection but can result in significant repair costs. Therefore, when submitting an offer on a power of sale property, it is advisable to include a condition for a home inspection. If multiple inspections are being contemplated—such as structural, mechanical, or pest inspections—it is prudent to specify each one clearly within the offer. While the seller, in this case the lender, is under no obligation to undertake repairs or remediate any issues identified, obtaining a comprehensive understanding of the property’s condition enables the buyer to make an informed decision. This due diligence is essential in assessing the potential financial exposure associated with necessary repairs or deficiencies.
Chattels and Their Legal Status
Since the selling lender in a power of sale transaction does not hold title to the property, they cannot provide any representations or warranties regarding the condition of the chattels on the premises. This means the buyer accepts all chattels “as-is,” without any assurance as to their presence, condition, functionality, or ownership. The lender is under no obligation to repair, replace, or ensure the inclusion of any chattels at closing, and the buyer assumes all risk related to these items. Buyers should therefore exercise caution and conduct their own due diligence with respect to chattels.
The UFFI Disclosure Gap
In most standard real estate transactions, sellers are required to disclose whether urea-formaldehyde foam insulation (UFFI) is present in the property. UFFI, once commonly used in home insulation, has since raised health and safety concerns due to the potential release of formaldehyde gas.
However, in power of sale transactions, the seller—typically a financial institution—does not provide any representation or warranty regarding the presence or absence of UFFI in the property. This is because the lender has never occupied the property and is therefore not in a position to make informed disclosures regarding its condition or history.
As such, the buyer assumes the risk of unknown conditions, including the potential presence of UFFI. The presence or even the uncertainty regarding the presence of UFFI may raise concerns for mortgage lenders and could impact the buyer’s ability to secure financing. Financial institutions may require additional inspections, certifications, or impose conditions on the mortgage approval, potentially delaying or complicating the closing process.
Financial Considerations in Power of Sale Transactions
Including a financing condition in an offer to purchase a power of sale property is highly recommended. Lenders may be more cautious when underwriting mortgage loans for these types of purchases due to the as-is condition, potential title concerns, and lack of seller disclosures. As a result, financing may be more difficult to secure or subject to stricter terms. Including a comprehensive financing condition protects the buyer by allowing them to exit the contract if they cannot secure financing on acceptable terms. Buyers should ensure that their mortgage pre-approval is specifically aligned with the property type and its condition, enabling a more efficient and timely mortgage approval process within the conditional period.
The HST Factor
Another important financial consideration when purchasing a property under power of sale relates to the potential application of Harmonized Sales Tax (HST). In a typical real estate transaction, the seller customarily provides a declaration as part of the closing documents confirming that HST is not payable. However, in power of sale transactions, where the seller is the lending institution, such a declaration is generally not provided. While HST is typically not payable on used (“resale”) residential properties, buyers may nonetheless be liable for HST in certain circumstances. It is therefore imperative that buyers conduct thorough due diligence to ascertain the prior use of the property by the defaulting owner.
In the case of a newly constructed condominium, buyers should make reasonable inquiries regarding whether the property was utilized as a primary residence, a long-term rental, or a short-term rental, as each use may carry distinct tax consequences. Additionally, if the condominium was built less than two years prior to purchase, there may be further considerations relating to a New Housing Rebate that could have been claimed by the original owner, potentially impacting the buyer’s tax obligations.
Contract Clauses That Can Delay or Cancel Your Purchase
Buyers should be aware that Agreements of Purchase and Sale involving power of sale properties often contain unique clauses that differ significantly from standard resale transactions.
Seller’s Right to Extend Closing
One such clause is the Seller’s Right to Extend Closing. If the seller’s ability to convey good title is challenged—whether due to requisitions, a certificate of pending litigation, third-party claims, or an inability to provide vacant possession—the seller (typically the lender) reserves the right to unilaterally extend the closing date by one or more periods totaling up to 60 days. If the issue remains unresolved after the extension period, the seller may terminate the agreement without any liability to the buyer, and the deposit will be returned without interest or deduction. This clause can pose logistical and financial challenges, particularly for buyers planning to move into the property, as it does not require the seller to provide advance notice of the extension. In practice, this means a buyer could be left in limbo on closing day—potentially with moving trucks waiting—while the closing is postponed without recourse.
Mortgagor’s Right of Redemption
Another important clause to note is the Mortgagor’s Right of Redemption, which is unique to power of sale transactions. This provision allows the defaulting mortgagor (homeowner) to reinstate their mortgage by curing the default at any time prior to the scheduled closing. Should this occur, the Agreement of Purchase and Sale is rendered null and void, and the mortgagor retains ownership of the property. While the buyer’s deposit is refunded, the seller assumes no liability for any costs, damages, or inconvenience suffered by the buyer as a result of the failed closing. Although such redemptions are rare, buyers must be made aware of this possibility in order to manage expectations and plan accordingly.
Engaging an experienced real estate lawyer to review the Agreement of Purchase and Sale for a power of sale property is a critical step that can greatly simplify the process and protect the buyer’s interests. Where possible, buyers should consider including a clause making the agreement “subject to solicitor review and approval.” This clause allows the buyer’s lawyer to examine the agreement and, if deemed unsatisfactory, provides the buyer with an option to terminate the transaction without penalty.
The Critical Role of a Real Estate Lawyer
The role of a real estate lawyer in power of sale transactions is particularly complex. In addition to reviewing the agreement and its often-lengthy schedules—many of which limit the seller’s liability—the lawyer must ensure that the buyer’s rights are adequately protected. One of the most important legal tasks during the conditional period is conducting a title search. Any issues uncovered during this process should be immediately brought to the attention of the selling lender, so that they have sufficient time to address the defects before closing. This proactive approach helps avoid uncertainty and reduces the risk that the seller will invoke their contractual right to extend the closing date in order to remedy title problems.
If the title issues cannot be resolved before the agreement becomes firm, the transaction will typically be rendered null and void, saving the buyer time, money, and unnecessary frustration—allowing them to pursue another property. Additionally, buyers should ensure they fully understand the scope and limitations of title insurance coverage in the context of power of sale properties, as not all defects may be covered.
Ultimately, a comprehensive legal review allows buyers to make an informed decision about whether a power of sale property is a suitable and prudent choice based on their specific circumstances.
