Apr 12, 2020
THE NEW REALITY: PRIVATE MORTGAGE LENDERS’ RIGHTS AND REMEDIES - Part V of a Series – Demand Letters – 2 Step Demands - 2 of 3
In the previous blog post, I wrote about demand letters following mortgage default. But not all defaults are created equal, as we shall see.
The courts are most comfortable with monetary defaults – for instance, when the mortgagor has failed to pay amounts owing to the mortgagee; such as a missed monthly instalment or the failure to repay the mortgage debt upon the maturity of the mortgage itself. Conversely, the courts are not particularly enamored with mortgage lenders enforcing mortgage security following non-monetary defaults nor after defaults in the payment of amounts owing to third parties; such as a failure to pay realty taxes or condominium maintenance fees. The reasons for this are due, in large part, to the ‘standard’ wording to be found in many of the mortgage forms used in Ontario.
You see, the Mortgages Act requires a charge to have been in default for 15 days before the mortgage lender is entitled to issue a Notice of Sale. And most private mortgage lenders (in fact, virtually all mortgage lenders) prefer to issue their Notices of Sale when in a position to claim that the entire principle and interest (and costs) secured under the charge has been accelerated (following default) and is due and payable in full. But in order for all principle and interest to be due and payable in full, many mortgage documents require that the mortgagor has defaulted in her or his obligation to pay amounts owing to the mortgagee directly.
The simple solution to avoid finding oneself at the receiving end of a court’s admonition, or worse, discovering at the end of the mortgage remedy process (like the completion of a sale under power of sale) that the entire process was flawed from the get-go, I recommend to my private lender clients that she or he first convert a default in the payment of amounts owing to third parties into a default in the payment of amounts owing directly to the mortgagee. I do this with a 2-step demand process.
First, I send a demand letter requiring the mortgagor to pay to the 3rd party the outstanding amounts owing to the 3rd party - within the next 5 or 7 days. Then, at the end of this first demand period, if the default continues to exist because the mortgagor has ignored the demand, the mortgagee should make the payment to the 3rd party (so long as the wording of the mortgage document itself permits the mortgagee to do so).
Immediately after this payment, I send a second demand letter requiring the mortgagor to repay to the mortgagee the third party payment just made. At the end of this second demand period, if the payment has not been made by the mortgagor to the mortgagee, the mortgagee can accelerate the principle and interest owing under the private mortgage and move on to issue a Power of Sale, being mindful of the 15 day period prescribed by the Mortgages Act (no Power of Sale can be issued under any mortgage until the mortgage has been in default for at least 15 days).
Next up, practical tips about the demand letter. And as always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and mortgage remedy team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.