Description of the legal term Power of Sale:
The term “Power of Sale” in British legal parlance refers to the right of a mortgage lender (often a bank or financial institution) to sell the mortgaged property without the need for a court order once certain conditions have been met. This power arises when the borrower defaults on their mortgage payments and is commonly laid out in the mortgage deed or agreement.
Under British law, specifically under the Law of Property Act 1925, a lender’s power of sale becomes exercisable under certain circumstances. These generally include the lender having waited a proper amount of time after the borrower has defaulted, having sent a formal demand for payment, and often only after the mortgage term has elapsed or after a certain period after the demand has been made. It is an important mechanism which enables a lender to recover the debt owed without having to go through lengthy legal processes.
Once the Power of Sale is activated, the lender is obligated to sell the property for a price that is considered to be the true market value, acting in good faith for both their interests and those of the borrower. It is not sufficient to sell the property at any price simply to recover the outstanding debt; there is a duty to obtain the best price reasonably obtainable. The proceeds from the sale first go to paying off the mortgage debt, with any surplus then given to the borrower.
The lender must comply with various legal requirements before exercising their Power of Sale, including serving notice to the borrower and any other parties with an interest in the property, such as second charge lenders. If these legal requirements are not met, the sale may be challenged and overturned.
Legal context in which the term Power of Sale may be used:
A practical example of the operation of Power of Sale might involve a particular homeowner, who, after suffering from financial difficulties, defaults on their mortgage repayments. The bank, after issuing notices and waiting the requisite period, realises that the homeowner is unable to remedy the default. The bank then invokes its Power of Sale, and proceeds to market and sell the property in question.
The property is eventually sold, and the proceeds first cover the costs of sale, followed by the repayment of the outstanding mortgage debt. Any remaining balance is then paid to the borrower. If the borrower feels that the bank did not make a reasonable effort to get a fair market price, they may have grounds to challenge the sale.
Another scenario might involve a developing property market where the values of properties are rapidly increasing. A lender seeking to exercise their Power of Sale may be incentivised to obtain the best possible price due to the rising market conditions—benefitting not only themselves but potentially leaving a surplus for the borrower after the disposal of the property.
The concept of Power of Sale holds significant importance in British law, serving as a foundation for the relationship between borrowers and lenders. It elucidates the measures a lender may take in the context of default, while imposing obligations on that lender to act fairly and reasonably. The enforcement of these obligations is instrumental in maintaining balance in financial transactions and upholding confidence in the mortgage system.
