Power of Sale on a Second Mortgage in Ontario: What Happens to Both Lenders

If your mortgage contains a power of sale clause, that lender cannot give notice until the default has continued for at least 15 days, and cannot sell until at least 35 days after the notice is given. If a mortgage has no power of sale clause, the statutory power of sale applies only after three months' default and requires 45 days' notice to persons having an interest in the property. That raises worries for the borrower and for the other lender: who gets paid first, and what happens to the other mortgage?

This article explains priority, notice and the main risks in plain terms. Exact payout calculations depend on the documents and the sale, so a lawyer should confirm your situation.

Two loans on one home

A second mortgage is a second loan secured on your home. You must keep paying the first mortgage too, and second-mortgage interest rates are usually higher because they are riskier for lenders. You can usually borrow up to 80% of your home's value, minus what you still owe, and if you cannot repay you may lose the home.

How priority is decided

Under the Land Titles Act, registered instruments affecting the same interest in the same parcel rank according to the order in which they are entered in the register, so a second charge ranks behind an earlier registered first charge.

There is an exception: a charge's priority can be changed by registering a postponement under subsection 78(6) of the Land Titles Act. Check the title search to see whether one exists.

How sale proceeds are shared between lenders depends on the amounts owing, the costs and the final sale price. It is worth confirming with a lawyer how this applies to your situation.

Notice and timing when power of sale starts

Where a mortgage contains a power of sale, the lender cannot give notice of exercising it until the default has continued for at least 15 days, and cannot sell until at least 35 days after the notice is given. The 35-day notice must go to every person having an interest in the mortgaged property. Another registered lender will often be among them, which is worth confirming on title.

The notice must be in Form 1, Notice of Sale under Mortgage, prescribed by O. Reg. 814/21. Where a person entitled to notice is an execution creditor, it may be addressed to the lawyer who issued the execution, or to the creditor if there is no lawyer.

Exception: if the mortgage has no power of sale clause, the statutory power of sale under Part II of the Mortgages Act applies only after three months' default and requires 45 days' notice to persons with an interest.

Once notice has been given, the lender cannot start any further proceeding to enforce the mortgage until the time stated in the notice has passed, unless a Superior Court judge permits it.

Other claims that can affect both lenders

• Condo liens: if an owner defaults on common expenses, the corporation has a lien against the unit. A registered lien has priority over every registered and unregistered encumbrance, including an earlier mortgage.
• That priority is lost if the corporation does not register within three months, or does not give written notice to every registered encumbrancer on or before the day it registers.
• A condo lien does not have priority over a Crown claim other than one by way of mortgage.
• The lien covers the unpaid amount, interest and reasonable legal costs, and the corporation can start its own power of sale 15 days after registering the certificate of lien.
• Tenants: a lender that becomes mortgagee in possession, or gets title by power of sale, is deemed to be the landlord under an existing tenancy.

Borrower protections and what to do next

Despite any agreement to the contrary, a borrower in default can stop the lender from enforcing the acceleration clause by paying the arrears, not money that is only due later, and the lender's necessary expenses. You can also give written notice requiring a statement of arrears and expenses, and the lender must answer within 15 days. Once the power of sale closes, section 22 no longer applies and the borrower is limited to a claim for damages.

The selling lender must take reasonable precautions to obtain the true market value of the property as of the date of sale. If the sale leaves a shortfall, an action on the 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. Selling the property does not by itself end that longer period.

• Get a title search to see every charge and its order of registration.
• Read each notice and check which lender sent it and the dates.
• Request a written statement of arrears from the lender.
• Contact the other lender early, whether you are the borrower or a junior lender.
• Speak with a lawyer before the sale period runs out.

Frequently asked questions