The Forclosure Process
1. The First Steps
When the owner of property charges or mortgages his or her property (as "Mortgagor") to the party lending the money (that party being the "Mortgagee"), the law assumes that the Mortgagor has conveyed his or her property to the Mortgagee but has retained the right to pay the Mortgagee in full and to then require the Mortgagee to reconvey or release all claim upon the property. This right is referred to as an "equity of redemption".
If the Mortgagor falls behind in his or her monthly payments or makes default under one of the other provisions in the mortgage (such as the requirement to insure, pay taxes, etc.), the mortgage usually provides that the Mortgagee can elect to "accelerate" the mortgage so that all monies due and owing under the mortgage are payable. Once the Mortgagee has elected to use the "acceleration" clause in the mortgage, the Mortgagee is not obligated to accept only the monthly payments which are in default (this amount commonly being referred to as the "arrears"). Therefore, subject to the right of the Supreme Court to order otherwise, after acceleration, the Mortgagee can insist that the total of the amount owing under the mortgage be paid and can not be required to accept only the arrears.
After a Mortgagor has fallen into arrears on his mortgage, a demand must be made on the Mortgagor before any Court proceedings are commenced. If no response is received from the Mortgagor, it is usual for an action to be commenced in the Supreme Court of British Columbia by way of a "Petition" by the Mortgagee who then becomes the "Petitioner" in the action. The "Respondents" in the action will be the owners of the property plus any individuals or companies who have an "interest" in the property (such as a mortgage, lien, or judgment) which was registered in the Land Title Office after the Mortgagee registered its mortgage. Accordingly, if a first mortgage is registered against the owners of the property in June of 1995, a second mortgage registered in September, 1995, a Judgment is registered against the owners of the property in October, 1995, and a Builders' Lien is registered against the property in November of 1995, the Respondents to an action will be the owners, the holder of the second mortgage, the Judgment Creditor who holds the Judgment as against the owners, and the person who has filed a Builders' Lien.
In a foreclosure action, the Court proceedings are commenced by a "Petition" which outlines in condensed form what the Petitioner claims against the Respondents as well as the facts which will be relied upon by the Petitioner in making its claim. The Petition is accompanied by an Affidavit sworn by the Mortgagee or an employee of the Mortgagee who can swear as to the truth of what is outlined in the Petition and by an Affidavit sworn by the solicitor for the Petitioner attaching a copy of the Certificate of Title for the property being foreclosed. Service of the Petition and Affidavits is usually accomplished by personally delivering copies of the documents to individuals, Banks and extra-provincially registered Companies (using a process server) and by mailing copies of the documents by registered mail to the registered offices of any British Columbia companies which are Respondents to the action.
2. Contested Foreclosures
If the Respondents (or any of them) have a "defence" to the action which has been commenced they have twenty-two (22) days from the date of service of the Petition and Affidavits on them to file an Affidavit setting out the nature of their defence and why they feel the claim of the Petitioner is either invalid or inaccurate (in whole or in part).
If a foreclosure action is opposed, it is usually necessary that a trial take place to hear the matters in dispute between the parties. The number of actions where it is necessary to have a trial is very low (less than 1 in 10,000). If an action is referred to trial by the Court, the trial takes place about 15 to 18 months after the date of commencement of the foreclosure proceedings.
3. The Order Nisi
If the action does not "go to trial", the Petitioner is in a position to obtain an "Order Nisi" of foreclosure.
The Order Nisi is the initial Order obtained in a foreclosure action. The term "Nisi" has been defined as:
"A limiting term added to such terms as Decree, Order, or Rule to indicate that these are not absolute or final, but are to be valid or take effect unless some cause is shown, or reason arises, to prevent this."
At the Order Nisi stage of a foreclosure action, the Court will establish the amount which is owning to the Petitioner and will establish a period during which time the Respondents can pay this amount. This period of time is known as the "redemption period" and the "usual" period is six months. If it can be shown that the property, if sold, would not produce enough to pay the amount owing under the mortgage which is being foreclosed, the Court will sometimes decrease the "usual" six-month redemption period. In rare circumstances, the Court might order a redemption period of more than six months.
At the time of the granting of the Order Nisi, the Court will establish what is due and owing to the Petitioner at the date of the Order Nisi and the per diem interest which accrues after that date. The Respondents will then have the six months (or any other period set) to pay what is due and owing. In order to "redeem" the property, they will have to pay the total of:
The balance owing at the date of the Order Nisi;The interest accruing to the date of payment;
The balance owing to the Petitioner for its Court awarded costs.
The Court will also usually order that Judgment be given against the Respondent Mortgagors or any Guarantors in an amount equal to the amount which is due under the Mortgage (including costs) at the date of the Order Nisi.
4. Enforcement Options
Once the Petitioner has entered an Order Nisi with the Court, it has two courses of action available to it which it can exercise concurrently:
Enforce (or execute on) the Judgment obtained by selling other assets of the Respondent Mortgagors; proceed with the foreclosure proceedings.
If the Petitioner executes on the Judgment, the Petitioner proceeds as if a Judgment had been obtained in a regular Court Proceeding (so that assets of the Mortgagors can be seized and sold to satisfy the Judgment, other land of the Mortgagors can be sold to satisfy the Judgment, etc.). The proceeds on any assets sold are applied against the balance owing under the Judgment and against the redemption amount. The interest rates on Judgments is about 7.5% and, unless the interest rate under the mortgage is also 7.5%, these amounts will be different so that it is possible for the Judgment to be satisfied even though the mortgage has not been redeemed. Until the redemption amount is satisfied, the Mortgagee will not be required to discharge its mortgage from the property.
At any time during the foreclosure proceedings, the Court has the power to order that the Petitioner accept the amount of the arrears owing (so that the mortgage is put back into good standing). In deciding whether it will make such an order, the Court takes into account the number of payments missed, the possibility of the arrears being paid, and whether the mortgage has been in arrears before. This Order cannot be made if the mortgage term has matured.
5. Order Absolute
The next step in the foreclosure proceedings is the application for an Order Absolute. An application for Order Absolute can be taken only after the redemption period has expired. After receiving a Certificate from the Court Registry that no monies have been paid into Court, the Petitioner requests that the Order Nisi be made "absolute". In some cases, proceeds have been received from execution proceedings or the sale of one property where the mortgage covers more than one property. These payments must be accounted for in the materials before the Court when the application for Order Absolute is made. The granting of the Order Absolute has the effect of "foreclosing" (shutting out/terminating) all the interests of the Respondents in the property. When registered in the Land Title Office, the Order Absolute has the effect of conveying the property into the name of the Petitioner free and clear of the interests of the Respondents. This registration is subject to one exception - the Respondent owners retain the right to go before the Court and obtain an Order that the property be conveyed back to them upon payment of the full balance then due and owing. This type of application is very rare and, in almost all cases, the registration of the Order Absolute in the Land Title Office by the Petitioner will mean that the Petitioner will retain the property as its own. Once Order Absolute is granted, the Petitioner loses its right to proceed against the mortgagors under the Judgment obtained even though, in due course, the property might be sold for a loss. However, if the property can later be sold for more than what was owing, the Petitioner does not have to share this surplus with any of the Respondents.
6. Appointment of a Receiver
At any time after the action is commenced, a person (called the "Receiver") may be appointed by the Court for the purpose of taking possession of the property and receiving any rents and profits from that property. The Receiver takes possession of the property and makes arrangements with the tenants to pay rent directly to him or her. The Court usually orders that this rent can be applied on taxes, repairs, etc. The appointment of a Receiver is often made when it appears that the property will be allowed to become "run down" during the period when the foreclosure proceedings are taking place. The Court will never appoint a Receiver if only the owners are occupying the property.
7. Obtaining an "Order for Conduct of Sale"
Any of the Respondents can apply to the Court at any time for an "Order for Conduct of Sale". This Order provides that the property be sold and that the party obtaining the Order have the ability to list the property with a real estate agent. If such an Order is granted, the party obtaining the Order can list the property with a real estate agent as though they were the owner of the property (subject to the proviso that the sale will usually have to be approved by the Court). This Order nullifies any previous listing agreement entered into by the Respondent owners. If, during the "redemption period", a purchaser cannot be found or if a purchaser is found but is not (in the opinion of the Court) offering enough to justify a sale, then the Petitioner is in a position (but only after the expiry of the "redemption period") to request an Order for Conduct of Sale instead of applying for Order Absolute of foreclosure. If a satisfactory offer is made to the party having conduct and a sale is approved by the Court, the proceeds of the sale will be used to satisfy any taxes owing on the property, any real estate commission which is due, the amount due and owing to the Petitioner under its mortgage, the amounts due and owing to the Respondents under the charges which they hold and the balance, if any, to the Respondent owners. It is only rarely that the Petitioner is granted an Order for Conduct of Sale during the redemption period.
8. Lawyer's Fees in Foreclosure Proceedings
The Petitioner will be awarded "Party and Party" costs in an amount to be assessed pursuant to Appendix "B" of the Supreme Court Rules. An "assessment" of costs involves the Registrar of the Supreme Court making a monetary assessment of the work done by the lawyer to that point in time. The assessment is made having reference to the Schedule of the Party and Party costs in the Supreme Court Rules. The amount of the "assessed" costs and the amount of the disbursements of the lawyer are added to the amount of the Judgment obtained against the Respondent owners and to the redemption amount. If the property is sold during the period of redemption, these costs and disbursements will be paid out of the proceeds of such a sale. IF the Respondent owners pay the amount which is owing under the mortgage during the period of redemption, it is also necessary for them to pay these costs and disbursements. If the property is not sold, if the Respondent owners do not pay the amount which is owing and if the Petitioner is successful in obtaining an Order Absolute, the lawyer's account is paid directly to the lawyer by the Petitioner. The Party and Party costs which are recoverable against the Respondents usually represent about 1/4 to 1/3 of the actual fees the lawyer will charge to perform the services required in the foreclosure proceedings.
9. Summary
The four main steps in a foreclosure proceeding (the demand, the issuance of a petition, the application for Order Nisi, and the application for the Order Absolute) usually involve a period of 8 - 9 months and provide a procedure whereby the Petitioner/Mortgagee obtains what is due and owing to him by receiving the "arrears" owing under the Mortgage, the full amount owing under the Mortgage, or the property itself.