Mortgages

mortgagor

the borrower (grants the mortgage)

mortgagee

the lender (provides money in return for an interest in land)

mortgage definition

Santley v Wilde [1899]: ‘A mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given; the security is redeemable on the payment or discharge of such debt or obligation.’

importance of mortgages

• enables social mobility

• enables low-risk, long-term investment

• part of retirement planning

repayment mortgage

both the loan amounts and interest is repaid in monthly installments throughout the mortgage term - mortgage term will be set

• type of mortgage most people have

interest-only mortgage

mortgagor repays in monthly installments only the interest charged on the mortgage - loan amount repaid in full at the end of the mortgage term - usually the mortgagor buys an investment product to ensure the loan amount can be repaid at the end of the term

• cheaper, but more challenging to repay at the end of the mortgage term

• not very popular

mortgage as a contract

• mortgagor enters into a binding contract with the mortgagee

• institutional lenders often impose restrictions on the mortgagor’s power to deal with the property, these may include getting a mortgagee’s written consent for transfer or sale, granting a lease or licence, changing the use, or making structural alterations

• consequence of a breach: mortgagee may give the mortgagor a notice requiring them to pay the money owed immediately

1925 reform

• s85(1) LPA 1925

• a demise for a term of yrs absolute, subject to a provision for cesser on redemption

• a charge by deed expressed to be by way of legal mortgage (s87 LPA)

2002 reform

• s23(1) LRA 2002

• bars the owner of the land from granting a mortgage by demise

charge

burden on land which gives the chargee (lender) a bundle of rights over the land, eg possession and sale, as a security for the loan

mortgage formalities

• s52 LPA: must be created by deed

• s27(2)(f) LPA: in registered land, once created must be registered to take effect at law

• s29(1) LRA 2002: mortgage that is registered in accordance with s27 will take priority over any unregistered interests

• s4(1)(g) LRA 2002: in unregistered land, grant of a mortgage triggers first registration of the land

equitable mortgages

• transaction intended as a legal mortgage but either not by deed or other formal requirements not fulfilled

• will take effect as an equitable mortgage if it complies with s2LP(MP)A 1989 and specific performance is available

• in unregistered land, must be registered as a class C (iii) land charge

• in registered land, must be registered with a notice in the charges register of the mortgagor’s register of title (s32 LRA 2002)

essential characteristics of a mortgage

1. equity of redemption

2. equitable right to redeem (right of mortgagor to recover the security at any time after the legal redemption date)

3. legal redemption date (contractual date when traditionally the entire mortgage debt became due)

mortgagee right to possession

• Four Maids Ltd v Dudley Marshall (Properties) Ltd [1957]: mortgagee has the right of immediate possession as the ink dries in the mortgage deed

• legal mortgagee’s right to possession arises as soon as the mortgage is made

• s87 LPA 1925 preserves mortgagee’s rights as if they held an estate in land

mortgagee’s power of sale (arises)

s101 LPA 1925: 3 conditions to be satisfied

1. mortgage is by deed

2. mortgage money has become due (legal redemption date has passed)

3. power of sale has not been precluded in the mortgage deed

mortgagee’s power of sale (exercisable)

s103 LPA 1925: 3 conditions to be satisfied (not ALL required)

1. notice requiring payment of mortgage money has been served on the mortgagor and default has been made in payment

2. some interest under the mortgage has remained in arrears and unpaid for 2 months after becoming due

3. mortgagor has breached a mortgage term other than a covenant for payment of the mortgage money or interest thereon

proceeds of sale

s105 LPA 1925 - order to be applied:

1. to cover all costs, charges, and expenses properly incurred by the mortgagee in connection with the sale

2. in discharge of the mortgage money, interest and costs due under the mortgage

3. payment of the residue to any subsequent mortgagee or chargee of who he/she has notice

4. to the mortgagor

standards imposed on mortgagee when exercising power of sale

• can act in its own interests but must act fairly toward the mortgagor and must demonstrate good faith

• Palk v Mortgage Services Funding plc [1993]

• cannot act in a way that completely prejudices the mortgagor

• free to determine the timing of the sale, and no need to improve the property however must ensure the property is fairly exposed to the market

mortgage as a contract

• personal covenant obliging mortgagor to repay the loan is normally included in a mortgage deed

s20 Limitation Act 1980

• time limit for actions to recover money secured by a mortgagee or charge or to recover proceeds of the sale of land

• mortgagee must bring their action to recover capital within 12yrs

• mortgagee cannot claim interest after the expiry of 6yrs from the date on which the interest became due

appointing a receiver (s109 LPA 1925)

• statutory power not appointed under the power of sale becomes exercisable

• receiver is an agent of the mortgage who is liable for their acts

• receiver preserves the security/mortgages property, and has a duty to manage the property with due diligence

• Medforth v Blake [2000]: owes a duty of care to mortgagee, mortgagor, and others with an interest in the equity of redemption

• Silven Properties Ltd v RBS [2004}: may exercise power of sale on behalf of the mortgagee

foreclosure remedy

• entire value of property is transferred to mortgagee

• extremely rare (and never happens in residential property)

• available only with a court order - court has discretion

• no duty of care owed to mortgagor when selling the property

• if property sold, then action under personal covenant to repay is unavailable

mortgagee application for possession

• at common law, court has an inherent jurisdiction to stay possession proceedings

• it is only a short-term discretionary power to allow full payment of the debt

s36 AJA 1970

• provides a statutory power to the court to suspend, adjourn or postpone a possession action by the mortgagee of a dwelling-house, for such a period ‘as the court thinks is reasonable’

• mortgagor must be likely to be able within a reasonable period to pay any sums due under the mortgage and remedy any breaches

s8 AJA 1973

• corrected an issue with drafting of s36

• installment mortgages require repayment on a monthly basis

• a missed payment will lead to the entire mortgage debt being due

• confirms the court will only consider those payments that have already been missed when exercising its discretion - remaining payments will continue as scheduled under the mortgage term

s36 AJA application

• only applies where mortgagee brings an action in which he claims possession of the mortgaged property

• s36 is not available in cases of peaceable re-entry

s91 LPA 1925

• allows someone to apply for an order that the property is sold

• great deal of discretion for the court here (can direct sale on such terms as it thinks fit)

• for application, see Palk v Mortgage Services Funding Plc [1993] and Cheltenham and Gloucester PLC v Krausz [1997]

undue influence

• developed from a principle of duress, however broader in scope

• developed by courts of equity to ensure that the influence of one person over another is not abused

• if intention to enter into the transaction was produced by unacceptable means, the law will not permit the transaction to stand

• see Barclays Bank v O’Brien [1994]

classification of undue influence

Barclays Bank v O’Brien [1994]

1. actual undue influence

2. presumed undue influence (automatic presumption with certain relationships + requirement for a relationship of trust and confidence to be proven)

actual undue influence

• established from the facts of the case

• overt exertion of pressure or coercion, such as unlawful threats

• C did not make a free choice when entering a transaction (Etridge)

• they were persuaded to enter into a transaction that they would not otherwise enter into

• no need to demonstrate that the transaction was to their manifest disadvantage

presumed undue influence

• arises out of a relationship between 2 persons where 1 has acquired over another a measure of influence and a person takes unfair advantage of their dominant position

• relationship between the parties is one in which the parties reposed trust and confidence in each other

• certain relationships the law presumes one has influence over another eg doctor-patient, parent-dependent, and solicitor-client (Etridge)

burden of proof and presumptions

• a person asserting that a wrong has been committed must prove it

• proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, couples with a transaction that calls for an explanation = rebuttable evidentiary presumption of undue influence

factors taken into account for burden of proof and presumptions

1. personality of parties

2. their relationship

3. the extent to which the transaction cannot readily be accounted for by ordinary motives in that relationship

4. all other circumstances

Etridge protocol

• banks should take reasonable steps to explain in a meaningful way the practical implications of proposed transaction to the vulnerable party

• vulnerable party to attend a private meeting with a bank representative at which they are told about: the extent of their liability as surety, warned of the risk they are running, and urged to take independent legal advice

Etridge protocol - function

• intended to eliminate risk that surely was misled as to the facts of proposed transaction

• risk of coercion not eliminated but reduced to a level which makes it proper for the lender to proceed

• tries to strike a balance between protecting vulnerable parties against undue influence and preserving strength of the security so banks have confidence to lend money