Foreclosures are the remedy available to a lender when a borrower who has pledged land as security fails to repay the loan.
The owner of a piece of real estate coronet realty ltd. who borrows funds through the use of a mortgage loan is said to have an “equitable right to redeem”, meaning that even though he owes money to a bank who has a charge against the asset and has breached the mortgage contract and for that reason lost the legal or contractual right to redeem the property the owner still has the capacity to redeem the land and pay the loan if he can get the cash.
What this means to a lender who’s loan has been unpaid is that before he can take the real estate or otherwise cause it to be sold he must extinguish the borrower’s equitable right to repay the loan. This is commonly a technicality in that a borrower who has the funds to clear the mortgage loan through his equitable right of redemption probably wouldn’t find himself in the foreclosure condition in the first place.
In British Columbia the process of foreclosure will begin with a petition to the Supreme Court. It is prepared, filed, and served to all respondents. The respondents are the borrower, of course, but also everybody has a claim against the title that has to be extinguished. These can include any guarantors, subsequent finance companies, the registered owner of the coronet realty ltd. (if different from the borrower), a purchaser (if there is an contract to sell the property in existence) and any Builders’ Lien claimants. The petitioner is the lender who wants to foreclose (or for that matter, a strata corporation that is owed funds).
There are various remedies available to a lending agency. The first move is an agreed upon accounting of all funds to be paid. The Registrar of the Supreme Court will review the home loan contract and the payment history and determine precisely what is outstanding, including how the debt will change as a result of increasing interest as time moves on. This produces a figure that all parties must accept and agree to should settlement actually come to pass.
Next is a judgement on any covenants that the borrower may have granted the bank. That covenant survives the sale of the property, so even if the borrower has disposed of the property he’s still accountable for the outstanding loan amount. This category of judgement can also be ascribed to any guarantors or subsequent buyers (assuming they also provided a covenant to the financial institution when buying the coronet realty ltd.).
If these steps work the process stops. For illustration, if the guarantor pays the bank, or the buyer clears up the debt, the lender has been satisfied and the foreclosure process will frequently cease. If it does terminate at this point it’s obvious that it wasn’t a very seriousquestion to start with.
For some real estate a receiver can be appointed. Property with commercial operations or leased properties fall into this category. Mortgage contracts usually have an assignment of rents, and this clause can be invoked.
A lis pendens can also be filed against a property. This stops the assets from being sold while the loan company sort out their conflicts.
For a genuine default foreclosure of the borrower’s interest in the property (and, as mentioned, the rights of all other respondents)is the usual course of affairs.
The first thing that arises is for the bank to send a demand letter to the borrower specifying a length of time to pay off the outstanding debt. Failure to do so results in the mortgage lender going forward to the next step, filing the petition in the Supreme Court.
The Court will then issue an Order Nisi which sets the amount required to redeem the loan and the time to do so. This time period is called the redemption period. It’s usually six months, but that may vary.
At this point there are two ways to go. The first involves the petitioner asking the Court to approve a judicial sale. In this case the title of the property doesn’t change, but the property is listed for sale. Generally a realtor will list the property, get offers and present them to the Court.
The Court (in the form of a Master) will review the offers and if they are acceptable (acceptable to the lender and fair to the borrower) will make a court order specifying that the property be sold with a clear title, and with the proceeds satisfying the debt. Any excess will go to the borrower; in the case of a shortfall the lender has added redress against the borrower.
The other way is the absolute order of foreclosure. If the redemption period has run out, the value of the asset is the same as the mortgage debt, or more, the borrower is “judgement proof” and the property can’t be sold (i.e, there is no interest from any buyers), the lender can petition the Court to transfer title free and clear of all encumbrances to the financial institution.
An Order Absolute cuts both ways. If it is ordered the loan company cannot enforce a personal covenant provided by the borrower unless the order is re-opened. If the mortgage lender sells the real estate asset to a third party he isn’t able to enforce a judgement against the borrower because the coronet realty ltd. cannot be returned upon payment. If the borrower gets the money to satisfy the loan the order can be re-opened, and the borrower’s right of equitable redemption is revived, but this is only done by the Court, is only done on an equitable basis, and is not common.
Any individual with any understanding acquaintance with foreclosures in British Columbia will understand that the judicial sale way is the most typical one used in foreclosures in British Columbia. Generally referred to as a “court ordered” sale, the court, through its officers (the lawyers) oversees the sale.
After the Order Nisi has been granted, and typically after the redemption period has ended, the lawyer for the loan company will petition for a conduct of sale order. He will then issue an order for the property to be put up for sale with a realtor who will market the property and assets. The real estate must be competitively priced to take care of the owner’s “equity of redemption”, and the Court will watch for this.
As a successful sale will be in the form of a court order all offers to purchase must be unconditional before they go to court. The Master’s decision will be final, and any successful purchaser who does not complete the sale will be defying a court order. The lawyers won’t permit this to happen. All conditions must be removed before a court date is fixed.
A single unconditional offer that is acceptable to the mortgage lender is enough to cause a court date. At court the lender’s lawyer will explain the offer and describe the marketing activities and response to the offering of the property. If the Master is satisfied that the marketing has been acceptable, and that the bid is representative and fair, he will accept it and issue a order.
Once there is a court date there can be multiple offers. The price and conditions of the 1st offer will be known, as it is a court document and as a result public. This enables other purchasers to know exactly what they have to do to beat the first buyer. Furthermore, the lawyers for some creditors will explicitly ask that the real estate salesperson disclose the first offer price to subsequent buyers.
If you ever find yourself in this situation bear in mind that bids can be transformed right up to the moment they are presented to the Master. Success often relies on evaluating the competition, making an estimate of what they will offer, and then adding as little as $200 to the best offer.
If you have not seen a foreclosure before the action will go by rather quickly. Buyers oftentimes don’t even know they’ve succeeded until another person with experience in the court tells them.
Bear in mind, these are laws for BC. Mortgage statutes can vary from jurisdiction to jurisdiction and country to country.