The Luton Bank Case - Essay Example

A) In this situation David and Anne are the mortgagors, as they have created a mortgage in favour of the mortgagee, Luton Bank. Luton Bank will therefore have a charge by way of legal mortgage against the freehold title of Apple Cottage. The bank is entitled to seek an order for vacant possession in order to sell the property. Once they have this they will be under duties to David and Anne in the way they conduct the sale (Chappelle, 2006, pg 347). The leading case in this area is Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997. In the case 34 properties were owned by two family property companies, and had all been charged to the bank to secure borrowing. In 1996 the bank appointed receivers in relation to the properties which were then sold over an 18 month period. The mortgagors complained that the properties had been sold at an undervalue and claimed that: 1) in some cases a far better price would have been obtained had the receivers or mortgagees first obtained planning permission for development. Planning permission had previously been sought but the receivers decided not to wait for it to be granted before selling; 2) in other cases a better price would have been obtained had possible leases of the vacant properties been completed before sale. (see MacKenzie and Phillips, 2008, pg 477). In deciding the case the Court of Appeal considered the duties owed by mortgagees in these circumstances. Several duties were highlighted, which will now be considered in turn. Firstly, a mortgagee in possession must take reasonable care of the premises (Downsview Nominees Ltd v First City Corporation Ltd (No.1) [1993] AC 295). Secondly, it must be remembered that a mortgagee is not a trustee of his powers. This means that the mortgagee may sell whenever he chooses and does not have to have regard to whether a different time may be more beneficial to the mortgagor (Raja v Austin Gray (a firm) [2002] EWCA Civ 1965). In this case therefore, the bank does not need to wait until the property market has recovered before they can sell the property (Gray and Gray, 2007, pg 534. The mortgagee is also under no duty to improve the position of the property before selling, but may instead sell it ‘as is’. Had no planning permission already be granted then, Luton Bank would be under no duty to obtain any before sale (Gravells, 2004, pg 994). However, the mortgagee is under a duty in equity to take reasonable precautions to obtain the ‘fair’ or ‘true market value’ or ‘proper price’ for the property. In Silven itself this would mean taking reasonable care to obtain any extra value that would arise as a consequence of drawing the attention of prospective purchasers to the possibility of obtaining planning permission. In Cuckmer Brick Co v Mutual Finance Ltd [1971] Ch 949 a property had the benefit of one planning permission for houses and a second for flats. When the mortgagee attempted to sell the property they widely advertised it but failed to mention that there was planning permission for flats. It was thought in that case that there was a duty in negligence to take reasonable care. However, in subsequent cases it has been held that this is incorrect and that the duty is one in equity. The remedy is therefore not damages but that the mortgagee must account to the mortgagor for the sums that would have been raised had they complied with the duty. Luton Bank is therefore under a duty to obtain the true value of the property by marketing it correctly. If they breach this duty they will be liable in equity. B) In some circumstances it may be reasonable for a warrant for possession of the mortgagee to be suspended where the mortgagor wants to negotiate a private sale of the property. However, this is only the case if the proposed sale is likely to produce a sum sufficient to discharge the entire mortgage debt (Cheltenham and Gloucester plc v Krausz [1997] 1 All ER 21, see Gray and Gray, 2005, pg 1693). In Palk v Mortgage Services Funding plc [1993] Ch 330 a house was in negative equity. The mortgagor wished to sell it but the mortgagee wished to take possession and let it on a short-term lease, waiting until the depressed market improved before selling the property (Burn and Cartwright, 2006, pg 774). The Court of Appeal held that it had discretion under section 91(2) of the Law of Property Act to order a sale at a depressed market price as against the wishes of the mortgagee. It was said that “it is just and equitable to order a sale because otherwise unfairness and injustice will follow” (Nicholls VC at 422). The reason for ordering the sale in that case was that the mortgagor would, if she could not sell the property, be compelled to participate in the risk that the mortgagees wanted to take in waiting to see if the housing market became more favourable. It was thought that if the mortgagee took over the property at the current market value they could then take the risks themselves without the mortgagor’s involvement, thereby striking a balance between the interests of both parties (Smith, 2006, pg 764). However, in Cheltenham and Cloucester plc v Krausz cited above, the Court of Appeal again considered the relationship between the circumstances in which the mortgagor is entitled to an order for sale under section 91(2) and those in which the court has jurisdiction in order to suspend an order for entry into possession by the mortgagee under section 36 of the Administration of Justice Act 1970. It was held that in cases of negative equity there is no jurisdiction to suspend an order for possession having been obtained by the mortgagee, in order to enable the mortgagor to apply for an order for sale (Thompson, 2006, pg 457) The reason for this decision was that in allowing a mortgagor the power to conduct the sale he may do so in such a way as to delay the conclusion of the sale, and this would be unfair to the mortgagee (Kenny 1998). In normal circumstances therefore, a mortgagor will not be able to obtain an order for the sale of the property where this is against the will of the mortgagee and the property is in negative equity (Thompson, 2006, pg 457). In this case then, once the bank have obtained an order for possession of the property, David and Anne are unlikely to be able to enforce a sale against the wishes of the bank in circumstances in which they are in negative equity. Bibliography Burn, E.H., and Cartwright, J., (2006), Cheshire and Burn’s Modern Law of Real Property, 17th Edition, Oxford University Press Chappelle, D., (2006), Land Law, 7th Edition, Pearson Gravells, N., (2004), Land Law: Text and Materials, 3rd Edition, Sweet & Maxwell Gray, K. and Gray, S.F., (2005), Elements of Land Law, 4th Edition, Oxford University Press Gray, K. and Gray, S.F. (2007), Land Law, 5th Edition, Oxford University Press MacKenzie, J. and Phillips, M., (2008), Textbook on Land Law, 12th Edition, Oxford University Press Smith, R., (2006), Property Law: Cases and Materials, 3rd Edition, Pearson Thompson, M.P., (2006), Modern Land Law, 3rd Edition, Oxford University Press Read More