The Power of Sale File With a Tenant
A lender retains enforcement counsel on a defaulted first mortgage. The borrower, Elena, stopped paying eight months ago; arrears plus costs are $41,000 on a $395,000 mortgage. The property is worth about $520,000. Elena has a tenant, Ravi, on a 12-month lease with 7 months remaining at $2,100/month; Ravi has paid on time and does not know about the default. Elena has also stopped responding to the lender. A second mortgage of $60,000 is registered behind the first. The lender instructs counsel to proceed with power of sale and asks the broker who arranged the original mortgage for advice on marketing the property.
1. What are the lender's key obligations in a power of sale, and how do they affect the timeline and marketing?
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Power of sale is a remedy under the mortgage terms and Ontario law; it is not automatic and requires a proper notice of sale giving the borrower a redemption period (commonly 35 days, extendable by the court). The lender must act in good faith and take reasonable steps to obtain a fair market price - it cannot sell to a related party at a discount or ignore better offers.
Because a second mortgage is registered, the second mortgagee must also be served with the notice and has rights to redeem or bid. That adds time and potential negotiation. The lender should obtain a current appraisal or broker price opinion, list the property on the open market for a reasonable period, and document the marketing effort - this protects against a later claim that the sale was improvident.
The surplus after paying the first mortgage, arrears, costs and the second (if any) goes to the borrower or subsequent encumbrancers in priority. Counsel should track the accounting carefully. The broker's role is to market professionally, not to advise Elena or negotiate away the lender's rights.
2. How should the tenant Ravi be handled, and what are the risks of ignoring him?
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Ravi has a valid lease and has done nothing wrong. The lender's power of sale does not automatically terminate a residential tenancy; the purchaser generally takes subject to the lease unless the lease is lawfully terminated. Ravi must be given proper notice and, if the lender or purchaser wants vacant possession, must follow the Residential Tenancies Act process - a notice to terminate for the purchaser's own use or a sale-based notice where permitted, with the required notice period and forms.
Ignoring Ravi creates real risk: he may refuse access for showings or appraisals, delaying the sale; he may file with the Landlord and Tenant Board, which can stall possession; and a buyer may discount the price heavily or walk away if occupancy is uncertain. The lender should instruct counsel to serve the tenant with the appropriate notice and to coordinate showings with reasonable notice.
Marketing should be honest about the tenancy - disclosing it attracts investors who value the income and avoids post-closing disputes. The broker should not misrepresent vacant possession.
3. The lender wants a quick sale. What should the broker advise about pricing and the risk of a low offer?
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The lender may want speed, but it must still obtain a fair price. The broker should recommend a current appraisal or BPO, a realistic list price near market (perhaps $510,000–$520,000), and a documented marketing period with showings and offers recorded. If the lender accepts a lowball offer, say $450,000, the borrower or second mortgagee could later allege the sale was improvident, exposing the lender to damages.
The numbers: a sale at $520,000 less the $395,000 first, $41,000 arrears/costs, and sale costs (commission, legal, discharge) might leave roughly $60,000–$70,000 before the second. A sale at $450,000 would leave little or nothing for the second, increasing the chance the second mortgagee challenges the process or demands an accounting.
The broker should advise: price to market, not to urgency; accept the best offer after reasonable exposure; document every showing and offer; and keep the lender informed in writing. If the lender insists on a below-market sale, the broker should record the instruction and recommend independent legal advice.