Mortgages Flashcards
What is a mortgage?
Lender provides money by way of loan and borrower provides security for the loan, by creating a mortgage over the land in favour of the lender
Borrower continues to hold legal estate, but subject to mortgage
It is a charge/third party right over land
Lenders can enforce the security against the borrower if there is default
Who is the mortgagor and who is the mortgagee?
Mortgagor – borrower giving lender the mortgage
Mortgagee – lender who has the benefit of the mortgage
How must a legal mortgage be created?
Deed required to create a legal mortgage
What are the lender’s main powers in relation to enforcing a mortgage?
Possession
Exercising a power of sale – will bring mortgage to an end
Debt action
Appoint a receiver
Exercising the power of foreclosure – will bring mortgage to an end
Provide some details on the lender’s power of possession
- As soon as the mortgage is completed, lender has the right to take possession
- Possession can mean literal physical possession and ousting the borrowers or where the property is let out, directing that the tenants pay their rent directly to the lender and not the borrower
- No default necessary, but typically lenders only use if there is default
- Usually exercised before another remedy
How is possession achieved?
If the property is residential, a court order for possession is required + lender must communicate with borrower to try and agree a more manageable payment schedule
No court order needed if property empty
What protections does the borrower have in relation to possession?
- Lender cannot use or threaten violence to obtain possession
- Borrower can ask the court for help; to get an order to adjourn proceedings or postpone an order for sale
- Where the property produces income (commercial), lender can use income to pay debt owed, but:
i) Must account to borrower for sums more than that
ii) Manage the property with due diligence
What are the three key prerequisites before the power of sale can be used?
Power must exist, have arisen and be exercisable
1) Will exist if expressly stated in mortgage deed, but implied into every legal mortgage
2) To arise, there must be mortgage money due – legal date of redemption must have passed
- Usually expressed in mortgage deed as defined term, but is usually about a month into the mortgage term
3) To be exercisable, there must be a trigger, either expressly set out in mortgage deed or lender relies one of three default elements in LPA:
- Lender has given the borrower notice to repay the full loan amount and they haven’t done so for at least three months after notice
- Interest is in arrears for at least two months after becoming due
- Borrower has breached another mortgage term (insure property/keep in good repair etc)
What are the lender’s duties in relation to the power of sale?
Lender must act in good faith and not cheat borrowers – must advertise the property for sale
Lender must take reasonable care to obtain a true market value for property when sold, but not obliged to wait for increase in value of market
i) If they don’t get the true value, they must account for the difference to the borrower
What is the effect of exercising the power of sale?
Terminates the mortgage on sale
The selling lender is a trustee of the proceeds of sale and must distribute it in accordance with LPA rules:
- Pay any mortgages, including selling mortgagee’s mortgage
- Pay any other mortgages
- Pay balance to others
Provide some details on the lender’s power to pursue a debt action
- Lender can recover debt owed through court action
- Legal date of redemption must have passed before action can be taken (some amount due)
- Rules for interest and capital limitation
i) Lender has six years to start action to recover interest
ii) 12 years to recover capital outstanding
Provide some details on the lender’s power to appoint a receiver
- Can only be used where the property is used as a business
- Allows the receiver to manage the business’ income
- Power must exist, have arisen and be exercisable - same rules as power of sale
- Receiver must use income to pay outgoings on property first before interest and capital on current mortgage
- Duties to the borrower
i) They must act in good faith
ii) Act with reasonable competence
iii) Can take steps to increase property value, but is not obliged to
- The receiver is an agent of borrower, so borrower is solely responsible for acts of the receiver and borrower cannot complain to lender about the acts of receiver
Provide some details on the lender’s power of foreclosure
Apply to High Court - Two stages - if both passed, it removes the right of the borrower to repay the mortgage and removes the mortgage from the property
What is the effect of foreclosure?
Terminates mortgage and transfers property title to lender
If property is worth more than the sum owed, lenders are entitled to keep the surplus (they keep whole property)
If property worth less than sum owed, the borrower is released from liability for the balance (lender won’t foreclose in these circumstances)
