MORTGAGES II
LAND LAW II
SEMESTER B
Mortgagees’ Rights
Mortgagees and chargees enjoy various rights to secure
their interests.
Some of these are completely unrelated to the security
they enjoy, such as the right to sue the mortgagor or
chargor to recover payment of the debt.
Others, such as foreclosure and taking possession, are
rights premised upon the title-based nature of a
mortgage security and hence unavailable to chargees.
(*Cf the legal charge created by s 44 of the
Conveyancing and Property Ordinance (Cap 219))
Still others, such as the power of sale and power to
appoint a receiver, were originally contractual in origin
but became so widespread that the legislature
provided for their implication in certain circumstances.
Mortgagees’ Rights
The rights to be considered are:
(i) Right of foreclosure;
(ii) Power of sale;
(iii) Right to take possession;
(iv) Power to appoint a receiver; and
(v) Right of action to recover the debt.
In each instances, it is useful to begin with the position of
a legal mortgagee before considering the position of
an equitable mortgagee or a chargee.
Right of Foreclosure
The right to foreclosure is premised upon the original
form of a mortgage and equity’s intervention.
Historically, mortgages had to be redeemed by the
legal date of redemption.
However, equity intervened to permit redemption after
the legal right of redemption had been lost.
Nevertheless, there are limits to the equitable right to
redeem thus created.
Foreclosure is the name of the process by which the
mortgagor’s equitable right to redeem is extinguished.
In the case of a legal mortgage, this would leave the
mortgagee the absolute owner of the property, both at
law and in equity.
Right of Foreclosure
“Foreclosure is done by the order of the court, not by
any person.”: Re Farnol Eades Irvine & Co Ltd [1915] 1
Ch 22.
The right to foreclose does not arise until repayment has
become due at law (Williams v Morgan [1906] 1 Ch 804)
as otherwise, the equitable right to redeem does not
arise and cannot be extinguished through foreclosure.
Repayment here refers to repayment of the full
mortgage sum, not merely interest or an instalment of
the principal.
The due date of repayment thus varies according to
each individual mortgage.
The action must be brought within 12 years from when
the mortgage moneys become due: s 19(2) Limitation
Ordinance (Cap 347).
Right of Foreclosure
An action of foreclosure can be brought by any
mortgagee but all persons interested in the equity of
redemption must be made parties to the action.
3rd Mortgagee 2nd Mortgagee 1st Mortgagee
Mortgagor
E1
E2
O
E3 O
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Right of Foreclosure
An action of foreclosure can be brought by any
mortgagee but all persons interested in the equity of
redemption must be made parties to the action.
3rd Mortgagee 2nd Mortgagee 1st Mortgagee
Mortgagor
E3 O
E1
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Right of Foreclosure
An action of foreclosure can be brought by any
mortgagee but all persons interested in the equity of
redemption must be made parties to the action.
3rd Mortgagee 2nd Mortgagee 1st Mortgagee
Mortgagor
E3 O
E1
E2
Right of Foreclosure
The need to join all subsequent mortgagees to the
action stems from the effect of foreclosure: all
subsequent incumbrances are extinguished.
3rd Mortgagee 2nd Mortgagee 1st Mortgagee
Mortgagor
E3 O
E1
E2
Right of Foreclosure
The need to join all subsequent mortgagees to the
action stems from the effect of foreclosure: all
subsequent incumbrances are extinguished.
3rd Mortgagee 2nd Mortgagee 1st Mortgagee
Mortgagor
E3 O
E1
E2
Right of Foreclosure
The court will, when satisfied that a foreclosure order is
justified, initially grant a foreclosure order nisi (Latin for
unless).
The order nisi will direct the taking of necessary
accounts and provide that if the mortgagor (or other
interested party) pays the moneys due by a fixed day
(normally 6 months), the mortgage will be discharged; if
not, it will be foreclosed (i.e. the order will be made
absolute).
A successive mortgagee will have the choice of either
losing its security or buying up the preceding mortgage
by redeeming it.
Instead of redeeming, the mortgagor or successive
mortgagee may apply to court to order a sale instead
of foreclosure: Clarke v Pannell (1884) 29 SJ 147.
Right of Foreclosure
Cf. s 91(2) Law of Property Act 1925.
The availability of the order of judicial sale in lieu of
foreclosure is an important safeguard where the
mortgaged property is worth substantially more than the
mortgage debt outstanding.
Indeed, because of the ready availability of judicial
sale, “foreclosure actions are almost unheard of today
and have been so for many years”: Palk v Mortgage
Services Funding plc [1993] 2 WLR 415.
Where the foreclosure proceedings have been started,
a mortgagee may not discontinue the proceedings and
sell the mortgaged property extra-judicially without the
leave of court: Hang Seng Bank Ltd v Yeung Sau Min
[1986] HKLR 273.
Right of Foreclosure
Even after a foreclosure has been made absolute, it is
not necessarily final as the court can still sometimes
“open [or re-open] the foreclosure”: Campbell v
Holyland (1877) 7 Ch D 66.
Exceptionally, this can even be done after the
mortgagee has sold the property after foreclosure
absolute, though it is unlikely to do so if the purchaser
had purchased without notice of the circumstances
which might justify the court’s interference.
Relevant circumstances include the special value of the
property to the mortgagor (e.g. old family estate),
marked disparity between the value of the property
and amount lent, an accident preventing prompt
repayment, and promptness of the application.
Right of Foreclosure
As foreclosure puts an end to all other remedies available
to the mortgagee, a mortgagee cannot foreclose and also
claim repayment.
A mortgagee can only sue on the personal covenant only
if he re-opens the foreclosure: Perry v Barker (1806) 13 Ves
198.
It is also clear that the court will not re-open the foreclosure
simply because of a revival of the property market,
especially after substantial delay.
This can be seen in Frencher Ltd (in liquidation) v Bank of
East Asia (1995) 2 HKC 263, where the mortgagor had
mortgaged its properties to the bank in 1981 for HK$28
million, which mortgage was guaranteed by its holding
company.
In 1982, the property market collapsed and the mortgagor
defaulted.
Right of Foreclosure
Initially, the bank took possession of the properties and
let them out.
The bank also sought to recover the outstanding debt
from the mortgagor’s holding company under its
guarantee but the holding company had gone into
liquidation.
Therefore, the bank applied for foreclosure and an
order was made in 1984.
When the necessary accounts were taken, it was shown
that HK$34 million was owed to the bank. The value of
the properties was then HK$23.5 million.
Between 1988 and 1990, the bank sold the properties for
HK$82 million as the market had recovered by then.
The mortgagor’s application to re-open the foreclosure
failed.
Right of Foreclosure
In the case of an equitable mortgage, foreclosure
operates through a court order directing the mortgagor
to convey title to the mortgagee unconditionally:
James v James (1873) LR 16 Eq 153.
This is true whether or not the equitable mortgage is
accompanied by a memorandum (York Union Banking
Co v Artley (1879) 11 Ch D 205) or merely effected by
the deposit of title deeds with the requisite intent
(Backhouse v Charlton (1878) 8 Ch D 444).
Although mortgages post-1984 now take the form of a
legal charge, the remedy of foreclosure is preserved by
s 44(2) of the Conveyancing and Property Ordinance
(Cap 219).
An equitable chargee may not foreclose: Tennant v
Trenchard (1869) 4 Ch App 537.
Power of Sale
The most important and significant of the mortgagee’s
remedies is now the power of sale.
The power of sale refers to the power of the mortgagee
to effect an extra-judicial sale of the mortgaged
property free of the equity of redemption.
Historically, a mortgagee had no such power whether
at common law or in equity but owing to dissatisfaction
with foreclosure, mortgagees began to insert express
powers into mortgages permitting them to sell the
mortgaged property out of court and free from the
equity of redemption.
This power was carefully drafted to permit exercise only
in proper circumstances (eg default) and to only permit
the mortgagee to recover any outstanding loan to
avoid equity’s intervention.
Power of Sale
By 1820 or 1830, it became the usual practice to do so
and as with many statutorily implied powers of its time,
its ubiquity caused Parliament to enact legislation
implying such powers.
The first such legislation was Lord Cranworth’s Act 1860
but the power implied was regarded as too narrow so
parties continued inserting express powers.
By the Conveyancing Act 1881, a satisfactory power of
sale was regarded as being statutorily implied and this
power is now found in the Law of Property Act 1925 as
well as s 51(1) read with para 8 of the Fourth Schedule
of the Conveyancing and Property Ordinance (Cap
219).
Nevertheless, it is today commonplace to find express
powers of sale in most mortgages, usually drafted to be
exercisable in broader circumstances than that implied.
Power of Sale
The power is implied in all mortgages created by deed,
whether legal or equitable: s 51(1) read with para 8 of
the Fourth Schedule of the Conveyancing and Property
Ordinance (Cap 219).
Paragraph 11 of the Fourth Schedule sets out the
conditions upon which the power of sale is exercisable:
(a) notice requiring payment of the mortgage money
has been served on the mortgagor and default has
been made in payment of part of the mortgage
money for one month after such service; or
(b) interest under the mortgage is in arrear and unpaid
for one month after becoming due; or
(c) there has been a breach of a provision of the
mortgage other than a covenant for payment of
the mortgage money and interest.
Power of Sale
It is often said that the mortgagee is not a trustee for the
mortgagor of his power of sale but that he must act not
only in good faith but with reasonable care in exercising
the power of sale.
As with foreclosure, the duties imposed on a mortgagee
are duties owed not just to the mortgagor but to all
subsequent mortgagees and even guarantors:
Standard Chartered Bank v Walker [1982] 1 WLR 1410.
Essentially, as the cases will demonstrate, a mortgagee
owes no duties so far as the timing of the sale is
concerned but in all other respects, owes both the duty
of good faith and duty of care to the mortgagor and
subsequent mortgagees.
Power of Sale
In Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch
949, the defendant mortgagee exercised its power of sale
and put the property up for auction but failed to advertise
the full development potential of the land and refused to
postpone the sale when such omission was discovered.
Accordingly, the land was sold for £44,000 although it was
thought to be worth £65,000.
The Court of Appeal held that the defendant was liable to
the plaintiff mortgagor for a failing to exercise reasonable
care to obtain the true market value of the property.
Arguments to the effect that the mortgagee must merely
act in good faith were rejected by the Court of Appeal.
The court held that the mortgagee must also take
reasonable precautions to obtain the true market value of
the mortgaged property at the date on which he decides
to sell it.
Power of Sale
The jurisdictional origin of the duty of care has been
disputed but it is now widely accepted to be equitable
in origin.
Note also that the duty does not extend to obtaining
the best possible price. The sale price must simply reflect
the true market value and be a proper price.
In Parker Tweedale v Dunbar Bank plc [1991] 1 Ch 26,
the mortgagees were a couple who purchased a
property in the wife’s name. When the couple fell into
default, the mortgagee first took possession of the
property and then, with the agreement of the wife as
mortgagor, sold the property for a sum equivalent to
£575,000.
However, one week later, the purchaser then sold the
property for some £700,000.
Power of Sale
When the husband sued the mortgagee for breach of its
duty of care, his claim was rejected by the Court of
Appeal.
The court held that the bank owed no duty of care directly
to the husband as a beneficiary under a trust. Its duty was
to the wife as mortgagor alone.
Moreover, according to Nourse LJ, the duty owed by the
mortgagee to the mortgagor does not derive from any
analogy with tort or contract, but is, instead, recognized in
equity as arising out of the particular relationship between
them.
As for the possibility of a breach of resulting trust, the court
held that the wife, as a resulting trustee, was not in breach
of trust in agreeing to the sale as there was uncertainty
over the true market value and there was some urgency in
finalising the sale. £575,000 was a proper price.
Power of Sale
Contrast the case of Tse Kwong-lan v Wong Chit-sen
[1983] 1 WLR 1349.
The appellant had mortgaged his land in Kowloon to
the respondent in order to fund the development of the
land.
When the appellant defaulted, the respondent sought
to exercise his power to sell.
On the advice of his solicitors, the respondent decided
to sell the property by auction.
However, although the auction was advertised in three
newspapers on three different days, this was done only
shortly before the date of the auction. The
advertisements gave only very brief details of the
property. The reserve price was fixed without the advice
of a qualified valuer.
Power of Sale
At the auction, only one bid at the reserve price was
received which had been by the respondent’s wife on
behalf of a company owned by the respondent and his
family.
Lord Templeman held in the circumstances that the
respondent failed to prove that he had taken
reasonable care to obtain the true market price.
It cannot be assumed that an auction would give the
true market value.
Lord Templeman also emphasised the desirability of
seeking and following the opinion of an expert, e.g. a
qualified valuer or estate agent, regarding the preferred
mode of sale.
Power of Sale
Note that the case is also significant because it involved
a sale to an associated person which may cast doubt
on the mortgagee’s good faith.
Although the court declined to hold that a mortgagee
could never sell to a company in which the mortgagee
was interested in, it did suggest that it will be more
onerous for it to prove that it had discharged its duty to
act in good faith and to take reasonable care.
However, the mortgagee may not sell to itself. Such a
sale breaches the self-dealing rule and is voidable
regardless of the price obtained: Tang Ying Ki v Maxtime
Transportation Ltd [1996] 3 HKC 257.
Power of Sale
Although the mortgagee owes the duty of both good
faith and care in exercising any sale, it is clear that there
is no duty in choosing the timing of a sale.
This is amply highlighted by the case of China South
Seas Bank Ltd v George Tan [1990] 2 WLR 56. The bank
had lent money to one of the companies controlled by
George Tan on security of a mortgage of Carrian
Investment Ltd shares and a personal guarantee by Tan.
When Carrian collapsed, the bank sought to recover
the loan from Tan who argued that it had failed to
exercise due care in not realising the Carrian shares
already mortgaged to it until such shares became
worthless.
The court held that a mortgagee was entitled to choose
the time of the sale of the mortgaged property.
Power of Sale
Under s 53(1) Conveyancing and Property Ordinance
(Cap 219), a sale by a mortgagee operates to assign
the mortgagor‘s interest in the land to the purchaser
subject to any prior mortgagees but free from the
mortgage under which the sale is made and any
subsequent mortgage.
The mortgagor’s equity of redemption is then
extinguished and will be transferred to the proceeds of
sale.
The proceeds of sale must be applied by the
mortgagee in accordance with s 54 Conveyancing and
Property Ordinance (Cap 219).
Power of Sale
The order of application of the proceeds is:
(i) to discharge any outgoings due in respect of the
property, e.g. government rent, rates, property tax
or management charges;
(ii) to discharge any prior encumbrances;
(iii) to pay any costs incurred in the realisation of
security, e.g. the costs of any receiver;
(iv) to repay the loan and any other sums secured
under the mortgage; and
(v) any balance must be paid over to the mortgagor or
any subsequent mortgagee.
Power of Sale
A mortgagor can apply by way of injunction to restrain
an improper exercise of the power of sale. But once the
sale has been effected, a mortgagor’s redress will
normally be in damages only: Horsham Properties Group
Ltd v Clark [2009] 1 WLR 1255.
It is not easy for a mortgagor to set aside a sale
because where a power of extra-judicial sale is
exercised, the title of a purchaser is protected even if
the conditions for its exercise have not been satisfied: s
52 Conveyancing and Property Ordinance (Cap 219).
Section 55 further provides that the receipt of the
mortgagee for the sale monies is a sufficient discharge.
Power of Sale
Although this provision provides no protection where the
purchaser in fact becomes aware of any facts showing
that the power is not exercisable or some impropriety in
the sale: Lord Waring v London and Manchester
Assurance Co Ltd [1935] Ch 310; Tang Ying Ki v Maxtime
Transportation Ltd [1996] 3 HKC 257, a mortgagor must
still act promptly to set aside the sale: Bailey v Barnes
[1894] 1 Ch 25.
The court’s power to set aside the sale is also
discretionary.
Any person who suffers loss through an unauthorized,
improper or irregular exercise of the power of sale shall
have a remedy in damages against the person
exercising the power: s 52 Conveyancing and Property
Ordinance (Cap 219).
Power of Sale
Hong Kong has not introduced the equivalent of s 91(2)
of the Law of Property Act 1925 which grants the court a
wide discretion to order the sale of the mortgaged
property “on the request of the mortgagee, or of any
person interested either in the mortgage money or in
the right of redemption” (eg mortgagor)
notwithstanding the dissent of “any other person”.
This raises the question of how the Hong Kong courts
would tackle a situation like that which arose in the
case of Palk v Mortgage Services Funding plc [1993] Ch
330.
In Palk, the mortgagors in default, who could not cope
with the mounting arrears of the mortgage instalments,
negotiated a private sale of the mortgaged property for
£283,000.
Power of Sale
However, this fell far short of the £358,000 required to
redeem the mortgage and so the first mortgagee
declined to agree to the sale.
Instead, it proposed to let the mortgaged property on
short-term leases until such time the property market
improved, crediting the mortgagors with the rental
income in the meantime.
However, this course of action would lead to an income
shortfall which would increase the mortgagors’ debt by
about £30,000 per year.
In effect, the mortgagee was speculating on the future
movement of the property market at the expense of the
mortgagors.
Power of Sale
The English Court of Appeal held that the court’s
discretion to order a sale under s 91(2) of the Law of
Property Act 1925 was “unfettered” and could be
exercised even when the property was in negative
equity.
This was because s 91(2) of the Law of Property Act 1925
was an “overriding statutory power” which displaced
the mortgagee’s otherwise unfettered right to
determine the date of sale or decide on lettings.
Equivalents to s 91(2) of the Law of Property Act 1925
can be found in other common law jurisdictions, eg s 30
of the Conveyancing and Law of Property Act 1886
(Singapore).
Does this mean that mortgagees in Hong Kong can
speculate on the property market at the expense of
mortgagors?
Right to Take Possession
Historically, a mortgagee had the right to take
possession of the mortgaged property as soon as the
mortgage is effected.
This stemmed from the fact that the mortgagee had
legal title which carried with it the right to take
possession.
Nevertheless possession was not usually sought
immediately because it came with onerous duties.
Possession is normally sought before exercising a power
of sale so as to sell with vacant possession. Otherwise, it
is sought if the mortgagee wishes to lease out the
property to recover its loan from the rent received.
If the property is already validly tenanted, taking
possession entails instructing the tenant to pay rent to
the mortgagee instead of the mortgagor.
Right to Take Possession
Post-1984, the right to take possession stems not from
legal title but legal implication: s 44(2) read with s 51(1)
and para 2 of the Fourth Schedule of the Conveyancing
and Property Ordinance (Cap 219).
Note, however, that the same limitations now apply to
the exercise of the right to take possession as that which
applies to the statutory power of sale.
First, the mortgage must be by deed: s 4(1) and 51(1)
Conveyancing and Property Ordinance (Cap 219).
Secondly, para 11 of the Fourth Schedule sets out the
conditions upon which the right to take possession is
exercisable.
Right to Take Possession
These are:
(a) notice requiring payment of the mortgage money
has been served on the mortgagor and default has
been made in payment of part of the mortgage
money for one month after such service; or
(b) interest under the mortgage is in arrear and unpaid
for one month after becoming due; or
(c) there has been a breach of a provision of the
mortgage other than a covenant for payment of
the mortgage money and interest.
Right to Take Possession
However, upon taking possession, a mortgagee is liable to
account strictly for any income that it actually receives as
well as what it ought to have received but for its gross
negligence or wilful default.
If the mortgagee leases the property, the lender must
obtain the market rent: White v City of London Brewery
(1889) 42 Ch D 237.
If a mortgagee goes into possession of the mortgaged land
and starts using the land for its own purposes, it is liable to
pay an occupational rent.
A mortgagee in possession is also obliged to use the
income received from the property to pay for repairs
necessary to keep the property in a reasonable state of
repair.
It is also responsible for any damage occasioned by its own
wilful negligence.
Right to Take Possession
A mortgagee, as a person deriving title from the
mortgagor, may become liable under s 41
Conveyancing and Property Ordinance on the
covenants affecting the land, whether under the
Government lease or any deed of mutual covenant,
e.g. the covenant to pay management charges.
Power to Appoint Receiver
Owing to the onerous duties imposed on a mortgagee
in possession, few mortgagees would take possession
except for the purposes of then effecting a sale with
vacant possession.
If a mortgagee does not wish to exercise its power of
sale, it would prefer to appoint a receiver instead of
taking possession.
The power to appoint a receiver, like the power of sale,
has contractual origins.
Like the power of sale, the power became
commonplace before being statutorily implied under
certain circumstances.
Under s 50 Conveyancing and Property Ordinance, a
power to appoint a receiver is statutorily implied in all
mortgages by deed post-1984.
Power to Appoint Receiver
One of the key advantages of appointing a receiver is
that although the receiver is appointed by the
mortgagee he is the agent of the mortgagor: see s 50(2)
Conveyancing and Property Ordinance (Cap 219).
Although the receiver acts for the benefit of the
mortgagee, his appointment insulates the mortgagee
from liability to the mortgagor.
A mortgagee will exceptionally become liable for a
receiver’s actions if it interferes with the receiver’s affairs.
It may also become liable if it authorises the receiver to
continue to act after the death/bankruptcy/liquidation
of the mortgagor.
Under such circumstances, the receiver becomes the
agent of the mortgagee because it can no longer be
the agent of the mortgagor.
Power to Appoint Receiver
A receiver can be appointed once mortgage money
has become due.
However, most of a receiver’s powers are derived from
the mortgagor and the mortgagee: s 50(6)
Conveyancing and Property Ordinance (Cap 219).
Where these are statutorily derived (s 51 Conveyancing
and Property Ordinance (Cap 219), they are usually
only exercisable upon default: para 11 of the Fourth
Schedule.
Like a mortgagee, a receiver’s liability to the mortgagor
is sourced in equity: Downsview Nominees Ltd v First City
Corporation [1993] AC 295.
Power to Appoint Receiver
Because a receiver is merely an agent and no property
is vested in him, he is not ordinarily able to bring actions
in his own name: Liu Yiu Keung Stephen v Keen Lloyd
Resources Ltd (in Liq) [2007] 1 HKC 605.
The statutory power to appoint a receiver must be
exercised in writing: s 50(1) Conveyancing and Property
Ordinance (Cap 219).
Personal Action
The mortgagee (as lender) may sue in contract for
breach of the agreement by the mortgagor (as the
borrower) to seek repayment of the loan and interest
under the mortgage.
As this is an action for an agreed sum, no causation or
remoteness principles apply.
Such right to sue is independent of the mortgage, and a
mortgagee’s remedies are ordinarily cumulative, which
means that the mortgagee can still sue to recover any
shortfall even after it has exercised its power of sale, if
the sale proceeds are insufficient to satisfy the loan.
However, foreclosure is not cumulative and if the
mortgaged property is foreclosed, the mortgagee
cannot sue in respect of any shortfall without re-opening
the foreclosure.
Discharge
A mortgage will be discharged if:
(i) the mortgage is redeemed by repayment;
(ii) the mortgagee exercises its power of sale;
(iii) the mortgagee exercises its power of foreclosure:
and
(iv) there is adverse possession through operation of the
Limitation Ordinance (Cap 347).
A discharge must be by deed: s 4(1) Conveyancing and
Property Ordinance (Cap 219).
However, a receipt written on or annexed to the
mortgage deed, executed by the mortgagee, will take
effect as a valid discharge: s 56(1) Conveyancing and
Property Ordinance (Cap 219).
Core Readings:
SH Goo & Alice Lee, Land Law in Hong Kong, 5th edition,
[13-79]-[13-93], [13-95]-[13-123], [13-134]-[13-139], [13-
153]-[13-156]
