Obligations of the Bank in Connection with the Sale of Property - Case Study Example

The Mortgagee’s Power of Sale: Problem Question A) Advise David and Anne on the Bank’s duties in relation to a sale of the property. In considering the Bank’s duties in relation to a sale of the property, it will be necessary to consider the various rights conferred on a mortgagee by virtue of granting the mortgage. Under section 101 of the Law of Property Act 1925 (LPA), the Bank as mortgagee will have rights in Apple Cottage, including the right to take possession of the property, to sell the property and to appoint a receiver. As David and Anne are in default on the repayments, the Bank has the right to sell the property to realise their security (Todd and Wilsons, 2007). Under section 101 of the LPA 1925, this power is implied into every mortgage made by deed, which further provides that a power of sale arises when the loan or repayment becomes due. However, under section 103 of the LPA, the power only becomes exercisable by the mortgagee if (i) he has served the notice on the mortgagor and not received payment three months after service; or (ii) mortgage interest payments 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 as it is the purchaser’s responsibility from the mortgagor to ensure that the power of sale has arisen, otherwise the power will be invalid (Sexton, 2006). If the mortgagee sells the property before the power is exercisable, then the Bank can be in breach of obligations to Anne and David (Gray, 2007). With regard to the current scenario, David and Anne have been in arrears for six months therefore the power of sale is clearly exercisable in accordance with the bank’s rights under section 103 of the LPA 1925. However, the bank has distinct duties in respect of its rights as mortgagee and firstly will have to seek an order for possession before any purported sale and cannot evict Anne and David by force (Cooke, 2006). Section 87 of the LPA 1925, effectively grants a mortgagee the right of possession (Gray, 2007). As Apple Cottage is a “dwelling house”, section 36 of the Administration of Justice Act 1970 (the Act) provides that the court will have powers to postpone any order for possession where there is a realistic possibility that the mortgagor will be able to meet the sums due under the loan. Under Section 8 of the Act, the “sums due” do not include sums that arise by virtue of the mortgagor’s failure to meet repayments of an instalment mortgage. Often mortgage agreements require repayment of the whole balance even if one repayment is missed however the effect of section 8 is that courts can grant relief to mortgagor without requiring him to raise the entire amount of the loan. Therefore if David and Anne can establish that they will be able to make repayments, this may prevent a possession order. Moreover, the power of sale must be exercised by the bank in good faith and as determined in the case of Cuckmere Brick v Mutual Finance ([1971] 2 All ER 633), the Bank has a positive duty to obtain the best price reasonably achievable. Furthermore, in the Cuckmere case the Court of Appeal asserted that failure to do so would render the mortgagee liable to account to the mortgagor. In the case of Williams and Glyn’s Bank v Boland ([1981] AC 487, it was held the power of sale cannot be enforced against equitable co-owners in property. However in the current scenario we are not aware of any third parties with equitable rights in Apple Cottage and it would appear that David and Anne are both legal co-owners. Moreover, as determined in the case of City of London Building Society v Flegg ([1988] 1 AC 54), the effect of section 30 of the LPA 1925 means that if there are two legal owners of a property, the equitable co-owners will be overreached upon the exercise of a power of sale by the Bank. Section 30 of the LPA 1925 further permits the Bank to ask the court for an order of sale and will be granted unless it can be establish that to be grant will cause exceptional hardship as determined in the case of Lloyds Bank v Byrne and Byrne 1993 ([2 FCR 41). However, section 30 of the LPA is currently replaced by Section 14 of the Trust of Land and Appointment of Trustees Act 1996 (TOLATA), which gives the courts significantly wider powers to determine orders for sale. As such, the Bank’s interest will be only one of the factors to be taken into account. Indeed in the case of Mortgage Corporation v Shaire ([2001] Ch 743), it was determined that pre-1997 case law should be treated with caution. In the Mortgage Corporation case, the rights of the mortgagee were rejected as the occupier’s rights were considered more worthy of protection. However, recent case law seems to have been inconsistent when considering the duty of care as postulated in the Cuckmere case. For example, in the case of Bristol & West v Bartlett ([2002] EWCA Civ 1181), the mortgagee was claiming the shortfall from the borrower post property sale. The Borrower argued that once the property was sold and mortgage discharged, they couldn’t get the shortfall. The Court of Appeal rejected this argument and held that the cause of action arises once there is failure to make payments due under the mortgage and the accrued right isn’t taken away by the exercise of a power of sale and “the right to sue for the mortgage debt arose at the time of that failure and, at that time, monies were outstanding on the security of the mortgage” (para. 14 and 20, per Longmore LJ). Conversely, in the case of Den Norske Bank ASA v Acemex Management Co Ltd ([2003] EWHC), in considering the mortgagee duty of care, Lord Templeman stated “if a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor”. Therefore, whilst the bank clearly have a duty to act in good faith, they cannot be held liable to David and Anne for merely failing to secure the best price, which will be difficult in the current market. Additionally, in the case of Michael v Miller ([2004] EWCA Civ 282), Jonathan Parker LJ in Court of Appeal argued that if valuation undertaken by the bank falls within an acceptable margin of error, the mortgagee will not be liable to mortgagor. In applying the rationale in the case of South Australia Asset Management Corporation v York Montague Limited ([1997] AC 191), it was held that only if the valuer was negligent could he be liable for all the loss caused by incorrect valuation being wrong, which was the difference between market price and sale price. However, in the case of Bishop v Blake ([2006] 17 EG 113) it was held that the mortgagee was liable to account to the mortgagor for sale of the pub at undervalue. This indicates that ultimately the decision will be dependant on the individual facts of the case. Another important point to note with regard to the current scenario that the Bank is aware of the planning permission attached to Apple Cottage and whilst the current market is down, the planning permission will clearly add value to the property, however the Bank’s agent have omitted these details in the particulars of sale. As such, David and Anne may attempt to argue that the exercise of the power of sale is being undertaken improperly. In the case of Meretz Investments NV v ACP Limited ([2007] Ch 197, the case involved a complex financial arrangement that was made in respect of a development of penthouse flats on top of an existing block in a prime location. The transaction was complex and the issue in contention was the motive of the mortgagee in exercising the power of sale. The claimant in this case sought to set aside the mortgagee’s sale on grounds that the power of sale was exercised for improper reasons. The key point at first instance was whether it was acceptable for a mortgage to sell the charged property if the mortgagee had mixed motives for the sale only one of which was to enforce security give by the mortgage. The court distinguished this from a case in which there was no intention at all to realise the security and therefore the sale was not properly connected to the nature of the charge. However, it was held that the nevertheless the mortgagee could still exercise the power of sale provided at least one of the reasons was to recover the sums secured by the mortgage and there was no implied “purity of purpose requirement” when selling. Accordingly, provided one of the bank’s motives is to realise the security (which does not appear to be in contention in the current scenario), the power of sale if exercised will be valid. b) If David and Ann want the property to be sold but the bank is refusing permission because the couple are negative equity, can the couple force a sale? If the Bank refuses to sanction an order for sale, as legal co-owners of the land, David and Ann can both make an application for an order of sale under section 14 of TOLATA, which provides that “Any person who is a trustee of land or has an interest in property subject to a trust of land may make an application to the court for an order under this section”. Moreover, section 15(1) of TOLATA provides wide discretion to the courts and states that “the matters to which the court is to have regard in determining an application for an order under section 14 include: (a) the intentions of the persons who created the trust, (b) the purposes for which the property subject to the trust is held. (c) the welfare of any minor who occupies or might reasonably be expected to occupy any land…as his home, and (d) the interests of any secured creditor of any beneficiary”. Therefore the Bank’s interests are one of many factors to be considered and will not automatically preclude an order for sale if an application is made by David and Anne. However, the inherent flaw of section 15 is that there is no guidance given with regard to the importance to be attached to the various factors set out when the court is exercising its powers. This is further compounded by the inconsistency in judicial decisions. Nevertheless in the case of Bank of Ireland v Bell ([2001] 2 All ER 920) it was commented obiter, that there should be a flexible interpretation of section 15. Peter Gibson asserted that “the 1996 Act, by requiring the court to have regard to the particular matters specified in section 15 appears to me to have given some scope for change in the court’s practice. Nevertheless a powerful consideration is and ought to be whether the creditor is receiving proper recompense for being kept out of his money, repayment of which is overdue” (at para.31). If we consider this in context of the current scenario, it is unclear whether David and Anne will succeed in an application under TOLATA. Alternatively, it is possible that the failure to take into account the added value to the property as a result of the planning permission will operate in Anne and David’s favour in contributing towards the “proper recompense” owed to the Bank in line with the Bell rationale. In summary, the scenario indicates that the Bank’s power of possession and power of sale are both exercisable. However, in applying for any order, the Bank will have a positive duty to ensure they secure the best price within the “acceptable margin of error”. Alternatively, if the Bank fails to order a sale, then David and Anne have powers as legal co-owners to make an application for an order for sale under section 14 of TOLATA. Bibliography Blackstone’s Statutes on Property Law (2007-2008) 15th Edition Oxford University Press. Elizabeth Cooke, (2006). Land Law. Oxford University Press. M Dixon., (2005). Principles of Land Law. 5th Edition Routledge-Cavendish Publishing. K. Gray & S. F. Gray (2007). Elements of Land Law. 5th Edition Oxford University Press. J MacKenzie& M Phillips (2005). Land Law. 10th Edition Oxford University Press. Megarry and Wade., (2007) The Law of Real Property. 7th Edition Sweet & Maxwell R Sexton (2006). Land Law. 2nd Revised Edition. Oxford University Press. S. Pascoe (2000) “Section 15 of the Trusts of Land and Appointment of Trustees Act 1996- A Change in the Law?” Conv. 315. Todd and Wilsons., (2007). Textbook on Trusts.8TH Edition. Oxford University Press. Law of Property Act 1925 Trusts of Land and Appointment of Trustees Act 1996 Read More