Introduction

• mortgage or charge on land: real security for loan of money
• mortgage is a charge by way of an equitable or legal mortgage (borrower is mortgagor & lender the mortgagee)
• legal right to redeem:
  borrowers' right to repay the loan date specified in mortgage (legal date for redemption)
  borrowers have strict legal right to redeem loan on that date
  equitable right to redeem means legal date for redemption unimportant (often set at 6 months after creation of mortgage)
• equitable right to redeem:
  once legal date for redemption (specified in mortgage deed) passed: equity gives borrowers equitable right to redeem loan at any time afterwards
  borrowers can only exercise if equitable rules are satisfied
• equity of redemption:
  comes into existence once mortgage created
  all of borrowers' rights in the mortgaged property after creation of mortgage
  on creation mortgage: lenders become legal owners of the land subject to equitable interest of borrower (equity of redemption)
• mortgage created correctly can take effect as a legal mortgage

  Law of Property Act 1925

  • s.1(2)(c): mortgage capable of existing as legal interest after 1 January 1926

Legal mortgages

• legal mortgage governed by statute

  Law of Property Act 1925

  • s.85: two methods create legal mortgage:
    demise (lease) for term of years absolute subject to provision for cessor on redemption
    charge by deed expressed to be by way of legal mortgage (or a legal charge)
  • s.87: lender of mortgage in form legal charge by deed same remedies as if granted a lease or sublease
• demise:
  borrowers grant lenders long legal lease (usually 3 000 years) with clause providing lease ends when borrowers repay loan
  borrowers keep fee simple & mortgage is an incumbrance over the fee simple
  mortgage still provides that borrowers must notionally repay the loan on a fixed date & after that date they have an equitable right to redeem
• legal mortgage or charge:
  must be made by deed & state that the charge is made by way of legal mortgage
  does not convey any estate in land to lenders
• Land Registration Act 2002 (LRA) changed methods of creating legal mortgages over registered title

  Land Registration Act 2002

  • for registered titles no longer possible to create a legal mortgage using a demise
  • borrower can charge registered title with: charge expressed to be by way of legal mortgage or by charging estate with payment of sum of money
  • s.27(2)(f): legal mortgage must be completed by substantive registration to bind the land
• on registration Land Registry place notice in charges register of title to preserve priority of the mortgage: effect is to create a charge by deed by way of legal mortgage over the registered title

Borrowers' rights: redemption

• traditionally legal date for redemption set at 6 months, sometimes 1 month
• mortgage must not be irredeemable but in some circumstances redemption may be delayed

  Knightsbridge Estates Trust v Byrne [1939] Ch 441

  • equity only interfere with terms that the parties have agreed in mortgage deed where terms are oppressive or unconscionable
• question: when will right to redeem be illusory & equity intervene to allow borrower to redeem despite restriction contained in the mortgage deed?

  Fairclough v Swan Brewery [1912] AC 565

  • court intervene to allow early redemption: according to deed borrowers could not redeem mortgage until 6 weeks before end of lease (worthless asset)
• borrowers' right to redeem mortgage may be delayed so long as postponement not have effect of making right to redeem illusory

Lenders' rights & remedies: sale

• borrowers mortgage their land to lenders in return for loan & mortgaged land is security for the loan
• if borrower fails to repay lenders may exercise power to sell mortgaged property & use proceeds to pay themselves back
• law distinguishes between existence of lenders' power to sell & circumstances when lenders can exercise that power
• power of sale rights are set out in LPA 1925

  Law of Property Act 1925

  • s.101: lender has power of sale only if has legal mortgage made by deed
    s.101(1)(i): lender has power to sell when mortgage money has become due
  • s.103: power of sale becomes exercisable:
    lenders have served notice on borrowers requiring repayment of loan & borrowers have failed to comply for three months after service
    interest due under the mortgage is two months or more in arrears
    borrowers have breached a term under the mortgage deed
• mortgage money becomes due on contractual or legal date for redemption
• if lenders sell mortgaged land before power of sale arises: buyers take a transfer of the mortgage & assume lenders' rights under that mortgage
• in practice s.103 LPA 1925 often modified in mortgage conditions in favour of lender
• question: how far do purchasers need go to check that lenders have a power to sell & can exercise?

  Waring v London & Manchester Assurance [1935] Ch 310

  • borrower can redeem mortgage by paying back loan before lender enters into contract to sell mortgaged land & obtain injunction to prevent sale
  • conditional contract for sale of mortgaged property not possible: must be binding contract to prevent risk of borrower redeeming mortgage between exchange & completion stages of sale
  • once lender enters contract for sale of mortgaged property, contract binds borrower (who loses right to redeem by paying back loan)

  Law of Property Act 1925

  • s.104(2): any person damnified by an unauthorised, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power
• under s.104(2) LPA 1925, if lender sells before power of sale is exercisable, borrower can sue lender for damages
• s.104(2) LPA 1925 protects purchaser from burden of checking whether lender's power to sell has become exercisable
• purchaser not acquire good title if knows power of sale is not exercisable or that there is some impropriety in the sale
• question: to what extent must lender seek to obtain high sale price when exercising power of sale?

  Cuckmere Brick v Mutual Finance [1971] Ch 949

  • lenders owe two duties to borrowers when exercising power to sell:
    lenders must act in good faith and not cheat the borrowers
    lenders must take reasonable care to obtain true market value of property at the date of the sale
• question: which lenders have priority for proceeds on sale if land subject to more than one mortgage?
• if lenders taken correct steps to protect mortgages as registrable dispositions they will appear as registered charges on charges title (s.27 LRA 2002)

  Land Registration Act 2002

  • s.48: order of priority between lenders governed by order in which mortgages appear on the register
• issue arises if lender 1 & 3 have correctly registered their mortgage but lender 2 has not

  Land Registration Act 2002

  • s.28(1): generally priority of an interest affecting a registered title is determined by date of its creation
  • s.30(1): If a registrable disposition of registered charge is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the charge immediately before the disposition whose priority is not protected at the time of registration
• priority of lenders:
  under general rule (s.28(1) LRA 2002): lender 1, lender 2, lender 3
  however as lender 2 not protected charge by registration: lender 1, lender 3, lender 2 (s.30(1) LRA 2002)
• under s.104 LPA 1925 when lender exercises power of sale: sells subject to prior incumbrances & free from ones which do not have priority
• in practice: purchaser must ensure that selling lender will redeem prior mortgage & sell free of that mortgage
• lender must deal with proceeds of sale

  Law of Property Act 1925

  • s.105: lender must discharge any prior incumbrances that are not to bind the purchaser & then hold proceeds on trust & must pay the following:
    costs & expenses of the sale
    discharge his own mortgage (outstanding loan plus interest & costs)
    residue to entitled to the mortgaged property or authorised to give receipts for the proceeds of the sale thereof
• if not enough money to discharge all mortgages, lenders can sue borrower for remainder

Lenders' rights & remedies: possession

• right to take possession of mortgaged land:
  if mortgaged land not subject to lease: lender can oust borrowers & take physical possession of land
  if subject to lease: lenders take possession by directing tenants pay their rent to lenders instead of borrowers
• remedy of seeking possession often exercised with other remedies
• lenders usually go to court to obtain a possession order

  Criminal Law Act 1977

  • s.6(2): fact lenders have right to possession of mortgaged property does not give them lawful authority to use or threaten violence to obtain possession
• lenders can take possession as soon as completed, usually deed will expressly or impliedly postpone right until borrower is in default
• in most cases lenders seeking possession order as wish to exercise another remedy - sale with vacant possession
• court's jurisdiction to postpone possession at common law very limited and depends on the terms of the mortgage deed, priority given to lenders' contractual right to possession which comes into existence as soon as mortgage created
• court as no implied discretion to postpone

  Birmingham Citizens Permanent BS v Caunt [1962] Ch 883

  • where (as here) the legal mortgagee under an instalment mortgage under which by reason of default the whole money has become payable, is entitled to possession, the Court has no jurisdiction to decline the order or to adjourn the hearing whether on terms of keeping up payments or paying arrears if the mortgagee cannot be persuaded to agree to this course. To this the sole exception is that the application may be adjourned for a short time to afford to the mortgagor the chance of paying off the mortgage in full or otherwise satisfying him
• at common law court can only refuse possession order or adjourn hearing:
  if lenders agree
  adjournment is for a short period (up to 28 days) to allow borrowers chance to pay all outstanding under the mortgage & reasonable chance of this happening
• court's equitable jurisdiction to postpone possession is more protective of borrowers

  Quennell v Maltby [1979] 1 WLR 318

  • Lord Denning set out wide equitable discretion to prevent lenders taking possession: if against justice in case to allow
  • lender only take possession if bona fide & acting reasonably in seeking possession to enforce their security
  • if borrower in default may be equitable to allow possession
  • in instant case, possession refused as lender did not want to enforce security but wanted to remove tenant
• some statutory protection for borrowers under mortgages of land which include a dwelling house

  Administration of Justice Act 1970

  • s.36: applies to instalment & non-instalment mortgages & gives court discretion to adjourn, suspend the execution of an order or postpone date for delivery of possession for reasonable period (with specific or ascertainable end date)
  • discretion can be exercised if borrowers likely to pay any sums due under the mortgage within a reasonable period
• s.36 AJA 1970 only gave court discretion where lenders sought an order for possession
• mortgage deeds often provide if borrowers default then whole mortgage is immediately payable, so court could only postpone in limited cases where likely borrower could repay whole amount
• s.36 AJA 1970 amended by s.8 Administration of Justice Act 1973

  Administration of Justice Act 1973

  • s.8: when considering postponing an order for possession court need only consider possibility of borrowers paying arrears within reasonable period & not paying back whole mortgage
  • if following conditions satisfied:
    1. mortgage must be over land that includes a dwelling house
    2. borrowers are entitled under the mortgage deed or by some agreement between them
    & lenders either to: (a) pay the principal sum by instalments or (b) defer payment of it in whole or in part 3 . provision made for earlier payment (on default by borrowers or demand by lender )
• s.36 AJA 1970 has been further interprepted in case law

  Western Bank v Schindler [1977] Ch 1

  • s.36 AJA 1970 not given literal meaning: would be manifestly unfair if protected a borrower in default but not borrower who had not

  Ropaigealach v Barclays Bank [1999] 3 WLR 17

  • Court of Appeal: s.36 AJA 1970 does not apply to protect borrowers where lenders take possession without a court order
• reasonable period to repay arrears question of fact & court will consider period for rescheduling payment & whether mortgaged property still adequate security for the loan
• court may also postpone possession to give borrowers time to sell & use proceeds to repay the loan: if plenty of equity less risk for lender so immediate sale not necessary but if less immediate order for sale may be granted

Lenders' rights & remedies: appointment of receiver

• if mortgaged property is subject to a lease, lenders can take possession by requiring tenants to pay rent towards debt but to avoid liability for mismanagement may appoint receiver
• receiver takes control of mortgaged land & either sells it or manages it using the income to repay the loan
• receiver is the agent of the appointing lender & duties & powers of the receiver are governed by mortgage document (under which he is appointed) & law of agency
• either express power to appoint receiver in mortgage deed or implied

  Law of Property Act 1925

  • s.101(1)(iii): implied power to appoint a receiver
• lenders power to appoint receiver arises in same way as power of sale (legal date of redemption reached & power exercisable)
• receiver either appointed in accordance with mortgage deed or in writing (s.109 LPA 1925)
• receiver must apply income in order set out in statute

  Law of Property Act 1925

  • s.109(8):
    (i) outgoings on the property
    (ii) payments due in respect of prior charges
    (iii) insurance premiums on the property & receiver's costs
    (iv) interest on the overdraft
    (v) capital if lender agrees
    (vi) balance to borrower
• principles underlying legal position of receivers

  Medforth v Blake [1999] 3 All ER 97

  • receivers managing mortgaged property owe duties to borrowers & anyone else with an interest in the equity of redemption
  • receiver duties include to act in good faith
  • extent & scope of any additional duty depends on the facts
  • when exercising powers of management primary duty is to bring about satisfaction of debt & interest owed
  • receivers owe a duty to manage the property with due diligence
  • due diligence not oblige receivers to continue business on mortgaged property previously carried on by borrowers
  • if receivers do carry on a business due diligence requires reasonable steps to be taken in order to try to do so profitably
.

Lenders' rights & remedies: foreclosure

• foreclosure is another remedy potentially available to lender once legal date for redemption has passed

  Campbell v Holyland (1877) 1 ChD 166

  • effect of foreclosure is to vest ownership of the borrowers' property in the lenders
  • borrower does not have claim for remaining balance after mortgage is deducted
  • equity gives court discretion to allow borrower to redeem even after an order for foreclosure has been made
  • if there is a lot of equity left in property after deduction of mortgage court more willing to re-open the foreclosure
• lender must go to court to obtain interim order fixing date borrower should pay outstanding money
• if borrower fails to pay lender may seek the final order or order of foreclosure absolute (after which borrowers cannot redeem unless court exercises its discretion to allow)
• foreclosure is not often used

  Law of Property Act 1925

  • s.91(2): allows any person interested either in the mortgage money or in the right of redemption to request that court order for sale instead of foreclosure