Mortgages Flashcards
what is a mortgage
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” (Lindley MR, Santley v Wilde [1899] 2 Ch 474
people
- Mortgagor – the borrower, who grants the mortgage to the bank = the householder
- Mortgagee – the lender, who in return for receiving the mortgage, lends the money. = the bank.
Types of Mortgages
• Repayment
o The borrower repays both some interest and some capital each month.
o At the end of the term (commonly 25 years), the borrower will own their home completely
- Fixed rate
- Variable rate
Interest only
- Mortgagor pays only interest to the bank each month, they do not pay any of the capital. At the end of the term, they still owe the full amount borrowed.
- They must then either sell the property, or pay the bank from other assets, usually from an investment vehicle they arranged for specially for this purpose.
- Risky, especially when the investment has not produced enough capital growth to pay the debt off entirely.
Creation of mortgages – historical perspective
- Mortgagor to transfer his interest (whether freehold or fee simple) in the land entirely to the mortgagee.
- Contract: when the money was paid in full, on the due date, the mortgagee would transfer the interest back to the mortgagor.
- Strict application: if the mortgagor was just a day late for the final payment, the mortgagee could keep the land for itself.
Creating a Mortgage
• With the passage of the 1925 legislation, mortgages can no longer be created by transferring the interest to the Lender.
by Legal charge s.23(1)(a) LRA 2002
- Must be by deed, s.85 LPA 1925
& by • Grant by ‘demise’ (meaning by lease), s.86 LPA 1925
Mortgage Equity
- Equity = Value of property less amount of mortgage.
* Negative Equity = Where the amount of the mortgage is more than the value of the property.
Fairclough v Swan Brewery Co. Ltd. [1912] AC 565
- The appellant bought a hotel from a vendor who held the hotel under a lease which was due to expire in June 1925. The property was mortgaged to the respondent lender. The respondent was a brewery company, and the mortgage deed contained a covenant which required the appellant to purchase beer and ale exclusively from the respondent. The respondent refused to allow the appellant to pay off the mortgage early in 1910.
- The Privy Council observed the firmly established rule that equity will not permit any term in a mortgage to prevent or impede redemption of the mortgage. Counsel on behalf of the respondents had admitted that a mortgage cannot be made irredeemable. In the circumstances, the provision for redemption was nugatory and the mortgage irredeemable. Therefore, the Privy Council restored the judgment of the First Instance judge and
held that the appellant was entitled to redeem the mortgage and the provisions in the mortgage deed which prevented the appellant from redeeming were void as being an unreasonable clog on the appellant’s equity of redemption. After the redemption had been refused by the respondent there was no breach of the mortgage deed by the appellant.
Palk v Mortgage Services Funding [1993] 2 WLR 415
- Palks owned a house with a debt amounting to £358,000. they had found a prospective purchaser willing to pay just £283,000. they wanted to sell the property and make up the difference out of their personal resources.
- However, the mortgagee refused to agree to this, and took proceedings for possession. it was the mortgagee’s intention not to sell the house until ‘the market improved’, and in the meantime to let the house to a tenant. Thus, the debt increased and resulted in bankruptcy. They obtained an order of sale under s91(2) LPA 1925, a less known provision of the 1925 Act which gives the court a discretion to order the sale of mortgaged property. They argued that it was just and equitable to order a sale because otherwise unfairness and injustice would follow.
- In conclusion, the court ordered for a sale. In making the order for sale the Court of Appeal stressed that a mortgagee must not exercise its various powers in a manner wholly unfair to the mortgagor. Furthermore, it was argued that mortgagee can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor.
Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441
- The plaintiff company granted a mortgage to the defendant’s insurance company. The mortgage deed provided for repayment in eighty instalments over a period of forty years. The plaintiff sought a declaration that, notwithstanding the repayment provisions, they were entitled to early redemption of the mortgage upon payment of the principal sum secured thereunder, with interest to the date of redemption and proper costs.
- The Court of Appeal allowed the appeal. The Court observed that this was a proper business transaction which had none of the features of an oppressive bargain where the borrower is at the mercy of an unscrupulous lender. The Court refused to find that the repayment period of forty years was “unreasonable” in the circumstances. According to the Court, equity is concerned that the essential requirements of a mortgage transaction are observed and that oppressive or unconscionable terms are not enforced. Otherwise, it does not interfere with a commercial bargain. The Court declined to treat the relevant provisions in the mortgage deed as unreasonable where the deed was entered into by two parties such as those involved, who had acted with the assistance of competent advisers.
Jones v Morgan [2002] 1 EGLR 125
timing
- A loan and mortgage was entered into between D mortgagee and C mortgagor in 1994 to finance the development of the mortgaged land
- C had provided assurances to D that he would have a share in the land, but this was not contracted in 1994
- An option to buy a half share of the mortgaged land was granted to the mortgagee in an refinancing agreement in 1997
- The mortgagee, C, sought to enforce the option
- Held: The option was void as a clog on the equity of redemption
Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496
- the case concerned whether the lender could rely on two provisions in its standard term mortgage conditions entitling it (1) unilaterally to vary the loan interest rate for any “valid reason” and (2) to terminate the mortgage on one month’s notice absent borrower default.
- The contract contained an “inconsistency clause”, favouring the lender’s bespoke “Offer of Loan” over its standard conditions in the event of inconsistency.
The Court agreed with the borrower that both the standard conditions in question were inconsistent with the specific terms of the “tracker mortgage” sold to the borrower and hence could not be relied on by the lender.
Rights of the mortgagee
• An action on the mortgagor’s personal covenant to repay the mortgage;
• The right to repossess the mortgaged premises;
• The right to appoint a receiver;
• The power to sell the mortgaged premises and
The right of foreclosure
Ropaigealach v Barclays Bank plc [1999] 4 All ER 235
right to repossess
Clark LJ ‘Many Mortgagors would be surprised to discover that a bank which has lent them money to buy a property for them to live in could take possession the next day.’
Duties on Sale
Mortgagee is not a Trustee of the mortgagor
Cuckmere Brick Co Ltd. v Mutual Finance Ltd [1971] Ch 949).
A duty of care is owed.
Parker-Tweedale v Dunbar Bank plc [1991] Ch 12
Time and Mode of Sale.
Palk v Mortgage Services Funding plc [1993] 2 WLR 415
Mortgagee can choose when it sells the property.
Kreglinger v New Patagonia Meat & Cold Storage Co. Ltd [1914] AC 25
Collateral advantages will be struck down if they are:
• Unfair and unconscionable
• A penalty that clogs equity or redemption
• Inconsistent with the right to redeem
Rights of the Mortgagor
- Mortgage is a debt secured on a property or piece of land.
- Intention: mortgagor will repay their debt and enjoy land freely. Not: to allow the mortgagee to obtain the land for themselves.
- Land simply a security: when the loan has been repaid, the mortgagee’s interest in the land disappears.
- Mortgage takes effect as a contract: frequently very unequal bargaining powers, see especially residential properties.
- The equity of redemption: a bundle of rights given by the law to the mortgagor. The equitable right to redeem is only one of them.
