Property - Mortgages

Question 1

Property - Mortgages - Steps

Answer 1

• STEP 1: Begin by defining:
• STEP 2: Next, go through the formalities - is it a legal or equitable mortgage?
• STEP 3: Are all the terms enforceable?
• STEP 4: Has the lender taken precautionary steps?
• STEP 5: Consider the lender’s powers in enforcing a legal mortgage:
• STEP 6: The lender’s duties when exercising a power of sale:
• STEP 7: Priorities of mortgages - who gets repaid first?

Question 2

Property - Mortgages - Definition

Answer 2

mortgage is a proprietary interest in land given by the mortgagor (the land owner) as security for a loan. The mortgagor receives a loan in return for giving the mortgagee (the bank) the security over his land. In Santley v Wilde, a mortgage was defined as “a conveyance og land … as a security for the payment of a debt or the discharge of some other obligation”.

Question 3

Property - Mortgages - formalities - Legal or equitable

Answer 3

• A mortgage is an interest capable of being legal (s. 1(2)(c) LPA 1925).
• To be legal it must be created by deed (s. 52(1) LPA 1925), i.e. signed, witnessed, dated, and headed a deed (s. 1 LPIMPIA 1989), so check if it is. If not, but there is a valid estate contract to create a mortgage i.e. in writing, signed by both parties and containing all agreed terms (s. 2 LP(MP)A 1989), then it will instead be a_n_ equitable mortgage. It would also be equitable if the land owner only had an equitable interest.
• A mortgage is a triggering event (s. 4 LRA) and therefore requires registration. A legal mortgage must be entered on the charges register of the title in order to be protected against a purchaser for valuable consideration (s. 27(2)(f) LRA 2002). If it is an equitable mortgage, you should instead cite s. 32 LRA 2002 for this. For unregistered land, the mortgagee/lender takes the title deeds instead of registration.
• Land can be mor_tgaged_ several times. A second mortgage is known as a puisne mortgage. It mu_st be_ registered as a C(i) at the Land Charges Department or it will not be binding.
• Bulk of your answer - discuss the substantive issues: You sho_uld_ _do_ _steps_ _(__1__)_ and (2) for any mortgages question.* *Any number* *of* *the* *substantive* *issues* *from* *(3)* *to* *(7)* *below* *can* *come up* *-* *remember* *that* *not all* *will* *come* *up* *so* *do* *not* *just write* *everything* *you* *know* *-* *apply* *what* *is* *relevant.

Question 4

Property - Mortgages - are all the terms enforceable?

Answer 4

• A mortgage should be solely security for a loan, with no extra benefits or terms added:
  
  • THE DATE OF REDEMPTION:
    
    • In Equity, the mortgagor is described as having the “equity of redemption” which represents the mortgagor’s equitable interest in the property and consists of the sum total of the mortgagor’s rights in relation to the land. There is a general rule that there must be no _“c_log” (i.e. impediment) on the equity of redemption.
    • Redemption (the first date that mortgage can be repaid in full) cannot be prevented altogether *(Toomes* v Conset), but it can be postponed if the date of redemptio**n is not so far in the future as to render the right to redeem illusory - which is a question of degree:
      
      • Fairclough v Swan Brewery
        
        • Postponed until 6 weeks before the end of a 17.5-year lease = a clog.
      • Knightsbridge Estates v Byrne
        
        • A 40-year postponement was upheld because it was a commercial arrangement of a freehold and had been used to negotiate a better rate of interest.
  • OPTIONS TO PURCHASE:
    
    • Will generally be held void if included in a mortgage (SamuelvJarrahTimber).
    • Can only be valid if granted afterwards in a separate agreement (ReevevLisle).
  • COLLATERAL TIES:
    
    • Will be struck out if unconscionable, a penalty, a restraint of trade or a clog on the equity of redemption.
      
      • Noakes & Co v Rice
        
        • A beer tie (brewery gave pub landlord a mortgage that included having to only buy their beer) was struck out because it could last the duration of the lease, even after the mortgage was redeemed.
      • Biggs v Hoddinott
        
        • A beer tie was upheld because it only lasted the 5-year duration of the mortgage on a freehold.
      • Esso Petroleum v Harper’s Garage
        
        • The defendant entered into “solus” supply agreements with the claimant, whereby it would distribute Esso’s petrol at its two garages, one for four years and five months and one for 21 years. The four-year agreement was valid. The 21-year agreement (which came with a mortgage with a covenant forbidding redemption for 21 years) was not. A tying agreement must not amount to a “restraint of trade”.
      • Kreglinger v New Patagonia Cold Storage
        
        • A collateral advantage will be allowed if wholly independent of the mortgage arrangement. Contrast below:
      • Jones v Morgan
        
        • Here,eventhoughthemortgagearrangementwa_s_entered into 3 years later, it was void because it was part of a refinancing arrangement and thus integral to th_e mortgage_.
  • INTEREST RATES:
    
    • The court can strike down a penal rate of interest (Holles v Wyse), i.e. one that is:
      
      • exorbitant, extravagant or unconscion_able_ (Cavendish v Makdessi ParkingEye v Beavis); or in conflict with the
      • Consumer Rights Act 2015;
      • Unfair Terms in Consumer Contract Regulations 1999;or
      • ConsumerCredit Act2006.
    • Compare the case law:
      
      • Examples of unconscion_able_ interest rates:
        
        • Cityland & Property Holdings v Dabrah
          
          • A 19% interest rate that increased to 57% if the borrower defaulted was reduced to 7%.
        • Falco Finance v Gough
          
          • A double interest rate (8.99% increasing to 13.99% if the borrower defaulted) was held to be unfair under the UTCCR 1999 (now replaced by the CRA 2015).
      • Examples of acceptable interest rates:
        
        • Multiservice Bookbinding v Marden
          
          • Repayments were linked to foreign exchange rates and equivalent to 16% interest. This was upheld because it was a commercial bargain between two parties of equal bargaining power.
        • Paragon Finance v Nash
          
          • Rates were 2-4% above the high street lenders, but the firm was allowed to set this and take its financial difficulties into account.
        • Davies v Directloans
          
          • Even though this was 4.6% above the high street lenders, a 21.6% interest rate was allowed because the mortgagor had a bad credit history.
    • Consumer Credit Act 2006;alsoFinancialServicesandMarketsAct2000:rate must not arise from an unfair relationship.
    • CRA 2015: must not be an unfair term, i.e. contrary to good faith and arising from significant imbalances in the parties’ rights to the detriment of the borrower (see s. 62(1) and Part 1 of Sch. 2) - remember that as the CRA applies between traders and consumers, thisisonlyrelevanttoretailbanking**.

Question 5

Property - mortgages - has the lender taken precautionary steps?

Answer 5

• If the wife/p*artner has not expressly or impliedlyconsented**to a mortgage being taken out over a joint property, she will continue to have**anoverridingequitableinterestinoccupation(Williams* & Glyn Bank v Boland).
• Lenders must take care to ensure that consent is not obtained as a result of undue influence; if it is, it will be invalid and the mortgage will be set aside (Avon Finance v Brid_g_er**). Examples:
  
  • Avon Finance v Bridger
    
    • Son misled elderly parents into thinking that they were signing documentation connected with the original mortgage, not a new one.
  • Barclays Bank v O’**Brien
    
    • Husband lied to his wife about the size and term of the loan.
• The lender will be put on enquiry where there is a substantial risk that conse obtained through improper means. RBS v Etridae (No.2) states that this is where is not for the wife’s benefit, or where a wife guarantees the debts of a husband company (as in Barclays v O’Brien), or where someone with a non-commer relationship guarantees the debts of another (as in Avon v Bridger).
• The lender will not be put on enquiry where money is advanced for an apparent joint benefit, e__.__g__. a loan given for a holiday cottage in CIBC Mortgages v Pitt, but which was actually gambled away by the husband, and the bank had no knowledge or reason to suspect that the husband had pressured the wife into consenting.
• If the lender is put on enquiry, it must take reasonable steps to explain the risks of consenting to the wife and insist that she takes independent legal advice in the husband’s absence (RBS* *v* *Etridge* *(No.2**)). The lender is entitled to assume that the solicitor has done his job properly, so can still enforce the mortgage even if he doesn’t.

Question 6

Property - mortgages - Consider the lender’s powers in enforcing a legal mortgage

Answer 6

• DEBT ACTION:
  
  • This will be the lender’s first option to reclaim the loan + interest, but the mortgagor may be unable to pay, so consider the following options:
• RIGHT TO TAKE POSSESSION:
  
  • Lenders can take possession as soon as the mortgage is signed (Four* *Maids* *v Dudle*y *Marshall)**. This is as a prelude to sale, so that the lender can make the most money back by selling with vacant possession.
  • Self_-__help_ is possible, but entry must not be forced, so this is risky (Ropaigealach v Barclays).
  • Lender could instead apply for a court order__, though this gives the mortgagor extra protection under s. 36 Administration of Justice Act 1970: possession will be postponed (at court’s discretion) if the borrower can repay within a reasonable period, i.e. the outstanding mortgage term (Cheltenham* *&* *Gloucester* *Building* *Society* *v* *Norgan)**.
  • The court will postpone an order for possession if the mortgagor has a sound financial plan to repay the instalments (National* *&* *Provincial* *v* *Lloyd*). Postponement is less likely to be awarded by the court if the lender is prejudiced by falling property prices (B*ristol* *&* W*est* *Building* *Society* *v* *Ellis)**.
  • Note that the lender is liable to account to the mortgagor for any rent they could have made whilst in possession (**White v City of London Brewery).
  • Lenders should follow pre-action protocol by discussing alternatives with the mortgagor before taking possession as a last resort.
• POWER OF SALE:
  
  • This power arises as soon as the first capital instalment is due (Payne v Cardiff RDC) under s. 101 LPA 1925 (Note: this means falling behind on a repayment mortgage, but not on an interest-only mortgage).
  • This power can be exercised by the lender even if the lender has not taken possession – but the land’s resale value will be less because the mortgagor will still be in possession.
  • But the power can only be exercised if notice is served, and if the rent is in arrears or there is some other breach (s. 103(i)-(iii) LPA 1925).
• OTHER OPTIONS:
  
  • Foreclosure:anequitableremedy(very rarely) awarded at the court’s discretion; the land is taken in satisfaction of the property and the lender keeps any surplus proceeds of sale.
  • Appointingareceiver:someonewhooversees the sale and prevents the lender beingliableforanegligentsale(s.101LPA1925).

Question 7

Property - mortgages - The lender’s duties when exercising a power of sale

Answer 7

• Lenders must take care** **toobtainaproperprice. The “proper” price does not mean the“best“price-itmea_ns_the true market value of the land (Cuckmere Brick Co v Mutual Finance).Thele_nder_should get an independent valuation (or average of several valuations)oftheproperty.
• Lenders can sell whenever they choose,even if they could have obtained a higher pricebywaiting(Cuckmere), but must do so in good faith,i.e. advertise the sale property andobtainindependent advice and valuations.
• Lenders can choo_se_ _how_ _to_ sell the property.Auctionsareoften used, as they are publicevents, with adverts for opportunities to view the property in advance, with a price set through a clear and transparent bidding process. This means auctions help to show that a proper price was obtained in good faith, even if the auction is poorly attended and the bidding is low (Cuckmere, but see Tse Kwong Lam below).
• Case law examples of proper prices and good faith sales:
  
  • Cuckmere Brick Cov Mutual Finance
    
    • A property was sold at auction, without it having be_en_ advertised that it had extensiv_e planning permission, meaning that the sale pric_e was much lower. Salmon DJ held that the mortgagee has not taken reasonable precautions and so had breached its duty to the mortgagor.
  • Tse Kwong Lam v Wong Chit Sen
    
    • An example of a mortgagee failing to obtain a proper price or sell in good faith. The mortgagee, Mr Wong, sold the claimant’s building by auction and set a reserve price that was not det_ermined_ by a qualified valuer. At auction, the only bidder bid th_e_ reserve price. This bidder was acting on behalf of Mr Wong’s company, and had agreed in advance with Mr Wong what their max_imum_ bid would be. The court held there was a conflict of interest and Mr Wong had failed in his duties.
  • Bishop v Blake
    
    • An example of a mortgagee failing to obtain a proper price. The mor_tgagee_ had sold the property (a pub) directly to a company, without putting it on the market or through a competitive bidding process. The sale price was 10% lower than the valuation price.
  • Silven Properties v RBS
    
    • The receiver appointed by RBS sold properties as they were; Silven claimed that the receiver was under a duty to maximise their value by applying for planning permission and letting vacant lots.However, the court held that the receiver and bank were not under** **anyobligationtoincurexpensesthatwoulddelay a sale beyond the usual period. The bank is entitled to improve a property but is under no duty to do so.
  • Meah v GE Money Home Finance Ltd
    
    • The duty to obtain a proper price is not necessarily breached if the court merely h_as_ _misgivings_ about the price - the market value is not an exact figure.
• Any surplus proceeds of sale are held on trust by the lender for the second mortgagee (if there is one), and then the borrower (s.105LPA1925).

Question 8

Property - mortgages - Priorities of mortgages - who gets repaid first?

Answer 8

• Legal mortgages of registered land: the first mortgage to be registered is repaid in full before any other mortgages (s. 48 LRA 2002).
• Equitable mortgages of registered land: the first mortgage to be created is repaid in full.
• Mortgages of unregistered land: the first mortgage takes priority over the puisne.