Buying at auction and release of judgement mortgages

I was looking at buying at the Allsop auction tomorrow and have had a solicitor had a look at the documents on line. On the property I am/was thinking of bidding on, there is a judgement mortgage for a debt registered after the main mortgage held by the bank. The special conditions say that there will be no release of any mortgages other than the banks mortgage and I am inclined to walk away at this point except that, contrary to what I have read on this site, my solicitor is saying that the Land Registry are telling him that when I buy the property the judgement mortgage will "fall away" and I will be left with a clean title. Apparently this is relatively new practice of some sort. This doesnt sound right to me and I am slow to rely on a conversation with the Land Registry which may or may not turn out to be the case after the hammer comes down.

Anyone heard of this practice of the Land Registry?

when I buy the property the judgement mortgage will "fall away"

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This comment appears very strange and improbable. Yes, a JM becomes unenforceable after 12 years, but I haven't herad of any change in legislation where it is taken off the Folio if the property changes hands. If you still want to progress the sale, get advice from another solicitor.

Correct me if I'm wrong, but I thought the whole point of a judgement mortgage is that if the property is sold the holder of the judgement is entitled to be paid from the sale proceeds?

This is, I assume, in circumstances where the mortgagee sells in possession and normally their charge isnt fully satisfied by the sale proceeds- ie there is nothing left for the judgement mortgage or any charge registered after the first charge. If you have concerns you should talk again to your solicitor and get further advice.

Yes Vanilla exactly.

In the end I attended the auction but didnt buy because I was concerned that, whilst the banks (BOSI) mortgage would be released on sale to the purchaser, there were subsequent JMs for which the contract specifically provided wouldnt be released.

A lot of the properties at the auction had JMs (after the main BOSI mortgage) with provisions in the contract for no release of the JM on sale and I was amazed at the level of interest from purchasers given this potential issue. I realise that they could be taking the view that they would hold the property for 12 years and the JMs become unenforceable but even still I found it hard to believe especially where (on the law of averages) some of these properties must have needed bank finance. Surely a bank wouldnt finance a property which had a JM which wouldnt be released on purchase?

I am happy I did the right thing given my concern but I cant help thinking what am I missing?!

Run away as fast as you can.

This can only be possible where a Bank/BS is completing the sale as a "mortgagee in posession". I.e. the full proceeds of sale go to clear the mortgage on the property. from the perspective of a purchaser, relevant assurances on same would need to be available prior to any transaction agreement being entered into.
In a normal sale the purchaser would be fully protected. However, the T&C's relating to Allsop type auctions may not give the purchaser that protection! A solicitor should be in a position to check this out on behalf of a potential purchaser.

Vanilla said:

This is, I assume, in circumstances where the mortgagee sells in possession and normally their charge isnt fully satisfied by the sale proceeds- ie there is nothing left for the judgement mortgage or any charge registered after the first charge.

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If BoS has a mortgage of €300k and MBNA has a judgment mortgage of €20k. If the proceeds are €200k, does the MBNA judgment mortgage "fall away" or does it still attach to the property?

If the judgment mortgage is still valid, one could simply factor it into one's purchase price.

For example:

You can buy the property for €170k and then pay €30k to the holder of the judgment mortgage.

So if you were prepared to pay €160k for a €200k property, you can now adjust your bid down to €130k, pay €30k to the holder of the judgment mortgage and still get a bargain.

Brendan

Brendan Burgess said:

If the judgment mortgage is still valid, one could simply factor it into one's purchase price.

For example:

Property value| €200k
Judgment mortgage|€30k
net property value|€170k

You can buy the property for €170k and then pay €30k to the holder of the judgment mortgage.

So if you were prepared to pay €160k for a €200k property, you can now adjust your bid down to €130k, pay €30k to the holder of the judgment mortgage and still get a bargain.

Brendan

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That is exactly the calculation I did on the property I wanted to bid on. Trouble is, it made the property expensive relative to similar property in the area hence I didnt bid. Reminded me of the madness in the Celtic Tiger era where people were buying investment property with a nominal yield which doesnt make sense.....

Brendan Burgess said:

If BoS has a mortgage of €300k and MBNA has a judgment mortgage of €20k. If the proceeds are €200k, does the MBNA judgment mortgage "fall away" or does it still attach to the property?

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Nope. It will stay unless discharged.

This is where it is dangerous for any purchasers.

Why are they saying these JMs will not be discharged?

JackMerridew said:

As I understand it, a purchaser for value from a Receiver in possession causes subsequent judgements to transfer to the proceeds of the sale. The purchaser obtains a clean title. The receiver has to account to the judgement mortgage holder for any monies left over after his appointer is paid off.

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Not exactly. In contracts I have seen the receiver holds the option to sell and assure only the mortgage pursuant to which he has been appointed or, alternatively, request that the Bank undertakes to clear the other judgement mortgages, existing or potential, and provide an assurance to the purchaser as mortgagee in possession.

Receivers seem to be slow to go about the latter, as seemingly it partly defeats the purpose of the bank having appointed the receiver, but is ultimately far better for the purchaser and removes the uncertainties that deter purchasers.

This is a ridiculous way for the receivers/banks to act, when it is within the power of the Bank to sell as mortgagee in possession and as evidenced by this thread, it is preventing properties from selling at their full value, many of which effectively belong to the taxpayer, pumping up fees for solicitors and dragging out the fiasco of re-possessing mortgaged property.

Perhaps somebody can explain the value of a receiver to the Bank.

Badran said:

Receivers seem to be slow to go about the latter, as seemingly it partly defeats the purpose of the bank having appointed the receiver, but is ultimately far better for the purchaser and removes the uncertainties that deter purchasers.

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Badran

That is very interesting and informative.

In layman's terms, am I right in saying that the receiver could sell the property and wipe out the judgment mortgages at no cost to his client or to the buyer? Assuming that the sales proceeds are less than the first mortgage outstanding.

This is very interesting, don't remember anything about how 'judgement mortgages' fall away when one purchases at auction on the Allsops website. But in any case it just shows that if you are going to purchase at auction you must hire a solicitor to look into the title. Money well spent. Presumably the banks that are now willing to lend on these will also be able to advice on the process (BofI and UB I think) as they won't give a mortgage unless title is clear.

Any up to date information on property sales "mortgagee in possession". Will the judgement mortgage "fall away", leaving the buyer with a clean title. if the purchase price fails to fully clear the first mortgage?

The sequence is normally as follows:-
1. Borrower buys property with bank funding and becomes registered legal owner
2. Borrower grants bank a registered mortgage over legal ownership which includes a power to sell and power to appoint Receiver
3. Judgment mortgage is registered against the Borrower's legal ownership by a third party
4. Borrower defaults and bank appoints Receiver
5 Receiver puts property up for sale (or auction) and signs a contract to sell to the purchaser

The contract is normally always signed with the Receiver but it is the Deed that makes a difference in respect of the judgment mortgage (or any other encumbrance registered after the bank's mortgage). There are 2 options with the Deed:-

1. Receiver executes Deed - what actually happens here the vast majority of the time is the Receiver is the agent and attorney of the borrower and signs the deed as the borrower. He does not sign the Deed on behalf of the bank, even though the bank has a mortgage and is in a position to transfer title as a result. The title moves from the (defaulting) borrower to you as purchaser and afterwards the bank will release its mortgage over the property, so that you get a clear title (apart from the judgment mortgage). The problem here is that the judgment mortgage affects the borrowers' title, and if the sale is completed in this scenario with a Deed from the borrowers (via the Receiver's hand) then the judgment mortgage will carry over and affect your title. In practice what would actually happen would be that the bank would give you a deed as mortgagee in possession in order to retain all of the purchase monies for itself and not have to pay anything to the owner of the judgment mortgage and the receiver would not normally be a party to that type of deed (see below).
2. Deed from Bank as mortgagee in possession - when done this way, the deed is from the bank direct to the Purchaser. The bank has title to the property by virtue of the mortgage and it ranks in priority to the judgment mortgage, as it was registered first. You will see quoted above that the 2009 Act provides that when the bank sells as mortgagee in possession like this the property is freed from any other interests ranking below/after the mortgage (which would include the judgment mortgage). This was the law previous to that Act too, so there is no change here.

In practice, if there is a judgment mortgage registered like this it shouldn't make any difference to you. If there is one, the bank will give you a deed as mortgagee in possession in order to avoid having to pay off the judgment mortgage. If for some stupid reason they didn't and insisted on a deed from the Borrower via the Receiver, then the judgment mortgage would be something that affects the Borrower's title, it would show up on a search and the Receiver would be obliged to discharge it and the bank would get less money. It would not increase the price to you, you would pay the same amount either way, the price you agreed to pay at the auction or on the contract. (I am assuming here that the contract does not provide otherwise and/or that there are no special conditions eg providing that the judgment mortgage will carry over to you etc)

Some mortgage deeds provide that the Receiver can exercise the power of sale on behalf of the bank, but I have never seen it done like this. The deed is normally always either 1) from receiver as attorney for borrowers or 2) from bank as mortgagee in possession, with No. 2 being far more preferable. There can be issues in the appointments of Receiver and whether they are validly appointed, a deed from the bank based purely on a solid mortgage title is a lot cleaner and less convoluted than a deed from a Receiver (on behalf of the borrower) based on the borrowers title + a number of powers contained in the mortgage deed.

Many thanks 1urka. for your reply. Are the rules the same for a commercial property?