Mortgages (DNF)

+ MORTGAGEE RIGHTS + POWERS CASES AND CCA 1974

What 2 forms can a mortgage over a fee simple take?

s85(1) LPA 1925:

1. Legal charge (“charge by way of legal mortgage”) → Registered and unregistered land.

2. Demise (lease is conveyed) → Only unregistered land.

3. Mortgage by grant of fee simple is abolished.

What is a legal charge and what land can it be used for?

A mortgage form usable over registered and unregistered land.

How is a mortgagee protected under a legal charge over a mortgaged fee simple?

Mortgagee is protected as if he has a leasehold of 3000 years — s87(1)(a) LPA 1925

What power does the proprietor of a registered charge have under s23(2) LRA 2002?

The power to create an equitable sub-charge over his charge

What does s23(1)(a) LRA 2002 say about mortgaging by demise?

Owner of a registered estate does NOT have the power to mortgage by demise.

What does s85(2) LPA 1925 do to a purported conveyance of a legal fee simple by way of mortgage?

It takes effect as a charge by way of demise (only unregistered land).

Under s85(2) LPA 1925, what terms do the first mortgagor and subsequent mortgagors take? (2)

(a) First mortgagor takes term of 3000 years.

(b) Subsequent mortgagees take a term 1 day longer than the prior ranking security.

Does s85(2) LPA 1925 apply to registered fee simple? Why? (2)

• NO, does not apply to registered fee simple.

• s85(3) provides that s85(2) does not apply to registered fee simple.

What 2 forms can a mortgage over a lease take?

1. Legal charge — for both registered and unregistered leases.

2. Sub-demise — for unregistered leases only.

Under a legal charge over a lease, how is the mortgagee protected?

Mortgagee is protected as if he has a sub-term less by 1 day than the lease — s87(1)(a) LPA

What is a mortgage by sub-demise and when is it available? (2)

• Sub-demise for a term of years absolute, less by one day than the lease. — s86(1)

• Only for unregistered leases.

What does s23(1)(a) LRA 2002 say about mortgaging by demise or subdemise?

Owner of a registered estate does NOT have the power ot mortgage by demise or sub-demise.

What does s86(2) LPA 1925 do to a purported assignment of a lease by way of mortgage? (2)

• Any purported assignment of the lease by way of mortgage shall take effect as a mortgage by sub-demise.

• Only unregistered lease.

Under s86(2) LPA 1925, what term does the first mortgagee take?

A term 10 days less than the term expressed to be assigned.

Under s86(2) LPA 1925, what term do subsequent mortgagees take?

A term 1 day longer if possible, but 1 day less than the term expressed to be assigned.

Does s86(2) LPA apply to registered leases? Why? (2)

• NO

• s86(3) provides that s86(2) does not apply to registered lease.

What are the formality requirements for mortgages in registered land/leases?

1. Deed — s25(1) LRA 2002

2. Registered in the charges register of the tile — s27(2)(f) LRA 2002

What are the formality requirements for mortgages in unregistered land/leases?

Must be registered in the register for land charges as a class C(i) charge — s2(4)(i) Land Charges Act 1972

What is the equity of redemption?

Borrower’s right to repay the loan and reclaim the mortgaged property free from the mortgage after the debt is satisfied. 

In traditional mortgages, what does the equity of redemption allow after the contractual repayment date?

The fee simple or lease conveyed can be redeemed from the lender even after the date has passed.

Why did equity intervene to protect redemption in traditional mortgages?

Because it would have been inequitable for Borrower to lose title with a small amount outstanding.

Why do legal writers question the modern relevance of the equity of redemption (post-1925)?

Because under a legal charge, there is technically nothing to redeem — the charge ceases automatically once the loan is repaid, rather than a legal estate being conveyed.

What does that imply about the continued validity of the clogs and fetters doctrine?

Its continued validity is also questionable because it is tied to the equity of redemption (and “there is nothing to redeem under a legal charge”).

How are excessive interest rates controlled in consumer vs commercial contexts? (2)

• Statutes operate in the consumer market.

• In the commercial context, equity provides a final but fragile safety net.

What is the test for striking down an interest term?

Term must be unconscionable, and not just unreasonable — Multiservice v Marden

In Multiservice v Marden, what 2 factors does the court assess when deciding unconscionability? (2)

1. Substantive fairness

2. Procedural fairness (financial expertise of borrower, bargaining position, whether advised)

What was held in Multiservice v Marden?

Even though interest exceeded the loan because the interest rate was pegged to the Swiss Franc and the £ devalued, the interest rate was NOT void.

What is the clogs and fetters doctrine? (5)

• Equitable prinicple applicable to mortgage.

• Protects mortgagor’s right to redeem their proeprty.

• “Once a mortgage always amortgage”.

• Prevents a mortgagee (lender) from imposing terms or conditions in a mortgage agreement that unfairly restrict or “clog” the mortgagor’s (borrower’s) equity of redemption.

• Such terms and conditions become void in equity.

What are clogs and fetters?

Terms or conditions in a mortgage agreement that unfairly restrict or “clog” the mortgagor’s (borrower’s) equity.

What was the clogs and fetters doctrine originally created to do? (2)

• To prevent ordinary borrowers from being taken advantage of by onerous mortgage terms.

• e.g. term that automatically transfers ownership of the property to the mortgagee upon default, regardless of the mortgagor’s ability to repay. 

What is the general approach courts take to clogs and fetters (substance vs form)?

The test is one of substance, not form.

Under Kreglinger and Warnborough, how can a condition be treated even if it appears in the same document as the mortgage? (2)

• It may be in the same document but in substance independent.

• A mortgage is not inevitably invalid even if the property is not in the same condition when redeemed — Kreglinger ; Warnborough.

What is the Court’s approach to clogs/fetters in commercial contexts? Why? (3)

• Reluctant to intervene — Kreglinger

• Intervention would upset commercial bargains.

• There is no serious concern of oppression where business persons negotiate on equal terms.

What did Lord MacNaghten emphasise in Samuel v Jarrah?

Difference between company directors in search of financing and an poor landowner.

What are “collateral advantages” in mortgage law?

Conditions in the mortgage that give the mortgagee benefits even after recovery of the debt.

In Kreglinger, what did Viscount Haldane say about the collateral advantages doctrine?

Collateral advantages doctrine is unlikely to be applied in commercial dealings.

What was held in Kreglinger regarding collateral advantages? (2)

• Collateral advantage was upheld.

• Right of pre-emption of sheepskin that was mortgaged was valid.

What was held in Santley v Wilde regarding collateral advantages? (2)

• Collateral advantage was upheld.

• Right to 1/3 of profits from underlease of lease that was mortgaged was valid.

What was held in Noakes v Rice regarding collateral advantages? (3)

• Collateral advantage was struck down.

• Exclusive beer supply agreement for the duration of pub lease mortgaged to a brewery was VOID.

• Lord Davey would have decided Santley v Wilde differently.

What was held in Bradley v Carritt regarding collateral advantages? (3)

• Collateral advantage was struck down.

• Obligation to use best endeavours to employ the mortgagee was VOID.

• Lord MacNaghten = reluctant to apply the doctrine in commercial dealings BUT felt compelled to invalidate it because the shares came back worse than when mortgaged.

What is “postponement of redemption”?

A term that prevents redemption until after a certain date.

Is postponement of redemption per se invalid? (2)

• NO — Postponement is not per se invalid.

• It is needed to ensure certainty of income for lenders.

What is the test for invalid postponement of redemption?

postponement must be unconscionable or oppressive, not just unreasonable — Knightsbridge v Byrne

What are the facts and decision of Knightsbridge v Byrne regarding the postponement of redemption? (2)

• Facts = 40-year postponement between 2 companies. → Mortgage between 2 companies acting under expert advice.

• HELD = Remained VALID even though the redemption date was 40 years in the future, preventing refinancing at lower rates.

What broader point is stated about court attitude to commercial postponement bargains?

Courts are conscious not to interfere with the bargain of commercial parties.

In a mortgage by subdemise, what is required for postponement clauses?

Agreement must not render the right to redemption illusory — Fairclough

What are the facts and decision of Fairclough regarding the postponement of redemption? (2)

• Facts = Right to redeem arose only 6 weeks before the mortgaged 17-year lease was due to expire.

• HELD = Invalid — agreement must not render the right to redemption illusory.

What are “options” in the mortgages context?

An option to purchase the mortgaged property after it is redeemed.

What is the Warnborough test for whether an option is void as a clog?

Option and mortgage must be part of the same transaction in substance, based on parties’ intention inferred from circumstances — Warnborough (Jonathan Parker LJ, citing Kreglinger).

Under the substance-based approach in Warnborough, when will a transaction be treated as sale and purchase rather than a mortgage?

Where mortgagor is seller and both mortgage and option secure payment of purchase money => Loan is incidental to the sale — Warnborough

What are the facts and decision of Jones v Morgan regarding options? (2)

• Facts = Option granted 3 years after the original mortgage.

• HELD = Void — it was a variation of the original mortgage.

What is the key quote in Four Maids?

“Mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract, express or implied, whereby he has contracted himself out of that right”. 

What are the facts and decision of Four Maids? (2)

1. Facts = Four Maids mortgaged a property to mortgagee. → Four Maids defaulted and mortgagee sought to repossess.

2. HELD = Mortgagee was granted order for possession. → Had right to demand payment immediately after Four Maids defaulted on rent payments. → “Mortgagee can go into possession whenever he chooses, whether there are arrears or not, whether there is default or not”. 

What does s126(1) CCA 1974 provide?

In order to take possession you need a court order.

What is the key point in Palk v Mortgage Services?

Court can order a sale under s91 LPA 1925 on application by mortgagor despite negative equity in property. 

What is the “outdated form-based approach” example from Samuel v Jarrah?

Lord Halsbury would have treated the option and mortgage as separate if they had been 1 day apart — “outdated form-based approach”

What is the source of a Lender’s right to possession under a legal charge?

Based on s87(1) — Mortgagee can take possession as if it has:

(a) Lease of 3000 years on a mortgaged fee simple; OR

(b) Subdemise of 1 day less on a mortgaged lease.

What is the source of Lender’s right to possession under mortgage by demise or sub-demise?

Common law

Give 2 purposes of the Lender’s right to possession

1. To sell with vacant possession to obtain market value.

2. To lease before selling at the right time to preserve security value.

Under common law, can possession be taken even without default?

YES — Caunt — this leads to inequity.

Give a limitation on exercising possession

Possession may only be exercised bona fide and reasonably for the purpose of enforcing the security — Quennell v Maltby

What are the facts and decision in Quennell v Maltby regarding Lender’s right to possession? (2)

• Facts = Wife of the mortgagor sought order of possession.

• HELD = DENIED an order of possession because she had the ulterior purpose of assisting her husband to evict tenants by evading legislation protecting tenancy.

What is the approach in Caunt regarding right of possession?

Implied-term approach — Courts may imply a term limited the right to possession to the event of default

What are the facts and decision in Western Bank v Schindler regarding right to possession? (2)

• Facts = Mortgage contemplated no payments of interest or capital for 10 years.

• HELD = Court denied implying a limit to the right to possession to the event of default.

What was held in Palk v Mortgage Services Funding plc regarding duties of mortgagee in possession? (2)

• Mortgagee in possession owes duty not to leave property empty.

• Must let it at a proper market rent.

What was held in White v City of London Brewery regarding duties of mortgagee in possession? (2)

Mortgage in possession is accountable for excess income and income that should have been received but for the Lender’s wilful default.

What does s36 AJA 1970 provide when possession is sought over a mortgaged dwelling house?

s36(2) AJA 1970 — If the Mortgagor can pay any sums due in a reasonable period (s36(1)), the Court may adjourn proceedings or stay/postpone execution of the order for a reasonable period.

Under s8(1) AJA 1973, what does “any sums due” mean where there is an acceleration clause?

Amount that would be due without the acceleration clause.

Is s36 AJA applicable even when the Mortgagor is not in default?

YES — Western Bank v Schindler — Condition in s36(1) AJA 1970 does NOT apply when Mortgagor is not in default.

In default cases, what is the relationship between “reasonable period” in s36(1) and s36(2) AJA 1970?

Same meaning in s36(1) and (2) — Western Bank v Schindler

What is the approach to “reasonable period” and arrears repayment? (2)

Norgan:

• Starting point = Full length of the mortgage.

• Court considers whether arrears can be paid by instalments over that period.

In Norgan, what are 3 factors that are relevant when considering reasonable period?

1. How much a borrower can reasonably afford to pay.

2. How long the temporary difficulty is likely to last.

3. Why the arrears accumulated.

Under s36(2) AJA 1970 where there is no default, what 3 factors are relevant to “reasonable period”?

1. Reason for mortgagee seeking possession.

2. Degree of urgency.

3. Whether mortgagor is likely to pay sums as they become due.

Where arrears can only be paid through sale, what 2 factors will the Court consider?

Bristol & West v Ellis:

1. Adequacy of the security

2. Time required to effect a sale

Under Bristol & West v Ellis, what is the “adequacy of security” framework and how does Krausz fit? (2)

• If debt/arrears close to land value = immediate possession or short postponement.

• If security inadequate (land value < debt) = immediate possession order — Krausz

Under Bristol & West v Ellis, what does the Court consider regarding time required to effect sale? (2)

• If already on market = short postponement.

• If likely considerable delay = immediate possession or short postponement.

What does s39(1) AJA 1970 provide regarding who can seek s36 protections?

Persons deriving title from the Mortgagor can also seek s36 AJA 1970 protections.

What is the source of the Lender’s power of sale and receiver appointment?

s101(1) LPA 1925:

(i) Power of sale of mortgaged property;

(ii) Power to appoint a receiver of income (e.g. rent) to pay off the debt.

What are the 3 conditions that must be met for the power of sale to arise under s101(1) and s101(4) LPA 1925?

All must be met:

1. Mortgage made by deed — s101(1): Legal charge automatically qualifies. → Equitable charge created by deed but not registered can confer a power of sale — Swift 1st

2. Money becomes due — s101(1)(i): Modern instalment mortgages often deem money due immediately or after 6 months for this power.

3. Deed contains no provision excluding statutory power — s101(4)

What are the 3 events under which the power of sale exercisable under s103 LPA 1925?

If one occurs:

1. Default continues 3 months after written notice requiring payment.

2. Interest is 2 months in default.

3. Mortgagor has broken an obligation in the mortgage agreement or LPA 1925.

If the power has arisen but is not properly exercisable, what happens to Purchaser’s title and Mortgagor’s remedy? (2)

s104(2) LPA 1925:

• Purchaser still gets good title.

• Mortgagor’s remedy = damages against Mortgagee.

How can the power of sale circumvent s36 AJA 1970? (3)

Power of sale can be exercised without a possession order.

=>

Mortgagor’s title is overreached.

=>

Purchaser can obtain possession without s36 postponement discretion — Horsham v Clark

What is the mortgagee’s duty when selling?

Mortgagee is not trustee of the power and holds it for own benefit, BUT must act in good faith and exercise reasonable care to obtain the true market value — Cuckmere Brick v Mutual Finance

What is the basis of the duty to act in good faith and take reasonable care?

It is based in equity, not the tort of negligence — Parker-Tweedale v Dunbar Bank

Does the duty extend to beneficiaries of a trust of land?

NO — Only the trustee of land can bring the claim; beneficiaries may require the trustee to exercise its claim — Parker-Tweedale v Dunbar Bank

What is the rule in Silven on improving vs preserving value?

No duty to improve value, only to preserve it.

What is the Silven point about planning permission applications and costs?

Mortgagee not obliged to continue with planning permission application, but must act reasonably in incurring application costs if seeking to claim them from sale proceeds.

What is the rule on timing of sale? (2)

• No duty to sell at the most favourable/propitious time — Cuckmere

• Mortgagee is prima facie entitled to sell at any time — Silven

What does s105 LPA 1925 say about surplus proceeds of sale?

Mortgagee is a trustee of any surplus of proceeds of sale for the Mortgagor.

What does s91 LPA 1925 provide about court-ordered sale and who can apply?

Courts have general power to order sale at the instance of any “person interested” — s91 LPA 1925

Must the power of sale have arisen for the mortgagee to seek an action under s91?

NO — the power of sale does NOT need to have arisen for the mortgagee to seek an action under s91

Can the mortgagor seek sale even where there is negative equity?

YES — Palk v Mortgage Services — even where value of property < debt

What was Sir Donald Nicholls VC’s reasoning in Palk v Mortgage Services? (3)

• A substantial lender may delay sale/take possession/lease to preserve value until market improves.

• Borrower with limited resources may wish to limit liability where rent from leasing does not match interest rate (as in the case).

• IF rental would exceed/equal/approach interest saved by sale, postponing sale might be reasonable.

Can s36 AJA 1970 be used to suspend possession to make an application under s91 LPA 1925?

s36 AJA 1970 can only be used to suspend a possession order for an application under s91 LPA 1925 if there is positive equity — Krausz

In Palk v Mortgage Services, is breach of duty by the mortgagee required for the mortgagor to obtain sale?

NO — There does not need to be a breach of duty by the mortgagee in exercising its power of sale.

What is “positive equity”?

Proceeds of sale are expected to exceed the mortgage debt.

What is foreclosure?

Common law remedy for mortgages by conveyance/demise/sub-demise where the equity of redemption arises.

What is the effect of foreclosure?

Equity of redemption is foreclosed.