Power of Sale
Royal Trust Corporation of Canada v. 880185 Ontario Limited, 2008 CanLII 42418 (ONSC)
One of the recurring questions in mortgage enforcement law is:
What duties does a lender owe after taking possession of a property and before selling it under a power of sale?
The Ontario Superior Court’s decision in Royal Trust Corporation of Canada v. 880185 Ontario Limited provides an excellent examination of a mortgagee’s obligations when managing and selling a mortgaged property.
The case reinforces a principle that every lender, borrower, and real estate professional should understand:
a mortgagee is required to act reasonably and prudently,not perfectly.
Facts
The dispute involved a newly constructed 12-unit apartment building in Strathroy, Ontario.
The property had been developed by 880185 Ontario Limited, a company owned by Michael Beattie and Peter Boshart. Construction was financed through a first mortgage from Royal Trust Corporation of Canada and a second mortgage from National Trust.
Problems arose when:
- Municipal property taxes went unpaid.
- Financial information requested by Royal Trust was not provided.
- The second mortgage was approaching maturity.
- The rental property was experiencing increasing tenant turnover.
As a result, Royal Trust exercised its rights under the mortgage and took possession of the property in March 1993.
After managing the property for several months through professional property management firms, Royal Trust sold the building under power of sale for $445,000.
The owners counterclaimed, alleging that Royal Trust had:
- Mismanaged the property;
- Allowed occupancy levels to collapse;
- Failed to preserve the value of the asset; and
- Sold the building for substantially less than its true value.
What Happened to the Building?
The evidence showed that the apartment building was initially successful.
When first opened, all twelve units were rented at some of the highest rental rates in the Strathroy market.
However, as the local economy weakened during the recession of the early 1990s, problems began to emerge.
The Court found that:
- Competing apartment buildings were offering lower rents.
- Good tenants left when their leases expired.
- Some replacement tenants created noise and behavioural issues.
- Frequent parties and property damage drove away other residents.
- Vacancy rates increased before Royal Trust ever took possession.
By the time the lender assumed control, the property was already experiencing significant occupancy challenges.
Did Royal Trust Mismanage the Property?
The former owners argued that Royal Trust’s property managers failed to keep the building occupied and allowed its value to deteriorate.
The Court disagreed.
Justice Brockenshire found that Royal Trust retained professional property managers who:
- Cleaned and repaired the property;
- Addressed tenant complaints;
- Attempted to remove problem tenants;
- Implemented tenant screening procedures; and
- Recommended rent reductions to make the building competitive.
The Court accepted evidence that turning around a troubled apartment building takes time and that many of the problems were inherited from the prior ownership.
Importantly, the Court concluded that the building’s decline was not caused by Royal Trust.
Rather, it resulted from:
- Excessive rental rates;
- Weak market conditions;
- Poor tenant selection; and
- Ongoing tenant disturbances that predated Royal Trust’s involvement.
The Legal Duty of a Mortgagee
The Court reviewed the leading Ontario authorities governing power of sale transactions.
The established principles can be summarized as follows:
1. The Mortgagee Must Take Reasonable Precautions
A lender selling under power of sale must take reasonable steps to obtain fair market value.
2. The Mortgagee Is Not a Guarantor
The lender is not required to achieve the highest possible price.
The duty is one of reasonableness, not perfection.
3. Courts Examine the Entire Context
A mortgagee will only be found liable if it is clearly on the wrong side of the line.
4. The Mortgagee May Choose When to Sell
Even if market conditions are poor, the lender is entitled to realize its security once the power of sale arises.
5. Adverse Markets Are Not the Mortgagee’s Fault
A lender may accept the best available price in a declining market, provided it did not create the adverse conditions.
6. The Mortgagor Must Prove Actual Loss
Even if a breach is established, the borrower must prove that a higher sale price would have been achieved but for the lender’s conduct.
Was the Sale Improvident?
The defendants argued that the property should have sold for considerably more.
Their expert appraiser suggested a value approaching $650,000.
The Court was not persuaded.
Before selling the property, Royal Trust:
- Obtained two independent professional appraisals;
- Listed the property with a realtor;
- Marketed the property for several months;
- Considered multiple offers; and
- Negotiated the eventual sale price upward.
The final sale price of $445,000 closely reflected the midpoint between the two independent appraisals obtained by Royal Trust.
Justice Brockenshire concluded that the lender had taken more than reasonable precautions.
The Court found that Royal Trust acted prudently throughout the sale process and that the sale was not improvident.
Significance of this Case
This decision remains an important Ontario authority on both:
- The duties of a mortgagee in possession; and
- The standard expected of a lender exercising a power of sale.
The case confirms that Courts will not judge a lender’s actions with the benefit of hindsight.
The fact that a property later sells for more money or that an expert later suggests a higher value does not establish wrongdoing.
The focus is always on whether the lender acted reasonably based on the information available at the time.
Considerations for Mortgagees
For lenders, this case demonstrates the importance of:
- Obtaining independent appraisals;
- Using competent property managers;
- Properly marketing the property; and
- Maintaining thorough documentation throughout the process.
The Court ultimately held that Royal Trust acted prudently both as a mortgagee in possession and as a mortgagee exercising its power of sale. The counterclaim was dismissed, and Royal Trust was awarded judgment for its mortgage deficiency.
Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com