There have been some recent developments regarding power of sale. A power of sale is a legal mechanism whereby a mortgagee has a contractual and statutory right to sell a property following mortgage default as long as the conditions precedent are met. These are enumerated in section 44 and 45 of the Property Act, RSNB 1973, c P-19 (the “Property Act”), and are reproduced in an abbreviated fashion in the mortgage.
These developments have occurred for two reasons: (1) mortgagors – debtors – are remaining in possession of their respective property and (2) the dramatic rise in home prices since the COVID-19 Pandemic, which have since plateaued and are remaining steady.
As a result, mortgagees have been trying to find alternatives to a mortgage sale being conducted pursuant to the Court of Appeal’s seminal decision of Keough v. Sandfire Capital Limited Partnership, 2016 NBCA 50 (Keough”).
In Keough, the Court of Appeal held that a mortgagee need not bid up to the probable market value of the mortgaged property determined by an appraisal because the best outcome a mortgagor can expect is a price that reflects the reality of the situation their default created, a forced sale.[1]
In other words, a mortgagee need only bid at the mortgage sale to the appraised forced sale value. This was subsequently confirmed by the Court of Appeal in Royal Bank of Canada v. Allan Marshall & Associates Inc., as Trustee in Bankruptcy for the Estate of Susan Lynn Williams (“Williams”), 2022 NBCA 10.
This is important because if a lender conducts a power of sale in an unauthorized, improper or irregular manner it may be liable to a mortgagor in a claim for damages. See, Gambit Holdings & Development, Deering v. Bayview Credit Union, 2002 NBCA 49 at para 4.
Keough and Williams appear applicable only to a Chartered Bank, because a private lender is only required to place a bid to the debt it is owed at the mortgage sale pursuant to the Court of Appeal decision in Bérubé v. Levesque, 1999 CarswellNB 425, [1999] N.B.J. No. 448 (NBCA).
Thus, a Chartered Bank is obligated to conduct the mortgage sale pursuant to Keough and Williams; otherwise, a mortgagor could commence a claim against the lender for recklessly sacrificing his/her interest in their property.
Herein lies the problem. Because a property is occupied, the Chartered Bank is often utilizing a drive-by appraisal to obtain both the market and forced sale value for the property. The Chartered Bank usually does not seek to obtain vacant possession of the property since a mortgagor may reinstate his/her mortgage and the Chartered Bank is trying to maintain its customer.
While a drive-by appraisal may be less persuasive then a full interior appraisal, it is in keeping with the decision in Keough.[2] However, neither a drive-by nor an interior appraisal are as determinative of the market value a person would receive when the property is listed with a real estate agent, marketed and sold on the open market. This is even more so as a result of the dramatic rise in property values.
For example, a mortgagor is indebted to the Chartered Bank in the amount of $30,000.00. The mortgagor is residing in the property, so the Chartered Bank obtains a drive-by appraisal. This provides a forced sale and market value of $112,500.00 and $150,000.00. A Chartered Bank is obligated to bid to the amount of $112,500.00.
A surplus has now been created and pursuant to CitiFinancial Canada East Corp v. Scotia Mortgage Corp., 2011 NBQB 214, should the property be sold for less on the open market, the mortgage sale is determinative of calculating the surplus, not the subsequent sale. See, also Central Trust Co. v. Phaseco Ltd., 1988 CarswellNB 173, [1988] N.B.J. No. 535 (NBCA).
Following the mortgage sale, a Chartered Bank would file an application seeking an order for vacant possession. Following that order being enforced, the Charted Bank would obtain an interior appraisal, retain a realtor and list the property for sale.
If the Chartered Bank sells the property on the open market for $70,000.00, the Chartered Bank cannot claim any property management, real estate commission or other expenses incurred subsequent to the mortgage sale.[3]
The Chartered Bank must account to the mortgagor and any subsequent encumbrancer pursuant to section 47(3) of the Property Act, which states as follows:
Effect of Power of Sale
The money which is received by the mortgagee arising from the sale shall be held by him in trust to be applied by him:
(a) in the first place in payment of all costs, charges and expenses, properly incurred by the mortgagee as incident to the sale or any attempted sale of the mortgaged premises;
(b) in the second place in discharge of all unpaid money and interest secured by the mortgage;
and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorized by the person so entitled to give receipts for the proceeds of the sale thereof.
In summary, the Chartered Bank would first pay itself and secondly pay any subsequent encumbrancer of judgment. If any monies are left over, they would be returned to the mortgagor.
For ease of reference the example has the following calculation:
| Bid at Mortgage Sale | $112,500.00 |
| Mortgage Debt | $30,000.00 |
| Surplus following Mortgage Sale ($112,500.00 – $30,000.00) |
$82,500.00 |
| Sale on Open Market | $70,000.00 |
| Surplus Balance to be Paid | -$12,500.00 |
The table is correct. The Chartered Bank would have a negative balance of $12,500.00.
In other words, the subsequent encumbrancer, judgment holder, and perhaps the mortgagor will benefit to the determinant of the Chartered Bank because it is legally obligated to pay $82,500.00 to these parties despite only receiving sale proceeds of $70,000.00. This is non-sensical; dare I say unbelievably unfair to the Chartered Bank who provided monies to the mortgagor in the first instance.
Chartered Banks are seeking alternatives to this phenomenon.
The first alternative was to reinstate the right of foreclosure which is provided for in section 47(5) of the Property Act, and the mortgage contract. The right of foreclosure, however, has been dormant for over 80 years since the birth of power of sale and the Court was not willing to reinstate the right of foreclosure. See, Toronto Dominion Bank v. Atilla Csaba Kovacs, 2024 NBKB 51.
The second alternative is that a mortgagee withdraws the property at the mortgage sale and does not either purchase or allow sell it to be sold. The mortgagee would then seek vacant possession, if the property is occupied, and proceed to sell it on the open market. There are competing decisions with respect to this scenario.
In Xceed Mortgage Corporation v. Geary, 2010 NBQB 83, Glennie, J., held that a mortgagee was not entitled to vacant possession when it proceeds with power of sale and withdraws the property at auction because the power of sale was not completed, to wit, the mortgage sale.
Glennie, J., did, however, assert that the mortgagee may have had a stand-alone right to vacant possession based on the standard mortgage covenant for vacant possession, but no application was filed by the mortgagee.
Fourteen years later, in TD Bank v. Robichaud and Robichaud, 2024 NBKB 143, Hamou, J., held that a mortgagee is entitled to vacant possession despite withdrawing the property at the mortgage sale because the mortgage filed an application pursuant to the mortgage covenant and not solely pursuant to the power of sale.
This decision has not been treated by the Court, so the question still remains weather the withdrawal of the property at the mortgage sale is an improper, unauthorized or irregular power of sale which could make the mortgagee liable for damages.
It is this writer’s opinion that withdrawing the property at the mortgage sale would be an improper, unauthorized or irregular exercise of the same. Further, the writer opines that the appraisal at the time of the mortgage sale would be the document utilized by the Court to determine the sale price for the property, particularly if it is different than the open market sale.
This leads to the final alternative. In Royal Bank of Canada v. Cosgrove, 2025 NBKB 195, Stephenson, J., held that a Chartered Bank can seek vacant possession pursuant to its mortgage prior to commencing power of sale.
Once the Chartered Bank has possession, it can list the property with a real estate agent and sell the property on the open market. Prior to the sale, however, the Chartered Bank would have to conduct a private power of sale pursuant to section 44(1)(a) of the Property Act. In other words, the Chartered Bank must ensure that it complied with the conditions precedent for power of sale enumerated at sections 44-47 of the Property Act.
This will allow the Chartered Bank to account to any subsequent encumbrancer, judgment holder or the mortgagor pursuant to section 47 of the Property Act with the open market sale price rather than an appraisal, which is best indicator of value for the property and the fairest for all parties involved.
These alternatives are all Court driven. It may now be time for the Court to address these issues with a meeting of the Court and practitioners in this area of law to change the practice memorandums issued by the Court; the first of which was on October 4, 2011.
I act for various Chartered Banks and private lenders and have exercised power of sale on their behalf on hundreds of engagements and would be pleased to answer any questions or concerns you have after reading this article.
Sources:
Bérubé v. Levesque, 1999 CarswellNB 425, [1999] N.B.J. No. 448 (NBCA).
Central Trust Co. v. Phaseco Ltd., 1988 CarswellNB 173, [1988] N.B.J. No. 535 (NBCA).
CitiFinancial Canada East Corp v. Scotia Mortgage Corp., 2011 NBQB 214
Gambit Holdings & Development, Deering v. Bayview Credit Union, 2002 NBCA 49 at para 4.
Keough v. Sandfire Capital Limited Partnership, 2016 NBCA 50 (Keough”).
Property Act, RSNB 1973, c P-19, s 44(1)(a) – 47(5)
Royal Bank of Canada v. Allan Marshall & Associates Inc., as Trustee in Bankruptcy for the Estate of Susan Lynn Williams (“Williams”), 2022 NBCA 10.
Royal Bank of Canada v. Cosgrove, 2025 NBKB 195
TD Bank v. Robichaud and Robichaud, 2024 NBKB 143
Toronto Dominion Bank v. Atilla Csaba Kovacs, 2024 NBKB 51.
Xceed Mortgage Corporation v. Geary, 2010 NBQB 83
Footnotes:
[1] Keough at para. 82.
[2] Williams at paras 28-32.
[3] Keough at para. 71.