TEACHING NOTES - MORTGAGES - TUTORIAL 5
MORTGAGE – a charge by way of an equitable or legal mortgage
MORTGAGOR – borrower (think Os!)
MORTGAGEE – lender (tip – think Es!)
BORROWERS’ LEGAL RIGHT TO REDEEM – borrowers’ right to repay the loan on the date specified in the mortgage (legal date for redemption – often 6 months after the date of creation of the mortgage). Equity will not allow the mortgage to be irredeemable but in circumstances it will allow redemption to be delayed (where the terms are oppressive/unconscionable and the contractual right to redeem is illusory – see Knightsbridge Estates Trust Ltd v Byrne and Fairclough v Swan Brewery Co Ltd
BORROWERS’ EQUITABLE RIGHT TO REDEEM – once legal date for redemption has passed, equity gives borrowers an equitable right to redeem the loan at any time afterwards, if certain conditions are satisfied.
EQUITY OF REDEMPTION – following the creation of the mortgage, lenders become the legal owners of the land, but that legal ownership is subject to the equitable interest of the borrowers (the equity of redemption – all the borrowers’ rights in the mortgaged property)
Creation of legal mortgages over registered freehold estates
Type of interest:
A mortgage is an interest in land capable of existing as a legal interest in land (s1(2) LPA 1925). So if created correctly, a mortgage takes effect as a legal mortgage (if these formalities have not been complied with, the mortgage may take effect as an equitable mortgage).
Formalities:
Should be created by deed (s52(1) LPA 1925).
Legal mortgage created by using a charge by deed expressed to be by way of legal mortgage (or a legal charge made in the form of a deed, stating that the charge is made by way of legal mortgage). s85 LPA 1925. All mortgages over registered land must be created this way from 13 October 2003.
Registration:
A legal mortgage is a registrable disposition under s27 LRA 2002, and so must be completed by registration against the title affected to be legal and to bind a purchaser or later mortgagee of the land . On registration, the mortgagee is entered as proprietor of the charge in the charges register of the title to preserve the priority of the mortgage.
Legal mortgages not registered as a registered charge cannot take full effect as a legal mortgage and only take effect in equity – an equitable mortgage as an interest affecting registered estate will not be binding upon a purchaser for value, and this includes the owner of a subsequent mortgage.
Remedies available to a legal mortgagee (lender)
Remedies available to a legal mortgagee – identify what, if any, aims the lender has in recovering its money – does it simply want to recover arrears (debt action, possession or receivership) or to secure repayment of the entire sum loaned (ie the capital and the interest) (power of sale or foreclosure (rarely ordered) )? It is important to select only relevant remedies on the facts provided.
When borrowers mortgage their land to lenders, in return for a loan, the mortgaged land becomes the security for the loan. The lender has various rights they can exercise over the mortgaged land if the borrower fails to repay the loan secured by the mortgage.
If the lender’s aim is to recover arrears and allow the mortgage to continue, they can use:
1. Debt action – the legal date for redemption must have passed for the right to request repayment to arise. Remedy of limited assistance as if borrower failing to make repayments on their mortgage, unlikely they would have the money to satisfy any court order.
2. Possession – often exercised with other remedies (obtain vacant possession first, to be able to sell for higher price). Possession with mean either:
· If land subject to a lease, lenders take possession by directing tenants to pay their rent to the lenders instead of the borrowers. No court order is required.
· If land not subject to a lease, lenders have a right to oust borrowers and take physical possession of the land.
Lenders usually seek court order when exercising their right to take possession, as if they use or threaten violence, it is a criminal offence – s6 Criminal Law Act 1977. If the mortgagor won’t comply with the order, a court bailiff will assist with eviction.
Lenders can take possession as soon as the mortgage has been completed but usually mortgage deed expressly or impliedly postpones this right until the borrower is in default.
When the property is producing income, the mortgagee is only entitled to use it to pay the debt owed to him under the mortgage. The mortgagee owes the mortgagor a duty to manage the property with due diligence, otherwise he could be held accountable for income received and income that could have been received if property managed correctly.
Where the property is a dwelling house, court will consider postponing the order for possession using equity:
S36 of the Administration of Justice Act 1970 – if likely the mortgagor can repay sums due or remedy breach within reasonable time, court will adjourn the possession proceedings. Court could also suspend the execution of an order or postpone the date of possession for any period it considers reasonable – both suspension and adjournment are for a fixed period.
S8 of the Administration of Justice Act 1973 – if the court thinks the mortgagor can repay the arrears due when the proceedings commenced and the arrears accrued during the proceedings, with a reasonable time, it will give him the chance to do so (borrower does not have to be able to pay back the whole outstanding sum borrowed.
Using common law, the court has limited power to refuse to make an order for possession or to adjourn the hearing where:
· Lenders agree, or
· The adjournment is for up to 28 days to allow the borrowers time to pay back the whole sum outstanding if there is a reasonable chance of this happening.
3. Receiver – the mortgagee can appoint a receiver to collect and redirect the income from the property, so that the mortgagee does not have the personal responsibility of taking possession. The receiver takes control of the land and either sells it or manages it and uses the income to repay the loan. The duties and powers of the receiver are governed by the mortgage document under which he is appointed and by the law of agency. Receiver should be appointed via the method stipulated in the mortgage deed, or if this is silent, in writing (s109 LPA 1925).
A mortgagee has the power to appoint a receiver if:
· The mortgage was created by deed. (The power to appoint a receiver is implied into every mortgage made by deed s101 LPA 1925) but will often also be expressly included as a mortgage term) AND
· The power has arisen (the legal date of redemption has passed) and has become exercisable under one of the three situations provided in s103 LPA 1925:
1. The lenders have served notice on the borrowers requiring repayment of the loan and the borrowers have failed to comply with that notice for 3 months after service
2. Interest due under the mortgage is 2 months or more in arrears
3. The borrowers have breached a term of their mortgage
The receiver must apply the income in the order set out in s109 LPA 1925:
1. Outgoings on the property
2. Interest on any prior mortgages (if there are any mortgages on the property that have priority over the mortgagee which appointed the receiver)
3. Insurance premiums on the property and his own costs
4. Interest on the current mortgage
5. Capital on the current mortgage if directed to do so in writing by the mortgagee
6. The balance to the mortgagor
If the lender’s aim is to secure repayment of all sums owed and end the mortgage, they can use:
1. Foreclosure – rarely used – arises when the legal date of redemption has passed, or when the mortgagor has breached a mortgage term. 2 stage process whereby lenders obtain an interim court order which fixes a date by which the borrowers should pay the outstanding money, and if they fail to do so, an order of foreclosure absolute is made. Following this order, the borrowers cannot redeem unless the court exercises its discretion to allow the borrowers to redeem.
2. The Power of Sale – sell the mortgaged property and use the proceeds of sale for repayment of the mortgage (any surplus proceeds goes to the borrowers).
Power to sell has arisen - s 101 LPA 1925– statutory power of sale implied into all mortgages created by deed, but also usually expressly stated in mortgage deed.
S101(1)(1) LPA 1925 – power of sale arises when money has become due (on the contractual or legal date for redemption) AND
Power of sale has become exercisable - s103 LPA 1925 - if
· Lenders have served notice on the borrowers requiring repayment of the loan and the borrowers have failed to comply with that notice for three months after service OR
· Interest due under the mortgage is 2 months or more in arrears OR
· The borrowers have breached a term under the mortgage deed
Note s103 can be modified in the mortgage conditions so power can become exercisable in other circumstances (in favour of the lender).
S104 (2) LPA 1925 – If lender sells before the power of sale becomes exercisable, borrower can sue lender for damages. When lender and buyer enter into a binding contract for the sale of the land, this has the effect of extinguishing the borrower’s right to redeem the loan (pay back the loan).
Lenders owe 2 duties to borrowers when exercising their power to sell (Cuckmere Brick Co Ltd v Mutual Finance Ltd):
· Lenders must act in good faith and not cheat the borrowers
· Lenders must take reasonable care to obtain the true market value of the property
The effect of the sale:
Under s104(1) LPA 1925, the sale by the lender passes to the buyer the borrower’s whole estate free from any estates or interests including other mortgages which the selling lender took priority over BUT subject to any estates and interests which took priority over the selling mortgagee. When lenders exercise their power of sale, they therefore sell subject to prior incumbrances and free from those which do not have priority.
The selling mortgagee (as trustee of the proceeds for sale) must use the proceeds in the following order (s105 LPA 1925):
1. to repay the cost of redeeming prior mortgages (mortgages with priority over the selling mortgagee’s mortgage)
2. to pay off the mortgagee’s expenses of sale
3. to pay off the mortgagee’s own mortgage
4. to pay any balance to the person entitled to the mortgaged property (ie a mortgagee with lower priority to the selling mortgagee, if there is one, or the mortgagor).
The priority rules
The lender who ranks first in the order of priority is entitled to be paid back in full first before the other lenders get any money. The lender who ranks second in the order of priority is entitled to receive the proceeds next. To determine the order of priority, you need to apply the rules on enforceability of third party rights.
The order of priority between legal mortgages
Priority is generally governed by the order of registration, so the mortgage that appears first on the charges register, ranks first. S48 LRA 2002
Priority between legal mortgages and other proprietary interests
To decide whether the interest is binding on the mortgagee, first check whether the interest was created before or after the date of registration of the mortgage. If it was created before the mortgage, it is necessary to decide whether that interest takes priority over the mortgage, ie is the lender bound by the interest? If the interest is created after the mortgage, the lender will not be bound unless it has given consent to the interest (eg the granting of a lease by the mortgagor)
S28 LRA 2002 – this is the basic rule that the priority of competing interests affecting a registered title is determined by the order in which they were created (eg unregistered mortgage). Note created (not registered) – so first created charge would take priority even if it was not registered when the second charge was created.
Therefore if an estate owner creates two registrable charges of the land in the order: charge 1 and then charge 2. Under s28, they will rank in their order of creation – charge 1, then charge 2.
2 exceptions to this basic rule:
S29 LRA 2002 – where there is a registrable disposition of a registered estate – so if charge 1 wasn’t registered when charge 2 is registered, charge 1 will lose its priority and they will rank in the order: charge 2, then charge 1. (The charges will each have to be protected by registration to maintain their priority.) This is the rule you will apply when you are concerned with a later disposition made by the owner of the registered freehold estate.
S29 (2) LRA 2002 – lists the ways in which various forms of interest must be protected. Its effect is that in most cases, to keep its priority, a first interest must be (1) protected by registration where it is a registrable charge (legal charge) or (2) in the case of all other interests must be protected by entry of a notice in the register unless it is in Schedule 3 class of unregistered interests which override.
Assuming the later disposition is for value: if the earlier interest is (1) registered charge, or (2) protected by a notice, or (3) listed in Schedule 3 as overriding, the earlier interest retains its priority. If the earlier interest is not 1, 2 or 3, the earlier interest loses its priority to the later interest.