1. Mortgages Flashcards
MORTGAGES
Def: a mortgage is a loan secured against real estate or another interest in land using a charge.
“a charge by deed expressed to be by way of legal mortgage” (ss.85 and 87 LPA 1925)
Mortgagor (the borrower), mortgagee (the lender)
Mortgages: LEGAL OR EQUITABLE
LEGAL MORTGAGES
To be legal the mortgage must be:
- capable of being legal
— a mortgage is capable of being legal (s.1(2)(c) LPA 1925), but an E Interest can NEVER become a legal mortgage.
- created by DEED (s.52 LPA 1925)
— signed, attested, delivered and clear on face that it is a deed (s.1 LP(MP)A 1989)
- Registered (s.27(2)(f) LRA 2002)
NB: Where nothing stated in Q about the status of the mortgage, assume to be legal and state REQ. Rare that a mortgage will be E.
EQUITABLE MORTGAGES
a mortgage will be E if either:
- a legal mortgage fails for lack of a valid deed but there is a valid estate contract. To be valid this contract must be in writing and contain all the relevant terms (s.2 LP(MP)A 1989)
- the interest in land is E in the first place
A valid TRANSFER of an E interest will involve both:
- a s.2 LP(MP)A 1989 compliant contract, AND
- the signing of the transfer of the E interest by the mortgagor (s.53(1)(c) LPA 1925)
Mortgages: ENFORCEABILITY
Issues may arise in relation to any of the following:
- INTEREST RATES AND UNCONSCIONABLE TERMS
- OPTIONS TO PURCHASE
- POSTPONED LEGAL DATE OF REDEMPTION
- COLLATERAL TIES
Mortgages: Enforceability - INTEREST RATES AND UNCONSCIONABLE TERMS
GR: a mortgage’s interest rate must be “UNFAIR AND UNCONSCIONABLE” to be struck out by the courts.
- tough terms or a hard bargain will NOT in themselves be sufficient to raise an issue of unconscionability; the rate or term must be PENAL (Holles v Wyse):
- – i.e. if it imposes a rate/condition which bears NO RELATIONSHIP with a lender’s pre-estimate of the loss that would be incurred in the event of default by the borrower.
- – a term is less likely to be deemed unacceptable in commercial mortgages than residential mortgages (Multiservice Bookbinding v Marden )
- – Flat Rate Interest Rates for the whole mortgage term will be seen as unfair (Falco Finance v Gough)
- DUAL interest rates are very likely to be considered to be unconscionable
- – an interest rate of 19% rising to 38% upon default was struck out as unconscionable, reduced to 7% (Cityland v Dabrah)
- – an 8.99% rate rising to 13.99% upon falling into arrears also struck out as unconscionable (Falco Finance v Gough)
The following may help a lender justify high rates:
- FINANCIAL DIFFICULTIES of borrower (Paragon Finance v Nash)
- POOR CREDIT HISTORY (Davies v Direct Loans)
An ‘unfair relationship’ favouring the lender will count against them (Consumer Credit Act 2006). Factors to consider:
- whether loan made in good/bad faith
- the lender’s bargaining power
- – a term will be unfair if borrower is disadvantaged by a significant imbalance in parties’ rights
- whether mortgage is COMMERCIAL/RESIDENTIAL
Regulations
- there are three ACTS which may apply to mortgage terms:
- – Financial Services and Markets Act 2000: covers first-time legal residential mortgages
- – Consumer Credit Act 2006: covers mortgages other than the above.
- – Unfair Terms (UTCCR 1999): governs unfair terms in mortgages. - UCTA 1977 does NOT apply to mortgages.
Mortgages: Enforceability - OPTIONS TO PURCHASE
GR: a mortgage should be solely a mortgage with no other additional conditions attached
- “once a mortgage, only a mortgage” (Krelinger v New Patagonia per Lord Parker)
An option may be VOID where:
- it interferes with/prevents the borrower’s right to redeem
- it is granted simultaneously with the mortgage (Samuel v Jarrah Timber and Wood Paving)
An option may be VALID if it is part of a separate and subsequent transaction (Reeve v Lisle)
Where a mortgage and an option are part of a broader transaction, the courts will try to determine whether the transaction is essentially a mortgage or just an element of the transaction (Warnborough v Garmite; Brighton and Hove CC v Audus).
- if just an element, option will be valid. If essentially a mortgage, then option will be invalid.
- label given to the transaction is irrelevant. Courts will look at SUBSTANCE, NOT FORM.
To be valid, an option must comply with s.2 LP(MP)A 1989 for a valid estate contract (signed by both parties, containing all relevant terms).
Mortgages: Enforceability - POSTPONED LEGAL DATE OF REDEMPTION
Definitions
Legal date of redemption: the date when the borrower must repay the mortgage loan
E right of redemption: the borrower’s right to repay the mortgage loan AFTER the legal date of redemption has passed.
GR: there must be no ‘clog’ or ‘fetter’ (no restriction) on E right of redemption.
- any term attempting to stop borrower from paying back altogether will be VOID (Toomes v Conset)
- A lender may be permitted to extend the date of redemption but ONLY if it does not make the borrowers right to redeem INEFFECTIVE or ILLUSORY
- – EGs: postponing the date of redemption for six weeks before the end of a 17 and a half year lease rendered borrower’s right to redeem as illusory (Fairclough v Swan Brewery). Postponement until 40 years after original date was acceptable to the court (Knightsbridge Estates v Byrne)
- Factors which may influence the court’s decision in determining whether illusory or not:
- – the interest rate on the loan
- – whether commercial/residential mortgage
Mortgages: Enforceability - COLLATERAL TIES/ADVANTAGES
“collateral ties” are supplementary obligations imposed in addition to the basic mortgage terms.
GR: a mortgage should not be used as an instrument to which collateral ties can be attached
- Collateral ties will be struck out of a mortgage agreement where they:
- – represent an impediment on the E right of redemption
- – are penal in nature
- – are a restraint of trade (Esso Petroleum v Harpers Garage)
- Where a collateral tie is part of the mortgage ITSELF, it must not last longer than the date of redemption (Krelinger v New Patagonia). However, even where a mortgage is part of a larger independent transaction, the collateral tie may still be struck out if it is found to be an ESSENTIAL PART of the mortgage within that transaction.
Mortgages: UNDUE INFLUENCE and PRECAUTIONARY STEPS
If relevant, it’s important to consider whether:
- UNDUE INFLUENCE has occurred
- R STEPS have been taken, or
- ENQUIRY has been made
Mortgages: UNDUE INFLUENCE
GR: a co-owner to a mortgage must not be unduly influenced to enter into the mortgage agreement, otherwise the lender may be bound by the co-owner’s E interest if they attempt to take possession of the property (Williams and Glyn’s Bank v Boland)
For UI to be absent, co-owners consent must be FULLY INFORMED and FREELY GIVEN
Consent may be EXPRESS or IMPLIED (Bristol and West Building Society v Henning)
Circumstances constituting undue influence include:
- the owner misleading co-owner about the nature or type of mortgage (Avon Finance Co v Bridger)
- false assurances being used a means of inducing consent (Kingsnorth Trust v Bell)
- non-disclosure of an extra-marital affair (Hewett v First Plus)
Mortgages: R STEPS
A lender should take R STEPS to ensure that the co-owner is FULLY INFORMED of their role in guaranteeing the mortgage involves, so as to avoid any undue influence situations.
Such steps may be:
- insisting that the co-owner takes precautionary steps (Kingsnorth Trust v Bell) such as obtaining independent legal advice in borrower’s absence
- – note that the lender is NOT responsible for advice’s nature/quality and can expect that solicitors will perform their duties properly, even if acts for both co-owners (Bank of Baroda v Rayerel; Barclays Bank v Thomson)
- writing DIRECTLY to the co-owner (Coldunell v Gallon)
Mortgages: ENQUIRY
If lender has failed to take R STEPS, MAY be put on enquiry if they should have been aware of any of the following:
- that the transaction COULD have involved UI (CIBC Mortgages v Pitt)
- that it was likely that improper means may have been used to obtain co-owner’s consent (Bank of Scotland v Bennett)
- that the mortgage was not for co-owner’s benefit (Barclay’s Bank v O’Brien), this could be where:
- – borrower’s personal/company debts are guaranteed by the co-owners, or a non-commercial party guarantees the borrowers debts (eg. parents guarantee a child’s mortgage)
A lender will NOT be put on enquiry where the mortgage is at least OSTENSIBLY for the benefit of both parties (CIBC Mortgages v Pitt)
Whether a lender is put on enquiry depends on the nature and context of the relationship (Thompson v Foy)
Once on enquiry, lender must show that it took R STEPS to help C appreciate the risks (RBS v Etridge)
A co-owner may AUTO be deemed to impliedly consent to a subsequent remortgaging of the property by consenting to the original mortgage, PROVIDED THAT the new mortgage is for:
- a lesser or equal sum (Equity and Law Homes v Prestidge), AND
- is for the SAME PURPOSE as initial mortgage (Castle Phillips Finance v Piddington)
Burden of Proof: C must prove that lender HAD KNOWLEDGE that the transaction was potentially against their interests. Lender must prove they took R STEPS to assure themselves that consent was properly attained (Barclays Bank v Boulter).
Mortgages: REMEDIES
The following remedies may be available to a mortgagee where the borrower has defaulted:
- POSSESSION
- POWER OF SALE
- FORECLOSURE
- APPOINTMENT OF A RECEIVER
Mortgages: Remedies - POSSESSION
Set out in s.95(4) LPA 1925
GR: unless agreed by parties, the lender’s right to take possession arises “as soon as the ink is dry on the mortgage deed” (Four Maids v Dudley Marshall)
Pre-Action Protocol 2008
- lenders expected to attempt to achieve alternatives to possession, only using it as a last resort. Failure to do so will count against them in court.
Lenders have two options regarding possession:
- enter the property themselves (self-help), OR
- obtain a court order
SELF-HELP
- may be risky if property is still occupied (cf. Ropaigealach v Barclays) as use/threat of violence to secure entry is a criminal offence (s.6 CLA 1977)
- NOT available for mortgages regulated by CCA 2006.
COURT ORDER: this is the generally advised approach. There are some disadvantages to it though:
- Court may decide not to grant if GOOD PROBABILITY that borrower can repay within a R period (s.36 Administration of Justice Act 1970)
- – R period will be usually determined as the remaining term of the mortgage (Cheltenham and Gloucester v Norgan)
- – borrower required to present detailed repayment plan (National and Provincial Building Society v Lloyd)
- – if STRONG EVIDENCE (exchange of contracts) that borrower near to completing a sale of the property (Mortgage Service Funding v Steele), may be given a period of time in which to complete it (Target Home Loans v Clothier).
- – Court less likely to allow borrower to sell where (Bristol and West Ellis; Cheltenham v Gloucester v Krausz):
- — prices are falling
- — the borrower is in negative equity
- — the borrower is merely obstructing the sale of the property. - court has right to postpone possession for 28 days (Birmingham Citizens Permanent v Caunt)
- Court may suspend possession if it considers it ‘just to do so (s.135 CCA 1974)
- the lender will be liable to account for ANY PROFITS made during the possession period (White v City of London Brewery)
Mortgages: Remedies - THE POWER OF SALE
This arises when the “mortgage money has become due” (s.101 LPA 1925). This will either be a legal date of redemption or when the first capital instalment is due (Payne v Cardiff)
Once power of sale has arisen, lender may sell the property before the power has become exercisable, BUT borrower will be able to claim damages under s.104 LPA 1925.
Power becomes exercisable (s.103 LPA 1925):
- (i) where lender has served notice that repayment is required and borrower in default for 3 MONTHS after notice
- (ii) any interest due is in arrears and unpaid for TWO MONTHS after becoming due.
- (iii) borrower has breached an express/implied term in the mortgage agreement.
the power of sale under s.101 LPA 1925 is compatible with HRA (Horsham v Clark)
As soon as the lender contracts to sell the property, borrower will no longer be able to redeem the mortgage (Property and Bloodstock v Emerton).
Mortgages: Remedies - FORECLOSURE
NB, foreclosure is RARELY USED.
In order for foreclosure to be available as a remedy, buyer must be provided with a FINAL OPPORTUNITY to repay the mortgage.
- even where foreclosure has been ordered, a borrower MAY STILL be able to repay the mortgage if he is able to repay the loan and ACTS QUICKLY in opening proceedings.
A court may order a property to be sold rather than foreclosed on, especially where the borrowers is in positive equity.
