Court ordered sales can be complex and tense, with uncertain outcomes. But the sales happen all the same. Your clients may be interested in purchasing a judicial sale, or maybe you’ve been approached by a lender to list one. Here’s what you need to know.
An unfortunate circumstance
In uncertain economic times, things can go from bad to worse for Albertans who lose their jobs, and they may stop making mortgage payments, and end up losing their home. In such an uncertain ownership situation, who sells the home? Who works for whom? Is a signed seller representation agreement required?
Likewise, when a couple divorces and one spouse wants to keep the home but can’t afford to buy out the other spouse, and the other spouse doesn’t want to keep the home and goes to court to enforce their right to sell their interest in the property, what happens? Can you sell half a home? Who’s involved? How does it work?
Court-ordered sales may not be the kind of listings many real estate professionals seek, but they happen, and it’s important to know the rules surrounding them.
Stages of Foreclosure
Owner in default: At this stage, the owner is behind on payments. They retain the property title, and if they choose to sell at this point, it is a typical selling arrangement with the owner as your client.
Owner is in default and a lender has indicated they will begin court proceedings: At this stage, the lender can put a lis pendens on title (which indicates to prospective buyers that there is pending court action on the property). Owner retains title for the moment, and any sale can go through traditionally, but it may be more difficult to find a buyer for a property with such an instrument on title.
Lender begins Court proceedings to foreclose the property, and all creditors get involved: At this stage, in order to satisfy the interests of all creditors, the Court may order a judicial sale of the property. Title is still technically in the owner’s name, but your client will be the Court. This article will mostly deal with this stage of foreclosure.
The Court grants a foreclosure of the property: At this stage, the title transfers to the lender. If they choose to sell the property at this point, they will be your client.
The Foreclosed property had a high ratio mortgage, and the insurer pays out the indemnity: At this stage, the title transfers to the insurer.
Foreclosure proceedings begin and the Court orders a judicial sale
In a judicial sale, a property for which a lender provided mortgage funds is in foreclosure and wants it sold to recover their investment. They do not technically own the home but they can still force the sale, which makes such a sale different from a traditional seller client relationship.
Plaintiffs and Defendants
In a judicial sale, the lender is the plaintiff, who wants a decision against the owner who is in foreclosure. The owner is the defendant. The Court of Queen’s Bench decides whether there will be a judicial sale. If the Court orders a sale as requested by the plaintiff, licensed real estate professionals become involved.
Who Represents Whom?
In a judicial sale, the Court typically allows the lender to choose the real estate professional who will list the property. Many brokerages advertise these services to lenders, and some have existing agreements that outline the lender’s commitment to using that brokerage for this service. These brokerages may also have experience with judicial sales. Real estate associates who are approached to list a judicial sale should speak to their broker first, and make sure the brokerage allows such listings and has appropriate policies and procedures in place.
But here’s the catch: the seller representation (listing) agreement is not between the lender and the real estate brokerage. The agreement is between the Court of Queen’s Bench and the real estate brokerage.
In such an agreement, the real estate professional becomes an Officer of the Court, and is officially assigned to help the Court carry out the judicial sale order.
The listing price and commissions are outlined in the agreement, and are at the Court’s discretion, but the Court will listen to the advice of the real estate professional on a proper listing price after conducting a Comparative Market Analysis.
Marketing the Property
The listing allows the real estate professional to put a For Sale sign on the property, and it requires that the defendant (that’s the owner) or anyone else on the property (i.e. a tenant) must cooperate with the professional, and allow them or their representative access to the property with 24 hours of written notice for viewings between the hours of 8 a.m. and 8 p.m.
Sometimes, after hearing arguments from the plaintiff and defendant’s counsel, the Court may stipulate in the agreement that there will be no viewings or access to the property.
All potential buyers must attach a document typically called Schedule A to their offers. This schedule makes it understood that the Court makes no representations about the property, and the buyer is purchasing the property As Is, Where Is. There are no representations about condition, improvements, attached or unattached goods, municipal compliance, encroachments, property safety, or in the case of condominiums, the state of the condominium corporation (condominium fees, status of reserve fund, etc). The Court has no knowledge of material latent defects, and will make no representations for unattached goods left at a property after the sale. If anything is left at the property, including furniture, construction materials, or even vehicles, they are for the purchaser to deal with.
NOTE: not having appropriate access to the property limits a professional’s ability to measure the home according to the Residential Measurement Standard (RMS). Though the Court will make no warranties for property size, your local listing service may require you enter a size in your listing. If you do, the RMS still applies, but it takes situations like this into account, and states that if a professional is unable to access a property to conduct proper measurements, they can use other methods to determine size, and disclose the fact they could not access the property to properly measure in the listing.
Even though your listing agreement is with the Court, you must first provide the plaintiff (the lender) with copies of valid offers. The plaintiffs’ counsel will then write affidavits and apply to the Court to either accept or reject certain offers for the Court’s consideration.
Usually, all offers made during a judicial sale must be unconditional. Typically, the Court will reject any conditional offers. It is up to potential buyers to perform their due diligence prior to making their offer.
All offers the plaintiff successfully argues for consideration are read in Court, on the same day, with the Court deciding which offer to accept.
The defendant can make it all stop at any time up to a completed sale
The listing agreement with the Court will give a date by which, if the defendant has repaid their debt to the lender, the Court will stay the judicial sale. The defendant can continue to own the property and continue with their mortgage payments, and foreclosure proceedings are discontinued.
Judicial Sale Due to Divorce
The Dower Act gives a legally married couple equal rights to dispose of the matrimonial home, regardless if only one party is on title. When legally married couples divorce, the Matrimonial Property Act (MPA) comes into play, as divorcing couples may disagree on the division of joint assets, including real property. When couples cannot agree on a division of assets, the Court has broad powers to enforce a division of property.
If one partner wants to divest themselves of their 50% interest in a property, they can make a Statement of Claim in the Court of Queen’s Bench, similar to a lender in the foreclosure situation. After considering the evidence, the Court may decide to move forward with a judicial sale of half an interest in a property.
As with a foreclosure, the plaintiff, that is the owner who wants to sell their interest, chooses a real estate professional, but the professional’s agreement is with the Court. Buyers will have to buy As Is, Where Is, and they likely won’t have access to the property for viewing. As with a foreclosure, the spouse who wants to solely own the property has the option to buy out the selling spouse of their interest in the property up to the date it is sold through the Court.
Marketing half an interest in a property sounds daunting, particularly if the person who is not selling their half is contentious. It is important to know your rights and responsibilities as an Officer of the Court, and to respect the rights of the individual who is keeping their interest in the property. Divorce is upsetting at the best of times, and adding in disagreements about the dissolution of real property can be a very tough situation.
In any such listing, you must indicate it is a Court ordered sale, that it is for 50% interest in the property, and that it is an As Is, Where Is situation. Make sure you talk to your broker before taking on these types of listings. Also make sure to inform your buyer clients that it is extremely unlikely that the Court will allow your buyers to live at the property. Your buyer client may own 50%, but the Court agreement will likely forbid habitation.