5. Mortgages

Question 1

If a building society grants a mortgage and is seeking to recover arrears, what are the best remedies for them?

Answer 1

1. Debt Action
2. Possession
3. Appointing a Receiver

Question 2

Best remedies for banks looking to secure repayment of the ENTIRE mortgage sum at once

Answer 2

1. Power of sale
2. Foreclosure (rare)

Question 3

Are mortgages capable of being legal interests in land? Formalities?

Answer 3

1. Yes
2. Created in a Deed
3. Registered in the charges register

Question 4

If there are multiple mortgages over one registered property, which has ‘priority’?

Answer 4

Mortgage entered on the charges register first

Question 5

If the mortgagee exercises their power of sale, how will they know if they sell the property subject to any third party interests?

Answer 5

1. Mortgagee will take land subject to all estates, interests and rights which have priority
2. To take priority, IARE or RD must be entered on the land’s title by the DATE OF REGISTRATION of the mortgage
3. for an overriding interest to take priority it must be in existence by the time the mortgage deed is completed

Question 6

Limitation Period for Debt Actions (2)

Answer 6

1. Mortgagee cannot recover arrears of the capital repayments if more than 12 years have passed since the payments first became due’
2. ‘The lender cannot recover arrears of interest payments if they have been outstanding for more than 6 years’

Question 7

Outcome of a successful debt action

Answer 7

outstanding mortgage payments will be made to mortgagee

Question 8

Two outcomes of ‘taking possession’

Answer 8

1. if the mortgaged land is not subject to a lease, the lender can oust the borrower from the property and take possession of the land (get vacant possession to sell)
2. If the land is subject to a lease, can direct tenant to pay rent to the lender (intercept rent)

Question 9

When can the lender take possession under a legal mortgage?

Answer 9

Generally, ‘as soon as the ink is dry’ but mortgage deeds may expressly / impliedly postpone this until borrower is in default

Question 10

If a mortgagee wants to ‘take possession’ by intercepting rents, do they need a court order?

Answer 10

No

Question 11

If a mortgagee wants to ‘take possession’ by removing current borrower - what must they do?

Answer 11

1. Comply with provisions of CLA 1996
2. Obtain court order

Question 12

A mortgagee pursues a court order for possession. The borrower thinks they will be able to repay the sums due within a reasonable time, can they defend the claim?

Answer 12

Yes, the court can exercise its discretion to allow mortgagor to repay sums due
- if the mortgage deed provides for sum to be repaid in instalments, ‘sums due’ = instalments in arrears at the date of possession proceedings only

Question 13

Can a mortgagee take physical possession of a house without court proceedings?

Answer 13

Yes, although if it is a dwelling house, the mortgagor in occupation is protected by s 6 CLA 1977 which would impose criminal sanctions on the mortgagee

Question 14

Effect of ‘appointing a receiver’

Answer 14

This remedy is an alternative to taking possession, the mortgagee appoints a receiver to collect and redirect the income from the property.

Question 15

Requirements for appointing a receiver:

Answer 15

1. Mortgage must be created by deed (power to appoint implied into all)
2. power has arisen and has become exercisable
3. receiver must be appointed in writing

Question 16

‘Power must have arisen’ meaning

Answer 16

the legal date of redemption has passed (usually 2 months after mortgage creation)

Question 17

Three ways that a ‘power’ (ie. of sale or of appointing a receiver) can become ‘exercisable’

Answer 17

Power becomes exercisable when:
1. The lender has served notice on the borrower requiring repayment of the loan and borrower has failed to comply with that notice for THREE months after service
2. interest due under the mortgage is two months or more in arrears
3. the borrower has breached a term under the mortgage deed (eg. borrower’s covenant not to grant a lease without first obtaining lender’s consent)

Question 18

If the mortgagee appoints a receiver to receive income from the property, how must this income be applied?

Answer 18

Must pay in this order
a. outgoings on property (including receiver’s fees)
b. interest on any prior mortgages
c. insurance premiums on property and thier costs
d. interest on current mortgage
e. capital on mortgage if mortgagee directs them to do so in writing
f. the balance to the borrower

Question 19

If the mortgagee appoints a receiver who is negligent, is the mortgagee liable to the borrower?

Answer 19

No, the receiver is an ‘agent’ of the borrower so borrower would have no legal recourse against the lender

Question 20

Duties of the receiver to the lender and borrower

Answer 20

1. ensure personal interests do not conflict
2. act in good faith
3. act in reasonable competence
4. take reasonable care to obtain true market value of the property at the date of sale (if they have the power of sale)

Question 21

Does a receiver have the power to sell the mortgaged property?

Answer 21

Not under statute but usually under the terms of the mortgage (may also stipulate that receiver must be appointed by deed)

Question 22

When does a mortgagee have the ‘power of sale’

Answer 22

1. All mortgages created by deed have a power of sale implied into them
2. power must have arisen and become exercisable

Question 23

If a mortgagee is exercising the power of sale, what must they do to fulfil their duty to obtain true market value of the property?

Answer 23

The lender must try to do this and will discharge this duty if they have exposed the property to the market properly and fairly

Question 24

If the mortgagee is exercising their power of sale and have not been able to find a buyer at market value, are they required to delay the sale to maximise the purchase price?

Answer 24

No, but if they fail to obtain true value they must account to the borrower for the difference - and the onus is on the borrower to show there has been a breach in the lender’s duty of care

Question 25

When exercising the power of sale, will the buyer be subject to any estates or interests over the property?

Answer 25

Sale by mortgagee passes to the purchaser the whole estate of the mortgagor (1) free from any estates or interests (including other mortgages) which the selling mortgagee took priority over; BUT (2) subject to any estates and interests which took priority over the selling mortgagee

Question 26

When a mortgagee sells a property, in what order must they apply the proceeds?

Answer 26

1. To repay the cost of redeeming prior mortgages (mortgages with priority over the selling mortgagee’s mortgage)
2. to pay off the mortgagee’s expenses of sale;
3. To pay off the mortgagee’s own mortgage;
4. To pay any balance to the person entitled to the mortgaged property (ie. a mortgagee with lower priority to the selling mortgagee, if there is one, or the mortgagor)

Question 27

Effect of foreclosure

Answer 27

Foreclosure vests ownership of the borrower’s property in the lender in full settlement of the debt. This is subject to any estates or interests which have priority (prior mortgages or leases) - Equitable Remedy

Question 28

When does the right of foreclosure arise?

Answer 28

The right to foreclose arises either when the legal date of redemption has passed or when the mortgagor has breached one of the terms of the mortgage (ie. payment of mortgage monies)

Question 29

If a mortgagee wishes to foreclose, what procedure must they follow?

Answer 29

Mortgagee wishing to foreclose must go to court to obtain an interim court order and then a final court order (order of foreclosure absolute), if borrower is unable to come up with the required payments before then

Question 30

If the court issues a final order for foreclosure, does the borrower have any recourse?

Answer 30

Borrower has the option of ‘redemption’, at the court’s discretion, after final order is issued
- Any person interested either in the mortgage money or in the right to redemption can request that the court makes an order for sale instead of foreclosure

Question 31

If a final order for foreclosure is granted and the buyer does NOT redeem, what happens if the property is worth less than the sum owed by the borrower

Answer 31

The borrower is released from liability

Question 32

Two stages of foreclosure

Answer 32

1. Foreclosure Nisi: directing the preparation of accounts of what is owed followed by a
   period of (usually) six months in which to pay; and
2. 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.