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Completed Sale, by Power of Sale, Invalidated

In a recent Ontario case, a dispute centered around whether the sale of a property, completed a year earlier under a lender’s power of sale, should be invalidated due to, among other things, technical deficiencies with the Notice of Sale.

The property had been owned by Metropolis Properties, which was in default on a first mortgage for $780,000 in favour of Canadian Investment Corporation (“CIC”). However, there were 12 additional mortgages on the property, totaling another $3,385,000, all of which were in default by mid-2013. By year’s end, some of the other lenders had taken initial steps to pursue various remedies, including issuing Notices of Sale, but none of them had progressed very far.

According to CIC, in November of 2013 it commenced power of sale proceedings, purportedly issuing a Notice of Sale and serving it on Metropolis and the other lenders. But as it turned out, that Notice was never actually received. The lawyer for CIC had sent those other lenders the wrong documents by registered mail.

Further, the Notice listed the amount due under the mortgage as being just under $3 million, which was an inaccurate, highly-inflated figure. Nonetheless, in February 2014 the property was sold under power of sale to a new buyer for $5,875,000, while the other lenders remained oblivious.

When the subsequent mortgagees did learn of the completed sale, they immediately, and successfully, brought a motion to set aside the sale; as the court agreed that the sale was legally invalid.

First of all, under the Mortgages Act any Notice of Sale must accurately state the amount due on the mortgage under which the power of sale is to be exercised. Here, the $3 million figure in CIC’s Notice of Sale was demonstrably incorrect, and this alone invalidated the Notice of Sale.

Next, the Notice of Sale had not actually been served on the other lenders as required by the Act. Although CIC’s lawyer prepared the document, intended to serve it, and honestly believed that he had done so, the fact remained that – through human error – the other lenders never received it as the legislation requires.

These two errors were sufficient to completely invalidate the Notice of Sale. However, even though the Notice of Sale was invalid, the new purchaser could have valid title to the property if it was a bona fide purchaser for value without notice of the invalidity of the sale.

But, the court found that although the buyer was a bona fide purchaser for value, it had received an e-mail from one of the subsequent lenders advising that CIC never served a Notice of Sale and that its attempts to sell the land were invalid. This amounted to notice of a defect and should have prompted the new buyer to make reasonable inquiries, which it failed to do.

This is where things only get more complicated. The question then arises as to the validity of the mortgages obtained by the new purchaser and registered on title to the property to finance the purchase.

The court found that the new mortgages fell into two categories. There was the first mortgage, which mortgagee was a bona fide encumbrancer for value without notice; and there was the remaining new mortgagees, which were caught by the same notice received by the purchaser warning of the invalid Notice of Sale. As the new first mortgage was valid, the court ruled it had an equitable charge in the property. But, all of the new subsequent mortgages were found to be invalid. See: Stanbarr Services Ltd. v. Metropolis Properties Inc., 2015 (ONSC).