Exercising a power of sale can be an important part of a secured lender's exit strategy on enforcement. But it is often overlooked. Our latest insight will tell you when and why it could be right for you.
Most instruments of security over land that are made by deed will contain an express power of sale. If they don't, the power of sale is applied by the Law of Property Act 1925 (LPA) section 101 and becomes exercisable subject to the provisions of section 103 of the LPA, which are for good reasons usually dis-applied in commercial mortgages and therefore not considered further here.
The power sits quietly in the security and probably won't be looked at, even where the security is likely to become enforceable and options around enforcement are being discussed. However, in some circumstances, the use of the power of the sale by the lender can have real impact and is worthy of serious consideration where there is otherwise intransigence between the relevant parties.
Multiple secured lenders may have security over the same assets and have their priority positions regulated by intercreditor and priority arrangements. Each one may have differing views on the redemption amounts claimed by the other secured lenders but are cognisant that a purchaser paying the best price for the property assets may not hang around for long. They also acknowledge that any formal insolvency enforcement could impact on price, the value of any ongoing contracts or result in other undesired consequences.
Alternatively, prior lenders may encounter subordinate lenders who have no financial upside in the mortgaged property, nevertheless refusing to give up their security or agree to the sale of the property.
Another issue may be that a company is subject to winding up proceedings and a lender may wish to protect an ongoing sale and purchase.
A potential solution
In such scenarios a secured lender may be able to unlock a difficult position by using the power of sale.
Assuming the prior security instrument has dis-applied the section 103 of the LPA restrictions (as is commonly the case) and any consents from other lenders is not required by the prior lender, then it is possible for the prior lender to exercise the power of sale and proceed to complete a sale of the mortgaged property without risk of losing the purchaser. In doing so it will overreach the interests of subordinate creditors so as to deliver registrable title to the purchaser by way of land registry form TR2. This would entitle the prior lender to take control over the sale proceeds, although any surplus on the prior lender's debt will be subject to the contractual trust arrangements in any priority/ subordination arrangements or otherwise held for the benefit of any second lender secured over the assets and their proceeds of sale.
The exercise of the power of sale has one other significant advantage over the appointment of a receiver. An LPA receiver would not be able to overreach a second chargeholder's interest in the same way a prior lender can under exercise of the power of sale. This is because the receiver acts as agent of the borrower/mortgagor and would need to deliver a consent/release from the subsequent chargeholder to a purchaser for the Land Registry to deal with registering the purchase.
For a purchaser, oblivious or indifferent to any conflicting positions between the secured parties, a sale delivered by the prior lender using its power of sale will allow the purchaser to register clean title free from the second lender security interests and without the original title being compromised - section 104 of the LPA. Priority is either an agreed contractual priority position or is determined by the sequence of registration of the security at the Land Registry. There should be no reason why the seller borrower should not provide the usual warranties on title in the contract for sale and for the contract to provide that a buyer can enforce those against the seller borrower, despite completion of the contract by the lender exercising its power of sale.
In fact, the lender exercising the power of sale does not need to be a party to the contract for sale. In using the power of sale, the lender is intervening in the sale process led by the mortgagor seller shortly before the point at which the sale is due to complete, i.e. the lender will be stepping into the process in place of the mortgagor seller to complete, or the lender can lead and complete a sale by way of TR2 alone.
A purchaser will however want to satisfy itself that the lender’s power of sale has become enforceable and exercisable. This will be governed by the security instrument terms and any requirements in subordination/priority agreements. Another useful source of information for a purchaser is Land Registry Practice Guide 75.
- A key consideration for the lender is to ensure that the power has become exercisable. Often this is a point of negotiation at the time of the creation of the charge, with lenders requiring the power to be exercisable anytime following the creation of the mortgage. In any case, it is well established that a power to sell without notice is oppressive and demand should always be made beforehand. In Miller V Cook (1870) it was said that "The power to sell without any notice to the plaintiff enabled the defendant at any moment to extinguish the right of redemption" and a power of sale leaving the mortgagor completely at the mercy of the lender will be considered oppressive.
- If secured lenders are in dispute over what forms part of the secured liabilities, then the demand need not specify the precise amounts - in Stubbs v Slater  the court said "if a mortgagee is going to exercise his power of sale he may say to the mortgagor 'pay me what you owe me; if not I will sell'. It is not for him to name the amount due. If the mortgagor asks what the amount is and the mortgagee states it, the mortgagor must come with that amount, otherwise the mortgagee may sell…Suppose a mistake has been made as the amount, the power of sale is nonetheless exercisable".
- Finally, the position of a lender exercising the power of sale is in contrast to the lender entering possession as mortgagee. The lender selling under power of sale would not the run the risk of rendering itself liable for any environmental damage and clean-up costs or other liabilities and obligations where entering possession results in the lender being a controlling shareholder.
And so, the often overlooked power of sale can, in some circumstances, come into its own and provide a quick and effective solution for a prior lender that is otherwise feeling constrained in pursuing its exit strategy.