Mortgages

Question 1

What is a mortgage? And what case provides the definition?

Answer 1

A mortgage is a transaction under which land or chattels are given as security for the payment of a debt or the discharge of some other obligation.
Santley v Wilde [1899]

Question 2

What are the important terminologies?

Answer 2

Mortgagee = the Bank 
Mortgagor = the legal home owner

Question 3

What are age two types of mortgages?

Answer 3

Repayment mortgage: the borrower repays both some interest and some capital each month to the bank.

Interest only mortgage: The mortgagor only pays interest to the bank each month, he or she does not repay any of the capital. At the end of the mortgage term, the mortgagor will still owe the mortgagee the whole of the amount borrowed.

Question 4

How long can you take out a mortgage for?

Answer 4

Most mortgages are normally taken out for a long time, typically 25 years

Question 5

How was a mortgage created with the old law?

Answer 5

The mortgagor must transfer their fee simple interest in the land to the mortgagee, when money was repaid in full, on the due date, the mortgagee would transfer the fee simple back to the mortgagor.

Question 6

With the old law, what happens if the mortgagor was a late in paying their mortgage?

Answer 6

If the mortgagor was a day late with their payment, or had almost repaid the debt in its entirety but failed to do so on the date of repayment

1. The mortgagee could keep the land
2. The mortgagor will lose their land and all the repayment made towards the loan

Question 7

How did the new law change the creation on mortgages using equity?

Answer 7

Equity was able to produce equitable right of redemption. This meant that there were two crucial dates for the life of the mortgage
1. The first date, this permitted the borrower to have 6 months after the creation of the mortgage, which was known as the legal date of redemption

They had the right to redeem based on a contractual agreement.

Question 8

What did the new law state about transferring fee simple?

Answer 8

It was no longer necessary to create a mortgage by transferring the fee simple interest to the mortgagee.

Question 9

What did the Law of Property Act 1925 say about creating a mortgage, s.85(1)

Answer 9

The act stated that there are two ways of creating a mortgage.

1. grant by legal charge
2. legal charge s.23(1)(a) LRA 2002
   - Must be by deed s.85 LPA 1925
   - must be entered on the charges register in case of registered land

Question 10

What will a legal mortgage of unregistered land trigger?

Answer 10

It will trigger for registration of the land. Land Registration Act 2002 s.4(1)(g) and s.6(2)(a)

Question 11

What does grant by demise mean?

Answer 11

If the mortgagor own the fee simple of the property, then he or she can grant a legal mortgage over it by demise to the bank.
Demise = lease
Once the mortgagor pays back the interest under the mortgage agreement, the lease will automatically com to an end and the bank’s interest in the property will cease.

Question 12

What are the rights of a mortgagor?

Answer 12

1. The intention of the mortgagor is that he or she will pay the debt and be allowed to enjoy his or her land
2. The mortgage takes effect as a contract, agreed between the mortgagor and mortgagee

Question 13

What is the right of a mortgagor? (Continued) -

What is equity of redemption?

Answer 13

1. Equity of redemption = a bundle of tight given by the law to the mortgagor which includes the equitable right of redemption.
   - If the legal date has passed, the mortgagor acquires the right to repay all of the capital interest, and cost involved under the initial agreement

Question 14

Mortgagor rights continued : What are clog and fetters? and how can the mortgagee apply it?

Answer 14

The prevents the mortgagee from attaching any unfair restrictions or applying any unfair conditions to the mortgage contract.

1. attempts by the mortgagee to restrict the mortgagor’s equity to redemption
2. attempts by the mortgagee to gain collateral advantages from the mortgagor (e.g. a mortgagor must buy products from the mortgagee)

Question 15

How does the element of unconscionability apply to the right of a mortgagor?

Answer 15

This calls for the court to look at the gross unfair or morally wrong behaviour that should go against the conscience of an honest person.

Question 16

Mortgagors rights continued - The right to redeem, how is this important?

Answer 16

The mortgagor’s right to redeem the mortgage by repaying the debt with interest is fundamental to the law of mortgages

Question 17

How did the case of Santley v Wilde [1899] describe clogs and fetters?
And how does the court asses clogs and fetters?

Answer 17

“A clog or fetter is something which is inconsistent with the idea of security”

They look closely at the agreement - the bargaining power of the parties
The circumstances surrounding the mortgage - if both parties freely entered into an agreement, then the court will not interfere.

Question 18

Can a mortgagee place a condition that permits the mortgagor from redeeming the mortgage? (Provide case facts for Fairclough v Swan Brewery Co. LTD [1912])

Answer 18

Yes it is possible

• The mortgaged property was leasehold and the lease ran for 172 years
• In the mortgage contract, the mortgagee imposed a term that prevented the mortgagor from redeeming the mortgage until 6 weeks before the end of the lease
• It was held that this term was void; it effectively died the mortgagor the right to redeem the mortgage

Question 19

What case allowed the prevention of right to redeem?

Answer 19

Knightsbridge Estates Trust Ltd v Bryne [1939]

• Two commercial orgnasitaions entered into a mortgage agreement on a freehold property
• That prohibited the mortgagor from redeeming the mortgage for 40 years
• When interest rate dropped, the mortgagor wanted to redeem the mortgage early
• The court held: the term was not unreasonable and the terms were neither unconscionable or oppressive because the men were two businesses men negotiating at arms length

Question 20

What were the facts in Service Bookbinding v Marden [1979]

Answer 20

• The mortgage agreement contained a number of clause that the mortgagor climbed were unconscionable
  1. Postponing the redemption of the mortgage for 10 years
  2. Capitalising any interest after 20 years (which meant if the mortgagor fell behind on payment, they could end up paying interest on the interest)
• The terms of the mortgage were upheld. The agreement were somewhat harsh but not unconscionable

Question 21

The right of a mortgagor ; How are they protected against collateral advantages?
CASE: Noakes v Ruce [1902]

Answer 21

The mortgagor is also given protection against the mortgage obtaining an additional advantage by including secondary conditions in the agreement.

• The mortgage imposed a condition that the mortgagor must buy all his beer from him
• Not only during the whole term, but also after the mortgage has been redeemed
• This was seen as a ‘solus ties’ agreement that ties the mortgagor to solely buy products from the mortgagee
• This was found to be a clog on the mortgagors equity of redemption

Question 22

Does the courts always rule against cases regarding collateral advantages?
Mention: Kreglinger v Patagonia Meat and Cold Storage [1914]

Answer 22

While the collateral term should not clog the equity of redemption, there is no reason why the parties can’t make a business agreement outside but alongside the mortgage agreement.

Case Ruling:
Although the courts would protect any conditions placed to clog the mortgagors right of redemption, it would not interfere in a legitimate business agreement

Question 23

What did Lord Mersey say in the case of Kreglinger v New Patagonia Meat Cold Storage regarding clogs and fetters?

Answer 23

“Unruly dogs, which if not securely kennel to its own kennel, is prone to wander into places where it should not be”

Question 24

Rights of a mortgagor continued - preventing the option to purchase, what is this?
CASE: Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904]

Answer 24

The mortgagee can fetter the equity of redemption by including a clause allowing it to acquire the mortgaged land for itself.

• The mortgagor grated a mortgage on some financial asset in order to obtain £5,000 in cash
• Th mortgage agreement contained a clause giving the mortgagee the right to purchase the stock at any time within the next year at a agreed rate
• The House of Lords: this was a clog on the equity of redemption.

Question 25

What was timing important in the case of Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] and Reeve v Lisle [1902]

Answer 25

In Jarrah, the option to purchase was included within the mortgage agreement itself. In Reeves, an option to purchase the mortgages property, was agreed 10 or 1 days after the mortgage agreement. It was, therefore, a separate transaction from the mortgage itself.

Question 26

What are the right and remedies for the mortgagee? (State the 5 remedies)

Answer 26

The right of a mortgagee is to recover money that has been lent to the mortgagor.
The mortgagor has 5 potential remedies to recover its money
1. An action on the mortgagor’s personal covenant to repay the mortgage
2. The right to repossess the mortgages premises
3. The right to appoint a receiver
4. The power to sell the mortgages premises
5. The right of foreclosure

Question 27

Rights of mortgagee continued: An action on the mortgagor’s personal covenant - how long does the right to bring an action continues for?
What did the case of West Bromwich Building Society v Wilkinson [2005] regarding this?

Answer 27

If the term of the contract is breached under which the mortgagor is unable to repay the mortgage, then the mortgagee can sue the mortgagor in common law. The right continues after the mortgagee has repossessed and sold the property.

It continues for 12 years - view Limitation Act 1980 s.20(1)

The House of Lords said in the case: they rejected any suggestion that the sale of the mortgaged property starts a further 12 year period

Question 28

What did the case of Bradford and Bingley plc v Rashid [2006] say regarding the limitation period starting afresh? Limitation Act 1980 s,29(5)

Answer 28

Under the LA 1980 s.29(5)
Any fish payment or acknowledgment of the mortgage debt will cause the limitation period to strut again.

In the case, House of Lords held that two letters from the legal advice centre, written on the mortgagor’s behalf cause the limitation period to start again, because the letter acknowledged the debt.

Question 29

Right of the mortgagee: The right to possession

For possession to occur do the mortgagor need to fall behind on their payment? Four Minds Ltd v Budley Marshall [1957]

Answer 29

Mortgagee has a right to enter into possession of the mortgaged premises “as soon as the ink is dry”, unless the mortgage agreement states otherwise.

CASE: There is no need for the mortgagor to have fallen behind in his or her payment

Question 30

If the premises are occupied can the mortgagee still possess the property?

Answer 30

No they cannot unless there is a court order. If there is no court order the mortgagee runs the risk of breaking the criminal law under Criminal Law Act 1977 s.6(1), if the mortgagor in possession is in any way treated violently or threatened with violence in the course of obtaining the property

Question 31

What does the case of Barclays Bank plc [1999] say about possession?

Answer 31

“Many mortgagors would be surprised to discover that a bank which had lent them money to buy a property for them to love in could take possession of it in the next day”

Question 32

Is there hope for the mortgagor during possession under the case of Birmingham Citizens Permanent Building Society v Caunt [1962]
Consider, Administration of Justice Act 1970 s.36

Answer 32

The court has an inherent discretion to allow a stay of the order for a short time to allow the mortgagor some time to organise his or her affairs.

The Act provides the mortgagor with a real opportunity to atop the process of repossession if he or she can demonstrate to the court that he or she has the means to pay back ‘any sums due under the mortgage’ within a ‘reasonable’ time’

Question 33

What did the case of Cheltenham and Gloucester Building Society v Norgan [1996] say about repaying money owed to stop repossession within a ‘reasonable time’?

Answer 33

In previous years a ‘reasonable time’ was considered to be a 2 year period, however, the case stated a ‘reasonable time’ is considered to be the reminder of the life of the mortgage.

Question 34

What did the case of Cheltenham and Gloucester Building Society say further about the ‘reasonable time’ factor?

Answer 34

The court should consider

1. How much can the borrower reasonably afford to pay, both now and in the future
2. If the borrower has a temporary difficulty in meeting his obligations, how long is the difficulty likely yo last
3. What was the reason for the areas to have accumulated
4. Hoe much remains of the original mortgage term
5. What kind of mortgage is it? What are the terms of the contract? When is the principal due to be repaid?

Question 35

How does the Administration o Justice Act 1970 s.36 protect the mortgagor if there is no court order for possession?
Barclays Bank Plc [1999]

Answer 35

The Act only applies when the mortgagee has sought an order for possession. if the mortgagee manages to acquire possess of the property without a court order, the court is unable to exercise its discretion.

• A husband and wife feel behind with their mortgage repayments, and the bank wrote to them serval times individually
• Finally notifying them of its intention to repossess the property and sell it at auction
• The bank took possession and sold the house
• The coupled were not at the property, because it was undergoing refurbishment, and both claimed that they had received no letter from the bank
• The couple claimed that AJA 1980 S.36 was applicable
• The court of Appeal held that the court could only exercise its powers under s.36 if the mortgagee had begun an action for possession. If the mortgagee was legally entitled to take possession of the property, then it need not seek a court order to do so. Thus the mortgagor will not be afforded the protection of s.36.

Question 36

What is the pre-action protocol?

Answer 36

It is intended to reduce the likelihood that the parties in a dispute will go to court, by encouraging them to discuss and try to settle the dispute between themselves.

Question 37

What are the duties of the mortgagee in possession?

Consider White v City of London Brewery Company [1889]

Answer 37

1. They are responsible for the physical state of the property.
2. The mortgage must obtain the best rent possible and not benefit from the arrangement
3. If it leaves the property empty, the mortgagee will be liable to pay the rent itself
4. If the mortgagee wishes to keep, rather than to sell, the mortgages property, it may well sense to appoint a receiver to look after it

Question 38

What is a receiver?

Answer 38

The mortgagee has a statutory right under LPA 1925 S.101(1) and 109, to appoint a receiver.

A receiver is a person appointed by the court to protect and preserve property during the course of litigation.
They essentially take over the management of the mortgaged property. He or she receives rent and other income from the property, and pays the property’s expenses, applying whatever money is left over to paying back the money owed under the mortgage.

Question 39

What is the mortgagee’s power to sale

Answer 39

As soon as the legal date of redemption of the mortgage has passes, which is usually 6 maths, the power of sale for the mortgage arises.

Law of Property Act 1925 s.101

(1) A mortgagee, where the mortgage has been made by deed, shall…have the following powers
- A power, when the mortgage money has become due, to sell, or to concur with any other person in selling, the mortgaged property

Question 40

In order for the mortgagee to exercise the right to sale what must be in place?

Answer 40

LPA 1925 s.103

A mortgage shall not exercise the power of sale conferred by the Act unless and until…

1. Notice refuting payment of the mortgage money has been served on the mortgagor
2. Defaulted has been made in payment of the mortgage money, or part thereof, for 3 months
3. Some interest under the mortgage is in areas and unpaid for two months after becoming due
4. There has been a breach of some provision in the mortgage deed to this Act

Question 41

What happens during the proceeds of sale?

Answer 41

Once the sale has taken place, the mortgage becomes a trustee of the proceeds of sale for the mortgagor. The proceeds must be applied according to the order laid down in LPA 1925 s.105

After paying off prior mortgages, the mortgagee. must apply the funds as follows

1. All costs, charges, and expenses incurred by the mortgagee in selling the property
2. Interest cost, and any other money due under the mortgage
3. The residue to the mortgagor, or indeed, any subsequent mortgages, if there is more than one mortgage on the land