When a mortgagee exercises a power of sale in Ontario, the law imposes important obligations on the lender regarding the manner in which the property is sold. A recurring question in litigation is:
- Did the mortgagee obtain the proper price?
Ontario Courts have consistently held that a mortgagee is not required to obtain the “highest possible” price. However, the mortgagee must act prudently, fairly, and in good faith, while taking reasonable precautions to obtain true market value.
The leading Ontario authorities establish the governing principles and provide the framework courts use to review whether a sale was conducted properly.
The Leading Ontario Authority: Royal Bank of Canada v. Soundair Corp.
Royal Bank of Canada v. Soundair Corp.
Citation: (1991), 4 O.R. (3d) 1 (C.A.), 1991 CanLII 2727 (ON CA)
Although Soundair was technically a receivership case, it has become the foundational Ontario authority governing mortgage enforcement sales, including power of sale transactions.
The Ontario Court of Appeal established what has become known as the “Soundair Framework” the four-part test used to evaluate whether a mortgagee or receiver acted properly when selling a property.
The Court emphasized:
- A mortgagee is not required to obtain the best possible price, but must take reasonable steps to obtain the best price available in the circumstances.
This distinction is critical. Courts do not judge mortgagees with hindsight. The issue is whether the mortgagee acted reasonably and prudently at the time of sale.
The Four-Part Soundair Framework
Ontario Courts generally examine four key considerations.
1. Were sufficient efforts made to obtain the best price and terms available?
This is the primary consideration.
The mortgagee should:
- properly market the property;
- use competent real estate professionals;
- expose the property adequately to the marketplace;
- allow a reasonable marketing period;
- consider competing offers fairly; and
- avoid unnecessary haste.
The law does not require perfection. The mortgagee is not an insurer of price. However, careless or rushed sales may expose the lender to liability.
2. Were the interests of all parties considered?
The mortgagee may protect its own financial interests, but it must also consider:
- the mortgagor,
- subsequent encumbrancers,
- guarantors,
- and other stakeholders whose interests may be affected.
A lender cannot unnecessarily sacrifice the owner’s equity merely for convenience or speed.
3. Was the sale process fair and commercially reasonable?
Ontario Courts place enormous emphasis on process integrity.
The Courts examine:
- how the property was marketed;
- whether the listing process was genuine;
- whether purchasers had equal access to information;
- whether insiders received preferential treatment;
- and whether offers were handled transparently.
A flawed process may invalidate a sale even if the price itself appears reasonable.
4. Was there unfairness in the process?
This branch focuses on equitable fairness.
Examples of problematic conduct include:
- conflicts of interest;
- self-dealing;
- collusion;
- concealed information;
- arbitrary rejection of offers;
- or conduct designed to suppress bidding.
Even absent bad faith, unfairness may justify court intervention.
1427814 Ontario Limited v. 3697584 Canada Inc.
Citation: 2012 ONSC 156 (CanLII)
This case is one of the clearest examples of a mortgagee being held liable for conducting an improvident sale under power of sale.
The mortgagees sold a valuable development property at a substantial undervalue price. The Court found serious defects in the process, including:
- inadequate marketing;
- an unrealistically low listing price;
- insufficient market exposure;
- failure to pursue stronger opportunities;
- and unnecessary haste.
The Court concluded that the mortgagees failed to take reasonable precautions to obtain fair market value.
Damages exceeding $3 million were awarded.
The case demonstrates that Ontario courts will closely scrutinize:
- marketing efforts;
- exposure periods;
- listing strategies;
- and the overall integrity of the sale process.
Royal Trust Corporation of Canada v. 880185 Ontario Limited
Citation: 2005 CanLII 17132 (ON CA)
This Ontario Court of Appeal decision reinforced that the mortgagee’s conduct must be commercially reasonable in the circumstances.
The Court recognized that practical realities may justify a prompt sale, including:
- declining markets;
- vacancy issues;
- carrying costs;
- tax arrears;
- or environmental concerns.
However, the Court emphasized that the mortgagee’s conduct is judged based on the circumstances existing at the time of sale not through hindsight after market conditions change.
Importantly, the Court reaffirmed that:
Evidence of a fair process is often more important than later appraisal opinions.
Manufacturers Life Insurance Co. v. Granada Investments Ltd.
Citation: 2001 CanLII 2808 (ON CA)
This case reaffirmed several core principles governing power of sale transactions.
The Ontario Court of Appeal held that:
- a mortgagee is not a fiduciary;
- a mortgagee may protect its own interests;
- and a mortgagee is not obligated to speculate on future market improvements.
However, the lender must still:
- act honestly;
- market appropriately;
- obtain competent advice;
- and avoid carelessly sacrificing value.
The Court emphasized that a disappointing sale price alone does not establish liability. A plaintiff must demonstrate:
- unreasonable conduct;
- a defective process;
- or failure to take reasonable precautions.
RCML Corp. v. 2524258 Ontario Inc.
Citation: 2023 ONCA 352 (CanLII)
This recent Ontario Court of Appeal decision modernized and reaffirmed the Soundair principles.
The Court stressed that the duty imposed on a mortgagee is primarily procedural:
- Was the process commercially reasonable?
- Was the property properly exposed to the market?
- Were reasonable steps taken to achieve market value?
The Court confirmed that:
The issue is not whether someone later claims they would have paid more.
Instead, Courts focus on:
- appraisals;
- listing records;
- exposure periods;
- marketing efforts;
- and documentary evidence demonstrating commercial reasonableness.
1173928 Ontario Inc. v. 1463096 Ontario Inc.
Citation: 2018 ONCA 669 (CanLII)
This important Ontario Court of Appeal decision dealt with self-dealing by a mortgagee.
The Court held that, absent clear authorization, a mortgagee cannot purchase the property itself under power of sale.
The decision reinforces the fairness and integrity components of the Soundair framework.
Even where the sale price appears reasonable, the process may still be invalid if:
- conflicts of interest exist;
- fairness is compromised;
- or the mortgagee places itself in a position inconsistent with its obligations.
Practical Lessons for Mortgagees and Real Estate Professionals
Ontario Courts consistently emphasize that process matters.
A mortgagee exercising power of sale should:
- obtain proper appraisals;
- retain competent real estate professionals;
- adequately expose the property to the market;
- document all marketing efforts;
- avoid rushed transactions where possible;
- and ensure transparency and fairness throughout the process.
For real estate professionals involved in power of sale transactions, proper documentation and a defensible marketing strategy are often critical evidence if the sale is later challenged.
Considerations
The law in Ontario does not require a mortgagee to achieve a perfect result or the highest imaginable price. However, lenders must act prudently, honestly, and fairly.
The governing principle remains:
A mortgagee exercising power of sale must take reasonable precautions to obtain the true market value of the property.
More than three decades after Soundair, Ontario Courts continue to apply its four-part framework when determining whether a mortgagee achieved “the right price” under power of sale.
Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com