Mortgages

Question 1

what is a mortgage?

Answer 1

(Or charge) interest over land granted as security for a loan. If the borrower fails to repay the loan, the lender can enforce its security

in other words, a mortgage is a third party right over land, the borrower retains legal estate but it is subject to the mortgage

Question 2

who is the mortgagor?

Answer 2

(Or borrower) the owner of the estate in land borrowing a sum of money and giving the lender a mortgage as security for the loan

Question 3

who the mortgagee?

Answer 3

(Or lender) has the benefit of the mortgage enabling them to enforce their security

Question 4

can a mortgage be legal?

Answer 4

yes, because they are listed in s1(2) LPA 1925. They are described as a ‘charge by way of legal mortgage’

Question 5

what is necessary for the mortgage to be legal?

Answer 5

it must be made by deed which meets the requirements of s1 LPMP 1989

Question 6

how can an equitable mortgage arise?

Answer 6

where a mortgage was created by contract (not deed) or the deed didn’t comply with the formalities, equity may step in and recognise an equitable mortgage if there is a signed written contract and the claimant has clean hands (Waldh v Lonsdale doctrine)

Question 7

what is an equitable mortgage?

Answer 7

An equitable mortgage arises where the formalities to create a legal mortgage have not been completed or where the asset being mortgaged is only an equitable interest

Question 7

when can a mortgage be taken over a equitable interest? Give an example.

Answer 7

a mortgage can be taken over an the equitable interest where the interest is signed and in writing i.e. co-owner of land wants to create a legal mortgage in relation to their equitable interest under a trust

Question 8

what remedies are available to the mortgagee?

Answer 8

o Possession
o Power of sale
o Debt action
o Appointing a receiver
o Foreclosure

Question 9

when can the lender take possession?

Answer 9

the borrower does not need to be in default for the lender to take possession

Question 10

what can possession involve?

Answer 10

either:
1. taking physical possession (ousting the borrowers); or
2. where the property is let, directing the tenants pay their rent to the lender (rather than the borrower)

Question 11

when is possession most commonly used?

Answer 11

alongside other remedies i.e. pre-cursor to exercising power of sale or appointment of a received

Question 12

when is a court order not required for possession?

Answer 12

if the lender can retake the property without use or threatening violence to anyone present on the property

in practice, a lender will not need a court order for possession when:
o the property is empty (if they are taking physical possession of the property); or
o they are directing tenants to pay the rent directly to the lender

Question 13

re: possession

what can the lender not do?

Answer 13

The lender cannot use or threaten violence towards anyone known to be present on the property in order to obtain possession

Question 14

re: possession

what is the first stage of possession of a residential property?

Answer 14

the lender must comply with the pre-action protocol

Question 15

re: possession

what can the borrower ask the court to do?

Answer 15

s36 AJA - the borrower can ask the court to exercise its discretion to:
o adjourn proceedings; or
o if a possession order is made, suspend execution or postpone the date for possession

Question 16

re: possession

when can the borrower ask a court to exercise its discretion under s36?

Answer 16

o the lender has started possession proceedings;
o the property includes a dwelling-house; and
o the borrower is likely within a reasonable period to pay any sums due under the mortgage (i.e. the arrears)

a reasonable period has been defined to include the full remaining period of the mortgage

Question 17

re: possession

when will the court exercise its discretion under s36?

Answer 17

the court will not exercise its discretion unless the borrow can provide detailed financial plan demonstrating that they can pay the ongoing payments and arrears as they fall due

Question 18

re: possession

if a mortgagee takes possession of a property, what can they do with the property?

Answer 18

o sell the property; or
o if it is producing income, use the property to secure repayment of the loan

Question 19

re: possession

if the mortgagee will use income from the property to secure repayment, what obligations are they under?

Answer 19

o they can only apply income for the amount under the mortgage (unless otherwise stated in the deed). Therefore, the mortgagee must account to the mortgagor for any excess profits made.
o the mortgagee must also account to the mortgagor for any monies the property should have made, but didn’t because of the mortgagee’s wilful default and neglect

for these reasons, lenders prefer to appoint a received in relation to an income-producing property

Question 20

when can a power of sale be exercises?

Answer 20

the power of sale can only be exercised if it exists, has arisen and has become exercisable.

Question 21

what is the effect of exercising the power of sale?

Answer 21

it brings an end to the mortgage; and

The buyer will take the whole estate free of any other estates and interests which the selling lender took priority over. However, the buyer will take estates and interests which the lender did not take priority over.

Question 22

re: power of sale & appointing a receiver

when will the power arise

Answer 22

the power will arise when the mortgage money is overdue i.e.:
o The legal date for redemption has passed; or
o Any instalment of the mortgage money has become due under an instalment mortgage

Question 22

re: power of sale & appointing a receiver

what is meant by ‘the power must exist’

Answer 22

This is either expressly stated in the mortgage deed or implied into every legal mortgage (provided that the power has not been excluded)

Question 23

re: power of sale & appointing a receiver

when will the power become exercisable

Answer 23

either the deed will set out when the power becomes exercisable or the lender will need to rely on one of the elements of s102 LPA 1925

Question 24

re: power of sale & appointing a receiver

what are the elements of s103 spa 1925?

Answer 24

o The lender has given the borrower notice to repay the loan amount (i.e. the entire amount) and the borrower has not paid the sum for 3 months since the notice; or

o Interest in arrears for two months after becoming due; or

o The borrower has breached a term of the mortgage (other than the covenant to pay the mortgage money or interest thereon)

Question 25

re: power of sale & appointing a receiver

what is the legal date of redemption?

Answer 25

The legal date of redemption is the date when a borrower is required to redeem a security. This is usually 1 month into the mortgage but the deed should specifically state this.

Question 26

re: power of sale

what are the lender’s duties on sale?

Answer 26

the lender must check that the power of sale has arisen and become exercisable

the lender must comply with their equitable duties owed to the borrower, i.e.:
o Act in good faith and not cheat borrowers (i.e. not hastily knocking down the price); and
o Take reasonable care to obtain the true market value of the property at the date of sale

Question 27

re: power of sale

what duty is imposed on the buyer?

Answer 27

the buyer only needs to check that the power of sale exists and has arisen (i.e. not that it is exercisable)

Question 27

re: power of sale

how and when can the property be sold?

Answer 27

the lender can choose i.e. auction, private sale

the lender can sell the property whenever. It is not obliged to wait for an increase in property values.

Question 28

re: power of sale

explain the borrower’s duty to ‘take reasonable care to obtain the true market value of the property at the date of sale’

Answer 28

 The lender is not under any obligation to delay sale to get a better price
 This duty will be satisfied so long as the lender has exposed the property to the market properly and fairly
 If the lender fails to obtain full value, they must pay the borrower (and all others with an interest in the equity of redemption) the difference
 The burden of proof is on the borrower to show that there has been a breach of the duty of care

Question 29

re: power of sale

give an example where it might be said the lender did not obtain full value

Answer 29

if the advert for the auction of the property left out a key detail which would affect the price the property would fetch i.e. planing permission

Question 30

re: power of sale

what position does the selling lender assume when the property is sold? What must they do under this position?

Answer 30

they become the trustees of the proceeds of sale and must distribute them in accordance with s105 LPA 1925 to pay:
o The costs of redeeming any prior mortgages (i.e. those with priority over the lenders);
o The lender’s expenses of sale;
o The lender’s own mortgage; and
o The balance (if any) to those entitled to the equity of redemption

Question 31

re: power of sale

in what order must the proceeds of sale be applied?

Answer 31

o The costs of redeeming any prior mortgages (i.e. those with priority over the lenders);
o The lender’s expenses of sale;
o The lender’s own mortgage; and
o The balance (if any) to those entitled to the equity of redemption

Question 32

when can the lender pursue a debt action?

Answer 32

the legal date of redemption must have passed before action can be taken

the lender should bring the claim within the relevant limitation periods

Question 32

re: debt action

what are the limitation periods?

Answer 32

o 6 years for recovery of interest
o 12 years for recovery of capital

Question 33

when can a debt action be pursued?

Answer 33

it could be a standalone action or might be used to recover a shortfall where another action has been taken (i.e. power of sale)

Question 34

what is negative equity?

Answer 34

Negative equity occurs when the value of a property is less than the remaining balance on the mortgage used to purchase it

Question 35

when is a lender likely to appoint a receiver?

Answer 35

where the property is producing income (i.e. let to tenants)

Question 36

when can a lender exercise the power to appoint a receiver?

Answer 36

the power must exist, have arisen and be exercisable

Question 37

who is the receiver and how are the appointed?

Answer 37

the lender who can decide whom the appoint but this must be done in writing

Question 38

in what order must the receiver apply income from the property?

Answer 38

o Outgoings on the property
o Interest on any prior mortgages
o Insurance, premiums, repair costs, own costs
o Interest on current mortgage
o Capital on the current mortgage
o Balance to the borrower

Question 38

what power does the receiver have?

Answer 38

to demand and receive income from the property

Question 39

in what capacity is the receiver acting? What is the effect of this?

Answer 39

The receiver is an agent of the borrower and so the borrower is responsible for the actions of the receiver.

This means that the borrower has no recourse to the lender for the acts or omissions of the receiver.

The lender therefore escapes the strict duty to account, which is why this is often a more attractive route than taking possession.

Question 40

to whom does the receiver owe a duty(ies) to?

Answer 40

o Primary duty > to the appointing lender (if there is a conflict between the interests of the lender and borrower the duty to the lender can be prioritised)
o The borrower
o Any person with an interest in the equity redemption

Question 41

what are the duties of the receiver?

Answer 41

o To ensure that there are no personal conflicting interests with their roles as a receiver i.e. a receiver cannot purchase the mortgage property in a personal capacity
o To act in good faith during their appointment
o To act with reasonable competence > this will depend on the nature of the property i.e. a receiver taking over a pig farm would be expected to negotiate usual trade discounts on pig feed
o To take reasonable care to obtain the true market value of the property at the date of sale (if they have this power)
o The receiver may take steps to increase the value of the property (but is not obliged to)

Question 42

can a receiver sell the property?

Answer 42

the LPA does not grant the receiver power to sell the property, but this is possible if provided for in the deed between the mortgagee and mortgagor

Question 43

what is the effect of foreclosure?

Answer 43

it brings an end to the mortgage

Question 44

when is foreclosure available?

Answer 44

This is available by application to the High Court once the legal date for redemption has passed.

Question 45

what is the process of foreclosure?

Answer 45

This is a two stage process:
o Foreclosure Nisi > directing the preparation of accounts of what is owed. The borrower is usually then given 6 months to pay;
o Foreclosure Absolute > title is vested in the lender and extinguishing the equity of redemption held by the borrower

Question 46

what is equity of redemption? Explain this in relation to power of sale for foreclosure.

Answer 46

The “equity of redemption” is the borrower’s legal right to reclaim their property by paying off the mortgage debt in full, even if the borrower has defaulted.

This means, if the power of sale is exercised, the borrower is entitled to any surplus from the sale.

This right exists up until the foreclosure process is completed. However, once foreclosure is complete, this right is extinguished and so the borrower is not entitled to any surplus. The lender can keep the suplus

Question 46

when the power of sale is exercised, if there is excess money after the mortgage is paid, who is this payable to?

Answer 46

the borrower

Question 47

where the lender takes action by foreclosure, what happens if there is a surplus or negative equity?

Answer 47

if there is a surplus, the lender is entitled to keep the excess.

if there is negative equity (i.e. not enough money in the property to repay the mortgage), the borrower is released from liability and not responsible to pay the shortfall. This loss would be borne by the lender.

Question 48

what protections are offered to the borrower in the foreclosure process?

Answer 48

o The court has discretion to re-open foreclosure proceedings in exceptional circumstances, even after the foreclosure absolute order; or

o If the property is a dwelling house, they can ask for foreclosure to be adjourned (this would require an application under AJA 1970); or

o An application for judicial sale under s91(2) LPA 1925. This is a court-ordered sale to satisfy the debt, the effect is that the equity of redemption would be preserved. This can be made by anyone with an interest.