Land and Mortgages

Question 1

What is the significance of whether something is classed as land or not?

Answer 1

• Transfer of land requires a deed (LPA, s 52)
• Clarifies what is to be included on a land transfer
• Clarifies what a lender can take possession of
• If you inherit land, clarifies what you get

Question 2

LPA 1925, s 205(1)(ix)

Answer 2

‘“Land” includes land of any tenure, and mines and minerals, whether or not held apart from the surface, buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other corporeal hereditaments; also a manor, an advowson, and a rent and other incorporeal hereditaments, and an easement, right, privilege or benefit in, over, or derived from land…’

Question 3

What does the definition of ‘land’ include under s 205(1)(ix) LPA 1925?

Answer 3

• The physical land, any buildings on the land, as well as other corporeal hereditaments (physical things attached to the land – described as ‘fixtures’)
• Incorporeal hereditaments – the benefit of any proprietary rights the property has, that have no physical substance e.g. an easement to park on the joining neighbour’s land.

Question 4

What happens when land is sold?

Answer 4

• When land is sold, everything classed as land will pass to the buyer (LPA, s 62)
• If a lender exercises its right to possess and sell the land, it is entitled to sell everything classed as land.

Question 5

Airspace and ground below the earth - Latin maxim

Answer 5

• ‘cuis est solum eius est usque coelom et ad inferos maxim’ = he who owns the land owns everything up to the heavens above and the depths below
• the maxim does not represent the true state of the law; the depth and height of an estate owner’s land is limited to what he might, from a practical and policy perspective, reasonably require to make effective use of his possession.

Question 6

Airspace

Answer 6

• An owner’s rights in the airspace above his land are restricted to such height as is necessary for the ordinary use and enjoyment of the land and the structures upon it.
• Something on a neighbour’s land that overhangs yours is likely to be a trespass as they are, by definition, using space that you could utilise.
• Above that height, the owner has no greater rights than any other member of the public (Bernstein of Leigh (Baron) v Skyviews and General Ltd)
• The law makes a distinction between:
  (a) The upper airspace
  (b) The lower airspace (the portion necessary for the landowner’s ordinary use and enjoyment)

Question 7

The upper and lower airspace

Answer 7

• There is no exact height from where the upper airspace begins.
• The lower airspace is to such height as is necessary for the reasonable enjoyment of the particular piece of land.

Question 8

The upper airspace - Bernstein

Answer 8

FACTS: Defendant flew over plaintiff’s house for purpose of taking an aerial photograph. Plaintiff claimed damages.
HELD: Had not committed trespass; did not interfere with any use to which the plaintiff might have put the land.
- Civil Aviation Act 1982, s 76(1) now grants immunity from trespass/nuisance for any flight of an aircraft ‘at a height above the ground which, having regard to wind, weather and all the circumstances of the case is reasonable.’ This applies to innocent passage and not, e.g., for an aerobatic display.

Question 9

The lower airspace

Answer 9

• If a structure overhangs your property so that it is in the ‘lower airspace’, that is a trespass.
• Kelsen v Imperial Tobacco: an injunction was granted for the removal of an advertising sign erected by the defendant projected into the airspace above the plaintiff’s shop by a few inches.
• Anchor Brewhouse Developments v Berkley House Developments: the jib of a crane trespassed in the airspace above the claimant’s property and an injunction was granted.
• If there is a trespass, the court could either grant an injunction or award damages.

Question 10

Lower airspace - extra trespass case

Answer 10

Laiqat v Majid
FACTS: Defendant installed extractor fan which protruded by 7mm into the claimant’s back garden at a height of 4.5m. Claimant contended it was a trespass and sought injunction to remove fan.
HELD: ‘The problem is to balance the rights of an owner to enjoy the use of his land against the rights of the general public to take advantage of all that science now offers in the use of airspace. This balance is in my judgment best struck in our present society by restricting the rights of an owner in the airspace above his land to such height as is necessary for the ordinary use and enjoyment of his land and the structures upon it…above that height he has no greater rights in the airspace than any other member of the public’
The fan was a trespass. Interference with the airspace directly above someone else’s land is sufficient to constitute a trespass.

Question 11

The ground below

Answer 11

Grigsby v Melville
FACTS: The claimant and defendant were freehold owners of adjoining properties. Under the claimant’s property was a cellar accessible only by stairs leading down from inside the defendant’s property.
HELD: The cellar was owned by the claimant and the court based their reasoning on the fundamental principle that a conveyance of land ordinarily carries with it all that is beneath the surface.

Question 12

The ground below - Bocardo SA v Star Energy UK Onshore Ltd

Answer 12

FACTS: Star Energy had a licence to bore for oil from an oil reservoir under Surrey. To reach the oil, they bored under land which belonged to Bocardo, who sued for trespass.
HELD: There was a trespass.
- However, the Infrastructure Act 2015 s 43 now states that there is no trespass at depths below 300m and therefore no need for the consent of the freehold owner to deep level drilling.

Question 13

Exceptions to what a landowner owns

Answer 13

• A landowner is not entitled to all minerals under his land. All mines of gold and silver belong to the Crown. If a landowner finds ‘treasure’ (as defined under the Treasure Act 1966), that also belongs to the Crown.
• Any coal under land belongs to the Coal Authority by virtue of the Coal Act 1938.

Question 14

Fixtures - Latin maxim

Answer 14

‘quidquid plantatur solo, solo cedit’ - ‘whatever is attached to the land becomes part of the land’

Question 15

Fixtures - legal definition of land

Answer 15

LPA 1925 s 205(1)(ix): ‘other corporeal hereditaments’ are included in the definition of land, i.e. things attached/fixed to the land

Question 16

Fixtures - the legal test for if something is a fixture (part of the land) or a chattel (not part of the land)

Answer 16

Holland v Hodgson:
(1) The degree of annexation test
(2) The purpose of annexation test
‘It is a question which must depend on the circumstances of each cause, and mainly on two circumstances, as indicating the intention…the degree of annexation and the object of annexation…’

Question 17

Fixtures - the degree of annexation test

Answer 17

• The more firmly the object is fixed to the land or building, the more likely it is to be classified as a fixture. Even if it is fairly easy to remove, its character is still prima facie that of a fixture.
• If, on the other hand, it rests on the land by its own weight, it is generally considered to be a chattel.

Question 18

Fixtures - the purpose of annexation test

Answer 18

• Consider why the object is attached to the land or building
• Ask whether the annexation was for more convenient use/enjoyment of the chattel as a chattel, or to enhance the land or building in some way.
• The purpose of installing the item is looked at objectively (Botham v TSB Bank) to determine whether the item was put in the property to improve it permanently, or whether it was put there temporarily for more convenient use/enjoyment of the object.
• If it is for the more convenient use as a chattel, it remains a chattel notwithstanding the degree of annexation, as long as the degree is no more than necessary for the enjoyment of the chattel.
• However, if an item cannot be removed without causing damage to the fabric of the building, it is likely to be a fixture.

Question 19

Fixtures - which test prevails?

Answer 19

• The purpose test prevails over the degree test where there is a discrepancy between them.
• It seems that perhaps after applying the degree of annexation test, there is a presumption on whether it is a chattel/fixture and it passes to whichever party is seeking to establish the opposite on the balance of probabilities to prove otherwise by application of the purpose of annexation test. It is therefore only when that burden is overcome that the purpose test prevails.

Question 20

Fixtures - further considerations

Answer 20

• If chattels are incorporated into the architectural design of a building, they may consequently be classified as fixtures even if they are not firmly affixed (D’Eyncourt v Gregory - a stone garden seat and ornamental statues standing on their own weight were held to be structures as they formed part of the architectural design of the house and grounds)
• A chattel may be securely affixed to the land but remain a chattel if the purpose is the better enjoyment of the chattel (Leigh v Taylor - a tapestry was tacked securely to a wall but the purpose was merely to display the tapestry for enjoyment so it was held to be a chattel)

Question 21

Fixtures - Berkley v Poulett

Answer 21

The question today whether objects which were originally chattels have become fixtures depends upon: (1) the method and degree of annexation, (2) the object and purpose of the annexation. ‘The early law attached great importance to the first test. It proved harsh and unjust’

• ‘If an object cannot be removed without serious damage to…some part of the realty, the case for its having become a fixture is a strong one.’
• ‘If there is no physical annexation there is no fixture…nevertheless an object, resting on the ground by its own weight alone, can be a fixture, if it be so heavy that there is no need to tie it into a foundation, and if it were put in place to improve the realty. Prima facie, however, an object resting on the ground by its own weight alone is not a fixture’

Question 22

Fixtures - Graham Charles Botham & Ors v TSB Bank plc

Answer 22

FACTS: Mortgagee took possession of Botham’s flat and Botham argued many items were chattels, not fixtures.
HELD: ‘If the item viewed objectively, is, intended to be permanent and to afford a lasting improvement to the building, the thing will have become a fixture. If the attachment is temporary and is no more than is necessary for the item to be used and enjoyed, then it will remain a chattel.’

Question 23

Importance of the fixture v. chattel distinction

Answer 23

• As a fixture is part of the land, ownership can only be transferred by a transfer of the land.
• The owner may not remove a fixture after they have contracted to sell the property to another.
• Under s. 62 LPA 1925, a conveyance automatically includes all fixtures in the property, unless the items are specifically excluded from the sale in the contract under LPA s 62(4).
• Where the land is mortgage, fixtures form part of the security and will be included in any sale by the lender following repossession.
• In practice, on the sale of land, the buyer and seller will agree which items are to pass on the sale by completing a Law Society Fixtures and Contents Form (Form TA10)

Question 24

Interests in land

Answer 24

• Proprietary rights of more limited use
• Does not give the right to possess the land in the way an estate does, rather gives interest holder the right to do something on the land, or restricts what can be done on the land.
• A powerful right in the land which can be recovered as an action in rem and is capable of enforcement against third parties
• Parliament have limited the number of rights that are capable of being proprietary in s 1 LPA 1925
• If a right has not been recognised by s 1, it will only ever be personal in nature

Question 25

LPA 1925, s 1 - Legal interests

Answer 25

(a) An easement, right or privilege in or over land for an interest equivalent to an estate in fee simple absolute possession or a term of years absolute;
(c) A charge by way of legal mortgage
(e) Rights of entry exercisable over or in respect of a legal term of years absolute, or annexed, for any purpose, to a legal rentcharge.

Question 26

LPA 1925, s 1 - Equitable interests

Answer 26

‘(3) All other estates, interests and charges in or over land take effect as equitable interests.’ [e.g. restrictive covenants]

Question 27

Legal interests - summary list

Answer 27

• Mortgages
• Easements granted for a term equivalent to a freehold/leasehold estate
• Rights of entry

Question 28

Equitable interests - summary list

Answer 28

• Freehold covenants
• Estate contracts
• Rights under a trust of land
• Easements granted for an uncertain term

Question 29

Mortgage

Answer 29

• Capable of being a legal interest (LPA 1925, s 1(2)(c))
• A loan of cash, which is secured by rights granted over property
• Include the right to possess and sell the land in the event of a default in mortgage payments
• It is the borrower that grants a mortgage, not the lender.

Question 30

Easements

Answer 30

• A proprietary right to use land which belongs to someone else.
• Must be granted for a term equivalent to one of the legal estates to be a legal easement (s 1(2)(a), LPA 1925)
• e.g. rights of way, drainage, storage, parking on neighbouring land

Question 31

Rights of entry

Answer 31

• A right for a landlord to re-enter leased premises and end the leasehold estate
• Usually arises in the event of tenant default or some other specified event occurring, and must be expressly included within the lease.
• A legal interest in land (LPA 1925, s 1(2)(e))
• Also known as a ‘forfeiture clause’ in a lease.

Question 32

Restrictive covenants

Answer 32

• A promise.
• Negative in nature; prevent a land owner from doing something on their land
• Not a recognised legal interest in land; an equitable interest (LPA 1925, s 1(3))

Question 33

Estate contracts

Answer 33

• a contractual right to a legal estate, whether freehold/leasehold
• equity will order specific performance of a contract to create or transfer a legal estate
• this together with the maxim that ‘equity sees as done what ought to be done’ results in an equitable interest arising from the contract
• LP(MP)A 1989, s 2: must be in writing, signed by both parties and contain all the terms

Question 34

Interests under a trust of land

Answer 34

• Where one person (trustee) holds land for the benefit of another (beneficiary)
• Trustee owns the legal estate and the beneficiary is entitled to the benefit, which gives them an equitable interest in the land
• Can be created expressly/impliedly

Question 35

Significance of the distinction between legal and equitable interests

Answer 35

(1) Remedies - a person who holds a legal interest has a wide range of remedies available, e.g. damages, which the holder would get as of right, there would be no discretion to take into account the merits of the case. Someone who holds an equitable interest is not entitled to damages as of right. The remedies granted are entirely at the discretion of the court.
(2) Enforcement - of the interest against third parties; legal interests can be enforced against third parties.

Question 36

Mortgages - how they work

Answer 36

• Secured loans offer more security to the lender in the event that the borrower becomes insolvent/bankrupt
• The lender makes money out of loaning the money by charging interest on the amount borrowed. This is expressed as a percentage of the amount of money lent and are typically noted on an annual basis, known as the APR (annual percentage rate)
• When the borrower is a low risk party, he/she will be charged a low interest rate. If they are higher risk, the interest rate will be higher.
• The bank loan the money, but it is the borrower who grants the mortgage. The lender is the mortgagee and the borrower is the mortgagor.

Question 37

Types of mortgage loan

Answer 37

• Capital repayment loan - each month you pay some of the interest you owe plus some of the money (capital) that has been borrowed. At the end, the borrower will have paid back everything and will own their home outright.
• Interest only - the borrower only pays the interest due month by month and will need to repay the capital at the end of the period with money from elsewhere.
• Endowment - An interest only mortgage with the repayment money coming from the proceeds of an endowment policy
• Pension - also an interest only mortgage with the repayment coming from the lump sum of the pension payment at retirement
• Sharia-compliant - Islamic law forbids Muslims from paying interest. Specialist Muslim lenders offer Sharia-compliant alternatives, which often involve the lender initially buying the property and then selling it on to the purchaser at an increased price.

Question 38

History of mortgages (pre-1925 approach)

Answer 38

• Historically involved a transfer of the ownership of the secured property for the lender for the duration of the loan agreement
• The borrower transferred the property to the lender by deed and the lender would lend money.
• The mortgage deed would contain a provision for the loan to be repaid on what was called the legal redemption date; the day on which the borrower could repay the loan. If that happened, the lender was obliged to transfer back the property to the borrower.
• If it was not paid on this date, the lender could keep the property, even if the amount of loan was small compared to the value of the property.
• The legal redemption date was construed as a 24 hour period only and construed strictly against the borrower.

Question 39

Consequences of pre-1926 approach

Answer 39

• The borrower was very limited as to when the loan could be repaid.
• Lenders could make themselves scarce and make it extremely difficult for the borrower to repay on the due date so that they could take the property
• The situation did not reflect the reality of the parties’ attitudes.
• This led to equity intervening in the 17th century to soften the effect of this common law system. Equity recognised a right to redeem which arose after the legal date for redemption had passed.
• Legal redemption dates can still be found today in all mortgage deeds.

Question 40

Post-1925 reforms to mortgages

Answer 40

• LPA 1925 made huge reforms to property law; one change was the way mortgages could be granted
• s 85, 86 and 87 apply, setting out 3 ways in which a property may be offered as security for a loan
• s 85 deals with mortgage of freeholds; instead of transferring the property, the borrower leases it on a long lease to the lender. The lease will usually be very long, and will contain an express clause stating that the lease will end when the loan is repaid.
• s 86 a similar procedure for mortgages of leasehold estates; a sublease shorter than the borrower’s own lease is granted, with provision for the sublease to end once the loan is repaid in full
• s 87; instead of granting a long lease/sub lease as security in s 85 and 86, the borrower can execute a deed creating a charge by way of legal mortgage.

Question 41

Advantages of a charge by way of legal mortgage

Answer 41

• Simplifies the process
• Borrower retains ownership but the lender has an asset too: a legal interest in the land which can be enforced
• It reflects practical reality; the borrower remains the owner

Question 42

Mortgages since 2002

Answer 42

• The legal charge in s 87 LPA 1925 is now the only way that loans in respect of registered land can be secured (s 23(1)(a) LRA 2002)
• The correct way of referring to security over registered land is ‘legal charge’

Question 43

Formalities for legal mortgages

Answer 43

• Deed and registration required
• Deed (LPA 1925 s 52): must comply with requirements of LP(MP)A 1989, s 1: clear on the face of the document that it is intended to be a deed, must be validly executed, and must be delivered.
• Registration at the Land Registry required (LRA 2002, s 27(2)(f)
• If it is not registered, the mortgage will not take effect as a legal mortgage in the land (s 27(1)) but could still be an equitable interest

Question 44

Two types of equitable mortgages

Answer 44

(1) Mortgages of equitable interests

(2) Defective legal mortgages

Question 45

Mortgages of equitable interests

Answer 45

• Where the borrower holds equitable interests in the land (i.e. they are not a legal owner, e.g. a beneficiary under trust), any mortgage of the interest will be equitable in nature
• In accordance with LPA s 53(1)(c), it needs only to be in writing and signed by the grantor in order to be validly created.

Question 46

Defective legal mortgages

Answer 46

• A mortgage over registered land which is not granted by a valid deed (as required under LPA 1925 s 52) or that is not completed by registration (LRA 2002, s 27(1)) will not take effect as a legal mortgage
• It may be regarded as an equitable mortgage if it complies with LP(MP)A 1989, s 2
• Equity will recognise it as a ‘contract to grant a legal mortgage’ provided it is in writing, contains all the agreed terms and is signed by the mortgagor and mortgagee.

Question 47

Discharge of mortgages

Answer 47

• A mortgage is only considered to be fully discharged when all reference to it has been removed from the Charges Register at the Land Registry
• Discharge of a registered charge is done using a specific Land Registry form
• A DS1 form is used to discharge a mortgage over the whole of the land in a title
• If only part of the land is being released from the mortgage, a DS3 form is used

Question 48

Equity of redemption

Answer 48

• Equity allows the borrower to repay the loan at any time after the legal date for redemption, known as the equitable right to redeem
• Equity recognises the borrower as the true owner of the property and protects the borrower’s rights as owner. These rights are collectively known as the equity of redemption.
• They prevent the borrower from exploitation by the lender; equitable right to redeem, protects the borrower from clauses postponing or preventing redemption, collateral advantages and unconscionable terms.
• The equity of redemption has a financial value, commonly referred to as the ‘equity’ that people have in their homes

Question 49

Postponement of the right to redeem

Answer 49

• Lenders can only make money from borrowers while the loan is outstanding. It is in the lender’s interest to keep the borrower on the hook for as long as possible. One way of doing this is to push back the legal date of redemption as far as possible.
• Courts will look at clauses which postpone the legal date for redemption very closely and will not allow a clause which prevents redemption altogether (Toomes v Conset)
• They may allow a lender to postpone the date, but there remains an 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 50

Fairclough v Swan Brewery Co Ltd

Answer 50

FACTS: A clause in the mortgage deed postponed the legal date for redemption (and therefore the equitable right to redeem) until six weeks before the lease expired.
HELD: The clause was struck out and the borrower was permitted to redeem earlier. The clause was a fetter on the equity of redemption because it prevented the borrower from getting back anything of value. A lease with only six weeks left to run would be virtually worthless.

Question 51

Knightsbridge Estates Trust Ltd v Byrne

Answer 51

FACTS: The borrower mortgaged the freehold of a hotel (unlike leaseholds, freehold estates rarely lose value). The legal date of redemption was postponed for 40 years from the date of the loan. The borrower wanted to redeem early.
HELD: The court upheld the postponement of redemption. The borrower would eventually get back exactly what had been mortgaged and the borrower had been given a favourable low rate of interest as part of the deal.

Question 52

Knightsbridge Estates Trust Ltd v Byrne - different if it was domestic?

Answer 52

• May have been a different outcome if the mortgage had been granted over a domestic property. Although domestic borrowers are often ‘locked’ for a period of time, this rarely exceeds a few years.
• It is possible for the borrower to redeem during the ‘lock in’ period, but a substantial fee would be payable for doing so.
• These arrangements are unlikely to be declared void as long as the borrower is offered a clear advantage, usually in terms of a low interest, in exchange for the lock in, understood precisely what was involved and made an informed decision to proceed.

Question 53

Options to purchase

Answer 53

• A mortgage may include an option for the lender to purchase the mortgaged property. Such terms may be declared void as preventing the exercise of the equitable right to redeem.
• If the lender has the opportunity to buy the property, the borrower inevitably loses the right to take the property back free of the loan, which is fundamental to the nature of a mortgage as security.
• This is a ‘clog’ on the equity of redemption, and equity will strike such terms down, especially in domestic cases.
• An option granted at the same time as the mortgage will normally be declared invalid (Samuel v Jarrah Timber). If it is granted in a subsequent independent transaction it may be upheld (Reeve v Lisle)

Question 54

Warnborough v Garmite

Answer 54

FACTS: The borrower bought land and granted a mortgage and an option over the land to the lender on the same day.
HELD: The option was a part of a sale and purchase agreement and not part of the mortgage. It was not therefore invalid as a clog on the equity of redemption. The court said it must look at the ‘substance’ of a transaction to ascertain whether it is substantially a mortgage or not. The label given to the transaction at the time is irrelevant.

Question 55

Collateral advantages

Answer 55

• Lenders are entitled only to the repayment of capital advanced plus interest.
• If a lender tries to extract additional value from the borrower, the offending term in the mortgage deed may be struck out.
• A collateral advantage will be struck out if it is unconscionable, in the nature of a penalty, or if it is repugnant to the equitable right to redeem.
• A typical example of a collateral advantage in commercial transactions: the solus tie. The lender makes it a condition of the mortgage that the borrower buys all its supplies from the lender. The interest rate may be made lower because of this.
• Generally, solus ties will be upheld if they end within the mortgage term. Ties which last beyond this may be upheld too if they are truly independent of the mortgage transaction (Krelinger v New Patagonia)

Question 56

Collateral advantages - Noakes & Co Ltd v Rice

Answer 56

FACTS: The borrower mortgaged his leasehold pub to a brewery. The mortgage included a solus tie requiring the borrower to sell only beer brewed by the lender. This tie was to last for the lease term, even if the loan had been repaid.
HELD: Solus tie was void as it exceeded the mortgage term. The borrower would not get back what he had mortgaged, because at the end of the term what had been a freehouse able to sell any beer would be a pub subject to the solus tie.

Question 57

Collateral advantages - Biggs v Hoddinott

Answer 57

FACTS: The borrower mortgaged his freehold pub to a brewery. The mortgage included a covenant by the borrower to buy beer exclusively from the lender for the duration of the mortgage, which could not be redeemed for five years.
HELD: The solus tie was not held void, as it was possible for the lender to gain a collateral advantage, as long as it is not unconscionable or oppressive. Described as ‘a reasonable trade bargain between two business men who enter into it with their eyes open’

Question 58

Unconscionable terms: two jurisdictions

Answer 58

(1) Equitable jurisdiction

(2) Statutory regulation

Question 59

Unconscionable terms: equitable jurisdiction

Answer 59

For courts to interfere, the terms must be more than simply ‘unfair’ or ‘unreasonable.’ It is high interest rates that have attracted the most attention.

Question 60

Unconscionable terms: equitable jurisdiction - Cityland and Property Holdings Ltd v Dabrah

Answer 60

FACTS: The borrower was a tenant of the lender for 11 years. Lender had refused to renew the lease and had threatened the tenant with eviction. The tenant had limited means so the lender offered to lend him the money to buy the property at a very high interest rate (38% overall).
HELD: The interest rate was unconscionable term and was reduced to 7%. The clear imbalance of bargaining power of the parties was emphasised. The borrower was in a vulnerable position threatened with homeless.

Question 61

Unconscionable terms: equitable jurisdiction - Multiservice Bookbinding Ltd v Marden

Answer 61

FACTS: A borrower company mortgaged its premises to a private individual. One term of the loan was that the level of repayments would be linked to the value of the Swiss franc, meaning that if the value of the pound fell against the franc, the repayments would be much more expensive.
HELD: No unconscionability; there was equality of bargaining power and the borrower had entered a bad bargain with its eyes open. A mortgage term would be unconscionable if it was imposed in a ‘morally reprehensible manner’. Lenders are entitled to make money from loans.

Question 62

Unconscionable terms: statutory regulation

Answer 62

• Statutory supervision is now carried out by the Financial Conduct Authority using the rules in its FCA Handbook.

Question 63

Unconscionable terms: statutory regulation - Falco Finance v Gough

Answer 63

FACTS: Mr Gough’s mortgage terms imposed on him a standard interest rate of 13.99% discounted from the start to 8.99%. The discount would be lost permanently if the mortgage went into arrears at any time, even if it was for a short period.
HELD: The dual interest rate was an ‘extortionate credit bargain’ contrary to the Consumer Credit Act 1974. It was almost impossible to make all the payments on time, and the higher rate far exceeded the lender’s losses if payments were missed.

Question 64

Unconscionable terms: statutory regulation - Davies v Directloans Ltd

Answer 64

FACTS: The borrowers granted a legal charge to the lender. The interest rate charged was 25.785% at a time when rates were generally 17%. The borrowers said that this was extortionate and should be reduced.
HELD: The lender had not acted improperly. The borrowers had a poor credit history and were a credit risk due to being self employed. The lender was justified in charging a higher rate.

Question 65

Unconscionable terms: statutory regulation - Paragon Finance v Nash

Answer 65

FACTS: The interest rate was 12.75% but the mortgage terms enabled the lender to charge an increased rate at its discretion. The lender had been in financial difficulties and had to borrow money on the international money markets. The lender increased the borrower’s interest rate to a much higher level than prevailing market rates to make up for this cost.
HELD: The lender in this case had not acted improperly and was entitled to take its own commercial needs into account. ‘Parliament has empowered the court to intervene only where a bargain is grossly unfair to the borrower, either because the payments…are grossly exorbitant, or because it otherwise grossly contravenes ordinary principles of fair dealing.’

Question 66

Statutory regulation today

Answer 66

• Financial Conduct Authority provides a single, consistent regulatory framework for the mortgage market.
• EU legislation aiming to reduce irresponsible lending practices heralded the Mortgage Credit Directive Order.
• Onerous mortgage terms may be challenged under the Consumer Rights Act 2015 if contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights to the detriment of the borrower (s 62). The offending term will not be binding on the borrower but the remaining agreement will remain in force.