A power of sale clause in a mortgage agreement allows the lender to take control of the property and sell it to a third party if the borrower fails to make payments. It protects both the lender and debtor’s rights, but lenders may prefer to work with borrowers to avoid costly foreclosure proceedings.
A power of sale is a provision or clause that is usually included in the text of a mortgage agreement. The purpose of the clause is to assert the right of the lender to take control of the property involved and sell it to a third party, if the borrower fails to make the mortgage payments in accordance with the terms outlined in the agreement. It is not unusual for the provision to also include some detail about what must happen before the lender can begin foreclosure proceedings. The exact verbiage used in the power of sale provision will vary, depending on the regulations that apply in the jurisdiction where the mortgage is written.
The inclusion of this type of clause in a mortgage contract is designed to protect the lender’s rights in the event the borrower fails to make payments in a manner that complies with the terms found in the contract. By having a power of sale, the lender has legal grounds to take control of the property and begin the necessary proceedings to foreclose on the property. Once the foreclosure is complete, the lender is free to sell the property to a new owner. In some jurisdictions, this is managed in a public auction overseen by a local government department or agency. In other parts of the world, the lender may set up a private auction or contract with a real estate company to advertise and sell the property on the lender’s behalf.
To some extent, a power of sale also protects the debtor’s rights. This is because the wording of the provision generally makes it clear what options the lender has in terms of taking action if payments are not made in a timely manner. By understanding what the lender is empowered to do if payments are routinely late or not remitted at all, the debtor knows what must be done if circumstances arise that adversely affect the debtor’s ability to pay in accordance with the terms of the contract.
While a power of sale gives the lender the ability to foreclose and sell the property in the event of a default, many lenders prefer to work with the borrower to resolve the situation and bring the mortgage up to date again. This is because the cost of foreclosure and obtaining a deficiency judgment is prohibitive in many jurisdictions around the world. In addition, the resources that the lender must devote to preparing the paperwork before beginning any foreclosure proceeding can also be somewhat prohibitive. For this reason, lenders may choose to delay invoking the power of sale until several attempts to work with the debtor have been attempted and ultimately failed.
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