Rights to Protect Security I
A mortgagee has rights under the general law to protect its security. A court application may or may not be necessary or appropriate. There may be a number of options. In some cases, it will be possible to exercise rights without the assistance of the court. In other instances, court assistance will be necessary.
Generally, the costs of necessary measures to protect and realise the security can be added to the mortgage debt. Application to court may be by way of an injunction or the appointment of a receiver.
The mortgagee is entitled to protect the value of its security. It can take action against a mortgagor by enforcement of the mortgage or by court injunction to prevent damage to the property. It may take possession or appoint a receiver for a period to protect the security, provided, as is likely that there is a breach of the mortgage conditions.
Where something happens in the course of a mortgage which jeopardises the security, the terms of the loan agreement or mortgage deed should be reviewed. The mortgage deed should be tailored to the type of security so that the lender has the most appropriate types of rights.
Rights to Protect Security II
A court will generally restrain actions and dealings by the mortgagor in breach of the mortgage. The mortgagee may take action where the mortgagor is damaging the physical security. This might include mining, dumping of waste cutting of timber or other action which is prejudicial to the value of the security. This action may be restrained by court order.
Generally, court protection may be necessary to protect against action which interferes with the secured assets or which might potentially jeopardise the security. What is appropriate will depend on the nature of the asset. It is not possible to set out all the circumstances where this could apply, A common sense view of action which undermines the value of the security should be taken.
A mortgagee is entitled to all additions to the property such as buildings, fixtures, and improvements They accrue for the mortgagee’s benefit. The mortgagor cannot generally dispose of, break, damage or destroy them.
The mortgage deed will generally set out detailed covenants and obligations on the part of the mortgagor which are designed to protect the security. See our chapter in relation to covenants in mortgage deeds. There will typically be specific provisions in relation to the following;
- the obligation to keep the property repair; in default the lender may be entitled to enter do the works and charge the cost;
- not to damage the property;
- in development loans, obligations to complete the development;
- to maintain proper insurance and do nothing to jeopardise the policy;
- insure if the mortgagor neglects to do so;
- not to do or allow anything which renders void the insurance policy;
- notify insurance claims;
- pay ground rents, service charges;
- comply with all title conditions;
- notify enforcement by head landlords;
- notify any adverse local or central government legal action e.g. compulsory acquisition enforcement of legislation breach;
- pay compulsory purchase acquisition monies;
- notify litigation and claims in relation to the property;
- prohibitions on leases, lettings and sharing possession without consent
- no further mortgages or charges without consent
- not to permit of acquisition of easements without consent
The types of clauses should reflect the type of property and the circumstances. Breach of the covenant will entitle the mortgagee to accelerate the obligation to pay the full loan and exercise its enforcement options. This will give the lender the opportunity to make the mortgagor “come to the table” and deal with it in relation the issue that has arisen.
The solution may involve remediation of the problem, the provision of extra security, payment of compensation monies to the lender (e.g. an insurance claim, CPO compensation, sales of part). It allows the lender the practical option of further securing its position if other security is available. If no solution is reached, the mortgagee may appoint a receiver or take possession to protect its position.
Generally a default on one loan agreement will trigger default on other loan agreements with the lender or with other lenders because of cross default clauses. A default may have adverse consequences across the borrower’s portfolio of assets. On the other hand, a cross default may allow the opportunity to negotiate on all loan agreements with the borrower.
It may be that another property is held as security for all sums due or collateral security under the loan. If not, then it may be appropriate to ensure or confirm that they are cross secured so that both assets are available. The cross default may give the opportunity to amend the loan agreement or mortgage to ensure that this is the case.
Sometimes, borrowers are party to loans agreements with spouses, relatives and business partners on one loan agreement while being a sole borrower or having different partners on another loan. Generally each borrower is jointly and severally liable on the whole of each facility. This means that each borrower can be personally sued for the whole of the loan monies which can be recovered from any one of them. It is then a matter for that borrower to pursue his partners for a contribution of his appropriate share. Some partnership loan facilities, particularly investments organised by third parties are not joint and several and may be “limited” recourse.
It may be that the security on another facility with the lender is already available because there has been a cross-default and that facility is “all sums due”. If there are other partners on that facility, then the borrower’s share of the equity only, is available, unless the other owner’s consent.
If there is cross default and cross security with a facility on a family home, then there may be limitations on the right to secure further advances to which a non-owning spouse has not given specific prior written consent.
A cross default may arise because of a personal or business partner has defaulted on another facility. This of itself can have cascading effect across the borrower’s portfolio.
Protective Receiver I
A receiver may be appointed under the statutory power in order to protect and preserve the security. The right to appoint a receiver arises on breach of the conditions in the mortgage deed.
A court-appointed receiver is a flexible means of protecting security. It is more flexible and carries more weight than a receiver appointed out of court. Interference with a court receiver may be punishable as contempt of court. A court receiver may be appointed over any type of property and not just land and buildings.
A court-appointed receiver is obliged to get in and take charge of rents and to manage a secured property where the security is in jeopardy. The application to court may be made without notice, under certain circumstances, where this is necessary as a matter of practical necessity. See our chapter in relation to court receivers.
A lower ranking equitable mortgage may be entitled to appoint a receiver to protect its security. He must account to the prior legal mortgagee and is appointed without prejudice to the rights of the prior legal mortgagee.
Protective Receiver II
A receiver may be appointed as a pre-emptive step in litigation or as a final order in litigation. The litigation must involve some claim such as an order for sale of the security. The receiver is a protective pre-trial measure.
The mortgagee can protect its title from the claims and actions of third parties. If, for example, a third party tries to make a legal claim against the mortgaged property, it is entitled to defend it and is entitled to take legal action to protect the property. If a third-party takes possession of the property, the mortgagee is entitled to take legal action to challenge it.
The right applies equally to protecting the physical land and buildings or other secured assets. The mortgagee is entitled to bring legal action to prevent deterioration of the property. If a property is to be compulsorily acquired, it is entitled to notice and the compensation.
The mortgagee is entitled to possession of the title deeds. This is an important right because it protects against the mortgagor dealing with the property and creating mortgages by deposit of the deeds. The mortgagee often requires the Land Certificate and Certificate of Charge in Land registry cases for much the same reason.
The mortgagee is responsible for the safekeeping of the mortgage deeds. Strictly speaking, the mortgagee is not entitled to custody of the Land Certificate, but it is usually required. This will be of less relevance with the withdrawal of Land Certificates.
The mortgagee has the right to protect its title. This includes the right to perfect and complete its security where this has not been done.
A mortgagee has the power to insure the property against the usual damage and destruction risks. The premiums are charged on the property as an addition to the mortgage monies with the same priority.
The amount which may be insured for not to exceed two-thirds of the amount required to restore completely destroyed property or the amount specified in the mortgage. The mortgage usually obliges that the insurance is kept up by the mortgagor or allows an unrestricted power to insure in default.
Under the 2009 law reforms, the power to insure is modernised. There is a power to insure against loss and damage from fire other risks commonly covered by a policy of comprehensive insurance. The mortgagee will be able to require money received to be applied towards making good the loss or damage or towards discharge of the debt.
Ground Rent and Service Charges
The borrower may refuse or neglect to pay ground rent due under his title. In the case of leases of apartments and commercial properties, failure to pay service charge may lead to the title itself being forfeited. The lender is entitled to pay these liabilities to preserve the assets and recover them in addition to the mortgage debt.
In the case of the mortgages of apartments, management companies frequently inform the lenders of breaches with a view to ensuring the service charge is collected through the mortgagee.
District Court Possession Order
Under the 2009 Act Reforms, it is possible to apply to the District Court in the case of abandoned property to protect the security. If there are reasonable grounds for believing a mortgagor has abandoned the property and urgent steps are necessary to prevent deterioration, damage or entry by trespassers or unauthorised persons, the mortgagee will be able to apply to the District Court for an order authorising possession.
The District Court order may be granted on such terms as the court decides. It may state the period during which the mortgagee may retain possession and it may specify works which may be required to protect the property. It may specify the costs and that they may be added to the mortgage debt. The mortgagee does not have the duties of a mortgagee in possession to account “strictly” during the period in possession.
The right of consolidation is the right of a mortgagee to require a borrower who has two mortgages to redeem both or neither. This is an exception to be mortgagee’s rights to redeem.
A borrower may have two loans one which is well secured with a low loan to value ratio and another which is “underwater”. The purpose of consolidation is to prevent injustice to mortgagees by allowing redemption leaving inadequate security. This is a different issue to that of whether the mortgage itself is an all sums due security. This may be the case irrespective of consolidation.
The Conveyancing Act excludes the right of consolidation unless the mortgage otherwise provides. It provides that a mortgagor seeking to redeem a mortgage is entitled to do so without paying money due under a separate mortgage of other property. This position only applies in so far as the mortgage deeds do not change this position.
Under the 2009 law reforms, the rights of consolidation are abolished for housing loans. A mortgagor is entitled to redeem any housing loan mortgage without having to pay money due under any other mortgage, irrespective of whether that mortgage is of the same or other property. However, it will still be possible to provide for an all sums due mortgage.
There are conditions and restrictions on the right to consolidate. Where there is a later mortgage, of which the mortgagee has notice, the right to consolidate does not hold good against the lower ranking mortgagee. Otherwise, the mortgagee could undermine the rights of the second mortgagee by taking a third mortgage.
There are certain other conditions. The same mortgagor must originally have created both mortgages. The right is an equitable right and the courts, therefore, have regard to principles of fairness in applying it. There are circumstances where it will not apply where it could prejudice a third party, such as another mortgagee.
The right of consolidation applies to all type of property including real property and immovable property. Each deed should be considered separately. It may be enough that there is a right to consolidate in one deed. The right of consolidation also applies to a later lower ranking mortgagee who redeems an earlier mortgage.
The rules on consolidation can be complex. There are scenarios under which a lender by purchasing another lender’s mortgage can gain a right to consolidate that it would not otherwise have.
Marshalling is a principle which may sometimes be to a mortgagee’s advantage. It can arise where a mortgagor mortgages one property (A) to one lender, and the same property (A) and another property (B) to another mortgagee. Under the principle, the mortgagee who has two securities may be compelled to satisfy itself from property B where property A is insufficient to satisfy both mortgagees’ debts.
If, for example, a mortgagor mortgages property A and property B to the first mortgagee to secure a €100,000 debt. He may subsequently mortgage A to another mortgagee to secure a secure €70,000 debt. If the normal rules applied, the first mortgagee could take €50,000 from each property leaving the second mortgagee’s security inadequate. If the securities are marshalled, the first mortgagee is obliged to take as much as possible of his security from property B leaving property A mortgaged for the balance only.
It is not enough that one mortgagee has two securities, while the other has just one. Certain conditions apply. The right arises against the mortgagor of both properties. It is not a right that applies between the creditors. It does not interfere with the right of the first ranking mortgagee to realise his security in the way he chooses.
The first ranking mortgagee may realise his security in such a way as to render one of the securities inadequate for a subsequent mortgagee. The principle operates so that subsequent mortgagee will be subrogated to the prior mortgagee’s rights over the first property (A). The principle is an equitable principle so that it is only available in accordance with principles of fairness. It will usually be necessary to apply to the court to secure the right.
Marshalling will not apply where it would prejudice a third-party. If the property (A above) is subsequently mortgaged to a third mortgagee, marshalling will not be allowed so as to prejudice the rights of the third mortgagee.
Subrogation may be available, subject to court discretion and principles of fairness. Subrogation is a general principle which applies where one person discharges the debt due to another secured person. In this case, the person discharging the debt may be subrogated to the rights of the person whose debt has been discharged. If that person had security, subrogation may act so that the person discharging the debt, steps into that other’s shoes in relation to the security.
The principle may operate where a guarantor or lower ranking mortgagee redeems an earlier mortgagee. The right to the mortgagee’s security is equitable where the mortgagee’s debt has been redeemed. There may also be statutory right, which reflects the same principle, to keep the debt and the earlier mortgage “alive” and take an assignment of them.
The principle of subrogation has wider application and may be available in situations where monies have been mistakenly or fraudulently used to redeem another security. In these cases, the rights of the party whose money was used to redeem another mortgage are subrogated to those rights.
A Court Order will generally be necessary to give effect to subrogation. It is a discretionary order so that the court will only make it available if it is fair and reasonable under the circumstances.
A so-called Quistclose trust (named after a legal case) may arise where a loan contract states that monies are to be used for a particular purpose. A loan offer will typically specify the purpose for which loan monies are to be used. It does not follow that a Quistclose trust will be available. The designated use has to be quite specific.
Where a Quistclose trust is held to apply, the lender may acquire a property interest in loan monies after they have been transferred. This cuts across the normal principle by which monies lent belong to the mortgagor and are his property. There may be separate security but the mortgage monies themselves are not normally secured.
A Quistclose trust may be important in insolvency. If the lender retains a property interest in the monies then this gives entitlement to these monies in insolvency over and above other creditors. The cases in which Quistclose trust has been made available by the courts have been where the monies are not used for the intended purpose or the borrower goes into insolvency before using them. When monies are used for a particular purpose and exchanges into another asset, it may be possible to trace these funds. That is to say, it may be possible to take security over the proceeds of the funds concerned.
Redemption is a right that is usually thought of as belonging to the mortgagor. However, the right can also be exercised by lower-ranking mortgagees, so as to improve their security position.
The mortgagor’s right to redeem is fundamental. A mortgage can be redeemed at any time up until sale. In some instances, it may be necessary for the mortgagor to give six months’ notice of his intention to redeem. This does not apply where the mortgage monies have been demanded or the mortgage is being enforced.
The cost of repayment and redemption fall on the mortgagor. The Consumer Credit Act prohibits redemption fees in the case of mortgages other than compensation in a fixed interest mortgage.
A mortgagor who redeems the mortgage debt may require the mortgagee to assign the mortgage debt and convey the mortgage to a nominee. If the mortgagor redeems a mortgage, he is not allowed to maintain the mortgage so as to claim an interest in priority to a subsequent mortgagee. He cannot set up a mortgage against a later mortgagee.
Redemption may be undertaken by a lower-ranking mortgagee, in a priority to later mortgagees. The later mortgagee can require the debt and mortgage deed to be assigned. A purchaser of land who acquires property land from the mortgagor may also acquire the mortgage separately from one of the mortgagees and keep it alive so as to keep priority over later mortgagees. There are limitations to this right to prevent abuse.
A person who is entitled to redeem a mortgage may apply for a court order for sale instead of redemption. This will not generally be granted if there are not sufficient monies to discharge the loan. Where a borrower wishes to sell to reduce his debt but the lender does not believe the sale is opportune, the lender’s interests will generally prevail. Exceptionally, a court may allow a sale where there are not enough proceeds, as for example where a borrower is ill and needs to move house.
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Conveyancing Act, 1881
Interpretation of property, land, &c.
(xviii.) Her Majesty’s High Court is referred to as the Court
Sale; Insurance; Receiver; Timber.
Amount and application of insurance money.
(4.) Without prejudice to any obligation to the contrary imposed by law, or by special contract, a mortgagee may require that all money received on an insurance be applied in or towards discharge of the money due under his mortgage.
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