Chapter 11: Mortgage
This workbook is about mortgages and, in particular, mortgages of domestic property.
I decide to buy a house for £ 50,000. I have £ 10,000 in savings.
I decide to borrow £ 40,000 from a Building Society and agree to repay this over 25 years either by means of an endowment mortgage or on an instalment mortgage.
Having borrowed the £ 40,000 I pay this to the seller (vendor) of the property together with my £ 10,000 and the title to the property is transferred into my name.
In this scenario I am the mortgagor, the Building Society is the mortgagee and the property is the security for the repayments which I promise to make.
This is a very common situation: I have a legal estate - either a fee simple absolute in possession or a term of years absolute - and the Building Society will have a similar, concurrent, interest depending on the form of security - the mortgage by demise or by way of legal charge.
What is a mortgage?
"the essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in property, with a provision for redemption ie that upon repayment of a loan or the performance of some other obligation the conveyance will become void or the interest shall be reconveyed."
Megarry's Manual of the Law of Real Property, Seventh Edition, 1993, Sweet & Maxwell.
The mortgage should be distinguished from a pledge or lien, charge and floating charge.
In fact most mortgages granted now take the form of legal charges which are much simpler than the type of mortgage which operates by way of demise or sub-demise. This is dealt with in more detail in the section on creation of mortgages.
Pledge
"An ancient form of security that takes the form of the pledgor, a debtor, transferring possession of the pledge (the property serving as security) to the pledgee creditor" M. Bridge Personal Property Law, Blackstone Press, 1993. p 137.
The pledgee retains possession of the pledge pending repayment of the loan. The pledge is normally chattels but can occasionally consist of a documentary intangible and the question then arises whether this creates an equitable mortgage. "It seems that, where a transaction of this nature can be reasonably interpreted as a pledge, a sense of judicial minimalism will result in the agreement being so characterised." op cit p 139.
In Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 1993 it states at page 439:
"A pledge or pawn consists of the loan of money in return for the delivery of possession of chattels to the lender. Although the lender has certain powers of sale, the general property in the goods remains in the borrower and the lender has possession; in a mortgage, on the other hand, the lender acquires ownership and the borrower usually retains possession."
Lien
"a passive right to retain a chattel (in certain cases, documentary intangibles and papers) conferred by the general law." M. Bridge, Personal Property Law, Blackstone Press,1993 p 133.
It enables the lienee to retain goods of the lienor in certain circumstances pending payment. A garage can retain a vehicle in its possession in certain circumstances pending payment; a solicitor can retain her client's papers for all sums owing for professional services. Although an ancient remedy statute has created specific liens, eg Civil Aviation Act 1982 which enables an airport to detain an aircraft for unpaid airport charges and fuel supplied - see Bristol Airport Plc v Powdrill [1990] Ch 744.
A lien gives no right to sell or otherwise deal with the property.
A common law lien is the right to retain possession of the property and an equitable lien does not depend on continued possession of the property, eg "a vendor of land who has conveyed it without receiving the full purchase price has an equitable lien upon it for the balance unpaid." Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 7th Edition p 438.
Charge
A Charge is another name for a mortgage. In section 205(1)(xvi) of the Law of Property Act 1925, the term "mortgage" includes any charge or lien on any property for securing money or money's worth.
In Megarry's Manual of the law of Real Property, 1993, Sweet & Maxwell, p 439 it states:
"For most practical purposes, a charge is regarded as a species of mortgage... Nevertheless, there is an essential difference between a mortgage and a charge. A mortgage is a conveyance of property subject to a right of redemption, whereas a charge conveys nothing and merely gives the chargee certain rights over the property concerned as security for the loan."
A fixed charge should be compared with a floating charge.
Floating Charge
This is a charge generally granted by companies and businesses over their whole undertaking. It is called "floating" because the company or business still has the power to dispose of its property unless the charge 'crystallises'.
Per Lord Macnaghten in Illingworth v Houldsworth [1904] AC 355
"A specific [or fixed] charge ...is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."
The mortgages with which we are concerned are, of course, fixed charges.
Purposes of mortgage
For the borrower (mortgagor) the mortgage serves two main purposes:
1) These are the main means of providing homes in which to live. In the UK approximately 70% of properties are owner-occupied. This is higher than many EU countries.
2) Because secured borrowing is cheaper than most other forms of loan mortgages are granted for home improvement, consumer goods, holidays etc.
For the lender (mortgagee) the mortgage provides some security for repayment of the loan. A Building Society, for example, will grant secured and unsecured loans but charges less for a secured loan because the risk is less. For the lender (mortgagee) the mortgage is also a form of investment and is approved as a trustee investment for the purposes of the Trustee Investments Act 1961.
The remainder of this introduction will look briefly at the social significance of mortgages in terms of home ownership, borrowing on a secured and unsecured basis and the provision of security.
Social Significance
Subsidy through tax relief on mortgage interest payments
The cost of subsidy for home owners can be compared with the cost of subsidy for tenants
1980:
Tenants £340 per annum
Mortgagors £250 (through MITR)
1990
Tenants £260
Mortgagors £740
Source: B.Pearce and S Wilcox, Home-ownership. taxation and the economy, JRF (1991)
What happened to house prices?
The chart on the next page shows details of the movement in house prices over the last decade.
These went up continuously from 1981 to 1989 and have now gone into reverse. This has had the effect of leaving many owners with a negative equity. This is thought to affect about a million home owners. Recent opinion polls show that the great majority of voters blame the politicians for this and, of the politicians, Lady Thatcher is most to blame.
To calculate the equity the outstanding mortgage debt is deducted from the value of the property.
Mortgages therefore serve three main functions: for the borrower they are a means of providing the capital to buy somewhere to live and a means of raising capital for other purposes, secured on the property itself. For the lender they are an investment.
Now we want to look at the provision of security for loans. Mortgages are one type of security but not the only one. Lien, debenture, floating charge, pawn and pledge are all forms of security. Arrange the items below into the correct category. You may need to check the descriptions first.
Debenture
This is a form of loan stock issued by companies who wish to raise money by way of loan and is repayable as a secured loan.
Pawn
Effectively carries on the business of making small advances against pledges. Previously subject to the Pawnbrokers Acts of 1872 and 1960 but now controlled by the Consumer Credit Act 1974 sections 114-121.
In Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 1993 it states at page 439:
"A pledge or pawn consists of the loan of money in return for the delivery of possession of chattels to the lender. Although the lender has certain powers of sale, the general property in the goods remains in the borrower and the lender has possession; in a mortgage, on the other hand, the lender acquires ownership and the borrower usually retains possession."
The creation of a legal mortgage
Before 1926
By a conveyance or assignment of property by a mortgagor to a mortgagee as security for the repayment of a debt or the performance of some other obligation. The security could be redeemed once the debt had been repaid or the obligation performed. This method involved the transfer of the legal estate from the mortgagor to the mortgagee. Since 1926 these methods have not been available.
After 1925
Law of Property Act 1925 ss 85-87
There are two methods contained in Section 85 of the Law of Property Act 1925 for mortgaging of freeholds:
1. A demise for a term of years absolute with a proviso for cesser on redemption
2. A charge by deed expressed to be by way of legal mortgage
By far the most common is method 2.
Mortgaging Freeholds
Highlight the two methods of mortgaging freeholds in the extract from section 85(1) of the Law of Property Act 1925.
Section 85(1) A mortgage of an estate in fee simple shall only be capable of being effected at law either by a demise for a term of years absolute, subject to a provision for cesser on redemption, or by a charge by deed expressed to be by way of legal mortgage: Provided that a first mortgagee shall have the same right to possession of documents of title as if his security included the fee simple
Mortgaging of Leaseholds
Highlight the two methods of mortgaging leaseholds contained in section 86 of the Law of Property Act 1925
section 86(1) A mortgage of a term of years absolute shall only be capable of being effected at law either by a subdemise for a term of years absolute, less by one day than the term vested in the mortgagor, and subject to a provision for a cesser on redemption, or by a charge by deed expressed to be by way of legal mortgage; and where a licence to subdemise by way of legal mortgage is required , such licence shall not be unreasonably refused: Provided that a first mortgagee shall have the same right to the possession of documents as if his security had been effected by assignment.
Look at the terms of s87(1) of the Law of Property Act 1925 and drag the cursor over the words which describe the quality of title conferred on a mortgagee through a legal mortgage over freehold land.
87(1) Where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protection, powers and remedies (including the right to take proceedings to obtain possession from the occupiers and persons in receipt of rents and profits, or any of them) as if –
(a) where the mortgage is a mortgage of an estate in fee simple, a mortgage term for three thousand years without impeachment of waste had been thereby created in favour of the mortgagee; and
(b) where the mortgage is a mortgage of a term of years absolute, a sub-term less by one day than the term vested in the mortgagor had been created in favour of the mortgagee.
Creation of equitable mortgages
Equitable mortgages of legal estates or interests can be created by:
a) an agreement to create a legal mortgage (complying with s2 of the Law of Property (Miscellaneous Provisions) Act 1989 or
b) an informal mortgage where there is evidence that the mortgagor intended to create an immediate effective mortgage but the necessary formalities have not been completed, provided the mortgage is in writing and signed by the mortgagor. eg where the mortgagor fails to use either of the approved ways of creating a legal mortgage or fails to register a legal mortgage under the Land Registration Act 1925 or
c) deposit of documents of title.
In The Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd (1992) The Times, July 27, 1993 the following sequence of events was disclosed:
• The title was registered.
• The Plaintiffs (MC) had a charge, dated 10 July 1989, which was not substantively registered as a legal charge nor protected by a notice or caution.
• The Defendants (NCC) had a charge dated 31 July 1989 and protected by entry of a notice under section 49 Land Registration Act 1925.
You may need to check S 106 LRA 1925.
a) The mortgage in favour of MC was an equitable mortgage
• ü True False
Answer: True
We agree. Section 106 Land Registration Act 1925 states that until registered a charge takes effect only in equity.
b) The mortgage in favour of NCC was a legal mortgage
• û True ü False
Answer: False
We agree. It was protected by a notice but that is not the same as a registered charge - see section 106(3)(a) of the LRA 1925.
c) Both charges were equitable mortgages
• ü True False
Answer: True
d) The NCC mortgage takes priority over the MC mortgage.
• True ü False
Answer: False
We agree. The court decided that it did not. Both charges were equities. Therefore "where the equities are equal the first in time prevails" and the MC mortgage was first in time. The fact the NCC mortgage had been protected by a notice did not give it priority. In so deciding the court followed the decision of the Court of Appeal in Barclays Bank Ltd v Taylor [1974] 1 Ch 137
e) If the NCC mortgage had been registered it would have taken priority.
• ü True False
Answer: True
We agree with this. The legal interest would take precedence in accordance with section 29 of the Land Registration Act 1925.
Protection of equitable mortgages
Unregistered land:
Unregistered land may be protected by means of a Class iii Land Charge under s2(4) of the Land Charges Act 1972.
Registered land:
Registered land may be protected by registration of a notice or a caution under s106 of the Land Registration Act 1925.
Equitable mortgage by deposit of documents of title
"There is a venerable doctrine, stemming from Russel v Russel (1783), that an equitable mortgage of land may be effected by a deposit of the title deeds relating to that land coupled with an intention on the part of the owner that the depositee should hold the title deeds as his security for a loan of money. Such a deposit has usually been construed as constituting a sufficient act of part performance to amount to evidence of a contract to create a mortgage..." Gray, Elements of Land Law, Butterworths 1993 p 944
Gray goes on to say that mortgage by deposit has become, over the years, a highly convenient form of real security used, in particular, by banks as security for customers' borrowing.
Equitable mortgage of an equitable interest
An equitable interest can be the subject only of an equitable mortgage: it is not possible to grant a legal mortgage of an equitable interest.
Method: the interest can be assigned to a lender as security for moneys advanced. The assignment is subject to a proviso for re-assignment on repayment of the loan. The assignment must comply with section 53(1)(c) of the Law of Property Act 1925 unless made by will.
Equitable mortgages of "trust" equitable interests cannot be protected by registration but may be protected by notice given to the trustees - the rule in Dearle v Hall (1823) 3 Russ 1, affirmed (1827) 3 Russ 48. - priority depends on the order in which notice is given.
For an example of a mortgage of the interests of beneficiaries under a discretionary trust see Re Smith [1928] Ch 915.
Mortgage terms
A mortgage contains a number of different terms and conditions. These are normally contained in a book of rules provided by the mortgagee and in addition the terms of the mortgage are governed by sections 85 to 120 of the Law of Property Act 1925.
Typically you will find clauses stating:
• the mortgagor should not create any tenancy or lease or part with or share possession of the property except with the written permission of the mortgagee.
Example: The borrower covenants:
not without the written consent of the [mortgagee] to create any lease or tenancy or part with possession or share the occupation of the whole or part of the property and so that the powers of leasing or agreeing to lease and of accepting surrenders of leases conferred on a mortgagor in possession by the Law of Property Act 1925 shall not apply to this charge.
• the property must be kept in a good state of repair.
Example.
The Borrower covenants to:
put and keep in good and tenantable repair all buildings erected at the property and to complete to the [mortgagee's] satisfaction any uncompleted buildings.
not without the prior written consent of the [mortgagee] to make any structural alteration or addition to the property nor to change the use thereof.
• no alteration or change of use should be made without the mortgagor's consent.
Example.
The Borrower covenants to:
i. put and keep in good and tenantable repair all buildings erected at the property and to complete to the [mortgagee's] satisfaction any uncompleted buildings.
ii. not without the prior written consent of the [mortgagee] to make any structural alteration or addition to the property nor to change the use thereof.
• the property must be insured
• to pay the instalments. Example.
the borrower covenants with the mortgagee:
that if on realisation of its security by the mortgagee the net proceeds shall not be sufficient to discharge the principal sum the borrower will immediately pay to the mortgagee the amount of the deficiency with interest at the current rate until payment.
• to notify the mortgagor if no longer eligible to claim MIRAS
• to comply with any covenants and restrictions affecting the property. Example.
The borrower covenants:
To observe and perform all covenants restrictions and obligation (whether of a public or private nature) for the time being affecting the property or to which the borrower may be subject whether as owner or occupier thereof and to indemnify the mortgagee against the same.
At all times to comply with the Planning Acts and any requirements of the Planning Authority.
• to repay the mortgage in full at the time of selling the property. Example.
the borrower covenants with the mortgagee:
that if on realisation of its security by the mortgagee the net proceeds shall not be sufficient to discharge the principal sum the borrower will immediately pay to the mortgagee the amount of the deficiency with interest at the current rate until payment.
Consolidation
Most mortgages contain a provision that the restriction on consolidation contained in section 93 of the Law of Property Act 1925 should not apply.
Unless a contrary intention is expressed section 93 allows the mortgagor to redeem one mortgage without redeeming any other mortgages granted to the same mortgagee on different property.
This right is generally excluded.
Interest
In order to borrow money the borrower must, normally, pay interest. This is the essence of the loan contract and was the basis for the dislike of usury.
It is now accepted that the payment of interest itself is not unacceptable but to what extent should the courts be able to interfere with the rates of interest charged?
There are two possibilities for interference.
1. The inherent jurisdiction;
2. Power under the Consumer Credit Act 1974.
The Consumer Credit Act 1974 gives some statutory powers to the courts to re-open 'extortionate' credit bargains. The powers are contained in section 137 of the Act and what is 'extortionate' is defined by section 138.
Section 137(1) "If the court finds a credit bargain extortionate it may reopen the credit agreement so as to do justice between the parties"
The equity of redemption
In every mortgage there will be a redemption date, that is the date on which the principal sum becomes due. This is often expressed to be one month after the date of the mortgage. This is known as the legal date of redemption.
Of course very few mortgages are repaid on the legal date: most domestic mortgages are geared over a life of 25 years. Equity has long protected the right of the mortgagor to redeem at any time: the so called equity of redemption.
At the turn of the century in particular the Courts had to determine to what extent they should interfere with arrangements which rendered illusory the right to redeem. The following pages will look at some of these developments.
According to Grey. op cit, p 950 "Of course the avoidance of formally agreed contractual terms represents a remarkable denial of the principle of sanctity of contract and the history of the 'clogs and fetters' doctrine provides a fascinating account of the confrontation between the irresistible force of equity and the immovable object of traditional contract doctrine.The fluctuating fortunes of the 'clogs and fetters' prohibition epitomise the resolute opposition of the requirements of conscience and the commercial ethic of late 19th century capitalism.
In Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323, the mortgagee of some debenture stock was by the terms of the mortgage given an option to buy the stock outright within twelve months of the date of the loan. The mortgagor applied to prevent the mortgagee exercising the option.
What did the court decide?
1. In view of the trading position of the parties the agreement should remain undisturbed
2. The declaration was granted that the option was illegal and void because it changed the nature of the transaction
Answer: (2)
The House of Lords granted the declaration that the option was illegal and void because, effectively, it changed the nature of the transaction.
The declaration was granted reluctantly in view of the trading position of both parties; Per Ld Macnaghten "the directors of a trading company in search of financial assistance are certainly in a very different position from that of an impecunious landowner in the toils of a crafty money-lender."
In Reeve v Lisle [1902] AC 461 the facts were similar but the option to purchase part of the mortgaged property was given ten days after the date of execution of the mortgage.
1. The option was not valid as it interfered with the exercise of the equity of redemption
2. As the option was derived from a different transaction to the mortgage it could not be challenged.
Answer: (2)
The option was exercisable. The distinction with the case of Samuel is that at the time of granting the option there was no pressure on the mortgagor.
Postponing date of redemption
Fairclough v Swan Brewery Co Ltd [1912] AC 565: the redemption date was postponed until six weeks before the end of the leasehold interest which had been mortgaged. Did this render the equity of redemption illusory?
1. The Privy Council allowed redemption at an earlier date
2. The mortgagor must be held to his bargain.
Answer: (1)
The Privy Council allowed the mortgagor to redeem earlier holding that 'equity will not permit any device or contrivance being part of the mortgage transaction or contemporaneous with it to prevent or impede redemption.'
In Knightsbridge Estates Ltd v Byrne [1939] Ch 441 the mortgage stated that the advance could not be repaid for 40 years after it had been made. There was a fixed interest rate of 6.5% and the mortgagor wished to redeem earlier to obtain cheaper borrowing elsewhere when interest rates fell.
1. The Court of Appeal refused to intervene
2. The terms of the mortgage were unreasonable
Answer: (1)
'equity does not reform mortgage transactions because they are unreasonable.' Per Sir Wilfred Greene MR. Equity is concerned to see two things - that the essential requirements of a mortgage transaction are observed and that other oppressive or unconscionable terms are not enforced.
Solus agreements
Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25.
An agreement that the mortgagor should not sell a specified product to anyone else other than the lender was upheld. The agreement was regarded as part of a wholly different transaction from that of the mortgage, even though it was contained in the same document and even though it may have been in the nature of a collateral bargain.
Restraint of Trade
As a general proposition agreements which operate unreasonably in restraint of trade are void on the grounds of public policy.
Courts are prepared to uphold solus agreements which are limited to relatively short periods - eg 5 years - but would not be willing to countenance a tie which extended over a period of 21 years unless such a prolonged tie is grounded in a clear case of economic necessity. Gray,op cit p 588
See further, Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269.
Investigating title
The mortgagee will investigate in advance of a loan whether the security offered is a good security. In recent years three particular problems have arisen.
A) The equitable interests of beneficiaries behind a trust for sale
Williams & Glyn's Bank v Boland [1979] Ch 312
City of London Building Society v Flegg [1988] AC 54
B) Tenancies by estoppel:
Church of England Building Society v Piskor [1954] Ch 553 (overruled in Abbey National Building Society v Cann [1991] AC 56).
C) Setting aside mortgages on the grounds of undue influence:
Barclays Bank Plc v O'Brien [1993] 4 All ER 417 (HL)
CIBC Mortgages plc v Pitt [1993] 4 All ER 433 (HL)
This section will look at these particular problems.
In William's and Glyn's Bank v Boland [1979] Ch 312 the title to the property was registered. The Bank advanced money on mortgage to the husband who was the sole legal proprietor. When the bank sought to enforce the security the wife argued that her interest in the property took priority over the bank's charge.
1. The wife - Mrs Boland - had an equitable interest in the property
o ü True False
Answer: True
Correct. She had made a substantial contribution to the purchase which entitled her to a share in the house.
2. She had not protected her interest by a notice, caution or restriction
o ü True False
Answer: True
This is correct. Although her interest was a "minor interest" she had not taken steps to register it.
3. Her interest was an overriding interest
o ü True False
Answer: True
Correct. Overriding interests are defined in section 70 of the Land Registration Act 1925. The relevant part of this section for Mrs Boland was 70(1)(g) viz:
"the rights of every person in actual occupation of the land or in receipt of the rents and profits thereof, save where enquiry is made of such person and the rights are not disclosed...."
4. The mortgage overreached the overriding interest
o û True ü False
Answer: False
Correct. The overriding interest took priority as the mortgage monies were not paid to two trustees. See section 2 of the Law of Property Act 1925.
5. The overriding interest was binding on the mortgagees
o ü True False
Answer: True
This is correct. Even though the interest of Mrs Boland had not been protected in any way because she was in actual occupation her interest amounted to an overriding interest which was binding on the Bank.
In Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783 the title was unregistered and in the sole name of the husband.The home was a residence for the husband and two children; his wife lived nearby and visited on a regular basis to cook. She slept at the house only in the absence of the husband. He charged the property to a Finance Co and absconded.
Before the mortgage was granted the mortgagee's agent inspected the house; he found evidence of the children but not of the wife.
1. The mortgagee had constructive notice of the wife's interest
2. The wife had an overriding interest which had not been overreached
3. As there was no evidence of the wife's occupation the mortgagee did not have notice of it
4. The reference to children and the description of the applicant as single need not alert the need for further enquiries
5. The husband had requested an inspection on a Sunday: it was irrelevant that this coincided with his wife's absence
Answer: (1)
As title was unregistered there could be no question of the wife having an overriding interest: that is confined to registered land. The agent's reference to children should have alerted the mortgagee to the need to make further enquiries as to the possible rights of the wife. The wife's regular attendance meant she was present 'virtually every day for some part of the day' and the mortgagee was fixed with constructive notice of her equitable interest under the trust for sale.
As title was unregistered there could be no question of the wife having an overriding interest: that is confined to registered land. The agent's reference to children should have alerted the mortgagee to the need to make further enquiries as to the possible rights of the wife. The wife's regular attendance meant she was present 'virtually every day for some part of the day' and the mortgagee was fixed with constructive notice of her equitable interest under the trust for sale.
In City of London Building Society v Flegg [1988] AC 54 the House of Lords was dealing with a title registered in the name of A and B where the greater part of the purchase price had been provided by X and Y who were the parents of B.
Unknown to X and Y who lived in the property A and B executed a mortgage in favour of the City of London Building Society which subsequently sought to recover possession of the property.
1. The interest of X and Y had been overreached on payment to A and B of the mortgage moneys
2. The interests of X and Y were overriding interests taking precedence over the mortgagees
3. On analogy with Boland the interests of X and Y must take precedence
Answer: (1)
This is correct. The House of Lords decided that payment to two trustees - A and B - had the effect of overreaching any interests of X and Y which were transferred to the purchase moneys - in this case the mortgage advance. In the words of Grey. op cit, p 556 the ruling "Has conclusively reinstated the conventional understanding of overreaching and the machinery of conveyancing. Observance of the two trustee rule guarantees that in registered land a purchaser may, in one sense, overreach even an overriding interest."
In Abbey National Building Society v Cann [1991] AC 56 the argument was as follows. Between acquisition of the title to the property which was to be mortgaged and the mortgage itself there was a scintilla temporis - perhaps better described as a micro second - during which an equitable interest could arise which was then binding on the subsequent mortgagee as it existed at the time of the mortgage.
Such an argument was consistent with the decision in Church of England Building Society v Piskor [1954] Ch 533.
1. There was no scintilla temporis and Piskor had been wrongly decided
2. The House of Lords felt constrained to follow precedent
3. The trust for sale took effect against the unencumbered title and was thus binding on the mortgagee
Answer: (1)
Correct. The legal owner who can fund his acquisition of title only 'by borrowing money for the security of which he is contractually bound to grant a mortgage to the lender eo instante with the execution of the conveyance in his favour cannot in reality be said to have acquired even for a scintilla temporis the unencumbered fee simple or leasehold estate in land where he could grant interests taking priority over the mortgage' per Lord Oliver at 92F.
Undue influence
In Barclays Bank plc v O'Brien [1993] 4 All ER 417 and CIBC Mortgages plc v Pitt [1993] 4 All ER 433 the House of Lords considered whether mortgages should be set aside because they had been induced by the wrongful conduct of the defendants' husbands - misrepresentation and undue influence respectively.
Mrs O'Brien charged the home to secure overdraft facilities extended to a business in which her husband had an interest but she did not. H had falsely stated that the liability was limited to £60,000 and was to last for only three weeks.
Mrs Pitt charged the matrimonial home for the stated purpose of discharging a first mortgage and buying a holiday home but the advance was in fact used mainly for Mr Pitt's speculation on the stock market. There was a finding of actual undue influence by H over W.
In O'Brien the charge was set aside but not in Pitt. The following principles arise:
1. A security is voidable if the creditor has actual or constructive notice that the wife's consent was obtained as a result of a legal wrong committed by the husband.
2. Creditors will be fixed with constructive notice if, on its face, the mortgage is not for the financial advantage of the wife and the relationship between borrower and security provider is such that there is a substantial risk that in procuring the consent of the security provider a legal wrong has been committed.
3. Creditors can avoid being fixed with constructive notice if they take reasonable steps
4. Reasonable steps involve explaining the nature and extent of the security to the wife in the absence of the husband
5. In exceptional cases the steps require the wife to have independent legal advice.
In Goode Durrant Administration v Biddulph (1994) 26 HLR 625 (ChD) H owned 90% of the shares in a property company and W and their children the balance. To secure a borrowing of £316,750 to the company and H, W charged the matrimonial home relying entirely on the advice of H.
1. The relationship gave rise to a presumption of undue influence
o ü True False
Answer: True
Correct. In the absence of evidence disproving undue influence W could have the charge set aside against H if she could show this was to her manifest disadvantage. Here she was making herself liable for a debt in excess of £300,000 in order to have a share of about 2.5% in any profits. Manifestly it was to her disadvantage.
2. The issue was whether the lenders had constructive notice
o ü True False
Answer: True
3. The potential benefit was so small that 'on its face' it was to her disadvantage
o True False
Answer: True
4. The lenders had taken reasonable steps
o True ü False
Answer: False
Correct. The lenders had no dealings with W at all.
"There is no issue that he alone dealt with the bank on behalf of the company, of himself and of his wife. It was to him that the documents were sent for signature and by him they were returned duly signed by him on behalf of the company, and himself and by his wife. All the signatures were witnessed by their son-in-law..." at p 629
5. The charge was enforceable against W
o û True ü False
Answer: False
In Midland Bank plc v Serter and another (1995) Independent March 2, H was a member of Lloyds. To secure guarantees the P Bank required a second charge on the home owned by H and W. The Solicitor for H and W telephoned W in Holland and explained the nature of the charge over the phone.
H executed the charge and flew to see W in Holland where "after a lunch during which a fair amount of alcohol was consumed" she signed the charge and a certificate stating that her solicitors had discussed and explained the nature and consequences of the charge.
W subsequently claimed that she had no recollection of signing the documents and that she was suffering from stress because of matrimonial problems.
"In order for the bank not to be entitled to rely on the fact that the solicitor was advising the second defendant and on his certificate to that effect, it would have to be shown that when the solicitor spoke to [W] he was doing so on the instructions of and as agent for the bank. Only in this way would his knowledge be imputed to the bank. The bank was not concerned to instruct the solicitor how he should advise the[W]...It was sufficient for the bank to know that her solicitor, or her H's solicitor who was willing to advise her, was taking on that obligation to her. The bank was entitled to believe that the solicitor had advised the [W]."
Registration of interest under the mortgage
Legal mortgages have the effect of creating legal estates or legal interests. To refresh your memory check here. Nevertheless there has to be a system for determining which mortgage or charge takes priority over the next.
Registered land. The charge takes effect only when it is substantively registered at the Land Registry - see Section 26(1) LRA 1925.
Section 29 LRA governs the priority between registered charges.
The Land Registry retains the land certificate and issues a charge certificate to each mortgagee.
Unregistered title. The mortgagee normally holds the title deeds. This would prevent the mortgagor creating a further mortgage without the first mortgagees knowledge.
Second and subsequent mortgages of unregistered land can be created but must be protected by a Land Charge class C(i) entry: these are puisne mortgages.
Priorities as between puisne mortgages - this depends not on the date of creation but date of registration as a land charge:
Section 97 Law of property Act 1925 - Every mortgage affecting a legal estate in land made after the commencement of this Act, whether legal or equitable (not being a mortgage protected by the deposit of documents relating to the legal estate affected) shall rank according to its date of registration as a land charge pursuant to the Land Charges Act 1925 (now 1972).
In The Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd (1992) The Times, July 27, 1993 the following sequence of events was disclosed: title was registered. The Plaintiffs (MC) had a charge dated 10 July 1989 which was not substantively registered as a legal charge nor protected by a notice or caution.
The Defendants (NCC) had a charge dated 31 July 1989 protected by entry of a notice under section 49 Land Registration Act 1925. You may need to check S 106 LRA 1925 again.
1. The mortgage in favour of MC was an equitable mortgage
o ü True False
Answer: True
We agree. Section 106 Land Registration Act 1925 states that until registered a charge takes effect only in equity.
2. The mortgage in favour of NCC was a legal mortgage
o û True ü False
Answer: False
We agree. It was protected by a notice but that is not the same as a registered charge - see section 106(3)(a) of the LRA 1925
3. Both charges were equitable mortgages
o ü True False
Answer: True
4. The NCC mortgage takes priority over the MC mortgage
o û True ü False
Answer: False
We agree. The court decided that it did not. Both charges were equities. Therefore "where the equities are equal the first in time prevails" and the MC mortgage was first in time. The fact the NCC mortgage had been protected by a notice did not give it priority. In so deciding the court followed the decision of the Court of Appeal in Barclays Bank Ltd v Taylor [1974] 1 Ch 137.
5. If the NCC mortgage had been registered it would have taken priority
o ü True False
Answer: True
Consolidation
Section 93 of the Law of Property Act 1925 states:
(1) A mortgagor seeking to redeem any one mortgage is entitled to do so without paying money due under any separate mortgage made by him, or by any person through whom he claims, solely on property other than that comprised in the mortgage which he seeks to redeem.
This subsection applies only if and as far as a contrary intention is not expressed in the mortgage deeds or one of them.
A contrary intention is frequently expressed.
Remedies
1. Possession.
The effect of section 87 of the Law of Property Act 1925 is to give the mortgagee "as if" a legal estate.
As a result of this legal estate the mortgagee has "an unqualified right to possession of the mortgaged property" (Mobil Oil Ltd v Rawlinson (1982) 43 R & CR 222 CHD per Nourse J) in the absence of any statutory or contractual limitation.
The mortgagee "may go into possession before the ink is dry on the mortgage unless there is something in the contract express or by implication whereby he has contracted himself out of that right." per Harman J in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317 at 320.
In Western Bank v Schindler [1977] Ch 1 the D mortgagor borrowed £ 32,000 on an endowment mortgage which provided that no payment of capital or interest was contractually due for ten years after the date of execution. The Mortgagee wanted to go into possession of the mortgaged property to preserve the value of the security.
Was the right of the mortgagee to possession excluded?
1) No; the right to possession was the only way in which the mortgagee could guarantee that the property was properly managed
2) A contractual term excluding the right to possession was implied where the mortgage precluded the mortgagee from making immediate demand for his money
Answer: (1)
We agree with this. The Court of Appeal unanimously held that the right to possession had not been excluded either expressly or by implication.
In Mobil Oil Co Ltd v Rawlinson (1981) P&CR 221, the P Oil company sought to recover possession from the defendant mortgagor. The D tried to counterclaim and set off against the arrears sums which he alleged were due to him under a supply agreement with the Plaintiffs. Do you think he was allowed to set off the debt?
1) No. The Court of Appeal said that the right to possession and debt were not connected
2) Yes. There was a sufficient connection between the alleged debt and the mortgage
Answer: (1)
We agree. Nourse J said: "the principle is that a mortgagor cannot unilaterally appropriate the amount of a cross-claim, even it is both liquidated and admitted, and a fortiori if it is unliquidated or not admitted, in discharge of the mortgage debt. On that footing the origin and nature of the cross-claim and its relationship to the mortgage debt are wholly irrelevant."
This principle follows the decision in Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43 and is followed in Citibank Trust Ltd v Aviyor [1987] 1 WLR 1157.
Statutory control over the right to possession is given to the courts by section 36 of the Administration of Justice Act 1970 as amended by section 8 of the Administration of Justice Act 1973.
Look at section 36(1) of the Administration of Justice Act 1970.Drag the cursor over the part of the section which says of what the court should be satisfied before it can exercise any of its powers.
Section 36
(1)Where the mortgagee under a mortgage of land which consists of or includes a dwellinghouse brings an action in which he claims possession of the mortgaged property (not being an action for foreclosure in which a claim for possession is also made, 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 any default consisting of a breach of any other obligation arising under or by virtue of the mortgage.
Look at section 36(2) of the Administration of Justice Act. Highlight the powers of the court in addition to adjournment eg what can the court do if it is making an order for possession.
(2) the court
a) may adjourn the proceedings or b) on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may
(i) stay or suspend execution of the judgment or order or, (ii) postpone the date for delivery of possession
for such period or periods as the court thinks reasonable
(3) any such adjournment, stay, suspension or postponement as if referred to in subsection (2) above may be made subject to such conditions with regard to payment by the mortgagor of any sum secured by the mortgage or the remedying of any default as the court thinks fit.
In Target Home Loans Ltd v Clothier (1992) 25 HLR 48 the mortgagors asked to defer the order for possession to enable them to find a buyer and complete a sale. There was some evidence from an estate agent that the property was likely to be sold very shortly. Which of the courses set out below do you think was adopted?
1) The Court of Appeal agreed to defer the order for possession for three months
2) The Court of Appeal refused to defer the order for possession
Answer: (1)
Correct. Nolan LJ referred to the value of leaving the mortgagors in occupation ' on the basis that they are in a far better position to sell it than the [mortgagee] would be'. The prospect of an early sale would be enhanced by the presence of the mortgagors since an occupied house 'is far more likely to look attractive and to command a buyer than one which has been repossessed by a mortgage company'.
In Britannia Building Society v Earl [1990] 1 WLR 422, the mortgagors had breached the terms of the mortgage by granting an unauthorised letting of the property to two joint tenants. On what basis would relief be granted?
1) By allowing the tenants independent access to discretionary relief under section 36?
2) Relief was only possible if the tenants left the property
Answer: (2)
A breach of this kind could only be remedied by the departure of the tenants. Tenants in this situation have no leg to stand on as their tenancy will not normally be binding on the mortgagee. See now Abbey National Building Society v Cann [1991] 1 AC 56.
Sale
The mortgagee's power of sale is the essence of the mortgage transaction. On top of the personal action against the mortgagor the mortgagee can sell the property over which there is security. This section will look at
1) when the power of sale can be exercised
2) what happens to the proceeds
3) what price should be obtained.
In Halifax Building Society v Thomas and Another, The Times, July 4 1995 the mortgagor had obtained a mortgage using a false identity.
When he defaulted on the payments the Building Society obtained an order for possession, sold the property, and obtained a surplus. The mortgagor was convicted of an offence of deception and a confiscation order was made in respect of the surplus. At issue was who was entitled. Effectively three arguments were put before the Court of Appeal. Which was successful? You may need to check section 105 of the Law of Property Act 1925 again.
1) The surplus was held by the mortgagor on constructive trust for the mortgagee to prevent the mortgagor benefiting from his fraud.
o û Accepted ü Rejected
Answer: Rejected
2) the terms of the mortgage deed menat that as the mortgagor was obliged to account for the surplus this was due under the mortgage
o û Accepted ü Rejected
Answer: Rejected
3) section 105 was quite clear and any surplus belonged to the mortgagor and, thus, could be confiscated
o ü Accepted û Rejected
Answer: Accepted
In fact the Court of Appeal decided that section 105 prevailed. There was no universal principle that in every case there would be restitution of benefit from a wrong. In this case the Building Society had lost nothing and there was no line of authority that a constructive trust had become a remedy for unjust enrichment and the Court was not prepared to extend such a remedy where a specific remedy of confiscation had been included by Parliament in the Criminal Justice Act 1988.
In accordance with section 105 the surplus was due to the mortgagor and, from him, to the Crown.
Position of a purchaser from a mortgagee
Section 104(2) governs the position of a purchaser from a mortgagee. It effectively states that the purchaser's title is unimpeachable.
This seems to have two effects.
The mortgagor retains any action against the mortgagee for a premature sale, and
the purchaser cannot rely on section 104(2) if at the time of sale he had actual notice that the power of sale was not exercisable or that there was some impropriety in the sale: to allow otherwise would be to 'convert the provisions of the statute into an instrument of fraud' per Stirling J in Bailey v Barnes [1894] 1 Ch 25.
In Palk v Mortgage Services Funding Plc [1993] 415, the Court of Appeal had to consider the extent of its powers under section 91(2) of the Law of Property Act 1925. The sum owed by the mortgagors exceeded by some £ 75,000 the value of the property. To minimise their losses the mortgagors wanted to sell but the mortgagees wanted to let the property and hope for a rise in house prices when the market recovered. If the mortgagees scheme had been followed the debt would increase as the rental income would not cover the mortgage interest.
1. The Court ordered the sale notwithstanding the negative equity
2. A sale was refused because this would remove the mortgagee's right to decide on the timing of the sale and more than £ 75.000 would still be outstanding.
Answer: (1)
The Court did agree to the sale. The mortgagee must act fairly towards the mortgagor and the action proposed by the mortgagee was likely to be financially very damaging for the mortgagor in the absence of a dramatic upturn in the domestic housing market. As Gray comments at p 1020 of Elements of Land Law
"although the court will direct sale in cases of negative equity 'only in exceptional circumstances' it seems clear that the discretion available under section 91(2) provides in such cases a valuable and hitherto unsuspected avenue to relief for certain categories of mortgagor caught in the trap of negative equity. The Palk decision throws a lifeline which may enable him or her to escape a calamitous situation in which debts increase exponentially beyond any hope of repayment from the proceeds of an eventual sale."
If a duty of care is owed by the mortgagee to the mortgagor does this extend to a beneficiary under a trust of property which had been held by his wife as sole legal owner and mortgagor?
In Parker-Tweedale v Dunbar Bank Plc [1991] Ch 12 the beneficiary husband alleged that the mortgagees owed him a duty of care. The purchasers from the mortgagees had resold the property three weeks later for a profit of £125,000,
1. No duty was owed by the mortgagees to the beneficiary
2. The normal duty of care was extended to include the beneficiary as the Bank was aware of the trust
Answer: (1)
The Court did agree to the sale.The mortgagee must act fairly towards the mortgagor and the action proposed by the mortgagee was likely to be financially very damaging for the mortgagor in the absence of a dramatic upturn in the domestic housing market. As Grey comments at p 1020 of Elements of Land Law
"although the court will direct sale in cases of negative equity 'only in exceptional circumstances' it seems clear that the discretion available under section 91(2) provides in such cases a valuable and hitherto unsuspected avenue to relief for certain categories of mortgagor caught in the trap of negative equity. The Palk decision throws a lifeline which may enable him or her to escape a calamitous situation in which debts increase exponentially beyond any hope of repayment from the proceeds of an eventual sale."
The effect of a sale by the mortgagee
Section 88 and 89 of the Law of Property Act 1925
The sale will vest the legal estate in the purchaser free from subsequent interests which are capable of being overeached but subject to prior mortgages. A purchaser from a mortgagee is unaffected by an estate contract - Class c(iv) Land Charge - entered into previously by the mortgagor - Duke v Robson [1973] 1 WLR 267. In registered land this was also the result in Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044.
Receiver
The power to appoint a Receiver is contained in section 101(iii) and section 109 of the Law of Property Act 1925.
The conditions for appointment of a Receiver are the same as for the statutory power of sale to arise and to become exercisable. See section 109(1).
The Receiver has to collect all the income from the mortgaged land and make all payments of rent and other outgoings on the mortgaged property and for interest due under the mortgage.
The Receiver is the agent of the mortgagor - section 109(2) - even though not appointed by the mortgagor.
Foreclosure
According to Gray, op cit, p 1028, foreclosure is the most draconian of the remedies as it "effectively abrogates the mortgagor's equity of redemption and leaves the entire value of the mortgaged property in the hands of the mortgagee."
The remedy is rarely sought and even more rarely granted and the Law Commission has proposed that it should be abolished.
"The courts have been increasingly reluctant to grant orders for foreclosure, particularly in the context of a rapidly rising property market, because an order for foreclosure may have the effect of transferring to the mortgagee a much more valuable property than the property over which he initially took his security."
Mortgage rescue
The state provides, therefore, limited assistance with mortgage costs. Income support is not available to those in full-time employment (16 hours a week) or whose partners are in full-time employment.
Some mortgage rescue schemes have been proposed to reduce the high levels of possession orders:
a. a mortgage benefit scheme somewhat like housing benefit
b. sale of the mortgaged property to a housing association with lease back to the mortgagor
c. shared equity schemes
d. mortgage interest direct by the DSS to the mortgagee
For the effect of some of these schemes see
o Mortgage Rescue - What does it add up to? S.Foster, Shelter, 1992;
o Mortgage Arrears - Reducing mortgage arrears and possessions - an evaluation of the initiatives - Janet Ford and Steve Wilcox, Joseph Rowntree Foundation 1992
In agreements regulated under the Consumer Credit Act 1974 the Courts have the power to make what is known as "time orders" - basically allowing the debtor more time to pay.
The statutory detail is set out in section 129 and section 136 of the Consumer Credit Act 1974.
In Southern and District Finance Plc v Barnes and Another, and J Securities Ltd v Ewart and Another and Equity Homes Loans Ltd v Lewis, The Times, April 19, 1995, the Court of Appeal had to consider the scope of the powers of the court under section 136 of the Consumer Credit Act 1974. Try and answer the questions below.
1. The first consideration was whether it was just to make a time order
o ü True False
Answer: True
2. A time order should normally be made only for a stipulated period on account of temporary financial difficulty
o ü True False
Answer: True
3. The sum owed meant every sum due and owing. If possession proceedings had been started this would normally comprise the whole debt.
o ü True False
Answer: True
4. The interest rate could not be varied
o û True False
Answer: False
5. If a time order was made any possession order should also be suspended
o ü True False
Answer: True
There is a section in J.Luba, V.Madge and D.McConnell, Defending Possession Proceedings, Legal Action, 1992, Third Edition, which deals with the powers of the court to grant time orders.
The authors refer to First National Bank v Syed and Syed [1991] 2 All ER 250 and comment:
"Where there has been a long history of default with only sporadic payments from the borrower, it would not be just to grant a time order where the only payments which the borrower can realistically afford are insufficient to cover the accruing interest."
I decide to buy a house for £ 50,000. I have £ 10,000 in savings.
I decide to borrow £ 40,000 from a Building Society and agree to repay this over 25 years either by means of an endowment mortgage or on an instalment mortgage.
Having borrowed the £ 40,000 I pay this to the seller (vendor) of the property together with my £ 10,000 and the title to the property is transferred into my name.
In this scenario I am the mortgagor, the Building Society is the mortgagee and the property is the security for the repayments which I promise to make.
This is a very common situation: I have a legal estate - either a fee simple absolute in possession or a term of years absolute - and the Building Society will have a similar, concurrent, interest depending on the form of security - the mortgage by demise or by way of legal charge.
What is a mortgage?
"the essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in property, with a provision for redemption ie that upon repayment of a loan or the performance of some other obligation the conveyance will become void or the interest shall be reconveyed."
Megarry's Manual of the Law of Real Property, Seventh Edition, 1993, Sweet & Maxwell.
The mortgage should be distinguished from a pledge or lien, charge and floating charge.
In fact most mortgages granted now take the form of legal charges which are much simpler than the type of mortgage which operates by way of demise or sub-demise. This is dealt with in more detail in the section on creation of mortgages.
Pledge
"An ancient form of security that takes the form of the pledgor, a debtor, transferring possession of the pledge (the property serving as security) to the pledgee creditor" M. Bridge Personal Property Law, Blackstone Press, 1993. p 137.
The pledgee retains possession of the pledge pending repayment of the loan. The pledge is normally chattels but can occasionally consist of a documentary intangible and the question then arises whether this creates an equitable mortgage. "It seems that, where a transaction of this nature can be reasonably interpreted as a pledge, a sense of judicial minimalism will result in the agreement being so characterised." op cit p 139.
In Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 1993 it states at page 439:
"A pledge or pawn consists of the loan of money in return for the delivery of possession of chattels to the lender. Although the lender has certain powers of sale, the general property in the goods remains in the borrower and the lender has possession; in a mortgage, on the other hand, the lender acquires ownership and the borrower usually retains possession."
Lien
"a passive right to retain a chattel (in certain cases, documentary intangibles and papers) conferred by the general law." M. Bridge, Personal Property Law, Blackstone Press,1993 p 133.
It enables the lienee to retain goods of the lienor in certain circumstances pending payment. A garage can retain a vehicle in its possession in certain circumstances pending payment; a solicitor can retain her client's papers for all sums owing for professional services. Although an ancient remedy statute has created specific liens, eg Civil Aviation Act 1982 which enables an airport to detain an aircraft for unpaid airport charges and fuel supplied - see Bristol Airport Plc v Powdrill [1990] Ch 744.
A lien gives no right to sell or otherwise deal with the property.
A common law lien is the right to retain possession of the property and an equitable lien does not depend on continued possession of the property, eg "a vendor of land who has conveyed it without receiving the full purchase price has an equitable lien upon it for the balance unpaid." Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 7th Edition p 438.
Charge
A Charge is another name for a mortgage. In section 205(1)(xvi) of the Law of Property Act 1925, the term "mortgage" includes any charge or lien on any property for securing money or money's worth.
In Megarry's Manual of the law of Real Property, 1993, Sweet & Maxwell, p 439 it states:
"For most practical purposes, a charge is regarded as a species of mortgage... Nevertheless, there is an essential difference between a mortgage and a charge. A mortgage is a conveyance of property subject to a right of redemption, whereas a charge conveys nothing and merely gives the chargee certain rights over the property concerned as security for the loan."
A fixed charge should be compared with a floating charge.
Floating Charge
This is a charge generally granted by companies and businesses over their whole undertaking. It is called "floating" because the company or business still has the power to dispose of its property unless the charge 'crystallises'.
Per Lord Macnaghten in Illingworth v Houldsworth [1904] AC 355
"A specific [or fixed] charge ...is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."
The mortgages with which we are concerned are, of course, fixed charges.
Purposes of mortgage
For the borrower (mortgagor) the mortgage serves two main purposes:
1) These are the main means of providing homes in which to live. In the UK approximately 70% of properties are owner-occupied. This is higher than many EU countries.
2) Because secured borrowing is cheaper than most other forms of loan mortgages are granted for home improvement, consumer goods, holidays etc.
For the lender (mortgagee) the mortgage provides some security for repayment of the loan. A Building Society, for example, will grant secured and unsecured loans but charges less for a secured loan because the risk is less. For the lender (mortgagee) the mortgage is also a form of investment and is approved as a trustee investment for the purposes of the Trustee Investments Act 1961.
The remainder of this introduction will look briefly at the social significance of mortgages in terms of home ownership, borrowing on a secured and unsecured basis and the provision of security.
Social Significance
Subsidy through tax relief on mortgage interest payments
The cost of subsidy for home owners can be compared with the cost of subsidy for tenants
1980:
Tenants £340 per annum
Mortgagors £250 (through MITR)
1990
Tenants £260
Mortgagors £740
Source: B.Pearce and S Wilcox, Home-ownership. taxation and the economy, JRF (1991)
What happened to house prices?
The chart on the next page shows details of the movement in house prices over the last decade.
These went up continuously from 1981 to 1989 and have now gone into reverse. This has had the effect of leaving many owners with a negative equity. This is thought to affect about a million home owners. Recent opinion polls show that the great majority of voters blame the politicians for this and, of the politicians, Lady Thatcher is most to blame.
To calculate the equity the outstanding mortgage debt is deducted from the value of the property.
Mortgages therefore serve three main functions: for the borrower they are a means of providing the capital to buy somewhere to live and a means of raising capital for other purposes, secured on the property itself. For the lender they are an investment.
Now we want to look at the provision of security for loans. Mortgages are one type of security but not the only one. Lien, debenture, floating charge, pawn and pledge are all forms of security. Arrange the items below into the correct category. You may need to check the descriptions first.
Debenture
This is a form of loan stock issued by companies who wish to raise money by way of loan and is repayable as a secured loan.
Pawn
Effectively carries on the business of making small advances against pledges. Previously subject to the Pawnbrokers Acts of 1872 and 1960 but now controlled by the Consumer Credit Act 1974 sections 114-121.
In Megarry's Manual of the Law of Real Property, Sweet & Maxwell, 1993 it states at page 439:
"A pledge or pawn consists of the loan of money in return for the delivery of possession of chattels to the lender. Although the lender has certain powers of sale, the general property in the goods remains in the borrower and the lender has possession; in a mortgage, on the other hand, the lender acquires ownership and the borrower usually retains possession."
The creation of a legal mortgage
Before 1926
By a conveyance or assignment of property by a mortgagor to a mortgagee as security for the repayment of a debt or the performance of some other obligation. The security could be redeemed once the debt had been repaid or the obligation performed. This method involved the transfer of the legal estate from the mortgagor to the mortgagee. Since 1926 these methods have not been available.
After 1925
Law of Property Act 1925 ss 85-87
There are two methods contained in Section 85 of the Law of Property Act 1925 for mortgaging of freeholds:
1. A demise for a term of years absolute with a proviso for cesser on redemption
2. A charge by deed expressed to be by way of legal mortgage
By far the most common is method 2.
Mortgaging Freeholds
Highlight the two methods of mortgaging freeholds in the extract from section 85(1) of the Law of Property Act 1925.
Section 85(1) A mortgage of an estate in fee simple shall only be capable of being effected at law either by a demise for a term of years absolute, subject to a provision for cesser on redemption, or by a charge by deed expressed to be by way of legal mortgage: Provided that a first mortgagee shall have the same right to possession of documents of title as if his security included the fee simple
Mortgaging of Leaseholds
Highlight the two methods of mortgaging leaseholds contained in section 86 of the Law of Property Act 1925
section 86(1) A mortgage of a term of years absolute shall only be capable of being effected at law either by a subdemise for a term of years absolute, less by one day than the term vested in the mortgagor, and subject to a provision for a cesser on redemption, or by a charge by deed expressed to be by way of legal mortgage; and where a licence to subdemise by way of legal mortgage is required , such licence shall not be unreasonably refused: Provided that a first mortgagee shall have the same right to the possession of documents as if his security had been effected by assignment.
Look at the terms of s87(1) of the Law of Property Act 1925 and drag the cursor over the words which describe the quality of title conferred on a mortgagee through a legal mortgage over freehold land.
87(1) Where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protection, powers and remedies (including the right to take proceedings to obtain possession from the occupiers and persons in receipt of rents and profits, or any of them) as if –
(a) where the mortgage is a mortgage of an estate in fee simple, a mortgage term for three thousand years without impeachment of waste had been thereby created in favour of the mortgagee; and
(b) where the mortgage is a mortgage of a term of years absolute, a sub-term less by one day than the term vested in the mortgagor had been created in favour of the mortgagee.
Creation of equitable mortgages
Equitable mortgages of legal estates or interests can be created by:
a) an agreement to create a legal mortgage (complying with s2 of the Law of Property (Miscellaneous Provisions) Act 1989 or
b) an informal mortgage where there is evidence that the mortgagor intended to create an immediate effective mortgage but the necessary formalities have not been completed, provided the mortgage is in writing and signed by the mortgagor. eg where the mortgagor fails to use either of the approved ways of creating a legal mortgage or fails to register a legal mortgage under the Land Registration Act 1925 or
c) deposit of documents of title.
In The Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd (1992) The Times, July 27, 1993 the following sequence of events was disclosed:
• The title was registered.
• The Plaintiffs (MC) had a charge, dated 10 July 1989, which was not substantively registered as a legal charge nor protected by a notice or caution.
• The Defendants (NCC) had a charge dated 31 July 1989 and protected by entry of a notice under section 49 Land Registration Act 1925.
You may need to check S 106 LRA 1925.
a) The mortgage in favour of MC was an equitable mortgage
• ü True False
Answer: True
We agree. Section 106 Land Registration Act 1925 states that until registered a charge takes effect only in equity.
b) The mortgage in favour of NCC was a legal mortgage
• û True ü False
Answer: False
We agree. It was protected by a notice but that is not the same as a registered charge - see section 106(3)(a) of the LRA 1925.
c) Both charges were equitable mortgages
• ü True False
Answer: True
d) The NCC mortgage takes priority over the MC mortgage.
• True ü False
Answer: False
We agree. The court decided that it did not. Both charges were equities. Therefore "where the equities are equal the first in time prevails" and the MC mortgage was first in time. The fact the NCC mortgage had been protected by a notice did not give it priority. In so deciding the court followed the decision of the Court of Appeal in Barclays Bank Ltd v Taylor [1974] 1 Ch 137
e) If the NCC mortgage had been registered it would have taken priority.
• ü True False
Answer: True
We agree with this. The legal interest would take precedence in accordance with section 29 of the Land Registration Act 1925.
Protection of equitable mortgages
Unregistered land:
Unregistered land may be protected by means of a Class iii Land Charge under s2(4) of the Land Charges Act 1972.
Registered land:
Registered land may be protected by registration of a notice or a caution under s106 of the Land Registration Act 1925.
Equitable mortgage by deposit of documents of title
"There is a venerable doctrine, stemming from Russel v Russel (1783), that an equitable mortgage of land may be effected by a deposit of the title deeds relating to that land coupled with an intention on the part of the owner that the depositee should hold the title deeds as his security for a loan of money. Such a deposit has usually been construed as constituting a sufficient act of part performance to amount to evidence of a contract to create a mortgage..." Gray, Elements of Land Law, Butterworths 1993 p 944
Gray goes on to say that mortgage by deposit has become, over the years, a highly convenient form of real security used, in particular, by banks as security for customers' borrowing.
Equitable mortgage of an equitable interest
An equitable interest can be the subject only of an equitable mortgage: it is not possible to grant a legal mortgage of an equitable interest.
Method: the interest can be assigned to a lender as security for moneys advanced. The assignment is subject to a proviso for re-assignment on repayment of the loan. The assignment must comply with section 53(1)(c) of the Law of Property Act 1925 unless made by will.
Equitable mortgages of "trust" equitable interests cannot be protected by registration but may be protected by notice given to the trustees - the rule in Dearle v Hall (1823) 3 Russ 1, affirmed (1827) 3 Russ 48. - priority depends on the order in which notice is given.
For an example of a mortgage of the interests of beneficiaries under a discretionary trust see Re Smith [1928] Ch 915.
Mortgage terms
A mortgage contains a number of different terms and conditions. These are normally contained in a book of rules provided by the mortgagee and in addition the terms of the mortgage are governed by sections 85 to 120 of the Law of Property Act 1925.
Typically you will find clauses stating:
• the mortgagor should not create any tenancy or lease or part with or share possession of the property except with the written permission of the mortgagee.
Example: The borrower covenants:
not without the written consent of the [mortgagee] to create any lease or tenancy or part with possession or share the occupation of the whole or part of the property and so that the powers of leasing or agreeing to lease and of accepting surrenders of leases conferred on a mortgagor in possession by the Law of Property Act 1925 shall not apply to this charge.
• the property must be kept in a good state of repair.
Example.
The Borrower covenants to:
put and keep in good and tenantable repair all buildings erected at the property and to complete to the [mortgagee's] satisfaction any uncompleted buildings.
not without the prior written consent of the [mortgagee] to make any structural alteration or addition to the property nor to change the use thereof.
• no alteration or change of use should be made without the mortgagor's consent.
Example.
The Borrower covenants to:
i. put and keep in good and tenantable repair all buildings erected at the property and to complete to the [mortgagee's] satisfaction any uncompleted buildings.
ii. not without the prior written consent of the [mortgagee] to make any structural alteration or addition to the property nor to change the use thereof.
• the property must be insured
• to pay the instalments. Example.
the borrower covenants with the mortgagee:
that if on realisation of its security by the mortgagee the net proceeds shall not be sufficient to discharge the principal sum the borrower will immediately pay to the mortgagee the amount of the deficiency with interest at the current rate until payment.
• to notify the mortgagor if no longer eligible to claim MIRAS
• to comply with any covenants and restrictions affecting the property. Example.
The borrower covenants:
To observe and perform all covenants restrictions and obligation (whether of a public or private nature) for the time being affecting the property or to which the borrower may be subject whether as owner or occupier thereof and to indemnify the mortgagee against the same.
At all times to comply with the Planning Acts and any requirements of the Planning Authority.
• to repay the mortgage in full at the time of selling the property. Example.
the borrower covenants with the mortgagee:
that if on realisation of its security by the mortgagee the net proceeds shall not be sufficient to discharge the principal sum the borrower will immediately pay to the mortgagee the amount of the deficiency with interest at the current rate until payment.
Consolidation
Most mortgages contain a provision that the restriction on consolidation contained in section 93 of the Law of Property Act 1925 should not apply.
Unless a contrary intention is expressed section 93 allows the mortgagor to redeem one mortgage without redeeming any other mortgages granted to the same mortgagee on different property.
This right is generally excluded.
Interest
In order to borrow money the borrower must, normally, pay interest. This is the essence of the loan contract and was the basis for the dislike of usury.
It is now accepted that the payment of interest itself is not unacceptable but to what extent should the courts be able to interfere with the rates of interest charged?
There are two possibilities for interference.
1. The inherent jurisdiction;
2. Power under the Consumer Credit Act 1974.
The Consumer Credit Act 1974 gives some statutory powers to the courts to re-open 'extortionate' credit bargains. The powers are contained in section 137 of the Act and what is 'extortionate' is defined by section 138.
Section 137(1) "If the court finds a credit bargain extortionate it may reopen the credit agreement so as to do justice between the parties"
The equity of redemption
In every mortgage there will be a redemption date, that is the date on which the principal sum becomes due. This is often expressed to be one month after the date of the mortgage. This is known as the legal date of redemption.
Of course very few mortgages are repaid on the legal date: most domestic mortgages are geared over a life of 25 years. Equity has long protected the right of the mortgagor to redeem at any time: the so called equity of redemption.
At the turn of the century in particular the Courts had to determine to what extent they should interfere with arrangements which rendered illusory the right to redeem. The following pages will look at some of these developments.
According to Grey. op cit, p 950 "Of course the avoidance of formally agreed contractual terms represents a remarkable denial of the principle of sanctity of contract and the history of the 'clogs and fetters' doctrine provides a fascinating account of the confrontation between the irresistible force of equity and the immovable object of traditional contract doctrine.The fluctuating fortunes of the 'clogs and fetters' prohibition epitomise the resolute opposition of the requirements of conscience and the commercial ethic of late 19th century capitalism.
In Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323, the mortgagee of some debenture stock was by the terms of the mortgage given an option to buy the stock outright within twelve months of the date of the loan. The mortgagor applied to prevent the mortgagee exercising the option.
What did the court decide?
1. In view of the trading position of the parties the agreement should remain undisturbed
2. The declaration was granted that the option was illegal and void because it changed the nature of the transaction
Answer: (2)
The House of Lords granted the declaration that the option was illegal and void because, effectively, it changed the nature of the transaction.
The declaration was granted reluctantly in view of the trading position of both parties; Per Ld Macnaghten "the directors of a trading company in search of financial assistance are certainly in a very different position from that of an impecunious landowner in the toils of a crafty money-lender."
In Reeve v Lisle [1902] AC 461 the facts were similar but the option to purchase part of the mortgaged property was given ten days after the date of execution of the mortgage.
1. The option was not valid as it interfered with the exercise of the equity of redemption
2. As the option was derived from a different transaction to the mortgage it could not be challenged.
Answer: (2)
The option was exercisable. The distinction with the case of Samuel is that at the time of granting the option there was no pressure on the mortgagor.
Postponing date of redemption
Fairclough v Swan Brewery Co Ltd [1912] AC 565: the redemption date was postponed until six weeks before the end of the leasehold interest which had been mortgaged. Did this render the equity of redemption illusory?
1. The Privy Council allowed redemption at an earlier date
2. The mortgagor must be held to his bargain.
Answer: (1)
The Privy Council allowed the mortgagor to redeem earlier holding that 'equity will not permit any device or contrivance being part of the mortgage transaction or contemporaneous with it to prevent or impede redemption.'
In Knightsbridge Estates Ltd v Byrne [1939] Ch 441 the mortgage stated that the advance could not be repaid for 40 years after it had been made. There was a fixed interest rate of 6.5% and the mortgagor wished to redeem earlier to obtain cheaper borrowing elsewhere when interest rates fell.
1. The Court of Appeal refused to intervene
2. The terms of the mortgage were unreasonable
Answer: (1)
'equity does not reform mortgage transactions because they are unreasonable.' Per Sir Wilfred Greene MR. Equity is concerned to see two things - that the essential requirements of a mortgage transaction are observed and that other oppressive or unconscionable terms are not enforced.
Solus agreements
Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25.
An agreement that the mortgagor should not sell a specified product to anyone else other than the lender was upheld. The agreement was regarded as part of a wholly different transaction from that of the mortgage, even though it was contained in the same document and even though it may have been in the nature of a collateral bargain.
Restraint of Trade
As a general proposition agreements which operate unreasonably in restraint of trade are void on the grounds of public policy.
Courts are prepared to uphold solus agreements which are limited to relatively short periods - eg 5 years - but would not be willing to countenance a tie which extended over a period of 21 years unless such a prolonged tie is grounded in a clear case of economic necessity. Gray,op cit p 588
See further, Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269.
Investigating title
The mortgagee will investigate in advance of a loan whether the security offered is a good security. In recent years three particular problems have arisen.
A) The equitable interests of beneficiaries behind a trust for sale
Williams & Glyn's Bank v Boland [1979] Ch 312
City of London Building Society v Flegg [1988] AC 54
B) Tenancies by estoppel:
Church of England Building Society v Piskor [1954] Ch 553 (overruled in Abbey National Building Society v Cann [1991] AC 56).
C) Setting aside mortgages on the grounds of undue influence:
Barclays Bank Plc v O'Brien [1993] 4 All ER 417 (HL)
CIBC Mortgages plc v Pitt [1993] 4 All ER 433 (HL)
This section will look at these particular problems.
In William's and Glyn's Bank v Boland [1979] Ch 312 the title to the property was registered. The Bank advanced money on mortgage to the husband who was the sole legal proprietor. When the bank sought to enforce the security the wife argued that her interest in the property took priority over the bank's charge.
1. The wife - Mrs Boland - had an equitable interest in the property
o ü True False
Answer: True
Correct. She had made a substantial contribution to the purchase which entitled her to a share in the house.
2. She had not protected her interest by a notice, caution or restriction
o ü True False
Answer: True
This is correct. Although her interest was a "minor interest" she had not taken steps to register it.
3. Her interest was an overriding interest
o ü True False
Answer: True
Correct. Overriding interests are defined in section 70 of the Land Registration Act 1925. The relevant part of this section for Mrs Boland was 70(1)(g) viz:
"the rights of every person in actual occupation of the land or in receipt of the rents and profits thereof, save where enquiry is made of such person and the rights are not disclosed...."
4. The mortgage overreached the overriding interest
o û True ü False
Answer: False
Correct. The overriding interest took priority as the mortgage monies were not paid to two trustees. See section 2 of the Law of Property Act 1925.
5. The overriding interest was binding on the mortgagees
o ü True False
Answer: True
This is correct. Even though the interest of Mrs Boland had not been protected in any way because she was in actual occupation her interest amounted to an overriding interest which was binding on the Bank.
In Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783 the title was unregistered and in the sole name of the husband.The home was a residence for the husband and two children; his wife lived nearby and visited on a regular basis to cook. She slept at the house only in the absence of the husband. He charged the property to a Finance Co and absconded.
Before the mortgage was granted the mortgagee's agent inspected the house; he found evidence of the children but not of the wife.
1. The mortgagee had constructive notice of the wife's interest
2. The wife had an overriding interest which had not been overreached
3. As there was no evidence of the wife's occupation the mortgagee did not have notice of it
4. The reference to children and the description of the applicant as single need not alert the need for further enquiries
5. The husband had requested an inspection on a Sunday: it was irrelevant that this coincided with his wife's absence
Answer: (1)
As title was unregistered there could be no question of the wife having an overriding interest: that is confined to registered land. The agent's reference to children should have alerted the mortgagee to the need to make further enquiries as to the possible rights of the wife. The wife's regular attendance meant she was present 'virtually every day for some part of the day' and the mortgagee was fixed with constructive notice of her equitable interest under the trust for sale.
As title was unregistered there could be no question of the wife having an overriding interest: that is confined to registered land. The agent's reference to children should have alerted the mortgagee to the need to make further enquiries as to the possible rights of the wife. The wife's regular attendance meant she was present 'virtually every day for some part of the day' and the mortgagee was fixed with constructive notice of her equitable interest under the trust for sale.
In City of London Building Society v Flegg [1988] AC 54 the House of Lords was dealing with a title registered in the name of A and B where the greater part of the purchase price had been provided by X and Y who were the parents of B.
Unknown to X and Y who lived in the property A and B executed a mortgage in favour of the City of London Building Society which subsequently sought to recover possession of the property.
1. The interest of X and Y had been overreached on payment to A and B of the mortgage moneys
2. The interests of X and Y were overriding interests taking precedence over the mortgagees
3. On analogy with Boland the interests of X and Y must take precedence
Answer: (1)
This is correct. The House of Lords decided that payment to two trustees - A and B - had the effect of overreaching any interests of X and Y which were transferred to the purchase moneys - in this case the mortgage advance. In the words of Grey. op cit, p 556 the ruling "Has conclusively reinstated the conventional understanding of overreaching and the machinery of conveyancing. Observance of the two trustee rule guarantees that in registered land a purchaser may, in one sense, overreach even an overriding interest."
In Abbey National Building Society v Cann [1991] AC 56 the argument was as follows. Between acquisition of the title to the property which was to be mortgaged and the mortgage itself there was a scintilla temporis - perhaps better described as a micro second - during which an equitable interest could arise which was then binding on the subsequent mortgagee as it existed at the time of the mortgage.
Such an argument was consistent with the decision in Church of England Building Society v Piskor [1954] Ch 533.
1. There was no scintilla temporis and Piskor had been wrongly decided
2. The House of Lords felt constrained to follow precedent
3. The trust for sale took effect against the unencumbered title and was thus binding on the mortgagee
Answer: (1)
Correct. The legal owner who can fund his acquisition of title only 'by borrowing money for the security of which he is contractually bound to grant a mortgage to the lender eo instante with the execution of the conveyance in his favour cannot in reality be said to have acquired even for a scintilla temporis the unencumbered fee simple or leasehold estate in land where he could grant interests taking priority over the mortgage' per Lord Oliver at 92F.
Undue influence
In Barclays Bank plc v O'Brien [1993] 4 All ER 417 and CIBC Mortgages plc v Pitt [1993] 4 All ER 433 the House of Lords considered whether mortgages should be set aside because they had been induced by the wrongful conduct of the defendants' husbands - misrepresentation and undue influence respectively.
Mrs O'Brien charged the home to secure overdraft facilities extended to a business in which her husband had an interest but she did not. H had falsely stated that the liability was limited to £60,000 and was to last for only three weeks.
Mrs Pitt charged the matrimonial home for the stated purpose of discharging a first mortgage and buying a holiday home but the advance was in fact used mainly for Mr Pitt's speculation on the stock market. There was a finding of actual undue influence by H over W.
In O'Brien the charge was set aside but not in Pitt. The following principles arise:
1. A security is voidable if the creditor has actual or constructive notice that the wife's consent was obtained as a result of a legal wrong committed by the husband.
2. Creditors will be fixed with constructive notice if, on its face, the mortgage is not for the financial advantage of the wife and the relationship between borrower and security provider is such that there is a substantial risk that in procuring the consent of the security provider a legal wrong has been committed.
3. Creditors can avoid being fixed with constructive notice if they take reasonable steps
4. Reasonable steps involve explaining the nature and extent of the security to the wife in the absence of the husband
5. In exceptional cases the steps require the wife to have independent legal advice.
In Goode Durrant Administration v Biddulph (1994) 26 HLR 625 (ChD) H owned 90% of the shares in a property company and W and their children the balance. To secure a borrowing of £316,750 to the company and H, W charged the matrimonial home relying entirely on the advice of H.
1. The relationship gave rise to a presumption of undue influence
o ü True False
Answer: True
Correct. In the absence of evidence disproving undue influence W could have the charge set aside against H if she could show this was to her manifest disadvantage. Here she was making herself liable for a debt in excess of £300,000 in order to have a share of about 2.5% in any profits. Manifestly it was to her disadvantage.
2. The issue was whether the lenders had constructive notice
o ü True False
Answer: True
3. The potential benefit was so small that 'on its face' it was to her disadvantage
o True False
Answer: True
4. The lenders had taken reasonable steps
o True ü False
Answer: False
Correct. The lenders had no dealings with W at all.
"There is no issue that he alone dealt with the bank on behalf of the company, of himself and of his wife. It was to him that the documents were sent for signature and by him they were returned duly signed by him on behalf of the company, and himself and by his wife. All the signatures were witnessed by their son-in-law..." at p 629
5. The charge was enforceable against W
o û True ü False
Answer: False
In Midland Bank plc v Serter and another (1995) Independent March 2, H was a member of Lloyds. To secure guarantees the P Bank required a second charge on the home owned by H and W. The Solicitor for H and W telephoned W in Holland and explained the nature of the charge over the phone.
H executed the charge and flew to see W in Holland where "after a lunch during which a fair amount of alcohol was consumed" she signed the charge and a certificate stating that her solicitors had discussed and explained the nature and consequences of the charge.
W subsequently claimed that she had no recollection of signing the documents and that she was suffering from stress because of matrimonial problems.
"In order for the bank not to be entitled to rely on the fact that the solicitor was advising the second defendant and on his certificate to that effect, it would have to be shown that when the solicitor spoke to [W] he was doing so on the instructions of and as agent for the bank. Only in this way would his knowledge be imputed to the bank. The bank was not concerned to instruct the solicitor how he should advise the[W]...It was sufficient for the bank to know that her solicitor, or her H's solicitor who was willing to advise her, was taking on that obligation to her. The bank was entitled to believe that the solicitor had advised the [W]."
Registration of interest under the mortgage
Legal mortgages have the effect of creating legal estates or legal interests. To refresh your memory check here. Nevertheless there has to be a system for determining which mortgage or charge takes priority over the next.
Registered land. The charge takes effect only when it is substantively registered at the Land Registry - see Section 26(1) LRA 1925.
Section 29 LRA governs the priority between registered charges.
The Land Registry retains the land certificate and issues a charge certificate to each mortgagee.
Unregistered title. The mortgagee normally holds the title deeds. This would prevent the mortgagor creating a further mortgage without the first mortgagees knowledge.
Second and subsequent mortgages of unregistered land can be created but must be protected by a Land Charge class C(i) entry: these are puisne mortgages.
Priorities as between puisne mortgages - this depends not on the date of creation but date of registration as a land charge:
Section 97 Law of property Act 1925 - Every mortgage affecting a legal estate in land made after the commencement of this Act, whether legal or equitable (not being a mortgage protected by the deposit of documents relating to the legal estate affected) shall rank according to its date of registration as a land charge pursuant to the Land Charges Act 1925 (now 1972).
In The Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd (1992) The Times, July 27, 1993 the following sequence of events was disclosed: title was registered. The Plaintiffs (MC) had a charge dated 10 July 1989 which was not substantively registered as a legal charge nor protected by a notice or caution.
The Defendants (NCC) had a charge dated 31 July 1989 protected by entry of a notice under section 49 Land Registration Act 1925. You may need to check S 106 LRA 1925 again.
1. The mortgage in favour of MC was an equitable mortgage
o ü True False
Answer: True
We agree. Section 106 Land Registration Act 1925 states that until registered a charge takes effect only in equity.
2. The mortgage in favour of NCC was a legal mortgage
o û True ü False
Answer: False
We agree. It was protected by a notice but that is not the same as a registered charge - see section 106(3)(a) of the LRA 1925
3. Both charges were equitable mortgages
o ü True False
Answer: True
4. The NCC mortgage takes priority over the MC mortgage
o û True ü False
Answer: False
We agree. The court decided that it did not. Both charges were equities. Therefore "where the equities are equal the first in time prevails" and the MC mortgage was first in time. The fact the NCC mortgage had been protected by a notice did not give it priority. In so deciding the court followed the decision of the Court of Appeal in Barclays Bank Ltd v Taylor [1974] 1 Ch 137.
5. If the NCC mortgage had been registered it would have taken priority
o ü True False
Answer: True
Consolidation
Section 93 of the Law of Property Act 1925 states:
(1) A mortgagor seeking to redeem any one mortgage is entitled to do so without paying money due under any separate mortgage made by him, or by any person through whom he claims, solely on property other than that comprised in the mortgage which he seeks to redeem.
This subsection applies only if and as far as a contrary intention is not expressed in the mortgage deeds or one of them.
A contrary intention is frequently expressed.
Remedies
1. Possession.
The effect of section 87 of the Law of Property Act 1925 is to give the mortgagee "as if" a legal estate.
As a result of this legal estate the mortgagee has "an unqualified right to possession of the mortgaged property" (Mobil Oil Ltd v Rawlinson (1982) 43 R & CR 222 CHD per Nourse J) in the absence of any statutory or contractual limitation.
The mortgagee "may go into possession before the ink is dry on the mortgage unless there is something in the contract express or by implication whereby he has contracted himself out of that right." per Harman J in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317 at 320.
In Western Bank v Schindler [1977] Ch 1 the D mortgagor borrowed £ 32,000 on an endowment mortgage which provided that no payment of capital or interest was contractually due for ten years after the date of execution. The Mortgagee wanted to go into possession of the mortgaged property to preserve the value of the security.
Was the right of the mortgagee to possession excluded?
1) No; the right to possession was the only way in which the mortgagee could guarantee that the property was properly managed
2) A contractual term excluding the right to possession was implied where the mortgage precluded the mortgagee from making immediate demand for his money
Answer: (1)
We agree with this. The Court of Appeal unanimously held that the right to possession had not been excluded either expressly or by implication.
In Mobil Oil Co Ltd v Rawlinson (1981) P&CR 221, the P Oil company sought to recover possession from the defendant mortgagor. The D tried to counterclaim and set off against the arrears sums which he alleged were due to him under a supply agreement with the Plaintiffs. Do you think he was allowed to set off the debt?
1) No. The Court of Appeal said that the right to possession and debt were not connected
2) Yes. There was a sufficient connection between the alleged debt and the mortgage
Answer: (1)
We agree. Nourse J said: "the principle is that a mortgagor cannot unilaterally appropriate the amount of a cross-claim, even it is both liquidated and admitted, and a fortiori if it is unliquidated or not admitted, in discharge of the mortgage debt. On that footing the origin and nature of the cross-claim and its relationship to the mortgage debt are wholly irrelevant."
This principle follows the decision in Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43 and is followed in Citibank Trust Ltd v Aviyor [1987] 1 WLR 1157.
Statutory control over the right to possession is given to the courts by section 36 of the Administration of Justice Act 1970 as amended by section 8 of the Administration of Justice Act 1973.
Look at section 36(1) of the Administration of Justice Act 1970.Drag the cursor over the part of the section which says of what the court should be satisfied before it can exercise any of its powers.
Section 36
(1)Where the mortgagee under a mortgage of land which consists of or includes a dwellinghouse brings an action in which he claims possession of the mortgaged property (not being an action for foreclosure in which a claim for possession is also made, 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 any default consisting of a breach of any other obligation arising under or by virtue of the mortgage.
Look at section 36(2) of the Administration of Justice Act. Highlight the powers of the court in addition to adjournment eg what can the court do if it is making an order for possession.
(2) the court
a) may adjourn the proceedings or b) on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may
(i) stay or suspend execution of the judgment or order or, (ii) postpone the date for delivery of possession
for such period or periods as the court thinks reasonable
(3) any such adjournment, stay, suspension or postponement as if referred to in subsection (2) above may be made subject to such conditions with regard to payment by the mortgagor of any sum secured by the mortgage or the remedying of any default as the court thinks fit.
In Target Home Loans Ltd v Clothier (1992) 25 HLR 48 the mortgagors asked to defer the order for possession to enable them to find a buyer and complete a sale. There was some evidence from an estate agent that the property was likely to be sold very shortly. Which of the courses set out below do you think was adopted?
1) The Court of Appeal agreed to defer the order for possession for three months
2) The Court of Appeal refused to defer the order for possession
Answer: (1)
Correct. Nolan LJ referred to the value of leaving the mortgagors in occupation ' on the basis that they are in a far better position to sell it than the [mortgagee] would be'. The prospect of an early sale would be enhanced by the presence of the mortgagors since an occupied house 'is far more likely to look attractive and to command a buyer than one which has been repossessed by a mortgage company'.
In Britannia Building Society v Earl [1990] 1 WLR 422, the mortgagors had breached the terms of the mortgage by granting an unauthorised letting of the property to two joint tenants. On what basis would relief be granted?
1) By allowing the tenants independent access to discretionary relief under section 36?
2) Relief was only possible if the tenants left the property
Answer: (2)
A breach of this kind could only be remedied by the departure of the tenants. Tenants in this situation have no leg to stand on as their tenancy will not normally be binding on the mortgagee. See now Abbey National Building Society v Cann [1991] 1 AC 56.
Sale
The mortgagee's power of sale is the essence of the mortgage transaction. On top of the personal action against the mortgagor the mortgagee can sell the property over which there is security. This section will look at
1) when the power of sale can be exercised
2) what happens to the proceeds
3) what price should be obtained.
In Halifax Building Society v Thomas and Another, The Times, July 4 1995 the mortgagor had obtained a mortgage using a false identity.
When he defaulted on the payments the Building Society obtained an order for possession, sold the property, and obtained a surplus. The mortgagor was convicted of an offence of deception and a confiscation order was made in respect of the surplus. At issue was who was entitled. Effectively three arguments were put before the Court of Appeal. Which was successful? You may need to check section 105 of the Law of Property Act 1925 again.
1) The surplus was held by the mortgagor on constructive trust for the mortgagee to prevent the mortgagor benefiting from his fraud.
o û Accepted ü Rejected
Answer: Rejected
2) the terms of the mortgage deed menat that as the mortgagor was obliged to account for the surplus this was due under the mortgage
o û Accepted ü Rejected
Answer: Rejected
3) section 105 was quite clear and any surplus belonged to the mortgagor and, thus, could be confiscated
o ü Accepted û Rejected
Answer: Accepted
In fact the Court of Appeal decided that section 105 prevailed. There was no universal principle that in every case there would be restitution of benefit from a wrong. In this case the Building Society had lost nothing and there was no line of authority that a constructive trust had become a remedy for unjust enrichment and the Court was not prepared to extend such a remedy where a specific remedy of confiscation had been included by Parliament in the Criminal Justice Act 1988.
In accordance with section 105 the surplus was due to the mortgagor and, from him, to the Crown.
Position of a purchaser from a mortgagee
Section 104(2) governs the position of a purchaser from a mortgagee. It effectively states that the purchaser's title is unimpeachable.
This seems to have two effects.
The mortgagor retains any action against the mortgagee for a premature sale, and
the purchaser cannot rely on section 104(2) if at the time of sale he had actual notice that the power of sale was not exercisable or that there was some impropriety in the sale: to allow otherwise would be to 'convert the provisions of the statute into an instrument of fraud' per Stirling J in Bailey v Barnes [1894] 1 Ch 25.
In Palk v Mortgage Services Funding Plc [1993] 415, the Court of Appeal had to consider the extent of its powers under section 91(2) of the Law of Property Act 1925. The sum owed by the mortgagors exceeded by some £ 75,000 the value of the property. To minimise their losses the mortgagors wanted to sell but the mortgagees wanted to let the property and hope for a rise in house prices when the market recovered. If the mortgagees scheme had been followed the debt would increase as the rental income would not cover the mortgage interest.
1. The Court ordered the sale notwithstanding the negative equity
2. A sale was refused because this would remove the mortgagee's right to decide on the timing of the sale and more than £ 75.000 would still be outstanding.
Answer: (1)
The Court did agree to the sale. The mortgagee must act fairly towards the mortgagor and the action proposed by the mortgagee was likely to be financially very damaging for the mortgagor in the absence of a dramatic upturn in the domestic housing market. As Gray comments at p 1020 of Elements of Land Law
"although the court will direct sale in cases of negative equity 'only in exceptional circumstances' it seems clear that the discretion available under section 91(2) provides in such cases a valuable and hitherto unsuspected avenue to relief for certain categories of mortgagor caught in the trap of negative equity. The Palk decision throws a lifeline which may enable him or her to escape a calamitous situation in which debts increase exponentially beyond any hope of repayment from the proceeds of an eventual sale."
If a duty of care is owed by the mortgagee to the mortgagor does this extend to a beneficiary under a trust of property which had been held by his wife as sole legal owner and mortgagor?
In Parker-Tweedale v Dunbar Bank Plc [1991] Ch 12 the beneficiary husband alleged that the mortgagees owed him a duty of care. The purchasers from the mortgagees had resold the property three weeks later for a profit of £125,000,
1. No duty was owed by the mortgagees to the beneficiary
2. The normal duty of care was extended to include the beneficiary as the Bank was aware of the trust
Answer: (1)
The Court did agree to the sale.The mortgagee must act fairly towards the mortgagor and the action proposed by the mortgagee was likely to be financially very damaging for the mortgagor in the absence of a dramatic upturn in the domestic housing market. As Grey comments at p 1020 of Elements of Land Law
"although the court will direct sale in cases of negative equity 'only in exceptional circumstances' it seems clear that the discretion available under section 91(2) provides in such cases a valuable and hitherto unsuspected avenue to relief for certain categories of mortgagor caught in the trap of negative equity. The Palk decision throws a lifeline which may enable him or her to escape a calamitous situation in which debts increase exponentially beyond any hope of repayment from the proceeds of an eventual sale."
The effect of a sale by the mortgagee
Section 88 and 89 of the Law of Property Act 1925
The sale will vest the legal estate in the purchaser free from subsequent interests which are capable of being overeached but subject to prior mortgages. A purchaser from a mortgagee is unaffected by an estate contract - Class c(iv) Land Charge - entered into previously by the mortgagor - Duke v Robson [1973] 1 WLR 267. In registered land this was also the result in Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044.
Receiver
The power to appoint a Receiver is contained in section 101(iii) and section 109 of the Law of Property Act 1925.
The conditions for appointment of a Receiver are the same as for the statutory power of sale to arise and to become exercisable. See section 109(1).
The Receiver has to collect all the income from the mortgaged land and make all payments of rent and other outgoings on the mortgaged property and for interest due under the mortgage.
The Receiver is the agent of the mortgagor - section 109(2) - even though not appointed by the mortgagor.
Foreclosure
According to Gray, op cit, p 1028, foreclosure is the most draconian of the remedies as it "effectively abrogates the mortgagor's equity of redemption and leaves the entire value of the mortgaged property in the hands of the mortgagee."
The remedy is rarely sought and even more rarely granted and the Law Commission has proposed that it should be abolished.
"The courts have been increasingly reluctant to grant orders for foreclosure, particularly in the context of a rapidly rising property market, because an order for foreclosure may have the effect of transferring to the mortgagee a much more valuable property than the property over which he initially took his security."
Mortgage rescue
The state provides, therefore, limited assistance with mortgage costs. Income support is not available to those in full-time employment (16 hours a week) or whose partners are in full-time employment.
Some mortgage rescue schemes have been proposed to reduce the high levels of possession orders:
a. a mortgage benefit scheme somewhat like housing benefit
b. sale of the mortgaged property to a housing association with lease back to the mortgagor
c. shared equity schemes
d. mortgage interest direct by the DSS to the mortgagee
For the effect of some of these schemes see
o Mortgage Rescue - What does it add up to? S.Foster, Shelter, 1992;
o Mortgage Arrears - Reducing mortgage arrears and possessions - an evaluation of the initiatives - Janet Ford and Steve Wilcox, Joseph Rowntree Foundation 1992
In agreements regulated under the Consumer Credit Act 1974 the Courts have the power to make what is known as "time orders" - basically allowing the debtor more time to pay.
The statutory detail is set out in section 129 and section 136 of the Consumer Credit Act 1974.
In Southern and District Finance Plc v Barnes and Another, and J Securities Ltd v Ewart and Another and Equity Homes Loans Ltd v Lewis, The Times, April 19, 1995, the Court of Appeal had to consider the scope of the powers of the court under section 136 of the Consumer Credit Act 1974. Try and answer the questions below.
1. The first consideration was whether it was just to make a time order
o ü True False
Answer: True
2. A time order should normally be made only for a stipulated period on account of temporary financial difficulty
o ü True False
Answer: True
3. The sum owed meant every sum due and owing. If possession proceedings had been started this would normally comprise the whole debt.
o ü True False
Answer: True
4. The interest rate could not be varied
o û True False
Answer: False
5. If a time order was made any possession order should also be suspended
o ü True False
Answer: True
There is a section in J.Luba, V.Madge and D.McConnell, Defending Possession Proceedings, Legal Action, 1992, Third Edition, which deals with the powers of the court to grant time orders.
The authors refer to First National Bank v Syed and Syed [1991] 2 All ER 250 and comment:
"Where there has been a long history of default with only sporadic payments from the borrower, it would not be just to grant a time order where the only payments which the borrower can realistically afford are insufficient to cover the accruing interest."
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