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Conveyancing Practice

Additional Practice Question – Mortgagees’ Powers

2007/08 – Question B2(c)

Sonia, who is represented by Spa & Co, owns a ground floor shop (“the shop”) at
Lucky Centre, 88 Lucky Road, Hong Kong. She has entered into a binding
agreement to sell the shop to Terry, who is represented by Zen & Co, and the agreed
completion date is 27th December 2007.

The shop is currently mortgaged to Precious Bank Ltd, which is also represented by
Spa & Co. Precious Bank Ltd will be signing a Receipt on Discharge of a Charge at
completion by virtue of a Power of Attorney in favour of Danny Chin dated 9 th
November 2005.

Your firm acts for Money Bank Ltd, which is Terry’s prospective mortgage, to prepare
a Legal Charge identical in form to Form 5 of the Third Schedule to the CPO.

Title to the shop has been approved and the parties have agreed to complete by way
of undertakings adopting, where appropriate, the Law Society’s recommended forms
of undertakings.

For the purposes of this question B2(c) only, you are to assume that it is now two
years after completion of Terry’s purchase and that the proposed partitioning of the
shop has never taken place. Money Bank Ltd informs you that Terry has been in
default of mortgage payments for the past 3 months. It wishes to know whether it
can sell or rent the shop and if so, when it can exercise such power in normal
circumstances. Furthermore, it wishes to sell or rent the shop to one of its senior
managers. Advise Money Bank Ltd.

Powers of Money Bank Ltd (“the Bank”) to lease and sell

Pursuant to section 51 of the Conveyancing and Property Ordinance (“CPO”),


subject to any express contrary intention (note: the fact that the parties used a form
identical to Schedule 3 Form 5 of the CPO indicates the absence of such contrary
intention), the powers of a mortgagee (e.g. the Bank) set out in Schedule 4 of the
CPO are implied into any legal charge or equitable mortgage by deed. The powers
include powers to take possession: paragraph 2, to lease: paragraph 4 and to sell:
paragraph 8.

When it can exercise such powers in normal circumstances

1. Events of default

In general, the Bank shall not exercise such powers unless one of the events
described in Schedule 4 paragraph 11 has occurred. Applying into the Bank’s
situation, although it is unclear whether the Bank has served a notice on Terry
requiring payment of the mortgage money under paragraph 11(a), the fact that
Terry has been in default in 3 months implies that interest under the mortgage
may have been unpaid for more than one month after becoming due under
paragraph 11(b). Relying on paragraph 11(b), the non-repayment would likely
be an event of default and the Bank should be able to exercise its powers
under Schedule 4.
Conveyancing Practice
Additional Practice Question – Mortgagees’ Powers

2. Timing of sale

If the Bank decides to sell or lease Terry’s flat, applying China and South East
Bank Ltd v Tan Soon Gin, the Bank can generally decide on the timing of sale
so long as the price obtained is the fair market price of the lease or the sale.

Selling or renting the shop to one of the Bank’s senior managers

Nonetheless, if the Bank wishes to sell or rent the shop to one of its senior managers
i.e. a closely connected person, Terry may challenge that the power of sale has been
wrongfully exercised on the ground that the Bank has not used its best endeavour to
obtain the best price for him.

Applying Tse Kwong Lam v Wong Chit Sen, the Bank is not absolutely barred from
selling or renting the shop to a closely connected person e.g. the senior manager.
However, if the Bank has done so, it will be put on enquiry. The transaction will be
closely examined and a heavy onus lies on the Bank to show that in all respects it
acted fairly to Terry (the borrower) and used its best endeavour to obtain the best
price reasonably obtainable for the mortgaged property. To discharge such heavy
burden, the Bank probably needs to hire an independent valuer to ascertain the best
price for selling or renting the shop.

If the Court is in the opinion that it has not exercised its best endeavour to obtain the
best price for Terry, Terry may seek to have the transaction set aside. Even if the
Court does not eventually set aside the transaction, Terry would still be likely entitled
to some damages.

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