Mortgages

Question 1

What does a secured loan (over a property) give a lender?

Answer 1

A proprietary right (a mortgage) over the property, which can be used to take possession and sell if the borrower defaults

As the lender is secured, it takes priority over unsecured creditors on an insolvency or bankruptcy

Under an unsecured loan, the lender has only a contractural remedy to sue the borrower for the money owed. If the borrower is bankrupt, suing them is pointless, so the lender must petition for bankruptcy

Question 2

What is a mortgage?

Answer 2

A charge by way of legal mortgage is the proprietary right granted over the property. The borrower retains legal title, but the lender gets a bundle of rights.

Question 3

What type of interest is a a charge by way of legal mortgage?

Answer 3

A charge by way of legal mortgage is a legal interest. It must be documented in a deed and registered (as a registered disposition or a trigger for first registration).

Mortgages can also be equitable. In practice, they are similar: both give rights over the land which are removed once the debt is repaid, but there are slightly different enforcement rights and registration rules. An equitable mortgage must be made by written contract. Usually, an equitable mortgage arises out of a failed legal mortgage (not registered and/or not in a deed)

Question 4

What is the equitable right to redeem?

Answer 4

The right to pay off the mortgage so that the land is free of the security

• The borrower is the owner of the property, and as such must have the right always to be able to repay the mortgage to free the land of the debt
• Arises after the contractual date of redemption has passed, which is a specific date by which the mortgage must be repaid. Even after this date, the equitable right steps in to allow the mortgagor to pay off the debt

Question 5

How is the equitable right to redeem protected?

Answer 5

There are a number of rules which protect the right for the borrower to repay the mortgage and take the property free of debt.

1) The redemption right is permanent and cannot be restricted or removed - because the equitable right arises after the contractual date of redemption has passed, having a really delayed contractural redemption date is void.

2) Option to purchase is invalid - allowing the mortgagee to buy the land as it prevents the mortgagor from being free of the debt and taking the land themselves.

3) Collateral advantages/restraint of trade: the only terms in a mortgage should be the repayment of the debt plus interest. Any other terms attached that advantage the lender are void (with a few well-established exceptions)

4) Unconscionable terms - excessive interest rates imposed unfairly likely to be struck out by the court (won’t apply to commercial parties)

5) FCA Supervision - FCA may strike down an unfair loan

6) CRA 2015 - if the terms in the loan are contrary to good faith

Question 6

What is the effect of undue influence on a mortgage?

Answer 6

Mortgage is voidable and cannot be enforced

Question 7

When does undue influence (mortgage) arise?

Answer 7

Undue influence arises where someone in a position of trust and confidence pressures another (most commonly their spouse or civil partner) to sign the mortgage deed , securing their property in order to obtain a loan for their own personal ends (such as for their business)

The person who has been pressured to sign will own an interest in the property. If the person does not provide express consent to the mortgage, the bank may not be able to take possession of the home on a default.

Undue influence means such consent is invalid and the mortgage will be voidable

Question 8

What kinds of undue influence are there?

Answer 8

Actual or Presumed.

Question 9

What is actual undue influence?

Answer 9

Where there is clear evidence of undue influence on the facts

Question 10

What is presumed undue influence?

Answer 10

Presumed:
Where the UI is presumed because there is a relationship of trust or confidence such as between a trustee-beneficiary, or solicitor-client.

OR

Where you have two spouses/civil partners and one is entering into a mortgage jointly with the other for the other’s sole financial benefit (such as getting more funding for their business), and for both the reason why the mortgage is entered into is because of that relationship of trust and confidence/the spousal relationship.

Question 11

What notice can the bank have of the undue influence?

Answer 11

The bank can have actual or constructive notice

Actual notice = the bank actually knows about the UI

Constructive notice = the bank ought to have known (e.g. a spouse is entering into a mortgage for the sole financial benefit of their other half)

Question 12

If there is undue influence (actual or presumed) and the bank knows (actual or constructive), what should the bank do?

Answer 12

Take reasonable steps to ensure the person being influenced gets independent legal advice

They should get written confirmation from the solicitor providing that advice that such advice has been given and that the nature and consequences of the transaction have been explained to the party who is being unduly influenced

The advice should be given away from and separate to the other party to the mortgage

The bank should also provide the solicitor with any evidence of the undue influence and other financial information they have on the spouse being unduly influenced.

Question 13

What enforcement rights does the mortgagee have if the borrower defaults?

Answer 13

• Sue under mortgage contract
• Right to take possession
• Power of sale (under the mortgage deed of LPA 1925 provided it has arisen and is exercisable)
• Foreclosure
• Right to possess title deeds
• Appointment of receiver (either expressly under the mortgage deed or under LPA 1925)

An equitable mortgage has fewer remedies than a legal mortgage. It cannot take possession and there is no power of sale. The only right an equitable mortgagee has are to apply to court for sale and the right of foreclosure.

Question 14

What restrictions are there on the right to take possession?

Answer 14

• Lender must act with honest intention and good faith
• If they take possession, they must take reasonable care of the property.
• Possession can be postponed by the court if the borrower can prove they can pay the arrears by the end of the mortgage term (residential only)
• The lender must comply with the Protocol for taking possession
• Protection for spouses/CPs under the Family Law Act 1996 (the bank has to inform spouse/CP of any possession proceedings and the spouse/CP can be a party to them)

Question 15

When does the power of sale arise and become exercisable under LPA 1925?

Answer 15

It arises as soon as the mortgage money becomes due, which is when the contract date of redemption has passed (usually three months into the mortgage term), or a capital mortgage instalment fails to be paid.

It becomes exercisable when the borrower:
1. fails to repay capital for 3 months after notice (from the lender); or
2. interest has not been paid for 2 months; or
3. the borrower has breached some other term of the mortgage deed

Note:
Power of sale rights can be set out in the mortgage deed, in which case that is followed. Otherwise use the LPA 1925.

When selling the property, the lender is under a duty to act in good faith and to take reasonable care to obtain the true market value or the proper price.

Question 16

What is the priority between legal mortgages over the same property for registered land?

Answer 16

Priority between legal mortgages is governed by the date of registration.

A legal mortgage is a registered disposition and triggers compulsory first registration of unregistered land.

If a mortgagor has more than one legal mortgage over their property, the priority between these mortgages is governed by the date of registration of those mortgages, not the date of creation

If a mortgage is not registered it will be an equitable mortgage only.

Question 17

What is the priority between a legal mortgage and an equitable mortgage for registered land?

Answer 17

Because a legal mortgage is a registrable disposition, it will take priority over any unregistered interests unless they are overriding interests.

A beneficial interest under a trust where the beneficiary is in actual occupation can override a legal mortgage if overreaching has not taken place.

A mortgage can effect overreaching if the mortgage money is paid to two trustees.

If an equitable mortgage is registered via a notice in the Land Registry or is an overriding interest, the equitable mortgage will take priority over the legal mortgage and any other subsequent interests.

Question 18

What is the order of priority between equitable mortgages?

Answer 18

The priority between equitable mortgages is determined by date of creation.

But, for registered land, this is subject to the rules on registered dispositions. An unregistered equitable mortgage, unless it is overriding, can never take priority over a newly registered legal mortgage (if equitable mortgage is unregistered or not overriding at the date of creation)

For unregistered land, an equitable mortgage must be registered to be valid and binding (or will be void against purchaser for value or new legal mortgage). Priority between equitable mortgages in unregistered land is based on the date of creation.

Question 19

What are the rules on priority for a legal mortgage over unregistered land?

Answer 19

Because the grant of a legal mortgage triggers first registration, the mortgage will be subject to any pre-existing mortgage registered on the Land Charges registry.

This means that the legal mortgage is subject to any pre-existing mortgage that is registered via a land charge. If you fail to register an equitable mortgage via a land charge, it is void against any purchaser for value of the unregistered land and against any subsequent legal mortgage.

Question 20

Who is the mortgagor?

Answer 20

The mortgagor is the borrower, who grants the mortgage as security for the loan.

Question 21

What is a mortgage?

Answer 21

A mortgage is a bundle of proprietary rights granted to the lender (the mortgagee) as security for a loan.

Question 22

What are the formalities needed for a mortgage to be capable of being a legal interest in land?

Answer 22

Must be a deed, which must be:
- intended to be a deed
- is validly executed (signed and witnessed)
- delivered (dated)

Must be registered at the land registry

Question 23

What happens if a mortgage deed is not registered at the land registry?

Answer 23

The mortgage will not take effect as a legal mortgage in the land but could still be an equitable interest.

Question 24

What are the two types of equitable mortgages?

Answer 24

(1) Mortgage of an equitable interest

(2) Defective legal mortgage

Question 25

What is a mortgage of an equitable interest?

Answer 25

Where the borrower holds an equitable interest in the land, any mortgage of that interest will be equitable in nature.

Such a mortgage can be created very informally - need only be in writing and signed only by the grantor in order to be validly executed.

Question 26

What is a defective legal mortgage?

Answer 26

A mortgage over registered land which is not granted by a valid deed or that is not completed by registration will not take effect as a legal mortgage (it will be defective).

May be regarded as an equitable mortgage if it complies with LP(MO)A 1989, s 2.

Equity will recognise it as a contract to grant a legal mortgage providing it is in writing, contains all the agreed terms and is signed by both the mortgagor and mortgagee.

Question 27

How is a mortgage discharged?

Answer 27

Once a mortgage has been repaid in full, the mortgage entries at the land registry must be cancelled.

A mortgage is only considered to be fully discharged when all reference to it has been removed from the Charges Register at the Land Registry.

Discharge of a registered charge is done by using DS1 form for a mortgage over the whole of land in title, and if only part of the land in title DS3

Question 28

What is the equitable right of redemption?

Answer 28

Essentially the right to pay off the mortgage.

A mortgagor has the right to pay off the mortgage so that the land is free of its security.

The borrower is the owner of the property and as such must have the right always to be able to repay the mortgage to free the land of the debt.

Question 29

Who is the mortgagor and who is the mortgagee?

Answer 29

The mortgagor is the owner, the person who takes out the mortgage.

The mortgagee is the lender usually the bank.

Question 30

What is the contractual right to redeem?

Answer 30

The contractural right to redeem is a clause in the mortgage deed providing for redemption on a specific date. Even after this date has passed the mortgagor has the right to repay the mortgage and get their land released of the charge provided that they pay the loan off in full.

The one and only date that a mortgage could be repaid. If not paid on that date the borrower forfeited the property to the lender. Equity intervened.

Question 31

When does the equitable right to redeem arise?

Answer 31

It arises after the contractual right to redeem has passed.

Question 32

What are the four elements of the equity of redemption?

Answer 32

1. Equitable right to redeem supplements the legal right to redeem
2. No postponement or prevention of redemption
3. No collateral advantages
4. No unconscionable terms

Question 33

What is postponement of the right to redeem

Answer 33

In the lender’s interest to keep the borrower on the hook (interest) for as long as possible by pushing back first date on which loan can be repaid (as equitable right arises the following day) .

Courts will not allow a clause which prevents redemption all together - must be no clog or fetter on the equity of redemption.

Where the right to redeem is rendered valueless will be a question of fact and degree.

Any delay in a commercial context is more likely to be upheld if received legal advice and are of equal bargaining power.

Question 34

What if the borrower wants to redeem early?

Answer 34

If the borrower wants to redeem early the lender can charge a fee for early redemption but must be reasonable and fully explained to the mortgagor.

Question 35

Can an option to purchase be included?

Answer 35

An option to purchase granted by the mortgagor to the mortgagee will be invalid as it will prevent the mortgagor from exercising the right to redeem.

If an option is granted in a substantially seperate transaction it may be upheld if independent of the mortgage.

Question 36

What is a collateral advantage?

Answer 36

Under a mortgage a lender should be entitled to nothing more than the repayment of the capital plus interest.

If the mortgage has other conditions attached which benefit the lender they will be struck down.

An exception is a solus tie - often breweries or oil companies. Lender makes it a condition of the mortgage that the borrower buys all of its supplied from the lender. Interest rate is usually lower in a deal which involves a solus tie. (must not exceed mortgage term).

Question 37

What if there are unconscionable terms in a mortgage?

Answer 37

Courts have equitable jurisdiction to strike out oppressive and unconscionable terms.

Test: has the term been imposed in a “morally reprehensible manner” if yes term will be void but not whole contract.

Includes excessive interest rates - must be imposed in a morally reprehensible manner - not receiving independent legal advice or mortgagee having superior bargaining power.

If equal bargaining power or just a bad deal will still uphold

• Void if penalty interest rate imposed in event of default exceeds lender’s losses
• not improper if high interest rate can be justified if borrowers have a poor credit history
• may be able to charge higher interest rate when in own financial difficulties (provided not exercising discretion for an improper purpose)

Question 38

When will a solus tie be permitted?

Answer 38

The solus tie will be permitted in a commercial transaction if the tie ends before or at the end of the mortgage term.

Question 39

Is there a presumption of undue influence between husband and wife?

Answer 39

No. In cases where undue influence is claimed, it will not be presumed but will need to be positively shown.

Question 40

In addition to a relationship of trust and confidence, what else must be shown for a claim of undue influence to succeed?

Answer 40

A transaction which requires explanation. If there is a relationship of trust and confidence the transaction must be one that initiates the question ‘why has X signed this?’ If it is, undue influence is established.

Question 41

What is the scope of the principles of constructive notice of undue influence?

Answer 41

The principles are relevant in every case where the relationship between the person claiming undue influence and the debtor is non-commercial.

Question 42

How do mortgages take effect when registered?

Answer 42

Take effect as a registered charge in the charges register.

Must be registered to attain status of a legal mortgage, if not registered will not be a legal mortgage.

Question 43

How is priority between registered charges determined?

Answer 43

Priority between registered charges depends upon the order in which they are entered on the register. This is regardless of the order of creation.

Where two or more mortgages are created at the same time, the application for registration will specify the order of priority.

Question 44

How is priority determined for equitable mortgages?

Answer 44

Equitable mortgages rank in the order of creation.

Question 45

What is the order of priority between registered and equitable mortgages?

Answer 45

An equitable mortgage over registered land can be protected by the entering of notice on the charges register.

If protected by entry of notice, an equitable mortgage over registered land will take priority over a subsequent legal mortgage.

If not protected by notice, it will not take priority over a subsequent registered disposition (estate or registered charge) i.e. sale or new mortgage.

Note: protection by notice will not affect priority between equitable mortgages.

Question 46

What is postponement?

Answer 46

Lenders can agree to alter the position that would apply according to priority rules by entering a deed of priority or inter-creditor deed.

Any agreement would need to be registered at the Land Registry.

Essentially modifies the priority rules.

Question 47

Why might postponement be used in a residential mortgage for the rights of occupiers?

Answer 47

Mortgages 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.

Important for the lender to enforce their security and take possession of the mortgaged property in the event of default.

If 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 48

What are the rights of the lender of a legal mortgage?

Answer 48

1. Debt action: sue on the contract for the outstanding debt
2. Possession: repossess the property
3. Sale: sell the property
4. Receiver: appoint a receiver
5. Foreclosure: foreclose

Note: equitable lender does not generally have the right to repossess or sell without a court order.

Question 49

Mortgagee rights: debt action

Answer 49

A contractual debt action - personal action against the borrower.

Often used in addition to other remedies - especially where value of the mortgaged property is less than the outstanding mortgage debt (pursue a personal debt action against the borrower for the shortfall).

Recover for capital debt is 12 years, recovery for interest is 6 years.

Question 50

Mortgagee rights: possession

Answer 50

A legal lender may wish to enforce its security by taking possession as precursor to sale:

1. Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower. Vacant possession makes a property more attractive to a potential buyer.
2. Possession will enable the lender to manage the property and derive an income from it. Income can then be used to reduce the outstanding mortgage debt.

Note: for residential cases possession must be last resort and lender is expected to explore alternative arrangements with the borrower such as extending mortgage term or scheduling new payment plan.

Question 51

Mortgagee rights: sale

Answer 51

Sale proceeds are applied towards the outstanding debt, if there is any surplus this will be forwarded to the borrower but if shortfall may take out debt action.

Procedural steps:
1. The power of sale must have arisen in accordance with statutory rules;
2. The power of sale must be exercisable in accordance with statutory rules; and
3. The lender must fulfil its duties on sale which have largely arisen from case law.

Question 52

Mortgagee rights: reciever

Answer 52

A receiver acts as a manager of the mortgaged property if the lender does not wish to take possession or to sell. The power to appoint a receiver arises under LPA 1925.

Receiver is an administrator whose function is to get an income from the land and will apply it towards the outstanding mortgage debt.

Receiver is deemed to be borrower’s agent - means lender will not be liable for their negligence.

Must act with due diligence (to borrower) subject to main duty to pay off mortgage debt.

Question 53

Mortgagee rights: foreclosure

Answer 53

Rarely used now.

Allows lender to take the property in satisfaction of the debt and borrower looses all rights to the property (ie none of the surplus of sale) -

although it also extinguishes all other mortgages so may be good option if potential for surplus debt. The borrower cannot be sued personally either by the lender who forecloses or any subsequent lender.

Question 54

When does the right to possess arise?

Answer 54

As soon as the mortgage is granted, before the ink becomes dry.

Possession is a right of the lender not simply a remedy.

Although this right will not be exercised arbitrarily and there are a series of safeguards in place.

Question 55

Limits on the right to possession: Criminal Law Act 1977

Answer 55

Criminal offence to use or threaten violence for the purpose of gaining entry to a property. Means that exercising the right to possess by ‘self-help’ is risky, unless the lender is certain that the property is unoccupied at the time.

A prudent lender will make an application to court for an order for possession even if not strictly necessary.

Question 56

Limits on the right to possession: pre-action protocol for possession claims

Answer 56

Steps which a court expects lender to take before resorting to possession of a residential property. e..g discuss debt with borrower and accept reasonable requests for a new payment plan.

Most lenders observe the protocol, if they do not may suffer delays and be ordered to pay costs.

Question 57

Limits on the right to possession: AJA s36

Answer 57

Applies where the property is wholly or partly residential, need not be borrower’s home.

Enables 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. any sums means arrears and accrued interest, starting point for reasonable period is remainder of mortgage term.
- needs detailed financial plan

Does not:
- enable 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
- enable the court to prevent a lender from exercising a power of sale without first obtaining a court order

Question 58

Will a court postpone an order for possession to allow the borrower to sell the property?

Answer 58

Yes, if there is firm evidence of an imminent exchange of contracts.

Question 59

When does a lender have the right to sale?

Answer 59

If there is an express power of sale in the mortgage deed, the deed will set out exactly how and when the power will be exercised. Lender will not need to rely on any statutory provisions although it will be subject to duties on sale in the same way a lender relying on statutory powers.

Lenders statutory power of sale arises when the mortgage money has become due.

Question 60

When is the lender’s statutory right to sell exercisable?

Answer 60

When one of the criteria is met:

1. Notice requiring payment of the whole load has been served by the lender and the borrower has defaulted (no arrears necessary, lender can request the full loan at any time)
2. Interest is unpaid and arrears for at least two months: Does not mean two months’ interest must be owed, there must be some interest outstanding for two months: it does not need to be a large sum.
3. There has been some breach of another mortgage provision such as a covenant to keep the mortgaged property insured or in good repair: essentially something which can effect the value of the security

Question 61

What duties does the lender owe the borrower?

Answer 61

1. 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 cannot be expected to achieve the perfect sale price, but the price must be in the correct bracket.

Not under a duty to improve the property or delay the sale.

Question 62

When does the lender’s rights to sell arise, where the mortgage is a capital and interest repayment mortgage? Interest only mortgage?

Answer 62

As soon as one monthly instalment has become payable.

In an interest-only mortgage, that will happen on the legal redemption date.

Question 63

When selling, what is the lender’s duty as to the timing of the sale in a slow market?

Answer 63

The lender has an unfettered discretion as to when to sell and need not delay.