During the pandemic, borrowers rode the wave of low interest rates and easy money, seeing it as an opportunity to invest in property. Whether it was commercial real estate or renovation projects, money was cheap, and dreams were big.
The mentality was simple: borrow now, worry later. Some envisioned flipping properties for a tidy profit, while others saw the chance to expand their businesses or renovate homes without breaking the bank.
Fast forward to today, where we’ve been seeing significantly higher interest rates.
Alexander Verrilli, a Commercial Litigation Lawyer at McKenzie Lake Lawyers in Guelph has a front-row seat to the fallout. Verrilli says, “I’m seeing more mortgage defaults, particularly among commercial and renovation property owners who over-leveraged themselves. For renovators, soaring costs for materials and dwindling budgets have stalled projects as they scramble to secure additional financing to avoid default.” There are many partially completed renovation projects and many old homes that are gutted but not finished enough for somebody to move in.
What is the default process in Ontario?
The default or enforcement process is the same whether someone owns a residential home or investment property. Verrilli says, “You should always read the terms of your own mortgage but there are basic rules that apply to everyone. If you miss a mortgage payment, don’t panic right away. Lenders must wait 15 days after a default before taking any enforcement action under what is called Power of Sale, which gives the mortgagor a little breathing room to get back on track.”
After 15 days of default, the typical remedy that a lender wants to take is to exercise Power of Sale and to do that, they must give a Notice of Sale to the mortgagor. A Notice of Sale is a form that says the mortgagor is in default and sets out, how much money is owed. Usually, the lender will say they want the entire mortgage paid immediately which means that the mortgagor must find new financing or sell the property pay off the mortgage.
However, Ontario’s Mortgages Act says a mortgagor will get 35 days from the Notice of Sale to act. During this window, the lender can demand the full payment of the mortgage. This might sound overwhelming, but there’s a silver lining, Verrilli says, “If you’re in the middle of your 5-year mortgage term, you can stop mortgage enforcement by paying the amount in default and put your mortgage back in good standing by covering the missed payments, interest, and legal fees. However, if your mortgage has matured (i.e. you are at the end of your term and the whole amount is due and owing), the lender can insist the entire mortgage balance is paid off because your term is up, and they’re not obligated to renew.”
What happens if you can’t pay?
The options, at that point are to find new mortgage financing to pay off the mortgage that’s in default, likely at a higher interest rate and additional fees or the mortgagor could sell the property and use the proceeds of sale to pay off the mortgage. Verrilli says, “Usually property owners who are in default and don’t have the money will try to sell the property privately to avoid paying the lender’s legal fees that will accrue through enforcement.”
If a mortgagor can’t resolve the default within 35 days, the lender can move forward with taking possession of the property and selling. The Notice of Sale is the last warning before more serious actions come into play. Because it’s been tough for owners selling properties in this market, lenders will often move to take control of the property.
What happens when a lender takes control?
Before a lender takes control of a property where owners are living in the home, typically the lender must first obtain a court order and writ of possession. It’s a legal step to ensure that there is no conflict in relation to the lender taking possession. The sheriff assists with handling possession of the property from the owner to the lender.
However, if the property is vacant, such as an unfinished renovation project that was stopped; it’s a different story. Verrilli says, “After the 35-day waiting period, lenders can act swiftly without involving the court. They can change the locks and take control the very next day. Many people do not realize that this is the law in Ontario – that a lender can take possession without a court order if taking possession is peaceable.”
Call a lawyer early
Receiving a Notice of Sale in the mail can feel like the world is crumbling around you, but Alexander Verrilli has a reassuring message. “Don’t panic, but don’t ignore the notice either. Acting quickly is key to finding a solution that could save your home, reduce costs, and ease your stress.”
A “Notice of Sale” may have penalties, interest, and fees added and the amount is huge. Verrilli says, “My experience is that many lenders will be willing to reduce the added costs because their primary concern is getting the principle that they’re owed, so there is room for negotiation.”
There are often more solutions than one might think. A lawyer can work with the mortgagor to find a new lender or negotiate an agreement with the current lender to buy more time. If a family is living in the property, the legal process can often by slowed down, giving them some room to explore alternatives. Verrilli adds, “The worst thing you can do is nothing. Ignoring the notice means the lender’s next steps, which could be selling your home, can move forward unchecked, leaving you with mounting legal fees added onto the mortgage debt and fewer options.” A lawyer can step in and advocate on the property owners’ behalf and open lines of communication with the lender to negotiate a better outcome.
Because of a weaker market, some investors who loaned money may move to get their security out of the property and they will trigger enforcement right away. A lender should also get a lawyer as soon as possible. Alexander Verrilli says, “Some lenders are sophisticated, while others are new to the business. Investors with little experience will give second chances, by extending the mortgage a few more months and when non-payment continues, they call me when they’ve lost a year and a half of time that during which they could have sold the property and mitigated their losses.”
Whether you’re a lender or a borrower, engaging a lawyer experienced in enforcement will ensure that you’re not navigating the legal process alone. Alexander Verrilli is a Guelph commercial litigator who primarily deals with mortgage enforcement for mortgagees. If you have a mortgage enforcement issue, reach out.
Contact Alexander Verrilli at (519) 826-4333 or via email: [email protected]. Connect with McKenzie Lake Lawyers online here.
