General
The mortgagee is entitled to protect the value of its security. It may take action against a mortgagor by exercising rights under the mortgage or by court injunction to prevent damage to the property. It may take possession or appoint a receiver for a period to protect the security, provided as is likely, that there is a breach of the mortgage conditions.
Where something happens in the course of a mortgage which jeopardises the security, the terms of the loan agreement or mortgage deed should be reviewed. The mortgage deed should be tailored to the type of security so that the lender has the most appropriate types of rights.
The mortgage deed will generally set out detailed covenants and obligations on the part of the mortgagor which are designed to protect the security. See our chapter in relation to covenants in mortgage deeds. There will typically be specific provisions in relation to the following;
- obligation to keep the property in repair; in default, the lender may be entitled to enter do the works and charge the cost;
- not to damage the property;
- in development loans, obligations to complete the development;
- to maintain proper insurance and do nothing to jeopardise the policy;
- insure if the mortgagor neglects to do so;
- not to do or allow anything which renders void the insurance policy;
- notify insurance claims;
- pay ground rents, service charges;
- comply with all title conditions;
- notify enforcement by head landlords;
- notify any adverse local or central government legal action e.g. compulsory acquisition, enforcement of legislation breach etc.;
- pay compulsory purchase acquisition monies;
- notify litigation and claims in relation to the property;
- prohibitions on leases, lettings and sharing possession without consent
- no further mortgages or charges without consent
- not to permit of acquisition of easements without consent
The types of clauses should reflect the type of property and the circumstances. Breach of the covenant will entitle the mortgagee to accelerate the obligation to pay the full loan and exercise its enforcement options. This will give the lender the opportunity to make the mortgagor “come to the table” and deal with it in relation the issue that has arisen.
The solution may involve remediation of the problem, the provision of extra security or payment of compensation monies to lender (e.g. an insurance claim, cpo compensation, sales of part). The breach allows the lender the practical option of further securing its position if other security is available. If no solution is reached, the mortgagee may appoint a receiver or take possession to protect its position.
Rights to Protect Security
A mortgagee has rights under general law to protect its security. A court application may or may not be necessary or appropriate. There may be a number of options. In some cases, it will be possible to exercise rights without the assistance of court. In other instances, court assistance will be necessary. Generally the costs of necessary measures to protect and realise the security can be added to the mortgage debt. Application to court may be by way of an injunction or the appointment of a receiver.
A court will generally restrain actions and dealings by the mortgagor in breach of the mortgage. The mortgagee may take action where the mortgagor is damaging the physical security. This might include mining, dumping of waste, cutting of timber or other action which is prejudicial to the value of the security. This action may be restrained by court order.
Generally, court protection may be necessary to protect against action which interferes with the secured assets or which might potentially jeopardise the security. What is appropriate, will depend on the nature of the asset. It is not possible to set out all the circumstances where this could apply, A common sense view of action which undermines the value of the security should be taken.
A mortgagee is entitled to all additions to the property such as buildings, fixtures and improvements They accrue for the mortgagee’s benefit. The mortgagor cannot generally dispose of, break, damage or destroy them.
Receiver
A receiver may be appointed under the statutory power in order to protect and preserve the security. See our chapter in fixed charge receivers. The right to appoint a receiver arises on breach of the conditions in the mortgage deed. However, certain pre-conditions apply which may not be satisfied where action is urgently required.
A court appointed receiver is a flexible means of protecting security. It is more flexible and carries more weight than a receiver appointed out of court. Interference with a court receiver may be punishable as a contempt of court. A court receiver may be appointed over any type of property, and not just land and buildings.
A court appointed receiver is obliged to get in and take charge of rents and to manage secured property, where the security is in jeopardy. The application to court may be made without notice, under certain circumstances, where this is necessary as a matter of practical necessity. See our chapter in relation to court receivers.
A lower ranking equitable mortgage may be entitled to appoint a receiver to protect its security. He must account to the prior legal mortgagee and is appointed without prejudice to the rights of the prior legal mortgagee.
A receiver may be appointed as pre-emptive step in litigation or as a final order in litigation. The litigation must involve some claim such as an order for sale of the security. The receiver is a protective pre-trial measure.
The mortgagee can protect its title from the claims and actions of third parties. If, for example, a third party tries to make a legal claim against the mortgaged property, it is entitled to defend it and is entitled to take legal action to protect the property. If a third-party takes possession of the property, the mortgagee is entitled to take legal action to challenge it.
The mortgagee’s rights apply equally to protecting the physical land and buildings or other secured assets. The mortgagee is entitled to bring legal action to prevent deterioration of the property. If a property is to be compulsorily acquired, it is entitled to notice and may be entitled to some or all of the compensation.
Title Deeds
The mortgagee is entitled to possession of the title deeds. This is less important than was previously the case because of dematerialisation of Land Registry. It is desirable to have the basic title documents to effect a sale, although much less so than in Ireland. The original or certified copy of the mortgage deed should be held. The mortgagee has the right to protect its title. This includes right to perfect and complete its security, where this has not been done.
Insurance
A mortgagee has power to insure the property against the usual damage and destruction risks. The premiums are charged on the property as an addition to the mortgage monies, with the same priority. The mortgage usually obliges that the insurance is kept up by the mortgagor and allows an unrestricted power to insure in default.
Ground Rent and Service Charges
The borrower may refuse or neglect to pay ground rent due under his title. In the case of leases of apartments and commercial properties, failure to pay service charge may lead to the title itself being forfeited. The lender is entitled to pay these liabilities to preserve the assets and recover them as addition to the mortgage debt.
In the case of the mortgages of apartments, management companies may inform the lenders of breaches, with a view to ensuring the service charge is collected through the mortgagee.
