knowledge 16 September 2024 |

Welcome Clarifications for Sales by Mortgagees

Maher

In the Supreme Court case (“Maher”), a property was bought with the aid of a mortgage. The property was entered on the derelict sites register, and the borrower, as the owner at that time, was served with a derelict sites levy. The borrower did not pay the levy resulting in the unpaid levy operating to charge the property. The borrower defaulted on the mortgage and the mortgagee sold without discharging the derelict sites levy. The purchaser from the mortgagee paid the levy under protest before seeking to recover the levy from the local authority through the courts on the basis that the levy did not burden the property after the sale. When the case finally came before the Supreme Court, that Court agreed with the purchaser.

Importantly the Supreme Court held that statutory charges do not generally have any “super priority” so that (subject to the terms of any specific statutory regime giving rise to a charge on property) ordinary rules of priority and a mortgagee’s powers of overreaching will apply. In this case the mortgagee’s charge predated, and so had priority to, the derelict sites charge, and the statutory regime in place for levying and charging derelict sites did not operate to displace the statutory right of the mortgagee to overreach the derelict sites charge.

Important to the outcome in Maher was the fact that the mortgagee had not in fact taken possession but had sold as mortgagee (not in possession). Had the mortgagee in fact sold as mortgagee in possession, then in that capacity it would have had obligations under the derelict sites legislation. By not taking possession, the mortgagee avoided these responsibilities.

The Supreme Court’s clarification of the legal status of charges under the Derelict Sites Act 1990 brings welcome clarity as to how to treat those charges in sales by mortgagees. While not conclusively applicable to other regimes for statutory charges (eg commercial rates) it also helpfully informs and guides our interpretation of the application of those other regimes in similar circumstances.

Langan

The facts at issue in the Court of Appeal case (“Langan”), are very familiar. The borrower bought property with the aid of a mortgage. The borrower was registered as full owner, and the mortgage was registered as a charge over the property. The borrower defaulted. The mortgagee appointed a receiver. The receiver went into possession and marketed the property for sale. The mortgagee finally stepped in (instead of the appointed receiver) to sell the property to the purchaser, selling as mortgagee in possession. 

The borrower challenged the practice whereby the receiver marketed the property, but the mortgagee sold, claiming that it was unlawful.  The receiver gave evidence that he had “offered up” possession to the mortgagee, but that he did not sign any deed transferring possession to the mortgagee. The plaintiff claimed that the only ways the mortgagee could have acquired possession from the receiver were with the borrower’s consent, or by a court order, neither of which had happened.

The Court of Appeal disagreed and held that a mortgagee may lawfully acquire possession through several means. Critically, however, the Court of Appeal said that where a mortgagee sells pursuant to a statutory power of sale, the statutory protection of purchasers is so strong as to preclude any challenge to the purchaser’s title based on the exercise of the mortgagee’s power of sale. This meant that the borrower’s claim against the purchaser’s “unimpeachable” title could not succeed.

Considerations for Possession

In both cases, the question of possession by the mortgagee was either disputed or determinative of a practical outcome, highlighting what a key consideration it can be for a mortgagee at the outset and during any enforcement process. We see from Maher that consideration should be given to whether the mortgagee taking possession will impose obligations on the mortgagee that would otherwise be avoided - if the mortgagee had entered into actual occupation of the property in that case, this could have imposed obligations on it to discharge the derelict sites levy. In coming to a decision on possession it is also important to note that actual possession by a mortgagee is not a prerequisite for the mortgagee to exercise its statutory power of sale³, and so pass on the benefit to purchasers of overreaching subsequent charges and the increased protection from challenge to a purchaser’s title as highlighted in Langan.