Court of Appeal Upholds Power of Sale Safe Harbour Protection

Published on: August 2022 | What's Trending

Chess strategy game: the black king is checkmated and defeated

The Court of Appeal for Ontario has overturned a decision that we wrote about in May 2021: Court Sets Aside Power of Sale Transfer to Good Faith Buyer.

At first instance, being faced with the competing interests of a good faith buyer without notice and policies supporting the protection of the equity of redemption of a defaulting mortgagor, the Application Judge found on the side of the mortgagor. The Application judge found that the lender mortgagees were in breach of their obligations to the mortgagor, specifically by failing to produce a default statement when requested by the mortgagor and as required by Section 22 of the Mortgages Act. That failure meant that the mortgagees’ power of sale was suspended at the time they purported to transfer the property to the good faith buyer. The Application Judge ordered the transfer to be set aside. The purchaser appealed.

In deciding to support the good faith buyer, who had no knowledge of the mortgage lender’s failure to comply with s.22 of the Mortgages Act, the Court of Appeal upheld the so called “Safe Harbour Protections” of sections 35 and 36 of the Mortgages Act and s.99(1) of the Land Titles Act.

The Court accepted the good faith purchaser’s position that the Safe Harbour Protections, on their face and as a matter of policy, must trump the rights of the mortgagor, or otherwise no purchaser under power of sale, for value and without notice, could ever be assured of good title. The Court of Appeal left open the possibility to set aside power of sale purchases despite the Save Harbour Protections in some circumstances including in the case of fraud, or if the purchaser is not a good faith purchaser or has knowledge of the defect in the power of sale process.

The Court of Appeal decided that the mortgagor cannot rely on s.22(3) of the Mortgages Act to invalidate the purchaser’s title: its recourse is against the mortgagees for the improper exercise of the power of sale.

What is yet to be decided:

  • Are the mortgagees liable in damages to the mortgagor?
  • What can a mortgagor’s lawyer do to protect the mortgagor when a mortgagee fails to comply with s.22 of the Mortgages Act?