Mortgages

Question 1

What is a mortgage?

Answer 1

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

Question 2

What are the formalities for a valid mortgage to be created?

Answer 2

-Deed

-Registration

Question 3

How can an equitable mortgage be created and what are the requirements?

Answer 3

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

LPA 1925, s53(1)(c): such a mortgage need only be in writing and signed by the grantor in order to be validly created.

Question 4

How may a defective legal mortgage be regarded as an equitable mortgage?

Answer 4

If it complies with LP(MP)A 1989, s2.

Equity will recognise it as a ‘contract to grant a legal mortgage’ provided it is in writing, contains all the agreed terms and is signed by both parties.

Question 5

When is a mortgage considered to be fully discharged?

Answer 5

When all reference to it has been removed from the Charges Register.

Question 6

What is the equity of redemption?

Answer 6

The name given to the bundle of rights which the borrower has. They essentially protect the borrower from exploitation by the lender.

Question 7

What are the four basic rights of the equity of redemption?

Answer 7

1. The equitable right to redeem the loan
2. Protection from clauses which postpone or prevent redemption
3. Protection from clauses which give collateral advantages to the lender
4. Protection from unconscionable terms in mortgage deeds

Question 8

When does the equitable right to redeem arise?

Answer 8

A borrower’s equitable right to redeem arises the day after the legal redemption date.

Question 9

Will the Courts allow a clause which prevents redemption altogether, refer to Fairclough v Swan Brewery Co Ltd (1912)?

Answer 9

No, but a lender can postpone the date but there must be no clog or fetter on the equity of redemption.

Fairclough v Swan Brewery Co Ltd (1912): the C mortgaged the lease of his pub to the D. At the time of the mortgage the lease had 17.5 years to run and a clause in the mortgage postponed the legal date for redemption until 6 weeks before the lease expired. The borrower wished to redeem early and the Court held the postponement clause was a fetter. A lease with only 6 weeks left to run would be virtually worthless.

Question 10

Will an option for the lender to purchase the property be upheld?

Answer 10

If granted at the same time as the mortgage, such a term will normally be declared invalid.

If granted in a subsequent transaction, it may be upheld if independent of the mortgage.

Question 11

What is a collateral advantage and when will it be struck out?

Answer 11

When a contracting party uses their stronger bargaining position to get terms that are advantageous to them, often disproportionately so.

It will be struck out if it is unconscionable or repugnant to the equitable right to redeem.

Question 12

What is a solus tie and when will they be upheld?

Answer 12

A condition that the borrower must buy all its supplies from the lender. This is common with breweries or oil companies.

Generally, solus ties are upheld if they end within the mortgage term.

Question 13

What is an unconscionable term and when will the Courts interfere?

Answer 13

A contract term that is so unfair or oppressive that it is considered unconscionable by the Courts.

For Courts to interfere, the term in question must be more than simply ‘unfair’ or ‘unreasonable’.

Question 14

Describe the case of Cityland Holdings Ltd v Dabrah (1968) with regards to unconscionable terms.

Answer 14

The Court held the interest rate of 19% was an unconscionable term and was reduced to 7%, due to the clear imbalance of bargaining power between the parties. The tenant had limited means and was threatened with eviction, and the landlord had taken advantage of this when offering to lend the tenant money to buy the property.

Question 15

How do equitable mortgages rank in order of priority?

Answer 15

Equitable mortgages rank in order of creation (LRA 2002, s28). This is the basic rule of priority that applies to all equitable interests.

Question 16

How can an equitable mortgage be protected and what are the effects of protecting it?

Answer 16

An equitable mortgage can be protected by the entering of a notice on the charges register (LRA 2002, s32).

If protected, an equitable mortgage over registered land will take priority over a subsequent legal mortgage (LRA 2002, s29(1)). If not protected by a notice, it will not take priority over a subsequent legal mortgage.

Question 17

Describe the lender’s right to commence a debt action against the borrower.

Answer 17

Personal action against the borrower.

If the value of the mortgaged property is less than the outstanding mortgage debt, there is said to be negative equity and the lender may wish to pursue a personal debt action against the borrower for the shortfall in any sale proceeds.

The limitation period for a contractual debt is 12 years for capital and 6 years for interest.

Question 18

Describe the lender’s right of possession of the property.

Answer 18

A legal lender may wish to enforce its security by taking possession of the property as a precursor to sale. Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower.

This is a last resort for residential properties.

Question 19

Describe the lender’s right of sale of the property.

Answer 19

This is the strongest right which the lender can use. If exercised, the borrower loses all rights to the property and the sale proceeds are applied towards the outstanding debt. Any surplus is forwarded to the borrower.

Question 20

Describe the lender’s right to appoint a receiver.

Answer 20

A receiver acts as manager of the mortgaged property if the lender does not wish to take possession or to sell.

The receiver is deemed to be the borrower’s agent and is an administrator whose function is to get an income from the land and apply it towards the outstanding mortgage debt.

Question 21

Describe the lender’s right of foreclosure.

Answer 21

This is a historic way of enforcing a mortgage which is rarely used nowadays.

It allows a lender to take the mortgaged property in satisfaction of the debt, meaning the freehold will vest in the lender and the borrower will lose all its rights.

Question 22

When does a legal lender have the right to possess the mortgaged property?

Answer 22

A legal lender has a right to possess the mortgaged property from the outset-Four Maids v Dudley Marshall (1957).

This is in practice not exercised unless there is a breach of mortgage terms.

Question 23

How does the Criminal Law Act 1977, S6 limit the lender’s right to possess?

Answer 23

Makes it a criminal offence to use or threaten violence for the purpose of gaining entry to property. This means that exercising the right to repossess is risky unless the lender is certain that the property is unoccupied.

Question 24

How does the PAP for Possession Claims 2008 limit the lender’s right to possess?

Answer 24

Lenders should try to discuss the debt with the borrower and accept reasonable requests for a new payment plan. Taking possession of a residential property should be a last resort.

Question 25

How does the AJA 1970, S36 limit the lender’s right to possess?

Answer 25

This gives the Court the power to postpone possession or adjourn possession proceedings of partly or wholly residential property if all sums due can be paid within a reasonable period, subject to such conditions ‘as the court thinks fit’.

Question 26

When does the lender’s statutory power of sale under LPA 1925, S101 arise?

Answer 26

When the mortgage money has become due, LPA 1925, s101 (1)(i).

Question 27

When does the power of sale arise with a capital and interest repayment mortgage?

Answer 27

The power of sale arises as soon as one portion of capital is due.

Question 28

When will the lender’s statutory power of sale become exercisable?

Answer 28

If at least one of the following criteria applies:

1. Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted
2. Interest is unpaid and arrears for at least two months
3. There has been some breach of another mortgage provision such as a covenant to keep the property insured or in good repair

Question 29

What is the consequence if a lender sells the property after the power has arisen but before it is exercisable to an innocent purchaser?

Answer 29

The sale to the innocent purchaser will be valid but the lender will be liable in damages to the borrower.

Question 30

What is the lender’s basic motive when exercising the right to sell?

Answer 30

To recover the debt due, meaning the capital sum, interest and costs. It does not necessarily want to achieve the best price.

Question 31

What level/standard of care does the lender owe the borrower when exercising the right to sell?

Answer 31

-Reasonable care to obtain the true market value or proper price for the property

-Perfection as to price is not required

-Take expert advice as to the method of sale, marketing strategy and reserve price

-Unfettered discretion as to when to sell and can not be expected to delay in order to improve the property or wait for an upturn in the property market