A power of sale clause within a contract provides for a specific remedy to a party to that contract in the instance of default. Essentially, it circumvents the courts to allow for a speedier process whereby an individual can sell either property or investments when the other party is in default. A power of sale clause is not required in any contract but can be extremely beneficial.
Power of sale clause in a mortgage deed
Example: “This mortgage is upon the statutory condition and upon the further condition that all covenants and agreements of Grantor in the purchase agreements, the notes, the security agreement, the loan agreement and the other loan documents shall be kept and fully performed and upon any breach of same, Grantee shall have the statutory power of sale and any other powers given by statute or set forth herein, including the right to foreclose any and all rights of Grantor in and to the property, whether by sale, entry, or in any manner provided for hereunder.” [1]
A power of sale clause written into a mortgage contract authorizes the mortgagee to sell the property in the event of default. These types of clauses invoke the right of foreclosure without going through the court process. However, the lender, under a power of sale clause, must follow specific rules and guidelines. For example, the lender must give notice of the pending foreclosure, which includes notice to the borrower and public notice. A power of sale clause in a mortgage contract is also known as “nonjudicial foreclosures.”
Power of sale clause in a trust deed
Example: “Trustee, at the request of the Lender, shall have the power to sell all or any part of Borrower’s interest in the property at auction, to the highest bidder, after having first obtained such notice of hearing as to the commencement of foreclosure proceedings and having obtained such finding or leave of court as then may be required by law and then having given such notice and advertised the time and place of such sale in such manner as then may be provided by law, and upon such sale and any resale and upon compliance with the law then relating to foreclosure proceedings and power of sale, to convey title to the purchaser in fee simple.” [2]
A power of sale clause in a trust deed allows the trustee to sell investments in a trust upon default by Borrower.
Power of sale clause in a will
Example: “The executor of this will shall have the power to sell any or all part of the estate of the decedent without court order and without interference of the probate court.”
A will can contain a power of sale clause, allowing the executor to sell the real property of the estate without court order from a probate court. If there is no will giving the executor the power to sell property, then the property will go into probate.
Power of sale v. Judicial foreclosure
With a power of sale clause, a foreclosure will occur without judicial review. However, the lender that uses the power of sale clause in order to foreclose on the property will not be able to seek deficiency judgment against the borrower. Any funds that are left after the debt is cleared, goes to the borrower. A judicial review is a foreclosure that occurs on a property through the courts.
Stopping the power of sale
The power of sale can be stopped. In the property context, if the borrower has received a notice of sale (which typically comes either in the form of a demand letter or accompanying a demand letter) , the borrower can still fulfill the demands in the demand letter. This may prevent the lender from moving forward. Unfortunately, the borrower will likely have to pay out both the mortgage default fees and the principal and interest on the mortgage. Though the lender in this situation can invoke the power of sale without judicial review, the borrower is still entitled to file in court to stop the foreclosure proceeding and ask for judicial review.
A state by state analysis
There are thirty-two states that permit power of sale foreclosures. Those states are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming. Iowa is primarily a judicial foreclosure state but only allows non-judicial foreclosure if both the lender and borrower agree to it. Of those states, judicial foreclosures are still allowed in all except Montana that only allows non-judicial foreclosures.
The District of Columbia and New Mexico allow it depending on the situation. Oklahoma and South Dakota allow the power of sale clause unless the homeowner requests judicial foreclosure at which point it will be transferred to the courts.
The states that do not allow power of sale clauses, only allow for an equitable right of redemption for a borrower and some of those states allow for a statutory right of redemption. Connecticut only allows judicial foreclosure either by strict foreclosure or a decree of sale foreclosure. Delaware, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, New Jersey, New York, North Dakota, Ohio, Pennsylvania, South Carolina, and Vermont only allow judicial foreclosure. Florida is only a judicial foreclosure state where the lender must file an action directly in court before seeking foreclosure.
References
[1] Statutory Power of Sale Sample clauses. Law Insider. (n.d.). https://www.lawinsider.com/clause/statutory-power-of-sale
[2] Ibid.
