Mortgages Flashcards
Is the mortgage a proprietary right?
Yes; a legal interest
What is a mortgage?
- A bundle of proprietary rights granted to the lender (mortgagee) as security for a loan
- Rights = to possess and sell the land in event of default of mortgage repayments
Who grants the mortgage?
The borrower (mortgagor) to the lender (mortgagee)
Why is everyday language re bank giving a mortgage technically wrong?
From bank
The bank gives us a loan which is secured by the granting of a mortgage over property
To be a legal interest, what are the formalities of a mortgage?
- Deed
- Registration
What are the requirements of a deed?
- Intended to be a deed (clear on face of doc)
- Validly executed
- Delivered
Conveyances of land/interest void unless made by deed
Recall valid execution:
* Deed must be signed by grantor (seller) in presence of a witness
* Witness needs to sign deed to confirm witnessing (attesting the signature)
Recall delivery: An acknowledgement that person entering a deed intends to be formally bound by provisions (usually dating the agreement in practice)
How is a deed validly executed for an individual and a company?
- Individual = grantor
What happens to the deed once it has been made?
Registered at Land Registry
What happens if a mortgage is not registered at the Land Registry?
- Mortgage won’t take effect as a legal mortgage in the land
- May still be an equitable interest
What are the 2 reasons an equitable mortgage is likely to arise?
- Mortgage of an equitable interest
- Defective legal mortgage
When will there be a mortgage of an equitable interest?
Where borrower holds equitable interest in land (not legal owner) any mortgage of that interest will be equitable
How is a mortgage of an equitable interest created? Is it as strict as a legal mortgage?
As in how is a mortgage of an equitable interest created (not how is an equitable mortgage created)
No - only need be in writing and signed by grantor (borrower)
Whatare the conditions for a defective legal mortgage to be regarded as an equitable mortgage?
- Not granted by a valid deed/not completed by registration = defective
- Provided in writing, contains all agreed terms, signed by mortgagor and mortgagee = equitable mortgage (LP(MP)A s2)
What is the difference between:
1. Estate contract which is recognised as an equitable mortgage
2. Equitable mortgage which is inherently equitable
- Created through a defective legal mortgage
- Equitable mortgage over equitable interest in the land
How is a mortgage fully discharged?
Following full repayment
When all reference to it has been removed from Charges Register at Land Registry
What form is used to discharge a mortgage over:
1. Whole of land title
2. Part of land (e.g. part of land being sold to buyer)
- Whole = DS1 [dis 1 whole piece of land]
- Part = DS3 [dis third of the land (not whole)]
What is the equity of redemption?
The bundle of rights that equity recognises the mortgagor as having
Must be no ‘clogs and fetters’ on the equity of redemption
What does the equitable right to redeem recognise?
That mortgage is security for a loan and not opportunity for lender to gain something more
Allows the borrower to repay the loan any time after legal date of redemption has passed
What does the equity of redemption do?
- Recognises borrower as true owner of property and protects them
- Prevents borrower from exploitation by the lender
- Protects borrower from clauses postponing/preventing redemption, collateral damages and unconscionable terms
What are the four basic rights under the equity of redemption?
- The equitable right to redeem the loan
- No postponement or prevention of redemption
- No collateral advantages to the lender
- No unconscionable terms in mortgage deeds
I.e. rights 2, 3 and 4 prevent clauses that do these things
Right 2 makes sure the equitable right to redeem is not interfered with
When will the equitable right to redeem arise?
Any day after the legal date of redemption (date specified on which borrower has to repay loan in full)
I.e. borrower can repay loan in full any time after legal date of redemption has passed
Re legal date of redemption: historically the borrower could only redeem the mortgage on this one day, if they did not pay on legal date of redemption, the lender could keep property! However equity intervened with this harsh rule and recognised that the borrower has an equitable right to redeem the mortgage any day after the legal date of redemption has passed
When is the legal date of redemption?
Usually within first 6 months of mortgage term - but as banks loan £100,000s, people cannot pay on this date, so mortgage terms are 20-30 years usually
What is the financial value of the equity of redemption?
Market value less the outstanding debt
I.e. the equity people have in their homes
Will courts allow clauses which prevent redemption altogether?
No; will be automatically void
What are the 2 conditions - that both must be satisfied - on which redemption can be postponed?
Goes against general ‘no clog or fetter’ rule
E.g. mortgage given in 2023 can not be redeemed until 2033 - locked in for 10 years
Only if borrower…
1. Gains some benefit from any ‘lock in’ (e.g. favourable rate of low interest) and
2. Gets back exactly what was mortgaged (rather than something less or worthless e.g. a lease with few years left)
Borrower must be informed of benefit/clear advantage of lock in
Will options for the lender to purchase the property be void?
Yes (esp in domestic cases) - unless they are genuinely part of an independent transaction
Mortgage should be security for a loan only rather than opportunity for lender to benefit
What is meant by collateral advantage?
Any additional value lender tries to extract from the borrower other than the repayment of capital advanced plus interest
May be struck out as contrary to equity of redemption
When will collateral advantages be void?
If they extend beyond the mortgage term unless they are genuinely part of an independent transaction
Truly independent
Will be struck out if unconscionable, in nature of penalty, or repugnant to equitable right to redeem
What is a solus tie and will it be upheld?
- Supply agreement included in favour of lender e.g. lender (e.g. brewer) makes it a condition of mortgage that borrower (e.g. pub) buys all supplies from it
- Generally upheld if they end within the mortgage term
What must unconscionable terms be?
Will be struck out
More than hard bargains (e.g. higher than market interest rate is fine); must be imposed in a morally reprehensible way e.g. taking advantage of borrower’s vulnerable position
E.g. Multiservice - term of loan was that level of repayments would be linked to swiss franc, so payments more expensive if pound fell against franc = not morally reprehensible, just a bad bargain in a situation of equal bargaining power
Cirtyland - borrower was a tenant of lender for 11 years and overall interest added up to 38% whilst tenant at risk of homelessness = morally reprehensible; clear imabalance of bargaining power and lender had exploited threat of homelessness
When can a lender justify a higher interest rate?
- Where borrowers have poor credit history and are a credit risk (higher risk lender)
- Where lender themselves in financial difficulty (as long as not exercising discretion for improper purpose)
Lenders are entitled to make money from loans!
What is the test for deciding if a high interest rate is an unconscionable term and what factors to be considered?
Has the term been imposed in a morally reprehensible manner?
* Consider circumstances in which term imposed and factors court had regard to
When will a penalty interest rate imposed in event of borrower’s default be void?
When it far exceeds the lender’s losses
If a term is declared void, what happens to the rest of the agreement?
The rest remains in force; the void term is not enforceable
How does a bank ensure it has priority in cases that could be undue influence?
E.g. husband with business takes out mortgage over family home he owns with wife - mortgage deed contains priority clause stating that bank’s interest ranks higher than freehold ownership - but if wife successfully argues undue influence, the bank’s interest ranks after wife’s freehold interest and bank cannot repossess and sell house
Lender must write to party granting the mortgage not for their benefit (e.g. wife) explaining bank needs confirmation from independent solicitor that they have explained transaction to her - should not proceed until confirmation of explanation
Bank gives all information to independent solicitor
What must the independent solicitor do?
Meet party entering into mortgage not for own benefit alone and explain undue influence risk and documents in non-technical language; pointing out risks and explaining they have a choice
When do these steps to prevent undue influence need to be taken?
Where a lender is put on notice (enquiry) of undue influence
What does it mean for the lender to be ‘put on notice’ of undue influence?
2 requirements
- Relationship of trust and confidence; and
- Loan not for direct benefit of both legal owners
Non-commercial case!
What situation do the rules on priorities of mortgages address?
Where number of different mortgagees lend money on same property, the borrower defaults, and the proceeds of sale are less than the total outstanding under the mortgages - who gets paid first/gets nothing?!
What is a registered charge?
What legal mortgages over registered land take effect as once they are registered
Mortgage over registered land not completed by substantive registration = will not take effect as legal mortgage
What is priority of legal mortgages and equitable mortgages determined by?
- Legal mortgages = by registration
- Equitable mortgages = by creation (because equitable interests in land can be created/exist without registration!)
What happens where two or more mortgages are created at the same time?
The application for registration will specify order of priority
Can an equitable mortgage over registered land be protected?
Yes, by entering of a notice on the charges register
But not required to validly create!
What happens where an equitable mortgage is protected by entry of notice at Land Registry, but a subsequent lender has a legal mortgage?
The equitable mortgage will rank in priority
What happens where an equitable mortgage is not protected by the entry of a notice at the Land Registry and then another equitable or legal mortgage is granted?
- Original equitable mortgage takes priority to subsequent equitable mortgage (even if the latter is protected by entry of notice!)
- Subsequent legal mortgage will take priority once registered
I.e. equitable mortgage not protected by notice loses its priority to subsequent registrable disposition of registered estate/charge
Summary: what will legal mortgage rank ahead of?
- Any subsequently granted mortgages; and
- Any unprotected equitable interests
But not pre-existing overriding interests
Summary: when will equitable interests rank ahead of 1. legal mortgage and 2. other equitable mortgages?
- If protected by a notice
- Order of creation determines priority (even if unprotected)
Can lenders expressly agree between themselves the priority?
Yes - by entering a deed of priority of increditor deed
Needs to be registered at Land Regsitry
Why is an express waiver or postponement important to include in a mortgage agreement?
So that rights of any person living at the mortgaged property not party to the mortgage are postponed to the interests of the mortgagee
Without = could not enforce security and take possession at default
What remedy is the lender under a duty to exercise should the borrower default on payment?
There is no obligation to exercise a particular remedy or any remedy at all
But if it does pursue - under a duty to act fairly and reasonably
What are the differences in the remedies that can be brought by an equitable and legal mortgagee?
Equitabe mortgagee has same rights as legal mortgagee,* except for right to repossess or sell without a court order
* debt action, apply for foreclosure, appoint a receiver
What are the 5 courses of action the lender has available to it?
- Debt action (contractual)
- Possession
- Sale
- Receiver
- Foreclosure
What are the right to possess and appointing a receiver both precursors to?
The power of sale; are means of mortgagee taking control of the property
When would a lender use a debt action?
When there is negative equity - value of mortgaged property is less than outstanding debt
Sale proceeds do not cover outstanding debt so lender wishes to pursue personal debt action against borrower
What is the limitation period for a debt action?
- 12 years for recovery of debt in deed
- 6 years for recovery of interest
Borrowers can find themselves in contractual debt actions many years after repossession
If a debt action is used, does that mean no other remedy can be used?
No - can be used in conjunction with others
What are the 2 reasons a lender may wish to enforce security by taking possession of the mortgaged property (as a precursor to sale)?
- Vacant possession makes property more attractive to a potential buyer (free from rights of borrower)
- Can manage the property and derive an income from it to reduce outstanding mortgage debt
Can a mortgage lender exercise possession straight away?
Must be a last resort; expected to explore alternative arrangements with borrower e.g. extending mortgage term/scheduling new payment plan
What happens if there is a surplus or shortfall on the sale of a property by the lender?
- Surplus = proceeds forwarded to the borrower
- Shortfall = borrower may be sued personally by the lender for outstanding debt
Does the borrower keep any rights in the property upon sale?
No - loses all rights to property
What are the procedural steps that must be adhered to for the power of sale?
- Power of sale must have arisen in accordance with statutory rules
- Power of sale must be exercisable in accordance with statutory rules; and
- Lender must fulfil duties on sale which have arisen from case law
What does a receiver do/what is its function?
- Acts as manager of mortgaged property if lender does not wish to take possession/sell
- Function = get an income from land e.g. continue to use as business to apply towards outstanding debt
Suitable where property is making property
As the receiver is deemed the agent of the borrower, is the lender liable for their negligence?
No! Appointment of receiver therefore safer option
What duty is the receiver always subject to?
The duty of paying off the mortgage debt - owes duty to act with diligence to the borrower
Medforth - receiver managing pig farm business was in breach of duty for failing to negotiate price reductions for animal feed; a major cost to business
What does foreclosure allow the lender to do and when is it used?
Lender can take mortgaged property in satisfaction of debt meaning freehold vests in lender and borrower loses all rights (even if very small amount outstanding on mortgage security) i.e. borrower gets nothing back
Used rarely nowadays
What will the court almost certainly order if the property is worth a lot more than oustanding debts?
A sale in lieu of foreclosure
What are the benefits of foreclosure for the borrower?
- Extinguishes all other mortgages secured on property
- Extinguishes mortgagor’s contractual debt - lender cannot pursue for any surplus debt over and above value of property
Does a legal mortgage comprise a proprietary interest or a contractual debt?
Both! But if borrower defaults unlikely that a debt action will be worthwhile
So will want to sell property and recover outstanding debt from sale proceeds
When does the right to possess arise?
Technically as soon as mortgage granted - but usually postponed in agreement until borrower defaults
Note that lender has no interest in possessing/selling if the borrower is making repayments!
Must a lender obtain a court order prior to taking possession of the property?
No - it is a right of the lender and is effective immediately when mortgage deed is signed (self-help remedy)
But a series of safeguards has evolved through statute and case law
So they usuall will!
What criminal offence limits the rights to possession and what does this mean the lender should do?
Lender cannot use/threaten violence for purpose of gaining entry to property = exercising right to repossess by self help is risky (unless certain property is unoccupied) = prudent lender will make application to court for order for repossession even though not necessary
So unless premises emptied/unoccupied, lender should always seek court order for possession
When should lender use self-help as a means of taking possession of property?
I.e. no court order
Only where lender knows property is empty and unoccupied - otherwise should use a court order always
What must a lender do under the Pre-Action Protocol for Possession Claims (before resorting to possession of a residential property)?
Discuss debt with borrower/accept reasonable requests for a new repayment plan
What happens if a lender does not observe the Protocol?
They can suffer delays in obtaining possession and may be ordered to pay legal costs of borrower
When can the court adjourn possession proceedings or stay/postpone the execution of possession order for a property which is wholly or partly residential?
The statutory duty to postpone
(Application for possession will kickstart statutory protection for borrower)
When it appears 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
Lender must have applied for order for court to do this!
What is meant by ‘any sums due’ and ‘reasonable period’ when the court uses its statutory jurisdiction to postpone?
- Any sums due = The arrears and accured interest, not the whole of the mortgage debt
- Reasonable period = starting point would be the remainder of the mortgage term
I.e. borrower must pay arrears before end of mortgage term
Can the court prevent the lender from exercising its right to possess altogether or prevent lender from exercising power of sale without first obtaining court order?
No
What conditions might the court impose on the borrower if it uses its statutory jurisdiction to postpone?
- Present a detailed financial plan to the court showing how loan/arrears will be paid off before term expires
- Sell the property to obtain sufficient sale proceeds to cover the debt due (with evidence of imminent exchange of contracts); instructing a solicitor is not enough
Main takeaway = conditions can be imposed
Is a court order required for the lender’s power of sale?
No - is also a right (subject to conditions)
Will need to have possessed it first!
What are the 3 conditions for power of sale?
NB property must be vacant to sell - meaning that by now all safeguards for borrower will have been adhered to in obtaining posession
- Must exist
- Must have arisen
- Must have become exercisable
Does the right to sell have to be expressed?
Can be express (inc in mortgage document) or implied/statutory (unless excluded in mortgage deed)
Which out of express and implied power of sale are subject to duties on sale?
Both
When does the statutory power of sale arise?
When mortgage money has become due
When does the statutory power of sale arise in:
1. An interest-only mortgage? (where capital not due until end of term)
2. A capital and interest mortgage?
I.e. when is mortgage money due in each
- At the legal redemption date where mortgage money will ‘become due’ (usually about 6 months from start of mortgage)
- As soon as one portion of capital is due (arises as soon as one payment is due)
What happens if the lender sells after the power has arisen but before it is exercisable?
Sale to an innocent purchaser is valid but lender liable in damages to borrower
If it has been expressly conferred, when is the right to sale exercisable?
In the wording setting out power; will set out circumstances
When is a lender’s statutory right to sell exercisable?
I.e. not expressly conferred
3 situations
At least one of the following:
1. Notice requiring payment of whole loan has been served by lender and borrower has defaulted
2. Interest is unpaid for at least 2 months (does not mean two months’ interest is owed, just some outstanding for 2 months)
3. There has been a breach of another mortgage provision e.g. covenant to keep mortgaged property in good repair
What is necessary for the lender to request full repayment of loan?
Nothing - not even arrears!
Note that they must take possession first (for which there are many safeguards) and that lender has no interest in possessing/selling if the borrower is making repayments!
What is the lender’s basic motive in sale?
To recover debt due (capital sum, interest and costs) - not interested in achieveing best possible price
What must the lender do with surplus proceeds of the sale as trustee?
Hand them to next person entitled (borrower or another lender)
What are the duties the lender owes re the price and method of sale of the property?
- Must take reasonable care to obtain true market value/proper price of property; perfection as to price not required
- Should take expert advice re method of sale and marketing/pricing strategy
What is the duty re when to sell?
Lender has unfettered discretion and cannot. be expected to delay in order to wait for upturn in market
AKA can sell when they want even if it results in shortfall
