#17302 - Mortgages - GDL Land Law

Connector between registration and co-ownership. A common law creation.

Very little risk in a mortgage (interest rates usually down at 2.25%)

• Unless you over lend (e.g. Northern Rock lent over the value of the land)

Essay questions usually about the extent to which borrowers and lenders’ remedies can be challenged.

A mortgage is a proprietary interest in the land given by the mortgagor (land owner) as a security for a loan.

• Stanley v Wilde defined as ‘a conveyance of land…as a security for the payment of a debt or the discharge of some other obligation.’

• As a contract many contractual elements and contractual remedies, but also proprietary elements with proprietary remedies.

Re-mortgage: replacing one lender with another.

Second mortgage: successive loans with different people, the more distant the lender is from the first mortgage the higher the rate of interest

Creation of a mortgage

• Historically, mortgages were created by the giving of a long lease of the land from the borrower to the lender – not dissimilar today (Stanley v Wilde: conveyance) - 3,000 year lease (under LPA 1925, s 85)

• A mortgage is an interest capable of being legal (s.1(2)(c) LPA 1925)

• Must be registered on the charges register in order to be protected from buyer (s.27(2)(f) LRA 2002))

  • The creation and redemption of mortgages is likely to be the first use of electronic conveyancing in this jurisdiction

  • Discharge of mortgages can already be done electronically,

Equitable mortgages can be created in a number of ways:

• Failure to register charge by deed by way of a mortgage.

  • Must be created by a written agreement (s.2 LPA 1989) signed by both parties containing all agreed terms.

• If the land owner only has an equitable interest then it will only be an equitable mortgage (rare in reality)

• Where the borrower could have created a legal mortgage, but (usually) wants a very short-term, low value loan (this is the most common form of equitable mortgage)

  • Again must comply with s.2 LPA 1989

• Mortgage arising from a purely oral transaction - rare in reality, common in exams

  • In truly exceptional circumstances, the law of proprietary estoppel may kick in and the court may award the lender an equitable mortgage by estoppel (Kinane v. Conteh)

  • This would only happen where the borrower has generated unconscionability in the lender

Problems with equitable lenders:

• Vulnerable if the land is sold – needs to register the interest (if so why not just register as deed)

• Vulnerable to fraud: If one party impersonates another, or forges a signature – the legal owners have not executed the charge, invalidating it – if it is registered, it has validity from its registration

  • When it is removed, it is no longer valid, defaults to an equitable mortgage over the share of the person who genuinely signed it

This is the order in which most remedies will pursue their remedies in relation to a residential property (commercial property, ‘power to appoint receiver’ would mostly come first).

• 1) Right to possession

• 2) Power of sale

• 3) Action to sue for the mortgage debt

• 4) Power to appoint receiver (not generally needed for residential property)

• 5) Foreclosure (redundant – could be abolished with zero impact, but no one can be bothered).

These remedies are not mutually exclusive: Alliance and Leicester PLC v Slayford, if you cannot get one of these remedies then the other options are still available.

The lender can never recover more than the sum owed.

• Cannot make profit out of exercising their remedies.

• Money owed is three parts:

  • The interest of the debt

  • The principle debt

  • The cost of exercising these remedies

1) Right to Possession

• It is a right and not a remedy – this means that it does not depend on default (unless lender states it should)

• Exists from day one of the mortgage irrespective of default (recall a mortgage is equivalent to 3,000year lease)

  • Four-Maids v Dudley Marshall: a lender can take possession “as soon as the ink is dry”

• Default occurs when:

  • Not paying the sum in full when demanded

  • Not paying and instalment when due.

  • Breaching some other term of the mortgage (inadequate insurance, subletting etc.)

• The lender can exercise the right without a court order:

  • Ropaigealach v Barclays Bank (1994) – The plaintiff was not residing in the property at the time when the defendant took possession and sold the property at auction, held no need for a court order

  • Cannot use force to enter/evict – S.6 Criminal Law Act 1977

• Instead most lenders apply for a court order:

  • Do NOT need to justify why you want possession.

  • Borrower must identify a specific statutory provision in orde rot challenge.

  • Human Rights are not compromised (FJM v UK in ECtHU – held that tenants in private housing cannot raise a proportionality defence under Art 8 (right to home))

• Risk: lender taking possession must account for all profits made.

  • White v City of London Brewery

    • Duty to use the land to generate income to pay the mortgage (in residential there is usually a sale to discharge this duty).

    • If possession is taken of the pub and make 3k, but should have made 6k, then the lender must credit to the borrower 6k.

• The Borrower’s Challenges Against Taking Possession:

  • 1) Check whether the mortgagee has limited their right to possession by contract.

  • 2) Remember the (currently very remote) possibility of Human Rights in public housing, not so much in private: FJM v UK

  • 3) Some single topic statutory jurisdictions which must be satisfied before possession

    • These are not on syllabus, e.g. Housing Act 1988 and Rent Act 1977

  • 4) A lender cannot exercise the right to possession when they have lost priority to an overriding interest.

    • Williams & Glyn's Bank v Boland – Mrs Boland had overriding interest

    • Lender will want to overreach if they can to give them the priority (City of London Building Society v Flegg)

      • This prevents the right to possession, but the lender can still apply for a remedy under the TOLATA.

  • 5) A borrower who is able to immediately redeem the entirety of the mortgage can apply for a stay of possession.

    • Birmingham Permanent Building Society (BPBS) v Caunt

      • Stay only granted if borrower could pay in full immediately – unlikely in real life.

  • 6) S. 91 LPA 1925 allow the court to order the sale of property at the instigation of any person interested in the land (keeping the lender out of possession because you want to sell it not the lender).

    • Lloyds Bank v Polonski: land was worth less than the debt, and the lender didn’t really want the land sold as they wanted house prices to rise.

      • Borrowers wanted to escape the debt.

  • 7) S. 36 Administration of Justice Act 1970

    • Allows court to suspend a possession order if the borrower is able to prove that they are able to pay any sums due under the mortgage.

      • Gives a breathing space to a borrower who is under short term difficulty (i.e. lost job, looking for a new one).

      • Does not help persons in systematic debt.

    • Direct result of BPBS v Caunt.

    • Often lenders will not oppose a s.36 application.

    • Three jurisdictional triggers:

      • 1) Only when a mortgagee (lender) applies for a possession order.

        • Horsham Properties v Clark – Horsham bought property from lender. Asked for a possession order. S.36 not available to Clark as H was not lender.

      • 2) If the lender takes possession without a court order then s. 36 is not available: Ropaigealach v Barclays Bank

      • 3) The application must be in relation to a dwelling – only in relation to residential properties.

        • NB a dwelling is widely defined (URATEMP v Collins)

    • Exercising s.36:

      • 1) When the borrower is likely to be able to pay…

        • The court approach this with some generosity.

        • Rare for court to reject – will advise e.g. cut out drink.

      • 2) …any sums due…

        • This is where amendment kicks in

        • This means any instalments missed (arrears) not the entire debt.

      • 3)…within a reasonable time.

        • Cheltenham and Gloucester v Norgan (1996) - Possession allowed, but postponed until the end of the mortgage term (so effectively denied)

          • Before this case a reasonable time was two years.

        • Post this case, a reasonable time may be the entire remainder of the mortgage (e.g. 15 years).

          • Effectively this allows a rescheduling of the debt.

2) Power of Sale

• Do not need possession to exercise power of sale (Horsham Properties v Clark) but usual to want to sell a vacant property.

  • This does not contradict ECHR as possible to take peaceable possession. It is in the public interest of a mortgagee to be able to do this.

• Most mortgages contain an express power of sale, but s.101 LPA 1925 says a power of sale is implied into every mortgage made by deed.

• s. 105 LPA tells us the order in which the lender must use the money:

  • 1. To pay the costs of the sale

  • 2. To pay any accrued interest

  • 3. To pay the principle debt

  • 4. To pay the debts of any other mortgages.

  • 5. The surplus is then paid back to the borrower

• Note it is better for borrower to sell land – lender will often accept under market value (av. 15% less)

• Power arises the moment that date of repayment falls due, but only becomes exdrcisible when default comes of a certain type

  • E.g. two months in arrears

  • Some other term of the mortgage is broken.

• Lender’s Duties:

  • Lender must get the best price reasonably obtainable, and they must sell in good faith.

    • An equitable not a tortious duty – therefore compensation is difference in money between what the lender sold for and what they should have sold for.

  • This is not about value...