Duhaime's Law Dictionary


Foreclosure Definition:

The sale of real property secured by a mortgage, in order to satisfy an outstanding loan.

Related Terms: Mortgage, Acceleration Clause, Bankruptcy, Redemption, Ejectment

Stritly speaking, a foreclosure is a "court order extinguishing the equity of redemption of the mortgagor (borrower) and establishing the mortgagee (bank/lender) as absolute owner of the property".1

Justice of the Saskatchewan Court of Queen's Bench adopted these words to describe foreclosure in the 2003 decision Royal Bank of Canada v. Aldridge:

"A legal proceeding to terminate a mortgagor’s interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property."

foreclosure imageBecause the foreclosure is often immediately followed by the sale of the property (the banks don't want to be home owners), the entire process is often called a foreclosure and sale. Foreclosure has come to mean the action at law taken to recover and sell land given as security upon a loan.

In Dikeman v Jewel Gold Mining, Justice Rudkin of the United States Circuit Court of Appeals wrote:

"Foreclosure is a remedy by which the property covered by the mortgage may be subjected to sale for the payment of the demand for which the mortgage stands as security...."

In Cain v Bultman, Justice wrote:

"In foreclosure, the unpaid amount of the debt is determined and the owner is given one last opportunity to redeem his property by payment of all sums due, failing which the property is sold at public sale conducted under court authority and the proceeds of the sale are applied to pay or reduce the unpaid balance on the debt, with any surplus available to those having inferior rights in the mortgaged property."

Foreclosure is sometimes described as action taken to eliminate a right of redemption on mortgaged real property. Generally, this is what happens when someone does not pay their mortgage.

Even though there has been default on the loan payments, or no payments, the borrower retains a equitable right of redemption if, some day, he or she were able to find the money and try to exercise their right of redemption by paying all arrears on the mortgage.

But this left lenders (mortgagees) on the tether indefinitely.

Equity had to come full circle and allow the mortgagee to force the lender (mortgagor) to fish or cut bait; to pay the arrears or to lose (be "foreclosed) as to the right to redeem.

That out of the way, the mortgagee can then seek a possession order and sell the real property, the proceeds of which go first to pay off the arrears on the mortgage.

Consider, on that basis, these words of Justice Hammer of the New York Supreme Court (Bronx County) in Harlem Savings v Cooper:

"Foreclosure is a judicial act invoked by one party to compel the other party to fulfill his mortgage agreement. The judicial act when invoked irrevocably cuts off beyond the possibility of recall the mortgagor's rights, including his equity of redemption."

In Falconbridge on Mortgages (Rayner and McLaren, Toronto: Canada Law Book, 1977, p. 447), foreclosure was described as follows:

"When the Court of Chancery began to entertain applications by mortgagors for leave to redeem notwithstanding that by default in payment they had caused a forfeiture by breach of condition and had therefore lost their legal or contractual right to redeem, it was obliged in turn, in order to do complete equity, to entertain applications by mortgagees for foreclosure - the effect of a decree of foreclosure being simply to require a mortgagor within a definite time to redeem under penalty of being finally foreclosed or deprived of his equitable right to redeem.

"The .... reciprocal remedy to redemption is foreclosure.

"Equity, which by its interference has prevented the mortgagee from asserting his legal right to absolute ownership under the strict terms of the contract, simply removes the stop it has put on, upon default of the mortgagor in discharging the debt after reasonable time has been given to him, or in other words decrees foreclosure."

To clear the title of this potential, a lender goes to court, demonstrates the default, requests that a date be set where the entire amount becomes payable after which, in the absence of payment, the lender is automatically relieved of the requirement to redeem the property back to the borrower; the debtor’s right of redemption is said to be forever barred and foreclosed.

This cancels all rights a borrower would have in the real property and the property then belongs entirely to the lender, who is then free to possess or sell the property.

The word is frequently used to generally refer to the lender’s actions of repossessing and selling a property for default in mortgage payments.

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