Can Your Lender Sue You for the Shortfall After Foreclosure in Alberta?

If your home may sell for less than you owe on the mortgage, the worry is simple: will the lender come after you for the difference? That difference is called a shortfall, or a deficiency.

In Alberta the answer often favours the borrower, but not always. The protection has several exceptions, and whether you fall inside one depends on how the mortgage was set up and how the property was used.

This article covers the law of Alberta.

The general rule: the lender is limited to the land

Foreclosure in Alberta is governed by Part 5 of the Law of Property Act together with the Alberta Rules of Court. Under section 40(1), a lender's right in an action on a land mortgage is restricted to the land the mortgage relates to, through sale or foreclosure, and enforcement runs through a court action.

In practical terms, section 40(1)(a) to (c) bars an action on the covenant for payment in the mortgage, on any express or implied covenant by a person to whom the mortgaged land was transferred, and for damages based on the sale or forfeiture for taxes of the land. For an ordinary individual's residential mortgage, the lender generally cannot sue on the covenant for payment, and section 44(2) bars that kind of action against an individual transferee of mortgaged land.

You cannot give this protection away in the paperwork. Any waiver or release of the section 40 protections is void.

When the protection may not apply

The general rule has real limits. These are the situations that most often decide whether a lender can pursue a shortfall:

• Mortgages under the National Housing Act (Canada), and high-ratio mortgages insured by a mortgage insurer licensed under the Insurance Act. Sections 40 and 41 do not apply to these, and the lender may sue on the covenant.
• Renewals of those mortgages, and mortgages entered into before the relevant subsection came into force, which are covered by the same exclusion.
• Mortgages given by a corporation, where sections 40 and 41 do not apply.
• Investment or rental properties that neither you nor any family member ever used as a bona fide residence while you were the registered owner.
• Guarantors, sureties and corporate co-borrowers, who can still be pursued for a shortfall.
• Borrowers who consent to the order, because the sale-first and no-action-on-covenant requirements do not apply where the debtor consents.

The meaning of a high-ratio mortgage comes from the regulations, so do not assume your mortgage is or is not one. Your lender or a lawyer can confirm how your mortgage is classified. Many insured residential mortgages may fall on the unprotected side of the line, so insurance is worth checking early.

Corporations, transferees and rental properties

If a corporation gave the mortgage, it gets no statutory six-month redemption period and no sale-first protection. There is a carve-out for individuals: sections 40 and 41 do apply to an individual who is a transferee of corporate-given mortgaged land, or an assignee of an agreement for sale to a corporation, and waivers of that protection are void.

The deficiency protections in sections 43(2) and (5), 44 and 46 apply only to residential land and farm land. Even then, they do not protect an individual who is or was a registered owner of residential land if neither they nor any member of their family ever used it as a bona fide residence during their ownership, such as a pure investment or rental property. If you say you are not in that excluded group, you carry the onus of showing it.

Guarantees, and how a shortfall is calculated

Nothing in sections 43(2), 43(5) or 44 limits any remedy against a corporation, a guarantor or a surety. If a family member or business partner guaranteed your mortgage, the lender may still be able to pursue that person for a shortfall even where you are protected.

Near the end of a foreclosure action, the plaintiff files and serves a statement of secured indebtedness, the sale proceeds, any deficiency calculation, a bill of costs and a proposed order. An assessment officer checks and corrects the amounts, and the certified bill of costs is served on every defendant and subsequent encumbrancer. If you are a defendant, reviewing those documents is your chance to spot errors.

Where the lender takes the property through foreclosure, an order of foreclosure made absolute vests title in the lender free of your right of redemption, satisfies the debt, and entitles the lender to a certificate of title.

What to check and do next

• Is your mortgage insured? Check your mortgage documents or ask your lender whether it is under the National Housing Act or insured by a licensed mortgage insurer.
• Is this a renewal of an insured mortgage? Renewals can carry the same exclusion.
• Who signed? Note any corporation, co-borrower, guarantor or surety on the documents.
• Did you or a family member ever live in the property while you were the registered owner? Gather proof, because you may need to show it.
• Did you consent to a court order? Consent changes which protections apply.
• Keep every court document you are served with, and read the statement of indebtedness and any deficiency calculation carefully.

Because the answer turns on the type of mortgage, who signed, and how the property was used, speak to a lawyer before you agree to anything with your lender or consent to an order.

Frequently asked questions