A mortgagee (a lender) is given a right to repossess premises, to take over the conduct of a business and to lease out or sell the premises or business.
These powers must be specified in the mortgage document. This document will usually be a mortgage over real estate, a company debenture or a bill of sale. The document will specify what notice must be given by the mortgagee. Notice can be given if there are any arrears of payment. However if the mortgagee does not take action within the time given in the notice, it is usually necessary to serve a notice of intention to repossess allowing at least one month to rectify the breach. After that period, repossession can take place [Law of Property Act 1936 ].
Usually a mortgagee will use a lawyer and a process server to prepare and serve the notice of intention to repossess. An accountant will then be appointed to act for the mortgagee, operating the business or organising it for sale. A land agent may be used to advertise the business for sale. A lawyer or land broker will handle the actual sale. A mortgage document will state that the mortgagee can recover all its costs, including fees for its own time, against the tenant. These costs are substantial and a tenant will suffer a heavy loss if a mortgagee does take possession.
A mortgage document is generally worded to allow the mortgagee the maximum amount of power to decide what course of action to take to recover the mortgagee's losses. A mortgagee in possession should not run down the business unnecessarily. However, it does not have to consider the tenants' interests in deciding how best to recover the losses. The mortgagee must give a written report to the tenant at the end of the possession listing its expenses, income and of assets sold.
A tenant can sue a mortgagee in possession for negligence, but this is difficult to prove. A mortgagee need not sacrifice its own interests for the sake of preserving the tenant's livelihood. However, it cannot be wasteful in allocating resources or spending time on activities that benefit neither the mortgagee nor the tenant. The mortgagee must make a reasonable attempt to sell assets at a market price. Auctions are allowed. If the business is not adequately advertised or it can be proved that a better price could have been achieved if reasonable steps had been taken, then an action in negligence may succeed. These actions are expensive and the tenant must prove that no reasonable mortgagee would have acted as this particular mortgagee did.
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