Mortgages

Land Law

What is a mortgage?

Loan in return for security (the mortgage over the property)

Borrower continues to hold the legal estate subject to the mortgage - third party over land

Is a mortgage capable of being legal?

YES - listed in s.1(2)c LPA 1925 (term mortgage and charge are used interchangeably)

What are the formalities for a legal mortgage?

i) a DEED (signed, witnessed etc.)

ii) if no deed - equity may intervene

iii) a mortgage can be created over an equitable interest - would need to comply with s 53(1) LPA 1925 – i.e. in writing and signed

What is the difference between a mortgagor and mortgagee? 

GOR = borrower - owner of estate in land borrowing the sum of money and giving security 

GEE = lender - benefit of the mortgage - can enforce security. 

What is the right of possession in a mortgage?

The lender has the right to take possession ‘before the ink is dry on the mortgage’ - borrower does not need to be in default (but in practice, basically only used when in default

Either i) take physical possession or ii) if renting, rent paid to lender

Can a lender use violence to obtain possession?

NO - if lender can retake possession without breach of s.6 CLA 1977 - a court order for possession is not required - usually when the property is empty

What are the proceedings for a lender taking possession of a property?

i) must engage in open dialogue with borrower to try and resolve issues by other means - borrower can apply to court to adjourn proceedings or suspend/postpone an order for possession (s.36 AJA 1970) 

When does s.36 AJA (Admin. of Justice Act) apply? (right of borrower to adjourn or suspend/postpone an order for possession)

a) lender has started possession proceedings

b) the property includes a dwelling house - BANK must obtain a court order if the property

c) the borrower is likely to pay any sums due within a reasonable period (full remaining period of the mortgage) - court must see detailed financial plan

What is meat by a lender’s duty to account?

Applies when the property under mortgage is producing income and the lender uses the income to pay debt - the lender MUST:

i) account to the borrower for any sum beyond that which is due to them

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

This strict duty is why lenders prefer to appoint a receiver in relation to an income-producing property.

What are the three steps for the power of sale to arise?

i) must EXIST - either express in deed or implied into every legal mortgage (i.e. made by deed) 

ii) must have ARISEN - mortgage money is due - one month into mortgage term or instalment due 

iii) must have become EXERCISABLE 

When is the power of sale exercisable?

Either expressly set out in mortgage deed or rely on s.103 LPA:

i) lender gives notice and sum not paid for three months

ii) interest (on mortgage payments) is in arrears for two months after becoming due - arises if two or more monthly payments are missed

iii) the borrower has breached a term of the mortgage (other than the covenant to pay the mortgage money or the interest thereon)

What are the lender’s duties when exercising the power of sale? (either through private transaction or auction)

a) act in good faith and not cheat borrowers (e.g. properly advertised and lender cannot sell at knock down price)

b) take care to obtain the true market value of the property at date of sale (if don’t do this - will have to account for the difference)

What is the ‘equity of redemption’?

Right to recover property if the property is worth more than the sum owed, the balance is payable to the borrower.

If the lender fails to obtain the true value, it must account to the borrower (and all others with an interest in the equity of redemption) for the difference - onus of proof on borrower.

What is the effect of a lender exercising the power of sale?

Borrower takes whole estate:

i) free of any interests which the selling lender took priority over

ii) subject to any estates and interests which took priority over the selling lender.

What happens to the proceeds of sale when a lender sells a property?

a) costs of redeeming any prior mortgages

b) lender’s expenses of sale

c) lender’s own mortgage

d) balance to the person entitled to the equity of redemption

What is a debt action for a mortgage?

Recover the debt by an action for repayment on the borrower’s covenant to pay - legal date of redemption must have passed before action can be taken

LA 1980 limits the lender’s ability to recover a debt to:

i) six years for the recovery of interest

ii) twelve years for the recovery of capital

If the power of sale are insufficient to pay debt, can pursue borrower for the shortfall as a debt action.

When would a lender appoint a receiver?

When a property is producing income - power to appoint arises in same way as power of sale

Receiver has power to demand and receive income from the property to pay outgoings, interest etc.

LPA does not grant power to sell the property (but can be granted this power in the terms of the mortgage

What are the consequences of a receiver being an agent of the borrower?

The borrower is solely responsible for the acts of the receiver - borrower has no recourse to the lender for the acts/omissions of the receiver - can only pursue the receiver

This makes appointing a receiver more attractive to a lender than taking possession - the lender escapes the strict duty to account in taking possession and liability is passed to the receiver (and by extension, the borrower) 

What are the duties of a receiver?

I) don’t let personal interests conflict - e.g. can’t buy a mortgaged property

II) act in good faith

III) act with reasonable competence

IV) take reasonable care to obtain true market value of property

What is foreclosure?

Vesting the title in the lender and extinguishing the equity of redemption held by the borrower - need to apply to HC

Lender can keep surplus if value is more than sum owed - if worth less, the borrower is released (only good when it is in favour of lender) - no remedy to recover any shortfall

How is a borrower protected from foreclosure?

1. Discretion of court to re-open foreclosure proceedings

2. If a dwelling house, can adjourn proceedings under AJA

3. Can apply to court for judicial sale under s.91 LPA 1925 - preserves equity of redemption in favour of borrower.