Land - Mortgages

Jade Gillett

What is a mortgage?

What is a mortgage?

Where the lender provides money by way of a loan and, in return, the borrower provides security by creating a mortgage over the property in favour of the lender.

A mortgage is also known as a 'charge'.

Who holds the legal estate over the land when a mortgage is created?

The borrower continues to hold the legal estate, subject to the mortgage.

A mortgage is therefore a third party right over the land.

Is a mortgage capable of being legal?

Yes. Mortgages are capable of being legal interests in land as they are listed in the LPA 1925.

What are the formalities required for a mortgage?

A deed is required to create a legal mortgage in relation to a legal estate.

If the mortgage documents lack the requirement of a deed, can there be an interest?

Yes. Although the interest won't be legal, equity may intervene and recognise an equitable mortgage under the principle of Walsh v Lonsdale.

How can a mortgage be created over an equitable interest?

It would need to be in writing and signed (LPA 1925).

What is a mortgagor?

The borrower. The owner of the estate in land, borrowing a sum of money and giving the lender a mortgage as a security for the loan.

What is a mortgagee?

The lender. The lender will have the benefit of the mortgage enabling them to enforce their security.

What are the available remedies in relation to a lender of a legal mortgage?

1. Possession.

2. The power of sale.

3. Debt action.

4. Appointing a receiver.

5. Foreclosure.

Which remedies will bring the mortgage to an end?

The exercise of power of sale and foreclosure.

Does the lender have the right to decide which remedy to pursue?

Yes. The lender can decide the remedy they wish to pursue.

However, the lender must avoid a course of action that would substantially increase the burden to the borrower.

What does possession mean?

Possession means either:

(a) Taking physical possession of the property (ousting the borrowers); or

(b) Where the property is let, directing that the tenants pay their rent to the lender (rather than the borrower).

How can a lender start possession proceedings for residential properties?

1) The lender must comply with the pre-action protocol. This considers selling the property or re-scheduling the debt with aim of avoiding possession proceedings.

Can the borrower ask the court to exercise its discretion to adjourn proceedings?

Yes.

S 36 AJA 1970 provides that the borrower can ask the court to:

(a) Adjourn proceedings; or

(b) On making an order for possession, suspend execution or postpone the date for possession.

When does s 36 AJA 1970 apply?

(a) When the lender has started possession proceedings;

(b) When the property includes a dwelling-house; and

(c) When the borrower is likely, within a reasonable period, to pay any sums due under the mortgage.

Is the threshold high for the court stopping possession proceedings?

Yes. The court will not exercise its discretion unless the borrower can provide a detailed financial plan demonstrating that they can pay the mortgage instalments that are due.

What is a reasonable period?

A reasonable period has been defined to include the full remaining period of the mortgage.

Wendy purchased and moved into 14 Hope Crescent (‘the Property’) five years ago with the aid of a 25-year loan from East Central Bank Plc (‘the Bank’). She duly granted the Bank a mortgage over the Property (by deed). Wendy lost her job six months ago and has not paid the monthly mortgage payments for four months. Wendy has just started a new, better paid, job and believes that she will be able to catch up with the arrears. The Bank have now started proceedings for possession.

What protection does Wendy have?

The mortgage was created by deed and is therefore a legal mortgage. The Bank have the right to take possession at any time but must not use violence or threats of violence to do so.

The Bank must obtain a court order for possession as the Property is a dwelling house occupied by Wendy. As part of those proceedings, Wendy can ask the court to exercise its discretion in s 36 AJA 1970 to adjourn the proceedings or stay or suspend the effect of any order. The reasonable period referred to in s 36 AJA 1970 will be the remaining 20 years of the mortgage. This means

that Wendy can spread the payment of the arrears over that 20-year period, but must show that she can pay both the usual monthly mortgage payments and the arears.

Where the property subject to the mortgage is producing income, the lender can use the income to pay the debt owed.

However, what must the lender do?

1) Account to the borrower for any sum beyond what is due to them; and

2) Manage the property with due diligence, accounting to the borrower for any income that should have been received had the property been managed correctly.

True or false: before exercising the power of sale, the lender may need to obtain possession of the property.

True.

What is the three criteria for a power of sale?

A power of sale must:

(a) Exist - either within the mortgage deed or implied into every legal mortgage;

(b) Have arisen - whereby the mortgage money must be due; and

(c) Become exercisable.

When will a power of sale be exercisable?

(1) Where it is set out expressly in the mortgage deed.

Alternatively, the lender will rely on one of the elements under s 103 LPA 1925.

(2) The lender has given the borrower notice to repay the loan amount and the borrower has not paid the sum for three months after such notice; or

(3) Interest is in arrears for two months after becoming due; or

(4) The borrower has breached a term of the mortgage.

What are the lender's duties on sale?

Lenders owe duties (in equity) to borrowers when exercising their power of sale.

A lender must:

(a) Act in good faith and not cheat borrowers; and

(b) Take reasonable care to obtain the true market value of the property at the date of sale.

Lenders are not under any obligation to delay the sale in order to maximise the price of the property.

What is the equity of redemption?

The right for the borrower to recover the assets subject to the mortgage upon repayment of the debt.

If the property is worth more than the sum owed, the balance will be payable to the borrower.

How can a borrower discharge its duty to ensure that the property has been listed for market value?

'Provided the lender has exposed the property to the market properly and fairly' it will have discharged its duty.

What happens if the lender fails to obtain a true value for the property?

The lender must account to the borrower (and all others with an interest in the equity redemption) for the difference.

The onus of proof is on the borrower to show that there has been a breach of the duty of care.

When a lender exercises its power of sale, how does the buyer take the property?

(a) Free from any estates or interests (including other mortgages) which the selling lender took priory over; but

(b) Subject to any estates and interests which took priority over the selling lender.

The selling lender is a trustee of the proceeds of sale. How must they distribute the proceeds of sale, in accordance with s 105 LPA 1925?

1) Cost of redeeming any prior mortgages (those with priority over the selling lender's mortgage);

2) The lender's expenses of sale;

3) The lender's own mortgage; and

4) The balance (if any) to the person(s) entitled to the equity of redemption.

When selling the property, does the lender have to wait for an increase in property market value?

No. Lenders are not obliged to wait for an increase in property values.

What is debt action?

Debt action is the process of recovering the debt by action for repayment on the borrower's covenant to pay.

The legal date for redemption must have passed before action can be taken.

What is the Limitation Act 1980 limit for lender's recover debt?

6 years for the recovery of interest and 12 years for the recovery of capital.

Where a lender has exercised its power of sale and the proceeds of sale are insufficient to pay the debt (negative equity), can the lender pursue the borrower for the shortfall?

Yes. The lender can pursue the borrower for the shortfall as a debt action.

What is an appointment of receiver?

Where a receiver (appointed by the lender in writing) has the power to demand and receive income from the property.

Who is a receiver?

Someone who is appointed by a lender under a charge over property to manage, secure and realise that property on behalf of that lender.

When will a lender appoint a receiver?

A lender will usually appoint a receiver if the property, subject to a mortgage, is producing income.

The receiver has the power to demand and receive income from the property. What is the income required to pay?

(a) Outgoings on the property;

(b) Interest on any prior mortgages;

(c) Insurance premiums, repair costs and their own costs;

(d) Interest on the current mortgage;

(e) Capital on the current mortgage; and

(f) The balance to the borrower.

Does the receiver have the power to sell the property?

The LPA 1925 does not grant the receiver to sell the property.

However, often the terms of the mortgage will extend the powers of the receiver to include a power to sell the property.

True or false: the borrower is solely responsible for the acts of the receiver?

True. A receiver is deemed to be an agent of the borrower and therefore the borrower is responsible for the acts of the receiver.

What are the duties of a receiver?

(a) To ensure that their personal interests do not conflict with their role as a receiver.

(b) To act in good faith in the course of their appointment.

(c) To act with reasonable competence.

(d) To take reasonable care to obtain the true market value of the property at the date of sale, if they have the power of sale; and

(e) The receiver may take steps to increase the value of the property.

What is foreclosure?

Whereby the lender has the right to enter and take over the property, with no obligation to give any payment surplus to the borrower.

Foreclosure refers to the lender exercising its power of sale.

When is foreclosure available?

When making an application to the High Court, once the legal date for redemption has passed.

What are the two stages for foreclosure?

1. Foreclosure nisi - directing the preparation of accounts of what is owed followed by a period of (usually) six months in which to pay; and

2. Foreclosure absolute -has the effect of vesting the title to the property in the lender and extinguishing the equity of redemption held by the borrower.

Does the lender have to pay any surplus, if the property is worth more than the sum owed?

- Foreclosure

No.

If the property is worth more than the sum owed, the lender is entitled to keep the surplus. Conversely, if the property is worth less than the sum owed the borrower is released from liability. Hence, a lender would not use this remedy where there was negative equity.

How is the borrower protected from foreclosure?

(a) Discretion of the court to re-open foreclosure proceedings, in exceptional circumstances, even after the foreclosure absolute order; or

(b) Where the property is a dwelling house, the borrower may seek to adjourn the foreclosure proceedings by means of an application under AJA 1970.

(c) An application to court for a judicial sale. This will preserve the equity of redemption in favour of the borrower.

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?

A The buyer need only check that 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.

D.

The power of sale exists and has arisen. However, as the borrower has only failed to pay one monthly payment (and not two) the power of sale is not exercisable.