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CHAPTER 11
MORTGAGES
The purpose of this chapter is to examine the nature of a mortgage, the rights of both lenders
and borrowers and the remedies available to a lender.
LEARNING OUTCOMES
Upon completion of this chapter you should be able to:
(i) understand the nature of a mortgage;
(ii) understand the rights of both lenders and borrowers;
(iii) explain with reference to relevant authorities the circumstances in which the court will
exercise its discretion to protect a borrower in possession proceedings;
(iv) understand the remedies available to a lender;
(v) understand the duties a lender has towards a borrower on a sale of the property;
(vi) appreciate in outline the rules for establishing priority between mortgages.
11.1 INTRODUCTION
A mortgage is a transfer of land as a security for the payment of a debt or the discharge
of an obligation. Note the terminology, the person who borrows money and creates the
mortgage is called the mortgagor and the person who lends money and who owns the
mortgage is called the mortgagee.
Prior to 1925, the only way to create a mortgage was to convey the land to the
mortgagee. This was altered in 1925. We will be considering the position post 1925.
1
1. By demise for a term of years absolute under s85 and s86 Law of
Property Act 1925. Section 85 relates to mortgages of freeholds and
s86 relates to leaseholds. Under s.23 Land Registration Act 2002 it
is no longer possible to grant a mortgage by demise (ie by creating a lease)
for registered land.
2. By legal charge under s87 Law of Property Act 1925. This is the
most common form of mortgage. Note how it is created and its effect.
Following s.23 LRA 2002, the legal charge is the correct form of mortgage to
use for registered land.
One of the consequences of the above methods of creating mortgages is that the
mortgagee is treated as having a legal estate in land. This means that he is a purchaser
of a legal estate for money or moneys worth with the result that any third party interest
in land which must be registered to be binding, will be void as against a mortgagee if it is
not registered.
As discussed above, the traditional method of creating mortgages was for the mortgagor
to convey the land to the mortgagee as security for the loan and a date would be set for
repayment. If repayment was made on that date then the property would be reconveyed
to the mortgagor. If however, on that date, the mortgagor did not repay the loan then he
lost his right to have the property conveyed to him and he remained liable to repay the
debt. This obvious injustice was remedied by the intervention of equity.
11.3.1 THE EQUITABLE RIGHT TO REDEEM
Equity took the view that even after the contractual date for redemption had passed, the
mortgagor was allowed to repay the debt and redeem the mortgage. This right is called
the equitable right to redeem.
Example
If a house is worth 100,000 and is subject to a mortgage of 80,000, then the equity in
the house is worth 20,000 and that sum can be used as security for another loan.
A modern development is the concept of negative equity, where the loan exceeds the
current value of the house. So for instance, if a house is now worth 70,000 but the
mortgage was for 80,000, then there is negative equity of 10,000.
The mortgagor of a dwelling house is provided with some protection under s36
Administration of Justice Act 1970 and s8 Administration of
Justice Act 1973. These sections empower the court to adjourn the
proceedings; stay or suspend execution of the judgment or order; or postpone
the date of delivery of possession for such period or periods as it thinks
reasonable. The court may only exercise those powers if the mortgagor is
likely to be able within a reasonable period to pay any sums due under the
mortgage or remedy any other default under the mortgage.
First National Bank v Syed [1991] 2 All ER 250, which held that the
power would not be exercised unless the court was satisfied that the borrower
could afford to pay off the arrears within a reasonable period and also cover the
current instalments under the mortgage;
Finally, note the possible liability of the mortgagee who takes possession and
then rents out the property - White v City of London Brewery Co
(1889) 42 Ch.D
237.
QUESTIONS
3. In what circumstances can the mortgagor get a second chance when possession
proceedings have been commenced by the mortgagee?
11.6.1 SALE
The power for the mortgagee to sell the land is implied into every mortgage made
by deed, s101(1)(i) Law of Property Act 1925. The power arises if the conditions
contained in s101 Law of Property Act 1925 have been satisfied and
becomes exercisable if one of the conditions in s103 Law of Property Act 1925
has been satisfied.
1. Price obtained:
2. Timing of sale
See China and South Sea Bank Ltd v Tan Soon Gin [1990] 1
AC 536, which shows that the timing of the sale is at the discretion of the
mortgagee.
In very exceptional circumstances there may be a limitation on the
mortgagees arbitrary power to determine the date of sale. See
Cheltenham
& Gloucester plc v Krausz [1997] 1 All ER 21.
3. Sale to himself
Note that if the sale realises insufficient to pay off the mortgage, the
mortgagor may sue on the covenant to recover any balance payable (12.6.4).
QUESTIONS
1. Which statutory provision was under consideration in the case of Palk v Mortgage
Services
Funding plc [1993] Ch 330?
2. Can you explain the distinction between the decisions in Cheltenham & Gloucester plc v
Krausz and Palk v Mortgage Services Funding plc?
3. A owns Bleakhouse
In 1985 A granted a legal mortgage to Halifax Ltd
In 1994 A granted a legal mortgage to Leeds Ltd
11.6.3 FORECLOSURE
This is where the court extinguishes the mortgagors equitable right to redeem. It can be
exercised once the legal date to redeem has passed. A court order is needed for the
remedy of foreclosure. It is a draconian remedy and therefore the mortgagor can ask the
court for an order for sale under s.91 (2) Law of Property Act 1925.
This remedy can lead to uncertainty for the mortgagee too, in that even after the
foreclosure order has been made absolute, the court may re-open the foreclosure
and allow the mortgagor to redeem the mortgage. This remedy is rarely used
today.
11.7 CONSOLIDATION
Consolidation applies when two or more properties are mortgaged to the same
mortgagee and the mortgagor wishes to redeem one of the mortgages. The mortgagee
may insist that all of the mortgages are redeemed or none at all. Note when
mortgagees are entitled to consolidate (s93 Law of Property Act 1925).
11.8 PRIORITIES
Restrict your reading to mortgages of the legal estate and ignore the section on
priorities of three or more mortgages.
Where the mortgage is legal, the position is that it has priority over
subsequent mortgages. Note the circumstances in which the first legal
mortgagee can lose his priority.
Where the mortgagee does not take deposit of the title deeds, then his
mortgage can be registered as a land charge. If the mortgage is legal, the
charge is a C(i), and is known as a puisne mortgage. If the mortgage is
equitable then it should be registered as a C(iii), which is a general equitable
charge. Note that registration constitutes actual notice, s198 Law of Property
Act 1925 and the effect of non-registration under s4(5) Land Charges Act
1972.
SELF-TEST QUESTIONS
2. When does the power of sale arise, and when does it become exercisable?
4. Why is it important for second and subsequent mortgagees to give written notice of the
mortgage to all prior mortgagees?
SAMPLE EXAM QUESTION
Oliver and Penny are the registered proprietors of The Lodge. They purchased the property in
2000 for 165,000, with the aid of a legal mortgage for 135,000 from Great Bank. In 2004 they
borrowed a further 35,000 from the Northern Finance Company, secured by a second legal
mortgage over The Lodge. Throughout 2012 Pennys catering business suffered a downturn in
customers and three months ago Oliver was made redundant. Oliver and Penny now owe Great
Bank 145,000 and the Northern Finance Company 40,000. The property has been valued at
175,000.
As a result of a recent marketing campaign Penny feels confident from the number of enquiries
from potential customers that her business will be successful again soon. Oliver is also sure
that his experience in computer programming will land him a job in the near future.
Great Bank is concerned about the mounting arrears, and seeks your advice on the following: