The Power of Sale
The Law of Property Act 1925 provides a statutory power of sale for the mortgagee under a mortgage by deed. This power applies unless the contrary is stated or implied. This would be most unlikely in the case of a bank mortgage. Accordingly, a mortgagee can usually sell a mortgaged property without going to court. The main purpose of going to court will be to secure vacant possession of the property where this cannot be obtained peaceably or by agreement.
A mortgagee has rights in the context of a sale. They includes rights to impose conditions and restrictions on the sale of part of the property and power to grant a right-of-way or easement, as may be necessary.
The power of sale is exercisable by the mortgagee or persons to whom it has transferred the property. The mortgagee may give a good receipt to a purchaser on a sale. The purchaser does not have to look any further. The purchase from the bank / mortgagee is equivalent to (and for the reasons below, in some respects, better) than a purchase from an owner.
Where there are successive mortgages, the first mortgagee may exercise the power of sale without the consent of later mortgagees. It must account to them for surplus sale proceeds. The first mortgagee can sell the property, free from later mortgages. This has the advantage that, unlike a sale by the borrower /mortgagor, it will not be necessary to agree the value of the security with later mortgagees, where the security value does not all debts.
The powers of sale under the Law of Property Act may be amended by the mortgage deed. Typically, the power of sale arises on a financial or other default by the borrower. The exact position will depend on the particular mortgage deed.
Exercise of Power
Under the Law of Property Act (LPA), the power of sale arises, once the mortgage is made and money is due. The LPA states that a statutory power may be exercised in the following circumstances;
- notice requiring payment of the mortgage money has been served and default has been made in payment three months after service or
- interest is in arrears and unpaid two months after becoming due or
- there has been a breach of the conditions of the mortgage
The above restrictions on the exercise of the statutory powers are usually modified and excluded, so that the power arises more easily.
The ground most commonly relied on is that interest is in arrears and unpaid for two months after becoming due A notice requiring payment is not required in these circumstances.
Where other grounds are relied on, notice must be served on the borrower. This will be in the form of a demand for immediate payment with notice that if it is not paid before the expiration of three months, the mortgagee will proceed to sale. The notice must be served on the borrower’s last known address. The restrictions are commonly modified in mortgage deeds so that the power arises with fewer or no pre-conditions.
A purchaser who purchases a property sold under a power of sale is protected against irregularities. His title cannot be challenged on the basis that the sale was not authorised or that any required notice was not given or that the procedure was not followed properly. If any person suffers loss or damage by reason of such irregularity, their rights are against the mortgagor only.
Timing and terms of Sale
The power of sale is given to the mortgagee to enable it to satisfy the mortgage debt. Therefore, the mortgagee’s interests come first. Its duty is to obtain the best price reasonably available. However, the mortgagee may sell the property even though it may be at a disadvantageous time, e.g. in an illiquid or depressed market.
The mortgagee must have some regard to the interests of the mortgagor and later mortgagees. It cannot unfairly prejudice or recklessly sacrifice the interests of the borrower and later mortgagees. If the power of sale is exercisable, the mortgagee must take reasonable care to obtain the best price reasonably available in the market at that time.
The timing of sale is usually the mortgagee’s prerogative. The mortgagee does not have to consult with the borrower or subsequent mortgagees. It has freedom of action, provided it obtains the best price reasonably available. It is well established that it is a matter for the mortgagee to choose the time of sale. It need not wait until the market picks up.
The mortgagee’s duty is to obtain the best price reasonably available. A mortgagee, who sold the property at “crash sale” valuation to achieve immediate disposal rather than offering it in the open market, was held to have breached its duty. It may be appropriate to take advice in relation to the sale from a valuer or surveyor. The need for advice is greater where the property is unusual.
Terms of Sale
Where property is tenanted and vacant possession would obtain a much higher price, the mortgagee should in appropriate cases, attempt to obtain vacant possession. A mortgagee may be liable if he fails to undertake rent reviews with the tenant where available.
The mortgagee should consider whether a sale by auction, tender or private treaty is most appropriate. A sale by auction is not necessarily required. However, a sale by auction has the advantage of being demonstrably public. The mortgagee should not impose unnecessarily restrictive sale conditions. The mortgagee may protect itself by adding appropriate conditions to the sale contract.
The mortgagee himself must not purchase the property. Likewise, persons connected to the mortgagee must not purchase.
The mortgage or charge is as effective as a conveyance to the mortgagee. It does not a matter what has happened after the date of the mortgagee deed (e.g. the later death or bankruptcy of the mortgagor is irrelevant)
In the case of a leasehold property, landlord’s consent may be required for a sale. In the case of long apartment leases, landlord’s consent, if required, cannot generally be unreasonably withheld. A ground landlord can generally only withhold consent for objectively justifiable reasons, such as to secure payment of outstanding ground rents.
A receiver may sell the property, provided he has appropriate powers in the mortgage. The powers under the Law of Property Act can be delegated to a receiver.
The sale proceeds must be paid in the order laid down by statute, this is as follows;
- in discharge of prior mortgages to which the mortgage was subject,
- payment of charges and expenses incurred incidental to the sale, or any attempted sale
- discharge of mortgage monies, interest and costs
- the residue to the borrower or the next mortgagee entitled.
Sale of Land
Generally, it is possible to sell a property in England by extracting the relevant information from public registers and by obtaining information from to certain local authorities. It is no longer possible to create an “equitable” deposit or mortgage by placing the documents by entrusting the documents to the bank.
The Land Registry register is searchable on line via the internet. Title deeds are of less significance. The title and other legal documents contain helpful information so that it is desirable to retain them because it may take some time or be impossible to compile the documents from other sources.
