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Property Law - Selling from under the Mortgagee

By : Andrew Lane

Where repossession of a mortgaged property is inevitable it will often be in the interests of the mortgagor(s) to conduct the sale of the property themselves and Court of Appeal authorities show this to be an effective and appropriate approach. However there can be problems if proposed or anticipated sale proceeds would not cover the sums owed to the mortgagee even if the best possible price were obtained. Andrew Lane explains why.

 

Where repossession of a mortgaged property is inevitable it will often be in the interests of the mortgagor(s) to conduct the sale of the property themselves rather than allow the mortgagee to do so. Court of Appeal authorities such as Target Homes v Clothier [1994] 1 All ER 439 have long established that this is an effective and appropriate approach even at the possession order stage provided a serious intent to sell is shown and the likely proceeds of sale will be sufficient to clear in full the mortgagee’s charge. Suspended possession orders are not unusual in such circumstances allowing for a variety of different periods to enable a sale. It is in the nature of the situation that such an “offer” frequently comes late in the day and is often put forward for the first time when the mortgagee has obtained a warrant for possession.

The position is less straightforward where the proposed or anticipated sale proceeds would not cover the sums owed to the mortgagee even if the best possible price were obtained. The High Court (or the county court if the amount outstanding does not exceed £30,000) has the power to order sale of a property in such circumstances under s.91(2) of the Law of Property Act 1925.

The case of Palk and another-v-Mortgage Services Funding plc [1993] 2 WLR 415 is generally seen as the definitive judgment in cases of sale where there is negative equity. Sir Michael Kerr, though dismissing the proposition that a s.91(2) order is only possible where the sale would redeem the mortgage in full, gave a word of caution not to see s.91 as being commonly available in negative equity cases (p.426B):

“I accept, of course, that it must be only in exceptional circumstances that the power will be exercised against the mortgagee’s wishes when a substantial part of the mortgage debt will nevertheless remain outstanding.”

Cheltenham & Gloucester-v-Krausz [1997] 1 WLR 1558 also involved a negative equity scenario though it is better known for determining that the court has no power to suspend a warrant for possession in order to allow the mortgagor to sell the mortgaged premises where there would be a shortfall. Millett L.J commented (p.1567H-1568A):

“Palk-v-Mortgage Services Funding Plc was a case in which the mortgagee had no wish to realise its security in the foreseeable future, whether by sale of foreclosure. It established that in such a case the mortgagor might obtain an order for sale even though the proceeds of sale would be insufficient to discharge the mortgage debt. It does not support the making of such an order where the mortgagee is taking active steps to obtain possession and enforce its security by sale. Still less does it support the giving of the conduct of the sale to the mortgagor in a case where there is negative equity, so that it is the mortgagee who is likely to have the greater incentive to obtain the best price and quickest sale.”

To show the harshness of the court’s application of s.91, counsel from Hardwicke Building recently represented a mortgagee who were opposing a mortgagor’s s.91 application. There was evidence of a proposed sale (the credibility of which was doubted by the mortgagee) which would exceed the mortgagee’s latest valuation of the property. The court dismissed the mortgagor’s application and said this would have been the case even if the proposed sale details were shown to be true (though the judge said that it may provide a defence/partial defence if the mortgagee sold for a lower price and sought recovery of the shortfall as arguably they may not then have achieved a reasonable price for the property).