Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Mortgage Enforcement, October 2008

Prohibition against taking further proceedings

Section 42 of the Mortgages Act (Ontario) prevents a lender from taking any further proceedings to enforce a mortgage (without court approval) during the currency of a demand for payment of money secured by the mortgage or the time specified for payment in a notice of sale. In other words, no further proceeding and no action to enforce the mortgage are to be taken until the period of time specified in the demand for payment or notice of sale has elapsed.

Two basic concerns prompted the enactment of Section 42. First, the legislature wished to prevent the lender from incurring unnecessary costs of enforcement which would be passed on to the borrower. Second, the legislature wanted to ensure the borrower would have the benefit of the notice period without being subjected to a multiplicity of other actions or proceedings.

What constitutes a "Further Proceeding"?

The courts have broadly interpreted Section 42 and have determined that each of the following acts constitutes a "further proceeding":

  1. an attempt by the lender to recover possession of the mortgaged premises – if control of the mortgaged property is vital, it may be more prudent for the lender to take possession of the mortgaged property prior to issuing a notice of sale;
  2. serving a notice of attornment on a tenant;
  3. entering into an agreement of purchase and sale with respect to the mortgaged property, even if the agreement is conditional upon the non-redemption by the borrower;
  4. the service of a statement of claim;
  5. the publication of an advertisement by the lender announcing the impending auction sale of the mortgaged property;
  6. the putting up of posters and placing of newspaper ads to advertise the sale of the mortgaged property;
  7. listing the mortgaged property for sale with a real estate agent;
  8. preparing the statutory declarations referred to in Section 35 of the Mortgages Act (Ontario) and having the same approved by the land registry office; and
  9. obtaining appraisals of the value of the mortgaged property.

What does not constitute a "Further Proceeding"?

The courts have held that the assignment of a mortgage by the lender after issuing the notice of sale is not a further proceeding to enforce the mortgage, as an assignment does not hinder or prejudice the right of redemption or increase the borrower's costs of redemption.

Section 42 also does not preclude informal discussions with a real estate agent about selling the mortgaged property in general terms where no listing is promised and such action does not interfere with the borrower's right to redeem.

Section 42(3) creates exceptions for proceedings to prevent waste or other injury to the mortgaged property. The problems raised by Section 42 may also be readily dealt with by an application for a court order pursuant to Section 42(2).

Consequences of taking further proceedings

The result of a contravention of Section 42 is that the notice or demand will remain valid but further proceedings commenced during the currency of the notice or demand will be set aside as invalid. Once a notice exercising power of sale has been given, it cannot be abandoned in order to circumvent Section 42. Accordingly, for obvious reasons, both lenders considering enforcement as well as lenders in the midst of enforcement proceedings must be mindful of the significant consequences of taking "further proceedings" in violation of Section 42.

Conclusion

Given the consequence that further proceedings commenced during the currency of a notice or demand will be set aside as invalid, lenders should be ever vigilant that they are not taking enforcement steps and incurring costs that contravene Section 42.

A lender can expect both the borrower and subsequent encumbrancers to attack the lender's sale process if a notice or demand was given by the lender and such notice or demand had not yet expired at the time the notice of sale was issued. If the time stated in the demand had not expired, Section 42 may permit the borrower or a subsequent encumbrancer to apply for a declaration that the further proceeding is a nullity. This will inevitably prejudice and delay the lender's opportunity for a timely and full recovery of the indebtedness.

With a prudent initial evaluation and decision of the appropriate ordering of the steps in the lender's enforcement strategy, such hiccups can be minimized and frequently avoided entirely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.