As lenders rely more and more on their powers to appoint an LPA Receiver, a recent case has clarified the Receiver’s obligations, both to the lender and its borrower. In the case of JL Homes Limited and (1) Mortgage Express (2) Paul Diakiw and David Heap (Acting as LPA Receivers) which came before the High Court in December, JL Homes unsuccessfully challenged the LPA Receivers’ attempts to secure possession.
JL Homes bought six buy-to-let properties, three of which were charged to one lender with the remainder charged to Mortgage Express. Mortgage Express subsequently acquired the other lender, taking an assignment of the JL Homes’ mortgages.
By May 2012, there were mortgage arrears of more than two month’s repayments on each of the six mortgages and Mortgage Express appointed LPA Receivers to protect its interests. The Receivers made several attempts to obtain the cooperation of JL Homes in the receivership process but were unsuccessful. The Receivers then took action to protect Mortgage Express’s security by taking possession of all six properties.
JL Homes made an application to the court, challenging the validity of the LPA Receivers’ appointment and seeking an order to prevent them from taking any further steps to secure possession, stating that the Receivers were discharging their obligations for an improper purpose. The proceedings were brought against Mortgage Express and the Receivers.
The claim was dismissed as being ‘entirely without merit’. JL Homes then issued and served a claim in the High Court, making substantially the same allegations. Mortgage Express and the Receivers each filed a defence and then made simultaneous applications for strike out on the basis that the claim was an abuse of process (trying to obtain that through the High Court which they had failed to obtain in the County Court).
The applications by Mortgage Express and the Receivers succeeded in full: JL Homes’ claim was dismissed again as being ‘totally without merit’.
Arising from the judgment, there are some points of interest:
Grounds to appoint an LPA receiver
Nothing in law requires a lender to identify the specific reason or reasons it considers the right to appoint LPA Receivers has arisen. In this particular case, there were two valid reasons – the arrears (more than two months) and the fact that tenancies had been granted without the consent of the lender. Mortgage Express only referred to the arrears when advising JL Homes of the appointment of Receivers. However, that does not prevent it from relying on other breaches of the mortgage conditions later.
An LPA receiver’s duties
It was JL Homes’ case that the LPA Receivers had “systematically gone about obtaining possession of properties and evicting tenants”, thereby depriving JL Homes of the income whereby the mortgage payments could be met.
The judge’s view was:
“[the] allegations reveal a very serious misunderstanding of the powers and duties of a mortgagee. It is…elementary law that a mortgagee is not a trustee of the power of sale or of the power of appointing a receiver. He is entitled to act in his own interests, so long as he does not act in bad faith, and he has a very limited duty of care…”
In reaching this conclusion the judge referred to the helpful comments of Eder, J on the powers and duties of a mortgagee, set out in the case of Saltri III Ltd v MD Mezzanine SA Sicar. Eder, J stated:
- A mortgagee has no duty to the borrower when exercising its powers to sell, to take possession or to appoint a receiver; nor to preserve the security or its value or to realise its security;
- A mortgagee has an unfettered discretion to sell when it likes to achieve repayment of the debt which it is owed;
- A mortgagee is at all times free to consult its own interests alone as to whether and when to exercise its power of sale;
- The mortgagee’s decision is not constrained by reason of the fact that the exercise or non-exercise of the power of sale will occasion loss or damage to the mortgagor;
- The mortgagee is not bound to postpone the exercise of its right to sell in the hope of obtaining a better price; and
- When and if the mortgagee does exercise the power of sale, it comes under a duty in equity (and not tort) to the mortgagor to take reasonable precautions to obtain “the fair” or “the proper price” for the mortgaged property at the date of the sale.
An LPA Receiver’s primary duty is to protect the mortgagee’s interests. The LPA Receiver is under no greater duty to the borrower than to ensure it does not act in bad faith.
A final issue that was considered in the JL Homes case is that of consolidation. Mortgage Express elected to consolidate its own loans with those of the other lender. In so doing it exercised its right to prevent JL Homes from settling one mortgage account in isolation of the other five.
JL Homes relied on a clause of the mortgage conditions which gave the lender a right to consolidate mortgages, conditional on the borrower’s legal rights and responsibilities under the mortgage agreement not being affected. They argued that by consolidating the two portfolios of three properties into one, their position was detrimentally affected because they were required to satisfy the entire debt on all six properties as opposed to having the option to discharge the debt on one portfolio and not the other.
Needless to say, the court disagreed, taking the view that the condition referred to was not intended to inhibit the lender’s right to consolidate mortgages; it was intended to ensure that the right to consolidate was not used to create further rights or responsibilities.
How does this case assist lenders?
This judgment clarifies the duties owed by an LPA Receiver to both lender and borrower. Whilst the relationship between an LPA Receiver and a borrower is that of agent (Receivers) and principal (borrower), in reality, it is the mortgagee’s interests that the LPA Receiver is obliged to protect. An LPA Receiver owes no greater duty than to ensure that it acts in good faith in its dealings with a borrower.