Deficiency After Power of Sale: Do You Still Owe Money in Ontario?

Sometimes a house sells under power of sale for less than the mortgage debt plus costs. The gap is called a deficiency or shortfall. Many borrowers assume the debt ends when the house is gone, and that is not always so.

This article explains whether a lender can pursue you for the shortfall, how long it has to do so, and the main points that may be raised in response. Whether you actually owe anything depends on your mortgage and the facts of the sale.

What a deficiency is

A deficiency is the gap that can be left when a power of sale brings in less than the mortgage debt and the costs of selling. How the sale money is applied depends on the mortgage and the lender's accounting, so it is worth confirming with a lawyer. A lender selling under power of sale must take reasonable precautions to obtain the true market value of the property as of the date of sale. If the money falls short, the lender may look to the borrower's promise to repay in the mortgage, known as the covenant. Whether a lender can recover a shortfall depends on that covenant and on whether the sale achieved true market value, so you should have the mortgage reviewed.

Can the lender sue for the shortfall?

Often it can try. A lender's claim on the mortgage covenant to repay, such as a claim for the shortfall after a power of sale, must be started within the later of 10 years after the cause of action arose and 10 years after the liable person's interest in the land was conveyed or transferred. This applies instead of the two-year period under the Limitations Act, 2002, and it covers guarantees too.

A lender does not lose the longer limitation period for a debt claim just because the mortgaged property has since been sold. So a sale closing does not by itself end your exposure.

• Borrowers can be pursued under the covenant.
• Guarantors can be pursued within the same longer period.
• The time clock depends on dates that can be hard to work out, so have a lawyer confirm them.

Defences and challenges to consider

The central question in many shortfall disputes is the price. A lender selling under power of sale must take reasonable precautions to obtain the true market value of the property as of the date of sale, and a hasty or secretive sale can cast doubt on whether a proper price was obtained. If the sale was poorly run, that may affect what the lender can claim, though the outcome depends on the evidence.

The second point is timing. If the lender waits too long, the limitation period may be argued. A lawyer can calculate the dates from your documents.

The third point is the amount claimed. No fine, penalty or rate of interest may be charged on mortgage arrears that increases the charge on the arrears beyond the rate payable on principal not in arrears, and interest on arrears at a rate no higher than the mortgage rate is allowed. Review the lender's figures for charges of this kind.

Timing and the closed sale

Once the power of sale closes, the borrower can no longer rely on section 22 of the Mortgages Act, which lets a borrower in default stop the lender from enforcing by paying the arrears and the lender's necessary expenses, and is limited to a claim for damages against the lender. The buyer's title is also usually safe. Where notice was given in professed compliance with the Mortgages Act, the purchaser's title cannot be attacked because of a defect in the sale process, and anyone harmed has a remedy against the lender who sold.

That protection does not extend to a purchaser who had actual notice of the defects. In practice, concerns about the sale are usually raised against the lender, so act promptly.

What to do next

• Collect the mortgage, the notice of sale, the sale agreement and any statement of the amount owing.
• Note the date of the sale and the date of any demand or claim you receive.
• Find out whether anyone guaranteed the mortgage.
• Look at how the property was listed and marketed, and whether the price seems consistent with its value.
• Do not ignore a statement of claim; respond within the time it states and get advice quickly.
• Ask a lawyer to review the lender's accounting before you agree to pay or sign anything.

Frequently asked questions