As its name suggests, a judicial sale is the sale of property authorized by the courts. Like foreclosure actions, the judicial sale starts through litigation. The lender can sue for the property to be sold and also to seek payment for any shortfalls and to obtain possession.
Judicial sales are not as often utilized as powers of sale or foreclosures. They may be more frequently used, for example, where there is some defect in the mortgage that might prevent a foreclosure from occurring. A more common example would be where the value of the property is insufficient to pay off the mortgage but there is a good chance that any shortfall can be obtained from either the borrower or a guarantor. Another example is where a borrower has requested that a foreclosure proceeding is converted into a sale proceeding.
As with foreclosures, a judicial sale can be suspended if the borrower puts the mortgage back into good standing and pays the lender’s legal costs prior to the sale occurring. At this point, it is important to note that a “sale” is not just the actual sale or closing of a purchase arrangement for the property. It occurs when an agreement of purchase and sale is entered into between the lender and a third party. So, if the lender and a third party sign an agreement of purchase and sale, and that agreement is subsequently approved by the court, it is too late for the borrower to “save the house” – even if the actual transfer of the property from the lender to the third party does not occur until months later.
Once an order is made for a judicial sale then various logistical rules come into play for the sale to occur. These are all overseen by a “referee” who determines such issues as whether a public auction or private sale can occur, what forms of advertising of the property should be used, etc. Ultimately, a new buyer is found for the property and the referee will determine if the sale is appropriate in the circumstances. If appropriate, then the lender has been given the court’s blessing and will have a certain level of protection from any later claims by the borrower that the sale was unfair