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Hidden obstacles

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  • 09/09/2003
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The property rights of a mortgagor do not end with a lender's repossession, and contrary to public perceptions this is the last resort for mortgagees

When a borrower persistently defaults on a mortgage, it is assumed that the response of the lender is almost always to take possession of the mortgaged property with a view to realising its security. However, lenders are usually more flexible than this as obtaining possession and selling the property involves a lot of onerous legal responsibility. Obtaining possession is a practical requisite of effecting a sale, but lenders can be surprisingly unwilling to repossess as the legal impositions can be onerous.

In cases of residential property, the mortgagee’s right to possession is restricted by the court’s statutory powers to adjourn, stay or suspend possession proceedings under Section 36 of the Administration of Justice Act 1970 and Section 8 of the Administration of Justice Act 1973.

Rights and duties

While the taking of possession is usually a necessity for lenders if they are to effect a sale of the property, it is not without its risks. As soon as a mortgagee obtains possession, whether by means of a court order or by peaceable re-entry, they not only obtain rights over the property, they also incur a variety of legal duties towards the mortgagor. Normally, a mortgagee will try and make a quick sale, but this is not always possible.

Even in everyday cases, there will be a period when the mortgagee is in possession of the property for a period of time prior to sale. In the case of buy-to-let mortgages, the mortgagee will often take property subject to an authorised tenancy. In a lot of cases, these tenancies will still have a term to run, sometimes for a year or more. Provided the tenant does not default on rent payments, the mortgagee will either have to sell with the tenant in situ or let the tenancy run before it can obtain vacant possession. It is during this period that the mortgagee has to be particularly live to the obligations and duties it still owes towards the mortgagor.

There is ‘a duty to account strictly to the mortgagor’. One of the basic obligations of a mortgagee in possession is to account to the mortgagor on the basis of ‘wilful default’. When a mortgagee takes possession, the mortgagor’s beneficial interest in the property is not lost. The mortgagee must account for any surplus achieved on a sale and for income earned when in possession. If a mortgagee takes possession subject to a tenancy, such as in a buy-to-let situation, it must account for the rents and other income derived.

In fact a mortgagee must not only account for what it actually receives, but for what it ought to have received, had it managed the property with due diligence. For example if a mortgagee takes no steps to collect rents from a buy-to-let tenant, it will have to account for the rent that it should have collected. Reasonable care must be taken to maximise a return on the property. However, this duty is not too strict. A mortgagee is not obliged to speculate with the property or make ‘special exertions’ to get the highest possible rent. Nor, in most cases, will a mortgagee be obliged to let the property pending a disposal, because this will often interfere with a sale.

Repair liability

A mortgagee in possession is under an obligation to maintain the property and keep it in good repair. However, at common law this obligation is limited to the extent that the rents and profits from the property allow the mortgagee to do so. It is not obliged to spend its own money on substantial repairs, although if essential minor repairs are needed to prevent the property suffering serious damage or, in the case of leasehold property, avoid forfeiture, such work should be undertaken, even at the mortgagee’s expense.

The ‘liability under leasehold covenants’ means the liability to repair may arise in a different way if a mortgagee takes possession subject to a tenancy. In that event, a mortgagee will be liable to the tenant on any covenants contained in the tenancy agreement. For tenancies created after 1 January 1996, this obligation derives from Section15(2) of the Landlord and Tenant (Covenants) Act 1995. For earlier tenancies, the common law obligation is similar, provided the subject matter of the covenant relates to the mortgaged land. The liability to keep premises in good repair would be one such obligation.

Finally the leasehold enfranchisement means that if a mortgagee goes into possession of property which is the subject of a long leasehold with rights of enfranchisement, a tenant will be able to serve relevant notices on the mortgagee and the mortgagee may be obliged to participate in court proceedings as if it were the landlord.

Few of the obligations imposed on mortgagees in possession are so onerous as to make them difficult to comply with. However, the unwary mortgagee can be caught out if it is unaware of what those obligations are. Borrowers should take comfort from the knowledge that lenders are always wary of the consequences of taking possession in cases where a quick sale may not be achieved.

key points

Buy-to-let repossessions may require tenancies to expire before sale or else they have to try and sell it with them in situ.

Mortgagees must account for any surplus accrued from the sale of the property.

Mortgagees may be liable for repairs to property out of their own pocket.

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