Mortgages 3: Remedies (Disputes as to Sale)
What are some scenarios that might lead to the mortgagee (the bank) to want to take possession of the property?
(a) Mortgagor defaults and is no longer able to meet repayments (b) Slump in market so that there is negative equity -Note: Mortgagees will usually refuse consent to selling where there is negative equity, because it would leave them with an unsecured debt right -They usually prefer to wait until the property's value increases to cover the debt (c) Mortgagor fails to maintain property and so puts the mortgagee's security at risk of devaluation
What are the remedies for the mortgagor (borrower)?
1. Relief from Possession: s. 36 AJA -This can be sought in court: as to postpone it (and in the mean time repay the debt) OR 2. Setting aside the mortgage contract: Undue Influence ➤See Barclays Bank v Buhr (2002) Note: Why borrowers afforded protection below!
Why are banks afforded protection (remedies)?
1. Incentivisation for lending: Needed for the functioning of the market 2. Freedom of contract: The borrower assumes a level of risk when entering into contract 3. By having more lending interest rates are lowered: Creating a more accessible market 4. The fear of possession before default is irrational: As this is usually excluded in the contract, and bad for the bank -As they need to remove dwellers before sale can be made (don't have to but make it easier; higher value) otherwise harassment charges -And they don't want that "bad debt" in their books Conclusion It may be unfair on paper that these "draconian" rules apply, but it works!
What happens when the mortgaged property is sold?
1. The mortgagor has all the rights of an owner -s. 85(1), s. 87 LPA 1925 and s. 23(2) LRA 2002 2. The mortgagor has the power to sell: vesting good title in the purchaser -s. 88 and s. 101(1)(i) LPA 1925 -This is statutory magic: an exception to nemo dat principle!
Why are borrowers afforded protection (remedies)?
1. Unequal bargaining power (a) Mortgagor is a relative outsides (b) Information asymmetry: Knowledge Imbalance 2. Difficult to set aside mortgage: High threshold of 'unconscionable' or 'undue influence' 4. Arguably people are "forced" into these deals due to the high property prices -Especially in considering insecurity of tenancies and desirability to have a home 5. Extremity of the bank's right of possession -However can probably be seen as an invalid fear 6. Inadequate protection: s. 36 not available where no order for sale is made
Structure of answering a problem question?
1. Who the parties are and what rights they have? (a) Who has legal title? (b) Does anyone have derivative rights? -Equitable interest by purchase contribution (resulting trust) -Mention constructive common intention trust (Rosset) where there is a couple involved and a sole-owner -Stack only applied to joint-ownership 2. Is there a bank who has a mortgage? -Will only have a right against the person with the legal title -With the equitable owner there will be a conflict of rights: Priorities -Unless there's an acquisition mortgage (Cann), the equitable owner has an overriding interest 3. Are there any unfair terms which may be struck down by court? -Nash v Paragon Finance and another case involving Paragon Finance in textbook -May also argue that ex. a term saying interest is tripled for "Q" last name is arbitrary and ultra vires (invalid from the start) 4. Possession? 5. Sale? -Power arising: s. 101 -Exercisable: s. 103 -Sale will be good even if it was not exercisable, unless the purchaser was not bona fide, had notice: s. 104 (so if bona fide purchaser, cannot be set aside and damages are awarded under s. 103) -Extended above! 6. Fraud?
Expand on remedy of sale
An order for sale can be sought by both the mortgagee and the mortgagor: s. 91 LPA 1925, application in s. 14 TLATA 1996 -But the mortgagee (when brought by mortgagor) must consent to it! -Possession by the mortgagee is not required for the sale: ➤Horsham Properties Group Ltd v Clark [2009] 1 WLR 1295 ➤Even where innocent party remains: First National Bank v Achampong [2003] EWCA 487 -Motive of mortgagee must be to protect security: Although no good faith requirement (as suggested by Quennell) ➤Meretz Investments NV v ACP Ltd [2007] EWCA Civ 1303 ➤Improper motive: Quennell v Maltby [1979]1 WLR 318 (CA) ➤Mortgagor can apply to the court for an order for sale against the mortgagee's wishes: Mortgages Services Funding v Palk [1993] Ch 330 ➤Affirmed: Polonski v Lloyd's Bank Mortgages Ltd [1997] 31 HLR 721 ➤Where there is negative equity, the general rule: Mortgagee will be allowed to control the sale: Cheltenham v Gloucester v Krausz [1997] 1 All ER 21 ➤Exceptional circumstances sake ordered in favour of mortgagor: Mortgages Services Funding v Palk [1993] Ch 330 In sum: s. 91 LPA 1925 enables both the mortgagee and the mortgagor to seek an order for sale of mortgaged property free from the mortgage and the equity of redemption. Since the mortgagee will normally have its power of sale, entitling it to overreach the equity of redemption, this section is more often invoked in circumstances where the mortgagee does not want to sell and the mortgagor prefers an early sale.
What happened in Horsham Properties Group Ltd v Clark [2009] 1 WLR 1295?
Facts -After the mortgagors fell into arrears, the mortgagee, GMAC, appointed receivers of the mortgaged property. -The receivers subsequently sold the property at auction to Coastal Enterprises Ltd, and recovered sufficient funds to repay the whole of the mortgage debt -On the day of purchase, Coastal Enterprises Ltd transferred the property to Horsham Properties, which became the registered proprietor -Shortly afterwards, Horsham began possession proceedings against the mortgagors in the county court -On the grounds that the purchase of the property had overreached the rights of the mortgagors, and seeking their eviction as trespassers -Clarks argued that s. 101 LPA 1925 violated their property rights (equity of redemption) under Article 1, First Protocol ECHR, as they were denied opportunity to protect it under a s. 36 AJA 1970 application Decision -Briggs J: There was no violation -Because: •The power of sale was purely a contractual (private) and not a state matter (and so the article was inapplicable) •Mortgagee's right to sell under s. 101 LPA 1925 does not violate the private agreement but implements it •s. 101(4) allows the parties to opt out: Can expressly state to contrary intention to the effect of s. 101 in the mortgage deed •the mortgagees power to sell was "a central and essential aspect of the security"
What happened in Tse Kwong Lam v Wan Chit Sen [1983] 1 WLR 1349 (PC)
Facts -D exercised his mortgagee's power of sale of TKL's property -He arranged to have it sold at public auction and for his wife, as director of his family company, to bid on it -He set the reserve price at $1.2 million, although the value plus interest came to $1.6 million -His wife was the only bidder and she obtained the property at the reserve price -TKL sought to have the sale set aside Decision -The Privy Council held that, although there was no fixed rule that a mortgagee exercising his power of sale might not sell the mortgaged property to a company in which he was interested, in order to resist a borrower's application to set aside such a sale he had to show that he had made the sale in good faith and had taken reasonable precautions to obtain the best price reasonably obtainable at the time -Lord Templeman at 1360: Where a mortgagee fails to satisfy the court that he took all reasonable steps to obtain the best price reasonably obtainable and that his company bought at the best price, the court will, as a general rule, set aside the sale and restore to the borrower the equity of redemption of which he has been unjustly deprived. But the borrower will be left to his remedy in damages against the mortgagee for the failure of the mortgagee to secure the best price if it will be inequitable as between the borrower and the purchaser for the sale to be set aside
What happened Ropaigealach v Barclays Bank [2000] QB 263?
Facts -Mortgagee possessed without obtaining court order when owners temporarily absent while home underwent building works -The claimants claimed that this was unfair as they had no chance to have the possession set aside/delayed under s. 36 AJA 1970 Decison -The court can only protect the mortgagor's possession if the mortgagee has applied to the court for an order of possession -And because the mortgagee is not under any obligation to apply for such an order, it may leave the mortgagor unprotected -Chadwick LJ: "I find it impossible to be satisfied that Parliament must have intended, when enacting section 36 of the Act of 1970, that the mortgagee's common law right to take possession by virtue of his estate should only be exercisable with the assistance of the court." -In other words: If parliament had intended to abrogate the common law right they would have done so expressly in the implementation of the act (which was 12 years after Four Maids clarified the common law right, in 57)
What happened in First National Bank v Achampong [2003] EWCA 487?
Facts -Mr and Mrs A mortgaged their home to raise money for a third party Mr Owusu-Ansah in Ghana, who promised to make the repayments -Mr O eventually returned to Ghana and stopped making repayments -Mrs A had the mortgage agreement set aside as against her for the Undue Influence of her husband, so the charge took effect over her husband's equitable share Decision -The UI was not avoided by the bank because it had not got reassurance from the solicitor that Mrs A had been advised of the risk -But more importantly: the court still ordered a sale under s. 14 TLATA 1996 despite the bank not being able tot take possession of the property due to the possession of innocent Mrs A
What happened in Quennell v Maltby [1979]1 WLR 318 (CA)?
Facts -Owner had leased premises to students without the consent of mortgagee -Leases therefore void as against mortgagee (mortgagee had priority over the tenants) -Owner then wanted to sell property with vacant possession, but as a landlord was prevented from doing so under the Rent Act 1977 -Tried to get mortgagee to sue for possession but the latter refused -Owner got wife to pay off loan and the mortgage was transferred to her (she became the mortgagee); she then sued for possession Decision -The CA deemed that possession had been sought in order to evade Rent Act: Not with Good Faith -Lord Templeman: "The mortgagee, Mrs. Quennell, is not bona fide exercising her rights and powers for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her own husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord." -Suggesting that mortgagee's are under a duty of good faith -This was limited by Meretz
What happened in Cheltenham v Gloucester v Krausz [1997] 1 All ER 21?
Facts -The mortgagor's had been granted relief five times from an order of possession under s. 36 -The bank sought possession, was fed up and just wanted an order to sell despite the negative equity of the property -D resisted Decision -The sale was ordered as this is the fundamental right of the mortgagee -So the general rule is if there is negative equity, the court will allow mortgagee to control sale
What happened in Mortgages Services Funding v Palk [1993] Ch 330?
Facts -The was negative equity on D's house -D wanted to sell the house to get rid of the debt, and to be able to move into an area that didn't have "high unemployment" -Whereas the bank wanted to wait for value in the house to rise (market improved), as selling now would mean that only part of the debt would be paid: The outstanding debt having no security -But doing so would push D into more and more debt, as he was also unable to become employed by staying there Decision -The court held that effectively drowning D in debt was unfair, and so ordered the sale despite the negative equity on the house -Implying that the possession of the mortgagee could be suspended under s. 91 -These are exceptional circumstances, and can therefore be distinguished from the general rule in Krausz
What happened in Western Bank v Schindler [1977] Ch 1 (CA)?
Facts -There was an endowment mortgage (no longer in use) -Endowment mortgages did not require capital repayments -Rather, the borrower was supposed to pay only the interest on the loan and premiums on a life-insurance policy -The capital would be repaid at the end of the term by the borrower's cashing in the policy -The investment was supposed to benefit both lender and borrower, as over time enough would build up in the policy to repay the capital and leave some over for the borrower -The arrangement assumed a steady rate of growth and did not contemplate shifts in the stock market -But a drop in the stock market (such as when the dot-com bubble burst in the 1990s) meant that the policies of many such borrowers did not accrue enough to repay the debt -After 2002, few banks would agree to them -Many borrowers claimed they were mis-sold such loans, as the risks were not explained, and banks had to pay out billions in compensation -M'or let policy lapse, so M'ee was in danger of never receiving their money -But, there was technically no default here, because no arrears (as the contract did not require them) -Since bank could not sue for debt, it applied for a possession order Issue -Were the mortgagor's protected, since it seemed that s. 36 only gave the courts discretion where there is a default? Decision -Majority view (Buckley and Scarman LLJ): Broad interpretation, s. 36 must apply even with no default -Because otherwise defaulting m'or (blameworthy) would be in better position (protected) than non-defaulting (non-blameworthy) -But here, there was no implied term limiting mortgagee's common law right to possession, so mortgagor's appeal was dismissed -Goff LJ: Narrow view, the purpose of s. 36 is limited to allowing a m'or time to remedy the default -s. 36 does not apply where no default, because that would abrogate generally the m'ee's right to possession under Four Maids Commentary -Query whether the majority's fear that non-defaulting mortgagors are put at a disadvantage; unlikely that such a mortgagor would need protection because normally mortgagees only seek possession where there is a default -This is a highly unusual case!
What does foreclosure mean?
In English law: The right of the mortgagee to ask the court to end the mortgagor's equitable right to redeem -A foreclosure order vests the title to the estate in the mortgagee: sections 88(2), 89(2) LPA 1925 -However: It is no longer used -Because, they lose money on it. -Now, the court may order a sale instead: s. 91 LPA 1925 -Law Comm No. 204, para 7.27 recommended it to be abolished In American law: It means our ordinary possession and sale.
What is the standard of care for a mortgagee when exercising their power to sell?
In order to not be in breach (to obtain the proper price): 1. The property must be Advertised Properly ➤Pendlebury v Colonial Mutual Life Assurance Society (1912) 13 CLR 676 (country property marketed only in city publications) 2. With a Full Description ➤Cuckmere. 3. Allow Reasonable Time before accepting offer below proper valuation, unless mortgagee can show that higher offer unlikely ➤Bank of Cyprus (London) Ltd v Gill [1980] 2 Lloyd's Rep 61 4. Duty Against Self Dealing ➤Tse Kwong Lam v Wan Chit Sen [1983] 1 WLR 1349 (PC) (below!) -May be allowed if via auction, but here there was a breach as auction was controlled -Duty can be discharged if obtaining expert advice on best mode of sale: Lord Templeman 5. There is No Duty to Improve Property ➤Silven Properties Ltd v Royal Bank of Scotland plc [2004] EWCA Civ 1409;[2004] 1 WLR 997 (here to obtain planning permission, which would increase price)
What are the remedies for the mortgagee (bank)?
Note: Why banks afforded protection below! The response of a bank in certain situations: 1. Repayment of sums due -Prefers this! Where this is not possible: 2. Possession and/or Sale: Below! -Where the security is danger of devaluation through neglect (going to waste), -Or where there is a default and no hope of getting back on track -The right to possession becomes available once the mortgage starts -Note: Possession is not required for sale (Four Maids common law right), but get better value for a vacant property -Power of sale arises when mortgage money becomes due (usually after 6 months): s. 101(1)(i) LPA 1925 ›Usually governed by contractual clauses ›An automatically arising power: No high threshold ›Mortgagee owes a duty to the mortgagor to take reasonable care to obtain a proper price (from contractual relationship) ›Standard of Care below! ➤Breached by failing adequately to publicise the planning permission for flats, and by refusing to postpone sale: Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949 ›However, mortgagee is not a trustee; can prefer his own interests where there is a conflict of interest ➤Therefore owed no duty to a beneficiary of a trust (claim brought by husband of the mortgagor): Parker-Tweedale v Dunbar Bank (No 1) [1991] Ch 12 ➤Salmon J at 965 in Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949 ➤Nash v Eads (1880) 25 SJ 95 -This power becomes exercisable: s. 103 LPA 1925 Regulation of exercise of power of sale A mortgagee shall not exercise the power of sale conferred by this Act unless and until— (i) Notice requiring payment of the mortgage money has been served on the mortgagor or one of two or more mortgagors, and default has been made in payment of the mortgage money, or of part thereof, for three months after such service; or (ii) Some interest under the mortgage is in arrear and unpaid for two months after becoming due; or (iii)There has been a breach of some provision contained in the mortgage deed or in this Act, or in an enactment replaced by this Act, and on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon -Power to convey estate free from all interests over which mortgagee has priority: s. 104 LPA 1925 -Meaning: Sale will be good even if it was not exercisable, unless the purchaser was not bona fide (had notice) -So, where the mortgage cannot be set aside, damages are awarded under s. 103 -Application of proceeds of sale: s. 105 LPA 1925 ›The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into court under this Act of a sum to meet any prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges, and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and secondly, in discharge of the mortgage money, interest, and costs, and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof ➤Residue Not given to fraudulent mortgagor (goes bona vacantia to the to Crown): Halifax BS v Thomas (1996)re
What was Halifax v Clark [1973] Ch 370's reading of any sums due in s. 36(1) AJA 1970?
That it was a standard clause demanding that the whole loan would be immediately repayable on any default in repaying instalments -And because few mortgagors in financial trouble would be able to do this, the s. 36 AJA 970 protection was undermined
Expand on the mortgagee's remedy of possession
The bank's right to possession is a common law right ➤Not dependant on default: Four Maids Ltd v Dudley Marshall [1957] Ch 317 ➤Applied in Ropaigealach v Barclays Bank (1999) -Note: Bank most likely so seek an order for possession of a habituated residential property to prevent criminal charges (such as assault): s. 14 TLATA -Order for a dwelling engages s. 36 Administration of Justice Act 1970: Below! However: There cannot be possession against an innocent party ➤Albany Homes v Massey [1997] 2 All ER 609 Yet: The mortgagee may push mortgagor into bankruptcy by pursuing debt: Insolvency Act 1986 s. 335A and 336 -There is a presumption for possession and sale in favour of trustee in bankruptcy ➤This is Not an abuse of process for lender to enforce its right, even if its results in borrower's bankruptcy: Alliance Leicester v Slayford [2000] EWCA Civ 257 ➤Here, for an innocent party to resist sale their circumstances must be exceptional: Re Citro [1991] Ch 142 -This is noted under Co-ownership 4: Remedies - Disputes as to Sale
Who do the courts usually rule in favour for in determining whether to grant an order of possession?
Usually in favour of the mortgagees (the banks), due to the importance of lending ➤Arden LJ in Barclays Bank v Buhr [2002] EWCA Civ 1224: "Mortgages, despite their roots in the twelfth and thirteenth centuries, are still an important means of raising money and using assets. Mr and Mrs Buhr like many other small entrepreneurs used their home as security for their business interests. This is a very important function of mortgages of every kind and I would have been loathe to reach a conclusion which would have exposed a significant technical gap in the protection given to mortgagees [banks]. That would hamper the freedom of mortgagors or dissuade mortgagees from lending money on the security of mortgages at all. It matters that there should be appropriate incentives and protections in the law for mortgagees as well as mortgagors."
How does an order for possession work where the property is a dwelling?
s. 36 Administration of Justice Act 1970 -Provides protection for a residential borrower's possession Limits on protection: -The mortgagee must have applied to the court for an order of possession to use s. 36 ➤Ropaigealach v Barclays Bank [2000] QB 263 ➤Horsham Properties Group Ltd v Clark [2009] 1 WLR 1295 -Cannot help a mortgagor in negative equity ➤Cheltenham v Gloucester v Krausz [1997] 1 All ER 21 (1) Where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession of the mortgaged property, not being an action for foreclosure in which a claim for possession of the mortgaged property is also made, the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of its exercising the power the 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 a breach of any other obligation arising under or by virtue of the mortgage -So: Not including commercial properties! -'Any sums due' = any sums already due that have not been paid (not the whole sum due over the lifetime of the mortgage) -Poor drafting as amended by s. 8 AJA 973, in response to Halifax v Clark [1973] Ch 370's reading (below!) -'Reasonable period' = Can be the remaining term of the mortgage, the arrears being spread out over this term in addition to the usual monthly repayments (more manageable) Cheltenham Gloucester BS v Norgan [1996] 1 WLR 343 -No literal interpretation: Also protects non-defaulting mortgagors ➤Western Bank v Schindler [1977] Ch 1 (CA) (2) The court— (a) may adjourn the proceedings, or (b) on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may— (i) stay or suspend execution of the judgment or order, or (ii) postpone the date for delivery of possession, for such period or periods as the court thinks reasonable
