Mortgages Flashcards
Santley v Wilde [1899]
Mortgage is a conveyance of land as security for payment of debt or discharge of another obligation
Today’s Definition of a Mortgage
Loan of cash secured by the mortgagee being given rights over the property offered as security by the mortgagor
Formalities
Legal Mortgages
- Capable of being a legal interest
- S.1(2) LPA 1925
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Must be created by deed to be legal
- Ss. 52, 85, 86 & 87 LPA 1925
- S.1 LP(MP)A 1989 – clear on its face it’s a deed, signed by mortgagor, witnessed properly, and delivered
- And must be substantively registered
- S.27(2)(f) and s.4 LRA 2002
- If not created properly, then may be equitable
Formalities
Equitable Mortgages
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Failed legal mortgages because don’t follow formalities but only if comply with:
- S. 2 LP(MP)A 1989 – in writing, containing terms, and signed by both parties
- United Bank of Kuwait plc v Sahib [1996] – equity won’t recognise the deposit of deeds as an equitable mortgage any longer
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Mortgages of equitable interests – very important in commercial transactions as avoids formalities and cost of legal mortgage
- S.53(1)(c) LPA 1925 minimum but usually s2 – in writing and signed by the grantor but usually in accordance with S. 2 LP(MP)A 1989
- Registered land: s32 Notice /s29
- Unregistered Land: C(iii) Land Charge /s4(5) LCA 1972
CONTRACTUAL RIGHT TO REDEEM
Paying back all of the money in return for lender giving up propriertal rights – often 20-25 years in residential
Legal Date for redemption
Mortgages
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Date on which the borrower is due to repay – normally 1-6 months from the date the borrower borrowed the money. Only valid for 24 hours.
- If doesn’t repay, loan cannot be repaid until the end of the term
- Very few borrowers will be in a position to take advantage of this so it’s of very limited value
- Equity stepped in to give the borrower more protection
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Equitable Right to Redeem
Mortgages
- Equitable Right to Redeem: arises AFTER the contractual date for redemption has passed
- Much more generous than legal contractual right; equity says a borrower can redeem at any time after the legal date for redemption has passed until the end of the mortgage term
Delaying the Legal Date for Redemption
Mortgages
- If the legal date is pushed back so is the equitable right to redeem.
- Lenders don’t want you to pay money back early as they will only earn interest if you delay paying back the loan.
- In domestic mortgages, courts are more generous to borrowers, but this may be okay in commercial transactions as long as the right to redeem remains real
Knightsbridge Estates v Byrne [1939]
Delaying the Legal Date for Redemption
Mortgages
If borrower knows what they’re getting into, enters of own free will, and gets back unencumbered free will land, courts are unlikely to bring forward the legal date for redemption
Commercial mortgage of freehold property (pub) – legal date for redemption 40 years after loan so equitable right to redeem didn’t kick in until 40 years and 1 day; borrower wanted to redeem early and wanted the court to declare the clause was invalid.
Borrower was also getting a very low interest rate in return so wasn’t unconscionable or oppressive.
Fairclough v Swan Breweries [1912]
Delaying the Legal Date for Redemption
Mortgages
If borrower does not get back unencumbered or seriously less encumbered free will of land, courts likely to allow legal date of redemption to be brought forward.
Commercial mortgage of leashold property (pub) mortgaged to brewery – At time mortgage was granted, lease of pub only had 17 years to run, legal date of redemption said couldn’t be redeemed until 6 weeks before the end of the lease. Borrower wanted to redeem earlier and went to court to get the court struck out.
Court agreed and said if they upheld this clause, borrower wouldn’t get what they put in as would have a lease with 6 weeks to run as opposed to 17 years. Borrower was allowed to redeem early.
Options to Purchase
Mortgages
Can’t have a clause in a mortgage that the lender has an option to purchase the property because if they exercise that option, the property goes to the lender and prevents the borrower from repaying the loan and getting the property back unencumbered
Samuel v Jarrah [1904]
Options to Purchase
Mortgages
Options to purchase granted to lenders in mortgage deeds will be void
Reeve v Lisle [1902]
Options to Purchase
Mortgages
Option to purchase may be valid if given by a subsequent independent transaction – lender has to show option granted was completely independent and separate
Warnborough v Garmite [2003]
Options to Purchase
Mortgages
Court must look at the substance of the transaction – mortgage and option granted on same day, but part of a separate sale and purchase deal and so allowed to stand
Collateral Advantages
Mortgages
- Collateral advantages e.g. admin fee, taking out insurance so get commission etc:
- Not allowed in residential transactions, but may be allowed in commercial transactions (breweries loan money to individuals to open pubs but have to buy beer from brewery or oil companies to petrol stations but have to buy petrol from them – solus ties
Advantage to lender must stop when mortgage is repaid
Noakes v Rice [1901]
Collateral Advantages
Mortgages
Advantage to lender must stop when mortgage is repaid
Pub tenant entered into a mortgage arrangement where they agreed to only sell the lenders wine and spirits for length of lease (26 years) even after mortgage had been repaid. Court didn’t allow it as devalued equity of redemption – at beginning of mortgage, pub was a freehouse, but now was a tied house
Biggs v Hoddinott [1898]
Collateral Advantages
Mortgages
Provided the collateral advantage stops within the mortgage term, it may be allowed.
Kreglinger v New Patagonia Meat Company [1913]
Collateral Advantages
Mortgages
Collateral advantages may be allowed if genuinely independent of mortgage transaction
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968]
Collateral Advantages
Mortgages
Collateral advantages may be allowed if genuinely independent of mortgage transaction
- A collateral tie, even if wholly independent, also risks being invalidated on public policy grounds if it is in restraint of trade. 21 year collateral tie struck down by 5 year upheld.
- Must not be unconscionable
Unconscionable Terms
Mortgages
Courts have the power to strike down individual terms of mortgage terms if they deem the oppressive
Cityland Properties v Dabrah [1968]
Unconscionable Terms
Mortgages
Court will strike down terms where lender had taken advantage of their position and can’t justify the terms
Borrower had been a tenant of lender for 11 years, lease was coming to an end and lender made it clear they weren’t going to renew the lease – under pressure to agree to their suggestion to buy the property from them – landlord said they would lend him the money and so borrower signed up. Interest rate was 19% (base interest rate now is 0.2%), borrower agreed that if he defaulted he would pay a premium of 57% - court didn’t allow it as an unconscionable term
Multiservice Bookbinding v Marden [1977]
Unconscionable Terms
Mortgages
Court will not strike down unconscionable terms where parties had equal bargaining power
- Postponement of legal date of redemption for 10 years, interest rate of 35% - borrower went to court to have terms struck down but court refused because had equal bargaining power – borrowed to expand business, had legal advice, and went in with eyes open, taken a risk paying in Swiss francs based on exchange rate staying the same. Lender (Mr Marden) was a private individual and had invested his life savings and was entitled to make a profit.
Falco Finance Ltd v Michael Gough [1998]
Unconscionable Terms
Mortgages
Term in mortgage that even if borrower was late in paying by 1 day, interest rate increased by 5% for whole term – struck down as unfair
Davies v Direct Loans [1986]
Unconscionable Terms
Mortgages
High interest rate justified as borrower was self-employed and had a poor credit history and so lender was taking a risk
Paragon Finance v Nash [2002]
Unconscionable Terms
Mortgages
High interest rate justified as lender itself was suffering financial difficulties so was paying more for the money that it was borrowing so was passing on higher cost.
Undue Influence
Mortgages
Where a loan has been secured on a property, but not for everyone’s benefit – e.g. husband and wife have granted a mortgage over their loan to release capital for the husband’s business – house may be in both names and wife may have to sign the document – lender must take steps to ensure wife has been fully informed of transaction and ramifications – if not, wife’s rights rank second ahead of the bank’s rights and so the mortgage can be declared void if undue influence
Barclays Bank plc v O’Brien [1994]
Undue Influence
Mortgages
- In certain circumstances, the lender will be “put on enquiry” in relation to undue influence because of something in the nature of the transaction itself.
- O’Brien needed money for business and mortgaged house to bank as security
- Loan not for benefit of all borrowers (only O’Brien’s benefit and not his wife) but O’Brien did not give his wife the details (said it was a s-t loan but long l-t, was for 60k but actually 150k). Bank official did not explain the situation and just got her signature; business failed and bank tried to repossess the property; Mrs O’Brien successfully argued that mortgage was unenforcable against her on grounds of misrepresentation and undue influence.
- Bank were aware of what Mr O’Brien had told her and they were in a much better position to give her the real position and independent advice
CIBC Mortgages plc v Pitt [1994]
Undue Influence
Mortgages
Lender will not be liable for undue influence where they have not been put on enquiry
- Husband and wife mortgaged home to pay for a new holiday home – joint benefit
- Husband used money not with her approval to bet on the stock market; lost the money and court ruled wife couldn’t argue undue notice as was nothing to put the bank on notice there was something to be concerned about.
- Loan was for joint benefit
RBS v Etridge [2001]
Undue Influence
Mortgages
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Where the lender has been put on enquiry must show it took reasonable steps to advise of risk
- Insist the party take independent advice from a solicitor in the other party’s absence.
- Claimant seeking to have the charge set aside must show that she placed trust & confidence in the other party and that the transaction called for explanation.
- Applies to any situation where a lender is putting up money for a borrower
Equity and Law Homes Ltd v Prestidge [1992]
Undue Influence
Remortgages
Where the spouse validly consents to an initial mortgage, but not to a subsequent re-mortgage for a larger sum, the wife will generally only be bound to the extent of the initial mortgage sum.
Enforcing a Legal Mortgage
- Lender always has the right to sue the borrower when something goes wrong but also creates a proprietary right
- Once borrower has got into trouble with mortgage payments, right to sue is probably not of much use
Right to Possess
S95(4) LPA 1925
Mortgages
Right to possession arises on granting of mortgage
Four Maids v Dudley Marshall (Properties) Limited [1957]
Right to Possess
Mortgages
Lender has right to possess before the ink is dry on the mortgage deed – right to repossess as soon as mortgage is signed
S.6 CLA 1977
Right to Possess
Mortgages
Criminal offence to use/threaten violence to gain entry to premises
s.36 AJA 1970 / s.8 AJA 1973
Right to Possess
Mortgages
Lender should apply to court for order of possession but court has a right to postpone the order of possession at its discretion if it think the borrower can repay the outstanding arrears in a reasonable time
Cheltenham & Gloucester v Norgan [1996]
Right to Possess
Mortgages
Reasonable time seen as the “outstanding term of the mortgage” to repay arrears by end of the mortgage term
e.g. 30 year term and arrears arise after 2 years – court will postpone possession if believes borrower can catch up in the next 28 years (almost inevitable)
Ropaigealach v Barclays Bank plc [1999]
Right to Possess
Mortgages
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Court can only suspend possession where there has been an order for possession.
- Borrower was doing up the property so wasn’t in occupation and so lender just took possession. When borrower applied for an order to suspend possession, it couldn’t help. Can only be used when lender brings an action so borrower should never give up possession voluntarily.
Right to Sell
When does Power of Sale Arise
Mortgages
- Power of sale arises under s.101(1)(i) LPA 1925 impliedly but most mortgage deeds contain very detailed powers of sale – power arises when mortgage is made by deed and legal redemption date has passed
Payne v Cardiff RDC [1932]
Power of Sale Arises
Mortgages
If loan is repayable by instalment, power arises as soon as one instalment is due
Horsham Properties Ltd v Clark [2008]
Power of Sale Arises
Mortgages
Right to sale is NOT contrary to Art 1 ECHR
s.103 LPA 1925
Power of Sale
Exercisable
Mortgages
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Power of Sale is Exercisable under s.103 LPA 1925 if 1 of 3:
- 3 months have passed since Notice to repay
- Some interest is at least 2 months in arrears
- Breach of another mortgage term e.g. breach of covenant to ensure or repair
Legal Mortgagee’s Duties on Sale
- Power to appoint receiver – someone to manage sale on behalf of lender or receiver may help to run business if commercial
- Foreclosure – court vests legal estate in the lender free of any interest from the borrower – very cumbersome process and hardly used now
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971]
Legal Mortgagee’s Duties on Sale
Mortgages
When selling the property, a lender is under a duty to take reasonable care to obtain the ‘true market value’ or the ‘proper price’.
Michael v Miller [2004]
Legal Mortgagee’s Duties on Sale
Mortgages
Lender will not be liable if the sale price is broadly within the correct ‘bracket’ or within an acceptable ‘margin of error’.
Lender had acted reasonably in selling agricultural land for £1.625m as valued in the range of £1.6m - £1.9m.
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971]
Legal Mortgagee’s Duties on Sale
Time of Sale
Mortgages
Lender is entitled to sell when he likes, even if a higher price could be obtained by marketing for a longer period.
Rights of an Equitable Mortgagee
Possession
- Right of equitable mortgagee to take possession not universally accepted as it has no legal estate.
- However, if equitable mortgage has arisen as a contract to create a legal mortgage, takes affect as an equitable lease, which in turn gives the right to possess the property.
- Equitable mortgagee not entitled to collect any rents due to the borrower, as it has no legal reversion.
LPA 1925, s101
Rights of an Equitable Mortgagee
Sale
Statutory power of sale only applies when mortgage is made by deed
Re White Rose Cottage 1965
Rights of an Equitable Mortgagee
Denning said that equitable mortgage can in certain circumstances confer a power of sale
S.91(2) LPA 1925
Rights of an Equitable Mortgagee
Mortgages
Remedy of an equitable mortgagee is to apply to the court for an order for sale
