Enforcement Clauses

Enforcement

The mortgage or other security document generally provides that it is enforceable when the secured monies fall due. This will often be expressed to be on demand. Sometimes, a certain a number of days’ notice is required for the demand. More commonly, the sums due are immediately payable on demand.

The restrictions set out in the Conveyancing Act, and Land and Conveyancing Law Reform Acts in respect of the exercise of enforcement powers are invariably excluded. Since the 2009 Act, the restrictions on enforcement may not be excluded in the case of housing loans.  Some mortgage deeds declare the loan monies to be due on execution, for the purpose of the Conveyancing Act powers.

A floating charge, typically contained in an all assets grant of security, may provide that on the occurrence of the events of default, the floating charge will crystallise automatically and become a fixed charge on assets within its scope.  Alternatively, it may require demand and notice.

The Conveyancing Act, 1881 was replaced by the 2009 Act, for charges executed after 1st December 2009. The 1881 Act provided certain key statutory rights for mortgagees. They included the power of sale and the statutory right to appoint a receiver.

On exercise of the statutory power of sale, the interests of lower ranking mortgage and charge holders and that of the owner are converted into an interest in the sale proceeds.  This effectively destroyed the equity of redemption and enabled the security holder to sell freely from lower ranking charges.


Receivers I

A receiver has been the remedy of choice for secured lenders, during the financial crisis. An advantage of a receiver is that the lender may enforce the security, without the expense or delay of an application to the court. A receiver may be appointed by deed if monies due are not paid following demand. The payment must be made within the time logistically required to make payments.   This means that in practice, a receiver can be appointed on relatively short notice, e.g. 24 hours’ notice or shorter, if necessary.

The receiver will be deemed agent of the mortgagor so that the mortgagor is responsible for his or her acts and defaults.  He is not deemed agent of the appointing mortgagee. The appointment of the receiver as an agent of the mortgagor has the important effect that neither the mortgagor nor the receiver undertakes the strict liabilities of a mortgagee in possession.

A mortgagee in possession has strict obligations to maximise the return from the secured asset.  He also undertakes many of the onerous obligations which arise for owners, such, for example, as the landlord’s obligations under a lease, environmental and other statutory responsibilities. Many mortgages purport to exclude such liability, but it is not clear how effective such exclusion may be, given that the duties may be for the benefit of third parties, such as lower ranking mortgagees.


Receivers II

Even if the mortgagee is minded to take possession directly, it is likely to need to sub-contract out the management of the security to an external party, with expertise in property management. Appointing an appropriately experienced third party as a receiver, performs the same function and has the added advantage of reduced mortgagee responsibility (with a corresponding reduction in direct control). Fixed charge receiverships, undertaken by property managers or surveyors, have accordingly become very common in the last seven years.

A receiver is unlikely to be able to immunise himself from statutory obligations such those under planning and environmental laws. Notwithstanding the theoretical hiving off of responsibility by a receiver by virtue of his agency, statutes such as those relating to planning and building control, landlord and tenant, residential tenancy laws and other laws will effectively bind the receiver in the performance of his functions. The obligations typically bind the owner or occupier of land and the receiver, as his agent will be obliged to conform to these obligations in the exercise of the receivership. They should be able to avoid personal liability on such obligations (provided that he takes care).


Receiver’s Powers I

The economic crisis illustrated the inadequacy of the receiver’s powers in many mortgages.  The receiver’s powers under the Conveyancing Act (even where incorporated contractually) provide for little more than rent collection.  A receiver has no inherent powers other than those specified in the mortgage deed. Many mortgages deed contain very inadequate receivership powers. In contrast, debentures or corporate “all asset” securities have usually contained very wide receiver powers, enabling a receiver or receiver-manager to be appointed, who can take over the business of the borrower, “lock stock and barrel.”

The National Asset Management Agency Act recognised this shortcoming and provided that where a power of sale or power to appoint a receiver is contained in the security document, then a NAMA statutory receiver may be appointed with the wide range of powers specified in the schedule to the National Asset Management Agency Act, 2009. The Companies Act, 2014 also provides for extended powers for corporate receivers.

There is a statutory restriction on the level of a receiver’s remunerations which might be charged as an expense to the mortgagor.  Under the 1881 Act, the maximum was 5%.  Under the 2009 Act, this is prescribed by ministerial order.  This is generally interpreted to apply to a statutory receiver.  In the case of a contractual receiver, it is usually provided that the bank determines the receiver’s remuneration.


Receiver Powers II

A receiver should ideally have the broadest possible powers, including powers to:

  • enter and take possession of the property and the rents and profits of the property;
  • raise and borrow money in priority to the security (as a receiver’s expense);
  • sell, lease, mortgage all or any part of the property;
  • form subsidiaries;
  • enter any arrangements or contracts that are expedient;
  • appoint managers, officers, and employees;
  • exercise all powers of a landlord or tenant under legislation;
  • perform contracts entered by the mortgagor or lease;
  • bring and defend litigation, arbitration, etc.;
  • redeem other encumbrancers;
  • generally, exercise all necessary powers in the name of the mortgagor.

Enforcement Events

The mortgage deed will set out so-called “events of enforcement.” These are events which entitle the lender to enforce the security. Typically, the entire loan monies become due or may be demanded at the lender’s option and the lender may exercise its enforcement rights. They typically include the following

  • borrower fails to pay secured monies when due;
  • borrower commits a breach of the terms of the loan agreement;
  • any representation or warranty made to the lender turns out to be untrue;
  • any other lender is entitled to enforce against the borrower;
  • another receiver is appointed to any part of the borrower’s assets;
  • borrower becomes bankrupt or in the case of a company, insolvent;
  • the borrower dies;
  • the secured properly is compulsorily acquired, damaged or destroyed.

Power of Attorney

The mortgagor may agree to execute any further documents as are required to perfect the security. An irrevocable power of attorney may be given, appointing the mortgagee or receiver attorney to perfect the title.

Since the Powers of Attorney Act 1996, such a power may be expressed to be irrevocable thereby surviving the death or dissolution of a borrower. The appointment can sometimes cover a wider range of matters.


Consent to Possession

A receiver is not a court officer and is not entitled (unlike a sheriff or bailiff) to enter property forcibly. Unlike a mortgagee (in the true sense of the word), a (registered title) charge holder has no inherent right to possession of the security.

A (Land Registry) charge generally provides that the bank or receiver may enter into possession of the property or the rents of the property.  This clause entitles the bank or receiver to take physical possession of the property or of the rents.

If peaceable possession of the secured property is not available, a court order may be necessary. The special summary procedure in the Registration of Title Act, to grant possession to a charge holder was repealed, by the Land and Conveyancing Law Reform Act, 2009 and was re-enacted and confirmed in 2013.


Consolidation

At common law, a security holder who had two securities was entitled to require that both or neither be redeemed.  The Conveyancing Act reversed this presumption but provided that the parties may contract otherwise.  In pre-2009 mortgages and post-2009 commercial mortgages, it is usually provided that the statutory position is reversed again.  In the case of post-2009 mortgages, this is impermissible in relation to housing loans.


Leasing and Further Security

There is a wide statutory power of leasing under the Conveyancing Act and the Land and Conveyancing Law Reform Act.  It is usually provided that this power is not exercisable, without the prior written consent of the mortgagee. In the absence of this provision, a mortgagor could grant an unsatisfactory lease for a long term or on unfavourable terms and conditions. This may bind the bank under the statutory power if there is no restriction on the mortgagor’s power to grant leases.

The consent of the lending institution will generally be necessary for each lease or letting. A lending institution may give a general consent in its loan offer to lettings within certain criteria, in the case of investment property.

A negative pledge clause provides that the mortgagor shall not create any other security over the assets nor sell, transfer, lease or dispose of them without the lender’s prior consent in writing. Such a restriction is usually inserted. Its breach will not invalidate the later mortgage unless the subsequent mortgagee has actual notice of the restriction.


Application of Monies Received

It is usually provided that the purchaser of the secured asset is not obliged to enquire as to whether the security has become exercisable. He is not obliged to enquire as to the disposition of the sale proceeds. The receipt given by the bank or receiver is deemed an absolute and conclusive discharge of all rights and interests.

The Conveyancing Act provides for the application of the proceeds of sale on enforcement.  This is commonly varied to provide that the proceeds of sale on enforcement are applied as follows:

  • costs, charges, and expenses of and incidental to the appointment of the receiver and his remuneration;
  • discharge of liabilities incurred by the receiver in the exercise of its functions;
  • payment of sums and liabilities owed to the lender on its own account or for on behalf of the mortgagor in the exercise of its powers;
  • in or towards the discharge of the mortgage money;
  • any surplus monies to lower ranking encumbrancers;
  • any further surplus to the mortgagor.

References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015