Archive for February, 2011

Power of Sale / Improvident Realization

Friday, February 25th, 2011

It’s been interesting going to court and seeing the fallout continue from the recession. I have more mortgage files than previously and it is clear that the number of mortgage files on the court dockets has increased substantially.

I was asked a question recently about what could be done, if anything, where the mortgagee sold property under power of sale and the property sold for a substantial amount of money below the lowest possible market value. The answer is that it is possible that you might have a claim, but it’s far from a guarantee. Before we examine this further, I should explain that most of the time people are concerned about this because there is a shortfall after the sale of the property and the lender then looks to the borrower to pay the shortfall. Less common is the situation where the borrower believes that he/she/it should have received some surplus funds after the sale.

Firstly, what is the nature of the claim? It is a claim for “improvident realization”. Let me use an admittedly facetious example but it will illustrate the point. Suppose that your house is worth $550,000. You needed to borrow money quickly and got a loan for $50,000 that was secured with a mortgage. For some reason you default on the loan and the mortgagee starts power of sale proceedings. The house is then eventually sold for $55,000 – being only 10% of its value – and being exactly enough to pay off the mortgagee for the mortgage and its legal fees. In that instance, we would likely have an improvident realization. The mortgagee is required to not only take into account what it is owed on the mortgage in determining the sale price, but also what is fair to the mortgagor (you) as the owner of the property. If the sale price is too low, the Court can find that the sale was “improvident” and require the lender to pay the difference between what the property should have sold for and the actual sale price.

That’s the concept, but the practice is not as simple. What is a “reasonable sale price”? That can depend on numerous factors. For example, it is fairly standard practice for the mortgagee to obtain one (often two) appraisals to determine the value of the property. However, this will not be the market value but the “forced sale value”. If the ultimate sale price is in the neighborhood of this value, then it will be difficult to convince a court that the sale price was “improvident”.

It should also be noted that “market value” and “forced sale value” are very different. Why? Because if I sell you my house today I will make numerous promises, such as that there is no UFFI insulation in the home, that the fences are on the property lines in the proper locations, etc. If these turn out to be untrue, then you could subsequently sue me for not conveying the house that I said I was conveying (although, in fairness, this type of a lawsuit is enough for several blog posts, so this statement is an oversimplification). However, when a mortgagee is selling property under power of sale, the mortgagee often has absolutely no idea of whether the insulation is UFFI or otherwise, whether the fences are in their proper location, etc. And the costs for the mortgagee of determining all of this information isn’t worth it. So, the mortgagee sells the property on an “as is / where is” basis – in other words, you get what you see and you’re not getting any promises of any type. The buyer has to accept this term of sale, but in exchange for doing so, the buyer will greatly reduce the price from the market value to create a “hedge” or “buffer” in case it should turn out, for example, that the main floor is rotten and needs to be replaced.

So, comparison should be to the “forced sale value” as set out in the appraisal(s). But other factors will also be taken into account. For example, what is the condition of the house and, more importantly, is there anything about its condition that requires a sale to be made sooner rather than later – for example, the property is in Oakville and it is near a potential location for a garbage incinerator and it is important to sell the property now before it becomes widely known that the incinerator could be located next door (as opposed to waiting and if the information becomes well-known then nobody is going to buy the property). Another factor is how long the property has been listed for sale. For example, the appraisals say that the value of the house is $550,000. However, the property has been on the market for 6 months without a nibble at $525,000. Then it is reduced down to $500,000 and still no nibbles and then after 18 months it finally sells for $475,000. Looking solely at the comparison between the appraised value of $550,000 and the sale price of $475,000, one would have a question of whether there was an improvident realization because of the $75,000 difference since it is a significant amount of money. However, when you take into account the fact that the property sat around for 18 months and got no nibbles until it went down to $475,000, then the sale price doesn’t appear improvident at all. In a similar vein, the law does not require mortgagees to sit around and wait until housing markets go back up. If the market is in a free fall or is not likely to increase anytime soon, then mortgagees will not be faulted for selling while they could – and, to the contrary, they could be faulted for failing to mitigate their losses if they sat around and did nothing and the values continued to fall.

These are just some of the factors that are considered in determining whether a sale price from a power of sale is improvident. While there can be a claim against the mortgagee for improvident realization, it is not an easy claim to win.

Something to think about.

CALC

Mediation – Huh? What is it good for? …

Saturday, February 5th, 2011

Alright, how about a combination rant and actual posting on something substantive?  Let’s give ‘er a go.

I’m about to date myself.  For those of you old enough to remember the old song by The Temptations called “War”, (subsequently done by, notably, Edwin Starr, and by Bruce Springsteen and by Frankie Goes to Hollywood and others – does anyone remember the cover by the punk band D.O.A. from the days when I still had hair and wore Doc Martens?  Ah, the memories, The Sex Pistols, The Dead Kennedys, but I digress … please, don’t bother with the cat-calls of “sell out” or “poser” or something similar, been there, heard that, long story without an interesting ending so save your breath), the lines were “War.  Huh.  Good God y’all.  What is it good for?  Absolutely nothin.  Say it again…’”.  Can the same be said about mediation?  Maybe.

I attended a seminar years ago when the speaker asked a series of questions.  He asked who had positive experiences with mediation.  About half of the people put up their hands.  Then he asked those of us who didn’t put up their hands a further series of questions and eventually whittled us down to myself and a few others.  We had basically answered the questions to show that we had no good experiences with mediation and that it was a complete and total waste of our times (that is, bollocks), at least in our opinions.  He then turned to us and said “you do collection work for lenders or banks, right?”  And he was right – if you really want to know why, I’ll put it in a separate post later (long story, nothing particularly funny nor interesting to the story).

I was reminded of this as I read an article this evening expounding upon the values of mediation and the Harvard Negotiation Project.  I snorted as I read the article.  It reminded me of when I was doing my Masters of Law degree at Osgoode Hall Law School.  At the time there was a competition between Osgoode and the University of Toronto Law School in which various teams tried to resolve  their differences on fictional disputes.  Osgoode, being the “kinder and gentler” group (of wimps) that they were, followed the Harvard Negotiation Project – and, to their credit (I supppose) they followed it perfectly.  And they proceeded to get their rear ends kicked from one end of the room to the other.

The Harvard Negotiation Project is a well-known procedure by which the parties put interests above positions.  The goal is conflict resolution and seeking some sort of “middle ground”.  If you want to read more about the concept, it is wonderfully set out in the book “Getting to Yes” by Roger Risher and William Ury – which I happened to look at on my bookshelf this evening and snorted at in disapproval.  In THEORY, this is wonderful because it presupposes that both sides are truly looking to find some way to resolve their dispute.  In PRACTICE, it is (I’ll put it extremely politely), a bunch of malarky.

At the competition between Osgoode and UofT, the UofT students proceeded to kick the Osgoode students’ butts because the Uof T students simply dug their heels in and said “come to us”.  Think of it this way.  If you are at point 0 and I am at point 10 and we are trying to resolve a dispute, eventually you will move from 0 to 5 and I will move from 10 to 5 and we will meet in the middle at 5.  But if I take the position of “to heck with you, I’m not budging”, then in order for a resolution to be achieved, not only do you have to move from 0 to 5, but you have to move beyond 5 and perhaps towards 7 or even 8.  If you move 8 and I move 2, who is the winner?  Me.  Just the same way that the UofT students all those years ago said “we’re not budging” and forced the Osgoode students to come meet them near the UofT students’ original positions.

The “interest-based” negotiation theory misses one key rule: the Golden Rule – he who has the gold makes the rules.  This rule works two ways.  The first is that  if I have more money for legal fees than you do, I’ll do everything in my power to drag you down and make this expensive for you because I can afford the legal fees better than you can so eventually you will cry “uncle” before I do.  The second, which is really the flip-side of the first, is ”I can make you spend more on legal fees than I will ever have to spend” and I’ll make you cry “uncle” that way.  I watched as my ex-[insert whatever epithet you wish] sister-in-law pulled this on my brother because she was able to get Legal Aid and he could not.  (I could only do so much because I don’t practice family law and he’s in Alberta and I’m in Ontario.)  I also see it all the time in my practice – I recently had a client settle a perfectly valid lawsuit because he sued a self-represented person who was going to turn the lawsuit into a total circus and the cost no longer justified the lawsuit.  In either situation, the one party doesn’t give a tinker’s darn (again, being polite) about the issues or with trying to resolve the dispute.  Rather, the goal is to force the other side to capitulate to the economic reality of the situation.

And so, ultimately, the question that has to be asked is whether the parties truly wish to settle this matter.  If they do, then the Harvard Negotiation Project (and, thus, mediation) is a wonderful model.  But if you have some sort of leverage in the situation, why would you ever want to settle?  Unless there is some other factor (economic, personal or otherwise), I would say that there is no reason why you would ever want to and, if nothing else, you would want to “run a bluff” and “make them come to you” like UofT did to Osgoode.

Unless there is some reason for you to find a middle ground, the song surely sounds like “Mediation.  Huh.  Good God y’all.  What is it good for?  Absolutely nothing.  Stick to your guns!”

As the saying goes, sometimes, nice guys (like the Osgoode students) finish last.

Something to think about.

CALC