Mortgages - Rights of Mortgagee

Question 1

Right to sue on the contract

Answer 1

This is a remedy. If mortgagee defaults on payments, mortgagor has a right to sue them for breach of contract.

Question 2

In what situation(s) would the mortgagee choose to sue on the contract? (1)

Answer 2

1st situation - Mortgagee takes possession after mortgagor defaults on mortgage repayments. Property is sold, proceeds are not enough to recoup outstanding loan. Mortgagee can sue for the difference. Not likely because if the mortgagee had this money he probably wouldn’t have defaulted on the repayments.

Question 3

In what situation(s) would the mortgagee choose to sue on the contract? (2)

Answer 3

2nd situation - Property cannot be sold because someone else has an interest in it which is binding on the bank. (for example, an equitable interest under a constructive trust which has not been overreached.)

For example: A purchases property and is alone on the legal title. B contributed to the purchase price and thus has an equitable interest under a constructive trust. A then creates a mortgage over the property with the Bank. A defaults on mortgage payments and the Bank wants to take possession and sell the property to recoup the outstanding loan. B’s equitable interest will be binding on the Bank if it has notice of B’s interest in unregistered land, or if B is in actual occupation in registered land. Assuming B’s interest is binding on the bank, this gives B a right of occupation under s12 of TOLATA 1996. Bank therefore cannot take possession, and will sue A for breach of contract instead. The court will then declare A bankrupt, and appoint a trustee in bankruptcy to manage his affairs. A trustee in bankruptcy can apply for a sale of the property to pay off A’s debts. If they apply for sale more than a year after the bankruptcy, court will order a sale and B will have to move out. Because B’s equitable interest was binding on the Bank, B will receive their share of the proceeds before the rest goes off to pay the mortgage debt.

Question 4

Section 8 and 20 of the Limitation Act 1980

Answer 4

The mortgagee has 12 years from the date of default in which to sue the mortgagor for the principal sum owed under the mortgage.

Question 5

Wilkinson v. West Bromwich BS (2004)

Answer 5

Should the mortgagee fail to commence proceedings during this period, the debt will be unrecoverable.

Question 6

Bradford & Bingley plc v. Rashid (2006)

Answer 6

If the mortgagee fails to commence proceedings during this period, the debt will be unrecoverable (Wilkinson v. West Bromwich BS), although any acknowledgement of the debt due by the mortgagor will restart the 12 year period.

Question 7

Power of sale

Answer 7

This is a remedy. Mortgagee can sell mortgaged property if certain conditions are met. 1) power of sale must have arisen. 2) power of sale must have become exercisable.

Question 8

Section 101 (1)(i) of the Law of Property Act 1925

Answer 8

Most mortgages will contain an express power of sale, but if not, a power of sale will be implied into every mortgage made by deed by virtue of s101(1)(i).

Question 9

Twentieth Century Banking v. Wilkinson (1977)

Answer 9

A mortgagee’s power of sale will arise as soon as the legal date for redemption has passed, or, in the case of instalment mortgages, usually when one instalment is in arrears.

Question 10

Power of sale arises …

Answer 10

… under s101 of the LPA 1925, and BOTH the following conditions must be satisfied:

• mortgage must’ve been created by deed
• mortgage money has become due, after the legal date of redemption.

Question 11

What happens if the mortgagee sells before the power of sale has arisen?

Answer 11

The mortgagee can only sell their interest, not the property. Meaning that the purchaser will only receive the right to receive the money due on the mortgage, and once the mortgagor has paid off this sum, the property is theirs again and the purchaser only receives the sum.

Question 12

Section 103 of the Law of Property Act 1925

Answer 12

Determines when the power of sale becomes exercisable. One of three conditions in the section needs to be met:

• Notice has been served on the borrower requiring payment & three months have gone by without the borrower doing so (s103(i)); or
• Some of the interest on the mortgage loan is at least two months in arrears (s103(ii)); or
• There has been a breach of the term of the mortgage other than one relating to the payment of capital or interest (s103(iii)). (a term like this for example - a term that the borrower will not lease the mortgaged property without the mortgagee’s consent, like in Bishop v Blake)

Question 13

Right to take possession

Answer 13

This is a right, not a remedy. Mortgagee has a right to possess the property. Usually a prelude to sale.

Question 14

Four Maids v. Dudley Marshall (1957)

Answer 14

The mortgagee is regarded as having an estate in the land and this gives the mortgagee an immediate right to possession the moment the ink is dry on the mortgage.

Question 15

Silven Properties Ltd v. Royal Bank of Scotland plc (2003)

Answer 15

• Mortgagee must take reasonable care of the property after they have taken possession.
• Mortgagee is not obliged to take steps an owner may take in selling the property, so there is no obligation on the mortgagee to pursue planning applications or the grant of leases that might make the property more valuable.

Question 16

Section 105 of the Law of Property Act 1925

Answer 16

s105 specifies the order in which proceeds of the sale go.

1) to any mortgagees who gave mortgage loans before the selling mortgagee
2) any expenses from sale
3) the money owned to mortgagee selling the property
4) payment to mortgagees who gave the mortgage loans after the selling mortgagee
5) any surplus to the mortgagee

Question 17

China and South Sea Bank Ltd v. Tan Soon Gin (1991)

Answer 17

The mortgagee needs only act in good faith (no reasonable care) for anything it does in conducting the sale (different than price). Mortgagee has unfettered discretion to sell whenever he likes, and doesn’t need to wait for a good market.

Question 18

Standard Chartered Bank v. Walker (1982)

Answer 18

A selling mortgagee is under a duty of care to the mortgagor to get the best price reasonably obtainable.

Question 19

Cuckmere Brick Co Ltd v. Mutual Finance Ltd (1971); Wilson v. Halifax plc (2002)

Answer 19

A sale by open public auction, even when prices are low, satisfies the duty of care to the mortgagor to get the best price reasonably possible.

Question 20

What happens when the mortgagee sells after power of sale has arisen but the power of sale has not become exercisable?

Answer 20

The purchaser will take the land free of the mortgage, save that the mortgagor may be able to set the sale aside if the purchaser had notice of the mortgagee’s fault - s104 of the LPA 1925 and Cuckmere Brick Co v. Mutual Finance (1971).

Question 21

Michael v. Miller (2004)

Answer 21

When sale is not by open public auction and a number of offers are made for the property instead, the court will consider the steps the mortgagee took to sell the property and then consider whether, in accepting the offer to contract at a price, this was within an acceptable bracket for the property.

Question 22

Meretz Investments v. ACP Ltd (2006)

Answer 22

The mortgagee’s motives in exercising power of sale are generally irrelevant, although it would be a breach of duty if NO part of his motive in selling was to recover the debt.

Question 23

Williams v. Wellingborough Council (1975)

Answer 23

Mortgagee may not sell the property to himself or his agent or his employees.

Question 24

Mortgage Express v. Mardner (2005);
Bradford & Bingley v. Ross (2005);
Alpstream v. PK Airforce (2013)

Answer 24

If a mortgagee sells to a company in which he has an interest, or is even associated with, the burden of proof of establishing that the sale was at the best price reasonably obtainable lies with the mortgagee, and if he cannot discharge it he is liable.

Question 25

Section 91 of the Law of Property Act 1925

Answer 25

If the mortgagee wants the property, he can apply to the court under s91 for authority to sell to himself, in which the propriety of the transaction will be assessed by the court.

Question 26

Horsham Properties v. Clarke and Beech (2009)

Answer 26

• Mortgagee is not required to take possession before sale because selling mortgagee has the power to convey the legal estate to the purchaser even if the mortgagor remains in possession.
• The right under s36 of the Administration of Justice Act 1970 is not available to a mortgagor if the mortgagee sells land without first taking possession, because such protection is only available to a mortgagor when a mortgagee seeks a possession order.

Question 27

Section 36 of the Administration of Justice Act 1970

Answer 27

Under s36, an application by a mortgagee for possession of a dwelling house may be suspended, adjourned or postponed by the court, in its discretion, if it appears that the mortgagor would be likely to be able to pay within a reasonable period any sums due under the mortgage.

Not available for commercial premises.

Question 28

Mortgage Agency Services v. Ball (1998)

Answer 28

s36 of the AJA 1970 is not available once a warrant for possession has been executed, meaning if the mortgagee has recovered possession.

Question 29

Ropaigealach v. Barclays Bank (2000)

Answer 29

If the mortgagee takes possession without a court order, as it can, the court has no jurisdiction to suspend or control the possession.

Question 30

Cheltenham & Gloucester BS v. Krausz (1997)

Answer 30

“s36 AJA does not empower the court to suspend possession in order to permit the mortgagor to sell the mortgaged property where the proceeds of sale will not suffice to discharge the mortgage debt, unless of course other funds will be available to the mortgagor to make up the shortfall.” - Philips LJ

Question 31

Cheltenham & Gloucester BS v. Norgan

Answer 31

Reasonable time for the purpose of S36 AJA 1970 depends on the circumstances of the case.