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Oct 25, 2020

THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part XXIX of a Series – A Post-Lockdown Review of Mortgage Remedies during a Pandemic - Part 4 of 5

My previous 3 blog posts HERE and HERE and HERE, introduced a retrospective review of mortgage remedies during the Covid-19 pandemic, focusing on institutional mortgage default. This post is a continuation of that theme, but looking at taking possession of mortgaged property.The law dealing with possession of mortgaged property, especially when the property is rented to a tenant, takes us back to our first year real property course from law school. Real Property Law 101 if you will.

Lawyers reading this will recall that in Ontario, when we talk about an owners’ fee simple interest in real property, what we are really saying is that at common law, an owner has a bundle of rights relating to her or his ownership of the land in question, and all of these rights taken together result in her or his absolute ownership of the real property ….. in fee simple. Included in this bundle of rights is the right:

  • to occupy and live in the property – or put more formally, to be in possession of the property
  • to allow others to use the property either by giving a license (temporary permission) to use the property or by granting a lease of the property
  • to develop and build upon the property
  • to farm the land or cut down timber
  • to sell the property
  • to bequeath the property upon death

In order to grant a lease of real property, the owner must give the tenant exclusive possession of the property for a clearly spelled out term. These 2 factors, exclusive possession and a ‘term certain’ are necessary preconditions to any lease of land at common law.

So an owner who has rented out the mortgaged property has, by definition, given exclusive possession of the property to the tenant as a necessary precondition to the creation of a residential lease. It is therefore the tenant, and not the owner, who is in possession of the mortgaged property.

A mortgagee’s ability to take possession of mortgaged property without a court order stems back to the centuries old origins of mortgage law, when the granting of a mortgage was accomplished by the mortgagor actually handing over to the mortgagee the deed to the mortgaged property. Historically, the delivery of the deed to the mortgaged property was accompanied by the delivery of possession of the mortgaged property. At law, the mortgagee became the owner of the mortgaged property and was entitle to possess the mortgaged property. Somewhere in the annals of time, likely shortly after the English Courts of Equity created the concept of ‘equity of redemption’ (which permitted an owner/mortgagor to redeem the mortgage following default), the mortgage contracts themselves started containing clauses allowing the mortgagor to keep possession of the mortgaged property until default. And only after default, was the mortgagee entitled to possession of the mortgaged property under the mortgage contract. This practice of contractually reversing the common law rules of possession exists in virtually all mortgages.

And so, when the mortgage goes into default, the mortgagee is entitled by the mortgage contract to take possession of the mortgaged property. But if the property has been leased, possession has already passed from the owner/mortgage to the tenant.

When a mortgagee changes the locks on rented property and gives the tenant the new key, that rather symbolic action indicates the mortgagee’s clear intention to prevent the owner/mortgagor from taking back possession of the property from the tenant at the expiry of the term of the lease. And upon doing so (as I mentioned in Blog XXI) the mortgagee becomes the mortgagee-in-possession of the mortgaged property.

The next blog post will complete this retrospective review of mortgage remedies during the Covid-19 pandemic. 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.