Topic 2

Question 1

Legal or equitable mortgage?

Answer 1

• If the mortgage is being granted over a legal estate by the legal owner, the mortgage is capable of being a legal interest.
• If the mortgagor (the borrower) only holds an equitable interest in the land (rather than being a legal owner) OR the mortgage is a defective legal mortgage (it does not comply with the requirements of a deed, or it has not been registered) then consider if there is an equitable mortgage.

Question 2

formalities for a mortgage

Answer 2

Deed + Registration
- In order to be valid, the deed must comply with the requirements of LP(MP)A 1989, s 1:
* A deed must be clear on the face of the document that it is intended to be a deed.
* The deed must be validly executed.
* The deed must be delivered.
- The mortgage deed must then be registered at the Land Registry: LRA 2002, s 27(2)(f).
- If it is not registered, the mortgage will not take effect as a legal mortgage in the land (s 27(1)) but could still be an equitable interest.

Question 3

Equitable Mortgages

Answer 3

An equitable mortgage can arise for a number of reasons. For example:

Mortgages of equitable interests
- Where the borrower holds an equitable interest in the land (ie they are not a legal owner, eg a beneficiary in a trust of land), any mortgage of that interest will be equitable in nature.
- Such a mortgage can be created very informally. In accordance with LPA 1925, s 53(1)(c), such a mortgage need only be in writing and signed by the grantor in order to be validly created.

Defective legal mortgages
- A mortgage over registered land which is not granted by a valid deed or that is not completed by registration will not take effect as a legal mortgage (it will be defective).
- However, it may be regarded as an equitable mortgage if it complies with LP(MP)A 1989, s 2. Equity will recognise it as a ‘contract to grant a legal mortgage’ providing it is in writing, contains all the agreed terms and is signed by both the mortgagor and mortgagee.

Question 4

Discharge of Mortgages

Answer 4

Once a mortgage has been repaid in full, the mortgage entries at the Land registry must be cancelled.

A mortgage is only considered to be fully discharged when all reference to it has been removed from the Charges Register at the Land Registry.

Question 5

The rights that make up the equity of redemption:

Answer 5

1. Equitable right to redeem supplements legal right to redeem
2. No postponement or prevention of redemption
3. No collateral advantages
4. No unconscionable terms

Question 6

Postponement of the right to redeem

Answer 6

• It seems obvious to say that lenders only make money from borrowers whilst the loan is outstanding. It is in the lender’s interest to keep the borrower ‘on the hook’ for as long as possible. One way of doing this is to push back the legal date for redemption as far as possible, as that date is the first day on which the loan can be repaid: the equitable right to redeem arises on the following day.
• Although domestic borrowers are often ‘locked in’ for a period of time, this rarely exceeds a few years. It is possible for the borrower to redeem during the ‘lock in’ period, but inevitably a fee would be payable for the privilege. These arrangements are unlikely to be declared void as long as the borrower is offered a clear advantage, usually in terms of a low interest rate, in exchange for the lock in, understood precisely what was involved and made an informed decision to proceed.

Question 7

Options to purchase

Answer 7

a mortgage may include an option for the lender to purchase the mortgaged property. This is a proprietary right for the lender to require the borrower transfer the property to it as some point in the further (an estate contract). Such terms may be declared void as preventing the exercise of the equitable right to redeem.

If the mortgage and option are granted on the same day, but are in fact completely separate, the equity of redemption is irrelevant, and the option can be upheld.
The court said that it must look at the ‘substance of a transaction’ to ascertain whether it is substantially a mortgage or not.

Question 8

Collateral advantages

Answer 8

Lenders are entitled only to the repayment of capital advanced plus interest. If a lender tries to extract additional value from the borrower, the offending term in the mortgage deed may be struck out as being contrary to the equity of redemption. The mortgage is not to be regarded as an opportunity to take anything from the borrower other than the repayment of money. A collateral advantage will be struck out if it is unconscionable, in the nature of a penalty, or if it is repugnant to the equitable right to redeem

Question 9

Unconscionable terms

Answer 9

The equity of redemption gives the borrower protection from unconscionable terms.
Courts have a well-established inherent equitable jurisdiction to strike out oppressive and unconscionable terms. For courts to interfere, the term in question must be more than simply ‘unfair’ or ‘unreasonable’. Not surprisingly, it is high interest rates which have attracted most attention.

Question 10

Applying the test to see if a term is unconscionable

Answer 10

A high interest rate might be an unconscionable term, but there is no ‘magic number’ above which will mean the interest rate is unconscionable. Further, lenders are entitled to make money from loans: if they do not do so they will simply stop lending, which would be a disaster from commercial, industrial and residential perspectives.
The test established by Multiservice_ is: has the term been imposed in a “morally reprehensible” manner?
You will need to therefore consider the circumstances in which term was imposed and the factors the court had regard to when making the decisions in both Multiservice and Cityland,and the statutory regime cases, which can be applied by analogy.
If a term is declared void, it will not be enforceable (binding) on the borrower, but the remainder of the agreement will remain in force

Question 11

Legal mortgages

Answer 11

Under the LRA all mortgages over registered land must themselves be registered substantively in order to attain the status of a legal mortgage (LRA 2002, s27(2)(f)).
Once registered, they take effect as a ‘registered charge’ under the LRA.
A mortgage over registered land which is not completed by substantive registration will not take effect as a legal mortgage (s.27(1) LRA 2002).
Under LRA 2002, s 48 priority between registered charges depends upon the order in which they are entered on the register. This is regardless of the order of creation. Where two or more mortgages are created at the same time (i.e. first and second mortgage simultaneously), the application for registration will specify the order of priority.
Priority between registered charges depends upon the order in which they are registered.

Question 12

Equitable mortgage

Answer 12

An equitable mortgage can arise for a number of reasons. The two you are most likely to encounter are:
1. Mortgages of equitable interests
2. Defective legal mortgages
As against another equitable mortgagee, equitable mortgages rank in order of creation (LRA 2002, s 28).
This is the ‘basic rule’ of priority that applies to all equitable interests because an equitable interest in the land can be validly created and exist without registration.
Although not required in order to validly create it, an equitable mortgage over registered land can be protected by the entering of a notice on the charges register (LRA 2002, s 32).
If protected by the entry of a notice, an equitable mortgage over registered land will take priority over a subsequent legal mortgage LRA 2002, s 29(1).
As between competing equitable mortgages, this does not affect the priority, which will always be determined by creation.
However, an equitable mortgage not protected by a notice, will not take priority (ie lose its priority) to a subsequent registrable disposition of either a registered estate or a registered charge (LRA 2002, s 29(1))
(ie a transfer of the legal estate for value or the grant of a legal mortgage)

Question 13

Modifying the priority rules: Postponement

Answer 13

The priority rules discussed in the previous section can be modified to allow a mortgage to take priority over a pre-existing interest which could otherwise enjoy priority if there is a postponement of that pre-existing interest.
Lenders can agree to alter the position that would apply according to the priority rules by entering into a deed of priority or intercreditor deed.
Any agreement would need to be registered at the Land Registry.
Mortgagees will also often require an express waiver or postponement to be included in a mortgage agreement so that the rights of any person living at the mortgaged property with the mortgagor are postponed to the interests of the mortgagee.
This is important for the lender to be able to enforce their security and take possession of the mortgaged property in the event of default.
If the lender’s interest in the land does not rank in priority to the interest of a person in occupation (not a party to the mortgage) then the lender would not be able to take possession of the land in order to exercise its power of sale.

Question 14

Rights to the lender: Debt action

Answer 14

The contractual debt action is a personal action against the borrower. As the lender has a proprietary right and can enforce it against the property itself, it may be thought that the contractual right to sue for the outstanding debt is rarely used. In fact, it is used in addition to, not instead of, one of the other remedies, and in recent years, has been used in particular situations.
If the value of the mortgaged property is less than the outstanding mortgage debt, there is said to be negative equity. The lender may take possession of and sell the property, but if the sale proceeds so not cover the outstanding debt, the lender will wish to pursue a personal debt action against the borrower for the shortfall.
The limitation period for a contractual debt is not straightforward: if the mortgage has been created by deed, as all legal mortgages must be, then the period for recovery of the debt stated in the deed (the capital) is twelve years. The limitation period for recovery of interest is six years. What this means in reality is that borrowers can find themselves involved in contractual debt actions many years after repossession, when they may have thought that their troubles were behind them.

Question 15

Right to the lender: Possession

Answer 15

A legal lender may wish to enforce its security by taking possession of the mortgaged property as a precursor to sale. There are two reasons a lender may wish to do this:
Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower. Vacant possession makes a property more attractive to a potential buyer and will enable a higher price to be obtained.
Possession will enable the lender to manage the property and derive an income from it. The income can then be used to reduce the outstanding mortgage debt.
Since 2008, the Pre-Action Protocol in residential cases, possession must be a last resort. The mortgage lender is expected to explore alternative arrangements with the borrower, such as extending the mortgage term and/or scheduling a new payment plan.

Question 16

Right to the lender: Sale

Answer 16

The power of sale is the strongest right which the lender can use against a defaulting borrower. If exercised, the borrower loses all rights to the property. The sale proceeds are applied towards the outstanding debt. If there is a surplus, this will be forwarded to the borrower; but if there is a shortfall, the borrower may be sued personally by the lender for the outstanding contractual debt.
Because the power of sale has such drastic consequences for the borrower, there are procedural steps which must be adhered to:
- The power of sale must have arisen in accordance with statutory rules;
- The power of sale must be exercisable in accordance with statutory rules; and
- The lender must fulfil its duties on sale which have largely arisen from case law.

Question 17

Rights to the lender: Receiver

Answer 17

A receiver acts as manager of the mortgaged property if the lender does not wish to take possession or to sell. The power to appoint a receiver arises under LPA 1925, s 101(1)(iii). The receiver is an administrator whose function is to get an income from the land, for example by continuing an existing business, and will apply it towards the outstanding mortgage debt.
The receiver is deemed to be the borrower‘s agent. This may seem odd, as the receiver is appointed by the lender, but it means that the lender is not liable for the receiver’s negligence. Thus the appointment of a receiver is a safer option for the lender than taking possession and running the business itself.
A receiver must act with due diligence, subject always to the main duty of paying off the mortgage debt.

Question 18

Rights to the lender: Foreclosure

Answer 18

Foreclosure is a historic way of enforcing a mortgage which is rarely used nowadays. It allows a lender to take the mortgaged property in satisfaction of the debt, meaning that the freehold will vest in the lender, and the borrower will lose all rights to the property. This could happen even though there may be only a very small amount outstanding on the mortgage security, when compared to the value of the property as a whole.
From the lender’s point of view, the procedure is lengthy and complex. The court may order a sale in lieu of foreclosure, and almost certainly will do so if the property is worth a lot more than the outstanding debt. Even after the final decree of foreclosure, the borrower can re-open the case if he can show that he has the means to pay.
From the borrower’s point of view, there are some advantages in that an order of foreclosure extinguishes all other mortgages secured on the property. It also extinguishes the mortgagor’s contractual debt, so the lender cannot pursue the borrower for any surplus debt over and above the value of the property.

Question 19

Legal mortgagee: the right to possess

Answer 19

A legal mortgage comprises both a proprietary interest and a contractual debt. If the borrower defaults, it is unlikely that a debt action will be worthwhile. The lender will therefore wish to enforce its security by selling the property and recovering the outstanding debt from the sale proceeds. The Lender will need to repossess the mortgaged property in order to sell ‘with vacant possession’ and acquire the best possible price. The lender may also require possession to manage the property and generate an income to pay the outstanding mortgage debt.
Possession is strictly a right of the lender, and not simply a remedy. Having said that, lenders do not exercise the right arbitrarily. It is a last resort, used when the borrower is in default with little hope of repayment. Mortgage deeds almost always contain a term which recognises that the right to possess is postponed for as long as the borrower pays the agreed instalments.

Question 20

Exercising the right to possess

Answer 20

The right to possess is exactly what it says: a right. It is not therefore strictly necessary for the lender to obtain a court order prior to taking possession.
However, a series of safeguards for the borrower has evolved through statute and case law, modifying the strict rule that a lender has a right to possess mortgaged land even if the borrower is not in arrears with payments.
Most of the protections are relevant for residential mortgages only. However, all lenders have general duties to borrowers and the Criminal Law Act 1977, s 6 applies to all mortgage lenders.

Question 21

Limits on the right to possession

Answer 21

The Criminal Law Act 1977, s 6 makes it a criminal offence to use or threaten violence for the purpose of gaining entry to property. This means that exercising the right to repossess by ‘self-help’ is risky, unless the lender is certain that the property is unoccupied at the time.
A prudent lender will make an application to the court for an order for possession, even though this may not be strictly necessary.
The Pre-Action Protocol for Possession Claims 2008 sets out the steps which a court will expect a lender to have taken before resorting to possession of residential property, which should be a last resort. Lenders should try to discuss the debt with the borrower and accept reasonable requests for a new payment plan.
Most lenders observe the Protocol. However, if they do not, they can suffer delays in obtaining possession and may be ordered to pay the borrower’s legal costs. Non-compliance of itself does not mean that possession is denied.

Question 22

Statutory jurisdiction to postpone -
Administration of Justice Act (AJA) 1970, s 36:

Answer 22

(1) Where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession of the mortgaged property… the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that… the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage…
The powers conferred in s 36(2) include a power to postpone the date for delivery of possession for such period as the court thinks reasonable. Any postponement may be subject to such payment conditions regarding payment as the court thinks fit.
It is important to understand how this section operates.

Question 23

AJA 1970, s 36: scope

Answer 23

The section does not:
- enable the court to prevent the lender from exercising its right to possess altogether; nor
- enable the court to postpone possession in cases where there has been no application for an order for possession: Ropaigelach v Barclays Bank plc [2000] QB 263; nor
- enable the court to prevent a lender from exercising a power of sale without first obtaining a court order: Horsham Properties Group Ltd v Clark [2009] 1 WLR 1255.
The section does apply where the property is wholly or partly residential, although need not be the borrower’s home. It enables the court to adjourn possession proceedings or stay or postpone execution of the possession order. In order to be able to do this, it must appear to the court that the borrower is likely to be able to pay any sums due (or remedy any other default) within a reasonable period.

‘any sums due’ = the arrears and accrued interest, and not the whole of the mortgage debt.
a ‘reasonable period’ = the remainder of the mortgage term (Cheltenham & Gloucester Building Society v Norgan [1996])

Question 24

Legal mortgagee: the right to sell

Answer 24

The right to sell is the strongest of the lender’s rights and there are strict rules as to when the power arises and when it becomes exercisable. As this power of sale is a right of the lender, no court order is required.
The power of sale must exist, have arisen and become exercisable.

Question 25

Express power of sale

Answer 25

Most mortgage documents will include an express power of sale and will set out exactly how and when the power will be exercised. The lender will not need to rely on any statutory provisions, although it will be subject to duties on sale, in the same was as a lender relying on statutory powers.

Question 26

Implied, or statutory, power of sale

Answer 26

In the absence of an express power, a right to sell can be implied under LPA 1925, s 101(1)(i) unless it is excluded or modified in the mortgage deed.
‘101(1) A mortgagee, where the mortgage is made by deed, shall… have the following powers:
(i) A power, when the mortgage money has become due, to sell… the mortgaged property… either together or in lots, by public auction or by private contract.’

Question 27

Lender’s statutory right to sell: when does it arise?

Answer 27

The lender’s statutory power of sale arises ‘when the mortgage money has become due’, LPA 1925, s 101(1)(i).
If a borrower has a capital and interest repayment mortgage, Payne v Cardiff [1932] 1 KB 241 confirms that the power of sale arises as soon as one portion of capital is due, meaning that it arises as soon as one payment is due.
Where a mortgage is an interest-only mortgage, the capital is not due until the end of the loan term. In these cases, the mortgage money will ‘become due’ at the legal redemption date, usually about six months from the start of the mortgage.
If the lender sells after the power has arisen but before it is exercisable, a sale to an innocent purchaser will be valid, but the lender will be liable in damages to the borrower, LPA 1925, s 104.

Question 28

Lender’s statutory right to sell: when is it exercisable?

Answer 28

Where the right to sell has been expressly conferred, the wording will set out in what circumstances the power can be exercised.
If the power arises under LPA 1925, s 101(1)(i), the power will become exercisable only when at least one of the criteria in s 103 applies:
1. Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted - No arrears are necessary here: the lender can request the full loan at any time!
2. Interest is unpaid and arrears for at least two months. This does not mean that two months’ interest must be owed: there must be some interest outstanding for two months: it does not need to be a large sum!
3. There has been some breach of another mortgage provision such as a covenant to keep the mortgaged property insured or in good repair. Examples: failure to insure the property or allowing it to fall into disrepair: basically, something which could affect the value of the security.

Question 29

Lender’s duties when exercising the right to sell

Answer 29

When the lender exercises its right to sell mortgaged property, whether the right is conferred expressly or by statute, it owes duties to the borrower. The lender’s basic motive is to recover the debt due, meaning the capital sum, interest and costs. It is not necessarily interested in achieving the best possible price. The cases show that the lender cannot simply consider its own interests: these must be balanced against the interests of the borrower.
After the sale, the lender is trustee of the surplus proceeds of sale (LPA 1925, s 105) and must hand them to the person next entitled. That may be another lender, or the borrower.