Mortgages Flashcards
A borrower purchased a house (‘the Property’) four years ago with the assistance of a mortgage (by deed) with a bank (‘the Bank’). The borrower has been made redundant and has not paid the last mortgage payment. The Bank want to sell the Property immediately.
Which of the following statements most accurately describes the position for the Bank?
A-The Bank cannot exercise the power of sale as the power of sale does not exist.
B-The Bank cannot exercise the power of sale as the power is not yet exercisable.
C-The buyer will take the Property subject to the mortgage in favour of the Bank.
D-The buyer need only check that that the power of sale exists and has arisen.
E-The Bank can exercise the power of sale as it exists, has arisen and is exercisable
The correct option is B.
The power of sale exists (the mortgage was made by deed) and has arisen (the mortgage was made four years ago so the legal date for redemption will have passed). Therefore, option A is wrong.
The power of sale is not exercisable as the borrower has only failed to pay one monthly payment, not two. Option E is, therefore, wrong.
Option D correctly states the legal position but does not answer the question and is, therefore, wrong.
Option C is wrong. A buyer would take free of the Bank’s mortgage upon the Bank exercising the power of sale.
Although the power of sale exists and has arisen, the power is not yet exercisable as there is not yet two months’ arrears. Option B is, therefore, correct.
A lender has taken a mortgage over a property to secure a loan that it has made. The mortgage is by deed and has been duly registered at Land Registry. The borrower is several months late with its interest payments and the lender is considering possible remedies. The lender wishes to keep the mortgage in existence for the time being and to allow the borrower to remain in occupation and to receive any income the property might produce.
Which of the following remedies is the most appropriate for recovering the money due whilst meeting the lender’s wishes?
A-Foreclosure
B-Taking possession
C-Appointing a receiver
D-Debt action
E-Sale
Option D is the best answer as a debt action would mean that the mortgage continued in force and the borrower remained in possession.
Options B and C are not the best answers. Taking possession would mean that the borrower no longer remained in occupation and appointing a receiver would mean that the borrower was no longer entitled to any income from the property.
Sale or foreclosure would bring the mortgage to an end and so, options A and E are wrong.
A client owns a registered freehold property. Two years ago, the client granted a lease, by deed, of an outbuilding on the property to a tenant for a period of five years. Last year, the client took out a loan from a building society. The loan was secured by a mortgage over the property. The mortgage was created by deed and was registered at Land Registry promptly following its completion. The client has not paid the instalments due on the mortgage for the last six months. The building society is planning to exercise its power of sale and has found a prospective buyer for the property. There is no mention of the lease on the register of title to the property.
Will the lease bind the buyer on a sale by the building society?
A-Yes, because the lease has priority over the building society’s mortgage.
B-No, because the lease was granted for a term not exceeding seven years.
C-No, because the lease has not been registered on the register of title to the property.
D-No, because the lease can be overreached.
E-Yes, but only if the tenant consents to the sale.
Option A is correct. The lease is a legal lease – it was created for a fixed term of five years and was created by deed – and it was created prior to the building society’s mortgage. As a legal lease for a term not exceeding seven years which was in existence when the building society’s mortgage was created, it would be classified as an overriding interest under Schedule 3 Paragraph 1 LRA 2002. This is why the lease will have priority over the building society’s mortgage and why the buyer of the property will be bound by the lease.
Option B is wrong. The length of the lease term does not dictate whether the lease will bind a buyer from the building society. As the lease was created prior to the mortgage, the application of the enforceability rules will determine whether the lease has priority. The application of those enforceability rules appears above in the explanation for Option A.
Option C is wrong. Since a legal lease for a term not exceeding seven years is an overriding interest under Schedule 3 Paragraph 1 LRA 2002, it is enforceable even though it does not appear on the register of title.
Option D is wrong because a lease cannot be overreached. It is only an interest under a trust that can be overreached.
Option E is wrong. The lease has priority over the building society’s mortgage, as indicated above, so the tenant does not have to consent to the sale for the lease to bind the buyer.
Five years ago, with the aid of a loan from a bank, a borrower acquired a freehold house. The loan was secured over the house under a repayment mortgage in favour of the bank. The mortgage was created by deed.
Clause 3 of the mortgage conditions provided that the legal date of redemption was one month after the creation of the mortgage.
The borrower has been struggling financially and has failed to make any repayments to the bank for the last four months. This is not the first time that the borrower has missed repayments. Three years ago and also last year, the borrower missed two monthly repayments before the borrower’s financial circumstances improved and the borrower was able to repay the arrears.
The bank has decided that it wants to terminate the mortgage.
Which of the following statements best describes the remedy the bank should pursue to achieve its objective of terminating the mortgage?
A-The bank should exercise its power of sale because the power exists, has arisen and has become exercisable.
B-The bank should seek a court order for forfeiture of the mortgage because the borrower is in breach of one the mortgage conditions.
C-The bank should sue the borrower for the debt because the legal date of redemption has passed.
D-The bank should take possession of the property and then let it out because the bank will not be under any duty to manage the property with due diligence.
E-The bank should foreclose on the mortgage because it does not require a court order to do so.
Option A is correct. The power of sale is implied into every mortgage made by deed (s101 Law of Property Act 1925 (LPA 1925)). It has arisen because the legal date of redemption has passed and one of the conditions in s103 LPA 1925 for the power to be exercisable has been satisfied (no repayments of interest for two months). This is now the third period of default and it has lasted longer than the other two periods and the power of sale will terminate the mortgage.
Neither suing the borrower for the debt nor taking possession will terminate the mortgage. Options C and D are therefore wrong. Option C also wrongly states that there will be no duty on the bank to act with due diligence.
Option E is wrong. The trigger for the bank to foreclose has been satisfied but foreclosure requires two court orders to be obtained. Foreclosure is also a more rarely encountered remedy due to the court’s power to order a sale of the property instead of allowing a lender to foreclose.
Option B is wrong. Forfeiture is not a remedy available to a lender. It is a landlord remedy for breach of covenant by a tenant but is often confused with foreclosure.
Quick Q:
The freeholder purchased a restaurant five years ago with the assistance of a legal mortgage from the bank. The mortgage was duly registered with the Land Registry and the freeholder started running the business. Last year the freeholder took a second legal mortgage from a building society to finance an extension to the restaurant, which was also registered at the Land Registry. At the start of this year the business ran into financial difficulties and the freeholder has not made any of the of the interest payments on the building society mortgage for five months. The building society wishes to exercise the power of sale.
Which of the following statements best describes whether the Building Society can exercise the power of sale?
The building society can exercise its power of sale as it is implied into every mortgage created by deed, has arisen and become exercisable.
Option B is correct. The power of sale is implied into every mortgage created by deed (s.101 Law of Property Act 1925) if not provided for expressly in the mortgage deed. However, the power of sale must have arisen and become exercisable. The power arises as soon as the legal date of redemption is passed and becomes exercisable either in accordance with an express term in the mortgage deed or when one of the circumstances set out in s.103 LPA25 is present. On the facts the mortgage was created last year so likely the legal date of redemption has passed, as it is usually set one month after the mortgage is created or on the date the mortgage is created. Interest payments on the mortgage have not been made for five months so the power is exercisable as per s.103(ii) LPA 1925 (any interest due under the loan is 2 months or more in arrears).
Option A is not the best answer. Whilst it is correct that the power of sale is implied into every mortgage created by deed (s.101 LPA 1925), that power must have arisen and become exercisable.
Option C is wrong. As per the answer to Option B above the power of sale has become exercisable under s.103(ii) LPA 1925 as interest payments on the mortgage have not been made for five months.
Option D is wrong. It is not a requirement that the selling mortgagee obtains permission from any other mortgagee to exercise its power of sale.
Option E is wrong. It is not a requirement that the selling mortgagee obtain a court order to exercise its power of sale.
Three years ago, the owner of registered freehold land granted a lease over the land to a tenant, by deed, for a term of 7 years. One year later, the owner created a mortgage by deed over the land in favour of a building society. The mortgage was registered at Land Registry immediately following its creation. Last year, the owner created another mortgage by deed over the land, this time in favour of a bank. This mortgage was also registered at the Land Registry immediately following its creation. The legal date for redemption has passed in respect of both mortgages. The owner is four months in arrears of interest on the mortgage to the building society.
Which of the following best describes the exercise of the power of sale by the building society and the priority between the three interests in the land?
A-The building society can exercise its power of sale and will be able to sell the land free from the lease and the bank’s mortgage.
B-The building society can exercise its power of sale and will be able to sell the land free from the bank’s mortgage but may have to sell subject to the lease.
C-The building society can exercise its power of sale and will be able to sell the land free from the lease, but subject to the bank’s mortgage.
D-The building society can exercise its power of sale but will sell the land subject to both the lease and the bank’s mortgage.
E-The building society cannot exercise its power of sale as the lease was created before its mortgage and a sale will prejudice the tenant.
Option B is the correct answer. As the building society’s mortgage was created by deed, the power of sale is implied into the mortgage by s101 LPA 1925 (and may well be expressly provided for in the mortgage deed itself). The power of sale has arisen, as the legal date of redemption has passed and the power is exercisable, as there are more than two months arrears of interest (see s103(ii) LPA 1925). Accordingly, the building society can exercise its power of sale.
Priority between mortgages is governed by s48 LRA 2002 and the first to appear on the register takes priority. The building society’s mortgage was registered first and therefore has priority over the bank’s mortgage and the building society can sell free from it.
The lease was created by deed and as it was granted for a term not exceeding 7 years, it would be classified as an overriding interest under Schedule 3 Paragraph 1 of the LRA 2002. As it was in existence at the date of creation of the building society’s mortgage, it will have priority over it and the building society will have to sell subject to it (see s104 LPA 1925).
Option A is wrong because it suggests that the building society’s mortgage has priority over the lease.
Option C is wrong because it suggests that the bank’s mortgage has priority over the building society’s mortgage.
Option D is wrong because it suggests that both the bank’s mortgage and the lease have priority over the building society’s mortgage.
Option E is wrong because the fact that the lease was created before the building society’s mortgage does not prevent the power of sale being exercised but, if the lease takes priority, the building society will sell subject to the lease, i.e. the buyer from the building society will not get vacant possession.
Quick Q:
Eight years ago the owner of registered freehold land created a mortgage by deed over the property in favour of a bank which was duly registered at the Land Registry. Five years later, the owner created another mortgage by deed over the land, in favour of a building society which was also duly registered at the Land Registry. The owner failed to make payments of interest to the building society and is four months in arrears. The building society is seeking to exercise its power of sale. The buyer wishes to buy free from both mortgages.
Which of the following statements best describes the position regarding distribution of the sale proceeds following sale of the land by the building society?
The sale proceeds will be applied first in repaying the bank’s loan, secondly in paying the building society’s expenses of sale, thirdly in repaying the building society’s loan and, finally, any surplus will be paid to the owner.
Option A is correct. Both mortgages were created by deed and registered, so they are legal mortgages. Priority between registered legal mortgages is governed by s48 LRA 2002 and the first to appear on the register takes priority. The bank’s mortgage was registered first and therefore has priority over the building society’s mortgage. The application of sale proceeds following a sale by a mortgagee is governed by s105 LPA 1925 and, firstly, requires the redemption of any prior mortgage to which the sale is not made subject, that is any mortgage which has priority over the selling mortgagee’s mortgage – here the mortgage in favour of the bank. Secondly, the selling mortgagee’s (here the building society) expenses of sale will be paid. Thirdly, the selling mortgagee’s mortgage (here the building society) will be redeemed and, finally, any surplus will be paid to the owner.
Options B and C are wrong. Note that the order of application of the sale proceeds is not affected by the fact that it is the mortgagee with second ranking priority (the building society) that is the selling mortgagee. The suggested order of application is wrong in both answers.
Options D and E are wrong. The suggested order of application is wrong in both answers
Quick Q:
A company purchases a freehold property with the aid of a loan from a bank. The bank secures their loan by way of a charge over the property. The loan is created by a document that is referred to as a deed and is signed, witnessed and delivered by both parties.
Which of the following best describes the interest of the Bank?
The bank has a mortgage over the property. It is a proprietary interest and it is capable of being legal because it was created by deed.
Option B is correct because a mortgage is a proprietary interest and is capable of being legal provided it was created by deed, which it was.
Option A is wrong because mortgages are capable of being legal under s1(1)(c) of the Law of Property Act 1925.
Option C is wrong because a mortgage is a proprietary interest and it is immaterial whether the bank has a right to occupy or not.
Option D is wrong because the bank does not have exclusive possession of the property.
Option E is wrong because regardless of whether it was created by deed, the bank has a mortgage, not a lease.
