5 - Mortgages Flashcards
Mortgage
The lender provides money by way of a loan and in return, the borrower provides security by creating a mortgage over the property in favour of the lender
Is a mortgage capable of being legal?
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.
Formalities
A deed is required to create a legal mortgage in relation to a legal estate (freehold or leasehold) – s 52(1) LPA 1925.
The deed must meet the requirements set out in s 1 LPMPA 1989.
As a mortgage is capable of being a legal interest, where the document lacks the requirements of a deed, equity may intervene and recognise an equitable mortgage under the principle of Walsh v Lonsdale.
A mortgage can be created over an equitable interest and it would need to be in writing and signed.
Lender’s powers and duties and protection of mortgages
Manual only discusses about legal mortgage.
The remedies available are:
* possession
* the power of sale
* debt action
* appointing a receiver
* foreclosure
Possession
The borrower does not need to be in default for the lender to exercise its right of possession. Possession means either:
* taking physical possession (ousting the borrowers); or
* where the property is let, directing that the tenants pay their rent to the lender (rather than the borrower).
The lender cannot use or threaten violence towards anyone known to be present on the property in order to obtain possession. If a lender can take possession without breaching this provision, then a court order is not necessary
Possession proceedings
Where the property is residential, the lender must comply with the pre-action protocol.
Section 36 of the Administration of Justice Act allows the borrower to ask the court to exercise its discretion to:
* adjourn proceedings; or
* on making an order for possession, suspend execution or postpone the date for possession.
Section 36 AJA 1970 applies when:
(a) the lender has started possession proceedings;
(b) the property includes a dwelling-house; and
(c) the borrower is likely within a reasonable period to pay any sums due under the mortgage (ie arrears).
The court will not exercise its discretion unless the borrower can provide a detailed financial plan demonstrating that they can pay both the mortgage instalments as they fall due and any arrears.
Strict duty to account
Where the property subject to the mortgage is producing income, the lender can use the income to pay the debt owed. However, the lender must:
(a) account to the borrower for any sum beyond that which is due to them; and
(b) manage the property with due diligence, accounting to the borrower for any income that should have been received had the property been managed correctly.
The power of sale
The power of sale exists:
The power of sale is either expressly stated within the mortgage deed or implied into every legal mortgage.
The power of sale must have arisen:
For the power of sale to have arisen, the mortgage money must be due.
The power of sale must be exercisable:
This will either be set out expressly in the mortgage deed or the lender will rely on one of the elements
i) the lender has given the borrower notice to repay the loan amount and the borrower has not paid the sum for three months after such notice; or
ii) interest is in arrears for two months after becoming due; or
(iii) the borrower has breached a term of the mortgage (other than the covenant to pay the mortgage money or the interest thereon).
Lender’s duties on sale
Before selling, the lender must ensure that the power of sale has arisen and become exercisable.
When exercising their power of sale. A lender must:
(a) act in good faith and not cheat borrowers (eg the property must be properly advertised and the lender cannot sell hastily at a knock down price); and
(b) take reasonable care to obtain the true market value of the property at the date of sale. Lenders are not under any obligation to delay the sale in order to maximise the price of the property.
Debt action
This is to recover the debt by an action for repayment on the borrower’s covenant to pay.
The Limitation Act 1980 limits the lender’s ability to recover the debt to:
* six years for the recovery of interest; and
* twelve years for the recovery of capital.
Where a lender has exercised the power of sale and the proceeds of sale are insufficient to pay the debt (negative equity), the lender can pursue the borrower for the shortfall as a debt action.
Appointment of a receiver
A lender will usually only appoint a receiver if the property subject to the mortgage is producing income, for example let to tenants.
The power arises in the same way as the power of sale (see 5.5.2) and therefore the power must exist, have arisen and be exercisable – s 109(1) LPA 1925.
The receiver has the power to demand and receive income from the property. Such income must be applied as per s 109(8) LPA 1925 to pay:
* outgoings on the property;
* interest on any prior mortgages;
* insurance premiums, repair costs and their own costs;
* interest on the current mortgage;
* capital on the current mortgage; and
* the balance to the borrower.
Receiver as agent of the borrower
A receiver is deemed to be the agent of the borrower (s 109(2) LPA 1925) and the borrower is solely responsible for the acts of the receiver. The practical effect is that the borrower has no recourse to the lender for the acts or omissions of the receiver.
This makes appointing a receiver more attractive to a lender than taking possession. The lender escapes the strict duty to account in taking possession and liability is passed to the receiver.
Duties of a receiver
A receiver owes their duties to the appointing lender, but has duties in relation to both the lender and borrower as follows:
(a) to ensure that their personal interests do not conflict with their role as a receiver. Therefore, a receiver cannot purchase the mortgaged property in a personal capacity;
(b) to act in good faith in the course of their appointment;
(c) to act with reasonable competence. What this means depends on the nature of the particular property. For example, where a receiver takes over the running of a pig farm, they should negotiate the usual trade discounts on pig feed;
(d) to take reasonable care to obtain the true market value of the property at the date of sale (if the receiver has the power of sale); and
(e) the receiver may (but is not obliged to) take steps to increase the value of the property (ie obtaining planning permission or letting the property).
These duties extend to any other person with an interest in the equity of redemption. However, if the interests of the lender and borrower conflict, the receiver is permitted to put the interests of the lender first.
Foreclosure
Foreclosure is available by an application to the High Court once the legal date for redemption has passed. The process is in two stages:
(i) Foreclosure Nisi directing the preparation of accounts of what is owed followed by a period of (usually) six months in which to pay; and
(ii) Foreclosure Absolute which has the effect of vesting title to the property in the lender and extinguishing the equity of redemption held by the borrower.
Protection for the borrower
The borrower is protected from the draconian effect of foreclosure by:
(a) the discretion of the court to re-open foreclosure proceedings, in exceptional circumstances, even after the foreclosure absolute order; or
(b) where the property is a dwelling house, the borrower may seek to adjourn the foreclosure proceedings by means of an application under the AJA 1970 (see 5.5.1); or
(c) an application to court for a judicial sale under s 91(2) LPA 1925. This will preserve the equity of redemption in favour of the borrower. Such an application can be made by any person with an interest in the equity of redemption. For example, another mortgagee.