A mortgage is a loan of cash to the borrower (mortgagor), which is secured by the lender (mortgagee) being given rights over the property being offered as security. Arguably, the most powerful remedy available to a mortgagee on a default of the mortgagor is the ability to realise its security by enforcing a sale of the secured property – otherwise known as the “power of sale”. 

A wealth of case-law exists on the “power of sale”. The latest commercial case is the High Court case of Skelwith (Leisure) Ltd v Armstrong and Others (2015), which dealt with the question as to whether an equitable owner of a mortgage had the ability to exercise a power of sale. 

Strictly speaking, a “legal mortgagee” is one who has been registered at the Land Registry as being the owner of the mortgage. Until such registration, the mortgagee will simply hold an equitable (i.e. beneficial) interest in the property and its rights and remedies will therefore be limited. 

In Skelwith, the claimant was an entity that had bought a property known as Flaxby Golf Club for circa £7 million. The claimant made the purchase with the help of a mortgage and had missed making the agreed payments. The court was asked to consider whether Polar, a company who was the assignee of the original mortgagor, had the ability to exercise the power of sale of the property to a third party company. Though the assignment of the mortgage to Polar had been executed, it had not been substantively registered at Land Registry and Polar was therefore the equitable assignee only. In this respect,Skelwith was distinguishable from previous cases, where the charge itself was not registered as a legal mortgage; in this case it was the assignee (i.e. the mortgagee entity) that was not registered as the legal owner of the mortgage.  

The relevant legislation on mortgages provides that the power of sale is exercisable by “anyone who is entitled to receive and give a discharge for mortgage money”. Other provisions on mortgagee’s powers provide that an owner of a mortgage has the power “to make a disposition of any kind of the secured property”. A person so entitled to exercise the mortgage owner’s powers would be “anyone who is the registered owner of a charge or a person who is entitled to be registered as the owner of the charge”. 

Polar’s first argument, in light of the fact that it obviously wasn’t a registered mortgagee, was that it was “entitled” to be registered as owner of the charge. However the court swiftly concluded that such a person entitled would not necessarily enjoy all of the powers that it would have if it had been substantively registered as the owner. The distinction between the powers of legal and equitable mortgagees could not be disregarded and the principle of nemo dat still applied i.e.  a person who does not own property cannot confer it on another, except with the “true owner's” authority.

The court then considered Polar’s second argument that it was entitled to receive and give a discharge for mortgage money. Polar contended that a beneficial assignment of the mortgage was sufficient to give rise to such entitlement, whereas the claimant argued that the debt had to have been assigned at law, not merely in equity. The court found in Polar’s favour that, whilst older cases suggested that equitable assignees could not give a valid discharge for a debt unless expressly empowered to do so, the current doctrine is that an equitable assignee is considered to have a substantive legal right to sue for the assigned debt. On this basis, Polar’s argument was valid; it was entitled to give and receive a discharge for mortgage monies and therefore able to exercise a power of sale. 

The case is likely to be significant for commercial lenders in that it demonstrates that a delay or failure to substantively register a mortgagee’s interest may not necessarily be fatal to the mortgagee’s power of sale. However, lenders should proceed with caution when seeking to rely on Skelwith. It is possible that the courts may, in subsequent cases, consider why there was a delay or failure to substantively register the mortgagee’s interest. If so, it is unlikely that undue idleness on the part of the lender in promptly registering its security interest would be looked upon favourably. 

On a practical level, the registration of security interests on behalf of lender clients is a long established part of professional practice. Unless a substantive change in legislation comes about, it is highly unlikely that sensible law firms would risk overlooking registration of a mortgagee’s interest simply on the basis of recent case-law.