7. Mortgages Flashcards
What is the modern word for mortgage?
Charge
What does redeeming a mortgage mean?
Redemption extinguishes the rights formerly enjoyed by the mortgagee.
What is the mortgage itself, contrary to everyday language?
The mortgage is the security for the loan and is not the loan itself, although in everyday language we tend to suggest otherwise.
Who is the mortgagor v the mortgagee?
borrower – the mortgagor
lender – the mortgagee
In lease terms, what is a mortgage?
It is when the mortgagee acquires a long lease (freehold) or a sub-lease (leasehold) of the land, or a charge over the land. It will end when all the money lent and interest payable has been repaid.
What is cesser on redemption?
It is when the mortgage ends once the money lent and all interest payable have been repaid.
What is the difference between vivum vadium and mortuum vadiam?
A vivum vadium (live pledge) used income from the property to discharge the debt.
A mortuum vadium (dead pledge) where, as well as being repaid the original debt, the lender would charge interest. This “dead pledge” developed into the classical English “mort gage”, that is, a mortgage.
Which way of obtaining a mortgage is no longer available and why?
A mortgage cannot now be created by a conveyance of the whole estate to the mortgagee. This meant that the lender (mortgagee) would own the property subject to the mortgage conveyed to them and if they did not pay by the contractual redemption date, the borrower (mortgagor) would lose their land.
What did equity introduce to combat the harsh effect of the contractual redemption date in old mortgages?
To combat the harsh effect of non-payment, equity intervened to allow an equitable right to redeem, which arises after the contractual date for repayment has passed. The mortgagor can repay the mortgage and will not lose their land.
In old mortgages, could the equitable right to redeem be lost?
This right to redeem in equity would be lost only if the mortgagee was successful in an application to the Court of Chancery for an order of foreclosure – bringing to an end the right to redeem and allowing the mortgagee to retain the land.
What is a contractual redemption date?
This is the date on which the mortgagor should repay their loan at common law.
What is the equitable right to redeem?
This is the right, recognised by equity, to pay off the loan after the contractual date has passed. Because of this equitable right, the contractual date is now fixed conventionally at a relatively short time period, usually six months. In effect, this is the earliest date on which the mortgage can be repaid.
What is foreclosure?
This is a court order which brings the equitable right to redeem to an end vesting the mortgaged property in the mortgagee. In fact, in spite of the term’s frequent use, foreclosure is rare today. The mortgagee’s usual remedy for non-payment is to sell the land and pay off the loan out of the proceeds.
What is the equity of redemption?
This is the sum total of equitable rights which the mortgagor has in the property. It includes the equitable right to redeem and the financial value of the land to the mortgagor – that is, its market value minus the value of the unpaid mortgage.
Can a mortgage be recognised by law and by equity?
Yes, a mortgage can be recognised by law or by equity.
What governs the creation of legal mortgages?
Law of Property Act 1925.
Can freehold mortgages now be created without the mortgagor losing their estate in land?
Yes, mortgages can only be created by two methods under s85(1) LPA 1925, both which allow the mortgagor to retain their estate in the land. A mortgage cannot now be created by a conveyance of the whole estate to the mortgagee.
What are the two methods of creating freehold mortgages under s85(1) LPA 1925?
A mortgage can only be created by:
A term of years absolute (a lease), or;
A legal charge (by deed)
Explain the first method of creating a freehold mortgage; the term of years?
This is when a legal freehold mortgage is created by the mortgagee being granted a long lease (typically for 3,000 years) subject to cesser on redemption (when the mortgage has been repaid, the lease ends). The mortgagor retains the freehold.
What is more important to the mortgagor when creating a term of years mortgage; the right to take free of the lease in 3,000 years’ time, or the right to pay off the mortgage and terminate early?
Their real interest in the land, however, is not the right to take free of the lease in 3,000 years’ time – it is the right to pay off the mortgage and terminate early that is of importance for them.
What are the benefits to the mortgagee of a term of years mortgage?
As it is a lease, the mortgagee has the right to go into possession immediately - a right that they will exercise if the mortgagor is late on repayments.
Is a term of years mortgage a legal interest?
Yes, if it is created by deed, it qualifies as one of the two legal estates in land (s1(1)(b) LPA 1925).
Which is simpler and more commonly used - the term of years mortgage or the legal charge mortgage?
The legal charge mortgage.
What is a legal charge freehold mortgage?
It is not an actual mortgage but, by s87 LPA 1925, the chargee has the same rights, remedies and liabilities as if a mortgage by way of a lease had been created - they can still go into possession.
Is a charge by way of legal mortgage a legal interest?
Yes, a charge by way of legal mortgage qualifies as a legal interest under s1(2)(c)LPA 1925.
Under s23 Land Registration Act 2002 (LRA 2002), which method is the only way a mortgage of registered land can be created?
A mortgage of registered land can only be created by a charge.
Which situation might a mortgage take effect as a lease nowadays?
If there is an attempt to convey the whole estate subject to retransfer on redemption, then, by s85(2) LPA 1925, the disposition is invalid and the mortgage takes effect as a lease for 3,000 years.
Or a second mortgage of freehold land.
How would a second mortgage of freehold land take effect?
A second mortgage of freehold land takes effect as a lease for a time period longer in duration than the first mortgage, for example, one day longer. Similarly, subsequent mortgages will be for longer than the previous mortgage.
How can a leasehold mortgage be created?
Obviously it can’t be created by means of a lease. But it can be created by means of a sub-lease under s86(1) LPA 1925. Either this, or as a legal charge.
Can a mortgage be created by way of assignment of the whole leasehold interest?
No, it is invalid - it will instead take effect as a sub-lease for 10 days less than the original lease.
Why does the first sub-lease mortgage (created when assignment of a whole leasehold interest fails) take effect for 10 days less than the original lease?
The first mortgage being 10 days shorter than the original term allows for the creation of subsequent mortgages.
What are the four ways a mortgage can be created in equity?
1) Agreement for mortgage
2) Equitable charge
3) Mortgage of an equitable interest
4) Prior to registration in registered land
How can an ‘agreement for mortgage’ be an equitable mortgage if it isn’t in a deed?
An agreement for a mortgage will be regarded by equity as an equitable mortgage from the date of the contract. See the rule in Walsh v Lonsdale [1882] where the rules of equity enabled a landlord to enforce a term of a lease with the claimant, despite the lease not being created by a deed.
Can a deposit of title deeds by way of security create a mortgage or charge?
No, it used to before 1989, but now the mortgage cannot rise of its own accord and must comply with s2 LP(MP)A 1989.
When would an equitable mortgage arise as an ‘equitable charge’ and are they common?
Equitable charges arise where an estate owner shows an intention to charge specific property with the repayment of a debt or other obligation. Creation by this method is extremely uncommon.
Is it possible to have a legal mortgage of an equitable interest?
No, any mortgage of an interest which cannot exist as a legal estate or interest (see s1(10 and s1(2) LPA 1925) must be equitable, e.g. a mortgage of a life interest under a settlement.
Why does a mortgage ‘prior to registration in registered land’ have to be equitable?
Because a mortgage is not legal until its actual registration at HMLR. Therefore, during the period following its execution and before registration, it will exist as an equitable mortgage.
What happens if a legal mortgage is never registered at HMLR?
It will not be a legal mortgage, but will stay as an equitable mortgage, though it would require protection by the entry of a notice under s34 LRA 2002 (unless it is an overriding interest i.e. actual occupation).
What is the equity of redemption?
It is the sum total of the mortgagor’s rights in the property, recognised by equity.
What is equity’s view on the mortgagee encroaching on the mortgagor’s equity of redemption?
Equity will not allow unfair advantage to be taken of the mortgagor.
What is meant by ‘clogs or fetters’?
The right to redeem must not be subject to any restrictions, known as clogs or fetters, as it is the primary right of the mortgagor.
What is the primary right of the mortgagor?
The right to redeem the mortgage upon the payment of the mortgage money and any interest.
What does the maxim ‘once a mortgage, always a mortgage’ mean?
It means the court will look behind the transaction in question and if it is, in fact, a mortgage it will be deemed as such even though it may be called something else.
What is the difference between the right to redeem and the equity of redemption?
The right to redeem is just one right (the primary right) and the equity of redemption is all the mortgagor’s rights and is an interest in the land.
Outline the case of Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904].
In the leading case of Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904] debenture stock worth £30,000 was mortgaged to Samuel to secure an advance of £5,000 at 6% interest. The mortgage money was to become payable with interest at 30 days’ notice on either side. Samuel, the mortgagee, was given ‘the option to purchase the whole or any part of such stock at 40 per cent [a fixed price] at any time within 12 months’. Samuel claimed to exercise the option and the mortgagor, Jarrah, sought to redeem and have a declaration that the option was illegal and void because it extinguished the mortgagor’s right to redeem.
Although reluctant to do so, as the arrangement in this case amounted to a “perfectly fair bargain”, the House of Lords held that the option was void and granted the declaration. They said there could not be any conditions made at the time of the loan that prevented the mortgagor from getting back his property once he had paid off the loan. This was to protect the mortgagor. However, they wished they could find a way to modify the rule to stop it being used to avoid a fair bargain between two people dealing at arm’s length and negotiating on equal terms.
Are clogs and fetters postponing the right to redeem or excluding it altogether?
Clogs and fetters exclude a mortgagor’s right to redeem altogether.
Will courts allow a provision in a mortgage deed to postpone the date of redemption?
Yes, they will allow a long postponement, as long as it isn’t to make the right to redeem illusory.
Outline the case of Knightsbridge Estates Trust Ltd v Byrne [1939].
K owned certain freehold property and arranged a loan from the defendants at 5¼ per cent interest, repayable over 40 years, repayment to be made by half-yearly instalments over the 40 years. The defendants undertook not to require payment in any other way, so long as instalments were paid promptly. Less than six years later, K claimed to be entitled to redeem upon payment of principal, interest and costs, on the ground that the 40-year term constituted a clog upon their right to redeem. The Court of Appeal held that the term was valid.
What is a collateral advantage?
It is when the mortgagor is required to do something as part of the mortgage, like only purchase supplied from a brewery if the brewery granted the loan.
Are collateral advantages acceptable in mortgage deeds?
Any collateral advantages that exist beyond redemption are void, but those which exist only until redemption may be valid if they don’t amount to unreasonable restraint of trade. Once the mortgage has been paid and any interest settled, if the advantage is then discarded, that should be fine.
What happens to contracts in restraint of trade?
These are prima facie void as being contrary to public policy. They are valid if they go no further than is reasonable and are in the best interests of the public and of the parties to the contract. In mortgages, even though the mortgage may not have been redeemed, a collateral advantage may be invalid as being an unfair restraint of trade.
What is a solus agreement?
Where a trader (usually pubs or petrol stations) is tied to a particular supplier, receiving all their merchandise from that supplier and from no-one else.
What would make a solus agreement void in a mortgage?
Whether the agreement is reasonable or not depends mainly on the time for which the agreement lasts – the longer the duration, the less the likelihood of validity.
In Alec Lobb (Garages) Ltd, a 21-year solus agreement was valid because 1. The mortgagor benefitted from being saved by the mortgagee, 2. He waited 10 years before complaining and 3. There were break clauses in the agreement.
What will the courts do if the mortgage includes ‘oppressive or unconscionable’ terms?
The courts will use its powers to strike down the terms.
What are two examples of where the courts’ used their powers to strike down ‘oppressive or unconscionable’ terms in a mortgage?
Cityland v Dabrah [1968] - landlord charged about 50% interest when lending the tenant money to buy the property as he was of limited means. Court changed it to 7% interest.
Multiservice Bookbinding v Marden [1979] - mortgage based on currency which fluctuated (swiss franc), 36K went to 133K, but building worth trebled. Courts ruled that as both parties were businessmen and they had independent legal advice, the terms were valid.
How common is protection from oppressive or unconscionable terms at the moment?
The protection from oppressive or unconscionable terms appears to be limited to extreme cases. The courts today are reluctant to see terms in complex contracts as clogs or collateral advantages.
What is the relationship between the Consumer Credit Act 2006 and the Financial Services and Markets Act 2000?
The CCA 2006 created an unfair credit relationship test between creditor and debtor to control extortionate credit agreements. This test applied to all existing and new mortgages, but not to first residential mortgages, which are covered by the FSMA 2000.
What happened to mortgages post 2016?
From March 2016 all new regulated mortgages came under FSMA 2000, where the aim is to protect consumers through responsible lending practices, including affordability checks and better information about mortgage products. The government implemented the Mortgage Credit Directive into UK law in March 2016 to align with EU law. It requires lenders to conduct an affordability test and provide advice that meets a minimum standard.
Does the mortgagor have the right to grant leases?
s99 LPA 1925 gives the mortgagor the statutory power to grant leaves binding to both mortgagor and mortgagee. These are usually excluded from most residential mortgages. In such cases, the mortgagee’s consent would be required before a lease could be granted.
What is undue influence?
When somebody is pressurised into accepting very unfavourable terms in the mortgage, e.g. when a vulnerable elderly person has been pressurised into entering into a transaction such that it is against their own free will and not in their best interests, or a husband persuades his wife to sign the mortgage agreement under false pretences.
What will courts do with mortgages with undue influence?
The court may set aside, or decline to enforce, any bargain, including a mortgage, reached by means of undue influence.
What is a surety?
A surety is a person who acts as a guarantor for another’s debts.
What are the two types of undue influence?
Actual or presumed.
When is undue influence presumed?
When there is a relationship of trust and confidence combined with circumstances justifying the presumption that the relationship was abused in order to achieve the bargain.
What are the three questions asked when addressing issues of undue influence?
(1) Is there undue influence?
(2) Is the mortgagee tarnished with the undue influence?
(3) Has the mortgagee taken steps to ensure that its mortgage is not void because of the undue influence?
