Northumbria University School of Law Property 1 Property Law

CHAPTER 11

MORTGAGES

PRESCRIBED READING: Textbook, Chapter 18 (excluding the sections headed

Unfair collateral advantages imposed by the lender and Undue influence and The Tacking of
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.

11.2 CREATION OF MORTGAGES

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.

11.2.1 LEGAL MORTGAGE

Legal mortgages can be created in two ways:

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.

11.2.2 EQUITABLE MORTGAGES

There are two main situations in which the equitable mortgage arises:-

(a) Mortgage of an equitable interest - i.e. the interest of a beneficiary under a

settlement or trust for sale.

(b) Contract to create a legal mortgage, if s2 Law of Property (Miscellaneous

Provisions) Act 1989 is satisfied. In the past, deposit of the title deeds as
security for a loan amounted to an equitable mortgage because the deposit
was interpreted as part performance of a contract to create a legal mortgage.
S2 Law of Property (Miscellaneous Provisions) Act 1989 abolished the doctrine
of part performance, so that now such a mortgage is only valid if a contract
which satisfies s2 exists.

11.3 THE NATURE OF A MORTGAGE

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.

11.3.2 THE EQUITY OF REDEMPTION

The equity of redemption consists of the mortgagors rights in the property, including the
equitable right to redeem. The equity of redemption arises when the mortgage is
created, whereas the equitable right to redeem arises when the contractual date of
redemption has passed. The equity of redemption is commonly known in its shortened
form as, the equity.

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.

11.4 RIGHTS OF THE MORTGAGOR

11.4.1 THE RIGHT TO REDEEM

This was mentioned in 12.3.1 above.

11.4.2 The right to grant leases

Section 99 Law of Property Act 1925 states that the mortgagor can create leases which
will bind the mortgagee. Most mortgagees will exclude this right because in the event of
default by the mortgagor, the mortgagee will want to sell the land and it will be less
marketable if there is a tenant in occupation.
11.5 RIGHTS OF THE MORTGAGEE

11.5.1 RIGHT TO TITLE DEEDS

Note the mortgagees right to the title deeds (s 85, 86 and 87 Law of Property Act 1925)
and the mortgagors right to inspect them (s96 Law of Property Act 1925).

11.5.2 RIGHT TO LEASE

Section 99(1) Law of Property Act 1925 gives the mortgagee who has taken
possession, the right to grant leases..

11.5.3 RIGHT TO POSSESSION

The mortgagee may take possession with the intention either:

1. to obtain vacant possession with a view to selling the property,

or
2. to rent out the property and use the rents and profits received
towards the mortgage payments.

Note when physical possession may be taken: Four-Maids Ltd v

Dudley
Marshall (Properties) Ltd. [1957]
Ch. 317.

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.

In Ropaigealach v Barclays Bank plc [1999] 4 All ER 235 , the court

held that the protection for the borrower under s36 Administration of Justice Act
1970 applies only where the lender brings a court action for possession. It is
always open to a lender to take possession by means of peaceable entry of the
premises without a court order if, for example, the house is empty. In those
circumstances the protection of s36 would not apply. Note, however, that in
practice the vast majority of lenders do seek a court order to avoid the
possible difficulty of proving that any re-entry was, in fact, peaceable.
 In the following recent cases the court considered the circumstances where the
power should be exercised:

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;

Target Home Loans Ltd v Clothier [1994] 1

All ER 439

Cheltenham & Gloucester Building Society v Grant [1994] 26 HLR

703

Cheltenham & Gloucester Building Society v Norgan [1996] 1 WLR

343

National & Provincial Building Society v Lloyd [1996] 1 All ER 630

Bristol and West Building Society v Ellis and Another (1997) 73

P&CR 158,

Cheltenham & Gloucester plc v Krausz [1997] 1 All ER 21

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

1. When does the right to possession arise?

2. Why does the mortgagee have such a right?

3. In what circumstances can the mortgagor get a second chance when possession
proceedings have been commenced by the mortgagee?

4. In considering what is a reasonable period for the purposes of s36 Administration of

Justice Act 1970, what is the starting point for the court?
5. Would your answer to question 3 differ if the borrower intended to pay off the arrears not
by periodic payments but by selling the property?
6. Following Cheltenham & Gloucester plc v Krausz (above), will the court suspend
possession under s36 to enable the borrower to sell the property where there is negative
equity?

11.6 MORTGAGEES REMEDIES

11.6.1 SALE

11.6.1.1 Power of sale

Note that possession will be required before the mortgagee is in a position to sell
the property otherwise it will be difficult to obtain an adequate price.

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.

11.6.1.2 Mortgagees duties

Read the important Court of Appeal case of Silven Properties v Royal Bank
of
Scotland Plc [2004] 1
WLR 997.

1. Price obtained:

See Parker-Tweedale v Dunbar Bank plc [1991] Ch. 12 , which

shows that the selling mortgagee who fails to take reasonable care to obtain
the market price will be liable to the mortgagor. This case followed the
earlier decision in Cuckmere Brick Co. v Mutual Finance [1971]
Ch 949. See also Bishop v Blake [2006] EWHC 831 (Ch).

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

It is a basic principle that a mortgagee cannot sell to himself, even if the

purchase price is the full value of the property. However a sale to a person
connected with the mortgagee is permissible subject to certain conditions
(see Tse Kwong Lam v Wong Chit Sen [1983] 1
W.L.R.1349, which discusses the possibility of sale to a person
connected to the selling mortgagee as well as the sale to the mortgagee
himself, and Corbett v Halifax plc [2003] 4 All ER 180 , where
there was sale by a mortgagee to one of its own employees).

4. Distribution of sale proceeds

s105 Law of Property Act 1925 contains the provisions. It is

important to bear in mind the need of the selling mortgagee to check
(normally by search) for subsequent mortgages before releasing the balance
of the sale proceeds to the mortgagor.

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).

11.6.1.3 Effects of sale

Note s104 (1) Law of Property Act
1925

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

What would be the effect of a sale by:

(a) the Halifax?
(b) the Leeds?

11.6.2 APPOINT A RECEIVER

Receivers are usually only appointed in commercial properties. The advantage to the
mortgagee is that the receiver is the agent of the mortgagor, and is liable for any
negligence.

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.

11.6.4 SUE IN CONTRACT

A mortgage will normally contain a covenant by the mortgagor that he will repay the
loan with interest. If he breaches this covenant then the mortgagee can sue him.
This means that any other assets which the mortgagor has can be used to meet the
debt. This remedy can also be used in conjunction with any of the other remedies,
apart from foreclosure. It is commonly used in conjunction with sale in cases where
the sale proceeds do not realise sufficient funds to meet the debt in full.

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.

An outline knowledge of this area will be sufficient.

11.9.1 REGISTERED LAND

Legal mortgages:
Where a title is registered, a mortgage can only be created by way of a legal charge.
Generally registered charges rank in the order in which they were entered on the register
(s29 Land Registration Act 2002).

11.9.2 UNREGISTERED LAND

(a) Deposit of title deeds:

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.

(b) No deposit of title deeds:

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

1. What is the equitable right to redeem?

2. When does the power of sale arise, and when does it become exercisable?

3. Why is the remedy of foreclosure not frequently used in modern times?

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:

a) can they repossess and sell the property?;

b) is a court likely to allow the borrowers more time to pay back the arrears?;
c) can the managing directors son purchase the property?;
d) could the Northern Finance Company sell the property, and if so what would be the
consequences for themselves?

Advise Great Bank fully on the above matter.

NOTES