Court of Appeal clarifies when mortgagees must issue a new notice of sale

The Ontario Court of Appeal recently clarified a mortgagee’s obligations when seeking to exercise its power of sale rights under the Mortgages Act. The Court of Appeal held that the provisions of the Act dealing with notices of sale and mortgage statements should be read together, and a timely, accurate, and complete mortgage statement could serve to correct an inaccurate notice of sale. This outcome is in line with the practical realities of power of sale proceedings and should be of interest to commercial lenders in Ontario.

Disclosure requirements under the Mortgages Act

When a mortgagee seeks to exercise a power of sale, it becomes subject to two important disclosure requirements under the Mortgages Act. First, section 31 requires the mortgagee to provide a notice of sale to every person appearing to have an interest in the mortgaged property. The notice of sale must include information identifying the property, the mortgage, and the amounts due, and it must prescribe a date by which the mortgagee will sell the property if the amounts due are not paid.

Section 22(2), meanwhile, allows a mortgagor to obtain from the mortgagee a mortgage statement confirming the outstanding debt. Section 22(3) provides that if a mortgagee fails to answer a section 22(2) request within 15 days of receipt, then the mortgagee’s enforcement rights are suspended until a mortgage statement is furnished.

1173928 Ontario Inc. v 1463096 Ontario Inc.

In the recent case of 1173928 Ontario Inc. v 1463096 Ontario Inc.,¹ the Ontario Court of Appeal considered the practical interplay between sections 31 and 22. In this case, 1463096 Ontario Inc. (146) owned a property that was leased to an affiliate of 1173928 Ontario Inc. (117). 146 defaulted on its mortgage, and the original mortgagee issued a notice of sale. The tenant then discontinued rent payments to 146 and attempted to acquire the property through various companies, including 117. The original mortgagee assigned the mortgage to 117, and 117 subsequently attempted to purchase the property from itself under power of sale over a two-year period. During this time, rent and other payments were made under the mortgage that changed the amount of the outstanding debt in the original notice of sale.

At first instance, the trial judge held that the original notice of sale was rendered invalid because these payments and the passage of time had altered the debt outstanding thereby rendering the notice of sale inaccurate and non-compliant with section 31. The Court of Appeal disagreed with this view and clarified that sections 31 and 22 should be read together and not separately. According to the Court of Appeal, a notice of sale is by its nature valid at a point in time, and therefore does not become misleading simply due to the passage of time. In practice, a party seeking to redeem a mortgage will request a mortgage statement, which will supersede and update the figures contained in a prior notice of sale, and this will not render the notice of sale invalid.

Practical implications

The Court of Appeal’s decision can be viewed as clarifying the law in this area and legitimizing common industry practice. The decision will be of particular relevance and interest to commercial lenders, as neither the Mortgages Act nor the previous case law provides much guidance on when a fresh notice of sale is required.

A fresh notice of sale is not required where partial payments have been made or where the debt has simply been altered due to the passage of time. However, a fresh notice of sale may be required where (i) the prior notice contained a material error or (ii) the mortgage default has been cured and then a further default has occurred.

Beyond this guidance, the Court of Appeal did not rule definitively on when a fresh notice of sale is required. Commercial lenders should remain mindful of any further developments in the law that may arise in light of the appellate court’s decision.