Mortgages

Question 1

Define a mortgage

Answer 1

A mortgage is not the loan itslef but the interest that the borrower ( mortgagor) grants the lender ( mortgagee) in his land ( or other asset) to secure his repayment of the loan.

A mortgage is security for the loan

Question 2

What are the two types of rights which a mortgage gives rise to.

Answer 2

1. Personal contractual right to repayment of the loan
2. Proprietary right over the land, granted to the mortgagee as security for the money lent. Allows mortgagee to charge less interest since there’s a smaller risk of default.
   
   • Mortgagee is a secured creditor
   • Since 1925 Mortgagee normallly gets a charge over teh land the mortgagor retains ownership ( before 1925 mortgagor would only have the property with a “provision for redemption” upon full payment.

Question 3

True or False:

“a mortgage can be granted over any interest land not just the freehold estate”

Answer 3

True

Question 4

True or False:

“There can be mutiple mortgaes over the same piece of land “

Answer 4

True

Question 5

What are the policy considerations at the heart of mortgages?

Answer 5

Protecting borrowers (from potentially malicious lenders)

vs.

Freedom of contract + The need to encourage lending to secure property transactions and expedite the property market.

Question 6

Fairclough v Swan Brewery [1912] AC 565 PC

Answer 6

• Facts:
  
  • A term in a mortgage agreement for a leasehold provided that a mortgage was not redeemable until 6 weeks before the end of the 20 year mortgage term
• Issue: Was this term enforceable?
• Decision: No
• Reasoning
  
  • It rendered the mortgagor’s equity of redemption illusory and so effectively destroyed it. The mortgage could be redeemed early.

N.b. This involves the mortgage of a leasehold hency why the mortgagor would have inherited a virtually worthless estate.

Question 7

Why do lenders seek to postpone the right to redeem?

Answer 7

To ensure a return on their money via interest payments

Question 8

In general the proprietary right is more important than the personal right since suing an insolvent person to pay back the loan is not useful. However what are the exceptions to this? (2)

Answer 8

Personal right is more useful when:

1. Mortgagor’s wife has an equitable interest in the property which precludes the mortgagee from selling the property. Therefore the mortgagee must sue the mortgagor himself - Alliance and Leicester v Slayford
2. The Contract gives mortggee additional collateral rights (providing they are not inconsistent with the mortgagor’s right of redemption) - Santley v Wilde , Kreglinger

Question 9

Knightsbridge Estates v Byrne [1939] Ch 44 HL

Answer 9

• Facts
  
  • The plaintiff company granted a mortgage to the defendant’s insurance company. The mortgage deed provided for repayment in eighty instalments over a period of forty years. The plaintiff sought a declaration that, notwithstanding the repayment provisions, they were entitled to early redemption of the mortgage upon payment of the principal sum secured thereunder, with interest to the date of redemption and proper costs.
• Issue:
  
  • At first instance, it was held that the period of postponement for redemption for forty years constituted a clog on the equity of redemption and the plaintiff company was entitled to the declaration sought. The defendants appealed. They argued that the doctrine of the clog on the equity of redemption was intended to deal with the case of an impecunious landowner and unscrupulous lender which did not apply in the present circumstances.
• Held
  
  • The Court of Appeal allowed the appeal. The Court observed that this was a proper business transaction which had none of the features of an oppressive bargain where the borrower is at the mercy of an unscrupulous lender. The Court refused to find that the repayment period of forty years was “unreasonable” in the circumstances. According to the Court, equity is concerned that the essential requirements of a mortgage transaction are observed and that oppressive or unconscionable terms are not enforced. Otherwise, it does not interfere with a commercial bargain. The Court declined to treat the relevant provisions in the mortgage deed as unreasonable where the deed was entered into by two parties such as those involved, who had acted with the assistance of competent advisers.

Question 10

Give 3 Key differences/explanations between Fairclough and Knightsbridge

Answer 10

1. Leasehold vs. Freehold
2. In Knightsbridge the Court were unwilling to interfere a consensual commercial bargain
3. inKnightsbridge at the time the contract was made the terms had been the most advantageous available.

Question 11

How is a legal mortgage created over registered land?

Answer 11

Charge by deed:

• Conferal effeectde through a charge by deed (s.52(1) LPA 1925) and cmopleted by registration (s.27(2) LPA 2002)
• Deed must expressly state that it is a legal mortgage

N.b. that the mortgagee does not obtain a legal estate but a legal interest. IN all other respects his rights and powers are teh same as if gratned a m**ortgage by demise. (3000 year lease subject to provision that once debt is paid the lease will terminate)

Question 12

When/how is a equitable mortgage created? (4)

Answer 12

1. Mortgage is granted over a mere equitable interest:
   
   • The equitable interest which is teh subject of teh loan must be protected by a notice on the register s.27(2) LRA
   • Mortgage must satisfy formality requirement of writing s.53(1)(c)
2. Parties expreslsly create an equitable mortgage:​
   
   • ​Must be in writing s.53(1)(a)
3. Failure or formalities for legal mortgage ( e.g. no deed)​
   
   • ​However failed attempt must be s2 LPMPA compliant (capable of SP)
   • Also when the attempted legal mortgae has not been registered at the Land Registry s.27(2)(f)
4. Estoppel​
   
   • ​FURTHER READING PLS

Question 13

United Bank of Kuwait plc v Sahib [1997] Ch 107 CA

Answer 13

Facts:

S mortgaged his house to P with the necessary deed, registration etc, and sought a declaration that it had priority over D who had agreed a mortgage informally, without writing etc.

Held:

CA held that P’s interest took priority, because s.2 of the LP(MP)A 1989 stated that mortgage contracts had to be written down to be valid. In the absence of a written contract, D’s mortgage is invalid and there was no basis on which any estoppel or constructive trust could operate to defeat or take priority over the plaintiff’s charging order.

Peter Gibson LJ: Proprietary estoppel might apply between S and D (since when D makes the loan they can claim to have detrimentally relied upon the apparent granting of a mortgage) , but cannot be used between D and P.

Question 14

What does Knightsbridge Estates v Byrneon the issue of collateral advantages

Answer 14

• A term conveying a collateral advantage must be more than merely unreasonable in order to struck out. It must be unconscionable and/or restrict the equity of redemption. Or be imposed ‘in a morally reprehensible way’

Question 15

Cityland Property v Dabrah [1968] Ch 166

Answer 15

• Facts:
  
  • Concerned the sale of a freehold by a landlord to his tenant, with a loan for the purchase being provided by the landlord. The loan repayments amounted to a 57% premium on top the actual sum advanced for the loan. This was held void for being unconsionable:
    
    • This was because the premium (collateral advantage) was out of all proportion to investment rates prevailing at the time of the advance the premium was so large that it had the effect of destroying the whole equity by rendering the security offered deficient and leaving no surplus for the tenant on any exercise by the company of its powers to repossess and sell the house.
• Principle:
  
  • Clauses in a mortgage that have been obtained unconscionably/ are unconsionable will be struck out as void

Question 16

Multiservice Bookbinding v Marden [1979] Ch 84

Answer 16

• Facts
  
  • A mortgage over business premises was granted by the claimants to the defendant in return for a £36,000 loan
  • The agreement linked the mortgage’s interest rate with the exchange rate between the pound sterling and the swiss franc
  • A dramatic change in the exchange rate caused a significant increase in the rate of interest charged
• Issue
  
  • Could the interest rate link term be avoided as is destroyed the equity of redemption possessed by the claimants?
• Decision: No
• Reasoning
  
  • the clause was not contrary to public policy; it was not a clog on the equity of redemption, and both parties had been of equal bargaining power, so, whilst possibly unreasonable, such a term was not unconscionable.
• Analysis:
  
  • ​Browne Wilkinson denied that Goff J really meant to establish a test of reasonableness rather than unconscionability in Cityland since “in that case it was unnecessary for him to distinguish between the two concepts, since on either test the premium was unenforceable”. Either way Goff J was wrong to substitute the word and correct wording of unconsionability established in Kreglinger should be used.
  • Bishop and Hindley suggest that this case is reconciled with Cityland because there is a different test for businesses- in Multiservice- and individuals – in Cityland, as evidenced by BW’s references to bargaining power. IT appears the courts are more likely to find unconscionable behaviour in the case of a peculiar term against an individual.

Question 17

Barclay’s Bank v O’Brien [1994] 1 AC 180 HL

Answer 17

• Facts:
  
  • After signing an increased (re-mortgage) mortgage deal securing both her and her husband’s house against the debts of her husband’s business, the claimant claimed undue influence when the bank tried to repossess her house: she had not obtained legal advice despite having been asked to and was not aware of the effects of the contract
• Issue: Could undue influence be claimed, could recovery be allowed?
• Decision: No undue influence, but repossession not allowed due to misrepresentation
• Reasoning:
  
  • There are 2 categories of undue influence:

1. Actual undue influence, where the claimant must prove the the wrongdoer exerted undue influence directly
2. Presumed undue influence, where there must be shown to have been a (1) relationship of trust and confidence where there was (2) a disadvantage to the complainant. The defendant must then rebut such a presumption that undue influence was exerted. For presumed undue influence, the relationship may be a given type ( ‘trust and confidence’), such as between a solicitor and a client, but not a husband and wife, or it may be proved on the facts.
   
   • In a suretyship transaction, a bank is put on notice whenever a wife is a surety for her husband and when the bank believes undue influence could exist
   • Once on notice, a bank should bring home the risks to the surety.
   • In this case, there was no undue influence, but the bank had misrepresented the contract such that it could be set aside and repossession not allowed
   • The misrepresentation made the liability for the re-mortgage loan amount of £43,000 voidable, such that the claimant was only bound by the original mortgage loan amount of £30,000

Question 18

Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773 HL

Answer 18

Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773

• Facts:
  
  • Eight conjoined appeals by wives seeking to have mortgages held void as against them on the basis they were obtained by undue influence. In each case, the mortgages appears to be for the principal benefit of the husbands.
• Principles:
  
  • Established key steps a must take to avoid being affected by undue influence asserted over the borrower.

Question 19

Quennell v Maltby [1979] 1 All ER 568

Answer 19

• Facts
  
  • A landlord owned a mortgaged house, which he let out to a tenant
  • He wished to take possession of the house, but couldn’t as his tenant was a statutory tenant
  • As there was only £1,000 outstanding on the mortgage, the landlord’s wife bought out the mortgage and sought possession herself
• Issue: Could the wife take possession?
• Decision: No
• Reasoning: Although on the face of the claim for possession, the wife could take possession irrespective of protective tenant legislation, a court is entitled to look behind a formal legal relationship. As the wife was not enforcing her security against her husband, but rather acting on behalf of her husband against the tenant, possession would be denied
• Analysis:
  
  • Lord Denning MR “A mortgagee will be restrained from getting possession except when it is sought bona fide and reasonably for the purpose of enforcing the security and then only subject to such conditions as the court thinks fit to impose.”
  • Here, there was a bad ulterior motive of evicting the tenants and avoiding the Rents Acts, which equity will not allow.

Question 20

Albany Home Loans v Massey [1997] 2 All ER 609 CA

Answer 20

Albany Home Loans v Massey [1997] 2 All ER 609

Facts:

P was in arrears to the mortgagee, D, and sought to defend possession on the grounds that he had been unfairly dismissed by one of P’s associate companies, X, would win money in excess of what he owed to D, and therefore the repossession ought to be stayed.

Held:

CA rejected D’s argument: a counter-claim does not prevent their being a claim for repossession, and the power to stay proceedings under s.36 AJA 1970 did not apply because repayment would not have been possible within a reasonable period (the unfair dismissal claim was not due for another 2 years at the time of the first instance trial).

Also N.b. P had been a co-habitee and the court at first instance had only issued a poseesion against him, but not his wife. Teh CA said that teh judge had been wrong to issue poseesion order against P while his wife was still entitled to remain in the house. Where a possession order was not necessary for the protection of the mortgagee’s rights it was generally wrong to order one of two joint borrowers to leave the property whilst the other was entitled to stay, especially where the parties were married.​

Question 21

Habib Bank v Tailor [1982] 3 All ER 561 CA

Answer 21

Key Point: Section 8 of the Administration of Justice Act 1973 does not apply to mortgages securing an overdraft i.e. ‘all monies charges’, which are not repayable until a written demand has been made and therefore in which there is no power of postponement of the debt

Facts:

P gave D an overdraft facility of £6000 which was to be set as a charge against his house. There was a term in the overdraft agreement that the loan was repayable on demand. When D exceeded his overdraft, P demanded FULL REPAYMENT, and upon failure to do so it sued D for possession of his house. D contended that the loan was really an indefinite one so that a clause allowing repayment on demand was really a default clause (i.e. clause demanding early repayment). Therefore the court should consider that he only had to repay what he would have done normally and under s.8 AJA he should be given a reasonable period in which to pay off the debt.

Held

CA rejected this and found for P, saying that s.8 didn’t apply to this type of loan. The phrase “permitted to defer payment” under s.8 referred to the date which the mortgage envisioned the loan being repaid. Since there was no such date, nor could it be deferred and s.8 did not apply. The only question was whether under s.36 D could repay the whole loan in a reasonable period, which he could not. Therefore P was entitled to possession.

Question 22

S.36 AJA 1970 & S.8 AJA 1973

Answer 22

S.36 AJA ( as amended by the s.8 AJA 1973) gives the Court a discretionary power to adjourn the procedding of susepnd an order for possession. This power may be exercisde where it appears likely that within a ‘reasonable period’ the mortgagor will be able to pay ‘any sums due under the mortgage’ or remedy any other breach.

Section 36 was enacted to give a mortgagor of a dwelling-house who had fallen into temporary arrears with instalments a reasonable time to catch up. But since most mortgages had the effect of rendering the whole sum due on default, as enacted, the expression ‘any sums due under the mortgage’ in s 36(1) had the effect of confining the operation of s 36 to relatively few cases in which the mortgagor was reasonably likely to pay off the whole of the sums due under the mortgage (Halifax Building Society v Clark [1973] 1 Ch 307)

The problem was remedied by s 8 AJA 1973 so that the court may treat as the ‘sums due under the mortgage’ only those sums which the mortgagor would have expected to be required to pay if there had been no provision for earlier payment. However the mortgagor must also convince the Court of his ability to make future payments on time once he has cought up.

Question 23

Western Bank v Schindler [1977] Ch 1 CA

Answer 23

Western Bank v Schindler [1977] Ch 1 CA

• Facts:
  
  • P borrowed money from D in return for a charge on his house. The money was to be repaid over 10 years in monthly installments. P then lapsed on payments and D sued for possession. CA found for P, but decided to exercise its ability under s.36 to stay possession for a period.
• Held:
  
  • Court of Appeal upheld the judge’s finding that on the peculiar facts, there were two separate agreements: the loan agreement and the mortgage agreement were separate, but that failure to keep up the loan payments led to repossession of the house. The Court held that a “reasonable time” for D to be allowed to repay outstanding payments under s. 36 AJA was applicable even where the mortgagor was not in default.
  • Buckley LJ: It would be manifestly unfair to give s.36 a literal meaning so that it would give help to a mortgagor in default, but not one who is not in default.
• Principle
  
  • The court can exercise it s discretion to prevent possession when possession is sought for reasons other than the mortgagor being in default.

Question 24

Parker-Tweedale v Dunbar Bank [1991] Ch 12 CA

Answer 24

• Facts
  
  • Following the default of a mortgagor on payments of a £164,000 mortgage loan, the mortgagee took possession in order to sell the property
  • The mortgage and house was in the wife’s sole name; her husband was a licensee only
  • The property was valued at £380,000 – £450,000, and sold for £575,000, with the wife’s consent
  • The purchaser re-sold the property within a week for £700,000
• Issue
  
  • Was the bank in breach of duty to the husband for not obtaining a proper price?
• Decision: No
• Reasoning: A mortgagee in possession owed duties under sale only to their mortgagor (the wife), and not other beneficiaries to the sale - (no duty of care under negligence which could be extended arose)

Question 25

Cheltenham & Gloucester BS v Norgan [1996] 1 All ER 449 CA

Answer 25

Cheltenham & Gloucester BS v Norgan [1996] 1 All ER 449

• Facts:
  
  • Mrs Norgan had a history of difficulty in paying her mortgage repayments and order for possession had been made, although postponed. A possession order was finally granted without postponement and Mrs Norgan appealed. Her case was reknitted back to the first instance court to determines where she had the means to pay off the debt and arrears within 13 years, the reming term of the mortgage.
• Principle:
  
  • In assessing what would be a reasonable period to postpone a possession order to allow arrears to be paid, the starting point should be the agreed duration of the mortgage term.

Question 26

Cheltenham & Gloucester BS v Krausz [1997] 1 All ER 21 CA

Answer 26

Cheltenham & Gloucester BS v Krausz [1997] 1 All ER 21 CA

• Summary: Where the mortgagor is in negative equity, a mortgagee’s rights take priority and the court has no power to suspend an order for possession unless the mortgagor can show he is able to make up the shortfall from elsewhere.
• Facts
  
  • The respondent borrowers had fallen into arrears on their mortgage payments. They applied for an order suspending a warrant for possession of the property, on the basis that they had identified a buyer and would take steps to arrange for the sale of the property. The appellant lender resisted the proposed sale on the basis that the mortgage debt exceeded the proposed sale price.
• Issue
  
  • The respondents’ application for an order to suspend execution of the warrant was allowed. The appellants appealed on the grounds that the Court did not have jurisdiction to make such an order.
• Held
  
  • The Court of Appeal allowed the appeal. The right of the appellant to enter into possession of the mortgaged property was protected strictly at common law.
• Reasoning:
  
  • s.36 only postponed possession to enable the mortgagor to repay from sources other than selling the house or, if a sale was proposed, the court had to be satisfied that it would be enough to discharge the entire debt.

Therefore s.36 di not empower the court to suspend possession in order to permit the mortgagor to sell the mortgaged premises while in negative equity.

Question 27

How was Palk distinguished and doubted by Phillips LJ in C&G BS v Krausz

Answer 27

Until Palk’s case it was the practice of the Chancery court only to entertain an application for sale by the mortgagor if the proceeds of sale were expected to be sufficient to discharge the entirety of the mortgage debt.

Palk established, for the first time, that the court has power under section 91(2) to make an order for sale on the application of a mortgagor, notwithstanding that the proceeds of sale will be insufficient to discharge the mortgage debt. In Palk the mortgagees had obtained an order for possession with the intention, not of proceeding to sell the property but of waiting in the hope that the market might improve. The mortgagor was anxious that the property should be sold so that the proceeds would reduce the mortgage debt, on which interest was accruing at an alarming rate. The Court of Appeal held that, as the mortgagees could buy the property themselves if they wished to speculate on an increase in its value, in the interests of fairness the property should be sold – Philips LJ

Question 28

LPA 1925 ss 91(2),

Answer 28

LPA 1925 ss 91(2),

• This gives the court a wide power to order a sale at the instance of any ‘person interested’. It is sometime requested by the mortgagor where the mortgagee refuses to sell
• Succeeded in Palk v Mortgage services but denied in Cheltenham & Gloucester Plc v Krausz

Question 29

Britannia BS v Earl [1990] 1 WLR 422 CA

Answer 29

Britannia BS v Earl [1990] 1 WLR 422 CA

• Summary: Where tenants are in unlawful occupation vis-avis the mortgagee. Their rights fall with the mortgagee and thyey hve no right to apply for relief un the AJA s.36
• Facts:
  
  • P were mortgagees of premises under a mortgage deed between themselves and D1.
  • D2 were granted a tenancy for nine months without P’s knowledge or consent and in breach of the terms of the mortgage.
  • D1 fell into arrears and possession proceedings were brought.
  • D2 argued that they had defence to the action or alternatively that they could apply for relief under s36 AJA
• Held:
  
  • CofA dismissed the appeal holding that:

1. Tenants rights fall with the mortgage whether the tenants are statutory or contractual
2. Definition of mortgagor in s.39(1) of the AJA 1970 applies only to the mortgagor or his assigns and not to his tenants
3. In any event, to avail himself of s.36 AJA the mortgagor would need to remedy the breach of covenant against leasing which cannot be done so long as the tenants remain in occupation.

Question 30

What is a debenture?

Answer 30

Debentures are an instrument available to business lenders in the UK, allowing them to secure loans against borrowers’ assets. Put simply, a debenture is the document that grants lenders a charge over a borrower’s assets, giving them a means of collecting debt if the borrower defaults.

Question 31

Downsview Nominees Ltd v First City Corp Ltd PC

Answer 31

• Facts:
  
  • ​A debenture-holder sought to enforce the debenture, and appointed a receiver in order to prevent a second debenture-holder from enforcing his debenture over the company. The receivers appointed by the first debenture-holder allowed the company to continue trading, during which time it made considerable losses. The second debenture-holder brought an action claiming breach of duty by the first debenture-holder and the receiver.
• Held:
  
  • Although a mortgagee and a receiver appointed by him owe no duty of care to subsequent encumbrancers generally, where they have acted in bad faith, as here, they will be liable.

Question 32

What is a receiver?

Answer 32

What Is a Receiver?

• A receiver is a person appointed as custodian of a person or entity’s property, finances, general assets, or business operations. Receivers can be appointed by courts, government regulators, or by private entities. Receivers seek to realize and secure assets and manage affairs to pay debts. For businesses, receivers seek to maximize profits and asset value, and either terminate operations or sell all or part of the company. When a receiver is appointed, a company is said to be “in receivership.”

KEY TAKEAWAYS

1. A receiver is a person appointed by a court, government regulator, or private entity to manage debt consolidation for a company.
2. When a receiver is appointed, a company is said to be “in receivership.”
3. Receivership is an alternative to bankruptcy.

Question 33

Silven Properties v Royal Bank of Scotland [2004] 4 All ER 484, CA

Answer 33

Silven Properties v Royal Bank of Scotland [2004] 4 All ER 484, CA

• Summary:
  
  • In seeking to obtain a fair and true market value of the property , the mortgagee is not required to incur expense in securing a better price, for example by pursuing planning applications.
• Facts
  
  • Appeal by the claimant property companies from the judgment of Patten J dismissing their claims for damages against the first defendant bank (‘RBS’) and the second and third defendant receivers appointed by RBS, arising from the alleged sale of properties mortgaged by the claimants to RBS at an undervalue.
  • By the terms of the mortgages the receivers were appointed as agents of the claimants. The claimants contended that, in respect of six properties, the defendants had been under a duty to pursue planning applications for the development of the properties in order to obtain the best price obtainable and, in respect of two of the properties, to complete the grant of leases. Patten J concluded that a receiver appointed by a mortgagee had the same obligations to the mortgagor as the mortgagee and that they were not required to incur expense in the improvement of the property in order to sell it at a higher price.
  • On appeal, the claimants contended that:

1. a receiver owed a duty of care to mortgagors in everything done in the course of his receivership if appointed agent of the mortgagor and if he had exclusive control over the property of the mortgagor;
2. (alternatively, a receiver who had pursued an application for planning permission became bound not to abandon it unless a reasonable and prudent person would have done so; and
3. the duty of mortgagees and receivers to obtain the best price reasonably obtainable included a duty to pursue applications for development of the property.

• Held:

1. There was no duty on a mortgagee to postpone exercising the power of sale until after the further pursuit of an application for planning permission or the grant of a lease.
2. A mortgagee was entitled to sell the property in the condition in which it stood without investing money or time in increasing its likely sale value and to discontinue efforts already undertaken with a view to increasing the sale value.
3. A mortgagee’s duty was limited to taking reasonable care to obtain a sale price that reflected the added value available on the grant of planning permission and the grant of a new lease, and to ensuring that the potential was brought to the notice of prospective purchasers.
4. The duties in respect of the exercise of the power of sale by mortgagees and receivers were the same.
5. By accepting office as receivers of the claimants’ properties, the receivers assumed a fiduciary duty of care to RBS, the claimants and any others interested in the equity of redemption. The appointment of the receivers as agents of the claimants did not affect the scope or the content of that fiduciary duty.

• Key points:
  
  • If the mortgagee decides to sell, it owes the mortgagor a specific duty to take reasonable care to obtain the best price reasonably available at the time
    
    • This is normally the market value of the mortgaged property at the date of sale not the market value at the time the decision to sell was made.
  • No obligation on a mortgagee to carry out or complete improvement it instigates
    
    • a mortgagee that submitted a planning application that, if granted, would have increased the value of the mortgaged property was not obliged to wait for the outcome of that application before selling the property

Question 34

Summarise the mortgagee’s duties (2) and entitlements (3) as per Lightman J in Silven Properties v RBS

Answer 34

• Duties
  
  • Take reasonable care of the property secured (on possession)
    
    • Includes a duty to carry out reasonable repairs (Palk)
  • Duty in equity to sell the property at fair, true or proper market price, at the date of the sale. Not entitled to sell at a hasty knock down price (less than current market value)
• Entitlements
  
  • A mortgagee is at all times free to consult his own interests alone whether and when to exercise his power of sale.
  • To sell the property as it is - no obligation to improve or increase it’s market value.
  • No obligation to postpone sale in the hope of obtaining a better price fi market conditions improve (providing the price obtained is the current market price)

Question 35

Summaires teh 4 general duties owed by the mortgagee to the mortgagee when exercising the power of sale.

Answer 35

Summary of Mortgagee duties:

A mortgagee can decide when to exercise the power of sale and can do so even if the timing or terms of the sale are disadvantageous to the mortgagor. However, the mortgagee must comply with the each of following duties when exercising its power of sale:

1. To act in good faith (Downsview)
2. To act with reasonable care and skill (Palk
3. To take reasonable care to achieve the best sale price (Silven)
4. To act fairly towards the mortgagor (Palk)

Question 36

Palk v Mortgage Services [1993] Ch 330 CA

Answer 36

Palk v Mortgage Services [1993] Ch 330 CA

• Facts:
  
  • The mortgagee wished to lease the mortgaged property, despite the fact that rent acquired would cover no more than a third of the mortgage interest payments. Realising that the effect of this would be to increase their debt, the mortgagors requested a sale under s.91(2) LPA 1925 which was granted by the CofA.
• Principle
  
  • Under s.91 LPA 1925 the court has jurisdiction to sell mortgaged property independent of the mortgagee’s right to do so
  • Sir Donald Nicholls VC: The court must exercise its discretionary power under s.91(2) where failure to do so would be manifest unfairness. Factors that influence his decision regarding fairness:

1. The likelihood that the amount rental incomes will produce will be less than increased amount P will owe;
2. The only reason behind the scheme is the speculation that property prices may rise (this is distinct from cases where there is a factor specific to one property);
3. the liability of P would continue indefinitely, which is too oppressive.
4. The amount P would still owe after sale (due to negative equity) is less than she would end up owing if the bank continue its plan to rent and later sell. In conclusion, the risk of loss to P is disproportionate to the potential for greater debt repayment that the bank might gain

• Analysis:
  
  • C&G Plc V Krausz appears to view this as an anomalous case. IN most circumstance the mortgagor will not be able to use s.91(2) LPA 1925 to sell whilst in negative equity or use s.36 AJA to suspend possession in order to permit the mortgagor to sell the mortgaged premises.
  • Palk is therfore best confined to its unusual facts

Question 37

A mortgagee’s right to enter into possession of the mortgaged propoerty arises upon the execution of the mortgage (Four Maids ltd v Dudley) (unless the terms of the mortgage restrict the right). Therefore what is stopping a mortgagee from simply taking possession at any time regardless of whether the mortgagor is in arrears

Answer 37

1. Expressly or impledly postponed until such a time as default
2. Pre action protocoal protects occupied residential pproperties.
3. Quennell v Maltby: ensures that possession order will only be granted if it’s purpose is bona fide and to enforce the security
   
   • ​​“A mortgagee will be restrained from getting possession except when it is sought bona fide and reasonably for the purpose of enforcing the security and then only subject to such conditions as the court thinks fit to impose.” - Denning
4. AJA s.36 gives the Court the power to suspend an order for possession of a dwelling house subject to various requirements

Question 38

When does a power of sale arise?

Answer 38

• Mortgage is by deed
• Mortgage monies are due (s.101 LPA 1925)
  
  • legal date of redemption has passed or
  • where payment by instalments, one instalment of capital is due (Payne v Cardiff)

Question 39

When does the power of sale become exercisable?

Answer 39

s.103 LPA 1925

• Notice has been served on the mortgagor requiring repayment and three months have lapsed without the mortgagor repaying the whole debt; or
• interest is at least two months in arrears; or
• a term other than one relating to payment has been breached

Question 40

What happens if the mortgaee exercises the power of sale before it becomes exercisable

Answer 40

• Good title will pass to the purchaser
• mortgagee may have to pay damages to anyone suffering loss from improper sale (s.104 LPA 1925)
• Where the purcahser know the power has not become exerciable he will not get good title and the mortgagor could seek to have the sale set aside.

Question 41

What happens when the mortgagee validly exericses the power of sale?

Answer 41

The mortgagee is trustee of the proceeds of sale and must distribute the proceeds in order as per s.105 LPA 1925:

• discharge the total debt owed to any prior mortgage
• dsicharge any cost of the sale
• discharge total devbt owed to itslef
• any remaining balance to be paid to any mortgagee next in priority and, if none, the mortgagor.

Question 42

Horsham Properties v Clark [2009] 1 WLR 1255

Answer 42

Horsham Properties v Clark [2009] 1 WLR 1255

• This case found that section 101 of the Law of Property Act 1925, giving a mortgagor the right to sell or appoint a receiver to sell land on default of mortgage payments did not infringe upon the European Convention on Human Rights. It is possible for a mortgagor to take peaceable possession, depriving a mortgagor of protection (postponement) under section 36 of the Administration of Justice Act 1970. It is in the public interest of a mortgagee to be able to do this.
• Analysis:
  
  • Note that, while the decision in Horsham Properties Group Ltd v Clark and another [2008] EWHC 2327 (Ch) confirmed that a lender can sell a defaulting borrower’s home without first obtaining a court order for possession, providing the mortgage contracts permits, since December 2008 members of the Council of Mortgage Lenders have voluntarily agreed not to seek to sell, nor appoint a receiver to sell, owner-occupied residential properties without a possession order (see Legal update, CML voluntary statement on sales without an order for possession).
• Facts
  
  • B and C mortgaged their property to a lender, L. B and C fell into arrears and L appointed LPA receivers pursuant to a contractual power in the mortgage deed (as well as s101(1)(iii) LPA 1925). The receivers contracted to sell the property to Company X following a sale by auction. The purchase price was sufficient to pay off the mortgage debt. Upon completion Company X transferred the property to Company Y (Horsham Properties Group Ltd) and they were registered as proprietors. They subsequently issued proceedings for possession against B and C claiming that they were trespassing on the property, and asserting that their rights as borrowers had been overreached by the receivers’ sale to Company X.
• Decision
  
  • Briggs J:

1. The borrowers lost their equity of redemption by virtue of the contract of sale entered into by the receivers. Section 101 did not confer on the receivers a statutory power of sale free of the mortgage. Their powers were purely contractual and did not involve any State intervention.
2. However, even if the lender had sold purely in exercise of its statutory powers, there would still have been no relevant deprivation of possessions within the meaning of Article 1 of the First Protocol..
3. Furthermore, any deprivation of possessions as a result of a sale out of court, without first obtaining a court order, is justified in the public interest, and did not require a case-by-case determination of the proportionality of an order for possession.
4. Ultimately, the question of whether any wider public policy ought to be implemented, wherever steps taken by a mortgagee to realise its security are likely to lead to the obtaining of possession, is a matter for Parliament.
5. Accordingly the effect of the sale in the present case was to discharge the equity of redemption and discharge the mortgage. By the time Company Y applied for possession, there was no subsisting mortgage and nothing upon which the court could exercise a discretion to stay or suspend under s36.
6. Company Y was therefore entitled to possession

Question 43

Define a collateral advantage

Answer 43

A collateral advantage is something that a lender may require is done for its benefit, in addition to repayment of the debt with interest, but which will not be part of the security for the debt.

Question 44

Santley v Wilde [1899] 2 Ch 474 CA

Answer 44

• Santley v Wilde* [1899] 2 Ch 474
• Facts:
• The owner of a lease of a theatre wanted to carry on a theatre business there and took out a mortgage of £20,000 in order to do this, secured against the lease, over five years. The mortgage also required that she also paid one third of the net profits to the lender until the end of the mortgage term.
• Issues:
• A mortgage is a conveyance of land as security for the payment of a debt. If the borrower fails to repay the debt, the lender can possess the property in satisfaction of the debt and any interest payable. However, equity protects the right of the borrower to redeem the mortgage and end it once the debt has been paid. Equity forbids any ‘clog’ on the equity of redemption, which includes any provision which is unconscionable. The mortgagor argued that the term regarding sharing profits was a ‘clog’.
• Held:
• The court found for the mortgagee. The mortgage could still be paid off in five years. Consequently, this provision was not a clog on the equity of redemption. There was no suggestion of fraud. The theatre business was unpredictable and if it failed the borrower would probably lose the money advanced. Therefore, asking for a share of profits was reasonable. A mortgagee was free to obtain any collateral advantage for himself beyond the repayment of the debt and interest provided it was not unconscionable or oppressive or made under pressure.. There was no automatic presumption that a collateral advantage was obtained under pressure. Each case had to be decided according to its own circumstances.

Analysis:

• Collateral advantages are not prima facie unenforceable providing there are not unconscionable or oppressive
• If a collateral advantage is a clog on the equity of the redemption it is unconscionable and therefore unenforceable.

Question 45

When will an advantage not be a collateral advantage

Answer 45

An advantage will not be a collateral advantage if the provision for advantage is either:

• In an agreement that constitutes a separate transaction from the security.
• In the security document itself, but independent of the security interest.

Question 46

When will an advantage be a collateral advantage? In which situation will it be invalid (3)

Answer 46

An advantage will be a collateral advantage if it can be construed as a term of the security. The advantage will be invalid in any of the following situations:

• It is in itself unfair or unconscionable.
• It is in the nature of a penalty clogging the equity of redemption.
• It is inconsistent with or repugnant to the right to redeem.

Question 47

Noakes v Rice [1902] AC 24 HL

Answer 47

• Noakes v Rice* [1902] AC 24 HL
• Facts:
• Mortgage created over a public house contained a clause tying the mortgagor into selling the mortgagee’s liquor for the tenure duration of the lease, not just for the duration of the mortgage. The clause was held void.
• Principles:
• Upon redemption , the mortgagor should get back his property in virtually the same state as when the mortgage was created, unencumbered by any collateral advantages in favour of the mortgagee.
• It is unlawful for the terms of the security to inhibit the realistic possibility of the borrower getting back exactly what it granted security over on repayment of the debt. This is a clog on the equity of redemption. A clog on the equity of redemption is void.
• Where a collateral the advantage is set continue after the mortgage is redeemed it will be deemed void. Since the continued existence of the advantage would hinder the mortgagor from recovering his property in an unencumbered state upon redemption.

Question 48

Bradley v Carritt [1903] AC 253 HL

Answer 48

Bradley v Carritt [1903] AC 253 HL

• Facts:
  
  • B mortgaged his shares in a tea company to C, who wished to become the sole broker for company.
  • B undertook in writing to endeavor to keep claimant as broker and pay compensation should tea not be sold through him.
  • Mortgage paid off.
  • Shares then mortgaged to different mortgagee.
  • This mortgagee ousted claimant from his position as broker.
  • C sued B for breach of covenant.
• Held: House of Lords held by bare majority that the covenant was void as a clog on equity of redemption.
  
  • Lord Macnaghten (bare majority): He draws the distinction between collateral advantages that expire with the repayment of the debt and those that continue afterwards. The former are enforceable, and the latter, as a clog on redemption, are invalid. In this case, even though the shares in th company are returned in the same condition and at the same value, there is an atmosphere of danger about using them and requiring delicate handling lest they induce legal action by D since the effect of the covenant permanently to fetter the mortgagor in the free enjoyment and disposition of the shares
  • Lord Lindley (minority): On the facts, the collateral agreement cannot be said to have inhibited the right to redeem as the shares are unaffected. Shares are got back in an unencumbered state.
• Analysis:
  
  • While Noakes established that if the mortgaged property is returned encumbered this qualifies as a clog, Bradley extends this so that if the advantage conveyed continues beyond redemption of the mortgage even it did not operate in rem or as a charge on the shares, then this also represents a clog.
  • N.b. Kreglinger would appear to overrule this decision.
    *

Question 49

Samuel v Jarrah Timber [1904] AC 323 HL

Answer 49

Samuel v Jarrah Timber [1904] AC 323 HL

• Facts:
  
  • P, mortgagor, borrowed from D, mortgagee, in an agreement that gave D the option to buy the mortgaged stock within 12 months of the mortgage commencing,
  • D sought to exercise the option
• Held:
  
  • Option was invalid as it was a clog on the equity of redemption
• When there is an option for the lender/mortgagee to purchase the mortgaged property as part of the mortgage transaction then this option is void.
• Analysis:
  
  • Only void if that option was granted at the time of the loan. If granted at a later date will be independent of the loan and will not operate as a clog.
  • Also note that several Lords expressed discontent on the rule on redemption as infringing on freedom of contract.
    
    • Earl of Halsbury LC: He is bound by authority due to “a principle of equity, the sense or reason of which I am not able to appreciate”. He believes such an agreement as this is “perfectly sensible” and ought to be, but is not, allowed by law.
    • Lord Macnaghten: He says that he is bound by 150 years of precedent, but criticises the rule on redemption and collateral advantage as allowing escape from fair bargains.
    • Lord Lindley: An option to buy is only valid where it doesn’t form part of the mortgage agreement but is separate (Lisle v Reeve). Again, he criticises the situation. Also, the validity of a contractual term should not depend on whether it is framed as part of the mortgage agreement or as a separate one: it is a purely artificial distinction with no substantive merit.

Question 50

Kreglinger v New Patagonia Meat Company [1914] AC 25 HL

Answer 50

Kreglinger v New Patagonia Meat Company [1914] AC 25 HL

• Facts:
  
  • Under the terms of a mortgage, the mortgagee was to have the right of first refusal on products produced by the mortgagor. Mortgagor claimed that this collateral advantage could not have effect once the debt was repaid as this would infringe the principle of redemption.
• Held:
  
  • HL rejected this, overturning its previous position (Bradlye v Carrit distinguished on the basis that the mortgage involved attachment o specific property whereas in this case mortgage secured by floating charge ) and enforce freely made contractual obligations instead.
  • It ruled that collateral advantages continue to operate once the debt is repaid except where:

(1) it is unreasonable/unfair; or
(2) if it operates as a penalty, clogging equity of redemption; or
(3) is repugnant to the right to redeem (per Lord Parker).

• More recently greater acknowledgement has been given to freedom to contract UN less you can establish that the term was imposed in an oppressive way, the collateral advantage may be upheld as a valid new of a mortgage agreement.
  
  • Lord Parker: There is no reason why a term of a mortgage agreement should be invalidated on grounds not applicable to other types of mortgage. Unconscionability, duress and undue influence (and nowadays the protection under UTCCR, UCTA and consumer credit legislation) are adequate protection for borrowers against exploitation.
  • Viscount Haldane LC: The rules on not clogging mortgages have turned into technicalities capable of defeating their actual purpose.
  • Lord Mersey: The rule of equity on redemption has to be strictly confined lest it wander into areas it ought not to enter, like “an unruly dog”

Question 51

Jones v Morgan [2001] EWCA Civ 995 CA

Answer 51

• Jones v Morgan* [2001] EWCA Civ 995
• Facts:
• A mortgage was created and three years later the parties entered into a second agreement giving the mortgagee the right to purchase some of the mortgaged property. The right was deemed invalid. The second agreement was seen as a reconstruction of the initial mortgage entered intro three years previously. The mortgage and the option to purchase were therefore not truly independent transactions.
• Held:
  
  • Chadwick LJ

1. mortgagee cannot as a term of the mortgage enter into a contract to purchase, or to obtain an option to purchase, any part or interest in the mortgaged premises
2. The foundation of this rule is that such terms are repugnant to the mortgage transaction of which they form a part
3. The reasoning is that such terms cannot stand with the contractual proviso for redemption or with the equitable right to redeem.
4. Finally, that it is essential to consider in all cases whether the transaction is in substance a mortgage.

-Principle:

• When there is an option for the lender/mortgagee to purchase the mortgaged property independent of the mortgage transaction then this option might be upheld (voidable)
• It depends whether the granting of the mortgage and the option are truly independent transactions
  
  • N.b. a mere delay between completing the mortgage and creating the option will not necessarily mean that the two are independent of one another. Neither will putting the option in to a separate agreement from the mortgage transaction, that right will be held as void.
  • Phillips MR: Agreed with Chadwick LJ’s conclusion but added ‘the doctrine of a clog on the equity of redemption is, so it seems to me, an appendix to our law which no longer serves any useful purpose and would be better excised’

Question 52

Warnborough v Garmite [2003] EWCA Civ 1544 CA

Answer 52

Warnborough v Garmite [2003] EWCA Civ 1544 CA

• Facts
  
  • The vendor was granted a mortgage over property being sold, as security for unpaid purchase money. An option was granted to the vendor to repurchase the property in specified circumstances.
• Held: The option was upheld
  
  • The Court of appeal declared that it was not part of the mortgage transaction but part of the sale transaction, thus independent of the mortgage. Mortgage rules should not apply when the reality is the transaction in question is of a different commercial character.
    
    • See Chadwick LJ’s point (4) in Jones v Morgan
  • Where an option to purchase was granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor for a price that was to be left outstanding on mortgage, there was a very strong likelihood that the court would conclude that the substance of the transaction was one of sale and purchase and not one of mortgage.

Question 53

What are the requirements for the operation of the doctrine of restraint of trade?

Answer 53

Restraint of trade doctrine under common law

The case law has established that the following requirements must be satisfied for a restraint to be valid under UK law:

1. The existence of a valid interest that the party imposing the restraint seeks to protect.
2. The restraint is no wider than is reasonable to protect that interest.
3. The restraint must not be contrary to the public interest.

Question 54

Esso v Harper’s Garage [1968] AC 269 HL

Answer 54

• Some collateral advantages may be struck out as void based upon the contractual principle that agreements must not impose unreasonable restriction on trade; for example clauses tying the borrower to buy only the lender’s products, although validity may depend upon the duration of that tie.