Topic 29 - Lenders’ legal rights and remedies Flashcards
What is the most commonly used legal remedy a lender takes when a mortgagor defaults?
The lender sues the
borrower for possession of the property and then sells the property in order
to recover the debt
What are the 5 legal remedies available to a lender when the borrower defaults
What is a legal remedy?
Legal remedies = The actions laid down in law that a lender can take against a borrower in
default
The lender can:
Sue for possession
Exercise the power of sale
Sue on the borrower’s
personal covenant for recovery of the debt
Appoint a receive
Foreclosure
(now not used)
A lender has chosen to seek a possession order which is one of their 5 legal remedies available to them
What happens next?
The lender must petition the county court for a possession
order. The county court will consider whether
all other options have been reviewed and this is the last resort
If the county court feels it is, which is should be, there are a number of things that could happen. These are:
Grant an outright possession order, enabling the lender to take possession,
usually within 28 days
OR
Grant a suspended possession order, which forces the borrower make repayments. The
suspended possession order becomes enforceable if the borrower fails to keep up the repayments. (The court will have to grant a final possession
order in this situation)
OR
Adjourn or suspend the case until a future date, or even dismiss it all together (if the lender has not reviewed all options or the lender cannot provide the courts with adequate docs - the lender must be well prepared for court hearings)
True or false.
A borrower can still settle the full mortgage account, which includes the capital plus arrears, even after the date of possession takes place?
True
The borrower has until the point at which the lender exchanges contracts with a
new buyer. This is why the lender still has a duty of care for the debtor even after the possession is complete
A lender has chosen to exercise their right to sue the borrower’s covenant, which is one of the 5 legal remedies available to the lender when the mortgagor defaults
What does this mean?
Sue the borrower on their personal covenant to repay the debt that arises from the contractual obligations in the legal charge
Taking this action is often futile because, even if the court makes an award to
the lender, the borrower may not have the resources to pay it
A lender has chosen to exercise their right power of sale, which is one of the 5 legal remedies available to the lender when the mortgagor defaults
What does this entail
It allows lenders to sell a property in specified circumstances
This is rarely used for residential property
It allows the lender to sell the property in 1 of 3 circumstances:
the mortgage has not been repaid within three months of the lender serving
notice to the borrower requiring full repayment of the loan;
the borrower is more than two months in arrears;
the borrower breaches another non‑financial mortgage covenant
A lender has chosen to exercise their right to appoint a receiver, which is one of the 5 legal remedies available to the lender when the mortgagor defaults
Exercised when
there is an income from the property.
For example, when the
property has tenants who are paying rent.
The receiver collects the rent and any other income from the property on behalf of the lender, and this
money is applied to the mortgage account to reduce the overall debt
NOTE: Lenders must be careful when exercising this right because their may an unauthorised tenant at the property, and by doing this the lender is formally recognising them as a tenant – this could create an overriding interest for the tenant
A lender has chosen to exercise their right to forclosure, which WAS one of the 5 legal remedies available to the lender when the mortgagor defaults
Forclosure is no longer available in the UK. Explain why this is
A foreclosure
order is never used in the UK today.
A foreclosure order results in the borrower
forfeiting all rights to the property. The lender is theoretically able to take possession, sell the security and retain any surplus. The borrower loses the
right to redeem the mortgage after possession – this is now regarded as unfair so no longer used
NOTE:
FORCLOSURE is
generically used to mean pursuing recovery of a debt so two meanings
In relation of Residential Property, Before starting formal possession proceedings, the lender must follow the
Ministry of Justice’s Pre‑Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears
What is the purpose or aim of this protocol?
ensure the lender and borrower act fairly and reasonably in resolving any arrears‑related matters;
encourage greater pre‑action contact to reach an agreement out of court, or, when an agreement cannot be reached, to enable efficient use of the
court’s time and resources;
encourage lenders to check who occupies the property before starting
possession proceeding
If, after all reasonable attempts to resolve the problem have failed, the lender
wishes to repossess the property, it must give 15 days’ notice in writing of its
intention
A lender cannot start the possession process if the borrower can
demonstrate WHAT?
a claim has been submitted for an SMI loan, for Universal Credit, for an
MPPI policy or for help from a mortgage rescue scheme;
there is a reasonable expectation of a payment from the DWP, an insurance policy, a local authority or a charity;
they have financial or specific personal difficulties affecting affordability and so need time to seek independent debt advice
Their financial circumstances should improve in the foreseeable future;
they have made a legitimate complaint about the possession claim to the
FOS;
they are taking active steps to market the property at an appropriate price
and have given the lender specified information
From start to finish outline the possession order procedure/process
PART 1
Outline from start to finish the process/procedure of a possession order
PART 2
When taking possession of the property what happens if the debtor leaves fittings behind?
What happens to the water/electric etc
Fixtures pass to the lender but any fittings left behind by the borrower are held in trust on their behalf
If the borrower reclaims them, the lender must take care not to
readmit them to the property, or a new possession order
may be required.
The lender should list the items involved and document how it has dealt with them, eg by arranging
removal and storage.
A mortgagee in possession can be held liable if it can be established that it has been negligent towards the borrower’s belongings.
If the borrower’s fittings are not claimed by a specified time, they may be disposed of, with any proceeds credited to the mortgage account
Utilities such as water, gas, electricity and telephone must be disconnected, and gas and electricity meters must be read. The local water and sewerage authorities should be advised that the property is empty.
The borrower is responsible for
payment of services used before the readings were taken
The borrower retains an ‘equity of redemption’ after possession. What is this
The borrower’s right to settle the mortgage debt in full at any time up to the point of sale.
In otherwords, the borrower retains an ‘equity of redemption’
until the lender exchanges contracts with a new buyer
In otherwords, the borrower can pay off the debts up until the point of exchange in contracts
‘In full’ means the settlement must include any arrears.
What is ‘NURSING’ A PROPERTY
Setting a sale price and then not selling the property until an offer at or very near that price is received, regardless of the time taken to achieve it
lenders cannot do this because of the implications to the borrower, they just have to obtain the best price reasonably possible
If the sale proceeds are not enough to pay off the mortgage, the lender must inform the borrower of any shortfall in a durable medium. If it intends to pursue the borrower for payment of any shortfall, the lender has HOW LONG from the date of sale to notify the borrower of that intention.
Tell me how long for both ENGLAND AND SCOTLAND
ENGLAND = 6 YEARS
SCOTLAND = 5 YEARS
What is the procedure on default where a MIG (Mortgage Indemnity Guarantee) is in place?
Mortgage not
fully repaid
Insurer pays
lender
Insurer sues
borrower
Lender may also
sue borrower (for MIG claim)
Tell me the process/procedure a lender takes when selling a property after possession
Part 1
Tell me the process/procedure a lender must following when selling a property following possession
Part 2
Define the following:
Subrogation
Sue for Possession
Outright possession order
Suspended possession order
Adjournment or suspension of the case
Sue on the borrower’s covenant
Right to appoint a receiver
Foreclosure
Court warrant (Section 24 application)
Equity of redemption
Nursing a property
Subrogation = The right of a mortgage indemnity guarantee (MIG) insurer to sue the borrower for repayment of any money paid to the lender due to a claim on the policy
Sue for Possession = The lender petitions the county court for a possession order
Outright possession order = The court rules that the lender can take possession, usually within 28 days
Suspended possession order = The court suspends possession as long as the borrower meets payment obligations set out by the court. The possession order becomes enforceable if the borrower fails to meet those obligations, at which point a final possession order will be required from the court.
Adjournment or suspension of the case = The court may adjourn or suspend an application for possession if the lender cannot demonstrate it has done everything possible to sort out the problem with the borrower. The court may also dismiss the case in some circumstances
Sue on the borrower’s covenant= A mortgage deed contains a personal covenant (promise) from the borrower to repay the mortgage. If they fail to do so, the lender can sue them for breaching the covenant
Right to appoint a receiver = Only applicable if there is a paying tenant in the property. The lender can appoint a receiver to collect the rent to pass on to the lender. The rent is applied to the mortgage account
Foreclosure = Never used today. The lender takes possession, sells the property and keeps all the proceeds, even if the proceeds are more than the mortgage debt. A complicated process: requires a petition to the Chancery Division of the High Court of Justice
Court warrant (Section 24 application) = Allows the lender to carry out necessary maintenance or sell the property to settle the mortgage debt
Equity of redemption = The right of a borrower in default to settle the mortgage, plus arrears, at any time before a lender in possession exchanges contracts with a new buyer.
Nursing a property = A lender in possession delays selling the property until a predetermined price is achieved, regardless of how long it takes.
Legal remedies available to a lender in England on a borrower defaulting are contained in which legislation?
Law of Property Act 1925.
Housing Act 1988.
Land Registration Act 2002
Law of Property Act 1925.
The Land Registration Act 2002 covers the requirements for a property to be registered with the Land Registry. The Housing Act 1988 covers the rights of landlords renting out properties
Which of the following is true in relation to a lender exercising the power of sale and foreclosure?
Foreclosure allows the lender to keep any surplus from the sale of the property; power of sale does not.
Exercising the power of sale requires court authorisation; foreclosure does not.
Both allow the borrower to redeem the mortgage after the lender takes possession
Foreclosure allows the lender to keep any surplus from the sale of the property; power of sale does not.
Foreclosure is seen to be unfair and is rarely, if ever, used today. Foreclosure allows the lender to keep any surplus from the sale, while the power of sale requires the lender to pass on to the borrower any surplus after the mortgage plus arrears and expenses have been settled. Both actions require authorisation from the court, although the foreclosure process is far more onerous and complex. While the power of sale allows the borrower to redeem the mortgage by settling the mortgage and arrears before the lender exchanges contracts with a buyer, foreclosure does not allow redemption
The court has granted a suspended possession order to a lender. This means that:
the lender has 30 days to make possession arrangements with the borrower.
possession is suspended to allow the borrower time to sell the property.
possession is suspended as long as the borrower makes court-ordered payments
possession is suspended as long as the borrower makes court-ordered payments
The court can grant a suspended possession order, imposing on the borrower an obligation to make payment in accordance with the court’s decision. The suspended possession order becomes enforceable if the borrower fails to keep up the repayments. The court will have to grant a final possession order in this situation
Which document contains the contractual obligation that gives a lender the right to sue on the borrower’s covenant? The:
mortgage contract.
legal charge.
court order
Legal Charge
Taking this action is often futile because, even if the court makes an award to the lender, the borrower may not have the resources to pay it.
A lender would exercise its right to appoint a receiver in the case of a borrower in arrears when:
suing for the borrower’s bankruptcy.
there is a tenant in the property.
taking possession of the property.
there is a tenant in the property.
The right to appoint a receiver is exercised when there is an income from the property. The receiver collects the rent and any other income from the property on behalf of the lender, and this money is applied to the mortgage account to reduce the overall debt
Once a lender has been granted a possession order, the borrower will usually be required to vacate the property within what timescale?
28 days
Argos Bank has taken possession of George’s house, but George has left various curtains and rugs behind. What action should the lender take?
Hold the items in trust for George for a specified period
Any fittings, such as curtains and rugs left behind by the borrower, are held in trust on their behalf. If the borrower reclaims them, the lender must take care not to readmit them to the property, or a new possession order may be required.
Once the lender has taken possession of a property, the ‘equity of redemption’ gives the borrower the right to: WHAT
settle the mortgage plus arrears and regain possession before the lender exchanges contracts on the sale of the propertY
Many lenders in England demonstrate they have met their duty of care to obtain the best price reasonably obtainable for a repossessed property by:
commissioning at least two valuations from independent RICS-qualified valuers.
seeking best and final offers after an acceptable offer has been received by advertising in a local newspaper.
always selling repossessed properties through property auctions
seeking best and final offers after an acceptable offer has been received by advertising in a local newspaper.
Which of the following is untrue of a claim made under a mortgage indemnity guarantee (MIG) policy?
The insurer has the right to claim back from the borrower all money paid to the lender.
the policy may not cover the entire mortgage shortfall.
The lender has no right to reclaim from the borrower any policy excess deducted by the insurer.
The lender has no right to reclaim from the borrower any policy excess deducted by the insurer.
The insurer can exercise its right of subrogation to claim from the borrower all money paid to the lender. The MIG covers the difference between the amount lent and the normal loan-to-value threshold, but any further shortfall is not covered. The lender has the right to sue the borrower for the amount of the excess deducted from the MIG claim
Which of the following legal remedies is not used in the UK today?
Exercising the power of sale.
Suing on the borrower’s personal covenant.
Appointing a receiver.
Foreclosure
Foreclosure
Once a possession order has been granted, the lender can usually take possession within:
7 days.
14 days.
28 days.
60 days
28 days.
A suspended possession order automatically becomes an outright possession order if the borrower fails to keep up the agreed repayments. True or false?
True False
False: a suspended possession order, if enforced, requires that the borrower make payment. If they do not, the lender can return to court to seek possession . It doesnt happen automatically
The right of subrogation enables insurers to sue borrowers for any amount paid out on a mortgage indemnity guarantee policy. True or false?
True
