Mortgages - Lender's powers and duties

Learning Outcomes

After studying this article, you will be able to explain the main statutory and equitable powers available to mortgage lenders, including possession, sale, and appointment of a receiver. You will also be able to identify the key duties owed by lenders when exercising these powers, such as the duty to obtain a proper price and to act fairly. You will be able to apply these principles to SQE1-style scenarios and MCQs.

SQE1 Syllabus

For SQE1, you are required to understand the powers and duties of mortgage lenders from a practical standpoint. Focus your revision on:

• the statutory powers of possession, sale, and appointment of a receiver under the Law of Property Act 1925
• the conditions for exercising these powers and the impact of contractual terms
• the duties owed by lenders when exercising their powers, including the duty to obtain a proper price and to act in good faith
• the protection available to borrowers, especially under the Administration of Justice Act 1970
• the consequences of breach of duty by lenders

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. When can a lender exercise the power of sale under a mortgage made by deed?
2. What duty does a lender owe to the borrower when selling a mortgaged property?
3. What is the effect of appointing a receiver, and who does the receiver act for?
4. What protection does a borrower have when a lender seeks possession of a dwelling house?

Introduction

Mortgage lenders in England and Wales have significant powers to enforce their security if a borrower defaults. However, these powers are balanced by duties designed to protect borrowers and ensure fairness. For SQE1, you must know the main statutory powers available to lenders, the conditions for their exercise, and the key duties imposed by law and equity.

Lender's Statutory Powers

Most of a lender's powers are implied into a mortgage made by deed, unless expressly excluded or varied by the mortgage contract.

Key Term: mortgagee
The lender in a mortgage transaction who takes security over the borrower's land.

Key Term: mortgagor
The borrower who grants a mortgage over their land as security for a loan.

Power of Possession

A lender has a right to possession of the mortgaged property as soon as the mortgage is created, unless the mortgage deed provides otherwise. This right is rarely exercised immediately but is available if the borrower defaults.

Key Term: possession
The right of a lender to take physical control of the mortgaged property, usually after default.

Power of Sale

Section 101 of the Law of Property Act 1925 gives a lender the power to sell the mortgaged property if the mortgage is made by deed. This power arises once the mortgage money has become due (usually after the legal date of redemption has passed).

However, the power is only exercisable when one of the conditions in section 103 is met:

• three months have passed since the lender served a notice requiring payment of the whole mortgage debt and the borrower has not paid
• at least two months' interest is in arrears
• there has been a breach of another term of the mortgage

Key Term: power of sale
The statutory right of a lender to sell the mortgaged property to recover the debt, subject to conditions.

Appointment of a Receiver

Section 101(1)(iii) LPA 1925 also gives the lender the right to appoint a receiver to collect income from the property if the borrower defaults. This is common for rental or commercial properties.

Key Term: receiver
A person appointed by the lender to collect income from the mortgaged property and apply it to the debt.

Debt Action

A lender can sue the borrower for the outstanding debt under the mortgage contract. This is usually used if the sale proceeds are insufficient to repay the debt (negative equity).

Foreclosure

Foreclosure is a rarely used remedy where the lender applies to the court to become the absolute owner of the property, extinguishing the borrower's equity of redemption. This is only granted in exceptional cases.

Conditions and Limitations on Powers

Lenders must comply with statutory and contractual requirements before exercising their powers. For example, the power of sale cannot be exercised until the relevant conditions are met. The mortgage deed may also impose additional requirements or restrictions.

Protection for Borrowers

Borrowers have important protections, especially for residential properties.

Key Term: equity of redemption
The borrower's right to redeem the mortgage and recover the property on repayment of the debt.

Section 36 of the Administration of Justice Act 1970 allows the court to adjourn, stay, or suspend possession proceedings for a dwelling house if the borrower is likely to pay the sums due within a reasonable period. The court will consider the borrower's financial plan and ability to pay.

Worked Example 1.1

A lender is seeking possession of a borrower's home after six months of missed payments. The borrower has just started a new job and can now afford to pay the arrears over the remaining mortgage term. What can the court do?

Answer: The court can suspend or postpone possession under section 36 AJA 1970, allowing the borrower to pay the arrears over the remaining term if the plan is realistic.

Lender's Duties When Exercising Powers

Lenders have important duties when exercising their statutory powers, especially the power of sale.

Duty to Obtain a Proper Price

When selling the property, the lender must act in good faith and take reasonable care to obtain the true market value at the time of sale. The lender is not required to delay the sale to get a higher price but must market the property properly and avoid a rushed or underpriced sale.

Key Term: duty to obtain a proper price
The obligation on a lender to take reasonable care to achieve the true market value when selling a mortgaged property.

Duty to Act in Good Faith

The lender must not act fraudulently, dishonestly, or for an improper purpose. The sale must be genuine and not designed to harm the borrower.

Duty to Account

If the lender takes possession or appoints a receiver, they must account to the borrower for any income received, after deducting costs and the debt.

Worked Example 1.2

A lender sells a repossessed property at auction but fails to mention that it has planning permission for development, resulting in a lower sale price. What is the consequence?

Answer: The lender has breached the duty to obtain a proper price. The borrower can claim damages for the difference between the sale price and the true market value.

Appointment and Role of a Receiver

A receiver collects income from the property and applies it in a set order:

1. Outgoings and maintenance
2. Interest on prior mortgages
3. The lender's debt
4. Any surplus to the borrower

The receiver is usually the agent of the borrower, so the borrower is responsible for their actions.

Foreclosure (Overview)

Foreclosure is rarely used because it extinguishes the borrower's equity of redemption and may leave the lender unable to recover any shortfall if the property is worth less than the debt.

Breach of Duty by Lender

If a lender breaches their duties (e.g., sells at an undervalue or acts in bad faith), the borrower can claim damages for any loss suffered. The onus is on the borrower to prove the breach and the loss.

Worked Example 1.3

A lender appoints a receiver who fails to collect rent from tenants, resulting in lower income. What can the borrower do?

Answer: The borrower can claim against the lender or receiver for failing to manage the property with due diligence and recover the lost income.

Exam Warning

When answering SQE1 questions, always check whether the lender has complied with all statutory conditions before exercising a power. Also, be alert to the borrower's right to seek court protection for a dwelling house.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Lenders have statutory powers of possession, sale, and appointment of a receiver under the Law of Property Act 1925.
• The power of sale is only exercisable when specific conditions are met.
• Lenders owe duties to act in good faith and to obtain the true market value when selling.
• Borrowers have protection under the Administration of Justice Act 1970 for residential properties.
• Breach of duty by the lender can result in damages for the borrower.

Key Terms and Concepts

• mortgagee
• mortgagor
• possession
• power of sale
• receiver
• equity of redemption
• duty to obtain a proper price