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MORTGAGES

LENDERS 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 lenders 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 lender


1. The right of investigation of title - power to investigate borrowers 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 borrowers 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
mortgage
1. Assertion of the lenders right of possession (almost always
sought as a preliminary to sale)
2. Exercise of lenders power of sale
3. Appointment of a receiver - s.101(1)(iii) LPA 1925
.appointed 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 borrowers personal covenant to pay Alliance v Leicester v


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

entire

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 procedures
.eviction 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 plc
Criticisms of this..
Prior to 1970 the court could stay possession and up until the early
1960s this was liberally used BUT
Birmingham Citizens Permanent Building Society v Caunt changed this
S.36 Administration of Justice Act 1970 followed

S.36 Administration of Justice Act


1970
The 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 courta. 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, mayi.

stay or suspend execution of the judgement or order

ii. postpone the date for delivery of possession for


period or periods as the court thinks fit

such

Interpretation of S.36
Meaning 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 passed
In 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 rescheduling 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 borrowers prospects of
paying become clearer Skandia Financial Services Ltd v Greenfield
Borrower can complete a private sale Target Home Loans v Clothier
BUT only if sale is likely to discharge the whole debt Cheltenham &
Gloucester Building Society v Krausz
Need evidence the private sale is likely within the foreseeable future
Mortgage Service Funding v Steele
If 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 borrowers 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 borrowers 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

Lenders 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

Lenders 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

Lenders 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?

Lenders 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 Ltd
Lender 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

Lenders 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 doesnt 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


2000
Duty of fair dealing
Eviction of the borrower is a last resort
Reasonable effort to agree an alternative plan
Recent 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 borrowers 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, and
that 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 lenders 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