Mortgages

Question 1

What is the fundamental nature of a mortgage, and how is it typically misunderstood?

Answer 1

A mortgage is often misunderstood as the loan itself, but it is actually the security interest provided by the borrower over the property in favor of the lender. The lender provides a loan to help the borrower purchase the property, and in return, the borrower creates a mortgage over the property. The borrower retains legal ownership of the property (either freehold or leasehold), but the mortgage gives the lender certain rights over the property until the loan is repaid.

Question 2

How is a mortgage capable of being a legal interest in land, and what legal provision governs this?

Answer 2

A mortgage is capable of being a legal interest in land as outlined in section 1(2)(c) of the Law of Property Act (LPA) 1925. It is defined as a charge by way of legal mortgage. If the formal requirements to create a legal mortgage are not met, equity can intervene and recognize an equitable mortgage, as established in the case Walsh v Lonsdale. Legal and equitable mortgages provide lenders with different levels of protection and enforcement powers.

Question 3

What are the formalities required for creating a legal mortgage, and what happens if these formalities are not followed?

Answer 3

To create a legal mortgage, a deed must be executed in accordance with s 52(1) of the Law of Property Act 1925. This deed must also satisfy the requirements set out in s 1 of the Law of Property (Miscellaneous Provisions) Act 1989, including being signed, witnessed, and delivered as a deed. If these formalities are not adhered to, equity may recognize the mortgage as an equitable mortgage, allowing the lender some protections, but not as strong as with a legal mortgage

Question 4

What remedies are available to a lender when enforcing a mortgage, and which remedies bring the mortgage to an end?

Answer 4

A lender has several remedies to enforce a mortgage, including:

• Possession: Taking physical possession of the property, which is often a precursor to other remedies.
• Power of sale: Selling the property to recover the loan, which can bring the mortgage to an end.
• Debt action: Suing the borrower for the outstanding debt.
• Appointing a receiver: Assigning someone to manage the property and collect income to pay off the debt.
• Foreclosure: The lender takes ownership of the property, extinguishing the borrower’s right of redemption, which also brings the mortgage to an end.
  Only the power of sale and foreclosure can fully extinguish the mortgage.

Question 5

What is the lender’s right to possession, and under what circumstances can it be exercised?

Answer 5

The lender has the right to take possession of the property, even without the borrower being in default, as established in Four Maids Ltd v Dudley Marshall (Properties) Ltd [1957].

Possession can mean either physically taking over the property (by removing the borrower) or directing tenants to pay rent to the lender if the property is let. However, in practice, lenders usually only seek possession when the borrower is in default. Additionally, under s 6 of the Criminal Law Act 1977, the lender cannot use or threaten violence when retaking possession.

Question 6

What legal protections are available to borrowers facing possession proceedings, and how can these protections be applied?

Answer 6

Borrowers are protected by the pre-action protocol for residential mortgages, which promotes dialogue between the lender and borrower to resolve arrears and avoid possession where possible.

Additionally, under s 36 of the Administration of Justice Act (AJA) 1970, the borrower can ask the court to adjourn possession proceedings, suspend execution, or postpone the date for possession, provided the borrower can demonstrate they will be able to pay the mortgage arrears within a reasonable period. The reasonable period has been interpreted to include the entire remaining term of the mortgage.

Question 7

What is the power of sale, and what conditions must be met before a lender can exercise it?

Answer 7

The power of sale allows the lender to sell the mortgaged property to recover the loan amount. For the lender to exercise this power, three conditions must be met:

1. The power must exist: This can be expressly stated in the mortgage deed or implied under s 101 of the LPA 1925 unless explicitly excluded. The power of sale becomes exercisable if the borrower fails to pay two months of mortgage payments.
2. The power must have arisen: This occurs when the mortgage money is due, typically after the legal date of redemption has passed( usually one month into the mortgage term), or when an instalment mortgage payment is overdue.
3. The power must be exercisable: This happens if the lender has given notice to the borrower to repay, and three months have passed without payment, or if interest is two months in arrears, or if the borrower breaches another term of the mortgage.

Question 8

What duties does a lender have when selling a property under the power of sale, and what happens if the lender fails to fulfill these duties?

Answer 8

When exercising the power of sale, the lender has a duty in equity to act in good faith and take reasonable care to obtain the true market value of the property. The lender must advertise the property properly and avoid selling at an artificially low price. If the lender fails to obtain the true market value, they must account to the borrower for the shortfall.

Additionally, any excess proceeds from the sale, after paying off the lender’s mortgage and expenses, must be returned to the borrower or anyone else with an interest in the equity of redemption.

Question 9

What happens to the buyer’s ownership when a lender exercises the power of sale under a mortgage?

Answer 9

When a lender exercises the power of sale, the buyer of the property acquires:

• The entire estate of the borrower.
• The property is free of any estates or interests, including other mortgages, over which the selling lender had priority.
• The buyer takes the property subject to any estates or interests that had priority over the selling lender.

This is governed by s 104 of the Law of Property Act (LPA) 1925.

Question 10

How must the proceeds of a sale by a lender be distributed, according to s 105 LPA 1925?

Answer 10

The proceeds of sale must be distributed as follows:

1. Redeeming Prior Mortgages: The costs of redeeming any mortgages with priority over the selling lender’s mortgage.
2. Expenses of Sale: The lender’s costs of conducting the sale, including any legal and administrative fees.
3. Repayment of the Lender’s Mortgage: The outstanding loan amount that the borrower owes the selling lender.
4. Balance to the Equity of Redemption: Any remaining balance must be distributed to the person(s) entitled to the equity of redemption, such as the borrower or any subsequent mortgagees.

Question 11

What is a debt action, and when can it be used by a lender after exercising the power of sale?

Answer 11

A debt action is a legal remedy where the lender sues the borrower to recover the debt owed under the mortgage. It is based on the borrower’s covenant to pay. The legal date for redemption must have passed before the lender can take this action. Under the Limitation Act 1980:

• The lender has six years to recover any unpaid interest.
• The lender has twelve years to recover the capital debt.
  If the proceeds of the sale are insufficient to cover the debt (i.e., negative equity), the lender can pursue the borrower for the shortfall through a debt action.

Question 12

What conditions must be satisfied for a lender to appoint a receiver, and what is the role of a receiver in the context of a mortgage?

Answer 12

A lender can appoint a receiver when the property is generating income (e.g., rental property) and the conditions for exercising the power of sale are met. These conditions are:

1. The power must exist.
2. The power must have arisen.
3. The power must be exercisable (under s 109(1) LPA 1925).

The receiver is appointed in writing and is responsible for collecting and managing income from the property. This income is applied to outgoings, prior mortgage interest, insurance, repair costs, the current mortgage interest and capital, and any remaining balance is returned to the borrower.

Question 13

What specific duties does a receiver have when managing the property under s 109 LPA 1925, and how do these duties affect the lender and borrower?

Answer 13

A receiver has several key duties, which apply to both the lender and the borrower:

• No Conflict of Interest: The receiver must not let their personal interests conflict with their role, meaning they cannot purchase the mortgaged property in a personal capacity.
• Good Faith: The receiver must act in good faith throughout their appointment.
• Reasonable Competence: The receiver must manage the property competently, taking actions appropriate to the property type (e.g., securing trade discounts on pig feed if managing a pig farm).
• Care to Obtain True Market Value: If the receiver has the power to sell, they must take reasonable care to obtain the true market value of the property.
  If the receiver’s duties conflict with the borrower’s interests, the receiver may prioritize the lender’s interests.

Question 14

What is the legal status of a receiver in relation to the borrower, and why is this significant for lenders?

Answer 14

A receiver is considered the agent of the borrower under s 109(2) LPA 1925. This means that the borrower, not the lender, is liable for the receiver’s actions. The practical effect is that if the receiver makes mistakes or mishandles the property, the borrower has no recourse against the lender. This is beneficial for the lender as they escape the strict duties they would have if they took possession of the property directly. Appointing a receiver is therefore often a more attractive option for the lender.

Question 15

What is foreclosure in the context of mortgages, and what are the stages involved in the foreclosure process?

Answer 15

Foreclosure is a legal remedy that allows a lender to take ownership of the mortgaged property and extinguish the borrower’s equity of redemption once the legal date for redemption has passed. The process involves two stages:

1. Foreclosure Nisi: The court orders the preparation of accounts to determine the amount owed, and the borrower is given a period (usually six months) to repay.
2. Foreclosure Absolute: If the borrower does not repay within the specified period, the court makes a final order, vesting full ownership of the property in the lender and extinguishing the borrower’s right to redeem the property.
   Once foreclosure absolute is granted, the borrower loses all rights to the property, even if it is worth more than the debt owed.

Question 16

How are borrowers protected from the harsh effects of foreclosure, and what remedies are available to them?

Answer 16

Borrowers are protected from the draconian effects of foreclosure through several legal mechanisms:

1. Court’s Discretion: The court has the discretion to reopen foreclosure proceedings in exceptional circumstances, even after foreclosure absolute has been granted.
2. Adjournment under AJA 1970: Where the property is a dwelling house, the borrower can apply to adjourn the foreclosure proceedings under the Administration of Justice Act (AJA) 1970.
3. Judicial Sale under s 91(2) LPA 1925: The borrower (or any other person with an interest in the equity of redemption, such as a subsequent mortgagee) can apply for a judicial sale. This preserves the borrower’s right to any surplus proceeds from the sale of the property.

Question 17

What is required to create a legal mortgage over a legal estate in land?

Answer 17

A legal mortgage over a legal estate in land must be created by a deed. If the document does not meet deed requirements, equity may recognize an equitable mortgage under the principle in Walsh v Lonsdale.

Question 18

How can a mortgage be created over an equitable interest, and what statutory provision governs this?

Answer 18

A mortgage can be created over an equitable interest if it complies with s 53(1) LPA 1925. For example, a co-owner of land may mortgage their equitable interest in a trust by adhering to the formalities set out in this statute.

Question 19

How is a first legal mortgage protected in unregistered land, and what impact does this protection have?

Answer 19

In unregistered land, a first legal mortgage is protected by the deposit of title deeds with the lender under s 85(1) LPA 1925. This protection makes the mortgage binding against the whole world. Furthermore, the creation of a first mortgage over unregistered land triggers compulsory first registration of the title to the land (s 4 LRA 2002).

Question 20

What is a puisne mortgage in unregistered land, and how is it protected?

Answer 20

A puisne mortgage is a legal mortgage over unregistered land that is not protected by the deposit of deeds (usually a second or subsequent mortgage). To ensure its enforceability, it must be registered as a Class C(i) Land Charge. Registration of the C(i) Land Charge gives actual notice of the mortgage interest from the date of registration, binding future buyers.

Question 21

How is a mortgage created over registered land protected, and what determines the priority of multiple mortgages?

Answer 21

A mortgage over registered land is a registrable disposition under s 27(2)(f) LRA 2002 and becomes a legal mortgage only once it is entered into the charges register. If multiple charges are registered, their priority is based on the order of registration in the charges register (s 48 LRA 2002), rather than the date of creation, ensuring the first-registered mortgage has the highest priority.

Question 22

What should a lender consider regarding third-party interests when exercising the power of sale over a mortgaged property in registered land?

Answer 22

When exercising the power of sale, a lender must determine whether third-party interests are binding on them. This depends on:

1. If the interest was created before the mortgage registration, the lender must verify if the interest is binding.
   2. If the interest was created after the mortgage registration, it generally does not bind the lender unless the lender explicitly consented to its creation (e.g., granting a lease).

Question 23

Under what conditions will a pre-existing interest bind a lender in registered land, according to s 29 LRA 2002?

Answer 23

A pre-existing interest will bind a lender if it is:

• A registered charge;
• The subject of a notice in the register; or
• An overriding interest as per Sch 3, provided it was created prior to the mortgage’s completion, not the registration date.

Question 24

How does actual occupation protect a beneficial interest under a trust in relation to a mortgage, and why might this protection fail?

Answer 24

A beneficial interest under a trust arising from a contribution to the purchase price is protected by actual occupation under Sch 3, para 2, provided this occupation existed before the mortgage’s completion. However, if the mortgage funds are used to acquire the property, the beneficial owner typically occupies after the mortgage’s creation, rendering their interest non-binding on the lender.