Can Borrower Block Power of Sale if Sale Price is Too Low?

In a recent Court of Appeal decision, the dispute centered on whether the borrower could stop the lender’s power of sale proceedings because they felt the price obtained for the property was too low.

The borrower had a vision to develop his property into a residential complex.  He borrowed $1 million from the lender, secured by a first mortgage.  After his default, he was unable to secure refinancing, so the lender commenced power of sale proceedings and agreed to sell to an arm’s-length third party. The purchase price was $1,150,000, which was down considerably from the initial list price of $1,420,000.

The borrower’s first attempt to ask the court to stop the sale was unsuccessful.  Then, on the scheduled sale closing date, the parties attended court to have an appeal heard. The lender asked the court to validate the imminent sale to the third party, and the borrower asked for injunction to have it blocked, so that he could redeem the mortgage instead.

The borrower’s complaint was that the lender was selling the property “in bad faith”, after only three weeks on the market, and well below the appraised value.  The borrower felt that the lender’s only concern was to recoup the $1 million that had been advanced under the mortgage (rather than focus on getting market value for the property) and that it had heedlessly accepted the second offer that came along, with no regard to the harm that it would cause the borrower.

The Court of Appeal rejected the borrower’s appeal and added that the Court could not make the declaration that the lender wanted, either.

It was premature for the Court to rule on whether the lender’s sale transaction was valid.   The lender had a duty to make reasonable efforts to sell for market value; this involved taking steps in good faith after considering the borrower’s interests, and after a reasonable time on the market with proper marketing efforts and appraisals. Whether the lender in this case had met those obligations, or conversely whether the sale was improvident, would come to light only after-the-fact. It was not the Appeal Court’s proper role to pre-judge any issue related to a future improvident sale action, which was also the most appropriate venue for assessing any damages that may have arisen from the sale.

Further, subject to the borrower’s right to redeem or bring the mortgage into good standing (neither of which had been exercised here) – a lender acting in good faith and without fraud could not be restrained from the proper exercise of its power of sale remedy.  Once the lender had accepted the new buyer’s offer, the borrower’s right to put the mortgage in good standing came to an end, in keeping with the provisions of the Mortgages Act.  The borrower and any subsequent mortgagees were out of time, and a mere allegation that the lender’s sale was in bad faith, or that it had breached its duty of care, did not provide the court with the jurisdiction to make an improvident sale declaration.

The lender was therefore allowed to proceed with its remedy, but the court could not go so far as to give its “blessing” to the sale to the new buyer. Those two parties were not at odds, and absent an actual dispute, the court could not declare the contract valid. See Linderwood Holdings Inc. v. Armanasco, 2017 ONCA 156; affirming 2016 ONSC 1605.