Mortgages - Lender's powers and duties

Learning Outcomes

This article outlines lender powers and duties in mortgages under the Law of Property Act 1925 and related borrower protections, including:

• Timing and exercise of statutory powers (possession, sale, receivership) under the LPA 1925 and contractual variation of those powers
• Statutory preconditions for the power of sale, purchaser checks, and priority in distribution of sale proceeds
• Principal duties of mortgagees and receivers (good faith, reasonable care to obtain the true market value, accounting, conflict avoidance) and consequences of breach
• Borrower protections and remedies (section 36 Administration of Justice Act 1970) and the mortgagor’s jurisdiction to seek sale (section 91 LPA 1925)
• Limitation periods for debt actions and practical options where sale proceeds are insufficient
• Frameworks for SQE-style problem questions (sequencing of statutory powers, equitable duties, borrower protections, and evaluation of outcomes for all parties)

SQE1 Syllabus

For SQE1, you are required to understand lender powers and duties in mortgages under the Law of Property Act 1925 and related borrower protections, with a focus on the following syllabus points:

• statutory powers implied into a mortgage made by deed: LPA 1925 ss 101 (sale/receivers), 103 (conditions for sale), 104–105 (buyer’s protection/priorities), 109 (receivers)
• right to possession, its timing, and court control of residential possession claims (AJA 1970 s 36; AJA 1973 s 8)
• contractual variation of statutory powers and acceleration/entire balance clauses
• mortgagor’s jurisdiction to seek sale (LPA 1925 s 91) and interaction with lender enforcement
• duties when selling: good faith; reasonable care to obtain the true market value; no obligation to delay or to improve; proper marketing and disclosure
• appointment, status, and duties of receivers; the borrower’s remedies for mismanagement
• debt action and limitation periods (Limitation Act 1980: 6 years interest; 12 years capital)
• priority of mortgages and distribution of sale proceeds (LRA 2002 s 48; LPA 1925 s 105)
• rare remedy of foreclosure and its relationship to sale

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. When can a lender exercise the power of sale under a mortgage made by deed?
2. What duty does a lender owe to the borrower when selling a mortgaged property?
3. What is the effect of appointing a receiver, and who does the receiver act for?
4. What protection does a borrower have when a lender seeks possession of a dwelling house?

Introduction

Mortgage lenders in England and Wales have significant powers to enforce their security if a borrower defaults. However, these powers are balanced by duties designed to protect borrowers and ensure fairness. For SQE1, you must know the main statutory powers available to lenders, the conditions for their exercise, and the key duties imposed by law and equity.

Lender's Statutory Powers

Most of a lender's powers are implied into a mortgage made by deed, unless expressly excluded or varied by the mortgage contract.

Key Term: mortgagee
The lender in a mortgage transaction who takes security over the borrower's land.

Key Term: mortgagor
The borrower who grants a mortgage over their land as security for a loan.

Power of Possession

A lender has a right to possession of the mortgaged property as soon as the mortgage is created, unless the mortgage deed provides otherwise. This right is rarely exercised immediately but is available if the borrower defaults. The right can, in principle, be exercised without a court order by taking peaceable possession if no one is present to resist entry; however, for dwelling houses, lenders almost invariably commence court proceedings because:

• the court has a statutory discretion to adjourn, stay or suspend possession under section 36 Administration of Justice Act 1970 if the borrower is likely to pay sums due within a reasonable period
• industry practice (including pre-action protocols) strongly discourages extra-judicial possession, and case law confirms that section 36 applies only where court proceedings are brought, so issuing a claim ensures the court can consider relief

Key Term: possession
The right of a lender to take physical control of the mortgaged property, usually after default.

Practical points:

• a standard mortgage contains contractual possession clauses and may permit possession on specified defaults (e.g., non-payment, breach of maintenance covenants)
• the court’s discretion under section 36 AJA 1970 focuses on realistic plans to clear arrears within a reasonable period, which is often assessed by reference to the remaining mortgage term and the borrower’s sustainable budget
• if possession is granted, the property may be sold, let, or managed to recover the debt; the lender must account for rents or profits received

Power of Sale

Section 101 of the Law of Property Act 1925 gives a lender the power to sell the mortgaged property if the mortgage is made by deed. This power arises once the mortgage money has become due (usually after the legal date of redemption has passed or upon a contractual acceleration event).

However, the power is only exercisable when one of the conditions in section 103 is met:

• three months have passed since the lender served a notice requiring payment of the whole mortgage debt and the borrower has not paid
• at least two months' interest is in arrears
• there has been a breach of another term of the mortgage

The mortgage instrument often includes an acceleration clause allowing the lender, upon specified defaults, to demand the entire principal and interest, thereby satisfying the “mortgage money due” requirement. Whether the lender must wait before sale depends on the statutory triggers above unless validly varied by contract (variation cannot remove minimum statutory protections where applicable).

Once a sale is planned:

• the buyer’s protection is strong: under section 104 LPA 1925, a purchaser need only check that the power of sale exists and has arisen; the buyer does not need to check that the power is exercisable (i.e., the lender’s compliance with section 103 conditions)
• sale proceeds must be distributed in line with section 105 LPA 1925: first, payment of prior encumbrances, then the selling mortgagee’s costs and debt, then any surplus to subsequent encumbrancers and ultimately to the mortgagor

Key Term: power of sale
The statutory right of a lender to sell the mortgaged property to recover the debt, subject to conditions.

Priority between mortgages is governed by registration and creation rules:

• for registered land, a legal charge’s priority is determined by the order of registration (LRA 2002 s 48)
• equitable charges generally rank by the order of creation unless postponed by agreement or notice principles

Appointment of a Receiver

Section 101(1)(iii) LPA 1925 also gives the lender the right to appoint a receiver to collect income from the property if the borrower defaults. This is common for rental or commercial properties where an income stream can service interest and reduce capital.

Key Term: receiver
A person appointed by the lender to collect income from the mortgaged property and apply it to the debt.

Key features (LPA 1925 s 109):

• the power arises and becomes exercisable on the same footing as the power of sale
• the receiver must be appointed in writing; the mortgage often extends the receiver’s contractual powers (for example, to sell, grant leases, or manage the property)
• the receiver is deemed the agent of the mortgagor (s 109(2)), meaning the borrower, not the lender, is primarily responsible for the receiver’s acts; nevertheless, receivers owe duties in good faith and reasonable competence

Debt Action

A lender can sue the borrower for the outstanding debt under the mortgage contract. This is usually used if the sale proceeds are insufficient to repay the debt (negative equity). The Limitation Act 1980 limits recovery to six years for interest and twelve years for the principal. A shortfall following sale is an unsecured debt claim against the borrower; the lender must consider recovery prospects and any insolvency issues.

Foreclosure

Foreclosure is a rarely used remedy where the lender applies to the court to become the absolute owner of the property, extinguishing the borrower's equity of redemption. This is only granted in exceptional cases and is a two-stage equitable process (interlocutory order with time to redeem, then final order if redemption does not occur). Courts often prefer ordering sale rather than foreclosure, especially if sale can better protect both parties (and other encumbrancers).

Conditions and Limitations on Powers

Lenders must comply with statutory and contractual requirements before exercising their powers. For example, the power of sale cannot be exercised until the relevant conditions are met. The mortgage deed may also impose additional requirements or restrictions, such as notice periods, valuation steps, or marketing standards.

Contract terms frequently:

• accelerate the debt on specified default events and expand powers (including appointment of receivers by deed, extended management or sale powers, and control over insurance and repairs)
• specify events of default beyond non-payment (e.g., unauthorised letting, material alteration without consent, damage or failure to insure)
• include costs-and-expenses clauses permitting the lender to add enforcement costs to the secured debt

Courts retain supervisory powers where statutory controls apply. In residential cases, the AJA framework permits time to pay arrears. In addition, mortgage regulation (for consumer residential mortgages) governs conduct before enforcement and the fairness of terms; however, the core legal powers under the LPA still frame the remedies available.

Protection for Borrowers

Borrowers have important protections, especially for residential properties.

Key Term: equity of redemption
The borrower's right to redeem the mortgage and recover the property on repayment of the debt.

Section 36 of the Administration of Justice Act 1970 allows the court to adjourn, stay, or suspend possession proceedings for a dwelling house if the borrower is likely to pay the sums due within a reasonable period. The court will consider the borrower’s realistic budget, any proposals to spread arrears over time, and whether the mortgagor can maintain ongoing instalments. Section 8 of the Administration of Justice Act 1973 assists where principal is payable by instalments by clarifying how “sums due” should be assessed in residential cases.

The borrower also has a distinct jurisdiction under section 91(2) LPA 1925 to apply to court for an order for sale of the property. This is especially useful where continued interest accrual is increasing the debt and a sale would cap losses; courts can order sale even against lender objections where that is the just and practical outcome.

Worked Example 1.1

A lender is seeking possession of a borrower's home after six months of missed payments. The borrower has just started a new job and can now afford to pay the arrears over the remaining mortgage term. What can the court do?

Answer:
The court can suspend or postpone possession under section 36 AJA 1970, allowing the borrower to pay the arrears over the remaining term if the plan is realistic.

Lender's Duties When Exercising Powers

Lenders have important duties when exercising their statutory powers, especially the power of sale.

Duty to Obtain a Proper Price

When selling the property, the lender must act in good faith and take reasonable care to obtain the true market value at the time of sale. The lender is not required to delay the sale to get a higher price and is not obliged to improve the property, but must:

• properly market the property (appropriate advertising, suitable method of sale)
• obtain appropriate valuations
• disclose material information which affects value (e.g., planning permissions, restrictive covenants, defects known to the lender)

Authorities confirm the standard:

• a lender who failed to advertise key planning permissions and obtained a depressed price breached the duty to take reasonable care to obtain the true market value
• a sale to a connected party at an untested reserve without independent valuation can breach the duty and the good faith requirement
• a receiver or lender is under no duty to incur expenditure to increase value (such as obtaining planning permission or letting vacant units) before sale

Key Term: duty to obtain a proper price
The obligation on a lender to take reasonable care to achieve the true market value when selling a mortgaged property.

Duty to Act in Good Faith

The lender must not act fraudulently, dishonestly, or for an improper purpose. The sale must be genuine and not designed to harm the borrower or favour a related purchaser. Conflicts of interest must be managed; selling to the lender’s associate at an undervalue without proper safeguards risks a breach.

Duty to Account

If the lender takes possession or appoints a receiver, they must account to the borrower for any income received, after deducting costs and the debt. On sale, the lender must account for the application of proceeds per statute and contract.

Worked Example 1.2

A lender sells a repossessed property at auction but fails to mention that it has planning permission for development, resulting in a lower sale price. What is the consequence?

Answer:
The lender has breached the duty to obtain a proper price. The borrower can claim damages for the difference between the sale price and the true market value.

Buyer’s Protection and Impact of Breach

Under section 104 LPA 1925, a purchaser is protected if the power of sale exists and has arisen; the buyer does not need to investigate whether the power is exercisable or whether the lender complied with section 103. If the lender sells prematurely, the borrower’s remedy is against the lender for breach of duty, not against the buyer (who takes good title if section 104 conditions are met). This creates certainty for purchasers and channels disputes back to the mortgage relationship.

Worked Example 1.3

A lender appoints a receiver who fails to collect rent from tenants, resulting in lower income. What can the borrower do?

Answer:
The borrower can claim against the lender or receiver for failing to manage the property with due diligence and recover the lost income.

Appointment and Role of a Receiver

A receiver collects income from the property and applies it in a set order (LPA 1925 s 109(8)):

• outgoings on the property (rates, necessary expenses)
• interest on any prior mortgages
• insurance premiums, repair costs and the receiver’s remuneration and costs
• interest due on the current mortgage
• capital due on the current mortgage
• any surplus to the borrower

The mortgage frequently extends these statutory powers, enabling the receiver to manage, let, and in some cases sell (if expressly provided). Core points:

• the receiver is the agent of the borrower, so the borrower bears primary liability for acts/omissions; this insulation is one reason lenders prefer receivership to possession
• receivers must avoid conflicts (they should not purchase the property personally), act in good faith, and exercise reasonable competence; what is reasonable depends on the nature of the asset and the market
• if empowered to sell, receivers owe the same duties as mortgagees: proper marketing and reasonable care to obtain the true market value

Receivership strategy is common in commercial contexts where managing income is more efficient than immediate sale or possession.

Foreclosure (Overview)

Foreclosure is rarely used because it extinguishes the borrower's equity of redemption and may leave the lender unable to recover any shortfall if the property is worth less than the debt. It requires court involvement and is discretionary. Given modern practice and the availability of sale (which realises cash to be distributed per statutory priorities), foreclosure will usually be refused if sale would better serve all parties’ interests.

Breach of Duty by Lender

If a lender breaches their duties (e.g., sells at an undervalue, sells to a connected party without proper safeguards, fails to disclose material value-affecting information, or acts in bad faith), the borrower can claim damages for any loss suffered. The onus is on the borrower to prove breach and quantify loss (the difference between the price obtained and the true market value at sale). The lender is not liable for market movements outside reasonable control where proper steps were taken.

Practical remedies include:

• damages (primary remedy), including consequential losses where causation is established
• accounting adjustments (e.g., reinstating sums wrongly deducted as costs)
• in exceptional cases, equitable relief (e.g., setting aside a transaction for fraud), though sales to bona fide purchasers are protected under section 104

Borrowers can also challenge failure to consider suspension under section 36 AJA 1970 in residential possession proceedings, and in appropriate cases, apply for sale under section 91 LPA 1925 to limit accruals.

Worked Example 1.4

A lender serves a section 103 notice demanding full repayment. Two months’ interest remains unpaid, and the borrower breaches a maintenance covenant. The lender sells, then it appears the lender did not properly market the property and a connected company bought it at an undervalue. Is the sale valid, and what are the borrower’s remedies?

Answer:
The sale passes good title to the purchaser if the power exists and has arisen (section 104). However, the borrower may recover damages against the lender for breach of duty (failure to obtain true market value and conflict of interest), measured by the difference between the achieved price and the true market value.

Worked Example 1.5

The mortgagor’s arrears are growing due to interest accrual. They propose a sale of the property to cap the loss, but the lender resists. What can the borrower do?

Answer:
The borrower can apply under section 91(2) LPA 1925 for an order for sale. The court can order sale against the lender’s wishes where sale is just and practical (for example, to prevent the debt from ballooning).

Additional Practical Points

• where the lender seeks possession of a dwelling house, the court will consider under section 36 AJA 1970 whether a realistic schedule to clear arrears exists; detailed income and expenditure and a plan to clear arrears over a reasonable period are essential
• lenders may, in rare cases, take possession without court order by peaceable re-entry; however, the borrower then loses the ability to seek suspension under section 36 (which applies only to court proceedings), a factor that has led lenders to prefer court routes for residential properties
• debt actions follow limitation rules: six years for interest (running from accrual), twelve years for capital; time can be affected by acknowledgements or part-payments
• distribution of sale proceeds follows statute and any inter-creditor agreements; second mortgagees receive after the selling mortgagee clears prior sums and its own debt and costs; any surplus goes to later secured creditors and then the borrower

Worked Example 1.6

A first legal charge is registered, followed by a second legal charge registered six months later. The first mortgagee sells under its power of sale. How are proceeds applied?

Answer:
Priority is by order of registration for legal charges. Sale proceeds pay prior encumbrances first, then the selling mortgagee’s costs and debt, then the second mortgagee’s debt, and any surplus goes to the mortgagor (LRA 2002 s 48; LPA 1925 s 105).

Exam Warning

• When answering SQE1 questions, always check whether the lender has complied with all statutory conditions before exercising a power. Also, be alert to the borrower's right to seek court protection for a dwelling house.
• For sales, remember purchaser protection under section 104: a buyer who checks that the power exists and has arisen takes good title even if the lender’s exercise was defective. The borrower’s remedy is against the lender for breach, not against the buyer.
• Receivers are the mortgagor’s agents by statute; allocate liability and remedies accordingly. Duties of competence and good faith still apply.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• lenders have statutory powers of possession, sale, and appointment of a receiver under the Law of Property Act 1925
• the power of sale arises under section 101 and is only exercisable when section 103 conditions are met; a buyer is protected under section 104 and proceeds are applied under section 105
• lenders owe duties to act in good faith and to take reasonable care to obtain the true market value when selling; receivers have parallel duties and must account
• borrowers have protection under the Administration of Justice Act 1970 for residential properties and can seek an order for sale under section 91 LPA 1925
• breach of duty by the lender can result in damages for the borrower; shortfall debts are recoverable subject to limitation periods

Key Terms and Concepts

• mortgagee
• mortgagor
• possession
• power of sale
• receiver
• equity of redemption
• duty to obtain a proper price