Mortgage

What is a mortgage?

A bundle of proprietary rights granted over land as security for a loan, including rights to possess and sell the property if the borrower defaults.

Which provision recognises a mortgage as capable of being a legal interest?

Section 1(2)(c) of the Law of Property Act 1925.

What does a lender receive when a mortgage is granted?

Security over the property, including a right to possess it and, where the relevant requirements are met, sell it to recover the debt.

Who grants a mortgage?

The borrower, also called the mortgagor, grants the mortgage to the lender or mortgagee.

How is a modern legal mortgage ordinarily created?

As a charge by way of legal mortgage executed by deed and completed by registration.

What are the two principal types of mortgage?

Legal mortgages and equitable mortgages.

What formalities are required to create a legal mortgage?

The legal owner must execute a valid deed and the mortgage must be registered under section 27(2)(f) of the Land Registration Act 2002.

Which provision requires a legal mortgage to be made by deed?

Section 52 of the Law of Property Act 1925.

Which provision sets out the modern requirements of a deed?

Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989.

What must appear on the face of a valid mortgage deed?

It must make clear that the document is intended to operate as a deed.

How must an individual borrower execute a mortgage deed?

The borrower must sign it in the presence of a witness who attests the signature.

What does delivery of a mortgage deed mean?

It means that the borrower intends to be formally bound by the deed, commonly indicated by dating it.

Which provision requires registration of a legal mortgage over registered land?

Section 27(2)(f) of the Land Registration Act 2002.

What is the effect of failing to register a purported legal mortgage over registered land?

It cannot operate as a legal mortgage until registration is completed.

What four statutory provisions are central to creating a legal mortgage?

Section 1(2)(c) and section 52 of the Law of Property Act 1925, section 1 of the Law of Property (Miscellaneous Provisions) Act 1989, and section 27(2)(f) of the Land Registration Act 2002.

In what circumstances may an equitable mortgage arise?

Where an equitable interest is mortgaged or where an intended legal mortgage is defective but a valid contract to grant it exists.

How may a person mortgage an equitable interest in land?

By disposing of the equitable interest in signed writing under section 53(1)(c) of the Law of Property Act 1925.

What is an example of a mortgage of an equitable interest?

One beneficial co-owner mortgages their one-half equitable share in a freehold estate.

Which formality applies to a mortgage of an equitable interest?

It must be in writing and signed by the person disposing of the interest under section 53(1)(c) of the Law of Property Act 1925.

How may a defective legal mortgage operate in equity?

It may be recognised as an equitable mortgage if it satisfies section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and is specifically enforceable.

What defects may prevent an intended mortgage from being legal?

An invalid deed or failure to complete the required registration.

What must a contract to grant a legal mortgage contain under section 2 of the LP(MP)A 1989?

It must be in writing, contain all expressly agreed terms and be signed by both parties.

What must happen when a registered mortgage has been repaid in full?

The mortgage entry at the Land Registry must be cancelled before the mortgage is fully discharged from the title.

What is the equity of redemption?

The borrower’s equitable right to recover the unencumbered property by repaying the secured debt after the legal redemption date.

What is the legal date for redemption?

The first date on which the mortgage contract allows the borrower to repay the loan.

When does the equitable right to redeem arise?

On the day after the legal date for redemption.

What was the historical consequence of failing to repay on the legal redemption date?

The borrower forfeited the mortgaged property to the lender.

How did equity modify the historical mortgage rules?

Equity treated the borrower as the true owner and allowed redemption after the contractual repayment date.

What financial value does the equity of redemption have?

The market value of the property less the amount of the outstanding secured debt.

What does the equitable right to redeem allow the borrower to do?

Repay the loan and recover the property at any time after the legal redemption date.

What is the general equitable rule concerning postponement of redemption?

A lender must not prevent or improperly postpone the borrower’s ability to redeem.

Which case states that a lender may postpone redemption only within equitable limits?

Toomes v Conset.

What is a fetter on the equity of redemption?

A mortgage term that prevents, unduly delays or makes practically worthless the borrower’s right to redeem.

What did Fairclough v Swan Brewery Co Ltd establish about postponement of redemption?

Fairclough v Swan Brewery Co Ltd struck down a clause postponing redemption of a leasehold until six weeks before the lease expired.

Why was the postponement clause invalid in Fairclough v Swan Brewery?

It left the borrower with a virtually worthless leasehold interest when redemption finally became possible.

How does the declining value of a leasehold affect postponement of redemption?

A long postponement may destroy the practical value of redemption because the lease term continues to expire.

What is the effect of a mortgage clause preventing redemption altogether?

The clause is void as a clog or fetter on the equity of redemption.

When may a lengthy postponement of redemption be valid?

It may be upheld for freehold property, particularly in a commercial transaction where the borrower receives a genuine corresponding benefit.

What did Knightsbridge Estates Trust Ltd v Byrne establish?

Knightsbridge Estates Trust Ltd v Byrne upheld a 40-year postponement where the borrower would ultimately recover the same freehold and received a favourable low interest rate.

Why was the postponement valid in Knightsbridge Estates Trust Ltd v Byrne?

The freehold did not waste away during the postponement and the commercial borrower obtained a beneficial interest rate.

What is a lender’s option to purchase the mortgaged property?

An estate contract allowing the lender to acquire the property rather than merely receive repayment.

Why may an option to purchase granted to the lender be invalid?

It may operate as a clog preventing the borrower from recovering the property through redemption.

What did Samuel v Jarrah Timber and Wood Paving Corporation Ltd establish?

Samuel v Jarrah Timber and Wood Paving Corporation Ltd held that an option granted to the lender at the same time as the mortgage will ordinarily be invalid.

Why is an option granted simultaneously with a mortgage treated suspiciously?

It may form part of the mortgage bargain and undermine the borrower’s right to redeem the property.

What did Reeve v Lisle establish about a later option to purchase?

Reeve v Lisle held that an option granted in a separate subsequent transaction may be valid if genuinely independent of the mortgage.

What did Warnborough v Garmite establish about mortgage and option transactions completed on the same day?

Warnborough v Garmite held that an option may still be valid where, in substance, it is a separate independent transaction.

What approach does the court take when deciding whether an option clogs redemption?

The court examines the substance of the transaction rather than relying only on timing or form.

What is the rule against collateral advantages in mortgages?

The lender should receive repayment of capital and interest rather than an additional advantage extending beyond the mortgage bargain.

What is a solus tie?

A mortgage condition requiring the borrower to obtain all specified supplies from the lender.

When will a commercial solus tie generally be valid?

It will generally be upheld where it operates only during the mortgage term and is not unconscionable or oppressive.

What did Noakes & Co Ltd v Rice establish about solus ties?

Noakes & Co Ltd v Rice held that a tie requiring a mortgaged public house to sell only the lender’s beer was invalid because it continued beyond the mortgage term.

Why was the solus tie invalid in Noakes & Co Ltd v Rice?

It burdened the property after the secured loan could have been redeemed.

What did Biggs v Hoddinott establish about solus ties?

Biggs v Hoddinott upheld a requirement to purchase beer exclusively from the lender because it lasted only for the mortgage term.

Why was the tie valid in Biggs v Hoddinott?

It ended when the mortgage ended and was not unconscionable or oppressive.

What is the rule concerning unconscionable mortgage terms?

Equity may set aside a term that is not merely unfair but sufficiently oppressive or morally reprehensible to be unconscionable.

Who now regulates fairness of many mortgage terms?

The Financial Conduct Authority applies the rules in its Handbook.

What did Cityland and Property Holdings Ltd v Dabrah establish?

Cityland and Property Holdings Ltd v Dabrah struck down an oppressive interest and default premium imposed on a financially vulnerable borrower.

What were the relevant charges in Cityland and Property Holdings Ltd v Dabrah?

Interest of 19% together with a 57% premium on default, producing an overall rate of approximately 38%.

Why were the mortgage terms unconscionable in Cityland and Property Holdings Ltd v Dabrah?

The lender exploited an imbalance of bargaining power and imposed terms that eliminated any realistic prospect of surplus sale proceeds.

What did Multiservice Bookbinding Ltd v Marden establish about an unusual repayment formula?

Multiservice Bookbinding Ltd v Marden upheld repayments linked to the Swiss franc because the term was not morally reprehensible and the parties had equal bargaining power.

What did Falco Finance v Gough establish about default interest?

A penalty rate far exceeding the lender’s likely loss may be void.

When may a higher mortgage interest rate be justified?

It may be justified where the borrower presents a greater credit risk or the lender has legitimate commercial reasons.

What did Davies v Directloans Ltd establish about borrowers with poor credit histories?

Davies v Directloans Ltd recognised that a higher rate may be justified where borrowers pose an increased credit risk.

What did Paragon Finance v Nash establish about a lender’s commercial interests?

Paragon Finance v Nash held that a lender may consider its own commercial needs when varying rates, provided the discretion is not exercised for an improper purpose.

What right protects a borrower or surety against improperly obtained mortgage consent?

The equitable doctrine of undue influence.

Which case sets out the modern categories and banking guidance for undue influence?

Royal Bank of Scotland v Etridge (No 2).

What is the first type of undue influence identified in Etridge?

Overt improper pressure or coercion, such as unlawful threats.

What is the second type of undue influence identified in Etridge?

Abuse of a relationship of influence or ascendancy where the weaker party enters a transaction requiring explanation.

In what mortgage situation may relational undue influence arise?

Where one spouse charges an interest in the family home to secure the other spouse’s business debts without receiving a direct benefit.

Must relational undue influence involve an express threat?

It may arise through abuse of trust and confidence even without a specific overt act of coercion.

Which relationships carry an irrebuttable presumption of trust and confidence in the notes?

Parent and child, guardian and ward, trustee and beneficiary, solicitor and client, and doctor and patient.

Can trust and confidence be proved in relationships outside the recognised categories?

Influence may be established in other relationships, particularly where one party is vulnerable and relies heavily on the other.

What must a claimant prove to raise presumed undue influence?

A relationship of trust and confidence and a transaction that calls for explanation.

What is a transaction that calls for explanation?

A transaction sufficiently unusual, suspicious or disadvantageous that it cannot readily be explained by the ordinary relationship between the parties.

Who bears the initial burden of establishing undue influence?

The person seeking to set aside the transaction must establish the relevant influence and suspicious transaction.

When is a bank put on inquiry about possible undue influence?

Where one party in a non-commercial relationship acts as surety for another person’s borrowing.

What does it mean for a bank to be “put on inquiry”?

The circumstances alert the bank to a risk that the surety’s consent may have been obtained through undue influence.

When is a bank not ordinarily put on inquiry in a joint mortgage transaction?

Where the loan is genuinely for the joint benefit of the co-owners.

What did CIBC Mortgages plc v Pitt establish?

CIBC Mortgages plc v Pitt held that a bank was not put on inquiry where a loan secured on the matrimonial home funded a holiday cottage for the couple’s joint benefit.

What must a bank do once put on inquiry under the Etridge guidelines?

It must ensure the surety receives independent legal advice and must not lend until the advising solicitor confirms that the transaction has been properly explained.

What should the bank communicate directly to the spouse acting as surety?

It should explain that independent legal advice is required and ask the spouse to nominate an independent solicitor.

What information must the bank provide to the independent solicitor?

All relevant information needed to explain the nature, purpose, financial implications and risks of the transaction.

When may the bank proceed with the secured loan?

Only after receiving confirmation from the independent solicitor that the transaction has been fully explained.

How should the independent solicitor meet the party acting as surety?

Face-to-face and alone, without the benefiting spouse or borrower present.

What should the independent solicitor explain about undue influence?

That the advice is intended to ensure genuine informed consent and prevent a later claim that the transaction resulted from improper influence.

How should the solicitor explain the mortgage documents?

In meaningful, non-technical language tailored to the client’s understanding.

What risks should the independent solicitor emphasise?

The risk of losing the home or other secured interest if the principal borrower’s debts are not repaid.

What choice must the independent solicitor emphasise?

The surety is free to refuse to enter the mortgage.

What records should the independent solicitor keep?

A detailed attendance note and written confirmation of the advice provided.

What must the solicitor send to the bank after advising the surety?

A certificate or written confirmation that the required independent advice has been given.

What is the effect of successfully establishing undue influence against a mortgage?

The mortgage may be set aside or rendered unenforceable against the affected party, subject to equitable discretion.

Why is relief for undue influence discretionary?

It is an equitable remedy and may be affected by delay, affirmation or the claimant’s unclean hands.

What did Barclays Bank plc v O’Brien establish about a successful undue influence claim?

Barclays Bank plc v O’Brien established that a mortgage may be unenforceable against a spouse whose consent was improperly obtained where the bank is affected by the wrongdoing.

Does a spouse guaranteeing the other spouse’s business debts automatically prove undue influence?

The guarantee alone does not establish undue influence; the claimant must show influence or pressure and a transaction requiring explanation.

When is the bank ordinarily on notice in a spousal surety transaction?

Where one spouse in a non-commercial context provides security for the other spouse’s separate borrowing.

What is a mortgagee’s essential right when the borrower defaults?

The lender may use proprietary remedies against the secured property to recover the outstanding loan.

Why may an ordinary debt claim be inadequate following mortgage default?

The borrower may have insufficient money to satisfy a personal judgment, whereas the mortgage gives rights against the land.

Is a lender required to choose one particular remedy after default?

The lender may select among the remedies available, but must act fairly and reasonably when exercising them.

What remedies are generally available under a legal mortgage?

A debt action, possession, sale, appointment of a receiver and foreclosure.

What remedies are generally available under an equitable mortgage?

A debt action, foreclosure and appointment of a receiver, with possession or sale generally requiring a court order.