Mortgages Flashcards
What is a mortgage
A mortgage is a loan contract with proprietary right attached to protect lender if the borrower fails to make repayment. These are described as security for the loan. If the loan is not repaid then the lender can take the property to pay off what is owed
Rights of mortgagee
Acquires property rights in the land that is acquired with the loan money. If the mortgagee registers their land at the Land register, then it will be protected against the rest of the world. If not it will be protected by equity. The mortgagee can rely on these rights to seize the property if the borrower fails to make their repayments
Rights of the proprietor of land when mortgage used to pay for it
- First, when a person buys the land with a mortgage, the purchaser of that land becomes the owner of the fee simple. So the holder of that legal estate, retains it, despite the mortgage. The lender must register their mortgage at the Land Registry for it to be protected.
- Second once the debt has been repaid, the borrower is entitled to take an unencumbered right over the land: ie. the mortgage disappears once the loan has been repaid in full. The term used to describe the loan being repaid in full is that the mortgage is ‘redeemed’. The right to have the mortgage disappear once the mortgage has been redeemed is known as the equity of redemption
Types of mortgage
Repayment mortgage – used frequently for the purchase of residential property and finance commercial activities. Mortgagor borrows a capital sum and agrees to pay it back, plus interest, over a fixed period of time. Capital and interest paid back in instalments. At the end of the period the mortgage is redeemed, registered charge is discharged and mortgagor owns property absolutely
Endowment mortgage – Mortgagor borrows a capital sum for a fixed periods. This accumulates interest and the mortgagor repays that interest in regular monthly instalments. Mortgagor also enters an endowment policy whereby they pay a regular sum towards the endowment which will mature and generate enough capital sum to pay off the capital mortgage debt.
Current account mortgage – Lender will agree an overdraft facility on a bank current account to the value of the mortgage. Lender will provide these monies for the purchase of the property in the normal way and borrower pays funds into the mortgage current account
Secured overdraft – lender promises to make an overdraft facility available and the borrower may draw monies up to this limit as and when needed.
Legal mortgages and charges
LRA s23 provided that a legal mortgage can take effect only as a ‘charge by way of legal mortgage’ in relation to registered land. Previously mortgages could have taken effect by way of lease. Long lease method. However not after 2003. After introduction of LRA 2002, a legal mortgage is only created over a freehold by a charge by deed expressed by way of legal mortgage.
This means, that the mortgage must be created by means of a particular kind of document known as a deed. The mortgage must create a charge over the property in favour of the lender, and the specific form of that charge must be a mortgage.
Such a legal charge is a registrable disposition which can, and for legal effect must, be registered.
How to create equitable mortgages
- Where a mortgage is created over an equitable interest
- Where the mortgage is an informally created mortgage (i.e. one which does not comply with the formalities)
- Where the right that is created is an equitable charge (i.e. a charge which is not in the form of a mortgage)
First National v Hegerty
A husband and wife were joint owners of legal and equitable interest held on statutory trust for sale. The husband dishonestly obtained a mortgage by forging his wife’s signature on the mortgage document before he then left the country with the loan money. The question was whether his wife retained rights in the property which overrode the rights of the mortgagee under the forged document. It was held that the mortgagee could not proceed against the wife because she had never actually been a party to the mortgage. It was held that the lender could not overreach the wife’s equitable interest in the property because there had never been any dealing with two people. The law on co-ownership found that the fraud committed by the husband has severed the co-ownership right that existed between the husband and wife and consequently, the husbands interest could be treated separately to the wife’s rights. The severance brought the existing co-ownership to an end. Therefore, the question became whether or not there was possibility to proceed against the husband’s half share in the house. It was held that the equitable mortgage created between the husband and lender over his half-share was effective and therefore the lender could enforce its rights over his half of the property. Thus, the bank was able to apply for an order to sell the property on the basis that it was a person with an interest in the property.
Thames v Campbell
Different outcome was reached. A letter ws sent by a lender to its customer to create an overdraft for the customer which was expressed “to be secured”. It was held that that suggested the rights would be secured in the future not in the present tie. Consequently, it was held that this did not amount to anything more than a promise to create an equitable mortgage in the future, but it created no rights immediately. Here, one spouse’s failure to obtain the consent of the other spouse to the mortgage meant that it could not be an equitable mortgage.
Ahmed v Kedrick
A purchaser in good faith acquired the property from a husband who fraudulently signed his wife’s name on the documentation. This constituted severance of that married couples joint tenancy. It was held that only the husbands half share was bound by this transaction. The wife’s share was not recoverable by the plaintiff.
Penn
A husband was in a conspiracy with a purchaser of the property. The property was sold without the wife’s knowledge. It was held that there was no severance of the couple’s joint tenancy and no right fort the purchaser over the property because he had colluded in the husband’s fraud.
Enforcement of mortgagees rights against co-owners
The Trusts of Land and Appointment of Trustees Act 1996 section 14 provides that any person with an interest in the property can seek an order for sale from the court. Therefore, a mortgagee is a person entitled to seek an order for the sale of the property. Ordinarily, in cases like Lloyds Bank v Byrne, the mortgagee receives an order to sell the property. It is rare in cases in which the sale of property is not ordered
Abbey National
A mother transferred property into the names of both her and her daughter for them to occupy during their lifetime. However, the daughter borrowed money mortgaged on that home without her mother’s knowledge. It was held that there had been a collateral purpose in the purchase of the house i.e. to provide the mother with a home for the rest of her life, alongside her daughter. Therefore, it was held that the mortgagee could not acquire better title to the property than the daughter. The daughter was bound by the mothers interest. Therefore, the court would not allow the trustees for sale to ignore the requirement of consent from the mother and a sale of the property was not ordered.
Summary mortgagee rights against co-owners
The outcome, in practical terms, is the following. A mortgagee can seek a sale of the property under s14 TOLATA 1996. However, if the mortgagor had dishonestly taken out the mortgage, as in Hegerty, then the mortgagee will only be able to proceed against the mortgagor’s severed half-share in the property. The impact of that will be that the mortgagee is entitled to a sale of the property in more circumstances. The mortgagee will only receive a half of the sale proceeds. However still unfair on the other co-owner because they lose their home and only have half of the market value of that property in cash – they cannot buy a house of the same value in the same neighbourhood.
Rule of equity of redemption
At one level, the rule is simple: all mortgages must leave the borrower with unencumbered title once the mortgage debt has been paid off, or else the mortgage contact is void.
By unencumbered title it means that the borrower must have all of their property rights in the land free of any obligations to the lender once the mortgage debt has been repaid.
What is no equity of redemption
Consequently, a mortgage contract will be void if it is interpreted as the obligations of the mortgage contract continuing in existence after the mortgage has been redeemed. If the loan debt is paid off but the borrower still owes obligations to the lender, then that will usually void the contract. The mortgagors right is the ‘equity of redemption’ – i.e. a right granted by equity to ensure that the mortgagee’s rights disappear once the mortgage is redeemed. Preventing the mortgage from being redeemed is known as a ‘clog’ or a ‘fetter’ on the equity of redemption.
Type of clog
Irredeemability
Postponement of redemption
Collateral Advantages
Samuel v Jarrah
Important early case concerned Mr Samuel who lent £5000 to the borrower. The loan was secured on debenture stock. The mortgagee was given an option to purchase all or part of that debenture stock. It was argued that this would make the mortgage irredeemable because once the debenture stock was purchased, then it would be impossible to recover it even if the mortgage loan was redeemed. It was held that there was a strict rule against irredeemability and that strict rule must be upheld. Lord Macnaghten held that it was unfortunate on these facts that the two agreements were entered into together on the same day.
It was held, on these facts, that even though there were arguably two separate agreements, the fact that the were created so close together in time was taken to mean that it was one composite agreement which would prevent the mortgagor from getting their debenture stock back even if they paid the mortgage off in full. Therefore, upholding this rule as a strict one, the mortgage would be void.
What Lord said what Samuel
Lord Lindley set out the general rule to the effect that:
“no contract between a mortgagor and a mortgagee as part of the mortgage transaction as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security”
Reeve
There was a mortgage agreement and a ship was part of the security. Thus, if the borrower failed to make its repayment, the lender could seize the ship. At a later date, an offer was put to the mortgagor that he be granted an option to buy a share in a partnership, that the ship be transferred to the assets of the partnership and that the mortgagor not be required to repay the remainder of the mortgage. The mortgagor argued later that this second agreement was a cog in the equity of redemption because the ship was transferred away from him and therefore he would not be able to recover it. It was argued that this made the mortgage irredeemable. However, it was held that these two agreements were separate and therefore valid. The agreements had been created at different time and therefore it was not the mortgage contract that was taking the property from the mortgagor, but rather a second different agreement he created.
Knightsbridge
A deed of mortgage provided that repayments could only be made every six months and that they must be paid over a period of 40 years. However, only 6 years into the mortgage agreement, the mortgagor wanted to pay off the mortgage. The mortgagee refused to accept repayment. It was held at fist instance in the High Court that this provision that interest payments must be made for 40 years, constituted a clog on the equity of redemption. The court considered it was onerous on the mortgagors and should therefore be void. However CoA overturned the decision of the High Court. The CofA held that this was not a clog on the equity of redemption because the parties were businessmen who had been properly advised and who had knowingly created a mortgage contract between them with an understanding of what they were proposing to do. It was held that the court could not introduce notions of reasonableness to the agreements of commercial people because it is not their place and commercial people are free to contract. It was held that the courts may intervene if the terms are oppressive or unconscionable. Thus, because this involved two parties of equal commercial bargaining power, who created the clause to that effect, the parties should be bound by their contract. Shows the determination of English court to allow commercial parties to be free to contract for whatever they like.
Fairclough
The mortgagor took out a mortgage with the brewery with reference to the provision of licensed premises. The agreement stated that the loan could not be redeemed, rather the moneys had to be paid in perpetuity throughout the mortgagor’s terms at the premises. There was a covenant requiring that beer be bought only from the brewery. It was held that this was a clog on the equity of redemption. The general principle was held by Lord Macnaghtern to be that ‘equity will not permit contrivance to prevent or impede redemption.’ In this instance, the requirement that beer must be bought from the brewery and that the publican must pay money to the brewery forever were clear devices to make sure the mortgage would not end.
Cityland
The mortgage contract provided that if the mortgage was redeemed within 6 years of its creation then the mortgagor was required to pay a premium which was greatly in excess of market investment rates for the time. It was held that the premium was so large that it rendered the equity of redemption ‘nugatory’. So large was the payment that it would deter early redemption of the mortgage and therefore was a clog on that equity. It was held generally that there was no objection in principle to contractual provisions for collateral advantages; rather the court will look at the nature of the collateral advantage in the circumstances.
Bookbinding
There was a mortgage granted over a business premises with the payment of interest. It was provided that interest was payable on the full capital amount regardless of any redemption during the term. I.e. even if the mortgagor repaid part of the capital they would still have to pay an amount of interest as if no capital had been repaid. It was also provided that the interest was compounded and the mortgage could not be redeemed within 10 years. The amount of interest was also linked to movements in the Swiss Franc against the sterling. The value of the sterling plummeted and therefore the rate of interest greatly increased. It was held that a collateral stipulation in a mortgage that does not clog the equity of redemption is permissible unless it can be shown to be unfair or unconscionable. That the term might appear to be unreasonable is not enough to make it impermissible. In that situation, even though the amount of interest was large. It was found the parties were of equal bargaining power and therefore the term was acceptable. Again we see the courts developing the idea that commercial people of equal bargaining power will be held to their bargains.
Noakes
A mortgage contract provided that the mortgagor was obliged to continue to buy all of the beer that they sold from the mortgagee even after the redemption of the mortgage created between the parties. There was an advantage to the mortgagee because it has secured a buyer for the beer. The question was whether this advantage was acceptable or not. It was held this was a void collateral advantage because the principle of equity of redemption requires that once the mortgage amount is paid off, then there should be no obligation to continue to provide security or make payments.
Kreglinger
A different approach was taken. In that case, a mortgage was created between a firm of wool-brokers and a firm of meat-packers. There was cleat commercial synergy here: one firm wanted sheep’s wool, the other sheep’s meat. Wool-brokers mad a loan to the meat-packers. Contract provided that the loan could not be redeemed for five years after its creation. The contract contained other provisions. Importantly, the meat-packers contracted that as part of the agreement, they would sell their sheepskins to no-one other than the lender wool-brokers. The wool-brokers would therefore profit from a mortgage loan to the meat-packers and would provide itself with a regular source of sheepskins for the business. It was held this was indeed collateral to the mortgage but, it was held this provision was in fact a condition precedent to the wool-broker entering into the mortgage in the first place. i.e. the wool-broker would not have made the loan unless the meat-packer agreed to sell its sheepskins to the lender. Therefore not a clog. (Commercial, =)
Remedies
Debt Action
Appointing Receiver
Foreclosure
Power of Sale
Possession