MORTGAGES Flashcards
What Is a Mortgage?
A mortgage (charge) is granted to a lender by a landowner in return for the loan of money. The land acts as security for the
loan.
‘mortgagor’
borrower
‘mortgagee’.
Lender
Legal Mortgage
A legal mortgage must be made by deed. This means the mortgage agreement must make it clear on its face that it is a deed, be signed by the mortgagor/borrower, be attested (witnessed) and delivered (usually by dating the document).
Equitable Mortgages
An equitable mortgage may be of either a legal estate or an equitable interest
A Mortgage Expressed to Take Effect in Equity Only
The parties can agree that an equitable mortgage will be suf-fcient for their purposes and will state that it is to take efect
in equity only. This might be suitable if the loan is only to be for a short time. The charge must be in writing and signed by the mortgagor or his agent.
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Equitable Mortgages can be created in one of the following ways:
a.A Mortgage Expressed to Take Effect in Equity Only
b.By a Contract to Create a Legal Mortgage
c. Where Mortgagor Owns Equitable Interest Only
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By a Contract to Create a Legal Mortgage
- Any contract to create a legal mortgage will be regarded as giving rise to an equitable mortgage from the date of the contract.
- This contract itself must comply with the requirements for a contract for land. \
- Such a contract can arise because the parties have tried to enter into a legal mortgage but it is defective in some way. An unsuccess-ful attempt to create a legal mortgage will take efect in equity.
Where Mortgagor Owns Equitable Interest Only
Generally, if the mortgagor/borrower holds only an equitable interest, an equitable mortgage is all that can be created. This must be created in a writing signed by the mortgagor.
Legal Mortgages of Registered Land
- A legal mortgage of registered land is a registrable disposition which must be completed by registration if the mortgag-ee/lender is to be able to exercise the power of sale.
- Once registered, the mortgage has priority over competing interests unless they are protected on the register or are overriding interests.
Equitable Mortgages of Registered Land
Generally, equitable mortgages of registered land are protected by placing a notice on the property’s register of title.
Legal Mortgage of Unregistered land
- If the land is unregistered, a mortgagee/lender with a first legal mortgage is protected, as they will have requiredthe mortgagor/borrower to have deposited the title deedswith them. (The first legal mortgage is the mortgage which takes priority over any other borrowing that is secured by
the property; if the property is sold, the first mortgage will be paid of frst.) - Any legal mortgage which is not protected by the deposit of the title deeds must be protected by the registration of a puisne mortgage (a class C(i) land charge).
- Bear in mind that since 1990, the grant of a frst legal mort-gage over unregistered land would trigger registration of the freehold.
Equitable Mortgage of Unregistered land
If the mortgage is an equitable mortgage of the legal estate not protected by deposit of the title deeds (whether a frst or subsequent mortgage), it should be protected by registration as a class C(iii) land charge. If the mortgage is an equitable mortgage of an equitable interest (for example, a benefcia-ry’s interest under a trust of land), the mortgagee should give notice to the trustees.
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RIGHTS OFTHE MORTGAGOR
- The Right to Redeem
- Option to Purchase
- Collateral Advantage
- Unconscionable Terms
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The Right to Redeem
- The right to redeem the property means the mortgagor/borrower has a right to pay of the loan in full and regain all rights over the property from the mortgagee/lender.
- The loan agreement will include a redemption date, which is the ear-liest date upon which the loan can be repaid in full and the property redeemed. This will usually be 6 months after the start of the mortgage.
- A term postponing the right to redeem will be void if it renders the right to redeem illusory.
EXAMPLE
A publican enters into a mortgage agreement with a brewery to fund the purchase of a 20-year lease of a pub. The mortgage agreement postpones the right of redemption for 19 years, meaning the publican cannot regain full property rights until there is only one year remaining on the lease.
This renders the right to redeem illusory, as almost all the value of the estate has gone and is likely to be void.
redemption date vs. repayment period
The redemption date is not to be confused with the repayment period; the redemption date is the earliest date upon which the mortgage can be paid of in full, whereas the repayment period is the longest time that can be taken to pay of the mortgage in full. Any clause attempting to exclude the right to redeem entirely will be void.
Option to Purchase
- A clause within a mortgage agreement that purports to give the mortgagee/lender the right to purchase the mortgaged estate will be void. It is fundamentally at odds with the mort gagor/borrower’s right to redeem.
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Collateral Advantage
- Sometimes a mortgage agreement will give the mortgagee/lender an additional advantage aside from the repayment of the loan. Typically, this might be a solus tie (that is, an agreement to buy only the mortgagee’s product)
- Collateral advantages are not necessarily void, but they must not clog or fetter the borrower’s right to redeem the property. This means that a collateral advantage will usually be void if it extends beyond the date of redemption.
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Unconscionable Terms
- The court will also void a mortgage or a term in a mortgageif it is held to be unconscionable. Unconscionable means morally reprehensible, or improper and unreasonable and the stronger party (that is, the lender) imposing terms that affect the court’s conscience.
- The courts would consider all the circumstances of the case, the extent of the imbalance of bargaining powers between the parties, and the manner in which the term was imposed to determine whether a clause is unconscionable.
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PROTECTION OFTHIRD PARTIES WITH AN INTEREST IN LAND
- interests of tenants
- interests of co-owners
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Tenancies Granted Before the Mortgage Was Created
Legal Tenancy of Unregistered Land
- A legal tenancy of unregistered land will bind the mort-gagee.
- If the land is registered and the tenancy** does not exceed seven years**, it will be an overriding interest and the mortgagee/lender will be bound by it.
- If the tenancy is for more than seven years, the lease should be registered with its own independent title. If this is not done, the lease will not be treated as an overriding interest unless and until the tenant goes into occupation.
Tenancies Granted Before the Mortgage Was
Created
Equitable Tenancy of Unregistered Land
1.An equitable tenancy of unregistered land must be protected as an estate contract by the registration of a class C(iv) estate contract. If this is not done, it will be void against a purchaser of the legal estate for money or money’s worth (this defnition includes a mortgagee).
2. Once the tenant goes into possession and pays rent, a court would normally infer a periodic tenancy, which is a legal tenancy, and this will bind the mortgagee.
Tenancies Granted Before the Mortgage Was
Created
Equitable Tenancy of Registered Land
An equitable tenancy of registered land must be protected by a notice on the registered title. Once the tenant goes itno occupation, their interest would then override taht of the mortgageee/lender as an interest of a person in actual possesssion.
Tenancies Granted After Mortgage Created
The mortgage deed usually prohibits the creation of tenancies without the lender’s consent. The mortgagee/lender will not be bound by an unauthorised tenancy.
Occupiers with an Interest in the Land
If the property is owned in the name of one party but there is someone else living at the property and who has an interest in the property (typically, a spouse or partner who has contributed to the purchase price), a court may be willing to allow the non-owning occupier to stay in oc-
cupation of the property, thus defeating the mortgagee’s ability to repossess.
cMORTGAGEE’S REMEDIES TO ENFORCE THEIR SECURITY
legal mortgage
- sue for debt
- take possession
- forclose
- sell
- Right to Appoint Receiver as Agent of Mortgagor
take possession
legal mortgage
After the borrower defaults, although the mortgagee/lender may obtain possession at any time, if the mortgaged land includes a dwelling, possession can be sought only through the courts.
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forclose
legal mortgage
- Foreclosure is the process by which the right to redeem is extinguished and the mortgagee becomes the owner of the property.
- The right to foreclose does not arise until after the contractual date for repayment of the mortgage has passed.
- Foreclosure takes place by a court order that transfers the legal estate from the borrower to the lender.
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sell
legal mortgage
- A legal mortgagee has the power to sell the mortgaged property without the need to apply to a court, provided the mortgage was created by deed and the contractual date set to redeem the mortgage has passed.
- However, the power of sale becomes exercisable only if one or more of the following is satisfed:
*Interest payments are more than two months in arrears; or
*There has been a written request for repayment of thecapital and three months have passed without payment; or
*There is a breach of some other term of the mortgage (for example, the mortgagee may have failed to keep the property insured).
If one or more of the conditions is met, the right to sell arises automatically. The mortgagee will probably obtain posses-sion before selling to ensure that they can sell with vacant possession.
effect of sale
legal mortgage
A sale by a mortgagee under a power of sale is subject to any prior mortgages but will be free of any estates or interests over which the mortgagee itself has priority.
The proceeds of sale are held by the selling mortgagee on trust, and the money must be used in a strict order
Right to Appoint Receiver as Agent of Mortgagor
legal mortgage
A receiver is appointed and acts as the agent of the mortgagor. As such the receiver can manage or sell the mortgaged property.
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Equitable Mortgages
An equitable mortgagee has the following rights:
*To sue for the debt—as above
*To take possession—as above
*To foreclose—as above
*To sell—an equitable mortgagee normally has the power of sale but does not have any statutory power to convey or transfer the legal estate.
*Right to appoint receiver—this right arises if the mort-gage was made by deed. Otherwise an application can be made to the court for the appointment of a receiver.
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Priority
The order of priority is determined depending on a number of factors:
*What interests are mortgaged—that is, whether the mort-gage is of the legal estate or an equitable interest;
*If it is a mortgage of a legal estate, whether the title to the land is registered or unregistered;
*Whether the mortgage itself is legal or equitable; and
*Where the mortgage depends for its protection on some type of registration, whether it has been protected.
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Priority
Legal Mortgage of Registered Legal Estate
- Provided that there is nothing on the register of title to the contrary, when a legal mortgage is entered on the register of title, it will have priority over any interest whose priority is not protected when the mortgage is registered.
- The registered mortgage will, therefore, have priority over all later mortgages. If there is a mortgage registered earlier, this will have priority.
- An overriding interest will also have priority if it existed before the mort-gage is registered.
Equitable Mortgage of Registered Legal Estate
If there is an equitable mortgage of a registered legal es-tate, priority will depend on whether it has been protect-ed in the appropriate way. Protection of most equitable mortgages will be by notice on the register of title. When this has been done, the equitable mortgage will have priority over any later dealing with the legal estate, even later legal mortgages.
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Priority
Mortgage of an Unregistered Legal Estate
- If the mort-gage is of a legal estate, the legal mortgage protected by deposit of the title deeds with that mortgagee will have priority over all other mortgages.
- The priority of all other mortgages of unregistered legal estates (that is, those where the mortgagee does not hold the title deeds) depends on the date on which they are registered as a land charge.
*Any legal mortgage that is not protected by the deposit of the title deeds should be protected by
registration as a class C(i) land charge—a puisne mortgage.
*An equitable mortgage of a legal estate should be registered as a class C(iii) land charge.
*Mortgages of estates registered at the Land Charges Department rank according to their date of registra-tion.
PriorityWhere Equitable Interest Is Being
Mortgaged
The rules for priority of an equitable interest against another equitable interest are the same whether the title affected is registered or unregistered.
Generally, the rule is that first in time takes priority.
Postponement
Two or more lenders may agree between themselves to vary the priority of their respective charges. The charge which
loses priority is said to be ‘postponed’ to the earlier charge.
As the priority of registered charges depends on the order
in which the mortgages appear in the Charges Register, any postponement made by deed must be refected by a register entry.
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Further Advances
- A charge may secure not only the present sum lent, but also any further advances lent. There are circumstances where further advances will be added to the original mortgage so as to be secured. This will have the effect of ‘using up’ the equity in the property which may be to the detriment of sub-sequent lenders which registered charges.
- Second and sub-sequent mortgagees of unregistered land need, therefore, to protect their interests by registering a C(i) land charge.
- Failure to do so will render the mortgage void against a pur-chaser of any interest in land for valuable consideration.
