- A lender selling under power of sale must take reasonable precautions to obtain the true market value of the property.
- A claim on a mortgage covenant to repay 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.
- A lender does not lose the longer limitation period just because the property has been sold.
When a home is sold under power of sale for less than the mortgage debt, the leftover amount is often called a shortfall or deficiency. Former owners reasonably ask whether the debt simply disappears with the house.
Not necessarily. Whether a lender can recover the shortfall depends on the wording of the mortgage and on how the sale was carried out. This article explains the main points that apply in Ontario.
Does the debt end when the house is sold?
Selling the property does not automatically wipe out the borrower's promise to repay. A lender's claim for the shortfall after a power of sale is an action on a mortgage covenant to repay. A lender does not lose the longer limitation period for a debt claim just because the mortgaged property has since been sold.
Whether a particular lender can recover a shortfall depends on the covenant in your mortgage and on whether the sale achieved true market value. A lawyer can review your documents and tell you where you stand.
The lender's duty to get a proper 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. A hasty or secretive sale can cast doubt on whether a proper price was obtained.
This duty matters because a low sale price increases the shortfall. If the price looks well below what the home was worth, that may be a point to raise if the lender claims the difference from you.
How long the lender has to sue
An action on a mortgage covenant to repay 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.
| Question | Answer |
|---|---|
| Which period applies to a mortgage covenant claim? | The Real Property Limitations Act period, not the two-year Limitations Act, 2002 period |
| Does the longer period apply to guarantees? | Yes, it covers guarantees too |
| Does selling the property end the longer period? | No, a lender does not lose it just because the property was sold |
What can be added to the debt
- Interest on arrears at a rate no higher than the mortgage rate.
- No fine, penalty or higher rate that raises the charge on arrears above the regular rate.
Under the Interest Act, 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, except that interest on arrears at a rate no higher than the mortgage rate is allowed. This means the lender can keep charging interest on missed payments, but not at a higher rate than the one your mortgage already sets. Whether a particular fee or charge on your statement fits within these limits depends on your situation, so it is worth confirming with a lawyer. If you are unsure how an amount was worked out, you can ask the lender to explain each item it has added to what you owe.
What to do next
- Ask the lender for a written accounting showing the sale price, the debt and each cost deducted.
- Keep your mortgage, the notice of sale and all letters from the lender.
- Find out how the property was listed and for how long, and whether the price seems close to its market value.
- Do not ignore a demand letter or a statement of claim.
- Speak with a lawyer about your mortgage covenant, any guarantee and the time limits.
Frequently asked questions
Can a lender sue me after the house has been sold?
It may be able to. A lender's claim for the shortfall is an action on a mortgage covenant to repay, and the lender does not lose the longer limitation period just because the property has been sold.
How long can a lender wait to sue for the shortfall?
The action 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 Limitations Act, 2002 period.
What if the house sold for too little?
A lender must take reasonable precautions to obtain the true market value as of the date of sale, and a hasty or secretive sale can cast doubt on the price. Whether that affects the shortfall depends on the facts.
Does a guarantor owe the shortfall too?
The longer limitation period covers guarantees. Whether a guarantor is liable for a shortfall depends on the guarantee, so have it reviewed by a lawyer.
Sources
- Court of Appeal for Ontario – Sheth v. Randhawa, 2022 ONCA 89 — ontariocourts.ca
- Justice Laws – Interest Act, s. 8 — Justice Laws (federal)
- Court of Appeal for Ontario – Hilson v. 1336365 Alberta Ltd., 2019 ONCA 1000 — ontariocourts.ca
- Court of Appeal for Ontario – 1250140 Ontario Inc. v. Bader, 2022 ONCA 197 — ontariocourts.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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