Disputes as to Sale; Mortgages

Question 1

Value of the mortgage for the mortgagor

Answer 1

Usually the only way o facquiring a large appreciating asset

Cheap way of raising large sums of money for other ventures

Question 2

Value of the mortgage for the mortgagee

Answer 2

Secure way of raising interest

Loan monies safe becuase secured on asset which apperciates through no effort on part of the mortgagee

Question 3

Value of the mortgage for society

Answer 3

Powerful instrument for creation of wealth; raises general level of prosperity

Question 4

When things go wrong

Answer 4

Mortgagor defaults and is no longer able to meet repayments

Slump in market so that the mortgagor is in ‘negative equity’

Mortgagor no longer maintains asset so that mortgagee’s security is at risk of devaluation

Question 5

Remedies for mortgagee

Answer 5

• Repayment of sums due
• Possession of the premises
  
  • E.g. where the security is in danger of devaluation through neglect
• Where there is a default, they would want possession and / or sale or the mortgaged premises

Question 6

Remedies for mortgagor

Answer 6

Relief from possession

Set aside mortgage contract where there is undue influence [Barclays Bank v Burh]

Question 7

Foreclosure

Answer 7

• America: ordinary possession and sale
• English law: the right of the mortgagee to ask the court to end the mortgagors equitable right to redeem
  
  • Foreclosure orders vest the title to the estate in the mortgagee [s88(2) + 89(2) LPA]
• The property is no longer the property of the borrower, they lose the entire ownership of their home
• Supposes a windfall for the mortgagee and thus is no longer used
  
  • Calls for it to be abolished [Law Comm n204 p7.27]
• Court may order a sale instead [s91 LPA]

Question 8

Possession of mortgaged property

Answer 8

• Arises from a common law right; in the nature of security that it is a proprietary right in land
  
  • For it to have any practical meaning, it would have to be open to the mortgagee to possess the property so they can sell it
  • Acknowledged in Four Maids v Dudley Marshall; the right to possession has nothing to do with default
• Usually, in order to possess the property, the mortgagee will have to seek a court order if the property is residential
  
  • If it is commercial, they do not need a court order, you can simply change the locks
  • In Ropaigealach v Barclays Bank, a couple vacated the mortgaged property during its refurbishment, and when they came bank they found out the bank had possessed and sold their house, which was perfectly lawful
• No possession will be awarded if there is an innocent co-owner [Albany Homes v Massey]

Question 9

Mortgagee may push mortgagor into bankruptcy

Answer 9

• The mortgagee may also push the mortgagor into bankruptcy to get a more favourable chance of getting possession and sale because the presumption is heavily in favour of the creditor under the insolvency act
  
  • S335A + s336 Insolvency Act: presumption for possession and sale in favour of trustee in bankruptcy
• Alliance Leicester v Slayford: it is not an abuse of process for a lender to enforce its right, even if it results in the borrower’s bankruptcy

Question 10

Protection for mortgagor - s91 LPA

Answer 10

• Either party can apply to the court for an order for sale
• The mortgagor can apply to the court for an order for sale against the mortgagee’s wishes [Mortgages Services Funding v Palk; Polonski v Lloyd’s Bank Mortgages]
  
  • In these cases, the court used its jurisdiction under s91 to allow the borrower to sell even though the proceeds would not pay off the loan. These were exceptional circumstances (during the slump in the market) and both the borrowers were living in very economically depressed areas and they were unemployed
• Usually the courts will allow the lender to control sale if there is no negative equity [Cheltenham & Gloucester BS v Krauz]
  
  • Here, the borrowers were simply using s91 as a stalling device and postpone possession. The bank allowed the mortgagee to possess so they could wait for the market to go up so they could sell it

Question 11

Court powers where the property is a dwelling

Answer 11

• S36(1) Administration of Justice Act 1970: where the mortgagee of land which includes a dwelling brings an action for possession, this section gives the court power (under subsection 2) to inter alia:
  
  • Adjourn proceedings
  • Make an order for delivery of possession to mortgagee
  • Postpone delivery of possession
• A36(1) AJA as amended by s8 AJA 1973: the court may postpone an order for sale (to protect the borrower) if
  
  • Mortgagor is likely to be able
  • Within a reasonable period
  • To pay any sums due under the mortgage or
  • To remedy a default consisting of any other breach under the mortgage (e.g. maintenance or property or payment of insurance under endowment mortgage)

Question 12

Poor drafting of s36(1) AJA

Answer 12

• “Likely to be able to pay any sums due in a reasonable period” – unclear
  
  • Halifax v Clarke: standard clause demanding that the whole loan would be immediately repayable on any default in repaying instalments. Few mortgagor’s in financial trouble would be able to do this, so s36 protection is undermined
• Amendment by s8 AJA 1973: “any sums due” under s36(1) AJA 1970 is to mean any sums already due that have not been paid, and not the whole sum due over the lifetime of the mortgage
• “Reasonable period”: may be the term of the mortgage agreement [Cheltenham Gloucester v Norgan]. Two-point test
  
  • The starting point for a reasonable period should be the outstanding term of the mortgage
  • It should then be determined whether the mortgagor could maintain the paying off of the arrears by instalments over the period

Question 13

How does s36 AJA affect mortgagee’s common law right to possession

Answer 13

• Ropaigealach v Barclays Bank: mortgagee possessed without obtaining court order when owners were temporarily absent while home was undergoing building works
  
  • The court can only protect the mortgagors possession if the mortgagee has applied to it for an order
  • But, the mortgagee is not under any obligation to apply for such an order because they already have a right to possession
• Chadwick LJ: this has been a long-standing common law right; if parliament were getting rid of it they would have said so explicitly

Question 14

Possession and sale

Answer 14

• No possession does not mean no sale
• Even where the mortgagee cannot get possession because an innocent co-owner is resident, it can still apply to the court for an order for sale under s14 TLATA [First National Bank v Achampong] in order to force the innocent co-owner to sell

Question 15

Horsham Properties v Clark

FACTS

Answer 15

Mortgagee sellig without taking possession

FACTS: The mortgagors fell into arrears, and their mortgagee appointed receivers of the mortgage property. The receivers sold the property at auction and recovered sufficient funds, and then the company that bought it at the auction sold it to Horsham, who wanted to sell the property to the open market and needed to force the Clark’s our on the grounds that they were trespassers

Question 16

Horsham Properties v Clark

Human Rights

Answer 16

• The Clarks sought to argue that s101 LPA violated their property rights (equity of redemption) under art1 First Protocol ECHR, as they were denied opportunity to protect it under a s36 AJA application
• Briggs J held that it did not
  
  • The power of sale was purely a contractual (private) and note a state matter
  • Mortgagees right to sell under s101 LPA does not violate the private agreement but implements it
  • S101(4) allows the parties to opt out
  • The mortgagee’s power to sell was a “central and essential part of the security”

Question 17

Limits of statutory protection for mortgagor as against mortgagee

Answer 17

S36 AJA 1970 *cannot* hold the mortgagor where:

• The mortgagee has not sought an order for possession [Ropaigealach], or
• There is negative equity [Cheltenham & Gloucester v Krausz]

Question 18

Does s36 AJA give protection only to a defaulting mortgagor?

Answer 18

The section presupposes that there is a default, and that is the reason why the mortgagee wants to sell the property

Question 19

Western Bank v Schindler

FACTS

Answer 19

• Endowment mortgage: no capital repayments to be made, but rather an investment made into insurance
• FACTS: concerned a badly drafted contract which did not stipulate interest payments nor endowment policy maintenance as terms. The mortgagor let the policy lapse, so the mortgagee was in danger of never receiving their money; but technically there was no default because there were no arrears. Since the bank could not sue for debt, it applied for a possession order, but s36 seems to give the court discretion only where there is a default
  
  • This may mean that defaulting mortgagors have recourse to protection under the section, whereas non-defaulting mortgagors do not

Question 20

Western Bank v Schindler

HELD

Answer 20

• Buckley and Scarman LJ: broad view
  
  • S36 must apply even with no default, because otherwise defaulting mortgagor would be in the better position than the blameless mortgagor who has not breached any of the terms
  • Here, there was no implied term limiting the mortgagee’s right to possession, so the mortgagor’s appeal was dismissed
• Goff LJ: narrow view
  
  • The purpose of s36 is limited to allowing a mortgagor time to remedy the default. S36 does not apply where there is no default, because that would abrogate generally the mortgagee’s right to possession under Four Maids

Question 21

Good faith requirement?

Quennell v Maltby

FACTS

Answer 21

• The owner had leased premises to students without the consent of the mortgagee, and the leases were therefore void as against the mortgagee. The owner then wanted to sell the property with vacant possession, but as a landlord was prevented from doing so under the 1977 Rent Act. he tried to get the mortgagee to sue for possession (since the lease was void as against the mortgage and therefore not protected under the Act), but they refused. The owner got his wife to pay off the loan and the mortgage was transferred to her; she then sued for possession
• The CA deemed that possession had been sought in order to evade the Rent Act

Question 22

Quennell v Maltby

HELD

Answer 22

• per Lord Templeman: “the mortgagee is not bona fide in exercising her rights and power for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord”
• There is no requirement that a mortgagee should have a ‘purity of purpose’ for selling, provided always that it is part of his motive to realise or protect his security [per Lewison J in Meretz Investments v ACP]
  
  • Thus, a mortgagee’s power can be said to be exercised improperly only if no part of the reason was to protect the security, as in Quennell itself

Question 23

Disputes as to who controls sale

Answer 23

S91 LPA, where there is a dispute as to who controls sale, the court has discretion to order a sale against the wishes of mortgagee / lender [Palk v Mortgage Service Funding]

Question 24

Sale of mortgaged property

Answer 24

• S85(1) + 87 + 23(2) LRA: the mortgagee has all the rights of an owner
  
  • They are treated as if they have the legal estate vested in them
• Power to sell and vest good title in the purchaser [s88, 101(1)(i) LPA]

Question 25

Power of sale

Answer 25

• S101 LPA: power of sale arises when mortgage money becomes due (usually after 6 months)
• S103 LPA: power becomes exercisable when notice requiring payment has been served and default has been made for three months after notice
  
  • Tells us when the lender is able to exercise their power of sale

Question 26

Consequences of sale

Answer 26

• S104 LPA: power to convey estate free from all interests over which mortgagee has priority
• S105 LPA: money received held on trust for mortgagor (and other secured creditors whose priority is later than first mortgagee’s)

Question 27

Residue held on trust

Halifax v Thomas

Answer 27

• FACTS: Thomas lied about who he was and his earnings. If Halifax had known the truth they would not have lent him the money. Thomas was convicted of a criminal offence. Halifax sold the property, and there was a surplus after they took what he was owed. S105 LPA meant that they held the rest on trust for Thomas, but he had only acquired the property by committing fraud. Under the Forfeiture Act, he could not keep the proceeds of his crime
• HELD: Halifax could not keep it, and it went to the crown
  
  • Equity does not like windfalls

Question 28

Exercise of power of sale

duties

Answer 28

• Not a trust duty
• Nash v Eads, per George Jessel MR: the mortgagee is not a trustee of the power of the sale and thus can prefer his own interest
  
  • The mortgagee does not have to put the borrower’s interest above his own
  • He must bear
• Cuckmere Brick Co v Mutual Finance Ltd: a case where the mortgagee had not valued the property properly. This was a property over which the owner had obtained planning permission (which means it is worth much more), and he forgot to mention. The price the property got was too low than it should have been
  
  • To what extent does the mortgagee have to get the best price going
  • He must bear in mind the interests of the borrower
  • Because he could have gotten a higher price, he was under a duty to market the property so that it would obtain the highest price possible, so they were at breach of their duty
• The duty of care is (to get the best price reasonably obtainable in the circumstances) owed only to the mortgagor because of the contractual relationship, and not to the beneficiary of the trust [Parker-Tweedale v Dunbar Bank]
  
  • There is no trustee duty

Question 29

Duty of care

Answer 29

• Narrow duty of care is owed to the mortgagor to obtain the best price reasonable obtainable
• The duty is to get the best price reasonably attainable at the time, but you can choose the time to sell
  
  • There is no duty to wait until the market improves
• But note difficulty in establishing ‘true market value’ or ‘best price’

Question 30

How to establish value

Answer 30

• Must advertise properly [Pendlebury v Colonial Mutual Life Assurance: a country property was marketed only in city publications]
• With full description [Cuckmere]
• Allow reasonable time before accepting offer below proper valuation, unless mortgagee can show that a higher offer is unlikely [Bank of Cyprus v Gill]
  
  • You cannot just take the first offer that comes along
• There is no duty to improve the property [Silven Properties v Royal Bank of Scotland – there is no duty to expend money on improving value]

Question 31

Duty against self dealing

Answer 31

• Duty against self-dealing: if you are selling to somebody you know, it will be at the lowest possible price
  
  • You can sell to someone associated to you if done at an open auction, or where you will not be control of the price [Tse Kwong Lam v Wan Chit Sen – self-dealing may be allowed if the buyer related to mortgagee obtains property through a public auction, but not in this case, as mortgagee-controlled auction and supressed reserve price)
• Lord Templemann: mortgagee can discharge by obtaining expert advice on the best mode of sale