One of the available remedies to mortgagees under a mortgage by deed is the power of sale


One of the available remedies to mortgagees under a mortgage by deed is the power of sale. This power does not come with a fiduciary duty to the mortgagor as noted in the case Silven Properties Ltd v Royal bank of Scotland plc [2003] where it was held that ‘A mortgagee is not a trustee of the power of sale for the mortgagor’. However, this does not mean that the mortgagee is under no rules or duties when exercising the power, the mortgagee is still under the duty to act in good faith and to take reasonable care as was held in Cuckmere Brick co. Ltd v Mutual Finance Ltd [1971].
The power of sale by the mortgagee is implied into every mortgage made by deed by the Law of Property Act (LPA) 1925, s.101(1)(i). This power arises when the mortgage money has become due, but it is not exercisable until the mortgagee has met one of the three conditions prescribed by s.103 of the LPA 1925; Mortgagee has served notice on the mortgagor requiring payment of the mortgage money, and mortgagor has defaulted for 3 months, or some interest owed is at least 2 months in arrears, or the mortgagee has breached some other provision of the mortgage. In exercising the power of sale. “A mortgagee is at all time free to consult his own interests alone” Silven Properties Ltd v Royal bank of Scotland plc [2003]. In contrast a trustee of a power is legally bound to act in the best interests of the beneficiary due to the special fiduciary relationship he has in relation to the beneficiary. For example, in the case of Bank of Cyprus v Gill [1980] the mortgagee bank sold the recovered property at an early date, on the facts of the case if the bank had waited they would have gotten a much better price than they initially got, however the court held that the bank was not liable in negligence in failing to take a longer time to sell in the hope they might obtain a better price, which ultimately was a disadvantage to the mortgagor. A trustee however in such a case would have been held liable for breaching their duty, as their job is to make sure in exercising their power the result is the best possible outcome for the beneficiary. In addition, in the case of Meah v Ge Money Home Finance Limited [2013] the court dismissed a mortgagor’s claim that his mortgagee had failed to obtain the best price reasonably obtainable on sale due to the poor manner of marketing by omitting the developmental potential of the property. The court however found that the property was sufficiently exposed to the market. The court was unable to find that the lender was “plainly on the wrong side of the line” the margin set out in Cuckmere Brick Co v Mutual Finance Ltd [1971]. The mortgagee therefore is offered a wide threshold in which to operate and exercise the power of sale unlike a trustee.
Even though the mortgagee is under no obligation to keep the mortgagor’s best interest at hand he/she is still bound by the duty to act in good faith and to take reasonable care. These duties are owed to the mortgagor, the guarantor of the mortgagor and to other mortgagees. When acting in good faith, the mortgagee is under a subjective obligation to ensure that he/she does not act wilfully and recklessly as was held in Kennedy v De Trafford [1897]. Under this duty a mortgagee cannot collude with interested parties in purchasing the mortgage property, for example, in Kennedy where the property was offered to one of the co-owners without the knowledge of the other at a reduced price. The mortgagee in exercising this power cannot do so fraudulently and/or corruptly. The second duty the duty to take reasonable care is an objective test which obliges the mortgagee not to act carelessly or imprudently during the sale. Under Silven properties ltd v RBS [2003] it was held that there is an equitable duty to try to obtain the “true market value” of the mortgaged property. Thus in discharging the duty to take reasonable care and obtaining the ‘true market value’ of a property misstatements must not be included in auction particulars if the property is to be auctioned off this was the decision arrived in Tomlin v Luce [1889] furthermore in relation to auctions in order to take reasonable care the property must be adequately advertised and auctioned of properly, in Predeth v Castle Phillips [1986] a mortgagee who sold by private treaty at a discount in order to achieve a quick sale, instead of auctioning the property at market value, was held to have breached his duty of reasonable care. This was also the case in Bishop v Blake [2006] where the mortgagee Blake had been entitled to exercise her power of sale but had breached her duty since she failed to take reasonable care to obtain the proper market price for the property. Additionally, the property must be fairly and properly exposed in the market ergo sales particulars should be produced and appropriately advertised as was held in Silven. Although the mortgagee can choose the time of sale, when exercising reasonable care in the case of Standard Chartered Bank v Walker [1982] Lord Denning stated, obiter, that the mortgagee must not sell ‘at the worst possible time’ this reasoning was questioned in Silven, here the court said it was up to the mortgagee when to sell . Last but not the least in Cuckmere Brick Co. Ltd. v Mutual Finance Ltd. [1971] it was held that the mortgagee must describe the property accurately thus here the failure to mention the planning permission enjoyed by the property which resulted in the property being sold for less than it would have sold for had it been mentioned was held to be a breach. In conclusion a mortgagee is offered a high amount of discretion and freedom when exercising the power of sale, subject to the duty to act in good faith and to take reasonable care to achieve the true market value, they do not have to take into account the mortgagor’s interest. In contrast a trustee always has to account for the beneficiaries which he holds the trust for due to the legal obligations which come with a fiduciary relationship. Finally, it must be noted that although the mortgagee is offered a wide discretion in exercising their power if they decide to sell the property to themselves or an agent the sale will be considered void. Likewise, If the property is sold to a related person this can be made voidable, but it will not automatically be void per Tse Kwong Lam v Wong Chit Sen [1983].

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