Mortgages

Question 1

Legal Mortgage

Answer 1

Deed + Registration

Question 2

Equitable Mortgage

Answer 2

Mortgage of an Equitable Interest or a Defective Legal Mortgage

Question 3

The equity of redemption allows

Answer 3

The borrower to repay the loan at any time after the legal date for redemption has passed

Question 4

The equitable right to redeem arises

Answer 4

The day after the mortgage can legally be repaid

Question 5

Options to Purchase in a Mortgage

Answer 5

If the lender has the option to buy back the property, The borrow loses The right to the property free of loan which is a clog on the equity of redemption so equity will strike down these terms especially in domestic cases

Question 6

Collateral advantages

Answer 6

Terms that try to extract additional advantages from the borrower May be struck out if it is unconscionable, in the nature of a penalty or repugnant to the equitable right to redeem

Question 7

Solus Tie

Answer 7

Where borrower must buy all of its supplies from the lender. Generally solus ties are upheld in commercial transactions if they end within the mortgage term but not if they exceed the mortgage term.

Question 8

Unconscionable terms

Answer 8

Where there is a clear imbalance of bargaining power between the parties and the interest rate was high and the borrower did not have a poor credit history
Or
Where it was imposed in a morally reprehensible manner Where there was equality of bargaining power

Question 9

Relationship That carry an irrebuttable presumption with undue influence

Answer 9

Parent/child, guardián/ward, trustee/beneficiary, solicitor/client, doctor/patient

Question 10

Undue influence is

Answer 10

Where there is a relationship of trust and confidence and a transaction which requires explanation

Question 11

If someone proves undue influence

Answer 11

The contract such as a mortgage will be un enforceable against them

Question 12

Taking advantage of influence or ascendancy in a relationship

Answer 12

There is no definitive list of relationships of influence or ascendancy. Commonly, the influence will
come from the trust and confidence which one party has in the other. However, a relationship
where one party is very vulnerable or dependent might also allow the other party to have
significant influence, even if the innocent party has not positively placed trust or confidence in the
other party.
There are a number of relationships in which there is an irrebuttable presumption that one party
has influence over the other. In these cases, the court will not allow any argument that, in fact,
there was no influence in that relationship. Such relationships include those between parent and
child, guardian and ward, trustee and beneficiary, solicitor and client and doctor and patient.
However, parent and adult child, or (crucially) husband and wife do not give rise to this
presumption. The influence will therefore need to be positively shown.
Note that it is not every transaction between parties to such a relationship that gives rise to undue
influence. It is only where the relationship is taken advantage of that there will be undue influence,
for example because the party with influence has deceived the innocent party, or simply taken a
decision entirely in their own interests.

Question 13

Proof of taking advantage of influence or ascendancy in a relationship

Answer 13

If a party wishes to allege it has been the victim of undue influence, the burden is on them to
prove this.
The court has established some basic principles as to how this might be proved.
If a party can show that there is a relationship of trust and confidence (or presumably one of the
categories of irrebuttable presumption) and also a transaction which requires explanation, then
this will be enough for the court to determine that the transaction is the product of undue
influence, unless the alleged wrongdoer can produce evidence to convince the court that there
was no such undue influence.
A transaction will require explanation if it does not fit with what would usually be expected in the
relationship concerned. It might be a suspicious type of transaction or be for a suspiciously high
value.
Note. The court has indicated that, in the majority of cases, a husband / wife offering their
interest in the matrimonial home as security for a loan to their spouse’s business is not a
transaction which requires explanation, so the party alleging undue influence would need to
prove that unfair advantage had been taken of the relationship.

Question 14

Limits on equitable relief

Answer 14

Where undue influence is proven, a contract (or gift by deed) may be set aside. However, this
relief is equitable and, therefore, discretionary. The court may not allow this relief where the
innocent party has delayed making its claim because ‘delay defeats equity’. Also, it may be
disallowed where the claimant’s conduct has been underhand because ‘you must come to equity
with clean hands’.

Question 15

Risk to a lender

Answer 15

If the spouse can successfully argue that they were unduly influenced into entering the mortgage
deed, then the effect is that the mortgage will be unenforceable against them (Barclays Bank plc
v O’Brien [1994] 1 AC 180) because the clause which postpones the spouse’s interest in favour of
the bank’s is ineffective; and the spouse’s interest in the land will still rank ahead of the lender’s.
This presents a real problem for the lender as it means it will not be able to exercise its right
possess or power of sale to recover the balance of the loan.

Question 16

How then does the bank ensure it has priority?

Answer 16

In RBS v Etridge (No 2) [2002] 2 AC 773 Lord Nicholls stated that the only practical way forward is
to regard banks as put on inquiry of the risk of undue whenever one party in a non-commercial
setting is standing as surety for the other party.
If a bank is put on inquiry (or notice) of undue influence, it must follow the guidelines laid down in
this case. Providing it does this, the lender is protected from future claims of undue influence.
Note. The lender is not put on inquiry/notice of undue influence if the purpose of the loan is for the
joint benefit of the co-owners. For example, in CIBC Mortgages plc v Pitt [1994] 1 AC 200 the
mortgage application said that the loan was for a holiday cottage, there was nothing to put the
lender on notice that the transaction was anything other than a normal advance for the couple’s
joint benefit.

Question 17

Etridge guidelines

Answer 17

Where the bank is put on inquiry/notice of undue influence, it must:
2: Mortgages 39
(a) Write to the spouse who is granting the mortgage not for their benefit explaining that it needs
confirmation from an independent solicitor that they have explained the transaction to the
spouse;
(b) Ask that party to nominate an independent solicitor, provide all information to that
independent solicitor; and
(c) It must not proceed to lend until confirmation is received from the independent solicitor that
the transaction has been fully explained.
The independent solicitor must:
(a) Meet the party who is entering into the mortgage not for their own benefit face to face, on
their own (ie not with the partner for whose benefit the mortgage loan is for);
(b) Explain why they have to come to see the spouse ie to stop them from being able to claim
undue influence later;
(c) Explain the documents and transaction in a meaningful way using non-technical language;
(d) Point out the risks;
(e) Emphasise that the spouse has a choice;
(f) Keep a detailed attendance note and confirm everything in writing; and
(g) Send a certificate to bank.

Question 18

Legal mortgages

Answer 18

Under the LRA 2002 all mortgages over registered land must themselves be registered
substantively in order to attain the status of a legal mortgage (LRA 2002, s 27(2)(f)).
Once registered, they take effect as a registered charge under the LRA 2002.
A mortgage over registered land which is not completed by substantive registration will not take
effect as a legal mortgage (s 27(1) LRA 2002).
Under LRA 2002, s 48 priority between registered charges depends upon the order in which they
are entered on the register. This is regardless of the order in which the mortgage deeds may have
been signed.
40 Land Law
Where two or more mortgages are created at the same time (ie first and second mortgage
simultaneously), the application for registration will specify the order of priority.
Priority between registered charges therefore depends upon the order in which they are
registered.

Question 19

Equitable mortgages

Answer 19

As against another equitable mortgagee, equitable mortgages rank in order of creation (LRA
2002, s 28).
This is the basic rule of priority that applies to all equitable interests because an equitable interest
in the land can be validly created and exist without registration.
Although not required in order to validly create the interest, an equitable mortgage over registered
land can be protected by the entering of a notice on the charges register (LRA 2002, s 32).
If protected by the entry of a notice, an equitable mortgage over registered land will take priority
over a subsequent legal mortgage (LRA 2002, s 29(1)).
As between competing equitable mortgages, the entry of a notice does not affect the priority,
which will always be determined by creation.
However, an equitable mortgage not protected by a notice, will not take priority (ie lose its
priority) to a subsequent registrable disposition of either a registered estate or a registered charge
(ie a transfer of the legal estate for value or the grant of a legal mortgage) (LRA 2002, s 29(1)).

Question 20

Postponement

Answer 20

The priority rules can be modified to allow a mortgage to take priority over a pre-existing interest
which could otherwise enjoy priority if there is a postponement of that pre-existing interest.
Lenders can agree to alter the position that would apply according to the priority rules by
entering a deed of priority or intercreditor deed.
Any agreement would need to be registered at the Land Registry.
Mortgagees will also often require an express waiver or postponement to be included in a
mortgage agreement so that the rights of any person living at the mortgaged property with the
mortgagor are postponed to the interests of the mortgagee.
This is important for the lender to be able to enforce their security and take possession of the
mortgaged property in the event of default.
If the lender’s interest in the land does not rank in priority to the interest of a person in occupation
(not a party to the mortgage) then the lender would not be able to take possession of the land in
order to exercise its power of sale.

Question 21

Rights of the lender

Answer 21

It is inherent in the nature of a mortgage that the lender’s right to repayment of the loan is
secured against the mortgaged property itself. This security is very important to lenders, as
without it, they may take the view that it is simply too much of a risk to advance large sums of
money to borrowers.
If the mortgagor fails to make the mortgage payments, the lender will wish to take steps to
protect itself against losses. The lender can always sue the borrower in contract for the debt, but
this can be a long and ultimately fruitless process if the borrower has insufficient money. The fact
that a mortgage is a proprietary right in the lender’s favour means that the lender has several
remedies available to it.
There is no obligation for a lender to exercise any particular remedy, or indeed any remedy at all.
The choice of remedy is a matter for the particular lender in the particular circumstances.
However, if the lender does decide to pursue a remedy, it will be under a duty to act fairly and
reasonably, and may be subject to additional duties to the borrower, depending on the remedy
sought.
The lender who holds the security of a legal mortgage, rather than an equitable one, has a wider
choice of remedies. An equitable mortgagee has the same rights to bring a debt action under the
mortgage contract for money owed, to apply for foreclosure, and to appoint a receiver. However,
the equitable lender does not, generally speaking, have the right to repossess or sell without a
court order.
The legal lender has five courses of action open to it: sue on the contract for the outstanding debt;
repossess the property; sell it; appoint a receiver; or foreclose.

Question 22

Debt action

Answer 22

The contractual debt action is a personal action against the borrower. As the lender has a
proprietary right and can enforce it against the property itself, it may be thought that the
contractual right to sue for the outstanding debt is rarely used. If a borrower is unable to make
their mortgage repayments, they are unlikely to be able to pay damages awarded by the court.
This remedy is therefore used in addition to, not instead of, one of the other remedies. In recent
years, a debt action has been used if the value of the mortgaged property is less than the
outstanding mortgage debt. In this situation there is said to be negative equity. The lender may
take possession of and sell the property, but if the sale proceeds do not cover the outstanding
debt, the lender will wish to pursue a debt action against the borrower for the shortfall.

Question 23

Possession

Answer 23

A legal lender may wish to enforce its security by taking possession of the mortgaged property as
a precursor to sale. Taking physical possession of the property is a practical step which enables
the lender to offer the property for sale with vacant possession, free from any rights of the
borrower.
Since 2008, the Pre-Action Protocol for Possession Claims makes clear that in residential cases,
possession must be a last resort. The mortgage lender is expected to explore alternative
arrangements with the borrower, such as extending the mortgage term and/or scheduling a new
payment plan.

Question 24

Sale

Answer 24

The power of sale is the strongest right which the lender can use against a defaulting borrower. If
exercised, the borrower loses all rights to the property. The sale proceeds are applied towards the
outstanding debt. If there is a surplus, this will be forwarded to the borrower; but if there is a
shortfall, the borrower may be sued personally by the lender for the outstanding contractual
debt.
Because the power of sale has such drastic consequences for the borrower, there are procedural
steps which must be adhered to, which are explored below.

Question 25

Receiver

Answer 25

A receiver acts as manager of the mortgaged property and is used by a lender as an alternative to seeking possession where a property needs management. For example, dealing with tenant issues and/or finalising any development of the mortgaged land. The power to appoint a receiver arises under LPA 1925, s 101(1)(iii). The receiver is an administrator whose function is to get an income from the land before sale, and will apply any income (eg rent received from tenants in occupation) towards the outstanding mortgage debt. The receiver is deemed to be the borrower‘s agent. This may seem odd, as the receiver is appointed by the lender, but it means that the lender is not liable for the receiver’s negligence. Thus the appointment of a receiver is a safer option for the lender than taking possession and running any business from the property itself. 2: Mortgages 43 A receiver must act with due diligence, subject always to the main duty of paying off the mortgage debt

Question 26

Foreclosure

Answer 26

Foreclosure is a historic way of enforcing a mortgage which is rarely used nowadays. It allows a lender to take the mortgaged property in satisfaction of the debt, meaning that the freehold will vest in the lender, and the borrower will lose all rights to the property. This could happen even though there may be only a very small amount outstanding on the mortgage security, when compared to the value of the property as a whole. From the lender’s point of view, the procedure is lengthy and complex. The court may order a sale in lieu of foreclosure, and almost certainly will do so if the property is worth a lot more than the outstanding debt. Even after the final decree of foreclosure, the borrower can re-open the case if they can show that they have the means to pay. From the borrower’s point of view, there are some advantages in that an order of foreclosure extinguishes all other mortgages secured on the property. It also extinguishes the mortgagor’s contractual debt, so the lender cannot pursue the borrower for any surplus debt over and above the value of the property. Today, foreclosure is viewed as a particularly draconian remedy and is rarely encountered in practice. The Law Commission has recommended that it be abolished and replaced by wider powers for the lender to sell the property.

Question 27

Legal mortgagee

Answer 27

LPA 1925, s 95(4) acknowledges ‘the right of a mortgagee of land […] to take possession’, and in Four Maids v Dudley Marshall (Properties) Ltd [1957] Ch 317 it was confirmed that the right arises as soon as the mortgage is granted, ‘before the ink […] becomes dry’ on the mortgage deed. Possession is thus strictly a right of the lender, and not simply a remedy. Having said that, lenders do not exercise the right arbitrarily. It is a last resort, used when the borrower is in default with little hope of repayment. Mortgage deeds almost always contain a term which recognises that the right to possess is postponed for as long as the borrower pays the agreed instalments.

Question 28

Exercising the right to possess

Answer 28

As the right to possess is exactly what it says: a right, it is not therefore strictly necessary for the lender to obtain a court order prior to taking possession, it can choose to physically take possession (‘self-help’). 6.2.1 Limits on the right to possess The Criminal Law Act 1977, s 6 makes it a criminal offence to use or threaten violence for the purpose of gaining entry to property. This means that exercising the right to repossess by ‘selfhelp’ is risky, unless the lender is certain that the property is unoccupied at the time. 44 Land Law A prudent lender will make an application to the court for an order for possession, even though this may not be strictly necessary. The Pre-Action Protocol for Possession Claims 2008 sets out the steps which a court will expect a lender to have taken before resorting to possession of residential property, which should be a last resort. For example, lenders should try to discuss the debt with the borrower and accept reasonable requests for a new payment plan. Most lenders observe the Protocol. However, if they do not, they can suffer delays in obtaining possession and may be ordered to pay the borrower’s legal costs.

Question 29

Statutory jurisdiction to postpone

Answer 29

Administration of Justice Act (AJA) 1970, s 36: (1) Where the mortgagee under a mortgage of land which consists of or includes a dwellinghouse brings an action in which he claims possession of the mortgaged property […] the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that […] the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage […] The powers conferred in s 36(2) include a power to postpone the date for delivery of possession for such period as the court thinks reasonable. Any postponement may be subject to such payment or conditions regarding payment as the court thinks fit. It is important to understand how this section operates. 6.3.1 The scope of AJA, s 36 The section does not: * Enable the court to prevent the lender from exercising its right to possess altogether; * Enable the court to postpone possession in cases where there has been no application for an order for possession: Ropaigelach v Barclays Bank plc[2000] QB 263; * Enable the court to prevent a lender from exercising a power of sale without first obtaining a court order: Horsham Properties Group Ltd v Clark [2009] 1 WLR 1255. The section does: * Apply where the property is wholly or partly residential, although need not be the borrower’s home. * Enable the court to: - Adjourn possession proceedings; or - Stay or postpone execution of the possession order. * In order to be able to do this, it must appear to the court that the borrower is likely to be able to pay any sums due (or remedy any other default) within a reasonable period.

Question 30

Case focus

Answer 30

National & Provincial Building Society v Lloyd [1996] 1 All ER 630: A borrower requesting a postponement of possession should present a detailed financial plan to the court, showing how the loan and arrears will be paid off before the term expires. Bristol and West Building Society v Ellis (1996) 73 P&CR 158: A postponement was granted to allow the borrowers to achieve a sale of the property themselves. The court needed to see that the sale proceeds would be sufficient to cover the debt due. An estate agent’s optimistic estimate of the price likely to be achieved would not be enough! Target Home Loans Ltd v Clothier [1994] 1 All ER 439: The court awarded a short, three-month postponement of possession to allow the borrower to sell the property. There was evidence from an estate agent that a genuine offer had been received. Mortgage Services Funding plc v Steele (1996) 72 P&CR 40: In order to grant a postponement to allow the borrower to sell, the court required firm evidence of an imminent exchange of contracts. Simply instructing a solicitor to handle the conveyancing will not be enough: courts are suspicious of mortgagor’s delaying tactics, enabling them to stay in possession for longer!

Question 31

Legal mortgagee: the right to sell

Answer 31

The right to sell is the strongest of the lender’s rights and there are strict rules as to when the power arises and when it becomes exercisable. As this power of sale is a right of the lender, no court order is required. The power of sale must, however, exist, have arisen and become exercisable. 46 Land Law The law regarding the lender’s power of sale explored below relates to a legal mortgagee only.

Question 32

Lender’s right to sell: does it exist?

Answer 32

1 Express power of sale Most mortgage documents will include an express power of sale and will set out exactly how and when the power will be exercised. The lender will not need to rely on any statutory provisions, although it will be subject to duties on sale, in the same was as a lender relying on statutory powers. 7.2.2 Implied, or statutory, power of sale In the absence of an express power, a right to sell can be implied into a legal mortgage under LPA 1925, s 101(1)(i) unless it is excluded or modified in the mortgage deed. 101(1) A mortgagee, where the mortgage is made by deed, shall […] have the following powers: (i) A power,when the mortgage money has become due, to sell […] the mortgaged property […] either together or in lots, by public auction or by private contract.

Question 33

Lender’s statutory right to sell: when does it arise?

Answer 33

The lender’s statutory power of sale arises when the mortgage money has become due (LPA 1925, s 101(1)(i)). If a borrower has a capital and interest repayment mortgage, Payne v Cardiff [1932] 1 KB 241 confirms that the power of sale arises as soon as one portion of capital is due, meaning that it arises as soon as one payment is due. Where a mortgage is an interest-only mortgage, the capital is not due until the end of the loan term. In these cases, the mortgage money will ‘become due’ at the legal redemption date, usually about six months from the start of the mortgage. If the lender sells after the power has arisen but before it is exercisable, a sale to an innocent purchaser will be valid, but the lender will be liable in damages to the borrower (LPA 1925, s 104)

Question 34

Lender’s statutory right to sell: when is it exercisable?

Answer 34

Where the right to sell has been expressly conferred, the wording will set out in what circumstances the power can be exercised. If the power arises under LPA 1925, s 101(1)(i), the power will become exercisable only when at least one of the criteria in s 103 applies: Criteria Notes Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted. No arrears are necessary here: the lender can request the full loan at any time! Interest is unpaid and in arrears for at least two months. This does not mean that two months’ interest must be owed: there must be some interest outstanding for two months: it does not need to be a large sum! There has been some breach of another mortgage provision such as a covenant to keep the mortgaged property insured or in good repair. Examples: failure to insure the property or allowing it to fall into disrepair: basically something which could affect the value of the security.

Question 35

5 Lender’s duties when exercising the right to sell

Answer 35

When the lender exercises its right to sell mortgaged property, whether the right is conferred expressly or by statute, it owes duties to the borrower. The lender’s basic motive is to recover the debt due, meaning the capital sum, interest and costs. It is not necessarily interested in achieving the best possible price. However, as the following cases show, the lender cannot simply consider its own interests, these must be balanced against the interests of the borrower. After the sale, the lender is trustee of the surplus proceeds of sale (LPA 1925, s 105) and must hand them to the person next entitled. That may be another lender, or the borrower. The Court of Appeal said that that the lender owed the borrower a duty to take reasonable care to obtain the ‘true market value’ or ‘proper price’ for the property. Perfection as to price is not required: the lender will not be liable for losses if the price is within the correct bracket or within an acceptable ‘margin of error’. A lender cannot simply put the property ‘under the hammer’ as a matter of course. Lenders are under a duty to take expert advice as to the method of sale, the marketing strategy and the reserve price. A lender has an ‘unfettered discretion’ as to when to sell and cannot be expected to delay in order to improve the property or wait for an upturn in the property market.