Unfortunately, the recent increase in interest rates is putting enormous pressure on homeowners whose mortgages may be coming up for renewal. Many of these homeowners bought properties during the buying frenzy and were enticed to buy when mortgage interest rates were at all time lows. However, just a few years later, interest rates have increased dramatically resulting in homeowners being faced with monthly mortgage payments that may have doubled in some cases. Unfortunately, many homeowners will be unable to afford their mortgage payments and may lose their homes if the lender enforces its mortgage and sells the property under Power of Sale. A Power of Sale occurs when the homeowner defaults on the mortgage and the lender can force the sale of the home to recover the outstanding amount owing under the mortgage. For Buyers, a Power of Sale can be an attractive option, however, it is not without risks. This column will examine some of those risks.
When buying a property under Power of Sale, the Buyer is buying the property from the lender and not from the registered owner of the property. In addition, the Agreement of Purchase and Sale (“APS”) will contain one-sided clauses in favour of the lender not typically found in a standard purchase APS and these clauses are non-negotiable. These clauses pose risks for Buyers who are buying under a Power of Sale. The following are some of the risks that a Buyer can face.
- Right of Redemption-a lender may include a clause in the APS that stipulates that the defaulting owner/borrower of the property may bring the mortgage back into good standing at any time before the closing date. The owner/borrower would then be able to keep and not lose the property. Buyers need to be aware of this and understand that at any time prior the closing date, they may lose the ability to buy the property despite the fact that they have an otherwise valid and binding APS with the lender selling the property under Power of Sale. Although it is rare for a defaulting owner to redeem the mortgage, it can happen, thus thwarting the Buyer’s ability to purchase the property.
- State of Property-as the lender has not resided in the property, it will provide no assurances as to the state of the property on closing. Buyers purchasing a property under Power of Sale are buying the property in an “as is” condition. This makes it critically important for the Buyer to make its offer conditional on a home inspection of the property so that any major defects may be uncovered prior to the purchase agreement becoming firm and binding.
- No Warranties or Representations-most Agreements will contain clauses stating that the Seller represents and warrants the condition of the property and its chattels and fixtures. This is not the case when buying under Power of Sale. In fact, the schedule to the APS will make it clear that the lender is not providing any warranties or representations whatsoever. Accordingly any appliances or chattels may not work at all and the Buyer has no recourse. In addition, in some cases, the Buyer may have to accept the risk that the chattels seen during a viewing of the property may no longer be at the property on closing if the chattel was financed with a third party.
- Title issues-in some cases, title to the property being purchased under Power of Sale may have issues which otherwise could be resolved under a normal transaction. With a Power of Sale, the Buyer typically takes the title “as is” which may result in the Buyer not having a good or marketable title. Examples of this could be encroachments onto the property, easements or any other matters which could affect the ownership of the property.
- Title Insurance coverage-while the title insurance company will issue a policy of title insurance for a property being purchased under a Power of Sale, the Buyer could face surprises when making a claim under the title insurance policy following closing. Title insurance policies contain exclusions/exceptions to coverage whereby a title insurance company could deny a claim if the Buyer of the property is making a claim for a matter which it agreed to assume when it purchased the property. For instance, if the Buyer purchased the property under Power of Sale and it turned out that there was an open permit or work order against the property, the title insurance company may deny coverage on the basis that the Buyer agreed to assume the risk of this by buying the property under Power of Sale. Similarly, if there were outstanding water bills or property tax arrears, these may not be covered by the title insurance company. For this reason, it is important for the Buyer to retain a lawyer who is experienced with buying properties under Power of Sale to review the APS prior to making the offer to purchase.
Buying a property under Power of Sale can offer significant price savings for a Buyer, however, as can be seen it is not without many risks.
Obtaining an experienced real estate lawyer can help Buyers to understand these risks.