Mortgages

Question 1

How are equitable mortgages created? (1) Source of the interest.

Answer 1

(1) When the borrower only has an equitable interest in the land, provided the mortgage is in writing (s53(1)(c) LPA). Note, no protection under s29.

Question 2

How are equitable mortgages created? (2) Manner of creation at early stage.

Answer 2

(2) Where the borrower has a legal interest but fails to use a deed (s2 LPA, still needs writing). Note, no protection under s29.

Question 3

How are equitable mortgages created? (3) Manner of creation at later stage.

Answer 3

(3) Where the borrower uses a deed but does not register the charge (LRA 2002 s27). Note, no protection under s29.

Question 4

How are equitable mortgages created? (4) A remedy given for…?

Answer 4

Kinane v Alimany Mackie-Conteh: through the doctrine of proprietary estoppel when Mo promises Me there would be security and Me relies on this. Note, no protection under s29.

Question 5

Clogs & Fetters: definition of the doctrine

Answer 5

Santley v Wilde: mortgage is supposed to be to protect the mortgagee’s security, not unduly burden them. The doctrine strikes out any undue burdens on Mo’s right to redeem. This includes delaying right to redeem, restricting it, putting penalties on it.

Solus ties: where you can buy your goods (Kreglinger vv New Patagonia) might be severable.

Question 6

Clogs & Fetters: undue benefits to the mortgagee or interests in the property attached to the mortgage are also invalid.

Answer 6

Jones v Morgan: giving the mortgagor an equity for late repayment was struck out on this basis.

Question 7

Clogs & Fetters: exacting alternative or extraneous benefits are invalid.

Answer 7

Samuel v Jarrah: option to purchase invalid, aka solus ties.

Question 8

Unconscionability: grounds for setting aside a transaction on the basis of it being unfair.

Answer 8

Multiservice Bookbinding Ltd v Marden: the term must have been imposed in a morally reprehensible manner.

Question 9

Unconscionability: specific example of unconscionable term, and also policy balancing involved.

Answer 9

Cityland and Property v Dabrah: interest rate of 57% unconscionable and gouging. However, note the clash between high-risk lenders and high interests rates to recoup their losses.

Question 10

Unconscionability: using implied terms.

Answer 10

Paragon Finance v Nash: the corut may imply in a term stating that rates of interest would not be set dishonestly, improperly, or arbitrarily.

Question 11

When a waiver, co-mortgage, or surety can be set aside on the ground of forgery, what is the effect?

Answer 11

First National v Hegerty: if the mortgage can be set aside on the grounds of forgery, then the individual is left with an unencumbered share in the property (equitable). If the charge has been registered then it will need to be rectified.

Question 12

Etridge Triggers

Answer 12

Etridge No 2:

Make sure to distinguish the proof of undue influence (which is tighter) with the test for notice, which is very wide.

The bank is bound by constructive notice if the mortgage surety/co-mortgage is signed by someone for the sole benefit of one of the parties over a domestic household. This is an evidentiary presumption shifting the burden of proof. Instant notice, unless the wife/other is co-owner, then it will only be put on notice if it knows the loan is being used solely for the husband or business.

“Consequently, the lender would be put on notice whenever a wife, husband, lover or similar partner stood surety for the other’s debts and cohabitation was not essential”

“In addition to the “family”-type situations covered by Lord Nicholls’ simple test, the creditor will also be put on inquiry if “the transaction is on its face not to the financial advantage” of the surety”

Joint loan cases raise no notice.

In addition, where the wife is the shareholder of the company the bank is put on notice if the risk is high or disproportional. Also note that Lord Nicholls regarded this as usually fixing constructive notice as shareholders are not a reliable indicator. However, if the loan is actually to their advantage (Scotlife) then no notice.

The bank must then carry out the etridge protocol.

Question 13

Etridge Protocol

Answer 13

(1) contact the wife directly, check name of the solicitor she wished to act for her; explain that for its protection it would require his confirmation as to her understanding of the documentation
(2) The lender should not proceed until it had received an appropriate response from the wife and should in every case receive the written confirmation from the nominated solicitor.
(3) Subject to the husband’s consent to disclosure, without which the transaction could not in any event proceed, the lender should routinely furnish to the nominated solicitor financial information relating to the facility and the husband’s existing indebtedness to enable a proper explanation to be given to the wife.
(4) The nominated solicitor should require confirmation that the wife wished him to act for her, and he might, so long as no conflict of duty or interest arose and he was satisfied that it was in her best interests to do so, also act for the husband or the lender.
(5) His advice should be given at a face-to-face meeting in the absence of the husband, and its contents need not be directed to the commercial wisdom of the transaction but should include, as a core minimum, an explanation of the documentation, its practical consequences and inherent risks based on the financial information provided by the lender; he should also state that the choice whether to proceed was to be exercised by her and should check that she wished to continue and, if so, he should obtain her consent to his giving the confirmation required by the lender.
(6) Since in so advising her the solicitor assumed professional responsibilities to the wife he did not act as agent for the lender, who was entitled to assume that he had acted properly, and, in consequence, knowledge of the contents of advice given to the wife, whether negligently or otherwise, was not to be imputed to the lender

Question 14

What happens if the wife/other was only deceived as to the extent of the mortgage?

Answer 14

TSB Bank v Camfield: when the misrepresentiation or mistake is only as to the extent of the mortgage, the whole thing will still be set aside.

Question 15

Staying possession: the court has the power to stay possession orders to give the mortgage the opportunity to pay back the mortgage debts. What is the common law power?

Answer 15

Birmingham Citizens Permanent Building Society v Caunt: it only allows for a very short postponement to allow the mortgagor the opportunity to sell the property themselves. This can be particularly relevant in instances where the repossessed house market is very different.

Question 16

Staying possession: the court has the power to stay possession orders to give the mortgage the opportunity to pay back the mortgage debts. What is the statutory regime (s?), and what are its provisions?

Answer 16

AJA 1970 section 36(1): the court has the power to postpone a sale if Mo is ‘likely within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligations arising under or by virtue of the mortgage’. This initially was the full value of the mortgage, but under AJA 1973 s8 it has been reinterpreted as installements

Question 17

What are two limits on the court’s power to postpone under AJA 1970? Who can it be brought against?

Answer 17

Markham: it must be for a fixed period;
Horsham Properties Group v Clark: it is only available when it is the mortgagee who is bringing the action - it cannot be used agianst purchasers.

Question 18

What factors will the court take into account when considering whether it will postpone the possession order? (8)

Answer 18

Cheltenham & Gloucester Building Society v Norgan

How much can the borrower reasonable afford to pay, both now and in the future?
If the borrower has a temporary difficult in meeting his obligations, how long is the difficulty likely to last?
What was the reason for the arrears which have accumulated?
How much remains of the original term?
What are the relevant contractual terms, and what type of mortgage is it?
Is it a case where the court should disregard accelerated payment provisions (s8 of AJA 1973)?
Is it reasonable to expect the lender to recoup the arrears of interest (1) over the whole of the original term, or (2) within a shorter period, or even (3) within a longer period, ie by extending it? It is reasonable to expect the lender to capitalise on the interest or not?
Are there any reasons affecting the security which should influence the length of period for payment? (ie, a long leasehold running out of time)

Question 19

What are some examples of the kinds of period which the possession delay has been ordered?

Answer 19

National and Provincial BS v Lloyd: sale could be delayed for 6-9 months to a year if it was likely a buyer could be found in that period.

LBI HF v Stanford: a year is okay.

Bristol and Wast BS v Ellis: a delay of more than 3-5 years was held to be purely speculative and far too long.

Question 20

How can the court order sale to protect the promisee and when will it do it?

Answer 20

LPA 1925 s91, the sale of a mortgage can be ordered instead of redempetion. This can be applied for by mortgagee, mortgagor, or any other interested party. This is rarely the case, but was allowed in Palk on the exceptional basis the mortgagee could not be allowed to speculate on the value of the property at the expense of the mortgagor by letting it out whilst letting the interest accumulate. Further, the mortgagee could have bought the property so it could have speculated on it that way (court ordered sale).

Question 21

How many remedies does the mortgee have and how can these be combined?

Answer 21

The mortgagee has a range of remedies: personal ones, suing on the covenant (Slayford); exercising its right to sell; exercising its right to repossess.

Question 22

How quickly can the mortgagee use its right to repossess and when will it do so?

Answer 22

The mortgagee can exercise its right to repossess immediately after granting the land, though there is usually no reason to do so. Once the mortgagee does go into possession it is responsible for any profits or rent due under the mortgage.

White v City of London Brewery Co: ““A mortgagee in possession must account for the rents which, but for his wilful default, he would have received.”

Common instances include preventing vandalism and where it wants to sell the property.

Question 23

What limits is the right to repossess (me) restricted by?

Answer 23

Co-operative Bank plc v Phillips: taking possession need not be reasonable or likely to help the bank realise its equity.

Ropaigealach v Barclays Bank plc: one way of doing this is by re-entry, which immediately allows the bank to take repossession. Once it does this it cannot be delayed by AJA 1970 s36(1).

Question 24

Does the bank need priority before it can exercise its right of repossession?

Answer 24

Yes, and it needs priority over every individual with a right to possess themselves. The court has created numerous ways for the mortgagee to take priority and this is one of the key areas in which the rights of mortgagors have been reduced. Initially Boland was seen as the high point - conveyancers and banks had an outcry, but nothing ended up coming of it.

Question 25

What are some of the ways the bank has eroded the priority of equitable owners?

Answer 25

No proprietary interest (Lloyd’s Bank v Rosset); No possession (AN v Cann); Overreaching (Flegg; even when no capital money is paid, leading to only one trustee being required - Sood, e.g. because there is negative equity and the whole mortgage loan goes to repaying other mortgage debts);
No pre-existing interest (Abbey National; Scott v Southern Pacific Mortgages). Note, even if it fails in all of these ways, the bank can still rely on sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996 and get a sale ordered. Cf TOLATA for ordering sales.

Question 26

How can a bank ensure when its loan is being used to pay off another mortgage that it is protected?

Answer 26

Subrogation: per Appleyard and Chandiram, if this occurs the second mortgagee enjoys the priority of the first mortgagee. This is limited to the extent of the first mortgage (appleyard), though the bank can still get repossesion and order a sale (which is more likely given the higher amount borrowed). There is no need to realise the mortgage is being used to pay off the second one (Boscawen v Bajwa)

Question 27

The bank’s most powerful tool, and perhaps the most controversial: the bank can still repossession on the basis the equitable owner has ‘consented’.

Answer 27

Mendehlson; AN v Cann; Kaymuu: the bank will ruthlessly hunt down anyone on the premises and make them sign consent forms, and if they miss them then they will probably be covered by Schedule 3 para 2(i)’s exception that the occupation was not reasonably discoverable. However, if this was not enough, the court can also get consent provided the individual taking out the mortgage is acting with their ostensible authority (Kaymuu).

Question 28

What happens when the third party consents to the first mortgage and the second one is a replacement mortgage?

Answer 28

Equity & Law Home Loans v Prestidge: the second mortgage takes effect up to the value of the first one. The third party is deemed to have consented to it.

Question 29

Is it possible for the mortgagee to be fixed with constructive notice?

Answer 29

Yes, and the widest vesion of this is found in Kaymuu, where the court found that provided the third party gave the purchaser the ability to hold himself out as purchaser, even if he did not permit him to purchase the land, and the purchaser took a mortgage out. The individual is fixed with constructive notice. This is probably best confined to its facts as if applied broadly would defeat any occupying beneficial owner. The facts would be situations akin to agency.

Question 30

What act gives the mortgagee the power of sale? When does it trigger?

Answer 30

LPA 1925 s101(1)(i). The act triggers when the amount under the mortgage becomes due. Traditionally under most contracts this is very soon after the mortgage (6 months), though the mortgagee tends to like to let it run so it can collect interest.

Question 31

What limits are there on the mortgagee’s power of sale in statute?

Answer 31

The mortgagee is limited under s104 LPA 1925, which requires it to provide notice after 3 mongths have gone by in which the sum is due post-notice. There is unpaid interest under the mortgage for two months. Or there has been a breach of the provision.

Question 32

What limits are there on the mortgagee’s power of sale in practice?

Answer 32

A close link to the mortgagee’s power of sale is possession. In short, the mortgagee is going to have a very tough time arranging a sale if the mortgagor is still in possession. Hence why possession orders are so important and, by postponing the explusion of mortgagors using s36(1) of the AJA1970 and by using priorities the mortgagor is in a much stronger position than they look.

Question 33

How does the power of sale operate?

Answer 33

Overreaching occurs; the mortgagee holds the profits on trust for the mortgagor, insofar as the mortgagor has any surplus.

Question 34

How must the mortgagee act when conducting its sale?

Answer 34

There is a duty of good faith: Medforth v Blake. Mortgagee cannot act recklessly or against the mortgagor’s interests

Question 35

What purpose must the mortgagee act with when conducting the sale?

Answer 35

The mortgagee must act in a way which is consistent with exercising a power of sale to recoup the security. Downsview Nominees Ltd v First City Corp Ltd: he must act with the sole purpose of securing his loan.

Mixed motives proabably okay as well (Meretz Investments). The mortgagee is entitled to prefer its own interests and distinguished Palk as an instance of statutory discretion, not the mortgagee’s duty. If the purchaser has knowledge, shut eye or actual, of the illicit purpose then they are safe. Otherwise they are subject to recision.

Question 36

What kind of price must the mortgagee obtain? Is the mortgagee under any positive duties, such as refraining from selling?

Answer 36

The mortgagee is under a duty to obtain a fair price. Cuckmere Brick Co Ltd v Mutual Finance Ltd. He must take reasonable precautions to obtain the fair market rate. Failing to properly list the property is unacceptable.

Silven Properties Ltd v Royal Bank of Scotland: however, the mortgagee is under no positive duties (unless it takes possession) and can exercise his discretion as to when to sell the property at any time it likes. However, where a short delay would yield a much higher value this might be a breach “Meftah v Lloyds TSB Bank plc (No. 2)”. Might be going to bad faith.

Question 37

Who is the duty to obtain a fair price owed to?

Answer 37

Parker-Tweedale v Dunbar Bank plc: it is owed to the guarantors and the mortgagor. Interested third parties, such as a husband involved in divorce settlement, cannot bring an action for breach.

Question 38

What does the duty to hold a real sale entail?

Answer 38

The mortgagee must conduct an actual sale, demonstrated by taking reasonable precautions. For example, getting expert advice as to the method of sale, the steps which ought to be taken to ensure success, and the amount of reserve.

The mortgagor cannot buy the property itself or sell it to an employee. Farrar v Farrars Ltd. However, if the mortgagee is a director of a company or employee and the company buys it then it is prima facie valid, but subject to increased scrutiny (Tse Kwong Lam v Wong Chit Sen).

Question 39

What is the remedy for failing to carry out a proper sale or abide by the other limitations on the power of sale?

Answer 39

Silven Properties Ltd v Royal Bank of Scotland plc: the usual remedy is for the amount which it should have sold for.

However, where the purchaser is also in on it then recision can be granted. Tse Kwong Lam v Wong Chit Sen: recision granted here as the wife was in on it.

Corbett v Halifax Building Society: same authority as above, but did not find collusion. The employee of the mortgage company who got his uncle to bid did so in a non-collusive manner.

Question 40

What measure of protection does an equitable mortgagee enjoy?

Answer 40

The equitable mortgagee does not have an immediate right to possession. However, as under the Law of Property Act 1925, s. 90(1) it can apply for a legal estate sufficient to vest possession in it, which it can then use to apply for a possession order. Likewise, the equitable mortagee must apply to the court for a power of sale Law of Property Act 1925, s. 91(2). As an aside, the equitable mortgagee does not enjoy the level of protection a legal mortgagee does under the priorities rules (ie, s29 rules).

Question 41

Under the court’s power to postpone a possession order, what period is looked at, and what sum is taken as the amount which the mortgagor needs to pay?

Answer 41

Cheltenham & Gloucester Building Society v Norgan: the term is the full mortgage term (AJA 1970 s36(1)), rather than the contractual term, and the amount is the arrears, not the full value of the mortgage (AJA 1973 s8). Further, this can be taken in installments as well: “Would it be possible for the mortgagor to maintain payment-off of the arrears by instalments over that period?”

Cf Counsel’s argument:

“The delaying powers under section 36 represent a substantial interference with the contractual right which the parties have themselves freely negotiated, namely the right of the mortgagee to repayment in full of the whole mortgage debt as soon as a default occurs.”

Question 42

When will the court not be able to postpone a sale, and when will it decline to exercise its s91 power?

Answer 42

Cheltenham and Gloucester Building Society plc v Krausz: the court will not postpone a possession order under Art 36(1) on the basis the party wants to sell by itself without positive equity. A s91 order (Palk) will only be used where there is positive equity in the property. Further, the court’s equitable delay (Connoly) could not be exercised without positive equity.

The court notes the tension between the benefit of a mortgagor sale and the tactics of delay to put off the evil day in which the mortgagor is deprived of their property. Also cf comments on Palk:

““It does not support the making of such an order where the mortgagee is taking active steps to obtain possession and enforce its security by sale. Still less does it support the giving of the conduct of the sale to the mortgagor in a case where there is negative equity, so that it is the mortgagee who is likely to have the greater incentive to obtain the best price and the quickest sale.””

Question 43

What other ways does the bank have to secure its loan?

Answer 43

In slayford they used their personal covenant action to bankrupt the parties to get around the court declining s14 of TOLATA. This allowed them to use the bankruptcy provision giving instant sale.

“Thompson notes this overlooks the debtor’s power to sue on the covenant of the debt and collect the debt as an unsecured creditor. Albeit, it must be noted that in the circumstance where the bank needs the house as security, this, more often than not, results in bankruptcy.”

Question 44

How does the power to sell arise and what are the statutory provisions?

Answer 44

The power for sale arises when the money is due, either the due date has arisen or where the installments due are not paid. 20th century banking v Wilkinson. Whether these powers are exercisable is under. LPA s104; s103

Question 45

Are there any limits on the power to sell - when will the purchaser lack good title?

Answer 45

Corbett v Halifax Society: the sale is only rescinable if the purchaser had notice of the improper exercise of the power.