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Mortgages

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Mortgages are security interests, usually given to a lender of money to secure a loan. They allows a lender (the mortgagee), to be confident that in the event that a loan is not paid off by a borrower (the mortgagor), the security may be used to recover the loan amount. The security interest will automatically come to an end once the mortgagor has paid off the loan amount and any additional costs required, such as interest. It is a common misconception that mortgages are ‘given out’ by banks, such that a person ‘obtains a mortgage’. This is not technically correct. A borrower (mortgagor) grants a mortgage to a mortgagee (bank) in return for a mortgage loan, which will be paid off over time, and with interest. The term ‘mortgage’ describes the security interest granted.

Creation of mortgages

Mortgages can be created to secure credit agreements over both unregistered and registered land. They can be either legal or equitable in nature, and their creation can be affected by both misrepresentation and undue influence, which are both discussed in more detail in the contract law revision notes section of this website.

Unregistered land

In unregistered land, mortgages over freehold (fee simple) estates can be created in two ways, according to section 85 of the Law of Property Act (LPA) 1925. Section 86 is an equivalent section applicable to leasehold estates, as long fixed term leases provide sufficient security for a mortgagee. The first method of creation is known as a ‘demise for a term of years absolute subject to a proviso for lesser on redemption’. This means that a mortgagee is granted a possessory interest in the mortgagor’s land so that the land can be sold by the mortgagee if necessary. The second method is known as a ‘charge by deed expressed to be by way of legal mortgage’. This grants a mortgagee a charge (security interest) over the property, without granting possession. However, s 87 LPA 1925 gives the same rights to a mortgagee with a charge as a mortgagee with a possessory interest would have.

Registered land

Under s 23 of the Land Registration Act (LRA) 2002, mortgages over registered land can only be created by way of charge. This, according to s 53 LRA 2002, has the same effect as creating a mortgage by way of deed.

Legal mortgages

Mortgages can be either legal or equitable in nature. Legal mortgages must be created by deed, according to s 52 LPA 1925. The grant of a legal mortgage in registered land is a disposition required to be completed by registration under s 27(2) LRA 2002

Equitable mortgages

A mortgage will be legal, rather than equitable, if it is created by a specifically enforceable agreement (in equity), but was: not created by deed; not agreed in writing as required by s 53 LPA or granted against an equitable, as opposed to a legal estate in land.

Misrepresentation

Where a statement is made to one or more parties to a mortgage (usually a one of two joint mortgagors) which inaccurately reflects the terms of a mortgage, and that representation induces the party to enter into the mortgage transaction, that transaction will be voidable to the extent of the statement by virtue of the law on misrepresentation. For example, in Barclays Bank v O’Brien [1994], where the defendant was told that a mortgage intended to secure an overdraft was limited to £60,000, when in fact it was not and £154,000 was owed, the defendant was only bound to the extent of the misrepresentation: £60,000.

Undue influence

Undue influence is the abuse or misuse of one person’s influence over another due to a threat, pressure or the deliberate withholding of information. In the context of mortgages, the stereotypical transaction involves a mortgagee bank and two joint mortgagors – a husband and wife. The stereotype continues that a wife is induced by her (trusted) husband to secure their joint home for the husband’s sole benefit, for example, over his company’s debts. The court is required to strike a balance between protecting mortgagees from being held permanently out of money owed and wives who expect secure accommodation.

Requirements of undue influence

There are two ways in which a ‘wife’ can avoid a mortgage transaction through undue influence. She may prove that she was unduly influenced in fact. This means, according to Barclays Bank v O’Brien [1994] that she must show that: her influencer had the capacity to influence her; she was in fact unduly influenced, and that this undue influence caused her to enter into the transaction. However, following the reform of undue influence culminating in RBS v Etridge [2002], a wife may avoid a transaction on the grounds of undue influence as a result of ‘presumed undue influence’, where there is no actual proof that undue influence took place. This will require the wife to show that there existed a relationship of trust and confidence, and that from this, a transaction resulted which calls for an explanation.

Where the above two requirements are satisfied, undue influence will be inferred where a satisfactory explanation is not given. There is neither a need to prove that any trust or confidence was actually placed in the influencer, nor that the transaction was to the manifest disadvantage or the wife.

A relationship of trust and confidence may be proven factually, or presumed. There will be a presumption of such a relationship where the claimant and influencer are parent and child, or solicitor and client. There is no presumption between a husband and wife, as wives, it is said, will often manage their financial affairs as a result of their marriage.

A transaction requiring explanation can arise easily. However, the more disadvantageous the transaction is to the wife/claimant, the more difficult it will be to explain the transaction.

Effect of undue influence

If actual undue influence is proven, the claimant will not be bound by the transaction entered into. The position concerning presumed undue influence is more complex. It will be presumed, for the purpose of explanation, that a wife has proved that she and her husband were in a relationship of trust and confidence, and that there has been a transaction calling for an explanation which involves a mortgagee (bank) being granted a mortgage over the marital home.

Whenever one person (the wife) grants a security over another’s debts (the husband’s) in a non-commercial context (a marriage), and which is not to the benefit of the person (the wife), a mortgagee will be “put on notice” or “put on enquiry”, according to RBS v Etridge [2002]. As a bank cannot be expected to delve into the private lives of every mortgagor they grant a mortgage to, Etridge lays out a number of steps which a mortgagee must take at minimum to satisfy itself that no undue influence could affect their mortgage. A mortgagee, according to CIBC Mortgages v Pitt [1994] may take the transaction at ‘face value’ to establish whether or not it is put on enquiry.

Once on enquiry, a mortgagee must: meet with the person (in private) and tell them of the extent of their liability, warn them of the risks of entering into the transaction and urge them to take separate legal advice. They may outsource this obligation to a solicitor, who must certify that he has advised accordingly in writing. Where a bank knows or ought to have known that a solicitor did not appropriately advise the person, reasonable steps will not have been taken.

If reasonable steps are taken by a bank, of which the above are a minimum, the person may not claim that by virtue of undue influence, they are not bound by the mortgage.

The result of undue influence

It is usually the case that the person referred to above will wish to avoid being bound by a mortgage once the mortgage has been defaulted on: the person will not wish to be required to pay up on their guarantee of the influencer’s debt, and may wish to retain possession of the land secured against that debt.

As confirmed by TSB Bank v Camfield [1995], if undue influence is either found or inferred, a mortgage will be void as against the person who was influenced. However, as illustrated by First National Bank v Achampong [2003], where a wife had been influenced by her husband as joint tenant, the influencer will still be bound, the marital joint tenancy will be severed under s 63 LPA 1925, and the mortgagee will then be entitled to claim against the influencer’s share of any resulting tenancy in common, which may include applying for an order for sale under s 14 of the Trusts of Land and Appointment of Trustees Act (TOLATA) 1996, or declaring the influencer bankrupt and applying for a similar order under s 335A of the Insolvency Act 1996. In all likelihood, the house will be sold, and the person influenced will be able to keep their share of the estate in the form of money, but not possession of that land.

Effect of mortgages

Mortgagors’ rights

Once created, the mortgagor (or borrower) in a mortgage transaction will expect to pay off his mortgage loan with interest, and then to have his property unencumbered by the mortgage once repaid.

To get his property back unencumbered, a mortgagor must redeem his mortgage (pay it off completely, whether early or on time). Every mortgage agreement will have a redemption date. At common law, a mortgage cannot be redeemed after this date, however, equity now allows redemption to take place at any time after this date. As a result, mortgage agreement redemption dates are usually shortly after the mortgage was initially granted to the mortgagee.

A right to redemption (to settle and end the mortgage) may not be excluded, either expressly or impliedly. In Samuel v Jarrah Timber [1904], an option to purchase the fee simple over which a mortgage was granted was void as it (in theory) destroyed the mortgagor’s right to redemption. A similar option may, however, be granted in a separate transaction, as occurred in Reeve v Lisle [1902]. A redemption date very close to the final payment date of a mortgage loan will also be void, as it renders the right to redemption (early) illusory, according to Fairclough v Swan Brewery [1912]. Finally, an unreasonable term in a mortgage will not destroy a mortgagor’s right to redeem, according to Multiservice Bookbinding v Marden [1979], unless it is unconscionable or contrary to public policy. Commonly, it is said that a mortgagor’s right to redeem results from his ‘equity of redemption’.

Priority between mortgagees and contributors

Where two people have contributed the purchase price of an estate which is mortgaged, there may often be disputes between non-mortgagor contributors and a mortgagee. If a contributor agreed to the mortgage being granted, and is one of two or more legal owners of the mortgaged estate, a sale by the bank will overreach the contributor’s interest. But if there has been no agreement, or the contributor has only an equitable interest in the estate, a mortgagee will be required to apply for an order for sale under s 14 TOLATA 1996 in order to realise its equity in the mortgaged estate.

Where there is an acquisition mortgage over an estate (i.e. a mortgage was granted to fund the initial purchase of the estate), agreement of another contributor may be imputed such that the mortgage will take priority over a contributor. This will be the case, according to Bristol & West Building Society v Henning [1985] where the contributor knew or ought to have known that an acquisition mortgage was granted. Abbey National v Cann [1991] confirmed this buy xanax medication online view, finding that an acquisition mortgage is ‘bound together’ with its purchase, such that a contributor’s interest cannot take priority as it is created later in time. It could be argued that the contributor’s interest should also be ‘bound together’, but such an argument would undermine a practical judgment.

In non-acquisition mortgages, a variety of priority issues could arise: overreaching (if the estate has two legal owners), notice (as above), registration (of the contributor’s interest) and actual occupation. In Equity and Law Home Loans v Prestidge [1992], a contributor (with contribution £10,000 and different sole registered legal owner) was only bound to the extent of £30,000 mortgage which was consented to, not a later re-mortgage for £43,000 which was not consented to.

Mortgagees’ rights

Following the grant of a mortgage loan, a mortgagee seeks only repayment. It will want the loan amount repaying, along with interest (its profit). It will also want the ability to reclaim unpaid loan amount though exercising rights over its security interest.

Irrespective of its security interest, a mortgagee will always have a personal claim against a mortgagor by virtue of the mortgage agreement. However, if the mortgagee is declared bankrupt, a personal claim would only allow a mortgagee to recover in the same proportions as any other creditor. A mortgage allows a mortgagee to seize the secured estate with priority over other creditors. When carrying out any of its obligations or exercising any of its rights, a mortgagee is under a duty to act fairly, according to Palk v Mortgage Services Funding Plc [1993].

A right to possession

In reality, a mortgagee will not usually want to possess an estate mortgaged in their favour. However, they may wish to obtain possession in order to maintain the value of their secured asset and intercept income (of rent), if appropriate. Possession will usually also be the precursor to sale.

A mortgagee has a right to possession even before the ‘ink is dry’ on the mortgage agreement, according to Four-maids Ltd v Dudley Marshall (Properties) Ltd [1957]. However, a mortgagee must:

Postponement of possession

Historically, where a mortgagee sought possession of mortgaged land in order to protect its interests, a mortgagor could apply to the High Court to have possession postponed for up to 28 days if he could show that the whole of his mortgage debt could be paid off within that time, as was held in Birmingham Citizens Permanent Building Society v Caunt [1962]. This has now been replaced by statute. It should be noted that possession may not be postponed where a mortgagor is in negative equity (he owed more under his mortgage loan than his secured asset is worth), according to Cheltenham and Gloucester Plc v Krausz [1997]. Section 36 of the Administration of Justice Act 1970 provides:

(1) Where the mortgagee under a mortgage of [a dwelling] brings an action in which he claims possession of the mortgaged property…the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.

(2) The court…may adjourn the proceedings … stay or suspend execution of the judgment or order, or…postpone the date for delivery of possession, for such period or periods as the court thinks reasonable.

Shortly after this enactment, Halifax Building Society v Clark [1973] decided that any sums due was to be interpreted as meaning all existing and future sums due under the mortgage agreement, rendering s 36 almost irrelevant. As a result, section 8 of the Administration of Justice Act 1973 redefined ‘any sums due’ as meaning any sum outstanding at the date of the hearing which the mortgagor would normally be expected to have paid.

A ‘reasonable period’ was more sensibly defined by First Middlesbrough Trading and Mortgage Co v Cunningham [1973] as the remaining mortgage term. This period of time is only the starting point though, according to Cheltenham and Gloucester Building Society v Norgan [1996], and originally hinted at in Royal Trust of Canada v Markham [1975].

As a few further clarifications, s 36, contrary to the words of its statute, does not require a mortgagor to have defaulted on payments before invoking its use, and a spouse, under s 30 of the Family Law Act 1996, is entitled to help pay off a partner’s mortgage loan, having been joined to any proceedings under s 55 of that same Act.

A mortgagor can be prevented from using section 36 of the Administration of Justice Act 1970 by the mortgagee taking peaceable possession of mortgaged land. A subsequent sale, leading to the eviction of the mortgagor, will not violate Article 1 of Protocol 1 (peaceful enjoyment of property) of the European Convention on Human Rights, according to Horsham Properties Group v Clark [2008].

A right to sell

Usually, a mortgagee is not interested in obtaining possession for any reason other than to sell the mortgagor’s land to recover their unpaid loan amount. To do this, the power of sale must have both arisen and become exercisable. If the power has arisen, but is not exercisable, the mortgagor will have a damages claim against the mortgagee. If the power has neither arisen nor become exercisable, the mortgagee will have no title to sell.

The power to sell is only available for legal mortgages and arises only after the date of redemption specified in the mortgage deed, according to s 101 LPA 1925.

The power to sell becomes exercisable when at least 1 of the three conditions in s 103 LPA 1925 is satisfied:

  • A mortgage loan instalment was missed, and 3 months has passed since the mortgagee notified the mortgagor of this failure to pay
  • Interest has been in arrears for at least 2 months
  • There has been some other breach of the mortgage agreement as defined by the mortgagor and mortgagee

When a mortgagee sells the mortgagor’s title, s 52 LPA 1925 allows a purchase to assume that the mortgagee has the right to sell, unless there is a contrary register entry; and s 54 LPA 1925 provides that a mortgagee has notice of anything on the land register for estate being sold.

Once sold, s 105 LPA 1925 instructs a mortgagor how to act with sale money. The mortgagee acts only as a trustee for the money received. Interests with priority over the mortgagee must firstly be settled (if not overreached). Sale costs must then be paid. Finally, the mortgagee may take what is left to discharge the mortgage loan amount owed to itself. If this residual amount does not cover the amount owed, the mortgagee is left with a personal claim only against the mortgagor. If there is any excess money, it must be returned to the mortgagor.

Duties when selling as a mortgagee

Cuckmere Brick Co v Mutual Finance [1971] requires a mortgagee to act in good faith and with reasonable care to obtain the true market value of an estate being sold. Silven Properties v RBS [2004] does not oblige a mortgagee to await planning permission outcomes or otherwise prepare land for sale, but does oblige mortgagees to point out the potential in land being sold. These duties are owed only to the mortgagor, not other interested parties, according to Parker-Tweedale v Dunbar Bank [1991]. Tse Kwong Lam v Wong Chit Sen [1983] prohibits a mortgagee from selling to a person with in interest in the mortgagee’s establishment unless it can be shown that the best price for the mortgagor was still obtained.

A right to foreclosure

It is possible in extreme circumstances that foreclosure will be granted to a mortgagee, entitling it to immediate possession and not discharging any excess loan amount owed by the mortgagor. However, it is used so infrequently that the Law Commission have proposed its abolition.

A right to appoint a receiver

A mortgagee may delegate its power to sell to a receiver, under the same conditions in s 101 LPA 1925 as discussed above.

Sale by mortgagor

It is possible that a mortgagor may wish to sell his land whilst still subject to a mortgage. This usually poses no difficulty if the sale price will cover the outstanding mortgage loan value – the mortgage will simply be redeemed. However, in some circumstances, where a mortgagee does not consent to this redemption, a court may intervene.

During postponement of possession proceedings, a court may postpone possession to allow a mortgagor to sell. The mortgagor must show that he will be able to pay off the outstanding loan amount from the sale, according to Royal Trust Co of Canada v Markham [1975]. This may include making up a shortfall with personal funds, as was said in Cheltenham and Gloucester Plc v Krausz [1997] (where there is negative equity). National & Provincial Building Society v Lloyd [1996] requires that the mortgagor must be able to sell within a reasonable time: postponement on the sale of a doubtful security for 3-5 years was rejected in Bristol and West Building Society v Ellis [1996], but postponement for 3 months where the mortgagor already had an offer in place in Target Home Loans v Clothier [1994] was acceptable.

It is also possible that a court will permit a sale by a mortgagor which is not to the benefit of the mortgagee in extreme circumstances, courtesy of its apparently limitless jurisdiction under s 91(2) LPA:

In any action, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money, the court, on the request of the mortgagee, or of any person interested either in the mortgage money or in the right of redemption, and, notwithstanding that:

  • any other person dissents; or
  • the mortgagee or any person so interested does not appear in the action;

Palk v Mortgage Services Funding Plc [1993] reserves this jurisdiction for exceptional circumstances (interest was accumulating at an unfair £30,000 per year, which was greater than the land’s maximum rental value). Though the odd case of Polonski v Lloyds Bank Mortgages [1998] permitted a non-disadvantageous sale under s 91(2) in very unexceptional circumstances.

A mortgagee can prevent a court from using its jurisdiction under s 91(2) by taking possession of the mortgagor’s land.

Successors to mortgaged land

Legal mortgages in unregistered land will bind the world if created by deed. Mortgages created by charge must be registered as class c(i) land charges or recorded as notices on the charges register of mortgaged land. Failure to comply with these requirements will leave a mortgagor without a security interest, and merely a personal claim against a mortgagor if the land is sold.

Equitable mortgages are also subject to the same rules, but are registered as class c(iii) land charges if title to mortgaged land is unregistered.

A mortgagee may assign the benefit of a mortgage to a third party either by deed (in the case of legal mortgages) or simply in writing (in the case of equitable mortgages), providing that assignment is not prohibited by the mortgage agreement.

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