A mortgagee does not have to wait for an opportune time to sell mortgaged property to achieve a better price

The English Court of Appeal has found that a mortgagee is entitled to sell mortgaged property when it likes and is not constrained by the fact that exercise or non-exercise of its power could cause loss or damage to the mortgagor.

In this case1, the bank advanced the borrower a loan to purchase three vessels and took mortgages over them as security.

When the borrower defaulted under the loan, the bank arrested one of the vessels in Panama. The vessel was loaded with bananas that were bound for Germany. In order to sell the vessel, the bananas had to be disposed of, the cost of which (US$200,000) was deducted from the proceeds of sale.

When the bank demanded payment from the guarantor of the amount outstanding, the guarantor argued that the bank had been negligent in arresting the vessel in Panama instead of allowing it to travel to Germany, where the proceeds of sale would not have been diminished by the cost of disposing of the bananas.

The court decided that:

• A mortgagee has an unfettered discretion to sell when it likes to achieve repayment of the debt it is owed, and its decision is not constrained by the fact that the exercise or non-exercise of the power could cause loss or damage to the mortgagor;
  
  
• A mortgagee is entitled to sell property "as is" and is under no obligation to improve it or increase its value;
  
  
• When a mortgagee does exercise its power of sale, it comes under a duty to take reasonable precautions to obtain fair value for the mortgaged property at the date of sale;
  
  
• The remedy for breach of that duty is not damages, but an order that the mortgagee account to the mortgagor, not just for what it actually received, but for what it should have received;
  
  
• In this case, the bank was entitled to take the view that releasing the vessel from arrest and permitting it to travel to Germany with its cargo on board was a serious risk to the bank;
  
  
• The bank owed no duty of care in deciding whether to arrest the vessel or in deciding whether to release the vessel from arrest; and
  
  
• The mortgage and loan documentation between the mortgagor and the bank contained a number of rights of the bank, in particular to take possession of the vessel and institute legal proceedings if there was an event of default. The loan agreement also provided that the bank was entitled to exercise its rights and powers notwithstanding any rule of law or equity to the contrary and it was therefore impossible to argue that arresting the vessel breached a contract or duty on the part of the bank when an event of default had occurred.
  

1 Den Norske Bank ASA v Acemex Management Company Limited [2003] EWCA CIV 1559

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