Security Flashcards
Background: if we look at the thrust of the FE1s, the questions usually relate to enforcing a mortgage as security.
Firstly, we need to get the terminology clear. When seeking finance, real estate (property) can be used as a form of collateral (security) for a loan. Before the LCLRA09, registered land was ‘charged’ and unregistered land was ‘mortgaged’. The distinction was because for registered land, the ‘charging’ was evident to all i.e. in the publicly available register, whereas you couldn’t ‘charge’ title to unregistered property. In the FE1, you have to be very careful to check when the mortgage was created.
Pre LCLRA09 mortgages, what law applies?
In respect of mortgages created prior to the coming into force of LCLRA09, if the mortgage does not include express powers of appointment, the mortgagee (bank) acquired an implied right to appoint a receiver by virtue of the provisions of the Conveyancing Act 1881 (1881 Act) immediately upon the creation of the mortgage. The right to appoint a receiver pursuant to such a mortgage survived the repeal of the 1881 Act by the LCLRA09, even where the act of default occurred subsequent to the repeal of the 1881 Act.
Mortgages: the FE1 will always refer to ‘mortgages’, but just be weary that a mortgage is only created by creating a charge (Section 89 LCRLA09).
As such, the distinction between ‘mortgage’ and ‘charge’ is now redundant. It is irrelevant whether the property is registered or not, the property will still be ‘charged’ i.e. a registered interest on the property in the land registry or registry of deeds (as applicable).
A charge involves an agreement by the borrower to give the lender a proprietary interest in an asset as security for a liability (like a loan) without transferring title. In this relationship, we have the mortgagor (person making the mortgage i.e. the borrower) and the mortgagee (person taking mortgage i.e. the bank).
Section 89 LCLRA09 does not affect equitable mortgages which occur where some formality required for a legal mortgage is missing i.e. the mortgagor only has an equitable interest in the land e.g.
(i) where money is advanced on the assumption a mortgage is created;
(ii) where there is an agreement to create a legal mortgage;
(iii) where the mortgagor holds only an equitable interest in the land at the time of creating the mortgage (e.g. they have not transferred funds yet); and
(iv) or on the deposit of title deeds.
Powers and rights of mortgagees (banks) in legal mortgages
Background: Right to enforce: Power to take possession: Power of sale: Power to appoint a receiver:
Background:
so there is a legal mortgage between the bank and the borrower, and the borrower defaults. The circumstances of default will be set out in the mortgage deed and the bank will have made a decision as to this factual circumstance (there are many other legal considerations for a bank to bear in mind for this, but these are not relevant for the FE1). The question is now, how will the bank recover its losses by enforcing the security.
Right to enforce:
Section 96 LCRLA09 states that a mortgagee can only enforce a mortgage for the realisation of security or the protection of security. Section 98 LCLRA09 allows the mortgagor to seek an emergency order for abandoned property if it is in danger of deterioration or being occupied by trespassers.
Power to take possession:
Section 97 LCLRA09: the lending institution must get ct order to repossess or sell your house unless you consent in writing 7 days before the repossession or sale.
Power of sale:
realises the value of the property which can be either express or implied in the mortgage deed Section 100 LCLRA09 provides that a mortgagee’s power of sale shall not become exercisable without ct order unless the mortgagor consents in writing to such exercise not more than 7 days prior to such exercise. After the expiration of the 28 days’ notice period, a mortgagee may apply to the ct for an order authorising exercise of the power of sale and, on such application, ct may grant such authorisation to the applicant on such terms and conditions, if any, as it thinks fit. This is normally done in conjunction with a Section 97 LCLRA09 order. Ct will respond in either adjourning; staying the enforcement; suspend or postpone the enforcement of the order for a period that it thinks fit. For pre LCLRA09 mortgages, a statutory right to sell arises by virtue of Section 19 1881 Act. For the right to arise, the mortgage money must have become due. In most cases this can be established by checking the terms of deed itself as it may fix a legal date for redemption. There is a distinction in the 1881 Act between when the power of sale arises and when the power is exercisable (Section 20 1881 Act). From the mortgagee’s point of view it is important that he complies with the requirements of both sections.
Power to appoint a receiver:
a receiver is appointed by the lender by deed of appointment on foot of the mortgage document. The receiver will act as agent for the legal owner of the property and his powers will be set out in the mortgage document at Section 108 LCLRA09 or Section 19(1)(iii) 1881 Act. As the receiver acts as agent of the legal owner he does not have the same powers as the mortgagee in possession. The most important power he does not have is the power to sell the property free of all interests, rights, and estates in respect of which the mortgage has priority. Therefore, if any charges, judgments, or mortgages are registered after the registration of the mortgage and charge the receiver may give possession of the property to the mortgagee in possession to complete the sale. When the mortgagee in possession, that is the lender, completes the sale he effectively wipes out those burdens/encumbrances by “overreaching” and sells the property free and clear of the burdens (Section 104 LCLRA09). Most mortgagees (banks) have no interest in managing the property so they appoint a receiver to do it instead especially when they want to get income from the land/property and they do not want to sell it. Receiver has to take strict account of the property i.e. must sell property for a proper price.
