Navigating the Power of Sale: A Critical Examination of Mortgagor and Mortgagee Interests

Question 1

Mortgage is a legal charge created under a mortgage deed; a legal mortgage can only be created through deed, and registered. This essay critically discusses the statement made by Salmon LJ in the Cuckmere judgment, where he noted that “mortgagee is not a trustee of the power of sale for the mortgagor,” and is not required to wait for a better time for selling the property in order to get a higher price. The focus of the essay is to consider whether there is consistence in the judicial approach in balancing the interests of the mortgagee and mortgagor. The essay argues that with regard to the duty of the mortgagor to ensure that he does all that is necessary to get a best market value for the property in power of sale is so far consistent. Moreover, the courts’ approach to equity of redemption is also consistently applied post Cuckmere. If you require assistance with your law dissertation, our team is here in place to provide expert law dissertation help that is tailored according to your needs.

The mortgagee has the power of sale under Section 101(1) of the Law of Property Act 1925, provided that the mortgage deed does not express a contrary intention. Section 103 lists the conditions leading to the arising of power of sale. These include default in payment of capital for two months after notice, non payment of arrears of interest for two months, or breach of deed provisions. Thus, the power of sale arises when the mortgage money becomes due and the mortgagor defaults on the payment. This is consistent with the nature of mortgage being a security; it is of essence that the mortgagee is able to exercise that security if there is a default on the part of the mortgagor. At the same time, the law protects the interests of the mortgagor by giving them protection against sale by redeeming the mortgage. Thus mortgagee has the right to security exercised through power of sale while mortgagor has right to redemption. The question is whether the law post Cuckmere has maintained a consistent approach in balancing the interests of the mortgagor and the mortgagee. Such a balance is necessary considering that the right of power of sale is essential to protecting the security of the mortgagee for the loan.

The law protects the interests of the mortgagee by allowing him to determine the time of the sale once the power of sale arises, thus allowing him to recover the amount at his convenience. Furthermore, law does not treat the mortgagee as a trustee. Accordingly, mortgagee is not bound to get the best price for the property. Considering these aspects of the mortgagee’s rights it may appear that the law allows the mortgagee to sell the property at will and without consideration to the interests of the mortgagor but, this would not be a true assessment of the balancing of interests between mortgagee and mortgagor. The mortgagee is also duty bound to obtain a “true market value”. There are also other rights of the mortgagor that ensure that the law does not become one sided in cases where the interest of the mortgagee is conflicted with the mortgagor.

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1. Law of Property Act 1925, Section 87.
2. Ibid, Section 52.
3. Ibid, Section 27(2)(f).
4. Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, [965].
5. Law of Property Act 1925, Section 101(4).
6. Law of Property Act 1925, Section 101 (1) (i).
7. N Gravells, Land Law: Text and Materials (Sweet and Maxwell 2012) 891.
8. Judith Bray, Unlocking Land Law (Oxford: Routledge 2016) 361.
9. Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.
10. Ibid.
11. Ibid.
12. Ibid.

The most important of the protections to the mortgagor is that of equity of redemption, which relates to the right of redeeming the mortgage and to not be exploited by the mortgagee. In Kreglinger, Lord Parker laid down three situations in which a term in the mortgage deed may be open to objection: (i) it is unconscionable; (ii) it is in the nature of ‘clogs and fetters’ restricting redemption; and (iii) it is repugnant to contractual or equity right. After Cuckmere, the position of the judiciary has remained consistent with the earlier approach that mortgagee not be allowed to introduce artificial stipulations that prevent the mortgagor from satisfying their obligations and reclaiming the property.

Whether a clause is oppressive or not is treated differently in commercial and domestic mortgages, which difference is based on the nature of negotiations in commercial and domestic mortgages. The judicial approach to upholding a clause in a freely negotiated business agreement, and striking down of a similar clause in a domestic mortgage indicates that more protection is afforded to domestic mortgagors considering their unequal bargaining power as compared to commercial mortgagors. This judicial approach to commercial and domestic mortgages are reflected in statutory and judicial approaches to protections to mortgagor against mortgagee’s possession prior to sale, which in the case of residential property cannot be effected without court order. At the same time, the judicial approach as seen Cheltenham v Norgan, is to allow a reasonable time to the mortgagor to make payments and avoid possession, with reasonable time possibly being the remainder of the mortgage term.

Another protection to the mortgagor against the mortgagee as noted in Cuckmere is the latter’s duty of care. There is consistency in the judicial approach since Cuckmere, as seen in Palk where the court held that the mortgagee must abide by the duty to act fairly towards the mortgagor. This principle was reiterated in Raja v Lloyds TSB Bank plc, wherein the court held that the duty to obtain a proper price is a general obligation of mortgagee in equity. Mortgagee’s duty to act fairly includes a number of aspects that the mortgagee is supposed to ensure in all his actions. For instance, in Tse Kwong Lam, higher scrutiny was demanded where the sale was to the company in which mortgagee had interest.

When the mortgagee procures the right to sell the property, he has to ensure that he gets the best price for the property. Law protects mortgagor so that they do not lose the benefit of obtaining part of the proceeds of the sale; in one case appeal was allowed in the ground that mortgagor would have obtained a higher price when planning permission was used to augment the price. Furthermore, onus is placed on the mortgagee to show that he took reasonable care to assess the market value where significantly low price is achieved. Courts have generally remained even handed in their approach to the mortgagor and mortgagee interests. Therefore, the mortgagee is not under a duty to aggressively market the property, or to delay the sale to wait for the market to improve. Even the receiver appointed for the property is under a fiduciary duty to the mortgagee with the primary duty being that of recovery of mortgage debt.

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13. Lewis v Frank Love Ltd (1961) 1 WLR 261.
14. Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1.
15. Jones v Morgan [2001] EWCA Civ 995.
16. Multiservice Bookbinding Ltd v Marden (1979) Ch 84.
17. Cityland & property (Holdings)Ltd v Dabran (1968) Ch 166.
18. Section 36 of the Administration of Justice Act 1970; Palk v Mortgage Funding Services plc [1993] 2 WLR 415.
19. Cheltenham and Gloucester Building Society v. Norgan [1996] 1 All ER 449.
20. Palk and Another v Mortgage Services Funding Plc [1993] Ch 330.
21. Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113.
22. Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54.
23. Standard Chartered Bank v Walker [1982] 1 WLR 1410.
24. Meah v GE Money Home Finance Limited [2013] EWCH 20.

To conclude, courts seek to ensure that while mortgagee’s interest is sufficiently protected by not putting a burden of fiduciary duty on him, this does not mean that the mortgagee is under no duty to act fairly. Thus, there is consistency in the balancing of the mortgagor’s and mortgagee’s interests as reflected in how the courts do not treat the mortgagee as a trustee, but at the same time protecting the mortgagor’s interests through the equity of redemption and the duty on the mortgagee to act fairly towards to the mortgagor.

Question 2

Before the mortgagee exercises the power of sale, he can exercise the right to possession as a prelude to sale. There is however, a difference between mortgage of commercial and residential properties. With respect to commercial property, the mortgagee does not require a court order for possession prior to sale. This right is given to the mortgagee by law to help the mortgagee’s risk be minimised with respect to the mortgagor sabotaging the sale. For residential property, the mortgagor has statutory protections under the Administration of Justice Act 1970, Section 36. This allows the mortgagor to approach the court to adjourn application for possession by the mortgagor if the mortgagor indicates that he can made payments within a reasonable period of time. However, the mortgagee may be able to take possession of the commercial property without court intervention.

In this case, the field is mortgaged which means that the lender may be able to take possession without order from court and the protection provided by Section 36 of the Administration of Justice Act 1970 is inapplicable to Kew in the situation. However, the mortgagor may apply for the equity of redemption to prevent sale. The power of sale arises under Section 101 of LPA 1925 and the conditions for its application are in Section 103. According to Section 101 for the power of sale to arise, there must be a mortgage deed; the date set for redemption have be gone by; and there must be no provision that prevents the exercise of such power in the mortgage deed. Thus, as long as the date of redemption is not passed, mortgagee cannot have power of sale. The equity of redemption allows the mortgagor to redeem the mortgage. Therefore, Kew Construction is advised to refer the provisions of the mortgage deed with references to terms related to redemption. If there are any terms in the deed that are unconscionable; or create ‘clogs and fetters’ restricting redemption; or are repugnant to contractual or equity right, then the terms are bound to be struck down as the equity of redemption is an important right of the mortgagor.

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25. South Australia Asset Management Corp. v. York Montague Ltd [1997] AC 191, [221].
26. Bishop v Blake [2006] EWHC 831 (Ch).
27. Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997.
28. Ibid.
29. J MacKenzie and M Phillips, Textbook on Land Law (Oxford: Oxford University Press 2014) 460.
30. Martin Dixon, Modern Contract Law (Oxford: Routledge 2014) 446.
31. Ropaigealach v Barclays Bank, [2000] QB 263; Cheltenham and Gloucester plc v Krausz, [1997] 1 WLR 1558; Cheltenham and Gloucester v Booker, [1997] 1 FLR 311; Palk v Mortgage Funding Services plc, [1993] 2 WLR 415.
32. Lewis v Frank Love Ltd (1961) 1 WLR 261.

A practical difficulty that may come before the mortgagor for redemption is to raise the money for the redemption. For this Kew may require more time. As per Cheltenham v Norgan, reasonable time may be allowed to the mortgagor to make payments and avoid possession or sale. However, the mortgagor has to show that he can arrange for the payments. Where mortgagor is unable to make the payment of the amount due, there are options available to avoid exercise of power of sale. This is the commercial angle that makes a case for allowing recovery to take place “in a range of ways over time often by significant modification of the terms of the loan to support actions to avoid possession.” From this angle, one of the possible ways of managing the mortgage payments is to remortgage the property to pay the first lender.

This relief may be asked for by the mortgagor at the time when the mortgagee takes proceedings in the county court for possession of the property, and the court may be requested for an adjournment of the application for a short time so that mortgagor has some time to pay off the whole debt. Regarding a possible auction of the property, this is within the discretion of the mortgagee as he needs to decide based on the market, whether to sell the property through auction. The mortgagor may even decide to appoint a receiver, and not sell the property immediately. The receiver can collect rents and apply these towards the payment of mortgages.

Unconscionability of the actions taken by the mortgagee also form an important aspect of this situation. In Kreglinger, the court had noted that actions affecting the mortgagor should be fair and unconscionable. Even when the power of sale arises, the mortgagor has certain rights through the mortgagee’s duty to obtain the “true market value” of the property. With respect to this, the mortgagee has the duty to advertise the property with the benefit of any planning permission which was achieved by the mortgagor. Although the mortgagee does not have to wait for improvement in market, the price for the property through power of sale must be reasonable.

The emphasis is on the right of the mortgagor to get the best market value for the property in the event of sale. As this property already has planning permission, it would be the duty of the lender in the case to ensure that the information about the potential of the property is properly advertised so that the property sells at the optimum value. The recent case of Meah v GE Money Home Finance Limited, may be mentioned here in which the court held that advertising the property without alluding to the development potential of the property compromised the right of the mortgagor to obtain the best possible price. However, the mortgagee is not under a duty to make the property more attractive than it already is, like by obtaining planning permission for making flats instead of houses.

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33. Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1.
34. Cheltenham and Gloucester Building Society v. Norgan [1996] 1 All ER 449.
35. A Wallace and J Ford, ‘Limiting Possessions? Managing Mortgage Arrears in a New Era’ (2010) International Journal of Housing Policy 133.
36. Ibid, 142.
37. Ibid.
38. Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883.
39. Michael v Miller [2004] 2 EGLR.
40. Section 101 (1) (iii).
41. R. (on the application of Glatt) v Sinclair [2011] Lloyd’s Rep.F.C. 140.
42. Ibid.
43. Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1.
44. Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.
45. Standard Chartered Trust v Walker [1982] 3 All ER 938.
46. Meftah v Lloyds TSB plc [2001] 2 All ER (Comm) 741.


To conclude, the lender has the power of sale where the case meets the conditions of Section 103. It however has to be exercised in a way that does not compromise on the right of Kew to get the best market value for the property and to get the surplus of the proceeds of the sale after paying off the debt. Kew should also be given time to exercise other options for payment of the mortgage arrears rather than mortgagee exercising the power of sale.

47. Meah v GE Money Home Finance Limited [2013] EWCH 20.
48. Silven Properties Ltd. v RBS [2004] 1 WLR 997.

Legislation

Administration of Justice Act 1970

Law of Property Act 1925

Cases

Alliance & Leicester v Slayford [2000] EWCA Civ 257.

Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883.

Bishop v Blake [2006] EWHC 831 (Ch).

Bristol & West plc v Bartlett [2002] EWCA Civ 1181.

Cheltenham and Gloucester v Booker, [1997] 1 FLR 311

Cheltenham and Gloucester plc v Krausz, [1997] 1 WLR 1558

Cheltenham and Gloucester Building Society v. Norgan [1996] 1 All ER 449.

Cityland & Property (Holdings)Ltd v Dabran (1968) Ch 166.

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.

Jones v Morgan [2001] EWCA Civ 995

Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1

Meah v GE Money Home Finance Limited [2013] EWCH 20.

Meftah v Lloyds TSB plc [2001] 2 All ER (Comm) 741.

Michael v Miller [2004] 2 EGLR

Multiservice Bookbinding Ltd v Marden (1979) Ch 84.

Oak Orchard Development Limited v Iseman [1987] OJ No. 361.

Palk and Another v Mortgage Services Funding Plc [1993] Ch 330.

R. (on the application of Glatt) v Sinclair [2011] Lloyd’s Rep.F.C. 140.

Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113.

Ropaigealach v Barclays Bank, [2000] QB 263.

Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997.

South Australia Asset Management Corp. v. York Montague Ltd [1997] AC 191.

Standard Chartered Bank v Walker [1982] 1 WLR 1410.

Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54.

Books

Bray J, Unlocking Land Law (Oxford: Routledge 2016).

Dixon M, Modern Contract Law (Oxford: Routledge 2014).

Gravells N, Land Law: Text and Materials (London: Sweet and Maxwell 2012).

MacKenzie J and Phillips M, Textbook on Land Law (Oxford: Oxford University Press 2014).

Journals

Wallace A and Ford J, ‘Limiting Possessions? Managing Mortgage Arrears in a New Era’ (2010) International Journal of Housing Policy 133.