20. Mortgagee in possession - Lavelle Coleman

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See our separate chapters in relation to residential and commercial property management. There may be a fixed term lease, in which case, the bank is bound to wait until after it expires to obtain vacant possession. There may be a rolling tenancy from period to period. It is generally possible to terminate a rolling tenancy in order to sell the property. Rolling residential tenancies have certain protections after six months. The bank may choose to sell a property under its power of sale with the tenant in place. This may be the most appropriate means of realising the security. The bank has some general obligations in relation to how it exercises its power of sale. Unless there was some financial good reason to the contrary, a sale with a tenant in place will be permissible. If a much higher price could be obtained with vacant possession, there may be a duty to obtain possession. If the tenancy does not bind the bank (because for example, it was made without consent), the bank is not entitled to demand rent as such. However, the bank may create a new tenancy by requesting and accepting rent. Alternatively, the bank may take action for possession of the property. Peaceable possession, other than by way of the tenants surrender, is not usually possible with residential property. A Private Residential Tenancies Board order is usually required. A mortgagee in possession of land may accept surrenders of leases and grant new leases under certain conditions set out in the Conveyancing Act. The powers may be delegated to a receiver. Furniture and Movables When a tenancy or lease of furnished property is in being, the mortgagee under a mortgage by an individual will have no claim to the movables and furniture. Strictly speaking, it is necessary to apportion the rent between the buildings, land and fixtures on the one hand and movable items / contents on the other hand. Contents and movables may be included in the letting, even though they belong to the borrower. If furniture or other effects are left in the property, a mortgagee in possession may obtain an order for their removal. Potentially, the borrower could be in breach of court order and be liable for contempt of court if he fails to remove them. Alternatively, if a judgment for the debt is executed, the sheriff may enforce against the goods. Movable items on a premises may be an impediment. A mortgagee in possession is generally entitled to remove an impediment. It may be entitled to the cost of removal. The mortgagee is generally allowed to store movables and to add the storage costs and expenses to the debt,
provided they are justifiable. Alternatively, the mortgage itself may specify what is to happen. Application of Proceeds A mortgagee is obliged to apply the receipts from the property, such as rents and profits as follows v paying outgoings; v paying interest on prior mortgages; v paying costs and expenses; v paying interest on the mortgage; v paying any surplus to the person next entitled, which may be the mortgagee, in reduction of the principal. A mortgagee who takes possession is not allowed to take any advantage beyond securing payment of the mortgage. It must use reasonable diligence to use the property in order to realise the money due, having regard to the fact that the property may ultimately be restored to the mortgagor, if there is a surplus. A mortgagee must account for rent and profit actually received and also rents and profits which would have been received, but for its willful default. The mortgagee must therefore take reasonable care to maximise the return from the property. This duty is often modified by the terms of the mortgage. The person to whom the mortgagee must account for any surplus (if any) depends on who is interested in the property after the mortgagee. There may be a second mortgage. If there is none, the person to whom account is made, is the borrower / owner. A mortgagee in possession cannot charge a commission, but can recover necessary outlay and expenses. A mortgagee in possession is generally entitled to claim the cost of rent collection and agents expenses. If the mortgagee in possession manages the property through an agent or employees, it may generally charge for their salaries. The mortgagee is not generally allowed anything for its own internal costs in collecting rents, although the mortgage may provide that a commission is payable. Duties of Mortgagee If the mortgagee itself takes possession and uses the property, it would be obliged to pay rent for occupation. This is not the case, if the occupation is for the purpose of a sale within a reasonable time. If a property is vacant and it is appropriate, the mortgagee should attempt to let it at a proper rent. However, there is no duty to do so, if this would impede the sale or if the tenant might obtain statutory rights. A mortgagee will only be liable in respect of rent he would have received, if the
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20. Mortgagee in possession - Lavelle Coleman

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