Portsea Football Club is the owner of a city centre football stadium. Whilst it is difficult to put a value on the stadium as such, the land on which the stadium is built has provisionally been valued for redevelopment purposes at some i?? 5,000,000. Three years ago the football club took out a loan with the Portsea and District Bank for the sum of i?? 2,000,000, repayable (with interest) by equal monthly instalments over the period of ten years in order to finance improvements to the stadium and the loan is secured by a legal mortgage on the land.
The football club is now in serious financial difficulties however, and has failed to pay the last two instalments when they fell due. Advise the Bank. The classic definition of a mortgage was provided by Lindley, cited in Chapelle (2007 p336) as “a transaction under which land or chattels are given as security for the payment of a debt or the discharge of some other obligation. ” It is fair to say that the relationship between Portsea Football Club and the Portsea and District Bank is directly related to the definition provided by Lindley.
The security provided by the football club is the land belonging to the club on which the stadium is built. Portsea Football Club has borrowed two million pounds from the Bank, using the value of its land to secure the loan and it has a legal obligation to repay this mortgage plus interest. In this particular case, the Portsea Football Club is under a lien mortgage. A lien may arise at common law, in equity or under certain statutes. A common law lien is the right to retain possession of the property of another until a debt is paid, as stated by Oakley (2002 p. 92). As noted in Clarke & Greer (2008 p384), the Law of Property Act states, “A mortgage of an estate in fee simple shall only be capable of being effected at law either by a demise for a term of years absolute, subject to a provision for cessor or on redemption or by a charge by deed expressed to be by way of legal mortgage. ” Clarke & Greer (2008 p385) note that there are two ways of creating a legal mortgage and describe these as follows. Firstly by ‘grant by demise’ (term of years absolute).
In this case, if the ‘mortgagor’ owns the fee available over the property then a legal mortgage can be granted and this will be by demise to the ‘mortgagee’. Once the fee has been paid back plus interest under the mortgage arrangement, the demise will then come to an end and the mortgagee’s interest in the property will cease; this is also known as ‘cessor on redemption’. The second way of creating a legal mortgage is by ‘legal charge’ (charge by deed).
In simple terms, a legal charge grants the mortgagee a legal interest in the mortgagor’s land until the mortgage is repaid. The legal charge has to be made by deed; also the land must be registered in order to protect the owner’s interest. The second type of mortgage is an equitable mortgage which is available if a mortgagor has just equitable interest in the land. This is true of beneficiaries under a trust who have only equitable interests and so can create only equitable mortgages. Clarke ; Greer (2008 p384).
As stated by Jackson, Stevens, ; Pearce (2008 p. 579), a legal mortgage must be created by deed. Equity recognises any specifically enforceable agreement to provide security as sufficient to create a mortgage or charge. Since 1989 any contract for grant over an interest in land must be made in writing. Also, it must contain all the specific performances and be signed by both parties. This is seen in the case Kuwait v Sahib (1996). Portsea Football Club have taken out a legal mortgage with the Portsea and District Bank.
The Bank has five potential remedies to recover its money which are as follows: Legal action on the mortgagor’s personal covenant to repay the mortgage; the right to repossession; the right to appoint a receiver; the right to sell the mortgaged land and the right to foreclosure. In addition, there is the opportunity to meet with the club’s directors on an informal basis, in order to gain a fuller understanding of the financial difficulties which the club is experiencing and their proposals for meeting the financial obligations of the mortgage.
If the informal approach fails to find a satisfactory solution, then consideration should be given to the formal remedies available to the Bank as follows: The right to sue on the covenant. When Portsea Football Club was granted the mortgage, it undertook an obligation to repay the money lent by the mortgagee, in this case the Portsea and District Bank, plus any interest accumulated. As the Portsea Football Club has failed to honour this agreement by not making regular payments by the due date, the football club is in breach of the covenant and can be sued at common law, as perceived by Chapelle (2007 p345).
Chapelle also comments on the Limitation Act 1980. It is held under the Limitation Act 1980 that any action to recover the principal monies and any interest owing must be brought by the mortgagee within 12 years from the date when the right to receive the money arose. However, this period will run afresh each time the mortgagor either pays off some of the monies owed, or acknowledges in writing the liability to pay. Clarke ; Greer (2008 p391) state that the mortgagee can only sue the mortgagor on the covenant, if the mortgagor is actually in arrears.
This is no use to the mortgagee if the mortgager has no money or assets to repay the monies owing. This remedy is mostly combined with repossession or sale. Oakley (2002 p 502) cites the case Alliance and Leicester Plc v Slayford (2001) to illustrate this remedy. Clarke ; Greer (2008 p. 353) state that the mortgagee also has the option of the right to repossession of the mortgaged premises under the terms of the mortgage agreement, if there is failure of payment.
In most cases, banks and building societies have no interest in possessing the mortgagor’s premises; in order to access the premises the bank would have to take out a Court Order. This remedy is often seen as unethical when mortgagors are living on or using the land. Land with a use of accommodation is very difficult to sell, so many banks refrain from using this method. The other limitation with this remedy is that under the Criminal Law Act 1977, the Bank is in danger of breaking the law if the mortgagor is harmed or treated in a violent or threatening manner in the course of repossessing the land.
Chapelle (2007 p353) notes that Lord Denning stipulated in Quennel v Maltby (1979), “a mortgagee will be restrained from getting possession except when it is sought bona fide and reasonably for the purpose of enforcing the security and then only subject to such conditions as the court thinks fit to impose. ” Gray & Francis (2007 p525) state that in circumstances where the mortgagor is in breach of mortgage, the mortgagee has the statutory power to appoint a receiver to then handle the income of the mortgaged property (Law of Property Act 1925, ss101 and ss109).
Gray and Francis also note that the receiver becomes responsible for managing the property including paying the properties expenses and then applying any money left over to repay the mortgage. Clarke S & Greer (2008 p395) consider the advantages of this method. If the mortgagee is deemed as the agent of the mortgagor, there is no responsibility for the mortgagee of their actions. Gray & Francis (2007 p525) support this statement by quoting the case of Refuge Assurance Co Ltd v Pearlberg (1938). If Portsea and District Bank choose this option, they will have to put the interest in another company.
The appointment of a Receiver will therefore allow Portsmouth and District Bank to acquire any monies owed to them without selling off Portsea Football Club’s stadium ground. Thompson (2008 p459-460) looked at the right to sell the mortgaged land. This remedy is usually activated after the mortgagee has obtained possession. Thompson also quoted the Law of Property Act 1925, (1) “where a mortgagee, where a mortgage has been made by deed, shall …. have the following powers: (i) A power, when the mortgage money has become due, to sell, or concur with ny other person in selling, the mortgaged property. ”
The Law of Property Act 1925 s. 103 also states: “A mortgage shall not exercise the power of sale conferred by the Act unless and until: (i) Notice requiring payment of the mortgage money has been served on the mortgagor or one or two of the mortgagors, and default has been made in payment of the mortgage money, or part thereof, for three months after such service, or (ii) Some interest under the mortgage is in arrears and unpaid for two months after becoming due, or iii) There has been a breach of some provision in the mortgage deed or in this Act. ” Clarke ; Greer (2008 p396) maintain that the limitation with this remedy is that if the mortgagee sells the property before the power of sale becomes exercisable, the mortgagor has the ability to sue the mortgagee. It should be clear, that if Portsea and District Bank possess or undertake the Portsea football club, there is no duty by the bank to continue the mortgagor’s business as shown in the case AIB Finance Ltd v Debtors (1998) cited by Clarke & Greer (2008 p398).
Chapelle (2007 p362) comments on the final remedy – the right to foreclosure. If a mortgagee forecloses then the mortgagor will lose his/her land and any equity. The Law of Property Act 1925 s91, tries to enforce the order of sale instead of foreclosure. Chapelle quotes the case Palk v Mortgage Services Funding plc which illustrates that the principle is to strike a fair balance between the interests of the parties. If Portsea and District Bank decide to implement the remedy of foreclosure on the Portsea Football Club, then it must apply for a Court Order.
Following this action, there would then be a period of usually six months for the mortgagor to repay the outstanding debt. These are the formal and informal approaches that could be taken by Portsea and District Bank in order to recover the outstanding debt from Portsea Football Club. If a formal approach is adopted, the actual remedy is a matter of judgement for the Bank. In all the circumstances of this case, however, the Bank may consider that the appointment of an official Receiver is the most appropriate formal course of action with which to proceed.