Mortgagee Possession

Legal Mortgage and Registered Charge

A mortgagee of unregistered title property is entitled to possession of the mortgaged property subject to whatever is stated in the mortgage deed. This is because the mortgagee has legal title to the land. The borrower has an equitable interest; his equity.

The position is different with a registered charge over Land Registry title. It does not carry the same inherent right of possession that a mortgage carries. There is a special right to apply under a summary procedure to court in the case of registered title to obtain possession.  It is often provided in the mortgage deed that the mortgagee may take possession of the property if there is a default. The Irish courts have upheld this type of clause in a registered title case and have confirmed that it allows the mortgagee to take peaceful possession.

After the 2009 reforms (see below), all mortgages will be by way of legal charge and there will be no inherent right to possession. Unless possession is surrendered voluntarily, a court order will be necessary for possession under the default rules. These provisions cannot be varied for housing loans.


Limitations in Loan Agreement or Mortgage Deed

The loan agreement or mortgage document may provide that possession cannot be taken by the mortgagee until certain conditions apply. There is limited number of cases where the provisions of statues restrict the right to possess.

In a mortgage loan payable by instalments, it is usually provided that the mortgagee is not entitled to possession until the mortgagor has defaulted.  Generally, the borrower may retain possession of the property until the mortgagee seeks its. The mortgagor is generally entitled to receive the rents for his own use and is not obliged to account to the mortgagee unless required.  The mortgagor can take legal action against anyone, except the mortgagee.


Peaceable Possession I

The mortgagee may take possession of the property by taking physical possession of the land if this can be done peaceably. Alternatively, it may bring a court application for possession. The mortgagee need not give notice before entering or commencing proceedings. Being a mortgagee in possession has certain implications and duties which are set out in the next chapter.

Although there may be a clear legal right to take possession of an owner-occupied property, lenders should take care in exercising this right in the case of the borrower’s home. For the reasons mentioned next, it is probably safer to take possession of an owner-occupied property, only where the property has been clearly abandoned or the borrower surrenders this property (with spouse’s consent).

There is a constitutional right of inviolability of the dwelling house, the full legal implications of which have not been worked out by the courts. The courts might decide in the future that this requires a court order to obtain possession of house possessed by an owner occupier. In the case of a family home, it has been suggested that the right for the non-owning spouse to pay arrears, means that court proceedings are necessary. On the other hand, there are English cases on a similar law which have decided this is not the case where legal proceedings are not necessary because peaceable possession has been taken.


Peaceable Possession II

In the case of a rented property where the lease is binding on the mortgagee, the right is exercised by the notice of the tenant to pay the rent to the mortgagee. The receipt of rent by itself does not necessarily make the mortgagee, a mortgagee in possession. The question depends on whether the mortgagor retains control and management over the property and dealings with the tenant.  A mortgagee can demand the rent without necessarily becoming a mortgagee in possession. However, there are risks that it will unintentionally become a mortgagee in possession.

Physical possession can only be taken if it can be done peaceably. If any force or violence is used, the mortgagee may be prosecuted under criminal law. Force may arise not only against persons but may arise in the manner of entry. The breaking of a door, window or lock would not be peaceable. Any presence of numbers or implied threat is likely to make a taking of possession not peaceable, even if consent appears to be obtained.

A mortgagor may be in possession of the property, notwithstanding that he is not in actual occupation at a given point in time.  For example, if a borrower secures a property with the intention of returning within a reasonable time, the borrower is in possession, although not physically present.


Peaceable Possession III

The English case of Horsham Properties Group Ltd v Clark in October 2008 reaffirmed the long-standing principle that a mortgagee need not obtain possession of a mortgaged property in order to exercise its power of sale.  The case received considerable attention because it highlighted the fact that under most mortgages, the secured property can be sold without a court order, with the mortgagor in place. The law is the same in Ireland, at least in the case of non-owner occupied properties, under mortgages signed prior to the 2009 law reforms.

The implication of the case was that a mortgagee could leave it to a purchaser to recover possession. This raised the spectre of mortgagees selling properties to unscrupulous unregulated purchasers who would purchase and obtain possession by whatever means they saw fit.

Because of the potential for potentially unfair practice that the case highlighted, the English Council of Mortgage Lenders members have declared that they will not seek to sell a mortgaged owner-occupied residential property without first obtaining a court order for possession. However, the CML declaration specifically does not apply to commercial transactions and buy to let loans. It does not apply to vacant or abandoned properties. The CML defended the right to sell a buy to let property with tenants in place as necessary and reasonable. They pointed out that a buy to let property is no different to a commercial loan secured on premises with a portfolio of business tenants.


2009 Reforms

In the cases of mortgages/charges signed after the 2009 Act is commenced (late 2009), there will be changes to the law on obtaining possession. These provisions can be varied in the mortgage deed, in commercial cases. However, if the loan is a housing loan, the rights and restrictions cannot be varied. See tthe chapter on the Consumer Credit Act in relation to the definition of a housing loan.

The 2009 reforms provide certain preconditions to the exercise of the right to possession. The taking of possession must be for the purpose of protecting or realising the security by sale or rent. These rights can be excluded in a non-housing loan.

A mortgagee seeking possession must obtain a court order unless the mortgagor gives seven days prior consent in writing to the delivery of possession.  A court order for sale is also required. On such an application for possession and or sale, the court has  the power to adjourn the proceedings or stay (suspend) the order for possession on such conditions as it sees fit to impose. The discretion will be exercised by the court where it appears that the mortgagor is likely to be able to pay the arrears due within a reasonable time. See our separate chapter on this power.

The 2009 Act also provides that where a mortgagee has taken possession, it must proceed with the sale within a reasonable time. If this is not appropriate, it must rent the property and use the rent recovered to lower the mortgage debt.


Mortgagee in possession

Where a mortgagee obtains possession of a property by surrender, peaceable possession (where possible) or a court order, it will become a mortgagee in possession. This carries certain duties and rights.

In the case of a mortgage or debenture by a company, the bank as mortgagee in possession or a receiver may be able to carry on the company’s business if the mortgage included a fixed and a floating charge over all business assets A mortgage by an individual will, for certain legal reasons, only cover land, buildings, and fixtures. Therefore, it is not generally possible for a mortgage by an individual to allow the mortgagee in possession to conduct a business.


Powers of Mortgagee in Possession

A mortgagee in possession may sell the mortgaged property. Provided (as would be usual), that there is a power of sale in the mortgage or the statutory power of sale in the Conveyancing Act applies, the property can be sold without a court order. Alternatively, the property may be let or continue to be let to generate an income.

The mortgagee can exercise the powers itself or it may be entitled to appoint a receiver to exercise the powers on its behalf. See our separate note of Receivers. Receivers carry certain advantages.

Where there is a lease or tenancy in existence which binds the bank (because, for example, the bank consented to it or predated the mortgage), possession is taken by taking possession of the rents. This is done by giving notice to the tenant requesting payment of the rent directly to the mortgagee. It is possible to take payment of the rents without becoming a mortgagee in possession.

After the bank as mortgagee has taken possession, the borrower/mortgagor has no right to collect rent from the tenant. If the tenant pays the rent in error to the borrower after notice has been given, the mortgagee may still recover it from the tenant.


Tenancies I

Most residential investment property loans allow the borrower to grant tenancies or leases. Sometimes the loan offer will state this specifically. Sometimes it may be implied. There may a consent clause in the loan offer which has not been operated in practice. In these situations, the bank may be bound by the lease or tenancy if it has waived its right to consent.

There may be a fixed term lease, in which case, the bank is bound to wait until after it expires to obtain vacant possession. There may be a rolling tenancy from period to period. It is generally possible to terminate a rolling tenancy in order to sell the property. At least two months’ notice is usually required. Rolling residential tenancies have certain protections after six months.

The bank may choose to sell a property under its power of sale with the tenant in place. This may be the most appropriate means of realising the security. The bank has some general obligations in relation to how it exercises its power of sale. Unless there was some financial good reason to the contrary, a sale with a tenant in place will be permissible. If a much higher price could be obtained with vacant possession, there may be a duty to obtain possession.


Tenancies II

If the tenancy does not bind the bank (because for example, it was made without consent) the bank is not entitled to demand rent as such. However, the bank may create a new tenancy by requesting and accepting rent. Alternatively, the bank may take action for possession of the property.

Peaceable possession other than by way of the tenant’s surrender is not possible usually with residential property. A Residential Tenancies Board order is usually required.

A mortgagee in possession of land may accept surrenders of leases and grant new leases under certain conditions set out in the Conveyancing Act. The powers may be delegated to a receiver.


Furniture and Movables

When or tenancy or lease of furnished property is in being, the mortgagee under a mortgage by an individual will have no claim to the movables and furniture. Strictly speaking, it is necessary to apportion the rent between the buildings, land, and fixtures on the one hand and movable items/contents on the other hand. Contents and movables will be included in the letting, even though they belong to the borrower.

If furniture or other effects are left on the property, a mortgagee in possession may obtain an order for their removal.  Potentially, the borrower could be in breach of a court order and be liable for contempt of court if he fails to remove them.  Alternatively, if a judgment for the debt is executed, the sheriff may enforce against the goods.

Movables on a premises may be an impediment. A mortgagee in possession is generally be entitled to remove an impediment.  It may be entitled to the cost of removal. The mortgagee is generally allowed to store movables and to add the storage costs and expenses to the debt provided they are justifiable. Alternatively, the mortgage itself may specify what is to happen.


Application of Proceeds I

A mortgage or is obliged to apply the receipts from the property, such as rents and profits as follows

  • paying outgoings,
  • paying interest on prior mortgages,
  • paying costs and expenses;
  • paying interest on the mortgage;
  • paying any surplus to the person next entitled, which will generally be applied in the reduction of the principal.

A mortgagee who takes possession is not allowed to take any advantage beyond securing payment of the mortgage. It must use reasonable diligence to use the property in order to realise the money due, having regard to the fact that the property may ultimately be restored to the mortgagor if there is a surplus.


Application of Proceeds II

A mortgagee must “account” for rent and profit actually received and also rents and profits which would have been received, but for its willful default.  The mortgagee must, therefore, take reasonable care to maximise the return from the property. This duty is often reduced by the terms of the mortgage.

The person to whom the mortgagee must account for any surplus (if any) depends on who is interested in the property after the mortgagee. There may be a second mortgage. If there is none, the person to whom account is made, is the borrower/owner.

A mortgagee in possession cannot charge a commission but can recover for necessary outlay and expenses. A mortgagee in possession is generally entitled to claim the cost of rent collection and agents’ expenses. If the mortgagee in possession manages the property through an agent or employees, it may generally charge for their salaries. The mortgagee is not generally allowed anything for its own internal costs in collecting rents although the mortgage may provide that a commission is payable.


Duties of Mortgagee I

If the mortgagee itself takes possession and uses the property, it would be obliged to pay rent for occupation. This is not the case if the occupation is for the purpose of a sale within a reasonable time.

If a property is vacant and it is appropriate, the mortgagee should attempt to let it at a proper rent.  However, there is no duty to do so, if this would impede the sale or if the tenant might obtain statutory rights.

A mortgagee will only be liable in respect of rent he would have received if the failure to receive it is due to his default, mismanagement or fraud. This could arise by removal of a satisfactory tenant, by letting it at undervalue or by making improper use of the property.

A mortgagee in possession must take reasonable care not to damage or neglect the property. It must take reasonable steps to protect the property such as securing it against vandals. The mortgagee should insure the property. The mortgagee is entitled to add the reasonable and proper expenses incurred in preserving the property from damage. The principle of salvage give priority in respect of certain necessary expenditure, even where that priority would not otherwise be available.


Duties of Mortgagee II

The mortgagee in possession has a duty to take reasonable care. It may carry out reasonable repairs, but generally, need not do so. It is not judged by the standards which an owner would be judged by. It need not increase its debt by laying out large sums beyond the immediate requirements. It need not rebuild ruinous premises.

A mortgagee in possession may make reasonable improvements to the property. The improvements should not be of a value, nature, and extent which makes it impossible or difficult for the borrower to redeem the mortgage debt.

Where the mortgagee takes possession of a leasehold property, it becomes liable on the covenants in the lease. The mortgagor will be allowed expenditure in preserving the security such as, for example, arrears of rent and expenditure to prevent forfeiture of a leasehold property.

The mortgagee may be allowed compensation paid to an outgoing tenant to obtain vacant possession. The mortgagee should inform the borrower and lower ranking mortgagees of the necessity to incur extraordinary expenses. This may be most relevant where buildings are incomplete or have become unsafe.


Other Liabilities of Mortgagee in Possession

A mortgagee in possession may exceptionally risk liability for environmental obligations. This depends on the type of pollution involved and the circumstances. In some circumstances, a mortgagee in possession may be in rateable occupation of the property and the liable for business rates.

A mortgagee in possession usually has control of the property and is therefore liable for accidents that occur. A mortgagee should, therefore, obtain appropriate liability and buildings insurance.

A mortgagee in possession must take reasonable care of the property. This includes a duty to take carry out reasonable repairs. The cost of reasonable repairs will be allowed in the accounts as to entitlement. It will not be held responsible for the deterioration of the property by ordinary lapse of time unless it is proper for such deterioration to be remedied. However, it need not increase the debt substantially by undertaking significant improvement. It need not rebuild a ruinous building law

Generally, there will be powers in the mortgage which will be of assistance to the mortgagee. There will generally be a power to undertake repairs if the mortgagor does not do so and recover the cost for the mortgagor.


Improvements I

Under appropriate circumstances, a mortgagee may make improvements. There may be powers in the mortgage deed which are of assistance.  A mortgagee may also carry out works as are necessary to prevent a forfeiture of the title. They must be reasonable having regard to the nature of the security. They should not improve the property, so as to make it difficult for the mortgagor to redeem. This is part of the equitable principle that a mortgagor who redeems must pay all that is equitably due.

A mortgagee in possession needs to take great care in undertaking improvement works. Issues arise as to whether the expenditure will be allowed under the default rules as against the lower ranking mortgagees and the mortgagor. Particular problems arise in applying the rules where there are known later charges, which limit the priority of the earlier mortgagee in respect of the extent of its secured debt. The better course is to agree the improvement works with lower ranking mortgagees and/or the mortgagor who rank lower in entitlement to the proceeds of the sale.


Improvements II

A mortgagee will not lose his right to claim for improvements by not notifying the mortgagor or lower ranking mortgagees, provided the works are reasonable and beneficial. Where the mortgagor consents, it does not necessarily follow that the mortgagee will recover the cost of unreasonable expenditure.

The mortgagee will have a stronger claim to repayment if it can be shown that the improvement added to the sale price to the extent of expenditure or more. In appropriate circumstances where there are buildings which are incomplete, the mortgagee may complete them or even pull them down and rebuild them. The rebuild or improvement must add to the substantially to the value.

The Conveyancing Act sets out the mandatory order of entitlement to payment of the proceeds of sale when the statutory power is exercised. Included are payments of all costs, charges, and expenses properly incurred by him as an incident to the sale or attempted sale or otherwise. Improvement expenditure may be allowable under this heading, depending on the circumstances.


Salvage

There is a separate principle of salvage. Salvage is an exception to the normal rules as to priority. Salvage involves action taken by one interested party for the benefit of all other interested parties.

An example would be where a mortgagee pays rent arrears in order to avoid forfeiture of the lease under which the property is held. The payment is likely to have priority, even when paid by a lower ranking mortgagee. This is because it is made to save and secure the position of all mortgagees. This is an exception to the normal rules.

Generally, the principle is only applicable to removing legal risks. There must be an absolute necessity. It is possible the courts may apply the same broad equitable principles to necessary physical works.


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