UNIT 8 - Legal Mortgages Flashcards
Which statutory provision(s) govern the creation of legal mortgages?
A) Schedule 3 paragraph 2 Land Registration Act 2002.
B) Section 2 Law of Property Act 1925.
C) Sections 85 and 86 Law of Property Act 1925.
D) Section 2 Law of Property (Miscellaneous Provisions) Act 1989.
CORRECT ANSWER C - 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.
Which ONE of the following statements accurately describes the extra requirement that exists in the case of legal mortgages of registered title?
A) The mortgage must be registered in the Charges Register of the mortgagor’s title.
B) The mortgage must be registered at the Central Land Charges Department as a C(iv) Land Charge.
C) The mortgagee should register the mortgage, so that it becomes an overriding interest.
D) The mortgagor should notify the mortgagee that the mortgage has become an overriding interest
CORRECT ANSWER A - 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.
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.
TRUE OR FALSE:
As the title to the property is registered, the second mortgage should be registered at Land Registry.
TRUE - 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).
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?
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.
B) The Bank will be bound by Paul’s mortgage and will therefore be unable to sell.
C) The Bank will sell free of Paul’s mortgage as it was registered after the Bank’s was registered.
D) The Bank must obtain Paul’s permission in order for the sale to go ahead.
CORRECT ANSWERS A & C - 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).
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.
Which ONE of the following statements correctly describes the position with regard to the Building Society’s mortgage?
A) As the Building Society’s mortgage is made by deed it will be binding on the Bank.
B) 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.
C) 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.
D) 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.
CORRECT ANSWER B - 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.
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.
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.
CORRECT ANSWERS B & 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.
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.
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?
A) The Bank will be unable to sell free of Paul’s mortgage as it is a lower priority incumbrance than the Bank’s mortgage.
B) The sale will be subject to Paul’s interest as it is registered on the Charges Register of the title.
C) 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.
CORRECT ANSWER C - S104(1) LPA 1925. However the debt will still be owed by David to Paul.
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.
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?
A) The Bank first, followed by the Building Society and then Paul.
B) The Bank first, followed by Paul and then the Building Society.
C) The Building Society first, followed by the Bank and then Paul.
CORRECT ANSWER B - 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).
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.
FALSE - 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.
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 ONE of the following statements is the best approach for the Bank to pursue?
A) Take possession immediately with a view to redirecting income from the Property to the Bank.
B) Exercise the power of sale and pursue a debt action against the owner for any shortfall.
C) Pursue a debt action against the owner to recover the money owed to the Bank.
D) Seek an order for foreclosure to bring the mortgage to an end and vest title in the Property in the Bank.
E) Appoint a receiver to demand and receive income from the Property.
CORRECT ANSWER 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.
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 ONE of the following statements best describes the exercise of the power of sale and the priority between the three interests?
A) 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.
B) 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.
C) 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.
D) 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.
E) 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.
CORRECT ANSWER B - 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.
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 ONE the following statements most accurately describes the position for the Bank?
A) The buyer need only check that the power of sale exists and has arisen.
B) The Bank can exercise the power of sale as it exists, has arisen and is exercisable.
C) The Bank cannot exercise the power of sale as the power of sale does not exist.
D) The Bank cannot exercise the power of sale as the power is not yet exercisable.
E) The buyer will take the Property subject to the mortgage in favour of the Bank.
CORRECT ANSWER 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.
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?
A) Yes, because the Bank must obtain a court order for possession prior to selling the Property.
B) No, because the power of sale is exercisable and the Property is not a dwelling house.
C) Yes, because the owner can apply to the court to adjourn the possession proceedings.
D) No, because the Bank can choose the timing of the sale but must obtain a possession order for possession.
E) Yes, because the Bank’s power of sale is not exercisable until the owner is in arrears for three months.
CORRECT ANSWER 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.
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 for the borrower 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?
A) Foreclosure.
B) Taking possession.
C) Appointing a receiver.
D) Debt action.
E) Sale.
CORRECT ANSWER D - 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.
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?
A) Yes, because the lease has priority over the building society’s mortgage.
B) No, because the lease was granted for a term not exceeding seven years.
C) No, because the lease has not been registered on the register of title to the property.
D) No, because the lease can be overreached.
E) Yes, but only if the tenant consents to the sale.
CORRECT ANSWER A - 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.
