Introduction

Power of sale is the most common mortgage remedy used by mortgagees (e.g. banks) of properties in Hong Kong. When a borrower fails to uphold the terms of the mortgage, the mortgagee may exercise the power of sale of the mortgaged property to recover the lender’s principal, interest and expenses. In this article, we will briefly look at this remedy.

Governing law

Under section 51 and the Fourth Schedule of the Conveyancing and Property Ordinance (Cap. 219), it is implied in every mortgage / legal charge that the mortgagee may sell and assigned the mortgaged property to a purchaser in such manner and subject to such lawful conditions as the mortgagee thinks fit, without being answerable to the mortgagor for any loss occasioned for such sale.

Limited duty

In Easy One Finance Ltd v Luk Wing Kee Andrew [2020] HKCFI 878, the court has helpfully summarised the duty of the mortgagee in exercising the power of sale:

“13.   It is well settled that, in exercising a power of sale under a mortgage:

1.      a mortgagee is not a trustee for the mortgagor; that once a power of sale arises the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so and that it matters not that the moment may be unpropitious or that, by waiting, a higher price could or might be obtainable;

 

2.      the mortgagee is not required to obtain the mortgagor’s consent or to inform the mortgagor before he exercises the power to sell the mortgaged property and the mortgagee is not required to consult or advise the mortgagor of the sale of the property;

 

3.      the duty of the mortgagee is limited to the duty to act in good faith and the duty to take reasonable care to obtain the true market value of the property at the time he decides to sell it;

 

4.      the mortgagee cannot be expected to get the market completely right, nor is he required to do so;

 

5.      when the judgment involves assessing the market value of the property the mortgagee will have acted reasonably if his assessment falls within an acceptable margin of error;

 

6.      the steps taken by the mortgagee and those acting with him must be viewed in the round and in practical commercial terms; and

 

7.      in assessing whether or not a mortgagee had breached his duty as regards the exercise of its power of sale, the burden of proof fell upon the mortgagor.”

Self-dealing rule

Pursuant to Easy One Finance, the mortgagee has a wide discretion to sell the mortgaged property in case of default. However, there are a number of exceptions. One of the major exceptions is the self-dealing rule, i.e., the mortgagee is prohibited from selling the mortgaged property back to himself.

The rationale of this exception is that, “For a sale by a person to himself is no sale at all, and a power of sale does not authorise the donee of the power to take the property subject to it at a price fixed by himself, even though such price be the full value.” (see Farrar v Farrars Ltd. (1888) 40 Ch.D.395).

Exceptions – selling by the mortgagee to a connected party

A mortgagee selling the property to himself or connected parties may lead to the risk of bad faith or collusion, potentially violating the duties of a mortgagee to act in good faith as mentioned in Easy One Finance above. A mortgagee in exercising his power of sale must do so with a view to recovering of the debt secured by the mortgage. Provided that such recovery was one of his purposes of taking action, it does not have to be his sole purpose.

In Tse Kwong Lam v Wong Chit Sen Anor [1983] 3 ALL ER 54 (PC), where the mortgagee sold the mortgaged property to a connected company in an auction, Lord Templeman states,

“In the view of this Board [Judicial Committee of the Privy Council] on authority and on principle there is no hard and fast rule that a mortgagee may not sell to a company in which he is interested. The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time.”

Lord Templeman then when on to criticize the manner such auction and failure to obtain valuation and ultimately held the mortgagee has failed to satisfy the court that he had taken reasonable steps to obtain the best price reasonably obtainable and that the mortgagee’s company bought at the best price. The Privy Council held in favour of the mortgagor but refused to set aside the sale because of the mortgagor’s “inexcusable delay” in pursuing the counterclaim (lapse of time) hence the mortgagee was ordered to pay damages.

Takeaway

While the mortgagee (lender) has a wide discretion in exercising the power of sale in case the borrower is in default, the mortgagee should not directly purchase the mortgaged property. In the event the mortgagee wishes to have the mortgaged property purchased by a connected company, the burden will rest with the mortgagee to show that the sale was in good faith and that the mortgagee has taken reasonable precautions to obtain the best price reasonably obtainable at the time.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

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