For some lucky people, a foreclosure is a buying opportunity. As layoffs, credit squeezes, and depressed markets are forcing some property owners to give up their homes or close their businesses, others are looking for great deals in power of sale purchases. Available in Ontario and some other jurisdictions, power of sale is the right of the mortgage lender to force the sale of a property without judicial proceeding. It’s the easiest and most common way for mortgagees to turn delinquent loans into cash — and, even though power of sale transactions are required to reflect market values, they can be good bargains for purchasers in a depressed market.
But these deals come with a big caveat emptor warning. Setting aside any potential karmic consequences of seeking to profit from others’ misery, there are many legal complications in power of sale transactions that prospective purchasers and their lawyers need to watch out for. “It might be a great purchase price, but there’s a lot more danger and the lawyer has to do a lot more work in particular on the contract and understanding it. It’s potentially very difficult and problematic, and very different from your regular purchase,” says Paul McCarten, a partner in the Toronto office of Borden Ladner Gervais LLP who practises commercial law with a focus on real estate.
And the complications involved in power of sale transactions may come as a surprise to lawyers who have never previously been called upon to deal with them, says McCarten. “It’s operating in a different world and it doesn’t come along very often. Powers of sale are common in a recession and we haven’t had one for a while, so it may be that there’s a whole generation that has never done this.”
More onus is placed on a lawyer acting for the purchaser in a power of sale transaction because the other party to the sale is not an owner willing to sell but a bank or other mortgage lender that may know nothing about the property other than its appraised value, notes Bernie Jankowski, a real estate lawyer in Barrie, Ont. “You get no representations from the lender,” says Jankowski, who always strongly advises clients to pay for a good home inspection. “If we find a problem, often we have to solve it ourselves, otherwise the bank just says, ‘Too bad.’”
Stephen Nadler, a real estate and commercial litigator at Minden Gross LLP who acts for institutional lenders, says agreements of purchase and sale that his firm prepares for power of sale transactions typically have “an out clause that if prior to closing the borrower has come up with money necessary to pay out the loan in full, then at the sole discretion of the lender, it could abort the sale and allow the mortgagor to redeem the mortgage.”
“While a mortgage lender might understand this is a safe way to proceed, for a buyer it’s terrible,” says McCarten, who adds the purchaser could have already sold her house and hired a moving van by the time she learns the deal has fallen through.
A purchaser’s lawyer should make every effort to negotiate such clauses out of the contract and there is a good chance of being successful in a bad market in which a bank would have difficulty selling the property at all with this condition in the agreement, suggests McCarten. As the market improves, banks might take a tougher negotiating stand, he adds.
Another huge concern that should set off all alarm bells is a contract that doesn’t make any representation or warranty about vacant possession, says McCarten. He notes it is extremely difficult to get judges to kick people out of their homes without a huge court process. A covenant to deliver vacant possession should be almost a requirement for making an agreement, he says.
Furthermore, the power of sale does not give lenders any right to sell any of the contents of a house, including such items as curtains, light fixtures, fridge, and stove. “It could be a surprise and you don’t want to buy a house with a bunch of stuff in it that somebody’s going to come along and rip out,” says McCarten.
Since banks typically make no representation about work orders, zoning, or the condition of the property, it is absolutely essential for the purchaser’s lawyer either to do a lot of searches before an agreement is signed or to make the agreement conditional upon obtaining a satisfactory result in all these searches. In some cases, warns McCarten, even the legal description of the property might be wrong, as there could be incorrect statements about the lot size or easements. “The bank is selling the property as is, where is,” he says.
Freelance business writer Kevin Marron can be reached at firstname.lastname@example.org