Mortgagee’s Power Of Sale

If a Mortgagor is in default of repayments, the Mortgagee may seek to sell the mortgaged property to realize his security. This power to sell is implied into every mortgage made by deed by s.101 of the Lpa (1925), which goes on to say that the power of sale arises when the loan repayment becomes due. However, the power only becomes exercisable (s.103) by the mortgagee if

(i) he has served notice on the defaulting mortgagor and not received payment three months after service; or

(ii) mortgage interest repayments are in arrears by more than two months; or

(iii) the mortgagor is in breach of some other covenant in the mortgage agreement.

The distinction between when a power of sale arises and when it becomes exercisable is important. This is because it is the responsibility of the purchaser from the mortgagor to ensure that the power of sale has arisen. If it has not, the sale is not valid. However, the purchaser does not have to satisfy himself that the power is exercisable. If the mortgagee sells the property before the power has become exercisable, he may be in breach of his obligations to the mortgagor, but it is still a good sale.

The effect of sale is to vest the estate in land in the purchaser, free of the mortgage and any other mortgages of lower priority.

In practice, unless the mortgaged property is standing empty, the mortgagee will need to seek an order for possession before the sale. He is not obliged by law to do so, but he cannot evict the mortgagor by force, and the property will probably not be saleable unless the mortgagee can give vacant possession.

The power of sale must be exercised in good faith, that is, in order to obtain the best price reasonably achievable. The mortgagee may find himself liable to the mortgagor if he fails to so so. Consequently, many mortgage lenders prefer to appoint a receiver to handle the sale; the receiver is the agent of the mortgagor, not the mortgagee, so the mortgagee cannot be liable for the negligence of the receiver (unless, perhaps, he is negligent in appointing the receiver).

Particular problems arise for the mortgagee if his charge is over only over a share in the property. This may happen if, for example, the mortgage cannot be enforced against all the equitable co-owners of the property (as, for example, in Williams And Glynns Bank v Boland (1981); but note that if the mortgage advance is paid to two or more legal co-owners, the equitable co-owners will be overreached — The City Of London Building Society v Flegg (1987)). s.30 of the Lpa (1925) allows a mortgagee to ask the court for an order of sale, and such an order would usually be granted unless to do so would cause exceptional hardship (Lloyds Bank V Byrne And Byrne 1993). However, s.30 is effectively replaced by s.14 of Tolata. s.14 gives the court a much broader discretion in deciding whether to order sale. The interest of the mortgagee is only one of the factors that must be taken into account. Consequently, in Mortgage Corporation v Shaire 2000 it was held that pre-1997 caselaw on determining whether to order sale should be treated with caution. In that case, an application for an order of sale from a mortgagee was rejected, because — in essence — the rights of the occupier (whose signature had been forged on a mortgage application) — were more worthy of protection than those of the mortgagee.

See Powers of mortgagee for more details.

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