Mortgages - rights of the lender

Question 1

What are the remedies available to the lender?

Answer 1

Mortgage is a proprietary right:

• Debt action
• Possession
• Sale
• Receiver
• Foreclosure

Question 2

Does a lender who holds an equitable mortgage have the same choice of remedies as a legal mortgagee?

Answer 2

No, they have less choice

- can do debt action, receiver & foreclosure but can only do possession & sale with a court order

Question 3

What is Debt Action?

Answer 3

contractual action to sue the against the borrower

- limitation period for legal mortgages = 12 years for the capital & 6 years for the interest

Question 4

What is possession? What are 2 reasons that a lender may wish to do this?

Answer 4

Taking possession of the mortgaged property as a precursor to sale.

1. Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower. Vacant possession makes a property more attractive to a potential buyer and will enable a higher price to be obtained.
2. Possession will enable the lender to manage the property and derive an income from it. The income can then be used to reduce the outstanding mortgage debt.
   - this must be a last resort - must explore alternative arrangements first

Question 5

What is the Sale remedy?

Answer 5

• If exercised, the borrower loses all rights to the property, the lender can sell the home.
• The sale proceeds are applied towards the outstanding debt. If there is a surplus, this will be forwarded to the borrower; but if there is a shortfall, the borrower may be sued personally by the lender for the outstanding contractual debt.

Question 6

What is the Receiver remedy?

Answer 6

• A receiver acts as manager of the mortgaged property if the lender does not wish to take possession or to sell.
• The receiver is an administrator whose function is to get an income from the land, for example by continuing an existing business, and will apply it towards the outstanding mortgage debt.
• The receiver is deemed to be the borrower‘s agent.
• A receiver must act with due diligence, subject always to the main duty of paying off the mortgage debt.

Question 7

What is the foreclosure remedy?

Answer 7

• It allows a lender to take the mortgaged property in satisfaction of the debt, meaning that the freehold will vest in the lender, and the borrower will lose all rights to the property.
• This could happen even though there may be only a very small amount outstanding on the mortgage security, when compared to the value of the property as a whole.
• rarely encountered

Question 8

When does the right to take possession arise?

Answer 8

s95(4) LPA 1925 - as soon as the mortgage is granted

Question 9

What are the lender’s duties in exercising the right to take possession?

Answer 9

Income:

• For lenders who repossesses mortgaged property in order to generate income
• must manage the property to its full potential and pay actual/ potential profit to the borrower

Duty to exercise its right in good faith and not for an ulterior motive

Question 10

What are the limits on the right to possession?

Answer 10

S6 Criminal Law Act 1977 s6:
- makes it a criminal offence to use or threaten violence for the purpose of gaining entry to property.

ThePre-Action Protocol for Possession Claims 2008:

• sets out steps which a court expects a lender to take before resorting to possession
• discuss debts/ reschedule debts/ extending mortgage term/ new payment plans
• non-compliance does not mean possession is denied but can suffer delays

Question 11

What is the common law jurisdiction to postpone possession?

Answer 11

• the court has an inherent jurisdiction to grant relief from possession to borrowers.
• The court can postpone an order for possession to enable time for the borrower to obtain funds from another source to pay off the debt.
• applies to all mortgages, whether of residential or commercial property.
• The jurisdiction is not available where there is negative equity, where the outstanding loan exceeds the value of the property
• This jurisdiction is temporary only: possession can only be postponed for 28 days
• The court is very limited in what it can do in terms of assisting the borrower. It cannot take any steps which would have a permanent effect on the status of the mortgage itself.

Question 12

What is the statutory jurisdiction to postpone possession?

Answer 12

• for residential property only
• a power to postpone the date for delivery of possession for such period as the court thinks reasonable. Any postponement may be subject to such payment conditions regarding payment as the court thinks fit (s36 Administration of Justice Act (AJA) 1970)

Question 13

Does s36 AJA 1970 enable the court to prevent a lender from exercising a power of sale without first obtaining a court order?

Answer 13

NO (Horsham Properties Group Ltv v Clark)

Question 14

When will s36 AJA 1970 apply?

Answer 14

• Possession proceedings must have started
• The mortgaged property must be fully or partly residential
• Borrower must be able to pay ‘any sums due’ ‘within a reasonable period’, subject to such conditions ‘as the court thinks fit’.

Question 15

What does ‘any sums due’ mean in the context is s36 AJA 1970?

Answer 15

s8 AJA 1973 - any sums due = arrears and accrued interest

Question 16

What does ‘reasonable period’ mean in the context is s36 AJA 1970?

Answer 16

no more than 24 months

• case law has become more generous
• borrower must present a detailed financial plan to the court

Question 17

Can a borrower achieve a sale of the property themselves?

Answer 17

Yes - The court needed to see that the sale proceeds would be sufficient to cover the debt due (Bristol and West Building Society v Ellis)
- must have firm evidence of an imminent exchange of contracts

Question 18

When does a lender’s right to sell arise expressly?

Answer 18

• Most mortgage documents will include an express power of sale and will set out exactly how and when the power will be exercised.

Question 19

When does a lender’s right to sell arise impliedly/ from statute?

Answer 19

• In the absence of an express power, a right to sell can be implied underLPA 1925, s 101(1)(i)unless it is excluded or modified in the mortgage deed.
• The lender’s statutory power of sale arises ‘when the mortgage money has become due’. (e.g. monthly payments due for capital mortgage, end of the loan term, at legal redemption date)

Question 20

When is a lender’s statutory right to sell exercisable?

Answer 20

If expressly conferred - the wording will set out in what circumstances
If power arises under s101(1)(i) LPA 1925, at least one of:

1. Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted.
2. Interest is unpaid and arrears for at least two months.
3. There has been some breach of another mortgage provision such as a covenant to keep the mortgaged property insured or in good repair.

Question 21

What are the lender’s duties when exercising the right to sell?

Answer 21

• owes duties to the borrower
• after the sale, the lender is trustee of the surplus proceeds of sale (s105 LPA 1925) and must hand them to the person next entitled
• duty on price: must accept a price that is within the correct bracket of worth
• duty on method of sale: must take expert advice as to the method of sale, the marketing strategy and the reserve price.
• duty on timing of sale and condition of property: it can sell property whenever it wants, even if a higher price could have been obtained if he waited