Mortgages - Lender's powers and duties

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Overview

Exploring a mortgage lender's powers and responsibilities is key for SQE1 FLK2 exam candidates. This area covers the legal dynamics of the lender-borrower relationship, including the lender's rights to secure their interests and their obligations to act fairly. Understanding these ideas is vital for handling complex mortgage law issues, from defaults to borrower protection. This article delves into the legal principles, statutes, and case laws that shape the lender's powers and duties, providing students with the comprehensive knowledge needed for the SQE1 FLK2 examination.

Legal Framework of Mortgage Lenders' Powers

Statutory Foundations

Mortgage lenders' powers are primarily based on statutory laws, particularly the Law of Property Act 1925 (LPA 1925) and the Administration of Justice Act 1970 (AJA 1970). These laws establish lenders' fundamental rights over mortgaged properties.

Law of Property Act 1925

Section 101 of the LPA 1925 implies certain powers in mortgages made by deed, including:

  1. Selling the mortgaged property
  2. Insuring against fire damage
  3. Appointing a receiver

These powers apply even if not explicitly mentioned in the mortgage deed, although the deed may alter or exclude them within certain limits.

Administration of Justice Act 1970

The AJA 1970 introduced essential borrower protections, especially regarding the lender's power of possession. Section 36 allows courts to suspend or delay possession enforcement if the borrower can fix the default within a reasonable timeframe.

Contractual Powers

Beyond statutory powers, lenders may have contractual rights defined in the mortgage deed, such as:

  • Demanding early repayment under certain conditions
  • Adjusting interest rates
  • Charging additional fees for administrative tasks

These rights are bound by legal and equitable constraints, including regulations on unfair terms in consumer contracts.

Key Powers of Mortgage Lenders

Power of Possession

The power of possession lets lenders take control of the property upon borrower default.

Legal Basis

At common law, the lender's right exists from the mortgage's creation. However, contracts typically allow borrowers to retain possession unless they breach the mortgage terms.

Statutory Considerations

The AJA 1970 provides important borrower protections. Under Section 36, courts can delay possession orders if:

  1. The borrower can catch up on arrears within a reasonable time
  2. The home is the borrower's primary residence

Relevant Case

In Ropaigealach v Barclays Bank plc [2000] QB 263, the Court of Appeal confirmed that a lender can take possession without a court order if the mortgage deed allows it. However, the court advised this power should be used carefully.

Power of Sale

This power allows lenders to sell the property to recover the debt.

Statutory Basis

Section 101 of the LPA 1925 grants a power of sale in mortgages by deed, becoming exercisable under Section 103 when:

  1. The mortgage money is due
  2. Payment notice is ignored for three months
  3. There's a two-month interest arrear
  4. There's a breach of the mortgage deed or LPA 1925

Equitable Considerations

While a legal right, equity requires lenders to get the best price possible, as shown in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.

Appointment of a Receiver

This power lets lenders manage the property and collect income without direct control.

Legal Framework

Section 101(1)(iii) of the LPA 1925 implies the right to appoint a receiver in deeds. The receiver acts for the borrower, not the lender.

Receiver Functions

Key tasks of a receiver include:

  1. Collecting rents
  2. Managing property upkeep
  3. Selling the property if needed

Case Example

In Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, the Court of Appeal clarified the receiver's powers derive from the deed and LPA 1925, not just the appointment letter specifics.

Duties of Mortgage Lenders

Duty of Care in Sale

While exercising the power of sale, lenders must ensure they secure the best possible price for the borrower.

Legal Principle

This duty is rooted in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and expanded in later cases. The expected standard is one of reasonable care.

Practical Steps

To meet this duty, lenders should:

  1. Obtain professional appraisals
  2. Market the property thoroughly
  3. Consider timing relative to market conditions
  4. Assess offers carefully

Case Law Development

In Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 1318, the Court of Appeal emphasized considering if delaying the sale might fetch a better price.

Transparency and Fair Dealing

Lenders must act fairly and transparently with borrowers, as mandated by legal principles and regulations.

Regulatory Framework

The Financial Conduct Authority's (FCA) Mortgage Conduct of Business (MCOB) rules require lenders to:

  1. Provide clear information
  2. Handle customers in financial trouble with care and support

Equitable Principles

Equity demands lenders avoid unfair conduct, including:

  1. Not exploiting the borrower's situation
  2. Giving reasonable notice before using their powers
  3. Not hindering the borrower's right to redeem

Respecting the Equity of Redemption

This principle provides borrowers the right to clear the mortgage after contractual deadlines.

Legal Basis

Equity of redemption exists alongside contractual redemption rights, emphasizing that a mortgage serves as security, not property transfer.

Clogs and Fetters

Attempts to hinder redemption rights are generally void. This was established in Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25 and maintained in later rulings.

Practical Application

Lenders must ensure mortgage terms don't unduly limit redemption rights. For example:

  1. Excessive early charges might be considered a hindrance
  2. Clauses preventing redemption for excessive lengths may not hold

Complex Scenarios and Exam-Relevant Applications

To effectively prepare for the SQE1 FLK2 exam, candidates should practice applying their knowledge to complex situations. Consider this scenario:

Scenario 1: Possession and Sale

A lender seeks possession...