2 - Mortgages

Question 1

What is a mortgage?

Answer 1

A mortgage is capable of being a legal interest in land.

• The lender (often a bank) is the mortgagee who loans money to fund the property purchase
• The borrower (an individual or company) is the mortgagor who grants rights over the property as security for the loan. These rights include the right to possess and sell the property in the event of default.

Question 2

What is the key terminology used for mortgages?

Answer 2

Mortgage - (Or charge) interest over land granted as security for a loan. If the borrower fails to repay the loan, the lender can enforce its security

Mortgagor (Or borrower) the owner of the estate in land borrowing a sum of money and giving the lender a mortgage as security for the loan

Mortgagee (Or lender) has the benefit of the mortgage enabling them to enforce their security.

Question 3

In order to be recognised as a legal interests, what formalities are required for the creation of a mortgage?

Answer 3

Mortgages are capable of being legal interests in land. They are listed in s 1(2)(c) LPA 1925
and described as a charge by way of legal mortgage. The terms mortgage and charge are used interchangeably

Deed + Registration

Question 4

What is the legal date of redemption for a mortgage?

Answer 4

At law, the right to redeem is a matter of contract: the mortgagor can redeem the mortgage on the date/s and in the manner required under the mortgage agreement. If the agreement provides that the mortgage must be redeemed on a particular date, the mortgagor must legally redeem the mortgage on that day.

Redemption - Redemption simply means the process by which a mortgage is discharged upon payment of all sums due.

The legal right exists for one day, and is the date set out in the mortgage deed.

Question 5

What are the legal requirements for the creation of a mortgage deed?

Answer 5

LPA 1925, s52 - All legal interests must be created by deed.

First, must comply with LP(MP)A 1989, s1 requirements:
1. A deed must be clear on the face of the document that it is intended to be a deed.
2. The deed must be validly executed.
3. The deed must be delivered.

Second, the mortgage deed must then be registered at the LR: LRA 2002, s27(2)(f).

If it is not registered the mortgage will not take effect as a legal mortgage, but could still be an equitable interest.

Question 6

When will an equitable mortgage arise?

Answer 6

• Mortgage of an equitable interest.

Where the borrower holds an equitable interest in the land (eg a beneficiary in a trust of land).
Created informally, LPA 1925 s53(1)(c), need only be in writing and signed by the grantor.

• Defective legal mortgage.

A mortgage over registered land which is not granted by a valid deed or that is not completed by registration will be equitable if it complies with LP(MP)A 1989, s2:
Equity recognises it as a ‘contract to grant a legal mortgage’ if it is in writing, contains all agreed terms, and signed by both parties.

Question 7

What is an equitable mortgage?

Answer 7

An equitable mortgage arises where the formalities to create a legal mortgage have not been completed or where the asset being mortgaged is only an equitable interest.

An equitable mortgage only transfers a beneficial interest in the asset to the mortgagee with legal title remaining with the mortgagor.

Question 8

When is a mortgage discharged?

Answer 8

When it has been repaid in full, and all reference to it has been removed from the Charges Register at the LR.

DS1 form used to discharge a mortgage over the whole of the land in a title.

DS3 form used if only part of the land is released from the mortgage.

Question 9

What is the equity of redemption?

Answer 9

Allows the borrower to repay the loan at any time after the legal date for redemption has passed.

Protects the borrower from exploitation and unconscionable terms, clauses postponing or preventing redemption, and collateral advantages.

Courts look at clauses which postpone the legal date for redemption very closely and will not allow a clause which prevents redemption altogether. They may allow a lender to postpone the date, but bear in mind the equitable rule that there must be no clog or fetter on the equity of redemption. Whether the right to redeem is rendered valueless is a question of fact and degree.

Question 10

Provide an overview of the remedies available to the lender against a mortgagor?

Answer 10

It is entirely for the lender to decide which remedy to pursue; although, in so doing, the lender must avoid a course of action that would substantially increase the burden to the borrower.

The remedies available are:
- Possession
- The power of sale
- Debt action
- Appointing a receiver
- Foreclosure

Only exercise of the power of sale and foreclosure will bring the mortgage to an end. The right to possession is usually used as a precursor to the exercise of another remedy (usually either exercising the power of sale or appointing a receiver).

Question 11

What are the lender’s rights concerning possession of the mortgaged property, and how can possession be exercised?

Answer 11

A lender has the right to take possession at any time, even if the borrower is not in default (Four Maids Ltd v Dudley Marshall [1957]).

Possession can be:
- Taking physical possession (ousting the borrower).
- Directing tenants to pay rent to the lender if the property is let.

While this right exists, lenders usually exercise it only when the borrower is in default and in conjunction with other remedies (e.g., a precursor to selling the property or appointing a receiver).

Question 12

What restrictions are there on a lender’s ability to repossess a property without a court order, and what legal provisions apply?

Answer 12

Criminal Law Act 1977 (s 6) prohibits lenders from using or threatening violence towards anyone present to gain possession.

If the lender can retake possession without breaching s 6 (e.g., when the property is empty or let, directing tenants to pay rent to the lender), a court order is not needed (Ropaigealach v Barclays Bank Plc [2000]).

Possession without a court order has been justified on ECHR Article 8 grounds as serving the public interest and ensuring mortgage security for affordable property lending (Horsham Properties v Clark [2008]).

Question 13

What must a lender do before starting possession proceedings for residential properties, and how does the pre-action protocol aim to protect the borrower?

Answer 13

The lender must follow the pre-action protocol for residential properties, promoting open dialogue to resolve arrears.

This includes:
- Considering selling the property or rescheduling the debt.
- Helping the borrower continue payments and remain in the property.

The protocol aims to prevent possession where possible, prioritising options for the borrower to stay in the property.

Question 14

What protections does section 36 AJA 1970 offer to borrowers facing possession proceedings?

Answer 14

s 36 AJA 1970 (amended by s 8 AJA 1973) allows the borrower to ask the court to:
- Adjourn possession proceedings.
- Suspend or postpone possession.

This protection applies when:
- The lender has initiated possession proceedings.
- The property includes a dwelling-house.
- The borrower can repay arrears within a reasonable period.

To succeed, the borrower must provide a detailed financial plan showing they can pay both regular mortgage instalments and arrears.

Question 15

How is the ‘reasonable period’ for repaying arrears defined under section 36 AJA 1970?

Answer 15

The ‘reasonable period’ for repaying arrears can extend over the entire remaining term of the mortgage (Cheltenham & Gloucester BS v Norgan [1996]).

This allows borrowers to spread arrears payments over the mortgage term, provided they can continue making regular payments.

Question 16

What are the lender’s obligations concerning income from mortgaged properties under the strict duty to account?

Answer 16

Where the property subject to the mortgage is producing income, the lender can use the income to pay the debt owed.

If a mortgaged property produces income, the lender must:
- Account for any sum received beyond what is due to them.
- Manage the property diligently and account for income that should have been received.

Due to this duty, lenders often prefer appointing a receiver to manage income-producing properties to ensure proper handling of income.

Example:
A property generates rental income that can be used by the lender to repay the mortgage debt.

Application of Strict Duty to Account:
The lender must ensure that income is properly managed and must account to the borrower for any income exceeding what is owed.

If the property isn’t managed diligently and income is lost, the lender may be liable to the borrower. This is why lenders often appoint a receiver to ensure income is managed correctly.

Question 17

What are the requirements for the lender’s power of sale to be exercised?

Answer 17

Before exercising the power of sale, the lender may need to obtain possession of the property.

The power of sale must:
Exist: Implied into every legal mortgage unless excluded (s 101 LPA 1925).
Have arisen: The mortgage money must be due (e.g., legal date for redemption has passed or a mortgage instalment is due).
Become exercisable: The lender must rely on one of the conditions in s 103 LPA 1925, which include:
- (i) Borrower has not repaid the loan within three months of a notice.
- (ii) Some interest is two months in arrears.
- (iii) Breach of a mortgage term (other than non-payment of mortgage money or interest).

Example - Murray is struggling to pay his mortgage, with four months of missed payments.
As the mortgage was created by deed, the power of sale is implied.
The legal date for redemption likely passed, and the mortgage is in arrears.
As there are four months’ arrears, the power of sale is exercisable under s 103 LPA 1925.

Question 18

What duties does the lender owe when exercising the power of sale?

Answer 18

The lender must ensure the power of sale has arisen and become exercisable.

Duties in equity owed to the borrower and others interested in the equity of redemption are to:
(a) Act in good faith and not cheat the borrower (e.g., no hasty sale at a low price).
(b) Take reasonable care to obtain the true market value at the date of sale.

The lender is not obligated to delay the sale to maximise the price.

If the lender fails to obtain the true market value, they must account for the difference to the borrower.

Question 19

What is the effect of a sale by the lender under the power of sale?

Answer 19

The buyer of the property takes the estate of the borrower:
(a) Free of any estates or interests that the selling lender had priority over.
(b) Subject to any estates or interests that had priority over the selling lender.

This is governed by s 104 LPA 1925.

Question 20

How are the proceeds of sale distributed after the lender exercises the power of sale?

Answer 20

The selling lender is a trustee of the proceeds and must distribute them according to s 105 LPA 1925:
(a) Redeem prior mortgages (if any).
(b) Pay the lender’s expenses of sale.
(c) Pay the lender’s own mortgage.
(d) Pay the balance (if any) to those entitled to the equity of redemption (borrower or subsequent lenders).

If the borrower feels the property has not been sold at its true market value, the onus is on the borrower themself to show otherwise.

Question 21

What is the purpose of a a lenders remedy of debt action and what are the limitation periods for recovery?

Answer 21

A debt action is used to recover the debt by enforcing the borrower’s covenant to pay.

The legal date for redemption must have passed before action can be taken.

Limitation Act 1980 limits the lender’s ability to recover to:
- Six years for the recovery of interest.
- Twelve years for the recovery of capital.

If the lender has exercised the power of sale and the proceeds are insufficient, the lender can pursue the borrower for the shortfall as a debt action.

Question 22

Why would a lender appoint a receiver as a remedy?

Answer 22

The primary aim of the receiver is to act in the interests of the lender and recover all owed monies as quickly and efficiently as possible.

Question 23

When can a lender appoint a receiver and what are the powers of the receiver?

Answer 23

A lender usually appoints a receiver if the mortgaged property is producing income (e.g., let to tenants).

The power to appoint a receiver arises in the same way as the power of sale (s 109(1) LPA 1925), and must:
- Exist,
- Have arisen, and
- Be exercisable.

The receiver must be appointed in writing, and the lender decides who to appoint.

The receiver’s power is to demand and receive income from the property, Such income must be applied as per s 109(8) LPA 1925 to pay:
- Pay outgoings on the property,
- Pay interest on prior mortgages,
- Pay insurance premiums, repair costs, and their own fees,
- Pay interest and capital on the current mortgage,
- Pay the balance to the borrower.

Note: The LPA 1925 does not grant the receiver power to sell the property unless extended by the mortgage deed.

Question 24

What is the legal status of the receiver and how does it affect liability?

Answer 24

A receiver is deemed the agent of the borrower (s 109(2) LPA 1925), meaning the borrower is responsible for the receiver’s actions.

The lender is not liable for the acts or omissions of the receiver.

This arrangement makes receivership more attractive to lenders than taking possession, as the lender avoids strict liability.

Question 25

What duties does a receiver owe, and who benefits from these duties?

Answer 25

A receiver owes duties primarily to the lender but also to the borrower and others interested in the equity of redemption:

(a) Ensure no conflict of interest (e.g., cannot personally purchase the property).
(b) Act in good faith during their appointment.
(c) Act with reasonable competence based on the nature of the property (e.g., negotiate trade discounts if managing a pig farm).
(d) Take reasonable care to obtain the true market value at the date of sale (if empowered to sell).
(e) May, but is not obligated to, take steps to increase the property’s value (e.g., obtaining planning permission).

The receiver can prioritise the lender’s interests if they conflict with the borrower’s.

Example:
- Emily’s property was sold by a receiver appointed by her lender. Emily believes a better price could have been achieved if the vacant floor had been let first.
- The receiver is deemed Emily’s agent, so Emily must pursue the receiver, not the bank.
- The receiver has no obligation to increase the property’s value before sale and can choose the timing of the sale.

Question 26

What is foreclosure as a remedy for the lender and how does it affect the borrower’s rights?

Answer 26

Foreclosure is available through the High Court after the legal date for redemption has passed. It occurs in two stages:

(i) Foreclosure Nisi: Accounts of what is owed are prepared, with a period (usually six months) for repayment.
(ii) Foreclosure Absolute: Transfers title to the lender and extinguishes the borrower’s equity of redemption.

If the property is worth more than the debt, the lender keeps the surplus. If worth less, the borrower is released from liability.

The borrower cannot be sued personally either by the lender who forecloses, or any subsequent lender.

Lenders typically avoid foreclosure when the property is in negative equity.

Question 27

What protections does the borrower have against foreclosure?

Answer 27

The borrower is protected from the harsh effects of foreclosure by:

(a) The** court’s discretion** to reopen foreclosure proceedings in exceptional circumstances, even after foreclosure absolute.
(b) Where the property is a dwelling house, the borrower may apply to adjourn foreclosure under the AJA 1970.
(c) An application to court for a judicial sale under s 91(2) LPA 1925. This preserves the equity of redemption and can be made by anyone with an interest in the equity of redemption (e.g., another mortgagee).

Question 28

What is the equity of redemption?

Answer 28

The borrower’s right to redeem (ie pay off) a security (i.e., a mortgage). English law prohibits any contractual provision which prevents the borrower from exercising this right (known as a clog on the equity of redemption).

Question 29

What is the significance of the rule against postponing or preventing redemption in mortgage law?

Answer 29

• Lenders make money while a loan is outstanding, so it is in their interest to delay redemption.
• Courts scrutinise clauses that postpone the legal date for redemption to ensure no clog or fetter on the equity of redemption.
• A lender may postpone redemption, but if the right to redeem is rendered valueless, the clause can be struck down.

Question 30

How does the court view options to purchase in mortgage agreements?

Answer 30

An option to purchase allows the lender to require the borrower to transfer the mortgaged property.

Such clauses are often declared void as they prevent the borrower from redeeming and taking the property back free of the loan, considered a ‘clog’ on the equity of redemption.

Examples:
Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904]: An option granted with the mortgage is typically invalid.
Reeve v Lisle [1902]: An option granted in a subsequent transaction, independent of the mortgage, may be upheld.

Question 31

What are collateral advantages in mortgage law and how are they treated by courts?

Answer 31

• Collateral advantages refer to lenders extracting additional value from the borrower beyond repayment of capital and interest.
• Courts may strike out such terms if they are unconscionable, act as a penalty, or are repugnant to the right to redeem.
• Solus ties, common in commercial mortgages, require the borrower to buy supplies (e.g., beer) from the lender.
• Courts generally uphold solus ties that end within the mortgage term.

Question 32

How do courts handle unconscionable terms in mortgage agreements?

Answer 32

Courts have inherent equitable jurisdiction to strike out oppressive and unconscionable terms, usually focusing on high interest rates.

A term must be more than just unfair; it must be imposed in a “morally reprehensible manner” to be struck out by the court.

Example: Multiservice Bookbinding Ltd v Marden [1979]: A term linking repayments to the Swiss franc was upheld as there was equal bargaining power and the borrower understood the deal.

Question 33

When might the issue of undue influence arise in relation to a mortgage and what problems does this create for the bank?

Answer 33

Example:
- If a husband successfully argues he was unduly influenced into signing the mortgage deed, the mortgage becomes unenforceable against him.
- This means the clause postponing his interest in favour of the bank’s is ineffective, and his interest in the land will still rank ahead of the bank’s.
- This prevents the bank from possessing or selling the land to recover the loan balance (Barclays Bank plc v O’Brien).

Question 34

How does a bank ensure it has priority in a mortgage involving undue influence?

Answer 34

To ensure priority, the bank must follow the guidelines in RBS v Etridge (no 2) 2001. This involves:
- Writing to the party granting the mortgage (not for their benefit) to explain that the bank needs confirmation from an independent solicitor regarding the transaction.
- Asking the party to nominate an independent solicitor.
- Providing all relevant information to the independent solicitor.
- Not proceeding to lend until confirmation is received from the independent solicitor that the transaction has been fully explained.

Question 35

What must an independent solicitor do to ensure the bank’s priority where the issue of undue influence arises in relation to a mortgage?

Answer 35

• Meet the party entering into the mortgage (not for their own benefit) face-to-face, alone (not with the partner benefiting from the mortgage).
• Explain the necessity of the meeting to prevent future claims of undue influence.
• Clarify documents and the transaction in non-technical language.
• Point out the risks involved.
• Emphasise that the party has a choice.
• Keep a detailed attendance note and confirm everything in writing.
• Send a certificate to the bank.

If these steps are followed, the bank’s interest in the land under the mortgage has priority over the freehold interest of the parties involved.

Question 36

What are the key requirements for registering a legal mortgage under the LRA 2002?

Answer 36

All mortgages over registered land must be registered substantively to attain the status of a legal mortgage (LRA 2002, s27(2)(f)).

Once registered, they take effect as a ‘registered charge’ under the LRA.
A mortgage over registered land that is not completed by substantive registration will not take effect as a legal mortgage (s.27(1) LRA 2002).

Priority between registered charges depends on the order in which they are entered on the register, regardless of the order of creation.

For simultaneous mortgages (e.g., first and second mortgages), the application for registration will specify the order of priority.

Question 37

How do equitable mortgages rank in order of priority?

Answer 37

Equitable mortgages rank in order of creation as against another equitable mortgagee (LRA 2002, s 28).

This is the basic rule of priority that applies to all equitable interests since an equitable interest can exist without registration.

Although registration is not required to validly create an equitable mortgage over registered land, it can be protected by entering a notice on the charges register (LRA 2002, s 32).

If protected by a notice, an equitable mortgage over registered land will take priority over a subsequent legal mortgage (LRA 2002, s 29(1)).

Competing equitable mortgages will have their priority determined by the order of creation, but an unprotected equitable mortgage will not take priority over a subsequent registrable disposition (LRA 2002, s 29(1)).

Question 38

How can the priority rules for mortgages be modified through postponement?

Answer 38

The priority rules can be modified to allow a mortgage to take priority over a pre-existing interest through a postponement of that interest.

Lenders can agree to alter the priority position by entering into a deed of priority or intercreditor deed, which must be registered at the Land Registry.

Mortgage agreements often require an express waiver or postponement to ensure that the rights of any person living at the mortgaged property (not a party to the mortgage) are postponed to the interests of the mortgagee.

This is crucial for the lender to enforce their security and take possession of the mortgaged property in case of default.

If the lender’s interest does not rank in priority to an occupant’s interest, the lender cannot take possession to exercise its power of sale.

Question 39

Provide a summary of the key points to consider for mortgages.

Answer 39

• A mortgage is granted by the borrower in favour of the lender as security for a loan.
• A mortgage is capable of being a legal interest.
• A mortgage must be created by deed in order to be legal.
• A lender has an automatic right to possession but if the property is occupied as a dwelling a court order will be required and the borrower can seek the protection of the AJA 1970.
• The power of sale is exercisable only when certain criteria have been met and the lender is bound by certain duties when exercising it. Exercising the power of sale will end the mortgage.
• A lender can pursue the borrower via a debt action.
• The lender can appoint a receiver in the same circumstances as exercising the power of sale and subject to the same duties but the receiver is deemed to be the agent of the borrower.
• A lender can foreclose a mortgage which brings the mortgage to an end and vests t