MORTGAGES LENDER’S RIGHTS

Learning Outcomes

At the end of this lecture you should be able to:

1. understand the rights available to a lender

2. discuss the remedies that a lender has when a borrower defaults on the mortgage

3. explain how a borrower can defend against possession proceedings brought by the lender

4. discuss the lender’s power of sale and their duties under it

5. explain the relevance of the Financial Services and Markets Act 2000 and the Pre-action Protocol

Rights available to the lender1. The right of investigation of title - power to investigate borrower’s

title before lending on its security

2. The right of possession of title deeds - deposit of title documents during the mortgage or restriction at HMLR

3. To overreach all equitable rights in the property (provided loan money is paid to two trustees) – Flegg

4. To sell the property and realise loan, or share of loan, in the event of fraud by one borrower

5. To exclude or limit the borrower’s right to grant leases and right not to be bound by unauthorised leases

6. The right to possession – Four-Maids Ltd v Dudley Marshall (Properties) Ltd

Remedies available to the lender where borrower defaults on the mortgage1. Assertion of the lender’s right of possession (almost always

sought as a preliminary to sale)

2. Exercise of lender’s power of sale

3. Appointment of a receiver - s.101(1)(iii) LPA 1925appointed to manage a business or property i.e. to accept rents acting as agent of the borrower (even though appointed by the

lender!)Medforth v Blake – defined the standard of care – good faith and

reasonableness

Remedies available to the lender continued….4. Enforce borrower’s personal covenant to pay – Alliance v

Leicester v Slayford

5. Foreclosure (transfer of property to lender, so borrower loses entire equity of redemption – rare today)

6. Consolidation of mortgages

7. Financial Services and Markets Act 2000 lenders have a duty to deal ‘fairly’ with customers who are in arrears

on a regulated mortgage contract or who have a ‘mortgage shortfall debt’

lenders need a written policy and procedureseviction is a last resort – alternative plan limitation period is 6 years

How does the borrower defend possession proceedings?

The borrower can only defend possession proceedings if the lender seeks possession by court order, not if they just exercise their power of sale

Ropaigealach v Barclays Bank plcCriticisms of this…..Prior to 1970 the court could stay possession and up until the early

1960’s this was liberally used BUTBirmingham Citizens Permanent Building Society v Caunt

changed thisS.36 Administration of Justice Act 1970 followed

S.36 Administration of Justice Act 1970The court has the power, in respect of a dwelling-house to:

1. Exercise any powers conferred on it….if it appears to the court that in the event of the court exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due…

2. The court-

a. may adjourn the proceedings, or

b. on giving judgement, or making an order [for possession]… or at any time before execution of such judgement or order, may-

i. stay or suspend execution of the judgement or order

ii. postpone the date for delivery of possession for such period or periods as the court thinks fit

Interpretation of S.36Meaning of dwelling house – Royal Bank of Scotland plc v Miller

Meaning of ‘any sums due’ – Halifax Building Society v Clark• mortgage deed stated the entire debt became due on default so

borrower had to show they could repay the whole loan, not just the arrears to apply s.36

• due to this drafting error:S.8 Administration of Justice Act 1973 was passedIn considering whether to defer possession to allow the mortgagor

time to pay, the court may treat as due ‘only such amounts as the mortgagee would have expected to be required to pay if there had been no such provision for an earlier payment’

Interpretation of S.36 continued…..

Meaning of ‘a reasonable period’ – Cheltenham & Gloucester Building Society v Norgan

• the courts may reschedule the arrears across the entire remaining period of the mortgage BUT

• the mortgagor must provide realistic evidence of some ability to pay off all arrears

FSMA 2000 – lender has to adopt a ‘reasonable approach’ to the re-scheduling of payments, in particular to ‘the need to establish, where feasible, a payment plan which is practical in terms of the circumstances of the customer’

How long can proceedings be suspended for?

No discretion to suspend them indefinitely – Royal Trust Co of Canada v Markham

But can be adjourned to a later date when borrower’s prospects of paying become clearer – Skandia Financial Services Ltd v Greenfield

Borrower can complete a private sale – Target Home Loans v ClothierBUT only if sale is likely to discharge the whole debt – Cheltenham &

Gloucester Building Society v KrauszNeed evidence the private sale is likely within the foreseeable future –

Mortgage Service Funding v SteeleIf breach of another term, s.36 can only be used where the breach is

capable of remedy – Britannia Building Society v Earl

How is a spouse affected?The borrower’s spouse has no right to be informed of the

mortgage arrears but they are entitled to pay the sums owed to the lender to prevent possession – Hastings Building Society v Goddard

The borrower’s spouse can apply to the court to be joined in proceedings – s.55 Family Law Act 1996

A lender seeking possession must serve notice on a spouse who has protected their matrimonial home rights by either a class F land charge (unregistered land) or a notice at the Land Registry (registered land) – s.56 FLA 1996

Lender’s Power of Sale

• The lender has a power of sale which can be used when:

1. The power of sale exists – implied into every mortgage made by deed (every legal mortgage) unless expressly excluded – s.101 LPA 1925

2. The power of sale has arisen – legal date for redemption has passed – date usually within first 3-6 months of the mortgage term – when in theory the mortgage money becomes due

3. The power of sale has become exercisable – s.103 LPA 1925 - notice and continuous default for 3 months, interest 2 months in default or borrower in breach of another term

Lender’s Power of Sale continued…..Effect of the sale is that the purchaser of the land gets the legal

estate subject only to rights existing prior to the mortgage – s.104 LPA 1925

Purchaser is not affected by rights which came into existence after the creation of the mortgage e.g. an estate contract – Duke v Robson – even if registered

Lender’s duties under the Power of Sale

Proceeds of sale to be held on trust by the lender to pay off as follows (in order):

1. costs, charges and expenses of the sale

2. repayment of the mortgage and interest

3. residue to the borrower – s.105 LPA 1925

Lender must act in good faith (subjective test) and discharge a duty of reasonable care (objective test) to the borrower but what does this mean?

Lender’s duties under the Power of Sale continued…….

What is the meaning of acting in good faith?Lender cannot sell the property to themselves – Farrars v Farrars LtdLender can sell to an associated person but only at market value

(burden of proof on lender to show they achieved the best possible price) – Tse Kwong Lam v Won Chit Seng

What is the meaning of reasonable care?Lender must take reasonable care to obtain ‘the best price that can

reasonably be obtained’ – s.13 Building Societies Act 1986; Schedule 17 Housing Act 1985; Cuckmere Brick Co Ltd v Mutual Finance Ltd

Lender’s duties under the Power of Sale continued…….To achieve the best value lender should ascertain value,

advertise the sale, bring it to the attention of all interested persons and encourage competition

Lender can choose the time of the sale – China and South Seas Bank v Tan

Lender can sell the property at auction – must choose appropriate date but may accept the best price (even if it doesn’t represent the true market value) – Tse Kwong Lam

Court can order a sale at the request of the lender or borrower, even if the other party objects – s.91(2) LPA 1925 and Palk v Mortgage Services Funding plc

The Financial Services and Markets Act 2000Duty of fair dealingEviction of the borrower is a last resortReasonable effort to agree an alternative planRecent government intervention – the Mortgage Possession

Pre-action Protocol

• launched for mortgage possession cases

• from 19 November 2008

• a new set of guidelines to help resolve disputes over mortgage payments and arrears has been drawn up by the Civil Justice Council.

The Pre-action Protocol applies to:

First charge residential mortgages and home purchase plans covered by the Financial Conduct Authority under the Financial Services and Markets Act 2000;

Second charge mortgages over residential property and other

secured loans regulated under the Consumer Credit Act 1974 on residential property;

Unregulated residential mortgages.

The Pre-action Protocol recommends:

Borrowers and lenders should take all reasonable steps to discuss with each other, or their representatives:

• the cause of the arrears,

• the borrower’s financial circumstances and the proposals for repayment of the arrears.

For example, parties should consider whether the causes of the arrears are temporary or long term and whether the borrower may be able to pay the arrears in a reasonable time.

The courts take the view:

That starting a repossession claim is usually a last resort, andthat such a claim should not normally be started when a

settlement is still actively being explored. Discussion between the parties may include options such as:• extending the term of the mortgage;• changing the type of a mortgage;• deferring payment of interest due under the mortgage; or• capitalising the arrears.

Learning Outcomes

Now we are at the end of this lecture you should be able to:

1. understand the rights available to a lender

2. discuss the remedies that a lender has when a borrower defaults on the mortgage

3. explain how a borrower can defend against possession proceedings bought by the lender

4. discuss the lender’s power of sale and their duties under it

5. explain the relevance of the Financial Services and Markets Act 2000 and the Pre-action Protocol