Mortgage Foreclosure and Judicial Sale

In Saskatchewan, the procedure to foreclose on a residence is relatively similar to that of a commercial foreclosure. Farm foreclosures have their own unique procedure. In this article, I speak about foreclosures on a mortgage. However, if you have an agreement for sale, the procedure is virtually identical. A rough outline of the steps is set out below. Keep in mind that it is general only. There are many other important factors to consider. I have conducted hundreds of foreclosure actions over my career. Please call me if you would like to engage my services in appearing and handling your case. I can assist a lender or a borrower in resolving many issues, including the following:

Residential and Commercial Foreclosures

• Court actions to enforce a mortgage must be taken through the Court of King's Bench. The Small Claims court does not have jurisdiction to deal with land, or the amount of money most often involved with a mortgage (more than $50,000).
• If a mortgage was granted by an individual or a corporation that did not waive certain legislation AND the property is not solely used for commercial purposes, then court permission is needed to start a foreclosure action. The procedure for this changed on September 1 2019. The lawyer for the mortgage lender will serve notice of a court application on the borrowers and also on a provincial government office known as the Provincial Mediation Board. The notice must be served at least 60 days before the court date. The application is a request for "leave" (permission) to commence an action. At this hearing date, the judge may grant permission or may allow the borrowers additional time to bring the mortgage arrears current, sell the property to pay out the loan, etc.. As mentioned above, this procedure is not necessary if the mortgage was granted by a corporation and the mortgage contains a waiver of The Land Contracts (Actions) Act, 2018. It is also not required if the property is entirely of a commercial nature. The word "commercial" is not defined in the legislation so it remains yet to be interpreted. I expect it would not apply to a building used for business. It is too early to say if a residential revenue property would be considered "commercial".
• Once the court grants leave to commence the action, the lender's lawyer will prepare, issue and serve a statement of claim. If there is a matter to defend, the defendants may file and serve a statement of defence within the time limits set out in the Rules of Court. If not, the mortgage lender may take the next step in the action once the appropriate time has expired.
• The next step would be for the lender to apply for an Order Nisi for Foreclosure or Order Nisi for Sale. In either case, the court will specify the amount owing under the mortgage, the scale of costs awarded to the lender and a deadline for paying the arrears and costs under the mortgage. Usually the deadline (redemption period) is in the range of 1 week to 6 months, depending on the equity or lack of equity in the property. With reasonable equity, the average is 3 months. Typically, if the lender feels the net proceeds of realization against the security will more or less cover the balance owing under the mortgage, they will opt for a Final Order of Foreclosure. This means that the court will eventually place title to the property in the name of the lender. If the lender believes they will incur a material loss and a deficiency judgment is possible, it may instead ask for an order for judicial sale.
• Once the redemption period (deadline for paying arrears and costs) expires, the court will either grant a Final Order of Foreclosure placing title in the name of the lender or if an Order for Sale was obtained, the property can be sold under the court order. In the case of a judicial sale, a further court application needs to be made to confirm the sale after it takes place.
• As long as the proper judicial sale procedure is followed by the mortgage lender, deficiency judgments are possible. The exception would be where the mortgage assisted the borrower in paying the purchase price of the property. This is because of a provision in The Limitation of Civil Rights Act. When a mortgage is signed by a corporation, the lender will require this protection to be waived. A waiver by individuals is not effective.
• Persons who sign guarantees, indemnities or co-covenants can also be sued at the same time or by separate action.

Farm Foreclosures

Farm foreclosures follow a somewhat similar procedure to the above. However, there are many significant differences. Instead of being served with an application 60 day before the court date (leave to commence) in the first step described above, the lender must serve a 150 day notice under The Saskatchewan Farm Security Act, a 15 business day notice under the Farm Debt Mediation Act and sometimes other notices such as a notice under the Bankruptcy & Insolvency Act.

Once the above notices are served, there is a mediation process which is handled primarily by the Saskatchewan Farm Land Security Board and to some extent by the federal Farm Debt Mediation Board.

Instead of applying for "leave to commence an action", The Saskatchewan Farm Land Security Act sets out different tests for a lender to satisfy the court to be able to commence an action under the mortgage. This will vary depending on certain factors such as whether the property is a home quarter (homestead) and when the mortgage was granted.

In some cases, a home quarter (homestead) can be exempt from foreclosure, but this is not always so.

Costs that can be added to the mortgage balance are limited.

After title to land is in the lender's name by foreclosure or after a voluntary settlement, depending on the circumstances, the farmer may in very rare cases have the right of first refusal to buy the property when the lender is disposing of it. The right to lease back used to exist almost all the time but that is no longer the case.

Agreements for Sale and Rent to Own

If you have an Agreement for Sale involving land, then the process to cancel the Agreement for Sale when it is in default is identical to a mortgage foreclosure. It must go through the Court of King's Bench. The Small Claims Court will not have jurisdiction to deal with it.

If you have a so-called "Rent to Own" Agreement (there really is no such thing under the law) then it is quite possible you really have an Agreement for Sale and this process must be followed to cancel it if it is in default. It is possible that you might not be as it depends on the wording but also on many other circumstances. The wording of the agreement alone will not determine this. You will need a lawyer who is very familiar in foreclosure actions (not just a lawyer who helps people buy and sell real estate) to tell you what your odds are of being an Agreement for Sale.

For more information about so-called "Rent to Own Agreements", and the problems with them, see my link on that topic. You'll find it on the menu under the "Real Estate" category. If you don't want to take the time to read it, and are thinking about entering into one, my simple advice to the average person is "don't do it". It may lead to disappointment.

Alternatives for Borrowers in Arrears

Communicate

Communicating frankly and sincerely with a lender at an early stage will often gain cooperation. Failure to communicate usually leaves a creditor with little alternative but to take court or other enforcement proceedings. Most creditors in business are prepared to work with a person to see themselves paid if they believe the debtor is sincere and making their best effort to pay over a reasonable period of time. The time to talk is at the very beginning before the creditor's patience has been exhausted. Gaining the cooperation of the lender may give a borrower time to obtain a new mortgage, sell the property to pay off the debt or raise money to bring arrears current. Keep in mind that broken promises will damage your credibility and the lender's willingness to trust and work on a solution.

Bankruptcy

Making an assignment in bankruptcy usually won't be of much help to someone in a foreclosure situation. This is because mortgages on land and security agreements against personal property are generally enforceable after bankruptcy. However, if the security held by the lender is worth less than the debt owing so that the lender is pursuing a deficiency judgment, bankruptcy may be a consideration as a last and final resort. This extreme measure should only be taken after obtaining specific legal advice. Bankruptcy can have many serious undesired side effects. For further information, see my article regarding bankruptcy.

Costs in Foreclosure and Sale Actions

Whether you are a defendant or a lender in a foreclosure action, you should be aware that the court limits the costs that can be awarded against borrowers who are unable to pay their mortgage. It doesn't mean that costs cannot be ordered. It just means that they has must be approved by the court and the court will often limit the costs in the early part of a mortgage action. These same rules also apply to very similar court proceedings to cancel an "Agreement for Sale". Read on if this applies to you.

Solicitor and Client Costs

Almost all mortgages have a clause in them saying that the borrower will pay the lender's legal costs if the mortgage is in default. It will say that they must be paid on a "solicitor and client basis" or a "solicitor and his own client basis". The first of these phrases means the full legal bill incurred by the lender, but subject to the review of the court. The court might say that a certain step was unnecessary or the charges are too high and reduce the costs somewhat, but in most cases it will cover the entire legal bill incurred by the lender. The second phrase attempts to be even broader to avoid the legal bill being reduced. There is a more technical explanation but this should serve the purpose.

Party and Party Costs

In Saskatchewan, there is a set of rules made by the judges called the "Rules of Court". It is long and complex and sets out the rules about court proceedings. It contains a table putting a dollar amount on costs to be awarded against the other side. These are called "party and party costs". If the court awards costs, then in normal cases, you only get the amount set out in the table for each step taken in the proceedings. It will amount to only a relatively small fraction of the total legal bill incurred. It is intended to contribute to the legal bill paid by the winning party ... but it is nowhere near full reimbursement. Except in some rare cases, or where the agreement specifies that costs will be paid on a solicitor and client basis, this is all that the person gets for costs. That's why the mortgage contract has words in it to expand on the costs the lender can ask for if they have to enforce their mortgage. Commercial leases are another example that will contain this type of clause.

Costs in Foreclosures

Saskatchewan legislation ... The Limitation of Civil Rights Act and The Land Contracts Actions Act, 2018 ... were originally passed many decades ago to protect people who had difficulty paying on their mortgage. The combined effect for these purposes is:

• Normally, if someone wants to sue, their lawyer will prepare a "statement of claim" and have it issued (stamped) at the court house. That starts the court action. However, the above legislation is aimed at giving the borrower on a mortgage a chance to solve their problem before a statement of claim is issued. It therefore makes the lender apply for permission from the court before the statement of claim can be issued.
• The first step in a foreclosure or mortgage action is to apply for "leave" or "permission" to commence a court action/issue a statement of claim. It means the lender's lawyer must serve an initial set of documents on the borrower/owner of a property and also a government department (Provincial Mediation Board). The documents will include information about the mortgage default as well as a document that sets out the date, time and location for the court hearing. The court date must be at least 60 days after these parties are served. The borrower can come to court and ask for some additional time to solve their problem before the lender can issue the claim. Depending on the circumstances, the judge has the ability to help the borrower by giving some time. The maximum time the judge can collectively grant is 8 months but usually adjournments are only about 1 month or so. The judge cannot re-write the loan terms. On this stage of the proceedings, the court cannot make rulings about the mortgage either. They can only grant time, require information to be exchanged and at some point they will typically be obliged to let the bank proceed. Every case is different.
• There are several court decisions which say that normally, unless the borrower is a repeat defaulter or there has been some objectionable conduct warranting the costs, the court should not make the borrower pay for solicitor and client costs up to and including this stage of the proceedings, regardless of what the mortgage document might say. "Repeat defaulter" doesn't mean someone has missed 3 payments. It means someone went through this process already last year, reinstated, and then defaulted again so that the lender had to go through all of this expense again. Even then, the cases say if someone is a repeat defaulter, the court should only award a fixed amount such as $500.00 or $800.00 instead of the lender's full legal costs to this point. That's a figure from a while ago so it might go up somewhat but you get the idea.
• Most banks and their lawyers are well aware of the multitude of cases that say this. Some of them ask for the costs anyway. My thinking is that if they feel the court decisions are wrong, they should appeal it to the Saskatchewan Court of Appeal. No one has to my knowledge. Maybe no one wants to run the risk of losing. I've seen lenders make the argument for costs frequently when I am in court when from what I hear, they don't seem to be entitled. Not every judge did this type of work before they were appointed so the issue isn't always clear to them. It makes me want to stand up and object but it's not my case and I'm not entitled to to so. I've also seen the bank try to collect them when a house under foreclosure is being sold when there is no court order granting the costs. Many lawyers may not realize the issue ... just as I don't practise family law and may not pick up on something there. That's why I'm writing this article.
• Don't take this to mean that all lenders are out to get something that they aren't entitled to. That's not the case. I've acted for many lenders and they abide by the court's rulings. However, for reasons not know to me, I've also seen some try to collect costs when I don't think they should. The key word is "some". Also to be fair to lenders ... they have lent their money in good faith that they would be paid. It's difficult for them to understand why they have to pay and write off what may amount to several thousands of dollars in legal costs for a default situation that they didn't cause.

When do Full Costs Start to Run?

If the borrower is a corporation, there will likely be a clause in the mortgage saying that because the borrower is incorporated, they waive all of this protection. The first 2 steps above won't apply and the protection about costs won't apply. The lender can ask for costs but they have to submit their bill for the judge to see and rule on it. The final say on the amount is with the judge.

For pretty much everyone else, the full legal costs (but still limited) only start to run after the court has given permission to issue a statement of claim ... not before ... subject to the exception I've described above about repeat defaulters or other special circumstances. Being in default by itself is not a special circumstance.

How to You Argue this if You are Representing Yourself

If a borrower at the first stage of the court action (leave to commence) and this issue comes up, don't be afraid to speak up. If the lender is asking for costs, tell the judge that you understand that at this point of the proceedings, costs are usually not awarded unless the lender has satisfied the court that you are a repeat defaulter or you have committed an unusual act warranting costs against you It's for the lender to prove ... not for you to disprove. There are cases such as Credit Union v. Black and Credit Union v. Hogg that the judges will be familiar with.

If the lender's lawyer asks for the court to put the issue off and give them permission to argue it later at the "order nisi" stage of the action, don't agree. Section 3(11) of The Land Contracts Actions Act only gives the judge hearing the leave application the power to decide on costs ... not what would probably be a different judge at the "order nisi" stage. The lender's lawyer knows they will probably lose and instead is trying to keep the door open in case you sell the house and want to pay them off. It will then be impractical and expensive to bring the issue before the court. If you are going to lose the costs argument now, you'll lose then so there is no benefit in the borrower putting it off. The odds are high that you will win.

What if it Never Went to Court

Only the court can authorize the legal bill to be added to your mortgage. There is a case called Canada Trust v. Murray by Mr. Justice Grostsky that says so. If the court didn't order and approve the costs, the bank isn't entitled to add them to their account. If you pay up your arrears and the bank adds the costs to your mortgage balance or insists on collecting them, you can ask the court to have it reversed. There are cases where the court has done so and ordered costs against the bank. My advise though is don't waste everyone's time over a small amount. Make sure it is a real issue. And ... if you are a repeat defaulter ... expect the bank to defend itself and raise it. My point is to be respectful and stand up for yourself when it is justified, but don't be a user. Remember that the lender is usually the innocent party when a mortgage is in default. They aren't the "bad guy" either.

2017 Court Decisions Limiting Solicitor and Client Costs

In the fall of 2017, there was a series of court decisions that effectively further diluted the lender's ability to recover legal costs. Whether it is fair is a matter of opinion, but the court added a new rule or limitation to the extent that "solicitor and client" costs can be collected for the stages of the court action beginning with the statement of claim and afterwards. The effect has been to dramatically reduce the amount the lender is able to recover from the legal costs the lender had to pay to enforce their mortgage. From a borrower's perspective, this may be seen as good news. From a lender's perspective, and speaking from decades of experience, the fact is that the majority of loans in foreclosure or judicial sale proceedings involve the lender taking a significant loss ... and sometimes a devastating loss. These losses can become even greater when the lender must spend very large sums of money to enforce payment but have to write off a substantial part of it. For banks, that may be perhaps seen as a cost of doing business and no one particularly feels sorry for the major banks. However, there are many smaller lenders or private lenders whose life savings can take a significant hit when a mortgage is not being paid. No doubt a mortgage in default can be very stressful for them and result in a large financial setback.