Mortgages

Question 1

Mortgage

Answer 1

A mortgage is a form of security held against a property when a lender provides a loan for finance. The borrower (the “mortgagor”) grants the lender (the “mortgagee”) proprietary rights over the property in exchange for the loan being made.

Question 2

Legal Mortgages in Registered Land

Answer 2

The creation of a legal mortgage in registered land:

• must take the form of a legal charge granted by the mortgagor in favour of the mortgagee (s(1) LRA 2002,
• must, as it is a conveyance in the land, must be created by deed (s205(1)(ii), 52(1) LPA 9125
• the granting of a legal charge constitutes a registrable disposition and must be completed by registration to operate at law (s27(1), (2)(f) LRA 2002)
• If registered, the charge takes effect by way of deed by legal mortgage (see s.51 LRA 2002 & s.87 LPA 1925)
• if not registered, the charge can only ever take effect in equity

Question 3

Legal mortgages in unregistered land

Answer 3

In unregistered land, the grant of a first legal mortgage will trigger compulsory registration of title under s. 4 of the LRA 2002. If the unregistered estate owner does not comply and duly register as proprietor of the land, after a two-month period from the date of grant of the mortgage, the mortgage has ‘effect as a contract made for valuable consideration to grant or create the legal estate concerned’: s. 7 of the LRA 2002. In essence, this means that either registration requirements are satisfied and the mortgage will become a registered charge or if not, after two months, it will take effect as an equitable mortgage only.

Question 4

Mortgages of an Equitable Interest

Answer 4

If someone only holds an equitable interest in the land (e.g. an interest behind a trust) then they cannot create a legal mortgage because in the eyes of the law there is no legal property available to be mortgaged. This means that a mortgage of an equitable
interest can only be an equitable mortgage. The method of creating such mortgages did not change under the LPA 1925. It consequently involves a transfer of the entire equitable interest to the lender for the duration of the mortgage with that interest being returned to the borrower on repayment of the loan. As with any disposition of an equitable interest, the transfer must comply with LPA 1925, s 53(1)(c), i.e. in writing signed by the person disposing of the interest (here, the mortgagor).

Question 5

Equitable right to redeem

Answer 5

This recognises that a mortgage is security for a loan, not an opportunity to take property from someone who is willing and able to repay the money owed.

To put it another way: ’once a mortgage, always a mortgage’ (Lord Parker in Kreglinger v New Patagonia Meat and Cold Storage Company [1915] AC 25). Equity recognises the borrower as the true owner.

The sum total of the borrower’s rights (including, but not limited to, the equitable right to redeem) is known as the ‘equity of redemption’. The financial value of the equity of redemption is the difference between the outstanding balance on the debt and the market value of the property (this is commonly referred to as the borrower’s ‘equity’ in the property).

The right to redeem means the right to repay the loan and for the mortgage charge to thereby be discharged from the land. Redemption is therefore the process by which the land is released from the charge or mortgage.

There must be ‘no clog or fetter’ on the equitable right to redeem.

Question 6

Any term in the mortgage which purports to exclude or restrict the mortgagor’s right to redeem will be void

Answer 6

here a clause attempts to remove the right to redeem in its entirety such that, in effect, the mortgage is irredeemable, the term will be void: Jones v Morgan (2001). Similarly, a clause which restricts those individuals that are permitted to redeem the mortgage or the time for redemption will be struck out: Re Sir Thomas Spencer Wells (1933). Clauses which attempt to postpone the right to redeem are also likely to be void in circumstances where the result is to render redemption meaningless or illusory: Fairclough v Swan Brewery.

Question 7

A term providing for the transfer to the mortgagee of the mortgaged property may be void

Answer 7

A term in the mortgage which provides for the transfer to the mortgagee of the mortgaged property or affords the mortgagee an option to purchase the land may be void. These terms are entirely inconsistent with the fundamental nature of the contemporary mortgage as well as being incompatible with the equitable right to redeem and may be struck down. There is no need to demonstrate unconscionability for these clauses: Samuel v Jarrah Timber & Wood paving Corporation Ltd (1904). A clause providing that upon the occurrence of a specified event the land becomes that of the mortgagee absolutely is therefore void as the mortgagor is not free to repay the loan and redeem the property unencumbered.

Question 8

Any term in the mortgage conferring collateral advantages on the mortgagee above and beyond repayment of the loan will be void

Answer 8

Terms conferring advantages on the mortgagee which go above and beyond the right to repayment of the loan may be struck out as inconsistent with the mortgagor’s right to redeem. These ‘collateral advantages’ are additional benefits provided to the lender by the mortgagor and might include the mortgagor undertaking further obligations such as promising to provide favourable treatment to the mortgagee’s business or to buy only the mortgagee’s goods. Not every collateral advantage clause will fail, however. In Kreglinger, the House of Lords emphasized that freedom of contract and equality of bargaining position between the parties would be relevant factors particularly in the commercial context.

Question 9

Any term in the mortgage which is deemed to be oppressive or otherwise unconscionable will be struck out

Answer 9

Where a term is deemed oppressive or unconscionable, the court can, in its discretion, strike down either that single clause or the entire mortgage.39 The test of what constitutes an oppressive or otherwise unconscionable term is a strict one. Mere unreasonableness will not suffice: Multiservice Bookbinding v Marden.

To be oppressive or unconscionable, a term must therefore be ‘imposed in a morally reprehensible manner’ such that the mortgagee’s conscience is affected and the court will have regard to: the equality of arms between the parties, whether the mortgagor could have refused to accept the deal, and whether the mortgagor received independent legal advice prior to granting the mortgage. If advice has been obtained, it will be difficult to argue that the terms were oppressive or unconscionable.

The court also has a well established inherent jurisdiction to strike down a penal rate of interest (Holles v Wyse (1693) 2 Vern 289). This is generally taken to mean an amount which does not relate to a genuine pre-estimate of the losses incurred by the lender as a result of the borrower’s default.

Question 10

Other Statutory Protections

Answer 10

A mortgage is self-evidently a creditor–debtor relationship. Statutory protections shielding cash-strapped borrowers from ruthless money-lenders may therefore apply. One example is s. 140A of the Consumer Credit Act 1974, inserted by ss 19 and 20 of the Consumer Credit Act 2006, which empowers the court to intervene if it finds the creditor–debtor relationship arising from a credit agreement to be unfair to the debtor.

For mortgages granted on or after 31 October 2004, the protective regime under the Financial Services and Markets Act 2000 (FSMA 2000) will, in the majority of cases, also apply. Under the FSMA 2000, those providing ‘regulated mortgage contracts’ must ensure fair treatment and transparency to ‘consumers’.51 If any of the codes of practice are breached, the offending mortgagee can be required to pay compensation to the injured party.

Question 11

Powers of the mortgagor to claim possession, grant leases, and seek an order for sale

Answer 11

In addition to the rights already outlined in this section, the mortgagor also enjoys certain ‘powers’ under the mortgage which can be enforced by seeking an order of the court:

• The power to claim possession of the mortgaged property provided that no claim to possession has been made by the mortgagee: s. 98 of the LPA 1925.
• The power to grant a lease over the mortgaged property provided that it is not inconsistent with the terms of the mortgage: s. 99 of the LPA 1925.53
• The power to seek an order for sale of the mortgaged property: s. 91 of the LPA 1925.

Question 12

Undue influence

Answer 12

If a borrower defaults on a mortgage, the lender will want to be able to take possession of the mortgaged property with a view to then selling the land - lenders have adopted the practice of requiring all adult occupiers to sign a written form of consent to the mortgage. In signing the document, adult occupiers agree that any rights they may have in the property take second place to the lender’s rights, which include the rights to possess and sell, so a lender will not be prevented from enforcing the mortgage - Where express written consent is obtained from a co-owner, lenders must take care to ensure that such consent is fully informed and freely given. If consent has been
Land Law 10 obtained as a result of undue influence, that consent may be invalidated and the mortgage is unenforceable against the co-owner.

Question 13

When should a Lender take Precautionary Steps?

Answer 13

In certain circumstances, the lender will be ‘put on enquiry’ (i.e. red flag should be raised) in relation to the risk of undue influence because of something in the nature of the transaction itself. Two House of Lords cases, delivered on the same day by the same judges, set out the guiding principles.

Question 14

Barclays Bank v O’Brien [1994] 1 AC 180

Answer 14

Wife signed the mortgage in reliance on her husband’s false representation that the loan was limited to £60,000 and would only last three weeks. When the debt grew to £154,000, the bank sought to enforce the mortgage. The House of Lords held that the mortgage was unenforceable against the wife. The bank was put on enquiry because the mortgage transaction was not for the wife’s benefit. To protect itself, the lender should have taken steps to bring home to the wife the risk that she was running and should have advised her to take independent advice.

Question 15

CIBC Mortgages plc v Pitt [1994

Answer 15

where the husband used the borrowed money to speculate on the stock market, losing everything in the 1987 stock market crash. The wife sought to have the mortgage on the matrimonial home set aside on the grounds of undue influence, having signed the mortgage without reading it under pressure from her husband. The House of Lords rejected the wife’s claim. The husband had not been acting as the lender’s agent and the lender had no notice of the husband’s undue influence. As the mortgage application said that the loan was for a holiday cottage, there was nothing to put the lender on notice that the transaction was anything other than a normal advance for the couple’s joint benefit.

Question 16

What Precautionary Steps should a Lender take?

Answer 16

The House of Lords recast this area of law and laid down clear guidance for how a lender should discharge its duty to properly obtain consent in the case of Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773.

Firstly, the claimant who is seeking to have the mortgage set aside must show that she placed trust and confidence in the other party and that the transaction called for an explanation. The lender would be put on enquiry where:

(a) a wife guaranteed her husband’s debts or the debts of his company – as in O’Brien; or
(b) where someone with a non-commercial relationship guaranteed the debts of another (e.g. elderly parents guaranteeing a child’s debts). The lender is not put on enquiry where money is jointly advanced for an apparent joint benefit (eg for a joint holiday home, as in Pitt).

Question 17

Lender put on enquiry?

Answer 17

Where the lender is put on enquiry, Etridge confirms that the lender must show that it took reasonable steps to bring home to the claimant the risks involved in giving the guarantee. The lender should insist on the wife taking independent advice from a solicitor, which should be in the context of a face-to-face meeting in the husband’s absence. The solicitor should explain to the wife the practical implications of the transaction in a meaningful way.

The House of Lords in Etridge emphasised that the solicitor was not the lender’s agent, and the solicitor, not the lender, is responsible for the nature and quality of the advice. The lender is entitled to assume that the solicitor has done his job properly, and it is not necessary that the solicitor acts only for the wife.

Question 18

Enforcing a Legal Mortgage

Answer 18

Right to Take Possession, Power of Sale, Foreclosure, Appointment of a Receiver.

Question 19

Right to Take Possession

Answer 19

A legal mortgage comprises both a proprietary interest and a contract of debt, and if the borrower defaults the lender can, of course, bring a contractual action for repayment of the loan plus interest. However, the borrower would be unlikely to be able to pay any damages awarded given it is unable to make its mortgage repayments in the first place.

If the borrower does not have the money to pay, the lender will want to enforce his security by having the property sold in order to recover the debt from the proceeds of sale. This normally requires the mortgagee to be in possession of the mortgaged property in order to sell with vacant possession

The right to take possession of the property arises on the granting of the mortgage, independently of any default by the borrower, and is given statutory acknowledgement under the LPA 1925, s 95(4). Unless the lender agrees otherwise under the terms of the mortgage, the lender’s right to take possession arises as soon as the mortgage deed is executed

Question 20

Exercising the Right to Take Possession

Answer 20

A lender will usually make an application to the court before it takes possession, but this is not always necessary. In Ropaigealach v Barclays Bank plc [2000] QB 263, the Court of Appeal confirmed that a prior court order was not necessary and that a lender could obtain possession itself by exercising its inherent right to do so. The drawback of a lender using ‘self-help’ to obtain possession is that the Criminal Law Act 1977, s 6 makes it an offence to use or to threaten violence for the purpose of securing entry. This makes self-help a risky option unless the premises are unoccupied at the time. (In Ropaigealach the property was vacant because it was undergoing repair and refurbishment.)

Question 21

Application to the courts

Answer 21

if the lender makes such an application, the borrower may get extra protection under the Administration of Justice Act (AJA) 1970, s 36. Under this section, the court has a discretion to postpone a possession order if it appears likely to the court that the borrower will be able to pay the sum due (as defined by the AJA 1973, s 8) within a ‘reasonable period’. Note that s 36 only applies to mortgages of land ‘which consists of or includes a dwelling house’.

A ‘reasonable period’ usually means the remaining mortgage term (Cheltenham and Gloucester Building Society v Norgan [1996] 1 All ER 449). A borrower wishing to obtain relief should present a detailed financial plan which, if followed, will result in the loan and any arrears being paid off before that term expires (National and Provincial Building Society v Lloyd [1996] 1 All ER 630 CA).

Relief may also be granted to give the borrower an opportunity to sell the house himself (e.g. a three month postponement in Target Home Loans Ltd v Clothier [1994] 1 All ER 439). However, this requires firm evidence that a particular sale is about to be completed (Mortgage Service Funding Plc v Steele (1996) 72 P & CR D40); for instance, evidence of actual or imminent exchange of contracts. Merely instructing a conveyancer will not suffice as the courts are rightly suspicious of mortgagors seeking to delay any sale by remaining in possession in such circumstances.

In addition to AJA 1970, s 36, the court has a further inherent jurisdiction to postpone possession where a reasonable prospect of paying the sums due is proved (Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883). Unlike AJA 1970, s 36, this power applies to mortgages of all types of land but normally only permits a postponement of up to 28 days.

Question 22

Power of Sale – when does it arise?

Answer 22

Most mortgage deeds contain an express power of sale, but in its absence LPA 1925, s 101 gives every legal mortgagee a statutory power of sale which arises ‘when the mortgage money has become due’. This can be the legal date of redemption which, for this reason, is usually set at one month after the date of the mortgage even though neither party actually expects the loan to be fully repaid at that time.

Where the loan is repaid by instalments, Payne v Cardiff RDC [1932]1 KB 241 confirms that the power of sale in any case arises as soon as one instalment of capital is due. It could therefore be important to ascertain whether the mortgage is a repayment mortgage or an interest-only mortgage.

Question 23

repayment mortgage or interest only

Answer 23

With a repayment mortgage, the borrower repays a proportion of the capital each month, as well as the interest. With an interest- only mortgage, there is no capital element to the monthly repayments. The capital will instead be due for repayment, usually as a lump sum, at an agreed later date.

Question 24

Power of Sale – has it become exercisable?

Answer 24

Under LPA 1925, s 103, the power of sale only becomes exercisable when any of the following apply:

1. notice requiring repayment of capital has been served by the lender and the borrower has defaulted for three months after service (Note: no arrears are necessary for the power of sale to arise here); or
2. any interest under the mortgage is in arrear and unpaid for at least two months (this is not two months interest in arrear – it could be £1 outstanding for two months); or
3. there has been a breach of some other mortgage provision, either express or implied by the LPA 1925.

Provided the power of sale has arisen under s 101, a sale to an innocent purchaser will be valid even if the power is not yet exercisable under s 103. If the property is sold before the power becomes exercisable, the borrower’s remedy is to claim damages from the lender for selling too early (LPA 1925, s 104).

Question 25

Foreclosure

Answer 25

Foreclosure is the historic way of enforcing a mortgage to allow the lender to take the property in satisfaction of the mortgage debt. Before foreclosure, the borrower must be given a last chance to repay. The court can also order a sale in lieu of foreclosure, which it will inevitably do if the property is worth more than the debt. For these reasons, foreclosure is hardly used today.

Question 26

Appointment of a Receiver

Answer 26

The power to appoint a receiver arises under the LPA 1925, s101(1)(iii). The function of the receiver is to get income from the land, e.g. by continuing an existing business, and to apply it in paying outgoings on the land, including paying off interest and capital under the mortgage. The receiver is deemed to be the borrower’s agent. The lender is therefore not liable for the receiver’s negligence. This makes the appointment of a receiver a safer option than the lender taking possession, particularly where the property comprises an existing business where the mortgagee can thereby avoid the risks that would otherwise arise if it ran the business itself.

Question 27

Legal Mortgagee’s Duties on Sale - Reasonable care to obtain a proper price

Answer 27

In Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, the Court of Appeal held that when selling the property, a lender is under a duty to take reasonable care to obtain the ‘true market value’ or the ‘proper price’.

It is for the lender to take an ‘informed judgment’ as to how the sale should be advertised and to decide how long the property should be left on the market. Perfection is not required, and the lender will not be liable if the sale price is broadly within the correct ‘bracket’ or within an acceptable ‘margin of error’.

A lender cannot simply put the property ‘under the hammer’ as if it were second hand furniture but should take expert advice as to the method of sale, how to market the property and any reserve to be set

The lender is entitled to sell the property as it stands and is under no obligation to improve it or to increase its value - Silven Properties Ltd v Royal Bank of Scotland plc

Question 28

Legal Mortgagee’s Duties on Sale - determining when to sell

Answer 28

The timing of the sale does not come within the lender’s duty of care. The lender is entitled to sell when he likes, even if a higher price could be obtained by marketing the property for a longer period (Cuckmere Brick Co Ltd v Mutual Finance Ltd).

Question 29

To whom is the Lender’s duty owed?

Answer 29

The lender’s duty of care is an equitable one. The duty to obtain the proper price is owed to the mortgagor and any surety or guarantor for the mortgagor. It is not a trustee’s power of sale and no duties are owed to a beneficiary under a trust of the property, where that beneficiary is not also a legal owner.

Question 30

Equitable Mortgage - Enforcement

Answer 30

The rights and remedies available to an equitable mortgagee are similar in certain respects to those of a legal mortgagee but sufficiently different in others to warrant a brief discussion here. Thus, for example, an equitable mortgagee has the same right to bring an action on the contract for repayment of the sums owed under the equitable mortgage and can seek foreclosure and the appointment of a receiver as is the case for legal mortgages. However, unless the equitable mortgage is created by deed, the equitable mortgagee will not enjoy a power of sale under s. 101 of the LPA 1925. Where no deed is used, equitable mortgagees will, nevertheless, still be able to rely on the court’s discretion to order sale of mortgaged property under s. 91 of the LPA 1925.

As to equitable chargees, they do not have the right to possession nor a right to seek foreclosure as they do not enjoy any estate in land. The power of sale and to appoint a receiver is only available to an equitable chargee where the charge was granted by deed. Where an equitable charge is not granted by deed, the equitable chargee would need to apply for sale under s. 91 of the LPA 1925 and for the appointment of a receiver under s. 37(1) of the Supreme Court Act 1981.