Экзамен зачет учебный год 2023 / Dixon, Modern Land Law

Modern Land Law

sell the mortgaged property and use the funds to satisfy the mortgage debt if two conditions are fulfilled.

First, the power of sale must have arisen. A mortgagee’s power of sale will arise as soon as the legal (contractual) date for redemption has passed or, in the case of instalment mortgages, usually when one instalment is in arrears (Twentieth Century Banking v. Wilkinson (1977)). Once again, this reflects the contractual nature of a mortgage and the liability of the mortgagor in debt when the stipulated date for redemption has passed.

Second, the power of sale must have become exercisable. The mortgagee’s power of sale becomes exercisable when the conditions specified in section 103 of the LPA 1925 are satisfied. These require either that notice requiring payment of the whole of the mortgage money has been served by the mortgagee, and the mortgagor is three months in arrears with such payments since the notice was served; or the interest under the mortgage is in arrears and unpaid for two months after becoming due; or that the mortgagor has breached some provision of the mortgage deed (other than the covenant to pay the sum due), or a relevant provision of the LPA 1925.97

10.10.2.1 The consequences of a sale

The point of the above provisions is that they give the mortgagee an effective power of sale of the mortgaged property should the mortgagor be in serious default, either because of a breach of the promise to repay the debt with interest, or breach of any other promise. The consequences of a sale are that the proceeds of sale are applied to meet the mortgage debt and associated liabilities according to the provisions of section 105 of the LPA 1925; that is, first, in payment of the costs and charges incurred by the sale; second, in satisfaction of the principal debt, interest and costs, with the aim of discharging the mortgage; and third, if there is any surplus, to the person entitled under the mortgage, usually being the mortgagor, as in Halifax Building Society v. Thomas (1995).

Necessarily, a successful sale extinguishes the mortgagor’s equity of redemption and transfers the land to the purchaser free of any claim of the mortgagor. The mortgagee has the right to transfer legal title to the purchaser by the proper exercise of the power of sale – the borrower’s legal title is technically overreached98 – because the mortgagee has the right to the economic value of the land that has been used as security for his loan. If it were otherwise, the mortgage as a secured debt would be meaningless. In addition, the purchaser

97For example, the mortgagor may have let the premises without permission, or failed to insure the property.

98Section 2(1)(iii) of the LPA 1925.

484

Chapter 10: The Law of Mortgages

takes the land free of any subsequent mortgages; that is, those granted later than the mortgage under which the sale has taken place,99 but subject to any previous mortgages. All subsequent mortgagees will be entitled to the balance of any money left after discharge of the mortgage under which sale has occurred in the order in which those mortgages were made, but before payment of any balance to the mortgagor. In other words, subsequent mortgagees are ‘persons entitled’ to the proceeds of sale of the mortgaged property under section 105 of the LPA 1925 as noted above. What this means in practice is that providing that property values have not fallen too far, and that subsequent mortgagees operated a sensible lending policy, there should be enough money to pay off the debt of the selling mortgagee and that arising under the later mortgages. For example, if a property worth £100,000 was subject to a first mortgage of £85,000, a second mortgage of £5,000 and a third mortgage of £7,000, a sale at £100,000 by the first mortgagee will enable payment of all three mortgagees plus some balance (if any, after costs) to the mortgagor. Similarly, if the second mortgagee was to exercise their power of sale, a purchaser would buy the land subject to the first mortgage, probably paying only £15,000 (£100,000 – the value – minus £85,000 – the first mortgage), and the second and third mortgagees would be paid.

10.10.2.2 Regulating the power of sale

It is clear that a sale of the mortgaged property is a calamitous event for the mortgagor. Essentially, it means forced loss of the land – often the home – with only the balance of the purchase price (if any) as a comfort. Not surprisingly, therefore, in addition to the limitations on the circumstances in which a sale by the mortgagee may be undertaken at all, the mortgagee is placed under common law and statutory obligations with respect to the conduct of the sale.

First, if a mortgagee sells the property before the power of sale has arisen, the purchaser obtains only the mortgagee’s interest, and the mortgagor remains unaffected. It is as if the mortgagee had transferred only the mortgagee’s rights to the purchaser. Second, if a mortgagee sells after the power has arisen, but before it has become exercisable, the purchaser takes 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 – section 104 of the LPA 1925 and see Cuckmere Brick Co v. Mutual Finance (1971).

Third, and most importantly in practice, in cases where the power of sale has both arisen and become exercisable,100 the mortgagor must rely on the

99Sections 88 and 113 of the LPA 1925.

100Of course, this is nearly always the case.

485

Modern Land Law

intervention of equity to protect his position. This intervention is premised once again on the fundamental point that a mortgage is security for a debt and that a mortgagee is entitled to his remedies in such a way that ensures fair payment of the debt and nothing more. In essence, a ‘selling mortgagee’ is under a duty of care to the mortgagor to obtain the best price reasonably obtainable (Standard Chartered Bank v. Walker (1982)). This has a number of different facets. The primary duty is, of course, to get the best price reasonably obtainable, so a sale by open public auction, even when prices are low, satisfies this duty (Cuckmere Brick Co v. Mutual Finance (1971), Wilson v. Halifax plc

(2002)). Where this course is not pursued and a number of offers are made for the property, 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.101 However, the mortgagee is not obliged to take those steps which an owner might take in selling the property, so there is no obligation on the mortgagee to pursue planning applications or the grant of leases which might make the property more valuable (Silven Properties v. Royal Bank of Scotland (2003)) or to sell certain fixtures separately in the hope of raising more money.102 Neither is the duty owed to any person other than the mortgagor – particularly, it is not owed to a person with an equitable interest in the property103 – and so the mortgagor may agree specifically to a sale by a mortgagee at a price lower than the market price and, in that way, become estopped from relying on any breach of the duty of care.104 Similarly, the mortgagee is not a trustee of the power of sale – he is exercising it for himself, not for the mortgagor – and therefore, his motives in choosing to exercise the 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 (Meretz Investments v. ACP Ltd (2006)).

It should not be thought, however, that the general duty is without substance. In particular, the mortgagee may not sell the property to himself or his agent or his employee105 (Williams v. Wellingborough Council (1975)) and 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

101Michael v. Miller (2004), where the initial offer was perfectly acceptable, being within the values specified by professional valuers, but the failure to fulfil the duty was caused by the last minute reduction in the price of some £25,000.

102Michael v. Miller – no obligation to sell commercially grown lavender plants separately.

103Parker-Tweedale v. Dunbar (1991).

104This appears to be the ratio of Mercantile Credit Co v. Clarke (1997), although it does assume that the mortgagor’s agreement to sale at a lower price was not tainted by undue influence or unconscionable action on the part of the mortgagee.

105In Halifax v. Corbett, the mortgagee was held liable in damages for sale at an undervalue. In fact, it had been purchased by an employee of the mortgagee acting deceitfully, but this was unknown by he mortgagee.

486

Chapter 10: The Law of Mortgages

reasonably obtainable lies with the mortgagee and if he cannot discharge it, he is liable.106 Likewise, the mortgagee fails to discharge this duty if he chooses a method of achieving a sale that is not likely to achieve the best price reasonably obtainable. In Bishop v. Blake (2006), the mortgagee failed to put the property up for auction and failed to advertise it sufficiently and then sold the property to a tenant of the mortgagor with whom the mortgagee was developing a commercial relationship, leaving the conduct of the sale in the hands of the purchaser’s solicitors. The mortgagor was able to recover some £115,000, being the difference between the price actually paid and the price reasonably obtainable. In general, failure to discharge this duty will result in the award of damages – as in Blake the difference between the price obtained and the true price reasonably obtainable107 – but if the sale was to a connected person, it may be set aside completely, and may even be set aside against an unconnected purchaser, but only if the purchaser had actual knowledge of the impropriety surrounding the sale at an undervalue.108

Finally, in respect of sale, although generally it is the mortgagee who will choose to sell the mortgaged property, a mortgagor may apply to the court under section 91 of the LPA 1925 for an order requiring a sale. As noted above, this is particularly beneficial to a mortgagor whose outstanding mortgage is greater than the value of the property because a sale in these circumstances will crystallise the mortgagor’s liability.109 Of course, in such circumstances, the mortgagor will still be liable on their personal contractual promise to repay the whole sum borrowed, although insurance can be obtained for this eventuality.

10.10.3 The right to possession

The most effective way for the mortgagee to realise its security, in the event of default by the mortgagor, is to sell the property in the manner explained above. However, for sale to achieve its aim of maximising the chances of the mortgagee recovering its loan in full, the mortgagee will want the property to be put on the market with vacant possession; that is, after having ejected the mortgagor from the premises. In practice, therefore, before the mortgagee attempts to sell, he will exercise his right to possession of the mortgaged property. Moreover, although possession is often a prelude to sale, it can also be used as a method of securing recovery of the outstanding interest on a loan. For example,

106Mortgage Express v. Mardner (2004), Bradford & Bingley v. Ross (2005). If he so desires the property, the mortgagee may apply to the court under section 91 of the LPA 1925 for authority to sell to himself, in which case the propriety of the transaction will be assessed by the court.

107Corbett v. Halifax (2002).

108Ibid.

109Mortgage Services Funding v. Palk.

487

Modern Land Law

the mortgagee may take possession of the premises and manage them in such a way so as to generate income that can then be used to satisfy the mortgagor’s obligations. Possession, then, does not necessarily mean the end of the mortgage, although realisation of the security through a sale may follow.

The mortgagee’s right to possession is exactly what it says. By virtue of the way in which legal mortgages are created, 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.110 It is important to realise, then, that the mortgagee may take possession of the property at any time, even if the mortgagor is not in default, subject only to any provision to the contrary in the mortgage itself or in statute. Of course, in the normal course of events, the mortgagee will not exercise this right, and will be content to allow the mortgagor to remain in possession so long as the terms of the mortgage are observed and agreed payments are made. Indeed, the mortgagee may have contractually promised not to seek possession unless the mortgagor defaults on the repayments or breaches some other obligation but, if this occurs, possession may then be obtained in virtue of the right of the mortgagee, not in virtue of a remedy to be asked for from the court.111

10.10.3.1 The consequences of the mortgagee taking possession

Although the mortgagee has a right to possession, subject only to self-limitation as expressed in the contract, it is not always productive to exercise this right. A mortgagee in possession of the mortgaged premises will be called to account strictly for any income generated by their possession (White v. City of London Brewery (1889)). This means that the mortgagee will be taken to have received not only the actual income generated by their management of the property (which can go towards repayments), but also any income that should have been received assuming the property had been managed to the high standard required. Any shortfall between the actual income and the reasonably expected income will have to be made up by the mortgagee, who may find that he actually owes money to the mortgagor if the income that should have been received is greater than the money owed. This is why most commercial mortgagees desist from seeking possession, and why most residential mortgagees seek possession only as a prelude to sale.112

110Four Maids v. Dudley Marshall (1957); Ropaigelach v. Barclays Bank (1999).

111See section 98 of the LPA 1925.

112A notable exception was Mortgage Services Funding v. Palk where the mortgagee wished to take possession in order to keep the mortgage alive in the hope that property prices would rise and wipe out some of the escalating debt. In effect, this was the mortgagee gambling at the mortgagor’s expense, for while the mortgagee was in possession, the interest would accumulate faster than any reasonably expected income from the property. This explains why the mortgagor was successful in obtaining an order for sale under section 91 of the LPA 1925.

488

Chapter 10: The Law of Mortgages

10.10.3.2 Statutory restrictions on the right of possession

In the residential context where the mortgage may well have been used to finance the purchase of the property in the first place, it is rare for the mortgagee to seek possession other than as a prelude to sale. The mortgagor will occupy the property unless there is a problem with mortgage repayments and the mortgagee is likely to have contractually bound themselves not to seek possession unless this occurs. Moreover, if a mortgagee brings an action to recover possession of land ‘which consists of, or includes, a dwelling house’, whether as a prelude to sale or not, the mortgagor may avail themselves of the protection afforded by section 36 of the Administration of Justice Act (AJA) 1970 (as amended by section 8 of the AJA 1973). Under section 36 as amended, 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. Whether a property is a ‘dwelling house’ for the purpose of section 36 is to be determined by reference to the state of the premises at the time the order for possession was sought, not by reference to their use at the time the mortgage was executed.113 By virtue of the section 8 amendment114 ‘any sums due’ may be treated only as those instalments that have not been paid by the mortgagor as they fell due and not, as most mortgages provide when one mortgage payment is missed, the whole mortgage debt. Likewise, the statutory relief is available for endowment mortgages, despite the elliptical wording of the statute,115 although there is some doubt whether the statutory discretion is available if the mortgagor is not actually in default under the mortgage.116 The statutory discretion is not available once a warrant for possession has been executed; that is, if the mortgagee has actually recovered possession (Mortgage Agency Services v. Ball (1998)).

It is important to realise the precise limitations and effect of section 36 of the AJA, for although it clearly benefits mortgagors in general, in reality it comprises a fairly limited power. First, as noted above, it is available only in respect of dwelling houses. Second, the court’s discretion is triggered by an application for an order for possession. If the mortgagee, in exercise of its right to possession, takes possession without a court order – as it is perfectly entitled to do – then the court has no jurisdiction to control or suspend the possession

113Royal Bank of Scotland v. Miller (2001).

114Effectively reversing Halifax Building Society v. Clark (1973).

115Bank of Scotland v. Grimes (1985).

116Western Bank v. Schindler (1977). Section 36 does not say in terms that it applies only when the mortgagor is in default, so it is arguable that it is applicable whenever the mortgagee seeks possession by court order. However, if the mortgagor is not in default, it will be a rare mortgage that has not curtailed the right to possession in this circumstance.

489

Modern Land Law

(Ropaigelach v. Barclays Bank (2000)). Third, the mortgagor must be likely to be able to pay any sums due within a reasonable period. While it is clear that a ‘reasonable period’ in which to repay the arrears might actually be the rest of the mortgage term,117 the court has no discretion to make an order if there is no prospect of the mortgagor making a reasonable attempt actually to repay the accumulated arrears, let alone meet future repayments.118 Thus, the court must embark on a fairly detailed analysis of the mortgagor’s overall income and outgoings in order to see if even the rescheduled arrears can be paid back alongside future obligations. Of course, an intended sale of the property by the mortgagor is a factor which could justify suspension of a possession order under section 36, as this might mean that the mortgagor is likely to be able to pay all moneys due within a reasonable period (National and Provincial Bank v. Lloyd (1996)), but it is clear that there must be firm evidence that a sale is likely, not merely that it might occur or that the mortgagor will now takes steps to secure a sale. Mortgagees are rightly worried that mortgagors will attempt to use the section 36 discretion to stay in their homes while the debt mounts without any real prospect of arrears or capital ever being paid.

Prior to the important Court of Appeal decision in Cheltenham & Gloucester Building Society v. Norgan, the practice relating to a mortgagor’s request to suspend or dismiss a possession application by reason of section 36 had become somewhat rigid, with the courts (especially the County court where most of these applications are heard) generally suspending possession for an ‘automatic’ two years, so that the mortgagor had to make up the arrears in that time. As noted above, however, section 36 itself lays down no such time limit and Norgan contemplates a ‘reasonable period’ for repayment as being the whole of the remaining mortgage term. Clearly, the thrust of Norgan is that section 36 should be used more effectively to protect mortgagors of residential property, and, to that end, the case established that a court should address a number of issues before deciding whether to exercise its discretion. These considerations are designed to ensure that the particular circumstances of each mortgagor are given due weight. They include consideration of how much the mortgagor can afford to pay given his other commitments; whether the mortgagor is in temporary difficulty, or are his problems more enduring; what were the reasons for the arrears; how long of the original mortgage period is left; what are the contractual terms relating to

117Middlesbrough Mortgage Corp v. Cunningham (1974), Cheltenham and Gloucester Building Society v. Norgan (1996). Thus, the arrears effectively may be rescheduled to be repaid alongside future scheduled repayments.

118First National Bank v. Syed (1991), Bristol & West Building Society v. Dace (1998), Barclays Bank v. Alcorn (2002).

490

Chapter 10: The Law of Mortgages

repayment of the capital sum, in particular, was this an instalment mortgage; over what period is it reasonable to expect the mortgagee to wait for repayment of the arrears, bearing in mind that the mortgagee could be asked to wait even longer than the original mortgage term; and finally how does the value of the land relate to the amount borrowed and now owed?

Obviously, these considerations represent an attempt to cover all eventualities and the Court of Appeal is essentially advising County courts to take more care to assess individual circumstances rather than adopt an institutional, patterned approach to its discretion. Even then, however, we must recognise section 36 for what it is. It is a great advantage to borrowers in short-term difficulty who are now able to cope after an unexpected disaster or whose fortunes are likely to improve. For these homeowners, a temporary set back will not mean loss of the family home. However, for those borrowers who are simply overcommitted, section 36 holds no magic potion. It is a temporary fix for a temporary problem; it does not allow the borrower to escape from an unwise bargain. Indeed, lets us not think that mortgagees find section 36 necessarily troublesome. Mortgagees do not want possession, or the expense of a sale. They want the mortgage repaid according to its terms. A possession order under section 36 gives the mortgagee all it could ask for: an order for possession, albeit suspended and an order requiring the borrower to repay the arrears and to stick to a schedule for future payments. This might explain why so many section 36 applications are not resisted by mortgagees.

Finally, to return to a matter touched on briefly above, it is important to appreciate that a mortgagee does not actually need a court order to secure possession. The mortgagee’s ability to possess arises as of right by virtue of the interest they have or are deemed to have in the land. Possession may then be taken peacefully through self-help without any application to the court. In most cases, of course, a lender will not pursue this option, not least because there is a real risk of committing criminal offences in the act of taking possession if there should be any person lawfully residing on the premises at the time. Moreover, the lender may well want the security that a court order brings and the assurance that the mortgagor is not trying to defeat the mortgage (and hence the right to possession) on other grounds (e.g. undue influence). Importantly, however, as just discussed, if a lender does take possession of a property without a court order, the court then has no power to suspend the possession under section 36 of the AJA 1970. Clearly, this may well represent a considerable advantage for a lender, as exemplified by Ropaigelach v. Barclays Bank (2000), where the lender took peaceful possession without a court order while the habitually defaulting mortgagee was elsewhere. Although this is perhaps not the first option for an institutional lender operating under the Council of Mortgage Lenders Code of

491

Modern Land Law

Practice and the Financial Services and Markets Act 2000, it is an effective and inexpensive way of realising the security of those mortgagors who appear to have no real intention or ability to repay the debt.119

10.10.3.3 Other possible limitations on the right to possession

The nature of possession as a right, rather than as a remedy, means that the court only has such powers to keep a determined mortgagee out of possession as are given it by statute or which arise out of the conscience of equity. Of course, many would argue that this is just as it should be; after all, what use is a security if the creditor cannot realise it easily. Nevertheless, the widespread use of the mortgage not only as a means of raising capital on the security of land, but also as a means of buying that land in the first place means that the taking of possession has a disruptive influence on more than simply the finances of the borrower. It can render a family homeless or require them to live apart. Consequently, much attention has been paid, judicially and academically, to assessing whether there are other grounds for keeping a mortgagee out of his right. Most of the possible ‘solutions’ to this ‘problem’120 are either narrow in scope or arise in very special circumstances. They are outlined below.

1In Quennell v. Maltby (1979), Lord Denning suggested that a court of equity could restrain a mortgagee from taking possession whenever there was no justifiable reason for that possession. His view was that possession could be sought only for a bona fide realisation of the mortgagee’s security. Obviously, this directly contradicts the mortgagee’s pure right of possession springing from their status as a deemed holder of estate in the land. Consequently, it is doubtful whether the dicta in Quennell are correct and they have found little support in subsequent cases.121

2Following on from Mortgage Services Funding v. Palk in the Court of Appeal, it appears that a court may suspend a mortgagee’s possession application or order if it concurrently orders sale of the property at the request of the mortgagor under section 91 of the LPA 1925. This presents no difficulty if the proceeds of sale would pay off the entire sum owed – anyway, section 36 of the AJA 1970 could

119Note also that many borrowers voluntarily surrender possession without any court intervention when they realise they cannot pay the sums due.

120Not everyone would agree that there is a ‘problem’. After all, the existence of an effective and inexpensive means of realising the security might encourage easy and inexpensive lending by mortgagees.

121Note, however, a similar argument found favour in Meretz Investments v. ACP Ltd (2006) in relation to a mortgagee exercising its power of sale, above section 10.10.2.

492

Chapter 10: The Law of Mortgages

have been used to like effect. However, if the sale proceeds would not pay off the whole debt – as in Palk itself – section 36 is inapplicable and so the suspension of the mortgagee’s possession in Palk seems to have derived from the wide discretionary power found in section 91 itself. This is a novel use of section 91, and in

Cheltenham & Gloucester BS v. Krausz, the Court of Appeal appears to have held that there is no power to suspend a mortgagee’s possession unless section 36 could be used. Yet, Krausz does not overrule Palk (itself followed in Lloyds Bank v. Polonski (1999)), because Palk is said to be limited to its ‘special facts’. In fact, the distinction drawn by the court in Krausz between it and Palk is not convincing and, while at present the balance of authority favours the narrow Krausz view, the matter is not yet finally determined. Therefore, for the present, if the mortgagor applies for sale under section 91 of the LPA 1925, there may be an opportunity for the court to utilise an ancillary power to suspend a mortgagee’s possession order while the sale takes place, whether or not the sale would pay off the entire debt.

3Albany Home Loans v. Massey (1997) establishes that a mortgagee cannot be granted possession of land mortgaged by joint mortgagors where, in fact, the mortgage turns out to be binding on only one of them. In that case, the mortgage of the house had been executed by the man and woman jointly and they were in default. However, the mortgage was held void as against the woman on the grounds of undue influence. In consequence, possession of the land could not be ordered, even though the man would remain living on the land with his partner.122

4There are other statutory restrictions on the mortgagee’s right to possession, which arise in very particular circumstances. These include attempts by the mortgagee to gain possession outside the time limit set by the Limitation Act 1980 (National Westminster Bank v. Ashe (2008))123 or in contravention of the Consumer Credit Act 1974 (as amended), the Rent Act 1977 and the Housing Acts 1985–96, or contrary to the dictates of the insolvency legislation.

5It remains to be seen whether a mortgagor can claim that the mortgagee’s exercise of the right of possession contravenes the

122Note, however, that the mortgagee may still apply for a forced sale of the land under section 14 of TOLATA 1996 which, if successful, will result in the land being sold and the innocent mortgagor receiving their equity as a first call on the proceeds of sale – see for example, First National Bank v. Achampong.

123The borrower remained in possession for more than 12 years after the bank’s right to possession had arisen. Consequently, the mortgage was extinguished under sections 15 and 17 of the Limitation Act 1980.

493