mortgages

Mortgages definition

A mortgage is a form of secured lending where the borrower (mortgagor) gives the lender (mortgagee) a charge over land to secure a loan

Borrower in a mortgage

The mortgagor

Lender in a mortgage

The mortgagee

Sum of money borrowed in a mortgage

The principal or the capital

Legal mortgage creation

Usually created by a charge under s.87 LPA 1925 - previously involved transferring the legal estate to the lender

Legal mortgage interest status

One of five legal interests under s.1(2)(c) LPA 1925

Legal mortgage formalities

Must be by deed - s.52(1); s.205(1)(ii) LPA 1925; s.1 LP(MP)A 1989 - must meet Land Registry rules for registered land

Legal mortgage protection against third parties

Depends on whether the land is registered or unregistered - different rules apply

What is an equitable mortgage

One that lacks legal formalities but is recognised in equity - e.g. agreement to mortgage; deposit of title deeds

Legal mortgage right to sue borrower

On default - mortgagee can sue on personal covenant to repay (contractual claim)

Right to possession under s.87(1) LPA 1925

Four-Maids Ltd v Dudley Marshall - mortgagee has automatic right to possession from the moment the mortgage is created

Limits on the right to possession

Birmingham Citizens - repayment agreements may prevent possession; Palk - duty of care; White - duty to account; CLA 1977 - no forceful entry

Peaceable re-entry

Permitted if property is vacant - Ropaigealach v Barclays

Statutory defence to possession

s.36 AJA 1970 amended by s.8 AJA 1973 - courts can delay possession if arrears can be repaid in a reasonable time

Repayment period for delay in possession

Cheltenham & Gloucester v Norgan - can be whole mortgage term if realistic plan shown

Court-ordered sale under s.91(2) LPA 1925

Possible even if lender objects - e.g. to reduce borrower’s debt; Palk v Mortgage Services Funding

Negative equity and sale refusal

Cheltenham & Gloucester v Krausz - court may refuse sale if no benefit to borrower

Limitation of s.36 AJA

Only applies if court proceedings are issued - not if lender sells without going to court (Horsham v Clark)

When does power of sale arise

s.101(1) LPA 1925 - arises when mortgage is made by deed and money is due

When does power of sale become exercisable

s.103 LPA 1925 - when 3 months’ notice not complied with; or 2 months’ interest unpaid; or other provision breached

Effect of exercising power of sale

Transfers both mortgagee’s and mortgagor’s interest - subject to prior interests (s.104 LPA 1925)

Can any mortgagee sell if multiple exist

Yes - any mortgagee can sell

Duty to make genuine sale

Farrar v Farrars - mortgagee cannot sell to themselves; Tse Kwong Lam v Wong Chit Sen - must not sell to associate without transparency

Duty to obtain best price

Cuckmere Brick v Mutual Finance - best price reasonably obtainable; Silven Properties v RBS - no duty to improve property

Duty when to sell

China and South Sea Bank Ltd v Tan Soon Gin - mortgagee not required to wait for market to improve

Basis of mortgagee liability when selling

Parker-Tweedale v Dunbar Bank - duty arises in equity - not tort or negligence

Distribution of sale proceeds

s.105 LPA - (1) prior mortgages; (2) expenses; (3) debt; (4) subsequent mortgages; (5) mortgagor - shortfalls can be claimed

Right to let mortgaged property

S.99(2) LPA - mortgagee can let while in possession - duty to account for benefit and care for premises

Right to appoint a receiver

Under s.101(1)(iii) and s.109 LPA - usually in commercial property - receiver = mortgagor’s agent

Receiver duties

Medforth v Blake - good faith and diligence; Silven v RBS - can sell property like mortgagee

What is foreclosure

Mortgagee becomes full owner by court order - starts as ‘nisi’; becomes ‘absolute’ after 6 months

Can foreclosure be avoided

Mortgagor or others can request a sale under s.91(2) LPA - foreclosure rarely granted now

Effect of foreclosure on mortgagor

Cannot be sued personally for shortfall - courts may reopen foreclosure if equity demands

Right to insure mortgaged property

Limited power in s.101(1) LPA - usually expressly agreed in mortgage deed

Do equitable mortgagees have same rights

No - weaker position than legal mortgagees - enforcement harder; must rely on equity

Key right of a mortgagor

Right to redeem the mortgage after repaying loan - creates ‘equity of redemption’

Further mortgages and priorities

Allowed - equity = property value minus debts - first charge gets paid first; others follow in order

Can mortgagor let the property

S.99 LPA authorises leases by mortgagor in possession

Ways to clear a mortgage off the title

(1) Foreclosure; (2) Sale by mortgagee; (3) Redemption

Effect of unpaid mortgage on third parties

Mortgagee can seek possession and sale

Leases before the mortgage (legal leases)

Unregistered - bind all; Registered - bind if protected by Notice or overriding interest (Sch 3 LRA 2002)

Leases before the mortgage (equitable leases)

Unregistered - bind if C(iv) land charge; Registered - bind if Notice or overriding interest (Sch 3 LRA 2002)

Leases after the mortgage

Usually forbidden without consent - mortgagee not bound by unauthorised lease

Protection of tenants in repossession

Mortgage Repossessions (Protection of Tenants) Act 2010 - delays possession up to 2 months