Wednesday, October 19, 2011

Distributing the Proceeds of Sale

Priorities Upon Sale (Mortgage, Lien, Execution)

liens priorities

Ontario Real Estate Source

By Brian Madigan LL.B.

What happens when there is a mortgage, construction lien and execution against the property? How does the money get distributed?

Let’s consider the simple straightforward case.

Here, the property is worth $300,000, and the buyer secures a first mortgage of $250,000.

The deal closes and the money is advanced.

Subsequently, the buyer defaults upon his credit card to the extent of $10,000 and a judgment is obtained.

The homeowner decides to sell and hires a contractor for $25,000 to effect some improvements, repairs and renovations to the property. The work is completed but the homeowner never pays.

So, the basic question is “who gets the money”. Basically, to some extent “priority of registration prevails”:

1)     the first mortgage was fully advanced, and it secures the number #1 position for the principal plus the interest to the date it is paid. 
2)     The construction lien comes in second. The proceeds upon the sale are considered in part to be repayment on account of the work done and the corresponding increase in value.
3)     The Judgment assuming it was registered as an execution comes in third position.

That is what happens 99% of the time, since that is the usual scenario.

If all the money was not advanced under the mortgage, then that would affect the mortgagee’s priority. Assuming only $200,000 was advanced, then it would have priority only for the $200,000 and not the other $50,000. It still has that money.

There may be more than one lien. Some of the liens fall under the general contractor. It works like a pyramid here, with the lien claimant at the bottom having priority over the General contractor.

Executions creditors share on a pro rata basis in respect to the amount of their claims. So, if there was one execution for $10,000 and another for $20,000, they would share 1/3, 2/3 out of the amount leftover.

If there is a shortfall they would share in the shortfall based upon the same ratio.

Any excess would be paid to the homeowner. And, any deficiency would remain the obligation of the homeowner.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage