During these troubled times, high-net-worth individuals may find themselves in difficulty when it comes to servicing their mortgages over “trophy properties” – that is, in common usage, the top 2% of properties in any category and, in particular, exclusive residential properties. In this article we look at the things a lender would need to consider when enforcing its security over a trophy property.
The lender will have the right in contract against the borrower, and also any guarantor, to repayment of the monies lent. This right will probably survive the exercise of the power of sale of the property, where the proceeds of sale are not sufficient to cover the mortgage, assuming it is not a non-recourse mortgage. The lender’s main remedies against the property under a legal mortgage are either to take possession and then sell the property or to appoint a receiver (or, in some cases, an administrator). The power of sale also covers fixtures, although these cannot be sold separately from the property. Although the term “foreclosure” is sometimes used to describe any enforcement process under a mortgage, it has a particular technical meaning under English law of extinguishing the borrower’s interest in the property and passing title to the lender. Foreclosure can only be exercised if it is sanctioned by a court order and is very rarely used.
In addition to these remedies, where the lender holds two or more mortgages over properties given by the same mortgagor, if at least one of the mortgages reserves the right to do so, the lender can consolidate the mortgages. If it does so, this means that the mortgagor cannot redeem one of the mortgages without redeeming them all.
The lender should also consider the possibility that it may have remedies against third parties such as professional advisers; for example against a valuer if the property was overvalued when the security was taken. It is important that any relevant valuation was addressed to the lender and the lender must have relied on the valuation. This is not necessarily displaced by the lender having mortgage indemnity insurance. Alternative remedies may be particularly important where a shortfall is likely on a disposal of the property.
The lender must ascertain with reference to the facility agreement whether the loan is repayable on demand or (in the case of a term loan) following an event of default. If the loan is not repayable on demand, the lender will need to consider what events of default it will be able to rely on to trigger repayment of the loan.
The lender must then make proper demand for repayment, whilst reserving its rights to enforce the security and any other guarantees, so that contractually the loan is repayable. Almost invariably, modern mortgages exclude the relevant provisions of the Law of Property Act 1925 so that the power of sale can be exercised at any time after the demand has been made.
The report on title on the property should be checked, and an updated Land Registry search made, to ensure that no adverse entries have been made. Generally, if the sale of the property is made by the lender (as opposed to a receiver), it will be free of any subsequent mortgage, but subject to any prior mortgage.
Where people are living in the property, it should be ascertained whether or not these individuals waived or postponed their interest in favour of the lender. The lender, however, will not be bound by the interest of tenants who were granted a tenancy after completion of the mortgage, where consent from the lender was required, but had not been obtained.
Depending on the relationship between them, a sale by the borrower with the agreement of the lender has much to recommend it in terms of achieving the best price. Potential buyers may expect to pay a lower price when aware that the lender is selling to enforce its security.
Fixtures and Fittings
It will be important to ascertain whether high value items at the property e.g. chandeliers or garden statutory are fixtures (which would be covered by the mortgage over the property itself) or fittings (which would not). The general rule is that a fixture is an item which has been fixed to the land or building so as to become part of it, and the purpose for which the item was annexed to the land or building will also be relevant when determining whether an item is a fixture or a fitting.
A court order is not required to exercise the power of sale. However, a lender will normally wish to obtain possession in order to ensure that it can sell the property with vacant possession. Where a mortgagor voluntarily allows the lender into possession of the property, a court order will not be required. However, great care should be taken in this regard as it is unlawful to gain forced entry (i.e. without consent) or, to enter whilst there are persons in possession. So, in many cases, it is prudent to obtain a court order for possession(which will be enforced by the court bailiff).
Possession proceedings must be commenced in the County Court local to the property.
Duties of mortgagee in possession
When a lender takes possession of a property, as a “mortgagee in possession” it is liable to account to the borrower and any subsequent secured lender not just for actual receipts, but for what it should have received with proper management of the property. The lender must take reasonable steps to protect the property from vandalism and damage. The lender is personally liable for the payment of the occupational rent if it does not let a property which could have been let, although in practice this is unlikely to be an issue if the property is sold without undue delay. The lender must ensure that the property remains fully insured, and ensure for example that the insurance does not become void where the property remains vacant. Where the property is leasehold the lender must ensure all ground rents are paid to ensure that the lease is not forfeited.
Appointment of a receiver
The lender may be reluctant to take possession of a property and may prefer to avoid the responsibilities above through the appointment of a receiver who will be the agent of the borrower and not the lender and is able to collect in any income from the property. In order to ensure that the receiver remains independent of the lender, the lender should avoid constantly liaising with the receiver as this may render the receiver as agent for the lender rather than the borrower company. A receiver will also generally require an indemnity from the lender against any loss arising to the receiver, except from his negligence.
Where the borrower is a company and has its Centre of Main Interests (COMI) in the EU, the lender’s security interest may include a “qualifying floating charge”. In this instance the lender can appoint an administrator out of court once the security becomes enforceable.
Effective marketing of the property will normally take 3 – 4 months and will need to be considered carefully by the lender. Both a lender and a receiver are under a duty to the borrower and any guarantor to achieve the best price reasonably obtainable on any disposal. However, they are not obliged to delay a sale in a rising market, or to take steps to improve the property before a disposal. The prudent course is for the lender / receiver to obtain proper advice as to marketing, and preferably a valuation from two independent reputable surveyors dealing with trophy properties. The valuation and marketing should be handled by a firm with appropriate experience.
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