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Rights and Remedies of the Mortgagee.

In a normal case where there is no default, the mortgagor pays interest upon the loan at quarterly or half -yearlyintervals, until either he is requested by the mortgagee to redeem, or he gives notice of his intention to redeem.Thereupon, upon payment of principal, interest, and costs, the mortgagee will reconvey the property to themortgagor, assuming that the latter has not in the meantime mortgaged the equity of redemption, i.e., given asecond mortgage over the property.

Suppose, however, that the mortgagor falls into arrear with his payments of interest, or refuses, or is unable to repaywhat he owes, when called upon by the mortgagee to redeem, the latter may proceed to enforce his security, that is,to repay himself out of it, and we have next to consider how this may be done. Assuming that the mortgage is anordinary legal mortgage, made by deed, the following remedies are open to the mortgagee:

a. He may sue the mortgagor upon the covenant for payment contained in the mortgage.b. He may bring an action against the mortgagor for foreclosure.c. He may exercise his power of sale.d. He may appoint a receiver of the mortgaged property.e. He may go into possession of the property himself.

Taking these remedies, and considering them in their order.

(a) Action upon the Covenant. - This remedy differs from all the others in being a personal remedy, and not anenforcing of the security at all. It is not advisable to resort to it, unless there is no doubt that the mortgagor is able topay, and that his refusal arises rather from obstinacy than impecuniosity. But the refusal of a debtor to pay generallyarises from inability to do so, and in such a case it would be no good to sue, merely to get an unsatisfied judgment. Inany case it is better not to sue the mortgagor on his covenant, whether or not he has money, unless or until theproperty has seriously depreciated in value, so as to be no longer a sufficient security for the debt.

An equitable mortgage only gives rise to a simple contract debt, for which the creditor has but six years in which tosue, while a covenant to pay in a mortgage deed creates a " specialty " debt, which is not barred until twelve yearsfrom the last acknowledgment or payment of interest.

a. Foreclosure .- If the mortgagor is in default, after the mortgage money has fallen due, the mortgagee maysue him for foreclosure. If the action succeeds, the mortgagor will be allowed a certain time, usually sixmonths, in which to redeem, failing which he and all other persons interested in the equity of redemption areforeclosed and deprived of it, so that the mortgagee becomes absolute owner of the property to the extent ofthe mortgagor's interest in it, subject, however, to the possibility of the foreclosure being " re-opened" undercertain special circumstances. It is better as a rule to exercise the power of sale than to bring an action forforeclosure, because the Court may order the property to be sold, unless it is not likely to realise its full value.The Court will generally order a sale in an action either for foreclosure or redemption:

1. where the mortgagor is bankrupt and the property much encumbered;2. where the interest is heavily in arrear ;3. where the property is unproductive.

A sale will not be ordered where the property seems likely to improve in value ; and this is the case where aforeclosure action may be the best remedy. A property which is an insufficient security for the debt may often beimproved into a good security with careful management, in the hands of the mortgagee, who, however, cannotrecover more than his principal, interest, and costs. If any balance is leftover after a sale, he holds it as a trustee forthe mortgagor.

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Any mortgagee has a right to redeem every mortgagee whose charge is prior to his own, and to foreclose themortgagor and every mortgagee whose charge is later than his own. In a redemption action (which is the converse ofa foreclosure action) the plaintiff will be given a certain time in which to exercise his right of redemption, and if hedoes not do so within the time given, the action will be dismissed, and such dismissal will operate as a foreclosure.

An equitable mortgagee has the same right to foreclosure as a legal mortgagee has.

(c) Power of Sale .-Previous to the year 1882 it was the invariable practice to insert an express power of sale in the

mortgage deed, but this is now omitted, as under the Conveyancing Act, 1881, there is implied in every mortgagemade since 1881 a power for the mortgagee to sell the property and convey it to a purchaser. The statutoryprovisions relating to the power of sale may be summarised as follows :-

The power can only be exercised after the mortgage money has become due, and one of the three followingalternatives has happened :

i. Notice has been served on the mortgagor requiring payment, and default has been made in payment for threemonths after such notice.

ii. Some interest under the mortgage is in arrear, and remains unpaid for two months after becoming due.iii. Some covenant or provision expressed or implied in the mortgage. other than the covenant for payment of

principal and interest, has been broken by the mortgagor.

A sale under a power of sale will only be set aside by the Court in one of the two following cases :

1. If the property has been sold at a gross undervalue.2. If the mortgagee has in reality sold to himself, his agent, or nominee, or to a firm in which he is a partner.

The proceeds of any sale made under his power by the mortgagee must be applied, first in payment of costs andexpenses, and then in discharging the mortgage money and any interest due and unpaid thereon. The balance mustbe paid to the mortgagor or other person entitled to the equity of redemption, a second mortgagee having a priorclaim to any one else. The mortgagor can only take what is left after all mortgagees have in turn been satisfied. Themortgagee selling is to the extent of such balance a trustee for the persons entitled to it.

The exercise of the power of sale is a mortgagee's best and most usual remedy, where the security is sufficient, and itis less expensive than foreclosure. The mortgagee will not be liable for any involuntary loss incurred in exercising thepower of sale.

The Conveyancing Act does not apply to mortgages made before 1882, which as a rule contain an express power ofsale. In its absence, there is a restricted power of sale under Lord Cranworth's Act (1860).

An equitable mortgagee by deposit of deeds cannot exercise the power of sale, at any rate until he has enforced hisagreement for a legal mortgage, because, not having the legal estate, he cannot convey the property to a purchaser.

The statutory power of sale does not affect the mortgagee's right of foreclosure in any way.

(d) Appointment of a Receiver .- This is a very useful remedy of the mortgagee, the object of which is to enable himto secure the rents of the property, without undertaking the onerous liabilities of going into possession. There aremany cases in which the property, though a sufficient security for the debt, would not fetch anything like its real valueon a forced sale, while it may be bringing in a good income in the shape of rent, and under these circumstances it willbe best to appoint a receiver. If, however, the property is not producing anything, this remedy will be useless.

Leaving aside the former practice as to receivers, in the case of any mortgage dated since 1882, and made bydeed, the mortgagee may, if circumstances have arisen giving him a right to exercise his power of sale

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(see ante), appoint a receiver of the income of the mortgaged property. The appointment is made in writing, underthe hand of the mortgagee. The receiver, when appointed, acts as the agent of the mortgagor, who is solelyresponsible for his acts. He has power to demand and recover all the income of the property by action, or otherwise,and to give receipts for it. He is entitled to be paid a remuneration - usually 5 per cent. of his gross receipts:

Money which comes into the receiver's hands as such, must be applied as follows:

1. In paying rents, rates, and taxes.

2. In paying the interest on all principal sums secured on the property prior to the mortgage under which thereceiver is appointed, according to the priority of each sum.

3. In payment of the receiver's commission, insurance premiums, and cost of repairs directed by the mortgagee.4. In payment of interest on the mortgage.

Any surplus will belong to the mortgagor.

It will be seen that an equitable mortgagee has no power, apart from special agreement, to appoint a receiverhimself, for the above power only applies to mortgages made by deed. But the Court has a general jurisdiction toappoint a receiver in an action, whenever it is just and convenient, so that an equitable mortgagee can commence anaction asking for sale or foreclosure, or and other remedy, and move therein for the appointment of a receiver at

once. If the: mortgage includes a business carried on on the premises, the appointment of a receiver and manager,and not merely a receiver, should be asked for, and will in a proper case be made. A receiver appointed by the Courtmust give security and will be entitled to remuneration. He is an " officer of the Court," and therefore he cannot beturned out except by further order of the Court, whereas a receiver appointed by the parties can be turned out by aprior legal mortgagee appointing another receiver on his own behalf, or himself going into possession. But the Courtwill not appoint a receiver if a prior legal mortgagee has done so, or is in possession.

(e) Mortgagee in Possession .- This is a remedy now seldom resorted to, partly because nearly all its advantages canequally well be obtained by the appointment of a receiver, but chiefly for the reason that a mortgagee by takingpossession of the property lets himself in for various heavy responsibilities. For instance, he will be l iable to accountnot only for the income which he has actually received, but also for what, but for his wilful default, he would havereceived. He cannot charge for collecting the rents, but must do so at his own expense. If he personally resides uponthe property, he must pay an occupation rent for it. Again, though it is easy to go into possession, it is not so easy toget out again, for the mortgagee cannot get rid of his responsibilities so incurred by the appointment of a receiver.Altogether, it is a remedy which may very well turn out to be worse than the disease, and it is one the resort to whichthe law does not encourage.

On the other hand, there are exceptional cases where it may be the only way of realising anything out of the property.For example, a mortgagee has power, when in possession, and only then, to cut and sell timber or contract for doingso. He may also open mines, and lease the property without the mortgagor's consent. He may charge for necessaryrepairs while in possession, but he is not allowed to "improve the mortgagor out of his property " ; in other words, tomake improvements, the cost of which would, if added to the mortgage-debt, make it impossible, or unreasonablydifficult, for the mortgagor to redeem. A mortgagee would only go into possession as an extreme step, as where thesecurity is grossly insufficient, or the mortgagee has absconded, and there is a chance of becoming absolute owner ofthe property under the Statutes of Limitation.

Other Remedies and Powers of the Mortgagee. The mortgagee has also power, under the Conveyancing Act,1881, to insure the mortgaged property. The premiums paid by him for such insurance will be a charge on theproperty, to be added to the mortgage-debt, with interest at the same rate as in the mortgage.

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The Foreclosure Process

The following is a summary of the main steps involved in a foreclosure action in order toassist in your understanding of the steps which must be taken when "foreclosing" amortgage.

I. The First Steps

When the owner of property charges or mortgages his or her property (as "Mortgagor") tothe party lending the money (that party being the "Mortgagee"), the law assumes that theMortgagor has conveyed his or her property to the Mortgagee but has retained the right topay the Mortgagee in full and to then require the Mortgagee to reconvey or release all claimupon the property. This right is referred to as an "equity of redemption".

If the Mortgagor falls behind in his or her monthly payments or makes default under one ofthe other provisions in the mortgage (such as the requirement to insure, pay taxes, etc.), themortgage usually provides that the Mortgagee can elect to "accelerate" the mortgage so thatall monies due and owing under the mortgage are payable. Once the Mortgagee has electedto use the "acceleration" clause in the mortgage, the Mortgagee is not obligated to acceptonly the monthly payments which are in default (this amount commonly being referred to asthe "arrears"). Therefore, subject to the right of the Supreme Court to order otherwise, afteracceleration, the Mortgagee can insist that the total of the amount owing under the mortgagebe paid and can not be required to accept only the arrears.

After a Mortgagor has fallen into arrears on his mortgage, a demand must be made on theMortgagor before any Court proceedings are commenced. If no response is received from theMortgagor, it is usual for an action to be commenced in the Supreme Court of BritishColumbia by way of a "Petition" by the Mortgagee who then becomes the "Petitioner" in theaction. The "Respondents" in the action will be the owners of the property plus anyindividuals or companies who have an "interest" in the property (such as a mortgage, lien, or

judgment) which was registered in the Land Title Office after the Mortgagee registered itsmortgage. Accordingly, if a first mortgage is registered against the owners of the property inJune of 1995, a second mortgage registered in September, 1995, a Judgment is registeredagainst the owners of the property in October, 1995, and a Builders' Lien is registeredagainst the property in November of 1995, the Respondents to an action will be the owners,the holder of the second mortgage, the Judgment Creditor who holds the Judgment as

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against the owners, and the person who has filed a Builders' Lien.

In a foreclosure action, the Court proceedings are commenced by a "Petition" which outlinesin condensed form what the Petitioner claims against the Respondents as well as the factswhich will be relied upon by the Petitioner in making its claim. The Petition is accompanied byan Affidavit sworn by the Mortgagee or an employee of the Mortgagee who can swear as tothe truth of what is outlined in the Petition and by an Affidavit sworn by the solicitor for thePetitioner attaching a copy of the Certificate of Title for the property being foreclosed. Serviceof the Petition and Affidavits is usually accomplished by personally delivering copies of thedocuments to individuals, Banks and extra-provincially registered Companies (using aprocess server) and by mailing copies of the documents by registered mail to the registeredoffices of any British Columbia companies which are Respondents to the action.

II. Contested Foreclosures

If the Respondents (or any of them) have a "defence" to the action which has beencommenced they have twenty-two (22) days from the date of service of the Petition andAffidavits on them to file an Affidavit setting out the nature of their defence and why theyfeel the claim of the Petitioner is either invalid or inaccurate (in whole or in part).

If a foreclosure action is opposed, it is usually necessary that a trial take place to hear thematters in dispute between the parties. The number of actions where it is necessary to havea trial is very low (less than 1 in 10,000). If an action is referred to trial by the Court, thetrial takes place about 15 to 18 months after the date of commencement of the foreclosureproceedings.

III. The Order Nisi

If the action does not "go to trial", the Petitioner is in a position to obtain an "Order Nisi" offoreclosure.

The Order Nisi is the initial Order obtained in a foreclosure action. The term "Nisi" has beendefined as:

"A limiting term added to such terms as Decree, Order, or Rule to indicate that these are notabsolute or final, but are to be valid or take effect unless some cause is shown, or reasonarises, to prevent this."

At the Order Nisi stage of a foreclosure action, the Court will establish the amount which isowning to the Petitioner and will establish a period during which time the Respondents canpay this amount. This period of time is known as the "redemption period" and the "usual"period is six months. If it can be shown that the property, if sold, would not produce enoughto pay the amount owing under the mortgage which is being foreclosed, the Court willsometimes decrease the "usual" six-month redemption period. In rare circumstances, theCourt might order a redemption period of more than six months.

At the time of the granting of the Order Nisi, the Court will establish what is due and owing tothe Petitioner at the date of the Order Nisi and the per diem interest which accrues after thatdate. The Respondents will then have the six months (or any other period set) to pay what isdue and owing. In order to "redeem" the property, they will have to pay the total of:

the balance owing at the date of the Order Nisi; the interest accruing to the date of payment; the balance owing to the Petitioner for its Court awarded costs.

The Court will also usually order that Judgment be given against the Respondent Mortgagorsor any Guarantors in an amount equal to the amount which is due under the Mortgage(including costs) at the date of the Order Nisi.

IV. Enforcement Options

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Once the Petitioner has entered an Order Nisi with the Court, it has two courses of actionavailable to it which i t can exercise concurrently:

enforce (or execute on) the Judgment obtained by selling other assets of the RespondentMortgagors; proceed with the foreclosure proceedings.

If the Petitioner executes on the Judgment, the Petitioner proceeds as if a Judgment hadbeen obtained in a regular Court Proceeding (so that assets of the Mortgagors can be seized

and sold to satisfy the Judgment, other land of the Mortgagors can be sold to satisfy theJudgment, etc.). The proceeds on any assets sold are applied against the balance owingunder the Judgment and against the redemption amount. The interest rates on Judgments isabout 7.5% and, unless the interest rate under the mortgage is also 7.5%, these amountswill be different so that it is possible for the Judgment to be satisfied even though themortgage has not been redeemed. Until the redemption amount is satisfied, the Mortgageewill not be required to discharge its mortgage from the property.

At any time during the foreclosure proceedings, the Court has the power to order that thePetitioner accept the amount of the arrears owing (so that the mortgage is put back intogood standing). In deciding whether it will make such an order, the Court takes into accountthe number of payments missed, the possibility of the arrears being paid, and whether themortgage has been in arrears before. This Order cannot be made if the mortgage term hasmatured.

V. Order Absolute

The next step in the foreclosure proceedings is the application for an Order Absolute. Anapplication for Order Absolute can be taken only after the redemption period has expired.After receiving a Certificate from the Court Registry that no monies have been paid intoCourt, the Petitioner requests that the Order Nisi be made "absolute". In some cases,proceeds have been received from execution proceedings or the sale of one property wherethe mortgage covers more than one property. These payments must be accounted for in thematerials before the Court when the application for Order Absolute is made. The granting ofthe Order Absolute has the effect of "foreclosing" (shutting out/terminating) all the interestsof the Respondents in the property. When registered in the Land Title Office, the OrderAbsolute has the effect of conveying the property into the name of the Petitioner free and

clear of the interests of the Respondents. This registration is subject to one exception - theRespondent owners retain the right to go before the Court and obtain an Order that theproperty be conveyed back to them upon payment of the full balance then due and owing.This type of application is very rare and, in almost all cases, the registration of the OrderAbsolute in the Land Title Office by the Petitioner will mean that the Petit ioner will retain theproperty as its own. Once Order Absolute is granted, the Petitioner loses its right to proceedagainst the mortgagors under the Judgment obtained even though, in due course, theproperty might be sold for a loss. However, if the property can later be sold for more thanwhat was owing, the Petitioner does not have to share this surplus with any of theRespondents.

VI. Appointment of a Receiver

At any time after the action is commenced, a person (called the "Receiver") may beappointed by the Court for the purpose of taking possession of the property and receivingany rents and profits from that property. The Receiver takes possession of the property andmakes arrangements with the tenants to pay rent directly to him or her. The Court usuallyorders that this rent can be applied on taxes, repairs, etc. The appointment of a Receiver isoften made when it appears that the property will be allowed to become "run down" duringthe period when the foreclosure proceedings are taking place. The Court will never appoint aReceiver if only the owners are occupying the property.

VII. Obtaining an "Order for Conduct of Sale"

Any of the Respondents can apply to the Court at any time for an "Order for Conduct ofSale". This Order provides that the property be sold and that the party obtaining the Order

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have the ability to list the property with a real estate agent. If such an Order is granted, theparty obtaining the Order can list the property with a real estate agent as though they werethe owner of the property (subject to the proviso that the sale will usually have to beapproved by the Court). This Order nullifies any previous listing agreement entered into bythe Respondent owners. If, during the "redemption period", a purchaser cannot be found or ifa purchaser is found but is not (in the opinion of the Court) offering enough to justify a sale,then the Petitioner is in a position (but only after the expiry of the "redemption period") torequest an Order for Conduct of Sale instead of applying for Order Absolute of foreclosure. Ifa satisfactory offer is made to the party having conduct and a sale is approved by the Court,the proceeds of the sale will be used to satisfy any taxes owing on the property, any real

estate commission which is due, the amount due and owing to the Petitioner under itsmortgage, the amounts due and owing to the Respondents under the charges which theyhold and the balance, if any, to the Respondent owners. It is only rarely that the Petitioner isgranted an Order for Conduct of Sale during the redemption period.

VIII. Lawyer's Fees in Foreclosure Proceedings

The Petitioner will be awarded "Party and Party" costs in an amount to be assessed pursuantto Appendix "B" of the Supreme Court Rules. An "assessment" of costs involves the Registrarof the Supreme Court making a monetary assessment of the work done by the lawyer to thatpoint in time. The assessment is made having reference to the Schedule of the Party andParty costs in the Supreme Court Rules. The amount of the "assessed" costs and the amountof the disbursements of the lawyer are added to the amount of the Judgment obtained

against the Respondent owners and to the redemption amount. If the property is sold duringthe period of redemption, these costs and disbursements will be paid out of the proceeds ofsuch a sale. IF the Respondent owners pay the amount which is owing under the mortgageduring the period of redemption, it is also necessary for them to pay these costs anddisbursements. If the property is not sold, if the Respondent owners do not pay the amountwhich is owing and if the Petitioner is successful in obtaining an Order Absolute, the lawyer'saccount is paid directly to the lawyer by the Petitioner. The Party and Party costs which arerecoverable against the Respondents usually represent about 1/4 to 1/3 of the actual feesthe lawyer will charge to perform the services required in the foreclosure proceedings.

IX. Summary

The four main steps in a foreclosure proceeding (the demand, the issuance of a petition, theapplication for Order Nisi, and the application for the Order Absolute) usually involve a periodof 8 - 9 months and provide a procedure whereby the Petitioner/Mortgagee obtains what isdue and owing to him by receiving the "arrears" owing under the Mortgage, the full amountowing under the Mortgage, or the property itself.