Mortgage Is ‘Security for a Loan’

In the event of the mortgagor’s default, mortgagee has rights to protect and enforce his/her security. The mortgagee has five remedies against the mortgagor: action on the mortgagor’s personal to repay, appointment of a receiver, assertion of the mortgagee’s right to possession, exercise of the mortgagee’s power of sale and foreclosure.

The question concerns the area of exercise of the mortgagee’s power of sale, and Christine should “act in good faith” and “take reasonable care to obtain true market value” when she is exercising her power to sale the Rainbow House (RH) for recovery of capital and interest [3] .

Statutory Power of Sale Arise

The mortgage of the RH, as a legal charge, contained an express power of sale implied by deed [4] . Christine, at any time after the date fixed for payment, she may sue for the recovery of the principal sum and any interest that may be due [5] , based upon Andrew’s promise to repay [6] .

Here the chance for Andrew to repay his secured loan to Christine is low as he was “made redundant from his job 10 months ago”. Christine is entitled to exercise her common law right to take possession without first obtaining a court order [7] under the Law of Property Act 1925 (LPA 1925) s.101, and was not in breach of the “right to peaceful enjoyment of property” under Art 1 Protocol 1 ECHR. However, Andrew may challenge Christine that she was exercising her power “without a court order for possession” of “residential” property under the Mortgaged Repossessions (Protection of Tenants etc) Act 2010 [8] which enforced on 8 April 2010.

The power arisen for the sale of the RH if Christine could satisfied all three conditions [9] , (1) RH is a “registered freehold property” and created the legal mortgage by deed [10] . (2) There is no indication that there have any contrary provisions [11] which has the effect of precluding a power of sale in the default of Andrew [12] . (3) The mortgage was established in June 2006 and the legal date for redemption was passed, and Andrew was “fell into arrears with numerous repayments under the legal charge to Christine”. Since the question does not indicate the exact number of “instalments in arrears” [13] of Christine’s mortgage, “instalments in arrears” is sufficient to satisfy “mortgage money has become due” [14] . Apparently Christine’s power of sale of the RH is arisen legally.

Statutory Power of Sale Exercisable

The power of sale would become exercisable when Christine satisfies either one of the conditions in LPA 1925 s.103. In the question, Andrew was “fell into arrears with numerous repayments” which meant that at least three months of repayments has been due. This satisfies the requirement in LPA 1925 s.103(1) that the “default has been made … for three months”. Christine’s power of sale of the RH has become exercisable legally.

Although there is no statutory duty of care for Christine to take specific precaution when exercising her power to sale the RH. There is a common law duty “to act in good faith and owes the mortgagor a duty to take reasonable care to obtain a proper price.” [15] The court will intervene if “fraud or bad faith” [16] is shown in the sales transaction of the RH.

In determining whether Christine has to “act in good faith” and take sufficient “reasonable care” in the sales of RH. We have to look at “what steps” [17] Christine had taken to sell the RH and that “approach would give the best price or not rather than purely look at what price obtained in the transaction” [18] . We can examine through the tests of (A) subjective duty – to act in good faith and (B) objective duty – to take reasonable care to obtain the “true market price” at the time of sale; which was suggested by Salmon LJ in Cuckmere Brick v Mutual Finance [19] , and was confirmed in Silven v Royal Bank of Scotland.

(A) subjective duty – to act in good faith

Normally Christine can give a “good title to the purchaser” free from the equity of redemption [20] upon the power of sale has arisen [21] . Although Christine didn’t sell the RH to herself directly [22] , but, there is a rule that the mortgagee cannot sell the mortgaged property to an associated person or entity [23] .

Here we assumed that Christine is a “Director” as described in the Companies Act 1983 [24] . Christine cannot sell the RH back to herself after it has taken possession regardless whether it is at market value or not [25] . Christine is a “Director of the Phanton Builders Limited”, either directly or through an agent, this would not be a “bona fide” [26] sale in this transaction. Her conveyance couldn’t effective to vest in “Phantom Builders Limited” of Andrew’s full legal estate.

Christine, therefore, cannot pass the “good title” to “Phanton Builders Limited” unless she could prove that the sale of the RH was “an arm’s-length transaction” and there was “no conflict of interest” in the transaction stated by Privy Council in Tse Kwong Lam [27] case. This was confirmed by the CA in Bradford & Bingley plc v Ross [28] .

The sales transaction to “Phanton Builders Limited” by Christine is deemed lack of good faith and dishonesty as sales price of the RH was at undervalue – “the price obtained was considerably less than for similar properties in the area”. Andrew and Dorothy could challenge [29] Christine that she was acted in bad faith as she sold the RH to an “associated person or entity”.

(B) objective duty – to take reasonable care to obtain the “true market price” at the time of sale

Christine must “clearly in breach” [30] for the court to imposed a duty of care owed to Andrew and Dorothy – the subsequent mortgages [31] .

(I) Method of Sale

Christine becomes a trustee [32] for the proceeds of the sales of the RH but she is “not strictly a trustee” for Andrew in respect of the power of sale itself [33]. She, although must “act in good faith”, has no obligation to sell “by auction or to advertise the [RH]” [34]. Therefore, Christine’s motives in choosing to exercise her power to sale are irrelevant as she is entitled to protect her own interests and to give these interests priority over Andrew’s and Dorothy’s [35]. However, she does “owes a duty of care” to Andrew and Dorothy in relation to the sales of the RH [36].

“The property was sold by auction” and Christine has the option of “electing its remedies” [37]. She ought to be adequately and sufficiently advertised, and where an auction takes place it must be held in reasonable conditions [38], resulting “very few people attended”. Andrew’s complaint is that once Christine decided to advertise the RH for sale, she had to give it adequate publicity in order to attract as many potential bidders as possible [39].

In this case, the advertisement of the RH appeared only once in “miscellaneous items” of the local newspaper instead of in the property section with reference to Andrew’s friend. The RH was inadequately advertised as compared with Tse Kwong Lam [40] case which was placed in 3 newspapers and appeared on 3 occasions; it led the price obtained from the auction “was considerably less than for similar properties in the area”. Furthermore, there is no evidence of the detailed offers received from the advertisement.

Perhaps Christine may not afford a reasonable number of advertisements placed in the newspaper, but she should at least advertise it in the proper section – property section to ensure it adequately captures the potential buyers. If RH had been given a wide publicity and seek advice on method of sale, the sale of the RH may raise more money.

(II) Duty to obtain “true market price”

Christine has a statutory power [41] to appoint Evita as she “thinks fit” [42] to act as a “receiver” [43] . Evita’s function is to ensure the interest on the mortgage of the RH can be repaid [44] . Christine and Evita didn’t “pursue a planning application for development of RH” as they have no obligation to “obtaining planning application permission” [45] to obtain a better selling price.

However, it is arguable that Evita didn’t appoint a qualified surveyor to obtain a current market price of a similar property for reference. She didn’t perform her duties to manage the due diligence of the RH properly [46] to obtain “the best price reasonably” for the interest of the two mortgages. Christine will be liable for Evita’s conduct as she instructed Evita “to sell the property at the earliest opportunity” [47] which led “the price obtained was considerably less”. The sale obtained at less than the open market value raises and inference of lack of “good faith”.

Christine failed to observe any required duty in exercising the sale of the RH and sold at a considerably low price, she “owes a duty to take reasonable precautions to obtain the true market value on the date on which she decides to sell” [48] and “damages for the difference” [49] may be awarded [50] to payable to Andrew.

(III) Time for Sale

Christine is at discretion to decide when to sell the RH [51] . However, Lord Denning rejected and suggested that “part of the mortgagee’s duty to take reasonable care may include the duty to choose an appropriate time for the sale” [52] . In Struggles v Lloyds [53] suggested that the proper exposure (this case is 6-12 months) to the market for the property is required.

Evita sold the RH “at the earliest opportunity” deemed that Christine might want to sell the RH to “Phantom Builders Limited” to sell to a “connected entity” intentionally and likely to resell the RH to obtain higher price in the subsequent sales. Her motives to recover the “secured loan” [54] are questionable. It seemed that Christine acted “wilfully and recklessly … with the sale of [RH] in such a manner that the interests of [Andrew is] sacrificed” [55] .

Christine doesn’t “take reasonable care to maximise her return from the RH’ [56] and ‘take steps to preserve its value’ [57] of the RH which led to the sales price obtained was insufficient for Andrew to cover the two legal charges. There is sufficient “proximity” [58] between Christine’s failure to obtain better price of the RH and resulted Andrew suffered his indebtedness. Andrew has a valid ground to complaint Christine when she exercised her power of sales of the RH and may lead the court to set aside the sales.

Disposition of sale s.105

In the event of Andrew’s default, Dorothy as an “equitable mortgage” is qualified as subsequent “incumbrances” [59] to receive the money owed to her. Christine is entitled to have first claim by “legal mortgage” [60] in the sale of the RH, and the money received is paid in order [61] under LPA 1925 s.105 prior to Dorothy. However, Christine doesn’t “act in good faith” and sufficiently “take reasonable care to obtain true market value” in the sales of the RH. Christine may likely to “damages for the difference” first payable to Dorothy and if there has any remaining goes to Andrew.

Conclusion

Given Christine didn’t act in good faith in the sales transaction of the RH as examined above. Andrew is eligible to have injunction from the court to reopen the sale of the RH.

For Dorothy, she is eligible to equity of rescission to obtain the order to sale from the court with consent from Andrew.

The drawback of the above suggestions would take longer time to realise the money, therefore, it would suggest to obtain the court order to claim for “damages for the difference” of true market value and the sales value of the RH by Christine to repaid Andrew’s charge to Dorothy, and if there is any remaining goes to Andrew.