#2045 - The Creation Of Mortgages - Land Law

The creation of Mortgages

Forms of Mortgages

• Two main forms of mortgage:

  • The Legal Mortgage

    • Essentially where L gains a legal charge in the land mortgaged by M to L – two most common forms are:

    • Repayment Mortgage

      • Where M agrees with L to pay a constant monthly payment (subject to interest)

        • Over an agreed period of time

    • Endowment Mortgage

      • This is linked to an endowment life assurance policy

        • Essentially, the policy is designed to produce a sum large enough to pay off the sum borrowed on maturity (i.e. policy holder dying)

          • With luck, there should be some surplus for the borrower

        • The lender is paid interest alone until the policy matures.

    • This means that since M retains legal title to the mortgage, multiple mortgages can be arranged over the same fee simple

      • However, the attractiveness of the mortgages are that the property can often be sold on default of payment by M

        • Which will not often repay the outstanding balance of two mortgages

  • The equitable mortgage

    • This is encountered where

      • Equitable interest mortgaged

      • Agreement to mortgage in the future

      • Where formalities for legal mortgage have not been satisfied

  • The charge over land

    • This is different from a legal charge

      • Equity recognises the charge as security short of a mortgage

        • Thus, the court can order the sale of the property or the appointment of a receiver

        • But there is no right of foreclosure nor right to take possession.

How to create a mortgage

• Legal Mortgage

  • A deed

  • An intention to create a mortgage

    • This is rather obvious when you have a Deed

      • However, the courts will infer mortgages where the substance of a transaction of “absolute transfer” was in fact intended as security for an obligation

        • If the purchase price is a loan and the property is clearly intended to be recovered on repayment then = mortgage

        • BUT can have legitimate sale where property intended to be transferred but their remains an option of repayment.

    • Grangeside Properties Ltd v Collingwoods Securities Ltd [1964]: a case concerning a lease when s.86 only allows mortgages by legal charge or sublease.

      • Harman LJ: Once a mortgage, always a mortgage

        • Thus, where the mortgage is proved from external evidence

          • Then it shall still take effect as a lease for 3000 years as per s.85(2).

• Equitable Mortgage

  • Agreement

    • To mortgage, essentially – that the lender will gain a security right over A’s land in return for paying A some money which a must payback.

  • Evidenced in writing signed by both parties

    • As per the Law of Property (Miscellaneous Provisions) Act 1989 s.2

      • (1) Contract concerning interests in land can only be made in writing with all terms included

      • (2) Terms can be incorporated in one document or with reference to some other document

      • (3) Document incorporating the terms must be signed on behalf of each of the parties.

      • (5) Nothing here affects the creation or operation of resulting, implied or constructive trusts

    • United Bank of Kuwait v Sahib: Z, who has title deeds deposited with him, tries to enforce his claim for the mortgage over UBK who are also owed money.

      • Peter Gibson LJ:

        • The mere deposit of title deeds with the lender

          • Even though this would previously give an equitable charge

            • Is not, without more, able to form a mortgage.

        • The reform of the law which required the creation of a document containing all of the terms

          • Was clearly meant to promote certainty

            • So no reason why securities over land should be allowed to be any less certain than other rights over land.

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