What can I do if a buyer defaults on a vendor take-back note?

A buyer who stops paying a vendor take-back note owes you what the note says it owes, and your options come from two documents: the note and any security agreement or mortgage that came with it. Read them before you write to the buyer. They define default, say whether you must give notice or allow time to fix it, and list your remedies. This page uses Ontario’s statutes as its example. Other provinces run their own regimes, so the details change with the province whose law governs the deal.

If the note is secured on business assets

Under Ontario’s Personal Property Security Act, where the debtor is in default under a security agreement, the secured party has the rights and remedies in the security agreement and the rights and remedies in Part V of the Act (s.59(1)). The Act defines default as failure to pay or perform the secured obligation when due, or an event that makes the security enforceable under the agreement’s terms. Before disposing of collateral after default, the secured party must give written notice to the persons the Act names (s.63(4)), subject to the exceptions in s.63(6). Have a lawyer review the security before anyone repossesses or sells anything.

If the note is secured by a mortgage on real estate

The Personal Property Security Act does not apply to the creation or assignment of an interest in real property, including a mortgage, charge or lease, subject to the exceptions listed in s.4(1)(e). Ask a lawyer how a defaulted mortgage is enforced under its terms and your province’s law before you start. Check any default-interest wording first. The federal Interest Act says no fine, penalty or interest rate may be stipulated for or taken on arrears of principal or interest secured by a mortgage on real property that increases the charge on the arrears beyond the rate payable on principal not in arrears (s.8(1)).

Watch the limitation period

Ontario’s Limitations Act, 2002 says that, unless the Act provides otherwise, a proceeding shall not be commenced after the second anniversary of the day the claim was discovered (s.4). For a demand obligation, the day the loss occurs is the first day there is a failure to perform after a demand is made (s.5(3)). Whether your note is a demand obligation, and whether the Act’s other provisions apply, are questions for a lawyer. If another province’s law governs the note, ask which limitation statute applies.

If the buyer goes bankrupt

The federal Bankruptcy and Insolvency Act says that on the bankruptcy of a debtor, and subject to listed exceptions, no creditor has any remedy against the debtor or its property, or may start or continue a proceeding to recover a claim provable in bankruptcy (s.69.3(1)). Subsection (2) says that, subject to sections 79 and 127 to 135 and s.248(1), the bankruptcy does not prevent a secured creditor from realizing or otherwise dealing with its security, unless the court orders otherwise. How that applies to your note is a question for a licensed insolvency trustee or lawyer. Read our answers on what happens on an acquisition loan default and on releasing the security once the note is paid.