Power of sale listings often signal opportunity for those seeking distressed properties, yet they represent a significant departure from conventional residential transactions. In Ontario, these are not merely "discounted sales" with a substitute Seller; they are forced dispositions conducted under a rigid legal framework. This structure fundamentally reallocates risk from the Seller to the Buyer, making the principle of caveat emptor (buyer beware) more potent than in almost any other real estate transaction. Understanding the legal principles behind power of sale transactions, as well as the practical implications for due diligence, is essential before considering to submit a formal Agreement of Purchase and Sale (APS).  Powers of sale transactions can involve any property in Ontario, but for the purpose of the discussion in this article- we will focus on residential properties.

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The Legal Framework: Mortgages Act and Contractual Rights

In Ontario, a power of sale is triggered either by an express contractual clause within a charge/mortgage or via the statutory provisions of the Mortgages Act, R.S.O. 1990, c. M.40. While frequently confused with foreclosure, the two remedies are legally distinct: foreclosure is a judicial process where the Mortgagee takes title and extinguishes the owner/borrower/mortgagor’s (Mortgagor) equity, whereas a power of sale involves the Mortgagee exercising a right to sell the property to a third party without ever taking title. Thus in the case of a power of sale, title transfers directly from the Mortgagor to the Buyer on closing without requiring the consent of the Mortgagor, as the Mortgagee retains total control over the transaction's terms and execution of all documents as the Seller. In fact, it is the “Mortgagee under power of sale” and not the registered owner that is listed as the Seller in the (APS).

The allocation of sale proceeds is strictly governed by Section 27 of the Mortgages Act, ensuring a transparent priority of payment. Funds are first applied to the principal mortgage debt, accrued interest, and all associated enforcement costs, including legal and brokerage fees. Any remaining surplus must be distributed to subsequent encumbrancers according to their registered priority, with the ultimate residue returning to the borrower. This prevents the Mortgagee selling a property under power of sale from reaping a windfall, as their recovery is strictly limited to the debt and costs incurred, reinforcing the Mortgagee's duty to act as a fiduciary for the proceeds to all parties subsequent to the Mortgagee’s interest.

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Notice Requirements and the Right of Redemption

The power of sale process is initiated by a default, which encompasses both monetary breaches, such as missed interest or principal payments, and non-monetary breaches, including the failure to maintain property insurance or satisfy municipal tax obligations. Pursuant to Section 32 of the Mortgages Act, once a default has persisted for at least 15 days, the Mortgagee may issue a formal Notice of Sale. This notice triggers a mandatory "redemption period" during which the Mortgagor and all other parties that may have an interest in the property and as such have been served with the Notice of Sale have a final opportunity to satisfy the debt and halt the sale. For mortgages containing an express power of sale clause, this period is 35 days; for those relying on statutory power under Section 26, the period extends to 45 days. Crucially, the Mortgagee is legally prohibited from executing an APS or listing the property until this period has strictly expired.

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The Mortgagee’s Duty: The Soundair Principles

Mortgagees do not have unfettered discretion regarding the sale price. The Ontario Court of Appeal in Royal Bank of Canada v. Soundair Corp. (1991) established that a Mortgagee must act in good faith and take reasonable precautions to obtain "fair market value". While they are not required to wait indefinitely for the highest possible offer or wait for better market conditions, they must demonstrate that the property was adequately exposed to the market that exists at the time the Mortgagee decides to sell the property and that the sale process was transparent and commercially reasonable.

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Strategic Risks: The "As-Is" Reality

The primary "legal reality" of a power of sale is that the property is almost universally sold on an “as is, where is” basis. Unlike a standard residential property Seller, a Mortgagee typically strikes all standard representations and warranties, shifting the burden of due diligence entirely to the Buyer. This means no warranties are provided regarding items such as structural integrity, latent defects, or compliance with municipal bylaws and work orders. Furthermore, while the sale may discharge many subsequent interests, certain executions under the Execution Act or liens under the Construction Act require sophisticated title searching to ensure the Buyer receives an unencumbered title. Finally, under the Residential Tenancies Act, 2006, vacant possession is not guaranteed; a Buyer can end up inheriting an existing residential tenant, as the Mortgagee as Seller will not typically agree to be responsible to evict occupants merely to facilitate a sale.

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While a power of sale offers a structured path to acquisition of a property, it demands a rigorous standard of due diligence by the Buyer. At Kormans LLP, our real estate lawyers assist clients throughout Ontario with the complexities of completing real estate transactions, including distressed property acquisitions by way of power of sale. By taking a proactive approach to title review and contractual risk, we help Buyers identify potential liabilities early, protect their investment, and navigate the closing process with confidence. If you are considering an offer on a power of sale property or have questions regarding any real estate transaction in Ontario, we encourage you to contact our office at to discuss your situation with a member of our real estate team.

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