In 1990 Jo obtained a loan of 300,000 from Sharx plc. The loan was secured by way of legal mortgage on Jo’s business premises. The premises valued at 500,000 comprised two business units. The mortgage deed stated that: 1. the loan must be repaid by monthly installments over twenty five years, and 2. no part of the property must be leased. In 2001 Jo granted a 5 year lease of the first floor unit to Sue at an annual rent of 10,000. Although Sue is paying her rent regularly, Jo is now in arrears with his monthly repayments. Furthermore, the value of the property has dropped to 280,000. Sharx plc is concerned about the arrears.
Advise Sharx plc of the action it can take against Jo.
The present factual scenario calls attention to the law surrounding mortgages, and most particularly to the law surrounding the rights of the mortgagee. In the present factual scenario, the mortgagor has fallen into arrears and has breached the terms of the mortgage. This essay proposes to analyse the way in which the law protects the position of the mortgagee in these situations.
There are several options available to the mortgagee. One of the oldest and perhaps the most draconian of all the measures open to the mortgagee is foreclosure. In fact this was the traditional remedy by which a mortgage was enforced. The mortgagee cannot therefore seek the remedy of foreclosure until the contractual obligation to repay the mortgage debt has been breached. Quite clearly, in these circumstances, Jo has indeed breached these obligations, and to that extent, therefore, is liable to be the victim of such a remedy.
The effect of foreclosure is to vest the mortgagor’s property, which is the subject of the mortgage security, in the mortgagee in full settlement of the debt. In this case, we can see that the value of the property is now 280,000. We do not know for certain, however, at how much the mortgage debt currently stands. We know that in 1990 it was 300,000, but from then till the present date one could assume that more than half the debt has been paid as the debt was to be paid in full within twenty five years. Therefore if the full interest in the house, now worth 280,000, was fully vested in the mortgagee, presumably there would be a surplus sum remaining. How is this surplus dealt with in foreclosure proceedings? Unfortunately for Jo, this answer to this is that the mortgagee is not liable to pay the balance in value to the mortgagor. This makes it, very often, an extremely unfair remedy to the mortgagor. For this reason a court order is needed to seek foreclosure. Moreover, on hearing an application for foreclosure, the court will give the mortgagor, in this case Jo, a period in which he can redeem the mortgage. Normally the mortgagor would be in financial difficulties and is therefore unable to redeem the mortgage; this is quite clearly the situation in the present case. As a result the mortgagor is given the right to ask for an order of sale instead of foreclosure. This is of course not as beneficial to Stark, as in this case they would only be able to keep the value of the debt plus interest, and they would have to return the remainder to Jo. Moreover, in Palk v Mortgage Services Funding plc ( Ch 330) it was held that an order for sale may also be appropriate in any case if it produces a better result for the mortgagor. The present case, it is submitted, would qualify. As a result it is doubtful whether in the present situation the court was grant an order for foreclosure.
Moreover, even if foreclosure is granted, the court may later choose to reverse the proceedings and allow Jo to redeem after all. The criteria which the court will take into account when deciding such an application to effectively reverse the order for foreclosure are: the mortgagor’s reason’s for failing to redeem before foreclosure, the speed of the application and the nature of the property. All in all in the present circumstances I would advise Stark that it is neither likely that the courts will grant foreclosure, nor for that matter advisable, as it is a remedy which fails to provide them with appropriate protection.
Another, more realistic, remedy is that of possession. This, in most cases, is little more than a prelude to the sale of the property, but in many cases the mortgagee opts for leasing out the property in order to pay the mortgage debt off from the rent. In such cases, however, we shall see that the mortgagee normally prefers to appoint a receiver. In the majority of cases involving possession, however, the mortgagee opts for possession to make the sale less problematic as it is easier to sell a property that is vacant. It is interesting to note, however, that the mortgagee has the right to possession of the mortgage property from the moment the mortgage is created. In fact, Harmann J, in Four Maids Ltd v Dudley Marshall Properties Ltd ( Ch 317), held that The mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract, express or implied, whereby he has contracted himself out of that right. Of course, this is almost always the case, and no doubt the mortgage contract between Stark and Jo contains a term that possession will not be taken whilst Jo pays the mortgage instalments. Of course, that term has been breached, and as a result Stark can, in theory, take possession of the property straight away. However, they have to obtain an order for possession from the court so as not to be in breach of Section 6 of the Criminal Law Act 1977 which applies where the property is occupied. If, however, peaceable entry is possible without resort to the court this is perfectly acceptable (Ropaigealach v Barclays Bank plc  1 QB 263). If this were possible, I would advise Stark Ltd to proceed in this manner, as it is a way of avoiding the protection available to the mortgagor when an order for possession is sought in court. For one, the court may postpone possession, although it has been held that this power is to be used sparingly. Further protection is given if the property is a dwelling house by virtue of section 36 of the Administration of Justice Act 1970. However, it is clear from the facts that the mortgage property is Jo’s business premises which is quite clearly not a dwelling house, and as a result the further protection afforded by section 36 is irrelevant to Stark.
Moreover, it was granted in Bristol and West Building Society v Ellis  73 P&CR 158, that a possession order will be granted where the mortgagor cannot discharge the arrears by periodic payments and whose only prospect is the sale of the property.
Moving on to the remedy of selling the property, then, it is first of all worth taking into account the fact that the power for the mortgagee to sell the land is, by virtue of Section 101(1)(i) of the Law Property Act 1925 (LPA), implied into every mortgage made by deed. It is also interesting to note, however, that the power arises when the debt becomes due (either when the contractual date for redemption has passed or the mortgagor fails to pay the mortgage instalments as in the present case), but can only be exercised when one of the following conditions, prescribed in Section 103 LPA, has been met:
a) A notice requiring payment has been served on the mortgagor and the default has continued for three months thereafter; or
b) Some of the interest payable is at least two months in arrear; or
c) There has been breach of a covenant in the mortgage deed (other than that relating to the payment of money) or of some provision of the LPA 1925.
In the present case there is no evidence that conditions (a) and (b) apply, but quite clearly Jo has breached the covenant not to lease the property by leasing the first floor unit to Sue, and it is submitted that this satisfies condition (c). As a result, I would advise Stark, that they would be entitled to sell the property without leave of the court.
I would warn Stark, however, that if they choose to sell the property and the court decides that the conditions in Section 103 were not met, then Stark is liable in damages to Jo if they have sold the property.
I would also warn Stark that they must act in good faith and take reasonable care to obtain the true market value of the property when they sell (see Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch 949. I would also warn Stark that they cannot sell the property to themselves. If, however, they sell to a company in which they own a share, there seems to be no rule against this, but the mortgagee must show that the sale was in good faith and that they took reasonable precautions to obtain the best price (see Tse Kwong Lam v Wong Chit Sen  1 WLR 1349.
I would advise Stark that they would be entitled to exercise the right to sell at any time, and that it is irrelevant that a better price would be obtained by delaying the sale. It is also worth noting that under Section 92(2) LPA, the court has jurisdiction to order sale at the request of either the mortgagor or the mortgagee even if the other party proposes sale.
Finally, as regards sale, I would have to advise Stark that if he sells the property he becomes a trustee of the proceeds of sale under Section 105 LPA and holds the proceeds of the sale to:
- Discharge prior incumbrances
- Pay expenses of sale
- Discharge money due to the mortgagee under the mortgage
- Pay balance to the next mortgagee or the mortgagor.
It was mentioned before that there are cases where the mortgagee may have the power to appoint a receiver. This power may be expressly granted in the mortgage deed or it will be implied into the mortgage deed by virtue of section 101 LPA as long as the mortgage is created by deed. It is a useful remedy where the mortgagee does not wish to sell the property or take possession of it. The power to appoint a receiver arises and becomes exercisable in exactly the same way as the statutory power of sale (see above). The receiver is deemed to be the agent of the mortgagor. The duty of the receiver is to collect all the income and to apply it in the following way:
- pay outgoings of the land
- make payments which rank in priority to the mortgage
- pay his/her own commission and insurance
- pay interest due under the mortgage
- pay capital if directed in writing by the mortgagee
- pay the balance to the mortgagor.
I would also remind Stark, that as the mortgage is a loan, Stark could sue on the personal covenant to repay as this term has been breached. Even after a sale, therefore, Stark can sue Jo if they have suffered monetary loss as a result of Jo’s failure to repay.
Remedies Available to Equitable Mortgagor
It was held in the case of Tebb v Hodge ((1869) LR 5 CP 73), that a contract to create a legal mortgage also takes effect as an equitable mortgage provided it is a contract for which the courts can order specific performance. On the facts it is likely that the present contract qualifies as presumably the mortgage money (the 500,000) has already been advanced. As a result there are a number of equitable remedies available to Stark as the equitable mortgagee. These remedies, however, are of little relevance in situations where the mortgagee can rely on legal remedies, as these are available as of right whereas the mortgagee to an equitable remedy may obtain the same remedy only after the trouble and expense of obtaining a court order. Moreover, equitable remedies, due to their equitable nature, will always be discretionary. In the present case, therefore, the remedies may be of little interest to Stark as it is submitted that they should be entitled to their remedies under the legal mortgage, but nevertheless they should be in a stronger position if they know where they stand as regards the equitable mortgage as well.
Foreclosure, of course, is an equitable remedy and therefore operates in the same way in an equitable mortgage as it does under a legal one.
As regards possession, there is some controversy as to whether an equitable mortgagee has a right to possession without a court order. In terms of obtaining a court order, the position is exactly the same as for a legal mortgage.
As we have seen the statutory power of sale under section 105 LPA applies only to mortgages made by deed, and therefore an equitable mortgagee will have no such power. However, under section 91(2) LPA he may still apply to the court for an order of sale.
Finally, the power to appoint a receiver under section 101(1)(iii) LPA applies only to equitable mortgages which are made by deed, but any equitable mortgagee may apply to the court for the appointment of a receiver, under section 37 of the Supreme Court Act 1981.
As we have seen there are a number of remedies available for Stark Ltd in the present situation. We are told that on the facts Stark and Jo created a legal mortgage, and plainly this provides better protection to Stark as mortgagee. Under a legal mortgage Stark has a number of rights whereas under an equitable mortgage any remedy is subject to the court’s discretion. Having advised Stark as to their different remedies, it remains for them to decide which remedy which be most beneficial or most worthy of pursuing in the present situation.
- Mackenzie, J and Phillips, M, Textbook on Land Law (9th edn), Oxford University Press, Oxford: 2002.
- Pascoe, S, Land Law, Bell & Bain, Glasgow: 2002.
- Palk v Mortgage Services Funding plc  Ch 330
- Four Maids Ltd v Dudley Marshall Properties Ltd ( Ch 317
- Ropaigealach v Barclays Bank plc  1 QB 263
- Bristol and West Building Society v Ellis  73 P&CR 158
- Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch 949
- Tse Kwong Lam v Wong Chit Sen  1 WLR 1349
- Tebb v Hodge (1869) LR 5 CP 73
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