The Power of Sale

The Conveyancing Act provides a statutory power of sale for the mortgagee under a mortgage by deed. This power applies unless the contrary is stated or implied. This would be most unlikely in the case of a bank mortgage. Accordingly, a mortgagee can usually sell a mortgaged property without going to court. The main purpose of going to court is to secure vacant possession of the property where this cannot be obtained peaceably or by agreement.

The power of sale is exercisable by the mortgagee or persons to whom it has transferred the property. The mortgagee may give a good receipt to a purchaser on a sale. The purchaser does not have to look any further. The purchase from the bank/mortgagee is equivalent to (and for the reasons below, in some respects, better) than a purchase from an owner.

Where there are successive mortgages, the first mortgagee may exercise the power of sale without the consent of later mortgagees. It must account to them for surplus sale proceeds. The first mortgagee can sell the property, free from later mortgages. This has the advantage that, unlike a sale by the borrower /mortgagor, it will not be necessary to agree on the value of the security with and procure releases from later mortgagees, where the security value does cover not all mortgagees’ debts.

The powers of sale under the Conveyancing Act may be amended by the mortgage deed. Typically, the power of sale arises on a financial or other default by the borrower. The exact position will depend on the particular mortgage deed.

Exercise of Power I

The statutory power of sale must both “arise” and become “exercisable” under the current law. The power of sale is usually deemed to arise on the signing of the mortgage or at an early date after that.

The mortgage monies must be due under the terms of the loan agreement. This will usually happen by the acceleration of the obligation to repay the entire loan monies, on the happening of a default. A demand in writing may be necessary under the terms of the loan agreement or mortgage deed in order for the total loan monies to be immediately due and payable.

The power of sale is “exercisable” in the following circumstances. The same provisions apply under at the 2009 reforms. These default rules can be varied by the terms of the mortgage deed, except in the case of post-2009 reform housing loans mortgages. The default requirements require that one of the following conditions must apply;

  • notice requiring payment of the mortgage money has been served on the mortgagor and default has been made in the payment of the money or part of it for three months after a service;
  • the mortgage is in arrears and unpaid for two months after becoming due and some interest under the mortgage is in arrears;
  • there has been a breach provision in the mortgage deed on the part of the mortgagee other than payment of covenant, in respect of mortgage money and interest

The ground most commonly relied on is that interest is in arrears and unpaid for two months after becoming due A notice requiring payment is not required in these circumstances.

Exercise of Power II

Where other grounds are relied on, notice must be served on the borrower. This will be in the form of a demand for immediate payment with notice that if it is not paid before the expiration of three months, the mortgagee will proceed to sale. The notice must be served on the borrower’s last known address. The restrictions are commonly modified in mortgage deeds so that the power arises with fewer or no pre-conditions.

A purchaser who purchases a property sold under a power of sale is protected against irregularities. His title cannot be challenged on the basis that the sale was not authorised or that any required notice was not given or that the procedure was not followed properly. If any person suffers loss or damage by reason of such irregularity, their rights are against the mortgagee only.

Timing and Terms of Sale

The power of sale is given to the mortgagee to enable it to satisfy the mortgage debt. Therefore, the mortgagee’s interests come first. Its duty is to obtain the best price reasonably available. However, the mortgagee may sell the property even though it may be at a disadvantageous time, e.g. in an illiquid or depressed market.

The mortgagee must, have some regard to the interests of the mortgagor and later mortgagees. It cannot unfairly prejudice or recklessly sacrifice the interests of the borrower and later mortgagees. If the power of sale is exercisable, the mortgagee must take reasonable care to obtain the best price reasonably available in the market at that time.

The timing of the sale is usually the mortgagee’s prerogative. The mortgagee does not have to consult with the borrower or subsequent mortgagees. It has freedom of action, provided it takes care to obtain the best price reasonably available at that time. It is well established that it is a matter for the mortgagee to choose the time of sale. It need not wait until the market picks up.

Duties in relation to Sale I

The mortgagee’s duty is to obtain the best price reasonably available.  A mortgagee, who sold the property at “crash sale” valuation to achieve immediate disposal rather than offering it in the open market, was held to have breahed its duty. It may be appropriate to take advice in relation to the sale from a valuer or surveyor. The need for advice is greater where the property is unusual.

The mortgagee’s duty is not necessary to obtain the best price, but to use reasonable care to do so. A mortgagee in selling must behave in the way a reasonable man would do in the realisation of his own property.

The Supreme Court has stated the older “good faith” test is too lenient on the mortgagee. In that case, the property was sold with tenants in place, when there was auctioneer’s advice in the circumstances that vacant possession would realise a greatly enhanced price. The Supreme Court restrained the sale.

Duties in relation to Sale II

A mortgagee must also bear in mind the interests of later mortgagees and mortgagor in obtaining the best price. The mortgagee may take action which is disadvantageous to them. He is free to decide when to sell. It is not generally under an obligation to postpone the sale until the market has improved nor to speculate for the mortgagor’s benefit. The mortgagee exercising a power of sale is entitled to act in its own interests. A mortgagee may accept the best bid, at auction even if it is poorly attended.

It is possible in the current financial crisis that the courts will hold the mortgagee to a higher duty to later mortgagees and the mortgagor, even in cases of pre-2009 Act mortgages. However, the mortgagee’s rights are likely to continue to be given preeminence.

Any clause attempting to wholly exclude a mortgagee’s responsibility in a mortgage deed would be strictly interpreted against the mortgagee’s interests.

Terms of Sale

Where property is tenanted and vacant possession would obtain a much higher price, the mortgagee should in appropriate cases, attempt to obtain vacant possession.  A mortgagee may be liable if he fails to undertake rent reviews with the tenant where available.

The mortgagee should consider whether a sale by auction, tender or private treaty is most appropriate.  A sale by action is not necessarily required. However, a sale by auction has the advantage of being demonstrably public. The mortgagee should not impose unnecessarily restrictive sale conditions. The mortgagee may protect himself by adding appropriate conditions to the sale contract.

The mortgagee himself must not purchase the property. Likewise, persons connected to the mortgagee must not purchase.

The mortgage or charge is as effective as a conveyance to the mortgagee. It does not matter what has happened after the date of the mortgagee deed (e.g. the later death or bankruptcy of the mortgagor is irrelevant).

Terms of Sale II

In the case of a leasehold property, landlord’s consent may be required for a sale. In the case of long apartment leases, landlord’s consent, if required, cannot generally be unreasonably withheld. A ground landlord can generally only withhold consent for objectively justifiable reasons, such as to secure payment of outstanding ground rents.

The secured property may be sold in any one or more of the following ways

  • sale of the whole or any part;
  • sale by auction or private sale;
  • sale together or in lots;
  • subject to such conditions as may be imposed

A mortgagee has certain other powers in the context of a sale. These include powers to impose conditions and restrictions on the sale of part of the property and power to grant a right-of-way or easement, as may be necessary.

A receiver may sell the property, provided he has appropriate powers in the mortgage.

Sale Procedure

The mortgagor must be given notice in writing of the intention to exercise the power of sale unless this is varied by the mortgage deed. The notice must be in writing and addressed to the mortgagor. It is generally sufficient if left at the last known place of abode business or may be affixed left at the land or property or sent by registered post to the person by name.

The failure to give notice would not invalidate the sale. However, the mortgagor may have rights against the mortgagee for loss (if any) caused by failure to notify.

The statutory power of sale is usually available in the case of all mortgages by deed of land and buildings. It also applies to mortgages by deed over other types of assets.

When the property is sold under the statutory power, it cannot be invalidated by a later claim that the power of sale had not arisen, that notice was not given or that the power was improperly exercised. If any person suffers loss by reason of a non-authorised or irregular exercise of the power, he or she has rights of compensation or loss incurred against the person exercising the powers.

Although a purchaser is not obliged to make enquiries regarding the sale procedure, he cannot shut his eyes where there is obvious and clear impropriety and failure to comply with the conditions.  If, for example, a sale is clearly at an undervalue and the power is being patently exercised improperly, the purchaser cannot purchase immune from these defects.

Post-Sale Completion

A buyer who buys from a mortgagee selling under its statutory power of sale takes free from the rights of lower ranking mortgagees and the mortgagor. There is sometimes a specific right of sale in the mortgage deed. However, only a sale under the statutory power enjoys the above protection.

Once a sale contract is entered, it is too late for the mortgagor to pay off a loan and redeem. The entitlement is converted into an entitlement in respect of the proceeds of sale only. If there are insufficient proceeds of the sale, the rights are effectively terminated.

It is the duty of the seller of property to apply to the Land Registry to have lower ranking mortgages removed from the register (after sale). The Land Registry rules allow for a cancellation of lower charges on the sale under a registered charge

The mortgagee is bound to pay the proceeds of sale under both the existing law and the 2009 Act as follows

  • paying prior mortgagees which the property was sold free from (where agreed);
  • paying the cost charges and expenses of the sale;
  • paying mortgage money interest costs and other monies to the mortgagee;
  • paying the remainder to the person entitled; either lower ranking mortgagees or the mortgagor

Court Order if no Deed

An equitable mortgagee by deposit will not enjoy the power of sale unless there is a deed accompanying it.  A contract to create a mortgage is an equitable mortgage. This must be by deed (signed as a deed) if the implied powers of sale are to be available. This would be unusual. The holder of an equitable mortgagee may take a power of attorney to enable him to vest the legal estate in the buyer in exercising the power of sale.

Unless the holder of a mortgage by deposit or an equitable mortgage has a statutory or express power of sale, it will need to apply for a court order for sale. In a court-ordered sale, all mortgagees and persons having an interest in the land must be ascertained.  The court directs an enquiry under through the High Court Examiner’s office as to the charges and mortgages which affect the land.

2009 Law Reforms I

The 2009 law reforms abolish the distinction between the power of sale arising and becoming exercisable.  Under the Act, the mortgagee’s rights arise as soon as the mortgage is created. However, there will be other, much more significant restrictions on the exercise of the rights under the 2009 reforms. In particular, a court order authorising the sale will be required.

In the case of mortgages signed after the 2009 reforms, the power of sale will not be exercisable until 28 days’ notice has been given to the mortgagor in the prescribed form. The sale must be for the purpose of protecting the security property or realising its value. The protection of purchaser is still provided for. The purchaser need not enquire into the position in relation to the sale procedures.

The provisions can be and usuall are excluded in mortgages, other than hosuing loan mortgages.

2009 Law Reforms II

Building Societies have legal duty act to sell the secured property at the best price reasonably attainable in so far as reasonably practicable. This now applies to all mortgagees under the 2009 Act.

Within 28 days of completion of the sale, the mortgagee is obliged to serve a notice on the mortgagor containing certain information in relation to the sale. In addition, the mortgagee must account for the proceeds of the sale. It must prove the sale details and the proper sums and expenses paid. If there are excess proceeds it must prove to whom they belong.

The mortgagee itself may not directly or indirectly purchase the property. A sale to a connected company may be vulnerable to be set aside.

Court Order for Sale

In any application where appropriate, the court has the power to order sale. There is generally no absolute right to require a sale. The court has the discretion to grant or withhold a sale. A court order for sale can be made in conjunction with a possession application, a well charging order and an order for accounts and enquiries as to entitlement.

A court order for sale will not generally be required. Usually, it will be possible to exercise the power of sale “out of court” with tenants in place or with vacant possession secured by surrender, peaceful possession or by court order. Accordingly, the court order for possession will suffice. In the case of mortgages, after the 2009 law reforms commence, a court order for consent to exercise the power of sale out of court will be required.

When an order for sale is made, a person in occupation is bound to deliver possession to the purchaser or such other person as the court directs. Failure to obey can be enforced against by committal to prison until obedience is forthcoming.

Power to Order Sale

The High Court and Circuit Court have the power to make orders for sale, well charging orders and orders for accounts and enquiries. The orders may be sought together with or separate to an order for possession. The procedures are broadly similar to the procedure described in earlier chapters in relation to High Court and Circuit Court orders for possession.

The mortgagor or any person entitled to redeem may apply to the court for an order of sale. A subsequent mortgagee is entitled to redeem and may apply for an order for sale. A court will not order a sale at the request of a mortgagor or lower ranking mortgagee if the proceeds will not cover the debt, other than in highly exceptional circumstances.

If the mortgagee can demonstrate some tangible benefit, of which he will be denied if a sale is ordered, the court will rarely exercise its discretion against its wishes. This would occur if the proceeds would not discharge the mortgage debt, leaving an unsecured shortfall.

Well Charging Order and Order for Sale

There are some circumstances in which a well charging order and a court order for sale are necessary or desirable. In these cases, the mortgagee must obtain well charging order first, before the sale will be ordered. This is an order confirming that the security is validly in place. There will usually be no power to sell out of court because there is no competed mortgage by deed by the borrower so that a court order for sale is required.

A loan agreement or solicitor’s undertaking which, for whatever reason, has not been completed and registered is an equitable mortgage i.e. the right to have the agreed thing done. An equitable deposit of the deeds and a judgment mortgage also lack a power to sell out of court. Each of these types of mortgage is enforced by a well charging order and order for sale.

The Examiner

Many aspects of a court sale are undertaken under the supervision and direction of the office of the court Examiner. The Examiner is an officer of the courts, who deals with certain types of matters consequent on or implementing a court order. The Examiner is in some respects like a judge and has many of the same powers. The Examiner has the power to summon witnesses and examine them under oath. Failure to reply truthfully or at all is subject to the same sanctions as contempt of court.

The Examiner approves contracts, fixes conditions of the sale, takes account, directs enquiries of the mortgages that affect the property and deals with other matters required to sell the secured asset and distribute its proceeds of the sale to the persons entitled.

Once the examiner has concluded, the results of examiner’s proceedings are embodied in a certificate. This will set out the items that have been allowed and specify how the distribution of sale proceeds should be made. Once the certificate has issued and is filed in court, it becomes a binding. There are court procedures by which it can be challenged in very limited way within, a very short time.

Conduct of Court Sale

Where a sale is ordered, it may be undertaken by way of private tenders, tenders before court or auction. Alternatively, the sale is undertaken by private sale under the direction of the Examiner. The court will have regard to the circumstances, the expense, and delay.

The court will give conduct of the sale to a party, usually the mortgagee and his advisors. The mortgagee must initiate and make the necessary applications to the Examiner. The procedure commences by the issue of a Notice to Proceed which is issued by the court office and served on the other party.

The Examiner holds daily lists or appointments at which the various stages are dealt with. The Examiner gives directions regarding the preparation of the sale conditions. Title documents are referred to a court-appointed barrister for preparation and approval of the sale conditions.

A valuation is usually directed by the Examiner for the purpose of fixing a reserve, to be given by an independent valuer. The valuation should not be disclosed so that it remains confidential. It is usually placed in a sealed envelope. The particulars of sale are signed by the solicitor who arranged the sale. The best available price must be obtained. The highest price at auction is normally accepted. The sale proceeds are paid into court.

Order for Accounts and Enquires

An order for accounts and enquiries can be made in any other mortgage proceedings. Where the court makes an order for sale, it will usually direct that the sale is made under court supervision and that accounts and enquiries are made in relation to the entitlement to the proceeds of the sale.

An order for accounts and enquiries is for the purpose of ascertaining the allowable, expenses and costs, the amounts due to each mortgagee, the respective priorities and the required distribution of funds. The procedure is undertaken under the auspices of the Examiner.

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