Mortgage Default

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Property Lawyer, Terese Kingman looks at the remedies available to a lender if a borrower defaults on mortgage repayments.

There are various remedies available to a mortgagee, or lender, if a mortgagor, or borrower, defaults on mortgage repayments.

The usual mortgage scenario involves the borrower making financial payments to the lender in respect of money advanced to purchase a home. The property itself is used as security for the borrowing.

If a borrower defaults on paying the mortgage instalments the lender can sue on the covenant. The covenant is the promise the borrower made to make mortgage repayments. However this can be a fruitless exercise where the borrower is experiencing financial problems and has no means of making any further repayments or meeting any court orders.

The lender also has the right to obtain possession of the property. This right was established in the case of Four Maids v Dudley Marshall, which dates back to the 1950’s. The Judge in that case said a lender has the right to possession of the property even before the ink is dry on the contract! It is a prerequisite to sale by the lender that vacant possession be obtained.

In order to obtain possession the lender must seek a Court Order to avoid liability under the Criminal Liability Act 1977. The borrower can apply under s36 Administration of Justice Act 1970 for postponement of these proceedings but the application will only be considered if they can show they are able to make repayments of the mortgage arrears and interest. The court will often allow the borrower time to repay the arrears and this may prevent the lender from obtaining possession.

Since the case of Cheltenham & Gloucester Building Society v Norgan (1996) the courts have been willing to consider giving the borrower a reasonable period of time to pay off the arrears.

Under s101 Law of Property Act 1925 a lender has the right to exercise its power of sale if the mortgage was made by deed and the legal date of redemption has passed. The lender’s power of sale then becomes exercisable under s103 of the Act if the borrower is in arrears, the legal date of redemption has passed and it is a mortgage.

Once the power of sale has become exercisable the lender has the right to sell whenever it chooses and has a duty to obtain the best price for the property. As soon as a sale has been agreed the lender must make available to the prospective buyer all documents relating to the property, including planning permissions.

A more draconian option available to a lender is foreclosure, but this right is rarely exercised these days.

It is unlikely in a residential transaction that a lender would appoint a receiver or issue a foreclosure notice but if they did then a borrower could applying for a sale of the property under s91 Law of Property Act 1925.

For free initial advice about conveyancing and property transactions please contact Terese Kingman at Slee Blackwell, 2 Lime Court, Pathfields Business Park, South Molton on 01769 575982 or email her at [email protected]