Mortgages Flashcards
City Land Property (Holdings) Ltd v Dabrah (Facts)
- Base lending rate at the time was 7%
- Annual rate of interest under the mortgage was 19%
- If defaulted, interest rate would have risen to 57%
- Held:
- Considered a penal rate of interest
- Unconscionable
- Rate of 7% was substituted
City Land Property (Holdings) Ltd v Dabrah (Principle)
Clauses contained in mortgages that are unconscionable will be struck out
Multiservice Bookbinding v Marden (Facts)
-Small company borrowed by was of a mortgage
-Under the mortgage, interest was index-linked to the Swiss Franc
-If the GBP fell against the Swiss Franc, amount of interest would rise dramatically
Held:
-Clause was upheld, not unconscionable
-Strength of bargaining position was equal (sophisticated)
-Mortgagor could not establish that the clause was imposed in a morally reprehensible way
-Mortgagor received independent advice
Multiservice Bookbinding v Marden (Principle)
- A clause will not be struck out of a mortgage agreement for being unreasonable
- It must have been imposed in a morally reprehensible way
Paragon Finance plc v Staunton (Facts)
- P was claiming possession from S for late payments
-Bank of England lowered interest rates while P did not
-S argued that his rate should have been lowered that that P was extortionate under under the Consumer Credit Act 1974
held: - Bank was not acting unconscionable
- It was protecting its own assets
- There is an implied term that the rate of interest will not be set dishonestly, arbitrarily, or for improper use
- Although it may be unreasonable for the mortgagor, it may be commercially necessary for the mortgagee
Paragon Finance plc v Staunton (Principles)
- Determined the issue of whether clauses allowing the mortgagee to vary interest rates was challengeable
- Only if it is unconscionable
- Although it may be unreasonable for the mortgagor, it may be commercially necessary for the mortgagee
Cuckmere Brick v Mutual Finance Ltd (Issue Topic)
Conduct of Sale by Mortgagee
Cuckmere Brick v Mutual Finance Ltd (Facts)
-Property was sold
- Mortgagor sued Mortgagee
- Mortgagor alleged that the Mortgagee sold the property for too low of a price
-Land was not properly advertised
Held:
-Mortgagee did not obtain the fair and true market value for the property
-Mortgagee will have to pay the difference or set the sale aside
Cuckmere Brick v Mutual Finance Ltd (Principle)
The Mortgagee has a duty to take reasonable care to obtain the true market price for the property when selling it.
Tse Kwong Lam v Wong Chit Sen (Issue Topic)
Associated Persons and Duty on sale
Tse Kwong Lam v Wong Chit Sen (Facts)
- Mortgagee sold property in an auction
- Only bidder was Mortgagee’s wife, at exactly the reserve price
- Mortgagor sought to have the sale set aside
Held: - Close relationship does not entitle the mortgagor to automatically set aside the sale
- Onus of proof is moved onto the purchaser to show that the sale was in good faith
- Onus was not discharged on the facts, transaction should have been set aside
- Was allowed in the case because of the Mortgagor’s excessive delay in seeking to dispute the sale
Tse Kwong Lam v Wong Chit Sen (Principle)
Mortgagee can sell to:
- An associated person, or
- A company in which he holds a substantial shareholding
-But, he burden of proving the transaction was made in good faith and without fraud would fall on him.
A Mortgagee can sell to?
- An associated person, or
- A company in which he holds a substantial shareholding
- But, the burden of proving the transaction was made in good faith and without fraud would fall on him.
China and South Sea Bank Ltd v Tan Soon Gin (Issue Topic)
Conduct of the Sale & Timing of the Sale
China and South Sea Bank Ltd v Tan Soon Gin (Facts)
???
China and South Sea Bank Ltd v Tan Soon Gin (Principle)
- Timing of a sale is a matter entirely up to the mortgagee
- Mortgagee should not be liable for failing to exercise their power of sale when market conditions were more favourable
Parker-Tweedale v Dunbar Bank plc (Issue Topic)
Conduct of Sale & Associated People
Parker-Tweedale v Dunbar Bank plc (Facts)
-P’s wife was the sole owner of the property mortgaged by D
- D sold the property, with the wife’s consent, with the power of sale
- P argued that they sold the property for less than it was with worth
- P brought proceedings against D for not taking reasonable steps
Held:
- Mortgagee’s Duty to take reasonable steps does not extend to a person with beneficial interest of which the mortgagee had notice
Parker-Tweedale v Dunbar Bank plc (Principle)
- No statutory duties are imposed on the mortgagee when exercising power of sale
- Duties have arisen in case law
- Duties exists solely between the mortgagee and the mortgagor
Palk v Mortgage Services Funding plc (Issue Topic)
Who sells the property? (selling v renting)
Negative equity
Palk v Mortgage Services Funding plc (Facts)
-M brought a possession action
-There was a negative equity
- M intended to rent the property until the price of the property was higher
-P argued that M should sell immediately because P’s debt increased because the rent was less than the money owed
Held:
-Argument accepted
-Ordered direct sale of the property under s.91(2) LPA 1925
Palk v Mortgage Services Funding plc (Principle)
-Under s.91 LPA 1925, the court has jurisdiction to sell mortgaged property independent of the mortgagee’s right to do so
Cheltenham & Gloucester B.S. v Krausz (Issue Topic)
- Negative Equity
- Sale of the property
Cheltenham & Gloucester B.S. v Krausz (Facts)
- C sought an order for the sale of the mortgaged property
-K (mortgagor) obtained a warrant for possession (ability to sell the house himself)
-Proposed sale by C would not have been enough to pay off what C owed
Held: - Refused sale order
- K’s warrant of possession was enforced
Cheltenham & Gloucester B.S. v Krausz (Principle)
- Courts can refuse a party from having possession of the property
Cheltenham & Gloucester B.S. v Norgan (Issue Topic)
Reasonable Period of Time to meet Mortgage Payments
Cheltenham & Gloucester B.S. v Norgan (Facts)
-N repeatedly experienced difficulties in meeting mortgage payments
-several possession orders were brought forward, but postponed under s.36 AJA each time
-Finally, another action was brought forward and this time was granted
Held:
- N was given until the end of the mortgage term
Cheltenham & Gloucester B.S. v Norgan (Principle)
- Creates rules around reasonable period to meet mortgage payments
- A reasonable period to postpone possession to pay arrears is the remaining term of the mortgage
What is a mortgage?
- A security interest over land
- Using land to secure a debt (repayment of a loan)
Who is the mortgagor?
The borrower
Who is the mortgagee?
The lender
- Receives property interest
If mortgagor defaults?
Property rights will be sold to pay back the loan
Mortgages are legal or equitable?
Both
Creation of a Legal Mortgage (LPA 1925)
2 methods: s. 85(1) & s. 87
1- Long Lease (Lease by demise): Lease for long period of time (i.e. 3000 years) that ends once debt is paid
2- Charge by Deed: A deed that is a mortgage interest (charge) (most common since 1925)
Creation of legal mortgage (LRA 2002)
s. 23(1)- Mortgage of registered land can only be by charge,
and,
s. 27(2)(f) & s. 93(1)(2)- Registration is essential
Mortgage is equitable when?
- Absence of correct formality to make it legal (Deed/Registration)
- Beneficial Interest or Equitable Lease
Is the deposit of title deeds enough to create a valid equitable mortgage?
- No
- There must be a valid contract (s. 2 LP Act 1989)
- United Bank of Kuwait v Sahib (1996)
s.2 Law of Property Act 1989?
Rules surrounding the creation of a valid contract
s.27 LRA 2002
Registration is required
Equity of Redemption
- Mortgagor’s property rights over the mortgaged land (can be transferred)
- Protects the Mortgagors rights
Financial Value of the Equity of Redemption?
Equity (Value)= value of Land - total mortgage debt outstanding
Negative Equity?
When the value of land is less than the total mortgage debt outstanding
Value of land < Mortgage debt
Equitable Right to Redeem?
- Eliminates Land rights under common law (harsh)
- Allows the mortgagor some lee-way to pay at a later date
- Mortgagor does not lose property immediately after the loan due date
“clogs” or “fetters”?
- Terms inserted into the mortgage which deny or prevent the mortgagor’s right to redeem (equity of redemption)
- Void by Equity
Examples of Clogs/Fetters? (3)
1) Terms restricting/postponing mortgagor’s right to redemption
2) Terms giving mortgagee right to buy mortgaged land
3) Terms giving mortgagee some additional advantage
Restricting/Postponing Redemption (Clog) inserted to do what? (2)
1) Prolong the ‘investment’
2) prolong a tie to the mortgagee to prolong the supply of agreed materials
Restricting/Postponing Redemption (Clog) Case
- Fairclough v Swan Brewery Ltd (1912)
- Knightsbridge v Byrne (1939)
Fairclough v Swan Brewery Ltd (1912)?
- Concerns a clog on the equity of redemption
-17 years left on a lease - Redemption was postpone until 6 weeks before the due date of the lease
Held: - postponement is invalid because it rendered mortgagor’s right to redeem valueless
Knightsbridge v Byrne (1939)
- Concerns a clog on the equity of redemption
- Parties were both businesses
- Term postponing redemption of freehold land for 40 years.
-Mortgagor seemed to have obtained a preferable interest rate
Held: - Term was valid
- Court is reluctant to interfere in proper business transactions between 2 parties of close standing
-Unless term was unfair/unconscionable or oppressive
Knightsbridge v Byrne (1939) (Principle)
- Court is reluctant to interfere in proper business transactions between 2 parties of close standing
- Unless term was unfair/unconscionable or oppressive
Fairclough v Swan Brewery Ltd (1912) (Principle)
- postponement of the right to redemption is invalid because it renders mortgagor’s right to redeem valueless
Term Permitting the Purchase of Land by the Mortgagee (Clog) is?
- Option to purchase when the mortgagee might exercise in first year is void as a clog
- Samuel v Jarrah Timber (1904)
Lord Macnaghten obiter in Samuel v Jarrah Timber (1904)?
-He question whether the rule (option to purchase) should apply where the bargain is a fair one in a commercial context between parties of equal standing (freedom of contract)
Term Permitting the Purchase of Land by the Mortgagee (Clog):
- Valid when separate transaction from mortgage?
- Yes, when the second document is created 10 days after the mortgage (Reeve v Lisle (1902))
- No, when they are made on the same day (c.f. Lewis v Frank Love (1961))
Term Permitting the Purchase of Land by the Mortgagee (Clog):
- Warnborough Ltd v Garmite Ltd (2003)?
-Interlinking transactions
- S sold land to P
- P borrowed purchase money from S in return for charge on land
-Parties created an option for S to re-purchase the land
Held:
- Option was held to be valid because it was not part of the mortgage, it was part of the sale.
Term Permitting the Purchase of Land by the Mortgagee (Clog):
-Relevance today? (case)
Jones v Morgan (2002)
Jones v Morgan (2002)
-1994, M agreed to mortgage with J over farm land
-M used money to turn farmhouse into a nursing home
-1997, M had financial difficulties.
-Led to mortgage agreement which had a term that allowed J to purchase half-share in M’s mortgaged farmland
Held:
-2:1 - Term is void (clog on equity of redemption)
-Prevented mortgaged land from being restored in original state
- 1997 mortgage not independent from 1994 mortgage
Collateral Advantages (clog) are?
- Mortgage terms that agrees on additional benefits, other than interest, in return for loan
- ex: Exclusive supply agreement
Collateral Advantages are clogs when?
- When they stop the mortgagor from getting back the property in original condition
- If the tie goes beyond the term of the mortgage
Noakes v Rice (1902)
- Concerns mortgage terms of collateral advantages
- The mortgage clause created a slous tie (collateral advantage) between the brewery and the pub landlord
-This meant the mortgagor would get a ‘tied’ pub rather than the ‘free house’ pub that he mortgaged
-Not in original condition
Held:
-Term was a clog on the equity of redemption
Bradley v Carritt (1903)
-Concerns when the collateral advantage must end
-Mortgagor had controlling shareholding in team company, Mortgagee was a tea broker
-mortgaged shares to mortgagee
-mortgage included term that the mortgagee would remain employed as the company’s tea broker or otherwise get a commission
Held:
-Term is unenforceable, MUST end at the end of the the mortgage
Collateral Advantages are valid of redemption when?
- When it is independent and separate from the mortgage (even if contained in mortgage agreement)
- Kreglinger v New Patagonia Meat Co. (1914)
Kreglinger v New Patagonia Meat Co. (1914)
- Concerns Collateral Advantages
- 2 businesses
- Mortgagee had right of pre-emption to purchase sheepskins from mortgagor for 5 years at best market price
-Mortgagor repaid loan after 2 years
Held: - Pre-emption was not a clog
- No oppression (commercial trade- freedom of contract)
-Separate transaction
Alternative legal basis to challenge a ‘solus agreement’?
Restraint of Trade Doctrine
- Is the term an unreasonable restriction on freedom of trade?
Restraint of Trade Doctrine test?
- Test is one of reasonableness and duration
- Longer tie requires stronger justification
- Esso v Harper’s Garage (1968)
Esso v Harper’s Garage (1968)
- Regarding Restraint of Trade
- solus agreement for petrol
- 2 mortgages
- 4 year + tie = reasonable
- 21 year + tie= unreasonable
- Duration- longer tie requires stronger justification
Who sets the base rate of interest for the banks?
Bank of England
When can the mortgagor challenge the interest rates being charged by the mortgagee?
- Only if the mortgagor can show that the rate is:
1) unconscionable, and
2) unreasonable
Cases where interest rates were challenged for being unconscionable? (2)
- City Land Property (Holdings) Ltd v Dabrah (1968)
- Multiservice Bookbinding v Marden (1979)
When can a mortgagor challenge a clause that allows mortgagee’s to vary the interest rate?
- only if unconscionable
- Although it may be unreasonable for the mortgagor, it may be commercially necessary for the mortgagee
- There is an implied term that interest rates will not be set dishonestly, arbitrarily, or for improper use.
Paragon Finance v Nash (2002)
What did Lord Dyson say about clauses that allow mortgagee’s to vary interest rates?
What case was this in?
- There is an implied term that interest rates will not be set dishonestly, arbitrarily, or for improper use.
- Paragon Finance v Nash (2002)
Statutory control for interest rates?
Consumer Credit Act 1974
Consumer Credit Act 1974 applies to what?
Second mortgages
Consumer Credit Act 1974 does what?
- Protects people of creditors
- Strikes down/adjusts unfair terms or use of powers by lenders
Consumer Credit Act 1974 sections?
140A: unfair relationship between creditors and debtors
140B: Powers of court in relation to unfair relationships
Remedies for the Mortgagee? (3)
Recovery
Possession*
Sale*
Remedy limitation period?
Where do I find this?
- 12 years from date the sum is due
- Limitation Act 1980 s.20
To sue for “Recovery” is available when?
-When the land was sold and there is still an outstanding liability
Right of Possession belongs to who?
- Mortgagee
- inherent part of property right
- Exists without Mortgagor default
Can the right to Possession be restricted?
Yes, as a term in the mortgage
Why would the mortgagee allow the right to possession be restricted?
- Mortgagor will have to consistently pay back the interest owed
- Less responsibility if not in possession
Risk of taking possession?
-Strict Accountability
White v City London Brewery (1889)
White v City London Brewery (1889)
- Mortgagee took possession
- rented the ‘free’ house as a ‘tied’ house which made rent lower
- Mortgagee had to pay the difference to the mortgagor because of using the land in a less valuable manner
Why would a Mortgagee want possession if the mortgagor is in default?
- Prelude to sale
- Easier to sell property if it is vacant
Can the Mortgagee gain possession by re-entering peaceably without a court order?
Yes, if it is unoccupied
Mortgagor can stop or delay a court order by the use of? (3)
- Common Law
- Equity
- Statutory*
Use of Common law to delay court order for possession?
- Very limited
- Allows mortgagor a short time to repay what is owed
- Allows for 28 days to repay the amount due
- Dependent on the reasonable prospect that the mortgagor can repay the entire amount in the time allowed
Use of Equity to delay court order for possession?
-Prevents mortgagee from taking possession unless it is fair and for proper purposes
Quennell v Maltby
Quennell v Maltby
-Q got a mortgage and sub-letted the property
-Need permission of mortgagee to do this
-Q was in breach of mortgage agreement
-Q created a protection tenancy, giving the tenant protection from being evicted
-Could not kick tenant out
-Q asked mortgagee to use its powers to say there was a breach of tenancy
-Mortgagee refused
-Q then persuaded his wife to buy the mortgage from mortgagee, making her the mortgagee
- Wife sought to evict the tenant
-Q sought to use his wife’s powers as a mortgagee for improper purposes (not to protect the value of the land)
Held:
- Mortgagee did not use her powers in good faith
-Wife was acting as an agent of Q, not as a independent mortgagee
-Equity intervened and prevented Q from evicting the tenant
A mortgagee may evict a tenant only in situations where?
-it is necessary to protect the property interest
Use of Statute to delay court order for possession?
- s. 36 Administration of Justice Act 1970
- Allows for extensive range of orders to help mortgagor
- Power to adjourn possession proceedings, or suspend/postpone operation of possession order
- Only applies to property that contains a dwelling-house
Administration of Justice Act s.36
- Gives court the power to adjourn possession proceedings, or suspend/postpone operation of possession order
- Only applies to property that contains a dwelling-house
S. 36 A.J.A. is not available when?
-unless there are court proceeding for possession
(obtained possession lawfully without going to court)
-If mortgagee sells the land without first taking possession, and the purchaser is the one who seeks possession
Horsham Properties v Clark (2008)
Horsham Properties v Clark (2008)
- s. 36 AJA could not be used
- mortgagee sold the property in an auction to H
- H successfully evicted the tenants as trespassers
What is ‘reasonable time’ under s. 36 AJA 1970?
-Used to be only a couple of years, until…
Cheltenham & Gloucester v Norgan (1996)
-Now it can be the full remaining period of the mortgage
-Can also be approximately half the remaining mortgage term (Bank of Scotland v Zinda (2012))
What does the mortgagor have to pay in a reasonable time under s.36 AJA 1970?
- Arrears + Resuming Monthly Payments
To use s.36 AJA 1970, the mortgagor must show what?
- Has the means of paying the loan
-Likely future income
(show that he can repay)
Balancing Act of s.36 AJA 1970?
- Court must balance the needs and interests of both parties:
- Mortgagor’s ability to repay
- Mortgagee’s right to protect the value of the land
Can the Mortgagor postpone possession in order to sell?
- Court may allow short period (Up to a year)
- Will want evidence that the mortgagor is actively trying to sell the land.
s.91(2) Law of Property Act 1925
-allows the court to ‘direct a sale’ of the property on terms as it thinks fit
Palk v Mortgage Services Funding plc (1993)
What are the 2 pre-conditions for the mortgagee to sell the mortgaged property?
-s. 101 LPA 1925: Power of sale
Mortgage must be by deed
Money must be due
There cannot be any express provisions precluding sale
-s. 103 LPA 1925: Power is exercisable Notice of repayment + 3 moths of arrear or 2 months of arrears or other breach of terms
Effect of sale by mortgagee when Power has not arisen?
- Sale transfers mortgage only
Effect of sale where Power has arisen but not exercisable?
- Title transfer free of mortgage
- Purchaser is unaffected unless he has knowledge
- Purchaser has no duty to find out if power is exercisable (Bailey v Barnes (1894))
- Mortgagor may claim damages under s.104(2)
What is the effect of a proper sale by the mortgagee?
- Destroys mortgagor’s equity of redemption
How are the proceeds of the sale dealt with?
- Mortgagee holds the money on trust
- s. 105 applies (in this order)
1) Defray legitimate costs and expenses of the sale
2) Discharge of outstanding mortgage debt
3) Pay any surplus to any other mortgage and/or the mortgagor
s. 105 LPA 1925?
-Determines how the proceeds of a sale is distributed.
What are the Mortgagee’s duties when it sells?
- Can act in its own interests (Good Faith)
- Must take reasonable care in determining the true market price (conduct of Sale)
- If fails, liable to make up the deficit
Mortgagee’s duty to take reasonable steps to obtain fair market price case?
Cuckmere Brick Co Ltd v Mutual Finance (1971)
Duty to achieve market price at the time of the sale by the mortgagee case?
-Do not need to wait for prices to rise
Silven Properties v RBS (2004)
Determining timing and method of sale case?
- Up to Mortgagee
- China & South Sea Bank (1990)
Can Mortgagee sell the property to himself?
No, Difficult to be legitimate
Can the mortgagee sell to an associate or company in which he is interested in?
-Yes
-Onus is on mortgagor to establish that he acted in good fairly and got the best price he could
Tse Kwong Lam v Wong Chit Sen (1983)
United Bank of Kuwait v Sahib (1996) Principle?
- Deposit of title deeds is no longer enough to create an equitable lease
- s. 2 LPA 1989 must be complied with
Reeve v Lisle (1902) Facts & Principle?
Facts: Ship had been mortgaged 12 days later, mortgagee was granted the option to purchase it Not Part of initial mortgage Held: - Not a clog Separate from mortgage
Principle:
- Second Document created after the original contract is not a Clog
Fairclough v Swan Brewery Ltd Issue
o Rather than a clog on redemption might including a term long postponing mortgagor’s right to redeem be seen an agreed commercial trade-off for favourable terms – such as lower interest rate?
Jones v Morgan & Reeve v Lisle?
Jones v Morgan Contradicted the rule in Reeve v Lisle
- Rules was that the option was not a clog if created after the initial contract
- Jones v Morgan found that the option was a clog because it was not independent from the initial contract
Mortgagee Powers Cases/ Statutes ?
Possession Action Equity - Quennell v Maltby Statute - Horsham v Clark - Norgan - Bank of Scotland v Zinda - National Privincial Bank v Lloyd - Palk - White v City London Brewery
Power of Sale 2 Precondition - Bailey v Barnes Duties - China v South Sea Bank v Tan Soon Gin - Cuckmire v Brick - Halifax v Corbett - Tse Kwong Lamb - After Sale - s. 105 Mortgagor sells property - Krausz
Mortgagor’s Rights/Protection?
Statutory Protection
- Consumer Credit Act 1974
- s. 36 AJA 1970 & 1973
- Horsham v Clark
- Norgan
Challenging Interest Rates
- Paragon finance v Nash (Lord Dyson)
- Dabrah
- Multiservice Bookbinding v Marden
Equity of Redemption
- Right to Sell/ Second mortgage
- Right to Redeem (Clogs)
- Right to get property back in original State
- Noakes v Rice
Clogs Term permitting purchase - Warborough v Garmite - Jones v Morgan - Samuel v Jarrah - Reeve v Lisle
term restricting redemption
- Fairclough v Swan Brewery
- Knightsbridge v Byrne
Collateral Advantage
- Noakes v Rice
- Bradley v Carritt
- New Patagonia Meat
- Biggs v Hoddinott
- Esso v Marden (Restraint of Trade Doctrine)
Equity of Redemption cases?
Equity of Redemption
- Right to Sell/ Second mortgage
- Right to Redeem (Clogs)
- Right to get property back in original State
- Noakes v Rice
Clogs Term permitting purchase - Warborough v Garmite - Jones v Morgan - Samuel v Jarrah - Reeve v Lisle
term restricting redemption
- Fairclough v Swan Brewery
- Knightsbridge v Byrne
Collateral Advantage
- Noakes v Rice
- Bradley v Carritt
- New Patagonia Meat
- Biggs v Hoddinott
- Esso v Marden (Restraint of Trade Doctrine)
Statutory Protection of Mortgagor’s rights?
Challenging interest rates?
Statutory Protection
- Consumer Credit Act 1974
- s. 36 AJA 1970 & 1973
- Horsham v Clark
- Norgan
Challenging Interest Rates
- Paragon finance v Nash (Lord Dyson)
- Dabrah
- Multiservice Bookbinding v Marden
Power of Sale cases?
Power of Sale 2 Precondition - Bailey v Barnes Duties - China v South Sea Bank v Tan Soon Gin - Cuckmire v Brick - Halifax v Corbett - Tse Kwong Lamb - After Sale - s. 105 Mortgagor sells property - Krausz
