Mortgages

Question 1

What is a mortgage?

Answer 1

A form of secured loan where the borrower (or mortgagor) grants the lender (the mortgagee) the right to take possession of their property if they default on the loan, and in return the borrower is in possession of the property.

Question 2

What is the difference between a mortgage before and after 1926?

Answer 2

Before 1926 a mortgage was described as a conveyance where the legal title was handed over to the mortgagee (Santley v Wilde). Post 1926 the mortgagee no longer has the legal title but instead holds a charge executed by deed (ss 85 and 87 LPA 1925) which gives the lender rights (possession and sale) as security for their loan.

Question 3

What is an equitable mortgage?

Answer 3

A mortgage that does not satisfy all the legal formalities ie no deed.

Question 4

How is an equitable mortgage created?

Answer 4

1. Following the formalities in s2 LP(MP)A 1989 ie written contract, signed by both parties and recording all the terms (United Bank of Kuwait plc v Sahib).
2. Following the formalities in s53(1)(c) LPA 1925 for the disposition of equitable interest ie in signed writing by the mortgagor at the time of disposition.

Question 5

According to De Serville v Argee Ltd what will not create an equitable mortgage?

Answer 5

An exchange of letters

Question 6

What type of mortgage cannot be created if the mortgagor has equitable title?

Answer 6

A legal mortgage

Question 7

Under the common law when did the mortgagor have to repay their loan? What is the date known as?

Answer 7

On the day specified in the mortgage deed. This is known as the legal date of redemption.

Question 8

What was the effect if the mortgagor did not repay the whole value of the loan on the legal date of redemption?

Answer 8

The borrower forfeited the entire mortgage estate.

Question 9

How did equity intervene with the harshness of the legal date of redemption?

Answer 9

Equity granted an ‘equitable right to redeem’ which allowed mortgagors to repay after the legal date of redemption

Question 10

How did Lord Parker summarise the equitable right to redeem in Kreglinger v New Patagonia Meat and Cold Storage Co?

Answer 10

“once a mortgage, always a mortgage”

Question 11

The equitable right to redeem is just one of the borrower’s equitable rights available in a mortgage. What is the name given to the sum total of the borrower’s equitable rights in a mortgage?

Answer 11

Equity of redemption

Question 12

What is the common understanding of ‘equity’ in a property?

Answer 12

The financial difference between the outstanding loan and the market value of the house.

Question 13

Why would a lender want to postpone the date of redemption?

Answer 13

To take advantage of interest or if they were evil to trap the borrower into defaulting on the loan.

Question 14

May mortgagees postpone the legal date of redemption?

Answer 14

Yes, but not if it is postponed perpetually (Toomes v Conset) or there is ‘clog or fetter’ or it is so far in the future the right to redeem is illusory.

Question 15

What two cases might we compare to help us understand when the right to redeem has been postponed too far in the future?

Answer 15

In Fairclough v Swan Brewery Co Ltd the date of redemption was six weeks before the end of a 17 and a half year lease. The court struck the clause down because by this point the lease would have minimal value and make the mortgage ‘irredeemable’.
By comparison, in Knightsbridge Estate Trust Ltd v Byrne the court upheld a date of redemption 40 years from the date of the loan because it was an arm’s length commercial transaction and gave a favourable rate of interest on a freehold property.

Question 16

Why would an option to purchase given to the lender be struck out by the court?

Answer 16

Because it could exclude or prevent the borrower from exercising their right to redeem.

Question 17

When may an option to purchase for the lender be allowed?

Answer 17

If it is a subsequent and independent contract from the mortgage (Reeve v Lisle)

Question 18

How did the court suggest determining whether an option to purchase for the lender was part of a mortgage or not in Warnborough Ltd v Garmite Ltd?

Answer 18

The court should look at the ‘substance’ of a transaction not the label given to it.

Question 19

How did the case of Brighton & Hove City Council v Audus confirm the principle in Warnborough Ltd v Garmite Ltd?

Answer 19

The court said even if a composite transaction includes a mortgage the court may determine it is not a mortgage deed, and so an option to purchase may stand.

Question 20

What fact in Warnborough Ltd v Garmite Ltd might lead you to think the option to purchase should have been declared void?

Answer 20

The option to purchase and mortgage were granted on the same day after the claimant sold the property to the defendant.

Question 21

Using the language of the courts when may a clause in a mortgage contract be struck down if it gives the mortgagee anything more than repayment plus interest ie collateral advantages?

Answer 21

If the collateral advantage is unconscionable, in the nature of a penalty, or if it is repugnant to the equitable right to redeem.

Question 22

Give an example of a collateral advantage.

Answer 22

A solus tie ie an agreement where the borrower will purchase and sell on the goods of the lender. This is common amongst petrol companies and breweries.

Question 23

Have courts upheld solus ties?

Answer 23

Yes, if they are not unconscionable and represent fair business (Biggs v Hoddinott), and don’t extend beyond the date of the mortgage (Noakes & Co Ltd v Rice) or wholly independent of the mortgage (Kreglinger v New Patagonia).

Question 24

What kind of collateral advantage extending beyond the date of the mortgage did the court uphold in Kreglinger v New Patagonia Meat and Cold Storage Co? Why?

Answer 24

The right to first refusal of all New Patagonia’s sheepskins for a certain period was upheld because the two parties were businesses of equal value and the mortgage deed and right to first refusal were independent even though they were part of the same document.

Question 25

Which case confirmed Kreglinger v New Patagonia Meat and Cold Storage Co?

Answer 25

Jones v Morgan

Question 26

What was the judgment in Jones v Morgan?

Answer 26

The collateral advantage giving the lender a half-share in the property was struck down as a clog or fetter on the equitable right to redemption.

Question 27

When may a collateral tie be struck out even if it wholly independent of a mortgage deed?

Answer 27

When it acts as a restraint on trade. In Esso Petroleum v Harpers Garage (Stourport) Ltd two solus ties - one 5 year, another 20 year - were respectively upheld and struck out.

Question 28

What was the collateral advantage in the case of Cityland & Property Holdings Ltd v Dabrah according to the court?

Answer 28

An unconscionable interest rate of 19% (which rose to 38% on default) where the parties were not of equal bargaining power.

Question 29

What caused the plaintiffs to argue the interest rates in Multiservice Bookbinding Ltd and Others v Marden was unconscionable? What was the court’s view?

Answer 29

The interest rate payable was index linked to the exchange rate with the Swiss franc. The British pound depreciated and instalments rose dramatically. The court held that this was just a hard bargain and could not be seen as unconscionable.

Question 30

What does the court understand as a penal rate of interest?

Answer 30

One that is not a genuine pre-estimate of the losses incurred by the lender as a result of the borrower’s default.

Question 31

Which authorities allow the court to strike down penal rates of interest?

Answer 31

Holles v Wyse and for certain mortgages the FSA Handbook

Question 32

What types of mortgages does the FSA under the Financial Services and Markets Act 2000 regulate?

Answer 32

First time residential mortgages

Question 33

What term was held to be unconscionable against the Consumer Credit Act 1975 in Falco Finance v Gough?

Answer 33

A 5% discount in the interest rate which lapsed if any payments were late. It was unconscionable because it was made impossible to make all payments on time and the difference between the two rates bore no relation to the losses the lenders incurred.

Question 34

What does the case of Paragon Finance v Nash say about variable interest rates? Were Paragon Finance acting unconscionably?

Answer 34

There is an implied term not to exercise the discretion for an improper purpose, arbitrarily or capriciously. The court found that Paragon Finance were not acting unconscionably in maintaining their interest rates 2-4% above market rate.

Question 35

Why was the rate of 21.6% in Davies v Directloans Ltd held to be fair?

Answer 35

Because at the time market rates were 17% and the borrower had a poor credit history.

Question 36

What has replaced the extortionate credit provision in the Consumer Credit Act 1974?

Answer 36

The ‘unfair relationship’ under the Consumer Credit Act 2006.

Question 37

What may we understand as an ‘unfair relationship’?

Answer 37

Unconscionable terms, lack of good faith and inequality of bargaining power.

Question 38

If the borrower has defaulted and there is another occupier can the mortgagee take possession of the property even where that occupier has not given express consent?

Answer 38

Yes, if the mortgagee pays two trustees (City of London BS v Flegg c/f William and Glynn’s Bank v Boland), or if the occupier has given implied consent (Bristol and West Building Society v Henning) and there has been no undue influence (RBS v Etridge).

Question 39

When may consent still result in a mortgage being set aside?

Answer 39

If it was obtained by undue influence

Question 40

In which case did Dillon LJ say the moral of the story for lenders to ensure their agreements were enforceable against occupiers was to have those third parties seek independent advice before signing?

Answer 40

Kingsnorth Trust v Bell

Question 41

Why was the mortgage upheld in Coldunell Ltd v Gallon even though the occupiers had not consented?

Answer 41

The lender had sent a letter to the defendant’s elderly parents directly, but the defendant had intercepted the letter and taken his parents to his solicitor to sign the mortgage. Unlike Kingsnorth the lender had not relied on the mortgagor as an agent to procure their signatures.

Question 42

What amounted to undue influence in Hewett v First Plus Financial Group?

Answer 42

The husband’s failure to disclose an extra-marital affair.