Lecture 7 - Mortgages
MORTGAGES
LEARNING OUTCOMES
At the end of this Unit, you should be able to:
Understand and apply the rules relating to the various methods of creating legal and equitable mortgages.
Understand and evaluate the reasons for invalidating particular terms of a mortgage or the mortgage itself.
Understand and apply the remedies available to the lender in the event of non-compliance with the terms of the mortgage by the borrower.
Understand and apply the protections available to a borrower.
WHAT IS A MORTGAGE?
A mortgage, or “charge,” is defined as:
A disposition of some interest in land or property “as security for the payment of a debt” (Santley v Wilde [1899] 2 Ch 474).
THINGS TO GET CLEAR ABOUT MORTGAGES
Ownership and Security:
A mortgage does not provide the lender ownership of the land; it grants only an interest in it.
The borrower owns the land.
Distinction from Loans:
A mortgage is not a loan; rather, it signifies an interest in land granted as security in case the loan is not repaid.
Roles Defined:
The borrower, referred to as the mortgagor, grants the mortgage, while the lender, known as the mortgagee, receives it.
THE ESSENTIALS OF A DOMESTIC MORTGAGE ARRANGEMENT
The borrower agrees to borrow a set amount of money from the lender for purchasing a house.
They enter into a formal loan agreement for repayment over a specified period, which includes interest.
As part of the agreement, the borrower agrees to grant the lender a mortgage over the land.
The borrower formally grants the mortgage to the lender at the time of purchasing the house.
WHAT KIND OF INTEREST IN LAND IS A MORTGAGE?
A mortgage is established as a “legal charge” over the land, which:
Burdens the land and is registered in the Charges Register.
If the borrower sells the land without repaying the lender, the charge remains on the title.
This allows the lender to sell the land to recover the loan amount.
WHAT ARE THE MORTGAGEE’S RIGHTS?
The mortgagee has specific rights that may be exercised under certain conditions:
Sale of the property
Sue for the debt
Possession of the property
Appoint a receiver
Foreclosure
REGISTERED LAND
To be regarded as a Legal Charge, the mortgage deed must be registered at the Land Registry as stipulated by Section 27(2)(f) of the LRA 2002.
Failure to register results in it “not operating at law” per Section 27(1).
If unregistered, it will only act as an equitable charge.
UNREGISTERED LAND
The creation of a first legal charge over unregistered land calls for first registration as per Section 4(1)(g) LRA 2002.
A first registration application must be submitted within two months of the mortgage grant.
Missing this window leads to the mortgage being recognized only as equitable.
EQUITABLE MORTGAGES
Created expressly or in default under certain conditions:
Where required registration has not occurred at the Land Registry.
Charges created without a deed but in writing only (see United Bank of Kuwait v Sahib [1996]).
When the estate to be charged is equitable, related to the “nemo dat” rule.
RIGHTS OF THE MORTGAGOR
The mortgagor (borrower) retains rights under the mortgage, including:
Right to redeem the mortgage upon repayment of the loan and any interest due.
Right to inhabit or use the property.
Right to sell or rent the property, subject to the mortgagee's consent.
Right to the equity in the property.
PROTECTION FOR THE MORTGAGOR
The following rights protect the mortgagor:
Right to redeem under both law and equity.
No clogs or fetters (restrictions) on the equity of redemption.
Legislative protection.
RIGHT OF REDEMPTION IN LAW
Defined as:
A contractual right to redeem on a specific date stipulated in the contract.
The mortgagor cannot insist on redeeming before or after this contractual date.
Refer to Kreglinger v New Patagonia Meat & Cold Storage Co. Ltd [1914] AC 25.
RIGHT OF REDEMPTION IN EQUITY
Equity views the mortgage as providing the mortgagee with security for the loan.
The mortgagee should not object to redemption on any date if the loan is repaid in full.
General right to redeem is acknowledged in cases such as Salt v Marquess of Northampton [1892].
NO CLOGS OR FETTERS ON THE EQUITY OF REDEMPTION
Equity asserts that there must be no clogs or fetters on the equity of redemption.
Types of Clogs and Fetters:
Exclusion of Right to Redeem:
Mortgages cannot be made irredeemable.
Any clause attempting this will be deemed void (see Toomes v Consent [1745]).
Undue Postponement of Right to Redeem:
Any clauses attempting to unfairly postpone redemption will also be void.
Refer to Fairclough v Swan Brewery Ltd [1912] AC 565, which affirms this principle.
Collateral Advantages:
Collateral advantages must not unfairly restrict the mortgagor's right to redeem.
Example case: Biggs v Hoddinott [1898].
Oppressive or Unconscionable Terms:
Terms can be struck out if deemed oppressive or unconscionable, not merely unreasonable.
Refer to Knightsbridge Estates Ltd v Byrne [1939] Ch 441.
EXAMPLES OF CLOGS OR FETTERS ON THE EQUITY OF REDEMPTION
Exclusion Attempts:
Courts invalidate clauses excluding redemption rights (e.g., option to purchase mortgaged property).
Case: Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323.
Limiting the Right to Redeem:
Cases like Re Wells (1933) confirm that agreements limiting redemption rights do not exist in equity.
Unduly Postponing Redemption Date:
Equity will not allow devices to impede redemption; referred in Knightsbridge Estates Ltd v Byrne [1939].
Collateral Agreements:
Must not unreasonably tie mortgagors (as seen in various cases).
THE RIGHTS OF THE MORTGAGEE
The lender's main concern is ensuring the debt is paid and the property is secured.
Breach of Mortgagor’s Obligations:
Obligations to the lender include:
Making agreed repayments of capital and/or interest.
Complying with terms set out in the mortgage deed.
Remedies of the Mortgagee:
Sue in contract for the debt.
Appoint a receiver.
Foreclose.
Repossess the property.
Power of sale.
CONTRACTUAL REMEDY
The mortgagee may sue for the owed amount, which includes capital, interest, and costs associated with the legal process.
Even after repossessing and selling the house, the lender retains the right to sue under the mortgage contract (Section 20 Limitation Act 1980).
APPOINTMENT OF RECEIVER
The right to appoint a receiver allows the lender to manage the land rather than ending the mortgage.
The power may be activated if an express term exists in the mortgage or as per the implied terms of LPA 1925 s109 when created by deed.
The receiver is deemed an agent of the mortgagor not the mortgagee and owes a duty of care to the mortgagor (see Medforth v Blake [1999]).
FORECLOSURE
Foreclosure is established under the Law of Property Act 1925.
Requires a court application in two stages, with the likelihood of selling instead of foreclosure.
This ensures that the mortgagor retains any surplus from the sale (see Campbell v Hoyland [1877] 7 CHD 166).
POSSESSION
The mortgagee possesses the right to take possession of the mortgaged property even if the mortgagor is not in default, under certain conditions (e.g., in Ropaigealach v Barclays Bank plc [1999]).
There are safeguards in place limiting this right (e.g., Quennell v Meltby (1979)).
RESPONSIBILITY OF MORTGAGEE IN POSSESSION
The mortgagee must account to the mortgagor for all generated profits and cannot charge management fees.
They are liable for the property's physical state and have to mitigate loss (see Lord Trimleston v Hamill [1810]).
HOPE FOR THE MORTGAGOR
Under the Administration of Justice Act 1970 s.36, courts can postpone possession proceedings if the mortgagor could likely repay any overdue sums.
Amended by Section 8 of the Administration of Justice Act 1973, which retains court discretion for suspension under suitable conditions.
CRITERIA FOR EVALUATING MORTGAGORS' OFFERS
Referring to Cheltenham and Gloucester Building Society v Norgan [1996] for reasonable timeframes to settle mortgage arrears, specifically considering the remaining mortgage term as a starting point.
THE POWER OF SALE
The power of sale allows a mortgagee to sell a property and clear the mortgage debt from the sales proceeds.
Often exercised post an order for possession to ensure vacant possession.
WHEN IS THE POWER EXERCISABLE?
Under s103 LPA, conditions for exercising the power of sale include:
A default notice must be sent and not remedied within 3 months.
At least 2 months’ worth of interest must be in arrears.
There must be a breach of a mortgage covenant or the LPA.
EFFECT OF THE SALE CONTRACT
The mortgagor's equity of redemption ceases as soon as a contract of sale is initiated between the mortgagee and purchaser.
The purchaser acquires the mortgagor's estate free of any subsequent charges.
HOW IS THE PROPERTY SOLD?
Properties can be sold at auction or via private treaty (s101 LPA), irrespective of market conditions.
Duty of care to obtain the best obtainable price during sale, supported by various case laws (e.g., Cuckmere Brick Company Ltd v Mutual Finance Ltd [1971]).
FAILURE TO ACHIEVE THE BEST PRICE
If sold at a low price through private sales, the mortgagee must account for the difference back to the mortgagor.
Burden on mortgagor to prove breach of duty of care.
Mortgagees cannot sell to themselves or related parties (see Tse Kwong Lam v Wong Chit Sen [1983]).
DISTRIBUTION OF MONIES UNDER SECTION 105
Process for distribution of proceeds from a sale includes:
Discharging legal charges higher in priority.
Covering the costs of the sale.
Paying back the total debt owed (capital + interest + costs).
Any leftover balance paid to the mortgagor.