SBAQ - LEGAL MORTAGES

Question 1

1. Which statutory provision(s) govern the creation of legal mortgages?
2. Schedule 3 paragraph 2 Land Registration Act 2002.
3. Section 2 Law of Property Act 1925.
4. Sections 85 and 86 Law of Property Act 1925.
5. Section 2 Law of Property (Miscellaneous Provisions) Act 1989

Answer 1

statement C is the correct answer. Section 85 provides that a mortgage may be created by way of a charge by legal mortgage over freehold land (the main method of creation nowadays) and section 86 over leasehold land

Question 2

Which one of the following statements accurately describes the extra requirement that exists in the case of legal mortgages of registered title?
Hide answer choices
1. The mortgage must be registered in the Charges Register of the mortgagor’s title.

2. The mortgage must be registered at the Central Land Charges Department as a C(iv) Land Charge.
3. The mortgagee should register the mortgage, so that it becomes an overriding interest.
4. The mortgagor should notify the mortgagee that the mortgage has become an overriding interest.

Answer 2

A. The mortgage must be registered in the Charges Register of the mortgagor’s title.

Correct. A legal mortgage over a registered title is a registrable disposition, so for the mortgage to be a legal mortgage it must be completed by registration - s27 LRA 2002.

Question 3

Hector buys a house with the aid of a mortgage by deed from the Dalton Finance Company. Later he takes out a further mortgage by deed with the Stretton Building Society.

Is the following statement True or False?

As the title to the property is registered, the second mortgage should be registered at Land Registry.

Answer 3

TRUE

Feedback
Correct. The second mortgage should be protected in exactly the same way as the first mortgage i.e. protected as a registrable disposition in the Charges Register of Hector’s title. Failure to take this step will result in the mortgage being treated as an interest affecting a registered estate (only recognised by equity) which would still require protection by registration of a notice (s32 LRA 2002).

Question 4

There now follows a series of questions based on the following facts.

In 2012 David purchased a registered freehold house at 8 Orchard Road, Greenwich. Shortly after becoming the owner David created a mortgage by deed over the property in favour of the Best Building Society to secure a loan of £100,000.

In 2016 David created a second mortgage by deed over number 8 in favour of the Midshire Bank (“the Bank”) to secure a debt of £70,000. The Bank registered its mortgage against the title to the property. Later that year, David created a further mortgage by deed in favour of his friend Paul, who also registered his charge against the title.

David has not made any payments to the Bank for the last six months.

If the Bank wants to exercise its power of sale, which one or more of the following statements reflects its position?
Hide answer choices
1. A sale by a legal mortgagee takes effect subject to incumbrances which have priority over its mortgage, but free from incumbrances that it has priority over.
2. The Bank will be bound by Paul’s mortgage and will therefore be unable to sell.
3. The Bank will sell free of Paul’s mortgage as it was registered after the Bank’s was registered.
4. The Bank must obtain Paul’s permission in order for the sale to go ahead.

Answer 4

A. A sale by a legal mortgagee takes effect subject to incumbrances which have priority over its mortgage, but free from incumbrances that it has priority over.

C. The Bank will sell free of Paul’s mortgage as it was registered after the Bank’s was registered.

On a sale by a mortgagee the buyer takes the property subject to incumbrances that bind the mortgagee who is selling the property (s 104(1) LPA 1925). In this case the Bank’s mortgage is entered on the register before Paul’s mortgage, so it ranks before Paul’s mortgage (s 48 LRA 2002).

Question 5

Which one of the following statements correctly describes the position with regard to the Building Society’s mortgage?
Hide answer choices
1. As the Building Society’s mortgage is made by deed it will be binding on the Bank.
2. The Building Society’s mortgage will be binding on the Bank if it was entered on the register of the title to 8 Orchard Road before the date the Bank’s mortgage was entered on the register.
3.The Building Society’s mortgage will be binding on the Bank if it was registered as a C(i) Land Charge at the Central Land Charges Department before the date the Bank’s mortgage was registered.
4 The Building Society’s mortgage will not be binding on the Bank as the Bank had no notice of the Building Society’s prior mortgage.

Answer 5

The Building Society’s mortgage will be binding on the Bank if it was entered on the register of the title to 8 Orchard Road before the date the Bank’s mortgage was entered on the register.

. A mortgage by deed must be registered against the title to become legal and to take priority over later mortgages (s 48 LRA 2002). In this case we need to know whether or not the Building Society protected its mortgage before the Bank’s mortgage was entered on the register.

Question 6

David is living in the property.

Which one or more of the following statements is/are correct?

A. The Bank cannot sell the property free of David’s interest as David is in occupation.
B. The effect of a sale by a mortgagee is to transfer the title of the mortgagor to the buyer, so David’s title will go to whoever the Bank sells the property to.
C. The Bank could apply to the court for a possession order to remove David from the property.
D. The Bank cannot obtain possession without the consent of the Best Building Society.

Answer 6

B. The effect of a sale by a mortgagee is to transfer the title of the mortgagor to the buyer, so David’s title will go to whoever the Bank sells the property to.

C. The Bank could apply to the court for a possession order to remove David from the property.

That’s not right, you should have selected statements B and C. In order to transfer title to a new owner, the Bank does not technically need to take possession of the property. If the Bank wants to sell the property with vacant possession, it will have to take possession of the property from David, or he will have to give up possession. If the Bank applies to the court for a possession order the court may postpone the order to give David time to repay the arrears. It is not necessary to obtain a court order, but it is safer to do so. The benefit of obtaining a court order first is that the Bank will avoid any risk of committing an offence under the Criminal Law Act 1977.

Question 7

Now consider Paul’s position. David created a further mortgage in favour of him in 2016. If possible, the Bank would like to sell the property free of Paul’s mortgage.

Which one of the following statements correctly reflects the position?

1. The Bank will be unable to sell free of Paul’s mortgage as it is a lower priority incumbrance than the Bank’s mortgage.
2. The sale will be subject to Paul’s interest as it is registered on the Charges Register of the title.
3. The sale is free of incumbrances with lower priority than the Bank’s mortgage, so Paul’s mortgage will not be binding on the purchaser.

Answer 7

The sale is free of incumbrances with lower priority than the Bank’s mortgage, so Paul’s mortgage will not be binding on the purchaser.

Question 8

Assume that the property is sold.

On the basis that the Building Society has never registered its mortgage against the title, which one of the following statements most accurately describes the order of priority between the three mortgages?
Hide answer choices
1. The Bank first, followed by the Building Society and then Paul.
2. The Bank first, followed by Paul and then the Building Society.
3. The Building Society first, followed by the Bank and then Paul.

Answer 8

2. The Bank first, followed by Paul and then the Building Society.

statement B should have been selected. The Bank will rank first as its mortgage is entered on the register first. The Building Society’s mortgage is unenforceable against the Bank because the Bank is a purchaser for value (s 29 LRA 2002). As the Building Society never registered its mortgage, it will also rank behind Paul’s mortgage, as again Paul has registered (s48 LRA 2002).

Question 9

Is the following statement True or False?

An overriding interest must exist at the date a mortgage is registered at the Land Registry to be binding on the mortgagee under s.29 land Registration Act 2002.

Answer 9

FALSE:

Correct. An overriding interest must exist at the date the mortgage is completed, not the date the mortgage is registered. s.29 LRA applies to Registrable Dispositions and Interests Affecting a Registered Estate. These must be registered before the date the mortgage is registered in order to bind a mortgagee.

Question 10

1. A borrower purchased a house (‘the Property’) four years ago with the assistance of a mortgage (by deed) with a bank (‘the Bank’). The borrower has been made redundant and has not paid the last mortgage payment. The Bank want to sell the Property immediately.

Which of the following statements most accurately describes the position for the Bank?
1. The buyer need only check that the power of sale exists and has arisen.
2. The Bank can exercise the power of sale as it exists, has arisen and is exercisable.
3. The Bank cannot exercise the power of sale as the power of sale does not exist.
4. The Bank cannot exercise the power of sale as the power is not yet exercisable.
5. The buyer will take the Property subject to the mortgage in favour of the Bank.

Answer 10

The correct Option is D.

The power of sale exists (the mortgage was made by deed) and has arisen (the mortgage was made four years ago so the legal date for redemption will have passed). Therefore, Option C is wrong.

The power of sale is not exercisable as the borrower has only failed to pay one monthly payment, not two. Option B is, therefore, wrong.

Option A correctly states the legal position but does not answer the question and is, therefore, wrong.

Option E is wrong. A buyer would take free of the Bank’s mortgage upon the Bank exercising the power of sale.
Although the power of sale exists and has arisen, the power is not yet exercisable as there is not yet two months’ arrears. Option D is, therefore, correct

Question 11

A solicitor acts for the freehold owner of a vacant office block (‘the Property’) subject to a mortgage (by deed) in favour of a bank (‘the Bank’). The owner purchased the Property five years ago on a 25-year mortgage. The owner has not paid the mortgage payments for the last two months after their tenant’s lease came to an end and vacated the Property. The Bank have told the owner that they plan to exercise their power of sale in relation to the Property. The owner wishes to oppose this as there is a downturn in the market and it is a dreadful time to sell.

Can the owner oppose the Bank in exercising its power of sale?
1. Yes, because the Bank must obtain a court order for possession prior to selling the Property.
2. No, because the power of sale is exercisable and the Property is not a dwelling house.
3. Yes, because the owner can apply to the court to adjourn the possession proceedings.
4. No, because the Bank can choose the timing of the sale but must obtain a possession order for possession.
5. Yes, because the Bank’s power of sale is not exercisable until the owner is in arrears for three months

Answer 11

The correct Option is B.

The power of sale exists (the mortgage was created by deed), has arisen (the mortgage was created five years ago and the date for redemption should have passed) and is exercisable as the owner is in two months arrears of interest payments. Option E is, therefore, wrong as only two months of arrears are needed.

The Bank do not need to obtain a possession order as this is not a dwelling house and the Property is vacant. Therefore, Option A is wrong.

The owner cannot apply to the court to adjourn the proceedings as (i) there are no such proceedings and (ii) the Property is not a dwelling house. Option C is, therefore, wrong.

The Bank can choose the timing of the sale but do not need to obtain a court order for possession. Option D is, therefore, wrong.

Question 12

A solicitor acts for the owner of a freehold factory block (‘the Property’) subject to a mortgage (by deed) in favour of a bank (‘the Bank’). The Property is currently vacant since the owner’s business closed. The owner has not paid the mortgage payments for six months. The Bank believes the Property is worth £350,000 and the owner owes £370,000. The Bank would like to end the mortgage.

Which of the following is the best approach for the Bank to pursue?
1. Take possession immediately with a view to redirecting income from the Property to the Bank.
2. Exercise the power of sale and pursue a debt action against the owner for any shortfall.
3. Pursue a debt action against the owner to recover the money owed to the Bank.
4. Seek an order for foreclosure to bring the mortgage to an end and vest title in the Property in the Bank.
5. Appoint a receiver to demand and receive income from the Property.

Answer 12

The correct Option is B.

Exercise of the power of sale will end the mortgage. As the value of the Property is lower than the debt, the Bank can pursue a debt action against the owner for the difference.

Taking possession, pursuing only a debt action and appointing a receiver do not end the mortgage. Therefore, Options A, C and E are wrong.

Foreclosure would end the mortgage. However, it is not in the Bank’s interest to foreclose as this would extinguish the mortgage and leave the Bank with no remedy to recover any shortfall from the owner. Option D is not therefore the best answer.

Question 13

A lender has taken a mortgage over a property to secure a loan that it has made. The mortgage is by deed and has been duly registered at Land Registry. The borrower is several months late with its interest payments and the lender is considering possible remedies. The lender wishes to keep the mortgage in existence for the time being and to allow the borrower to remain in occupation and to receive any income the property might produce.

Which of the following remedies is the most appropriate for recovering the money due whilst meeting the lender’s wishes?
1. Foreclosure.
2. Taking possession.
3. Appointing a receiver.
4. Debt action.
5. Sale.

Answer 13

Option D is the best answer as a debt action would mean that the mortgage continued in force and the borrower remained in possession.

Options B and C are not the best answers. Taking possession would mean that the borrower no longer remained in occupation and appointing a receiver would mean that the borrower was no longer entitled to any income from the property.

Sale or foreclosure would bring the mortgage to an end and so, Options A and E are wrong.

Question 14

A client owns a registered freehold property. Two years ago, the client granted a lease, by deed, of an outbuilding on the property to a tenant for a period of five years. Last year, the client took out a loan from a building society. The loan was secured by a mortgage over the property. The mortgage was created by deed and was registered at Land Registry promptly following its completion. The client has not paid the instalments due on the mortgage for the last six months. The building society is planning to exercise its power of sale and has found a prospective buyer for the property. There is no mention of the lease on the register of title to the property.

Will the lease bind the buyer on a sale by the building society?
1. Yes, because the lease has priority over the building society’s mortgage.
2. No, because the lease was granted for a term not exceeding seven years.
3. No, because the lease has not been registered on the register of title to the property.
4. No, because the lease can be overreached.
5. Yes, but only if the tenant consents to the sale.

Answer 14

Option A is correct. The lease is a legal lease and it was created prior to the building society’s mortgage. As a legal lease for a term not exceeding seven years which was in existence when the building society’s mortgage was created, it would be classified as an overriding interest under Schedule 3 para 1 LRA 2002. This is why the lease will have priority over the building society’s mortgage and why the buyer of the property will be bound by the lease.

Option B is wrong. The length of the lease term does not dictate whether the lease will bind a buyer from the building society. As the lease was created prior to the mortgage, the application of the enforceability rules will determine whether the lease has priority.

Option C is wrong. Since a legal lease for a term not exceeding seven years is an overriding interest under Schedule 3 para 1 LRA 2002, it is enforceable even though it does not appear on the register of title.

Option D is wrong because a lease cannot be overreached.

Option E is wrong. The lease has priority over the building society’s mortgage, as indicated above, so the tenant does not have to consent to the sale for the lease to bind the buyer.

Question 15

A building society has a mortgage over a registered freehold property. The mortgage was registered at Land Registry immediately following its completion five years ago. A bank has a mortgage over the same property which was also registered at Land Registry immediately following its completion three years ago. The building society is proposing to sell the property because six months’ interest is overdue under its mortgage, but the sale proceeds will not be sufficient to repay both the building society and the bank.

Who will be entitled to the first claim on the sale proceeds?
1. The building society will be entitled to first claim on the sale proceeds because the building society’s mortgage was created before the bank’s mortgage.
2. The building society will be entitled to first claim on the sale proceeds because building societies are always entitled to be repaid before banks.
3. The building society and the bank will be entitled to share in the sale proceeds in proportion to the amounts outstanding on their mortgages.
4. The building society will have first claim on the sale proceeds because its mortgage was registered at Land Registry before the registration of the bank’s mortgage.
5. The building society and the bank will each be entitled to an equal share of the sale proceeds.

Answer 15

Option D is correct because priority between mortgages in registered land depends on the order in which the mortgages were registered at Land Registry (s48 LRA 2002). When a lender sells under its power of sale, it is s105 LPA 1925 which determines the order of distribution of the sale proceeds. On these facts, the building society is the lender with the highest priority mortgage so there will be no prior mortgages for the building society to redeem. After paying its own expenses of sale, the building society can therefore redeem its own mortgage. The bank will then be entitled to the balance although that will not, on the facts, be enough to redeem its mortgage in full.

Option A is wrong because, as indicated above, in registered land, priority depends not on the date of creation of the mortgage but on the date on which it was registered at Land Registry.

Option B is wrong because entitlement to repayment does not depend on the nature of the lender.

Option C is wrong because under s105 LPA 1925, the building society is entitled to repayment of the whole of its mortgage before the bank is entitled to any repayment.

Option E is wrong because there is no provision in law or in equity whereby lenders are entitled to be repaid equally

Question 16

Five years ago, the owner of registered freehold land created a first mortgage by deed over the land. Three years later, the owner granted a lease of the land for a term of six years, by deed. Last year, the owner created a second mortgage by deed over the land, which was then registered at the Land Registry. Two months later, the first mortgage was registered at the Land Registry. The legal date for redemption has passed in respect of both mortgages. The owner is four months in arrears of interest on the second mortgage.

Which of the following best describes the exercise of the power of sale and the priority between the three interests?
1. The second mortgagee can exercise the power of sale and will be able to sell the land free from the lease, but subject to the first mortgage.
2. The second mortgagee can exercise the power of sale and will be able to sell the land free from the first mortgage, but subject to the lease.
3. The second mortgagee can exercise the power of sale and will be able to sell the land free from both the first mortgage and the lease.
4. The second mortgagee can exercise the power of sale and will have to sell the land subject to both the first mortgage and the lease.
5. As the second mortgage was created second in time, the second mortgagee will not be able to exercise the power of sale, but when the first mortgagee sells the land, the monies received will be applied first in discharge of the second mortgagee.

Answer 16

Option B is the best answer.

The power of sale in respect of the second mortgage has arisen, as the legal date of redemption has passed, and is exercisable, as there are arrears of interest. Accordingly, the second mortgagee can exercise the power of sale. The fact that the second mortgage was created second in time does not prevent the second mortgagee from exercising the power of sale. If the first mortgagee were to exercise the power of sale, it is correct that the proceeds of sale would be applied first in the discharge of the second mortgage under s105 LPA 1925. However, the power of sale has not arisen on the first mortgage.

Priority between mortgages is governed by the LRA 2002 and the first to appear on the register takes priority. The date of creation is irrelevant. The second mortgage was registered first and therefore has priority over the first mortgage and can sell free from it. Therefore, Option B is the best answer and Options A, D and E are wrong.

The lease is an overriding interest under Schedule 3 paragraph 1 LRA 2002, a legal lease for a term not exceeding 7 years. This will have priority over the second mortgage as it was in existence at the date of creation of the second mortgage. The second mortgagee will have to sell subject to the remaining term of the lease. Therefore, Option C is wrong

Question 17

Three years ago, the owner of registered freehold land granted a lease over the land to a tenant, by deed, for a term of seven years. One year later, the owner created a mortgage by deed over the land in favour of a building society. The mortgage was registered at Land Registry immediately following its creation.

Last year, the owner created another mortgage by deed over the land, this time in favour of a bank. This mortgage was also registered at the Land Registry immediately following its creation. The legal date for redemption has passed in respect of both mortgages. The owner is four months in arrears of interest on the mortgage to the building society.

Which of the following best describes the exercise of the power of sale by the building society and the priority between the three interests in the land?
1. The building society can exercise its power of sale and will be able to sell the land free from the lease and the bank’s mortgage.
2. The building society can exercise its power of sale and will be able to sell the land free from the bank’s mortgage but may have to sell subject to the lease.
3. The building society can exercise its power of sale and will be able to sell the land free from the lease, but subject to the bank’s mortgage.
4. The building society can exercise its power of sale but will sell the land subject to both the lease and the bank’s mortgage.
5. The building society cannot exercise its power of sale as the lease was created before its mortgage and a sale will prejudice the tenant.

Answer 17

Option B is the correct answer. As the building society’s mortgage was created by deed, the power of sale is implied into the mortgage by s101 LPA 1925. The power of sale has arisen, as the legal date of redemption has passed and the power is exercisable, as there are more than two months arrears of interest (see s103(ii) LPA 1925). Accordingly, the building society can exercise its power of sale.

Priority between mortgages is governed by s48 LRA 2002 and the first to appear on the register takes priority. The building society’s mortgage was registered first and therefore has priority over the bank’s mortgage and the building society can sell free from it.

The lease was created by deed and as it was granted for a term not exceeding seven years, it would be classified as an overriding interest under Schedule 3 para 1 of the LRA 2002. As it was in existence at the date of creation of the building society’s mortgage, it will have priority over it and the building society will have to sell subject to it (see s104 LPA 1925).

Option A is wrong because it suggests that the building society’s mortgage has priority over the lease.

Option C is wrong because it suggests that the bank’s mortgage has priority over the building society’s mortgage.

Option D is wrong because it suggests that both the bank’s mortgage and the lease have priority over the building society’s mortgage.

Option E is wrong because the fact that the lease was created before the building society’s mortgage does not prevent the power of sale being exercised but, if the lease takes priority, the building society will sell subject to the lease, i.e. the buyer from the building society will not get vacant possession.