Creating a Mortgage Lecture

Introduction

The focus of this chapter will be on the creation of a mortgage. A mortgage is something you will have heard about before, but may not have an understanding of. When an individual wishes to pay for the purchase of a property, it is very unlikely they will have sufficient free assets to buy the property outright. Therefore, they will seek a loan to finance this up-front purchase. In return for the loan, the lender will take ‘security’ over the property. In other words, if the borrower of the money does not pay their loan back, the lender can take the property and sell it in order to get the money they lent back plus interest. This is called a mortgage. Mortgages can also operate on land already owned. For example, if I own a property outright worth £100,000, I may wish to mortgage this property for a £50,000 loan in order to start my own business. Again, if I fail to pay the loan repayments back, the lender can take over my property and sell it to get their money back.

The term ‘mortgage’ is used interchangeably with the more modern term of ‘charge’. Usually, ‘mortgage’ is used when referring to land, whereas ‘charge’ is used with other chattels or property (you can mortgage any type of property, for example, a car if you so wish). This chapter will focus solely on mortgages that relate to land, you may come across charges of other property in your studies of commercial or company law.

What may seem a basic concept is complicated by the conflicting rights of the mortgagee/chargee (the lender of the money) and the mortgagor/chargor (the borrower of the money). Imagine a scenario where the mortgagor has had a number of financial emergencies in one month; their car has broken down and so has their boiler. Unfortunately, they cannot pay their mortgage repayment on time. Would it be fair if the mortgagee could immediately take and sell the property to get their money back? Clearly not. Therefore, there are various rules and safeguards that we will explore.

What is a mortgage?

The case of Santley v Wilde [1899] 2 CH 474 defined a mortgage as ‘a conveyance of land as security for the payment of a debt or the discharge of some other obligation’. As mentioned in the introduction, in its most basic form it is the borrowing of money with security for that debt. If the borrow defaults on the payment, a lender may use the property to recover the sum and any interest. The most common way a lender will do this is by selling the property.

The different types of mortgages

There are a number of differing types of mortgages. The majority of these are no longer used, however, they may still exist and need to be understood. In modern times, the registration of title means that the ‘registered charge’ is most commonly used.

Legal or equitable

The first way a mortgage or charge can be differentiated is by being either legal or equitable. Almost any interest in land can be used as security under a mortgage. However, the type of interest used as security will impact the type of mortgage formed. If a legal interest is used as security, the mortgage can be legal or equitable. However, where an equitable interest is used, for example, an equitable lease, the mortgage can only be equitable.

Pre-1926 mortgages

Although this method of creating a mortgage is no longer possible, it is important to know how it operates in order to understand old case-law. This mortgage would be made by the borrower transferring his legal estate to the lender in exchange for the loan. If the borrower defaulted on a payment, the lender would then sell the property. One of the main issues here was that it would not allow the borrower to place a second mortgage on the property if they so-wished, because the lender had legal title of the property. The Law of Property Act 1925 reformed this by creating new forms of mortgages that did not involve the transfer of legal title. These different methods will now be explained.

Legal mortgage under the Law of Property Act 1925 S85

As an alternative to the pre-1926 method of transferring legal estate to the mortgagee, S85 allows the mortgagor to grant a long lease of the property to the mortgagee. The lease will be terminable once the loan is repaid.

The advantage of this method is that the legal title of the estate is retained by the mortgagor, whilst the mortgagee also has an estate with rights in relation to the land. The lease will be created with an extremely long term, for example, 1,000 years, to ensure the lease does not expire before the debt is repaid. There is also a safeguard under S85(2) of the statute which provides that if the pre-1926 method of creating a mortgage is used by transferring legal estate, it will automatically be converted into a 3,000 year long lease.

This method of creation of a mortgage is advantageous because it allows a second mortgage to be granted over the property. This may be created by granting a lease to a second mortgagee that is longer than the first lease to the original mortgagee.

Legal mortgage of a term of years under the Law of Property Act 1925 S86

Where the legal estate being mortgaged is a lease, the whole term of years would be assigned to the mortgagee pre-1926. Under S86 the lease no longer needs to be assigned, but instead the creation of a sub-lease would create a mortgage. The same advantages as above apply - the mortgagor retains a legal estate, yet the mortgagee has an estate in the land. Similar to above, an attempt to use the pre-1926 method of assigning the lease will result in the lease being converted into a sublease for the current unexpired period of the main lease, minus 10 days. This period of ten days allows a second sub-lease to be granted for a second mortgage.

Charge by deed under the Law of Property Act 1925 S87

This method of creating a legal mortgage is the method used most commonly today. As opposed to granting a lease or sub-lease over the property to the mortgagee, a deed will be executed by the mortgagor confirming that there is a mortgage/charge over his land by way of legal mortgage, the condition being repayment of the loan plus interest.

S87 gives the same powers and remedies to the mortgagor and mortgagor as would be given if the property had been leased or subleased by S85 or S86.

The S87 method has two main advantages of the S85 and S86 methods. Firstly, it is in a very simple form, a simple deed document; there is no need for leases or subleases as per the other methods. Secondly, particularly relevant to S86, if there is a covenant against sub-leasing the property, the S87 method of creation circumvents this covenant, as there is no actual sub-lease.

Therefore, the S87 method is the most commonly used and is the usual method of mortgage. These charges will usually include a number of covenants, for example, preventing the mortgagor from granting leases. Provisions detailing repayment and interest terms will also be included.

Registered land

Where land is registered, a legal charge should be used. Under the Land Registration Act 2003 S23(1)(a) the power to create a legal charge is provided. Similar to S87, a charge should be created by the completion of a deed. However, in line with other provisions in relation to registered land, the charge must be registered before it will have legal effect (but it will operate in equity).

The case of Cityland and Property (Holdings Ltd) v Dabrah [1968] Ch 166 ruled that a legal charge is created by simple words showing an intention that the land is to be mortgaged with the repayment of a loan. There does not need to be an express mention of a legal charge. S25 of the Land Registration Act 2003 confirms this along with the Land Registration Rules 2003 rule 103.

First registration

As we know from the previous chapters, one of the aims of modern land law is for all land to become registered, due to the difficulties that come with unregistered land. Unregistered land must be registered when certain things happen with the land. The grant of a legal mortgage is one of those triggers.

As per S4(1)(g) of the Land Registration Act 2002, the creation of a ‘first protection legal mortgage’ of a qualifying estate means the property will then be required to be registered. A ‘protected’ legal mortgage is one which is protected by the deposit of documents relating to the estate - ie. The title deeds.

Following the registration of the estate, the charge must be then registered as per the Land Registration Act. Once registered, the charge will take effect as a charge by deed by way of a legal mortgage - even if it was created in a different manner such as a S85 or S86 mortgage.

Equitable Mortgages

The equitable principle of ‘Equity regards as done that which ought to be done’ can apply to create an equitable mortgage. This principle operates where there has been a contract to create a legal mortgage but it has not yet been executed as a deed. This will give rise to an equitable mortgage from the date the contract is formed. This contract must be in writing as per S2 of the Law of Property (Miscellaneous Provisions) Act 1989. The same will apply to a legal mortgage which has not been properly executed. However, the remedy of specific performance will only be available if the mortgage money has been advanced to the mortgagor (Walsh v Lonsdale (1882) 21 ChD 9. In absence of this, the mortgagor must seek damages.

Informal mortgage by deposit of deeds

Equity will also protect an individual where it was clear that the owner of the property intended to charge their property in relation to a loan. One of the main examples of this is where the estate owner deposits their title deeds with the lender in return for a loan. The case of Russel v Russel (1783) 1 Bro CC 269 confirmed this.

However, for an informal mortgage to be formed, S2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires there to be an agreement made in writing. This was confirmed in United Bank of Kuwait plc v Sahib [1997] Ch 107, meaning the simple deposit of deeds with the lender is not enough, a written agreement must accompany this.

Equitable mortgage of an equitable interest

As was previously mentioned, a legal mortgage cannot be created in an equitable interest. An equitable mortgage is created by the pre-1926 method of transferring the whole legal estate to the mortgagee. This transfer must be made in writing to pass the equitable interest.

Rights of the mortgagor

Now we know exactly how a mortgage is created and the different forms it can take, we can begin to look at the rights of the mortgagor and mortgagee. We will start with the mortgagor.

The right to redeem

The right of redemption refers to the right of the borrower to ‘redeem’ the mortgage once the loan and all of the interest has been repaid. Following this repayment, the mortgage ends and the lender no longer has any right over the property.

Redeeming at law

The right to redeem at law is a contractual right. Therefore, the borrower should turn to the contractual provisions to identify when they can redeem. It may be a certain date and in a certain way. The contractual provisions cannot be altered or ignored - Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25.

Redeeming at equity

The equitable right of redemption is far more relaxed than its legal counterpart. Equitable redemption is possible as long as the loan and any interest has been repaid. This approach is taken by equity as the purpose of the mortgage is to provide security for the loan - once this has been paid, there is no reason why the mortgage should continue to exist.

The equity of redemption

In an equitable mortgage, where the legal estate has been transferred to the mortgagee, the mortgagor owns the ‘equity of redemption’, this must be distinguished from the equitable right to redeem - if you are faced with a question in relation to an equitable redemption ensure to use this terminology. This refers to the mortgagor’s equitable interest in the property, which is an interest in land - Pawlett v Attorney General (1667) Hardres 465.

Protection on the equity of redemption

Equity protects the rights of the mortgagor, and does not allow any arrangement that prevents the mortgagor from redeeming, and prevents any burdens imposed on the property during the term of the mortgage operating once the mortgage is redeemed. Some of these restrictions will now be considered.

Prevention of redemption

If a provision in an equitable mortgage prevents a mortgagor from redeeming it will be void. For example, as seen in Toomes v Conset (1745) 3 Atk 261 a condition that would result in the land becoming the mortgagee’s absolutely.

This equitable principle even prevents the mortgagee from having an option to buy the property as part of the mortgage, as if exercised, the mortgagor’s right to redeem would disappear.

Postponement of redemption

A provision that postpones a redemption in such a way that the right to redeem is worthless will also be void. Following, there is no equitable right to redeem before the date of redemption, but once that date has passed, nothing can postpone redemption.

Other advantages for the mortgagee

The mortgagee may also insist on terms which are unrelated to the actual mortgage, but provide a benefit to the mortgagee. For example, in a commercial mortgage, the mortgagor may agree to only buy their supplies from a company owned by the mortgagee.

These kinds of agreements are valid so long as they are not in breach of competition law or unconscionable. However, they are only usually valid for the duration of the mortgage (Biggs v Hoddinott [1898] 2 Ch 307), even if the mortgagor has agreed that the agreement will continue after the redemption of the mortgage.

Despite the above case, oppressive or unconscionable agreements may be invalid even whilst the mortgage agreement is in effect. An example of this comes from Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166 where an excessive premium on the mortgage was unreasonable and was held to be invalid.

Right to grant a lease

As we know, the S85 and S86 powers require the mortgagor to grant a lease to the mortgagee. Therefore, it would be impossible to grant a second lease over this property. The same would apply for a S87 mortgage, as it creates mortgage with the powers of S85 and S86.

Therefore, S99 of the Law of Property Act 1925 gives a statutory power to the mortgagor to create a lease that is binding on the mortgagee. However, this is very unlikely to be utilised, as the right to grant leases is usually excluded.

Right to sue

The mortgagor also has a right to sue in relation to their land, despite the estate being subject to the rights of the mortgagee. S98 of the Law of Property Act 1925 alleviates any potential problems with the mortgagor bringing any action.

Right to surrender

The mortgagor may accept the surrender of a lease but only where a new lease is to replace this surrendered lease within one month of termination - S100 of the Law of Property Act 1925

Rights of the mortgagee

The right to title deeds and charge certificates

In relation to unregistered land (pre-1926 mortgages), the mortgagee has the right to possession of the title deeds of the property. This is because possession of the title deeds represents the legal estate, and of course, in pre-1926 mortgages, there must be a transfer of a legal estate. However, this is not required for post-1926 mortgages, but it is standard procedure for the mortgagee to hold the deeds, because it prevents the mortgagor from making any further mortgage without the mortgagee’s approval and knowledge.

As discussed earlier in the chapter, with registered land, a legal charge must be registered. As per Section 27(2)(f) of the Land Registration Act 2002, the charge must be registered with the mortgagees name as the proprietor. A charge certificate used to be issued pre-2002. The mortgagee has the right to possession of these, however, they are no longer issued, but may still be used for properties mortgaged before the 2002 Act.

The right to possession

S85, S86 and S87 mortgages have the effect of giving a lease or sublease to the mortgagee. Therefore, the mortgagee has right to possession of the land from the date of the mortgage (National Westminster Bank plc v Skelton [1993] 1 WLR 72). There may be restrictions on this right, for example, possession can only be taken where there has been a default by the mortgagor on the mortgage repayments.

Clearly, it would not be normal practice for the mortgagee to take possession whenever they like. Usually, it is only used prior to the mortgagee exercising their right of sale when the mortgagor has defaulted on sale. The taking of possession must be peaceful, and will usually require the court’s permission. The protections afforded to the mortgagor will be explored further later in this chapter.

The right to insure

Due to the mortgagee’s interest in the property, they will want to ensure that the property is insured, as if the property is destroyed, so is their security. Therefore, terms relating to the mortgagor providing insurance for the property are commonplace. In absence of these terms, S101(1)(ii) of the Law of Property Act 1925 implies a term allowing a mortgagee to insure the property against fire loss/damage. The premiums paid by the mortgagee will be added to the money owed by the mortgagor.

The right to lease

Once a mortgagee takes possession of a property, they then have a right to lease the property. This lease binds the mortgagor. However, these leases are rare as once possession is taken the mortgagee is usually looking to sell the property

Remedies of the mortgagee

As a mortgage provides security for the loan, a number of remedies are available to the mortgagee in the event of a default of the mortgagor. The most obvious remedy would be a claim under contract law for repayment of the loan. However, the mortgagor evidently does not have the money to pay the mortgage repayments, therefore it is unlikely you will be able to recover the debt from them. Therefore, a mortgage allows for more complex remedies to ensure the security of a mortgage is effective.

Foreclosure

Foreclosure is the process of the mortgagee taking possession of the property. The remedy of foreclosure cannot be effected until the contractual obligation of the mortgagor to keep up with the mortgage repayments has been broken - Williams v Morgan [1906] 1 Ch 904.

The first step of foreclosure is for the mortgagee to obtain a court order as per Re Farnol Eades Irvine & Co Ltd [1915] 1 Ch 22, and then possession of the property transfers to the mortgagee as settlement of the mortgagor’s debt. The mortgagee can then sell the property. It is interesting to note that if the property sells for more than the debt owed, the mortgagee does not need to pay the balance to the mortgagor. This is one of the main reasons foreclosure is rarely used in modern times, as it is unfair on the mortgagor, another reason for this is that mortgagor has the right to ask for an order for sale rather than a foreclosure under S91(2) of the Law of Property Act 1925, and as you will see when we explore an order for sale it is much preferable.

Possession and sale

We have touched on how a mortgagee will take possession of a property in order to repay his debt, which will usually be by a sale. However, there may be certain circumstances in which the mortgagee may use any income generated from the property to repay the debt. For example, if the property has been let out to a tenant. In these circumstances, a mortgagee would appoint a receiver to manage to land and ensure the land continues to produce income and is not mismanaged, ensuring they do not become personally liable for any mismanagement.

Section 101(1)(i) of the Law of Property Act 1925 grants the mortgagor the power to sell the land, even if it is not explicitly given in the deed. The power arises when the mortgage money is due, which is usually the contractual date of redemption. However, there are three further conditions imposed by S103 of the Law of Property Act 1925:

1. The mortgagee must serve a notice that payment is required on the mortgagor and this default continues for three months; or
2. The interest payable is two months in arrears; or
3. A covenant of the mortgage deed has been breached

This remedy is advantageous in comparison to foreclosure for a few reasons. Firstly, a court order is not required for a sale as is the case with foreclosure. The sale may be negotiated in any way the parties see fit, it may be through an auction, for example, and the mortgagee may also place conditions on the sale. The sale is also preferable to the mortgagor as the mortgagee may be liable to the mortgagee for any loss as a result of negligence when selling the property.

The case of Target Home Loans Ltd v Clothier [1994] 1 Ell ER 439 also provides for an interesting advantage to the mortgagor. The court may delay an order for possession if they believe the mortgagor can obtain a higher price by selling the property themselves. The case of Barrett v Halifax Building Society (1995) 28 HLR 634 has further shown the courts willingness to allow the mortgagor to sell the property, as it is almost inevitable that they will be able to get a better price for the property. The only time where this is unlikely to be the case is where there is negative equity in the property. In other words, when the debt owed is greater than the value of the property. If this is the case, the mortgagee will be entitled to immediate possession and sale. As mentioned, as a final remedy, the mortgagee may sue for the debt and bankrupt the mortgagor.

What happens once the property has been sold?

When a mortgagee sells a mortgaged property, they transfer good title to the purchaser free of any of the mortgagor’s interests and rights. However, the property will be subject to estates and interests which were in effect prior to the mortgage. By way of example, if a property had been mortgaged twice, once to Bank A, and five years later to Bank B. If Bank B sold the mortgaged property, the buyer would take subject to the mortgage of Bank A, as this interest existed before Bank B’s mortgage. If Bank A sold the mortgaged property, the buyer would not be subject to Bank B’s mortgage.

You should remember that even though S85, 86 and 87 grant a lease or a sublease to the property to the mortgagee, any purchaser of the land from the mortgagee will obtain the full estate of the land, not just the lease/sublease.

If the mortgagee has sold the property to a purchaser whilst the mortgagor retains occupation in the property, the new owner will be able to obtain an order of possession against the mortgagor.

What happens to the proceeds of sale?

S105 of the Law of Property Act 1925 states that the mortgagee selling the property becomes a trustee of the proceeds of sale. The proceeds of sale must then be distributed in this particular order:

1. The payment of any money required to discharge encumbrances prior to the mortgage which the sale is not subject to;
2. Payment of costs and expenses incurred in arranging the sale;
3. The amount required to discharge the mortgage debt, including interest and any other payments required
4. The balance is to be paid to the mortgagor or anyone else entitled (British General Insurance Co Ltd v Attorney-General (1945) 12 LJNCCR 113

As you can see, this is a huge difference from foreclosure, as the mortgagor will actually be able to retain any balance of the proceeds of sale left after the discharge of the debt.

If the proceeds of sale are insufficient to discharge the mortgage debt after all of the other repayments, the mortgagee retains the power to sue the mortgagor for the remainder of the debt as per Rudge v Richens (1873) LR 8 CP 358. This often leaves the mortgagee out of pocket, as a mortgagor’s only valuable asset is likely to have been the property itself. Any action for a claim by the mortgagee of damages is subject to a 12-year limitation period, because mortgagees may sit on the debt until a time the mortgagors have regained assets.

Protection for the mortgagor

The process of possession and sale seems fairly straightforward. However, as you can imagine, there are a myriad of situations in which this will be extremely detrimental for the individuals living in the home. If they do not have the funds to pay a mortgage, is it likely they will be able to begin renting another property to live in?

Ability to pay debts

The first protection afforded to the mortgagor is where they can provide evidence that despite being in arrears to the mortgagee they will be able to pay their debts shortly. This will prevent the mortgagee from forcing a sale at this point.

Obtaining of possession

We have touched upon the requirement of the mortgagee to obtain possession before a sale. The first important thing to note is that this may not done by force, as it would be a criminal offence as per S5 and 6 of the Criminal Law Act 1977. The mortgagee must make an application to the court, this will give a further period of time for the mortgagor to pay their debts and the court even has a power to extend this, despite being used rarely (Cheltenham & Gloucester plc v Krausz [1997] 1 Ell ER 21).

Dwelling-houses

If the property includes or is a dwelling-house (inhabited as a residence rather than a business), the Administration of Justice Act 1970 S36 protects the inhabitants. The mortgagee will have to produce an application for possession, and the court will decide what action to take. Again, if the mortgagor may be able to pay the debts within a reasonable time the possession will be postponed. For this to be applicable the mortgagor must continue paying the current instalments (First National Bank plc v Syed [1991] 2 All ER 250).

If the house is vacant, the mortgagee may repossess without an order (Ropaigealach v Barclays Bank plc [1999] 1 QB 263).

This protection is not afforded to the mortgagor if they give up possession of the property only to later realise that they may use this protection to delay the sale - Barclays Bank plc v Alcorn [2002] All ER (D) 146

Reasonable period of time

A ‘reasonable’ period of time has been used numerous times in this section. What exactly is this reasonable period? The courts take a holistic approach, considering the circumstances of each case.

Mortgagee’s duty to obtain a proper price

The mortgagor is also afforded protection by the mortgagee’s duty to obtain a proper price for the property. This is highlighted in Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113, where it was compared to a duty of care. Therefore, it is commonplace for a mortgagee to appoint a receiver to sell the property, to avoid any breach of duty.

Protection where the mortgagor has leased the property

If there are tenants of the mortgagor in the property, some further protections apply. Various issues can arise if a covenant of the mortgage was not to lease the property. This would result in the tenant being obliged to leave immediately without notice.

The Mortgage Repossessions (Protection of Tenants) Act 2010 has given some protection to the tenant in such a situation, only applicable to dwelling houses. Service of a notice is now required before a mortgagee can enforce an order for possession. The tenant may apply to the court and postpone the repossession for up to two months, giving them sufficient time to find alternative accommodation.

Mortgagee’s power to appoint a receiver

As previously mentioned, a mortgagee can appoint a receiver to manage the possession, management or sale of the repossessed property. They are most commonly utilised in relation to commercial properties but can be used for dwelling-houses.

The right to appoint a receiver may be express but is also implied by S101(1)(iii) of the Law of Property Act 1925. The power arises when the power to sale arises, ie when the mortgagor defaults on the repayments of the mortgage.

The receiver must be appointed by written document executed by the mortgagee, and this receiver becomes an agent of the mortgagor (not the mortgagee!), as per S101. Similar to the proceeds of sale, any income generated by the receiver must be applied in this order:

1. Payment of any outgoings on the land, such as the current mortgage repayments;
2. payment of the insurance premiums;
3. payment of interest on the loan;
4. payment of capital on the loan if the mortgagee agrees; and
5. payment of any balance shall go to the mortgagor

Remedies in equitable mortgages

The remedies we have explored above have focussed on their applicability to legal mortgages. However, some of the remedies face issues in relation to equitable mortgages. The main difficulty with equitable mortgages is that every remedy will require a court order. Each remedy shall be addressed in turn

Foreclosure

Even for a legal mortgage, foreclosure requires the permission from the court, therefore, nothing changes for equitable mortgages! You should still bear in mind the disadvantages of foreclosure we explored earlier in the chapter.

Possession

It has been suggested in case law that an equitable remedy holds no right to possession (Barclays Bank Ltd v Bird [1954] Ch 274). This is an area which is uncertain and various different legal possessions have been taken. Most academic opinion has stated that an equitable mortgage does in fact have a right to possession. However, it seems possession can only be taken with a court order, demonstrated in Barclays Bank v Bird.

Sale

The statutory power of sale is only granted to mortgages by deed, therefore does not apply to equitable mortgages automatically without a deed. Therefore, to exercise the power of sale an execution of a memorandum or deed evidencing the transaction would be required.

Issues may still arise with an equitable mortgage when there is a deed, as Re Hodson and Howe’s Contract (1887) 35 ChD 668 decided that an equitable owner cannot covey the legal estate because they have no legal ownership of the property. The usual way to circumvent this is include a deed declaring a trust or the power of attorney to confer a separate power of sale.

Appointment of a receiver

The statutory power to appoint a receiver is only applicable where the mortgage is made by deed. Therefore, without a deed, the mortgagee must apply to the courts for the appointment of a receiver

Liability of mortgagees and other parties

We have touched on the fact that the mortgagee or receiver can become liable to the mortgagor in certain circumstances. For example, if the property is mismanaged, or sold for less than expected. There are various questions to ask; what happens in the case of market slumps, or negligent valuations?

The leading case in this area is Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997. The courts considered the duties of the mortgagor/receivers and the mortgagees.

Mortgagee’s duties

Before we cover the mortgagee’s duties, it should be noted that the mortgagee does not have to exercise any of their powers, they can simply do nothing. They will not be forced to take possession or sell the property if they do not wish to, even if this would benefit the mortgagor.

Duty to take reasonable care of the property

When the mortgagee is in possession of the property, they must take reasonable care of it. This has been confirmed in cases such as Downsview Nominees Ltd v First City Corporation Ltd (No. 1) [1993] AC 295

Not to be a trustee of his powers

A trustee must do everything to the maximum benefit of the beneficiaries. However, a mortgagee is under no obligation to maximise the benefit of the mortgagor. In other words, they can sell the property when the like, irregardless of whether a different time of sale would have been more beneficial - Raja v Austin Gray (a firm) [2002] EWCA Civ 1965.

A mortgagee may have a number of motives for choosing to sell a repossessed property at a particular time. So long as one of these motives is to enforce the security and repay their debt, the sale will be valid - Meretz investments NV v ACP Ltd [2007] Ch 197.

Duty to obtain market value

The Silven case confirmed that the mortgagee has an equitable duty to obtain a ‘fair’ or ‘true’ market value for the property on the date of sale. The transaction must not be rushed through a low sale price to only cover the debt, as if they had sold the property properly the mortgagor may have been able to recover any of the balance, as per Palk v Mortgage Services Funding plc [1993] Ch 330.

It was suggested in Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 that this duty is a duty in negligence, and the mortgagor could claim damages for negligence. However, modern cases have confirmed the duty is in equity, meaning the mortgagor can only claim for the difference between the value the property is sold for and the actual value of the property.

Receiver’s duties

Selling the property

The receiver’s duty is identical to what the mortgagee’s would be when selling. They must obtain a proper market value - Medforth v Blake [2000] Ch 86

Acting in relation to the property

Unlike the mortgagee, who may remain passive and not actually sell the property, the receiver is under a duty to not remain passive - they must take positive steps to sell or maintain the value of the property.

Setting aside

Where the sale of a property is fraudulent, the sale can be set aside. It is often difficult to differentiate between a sale at an undervalue and fraud, the presence of deception of some kind is usually sufficient.

Ending a mortgage

Formalities

The mortgage will end either if a remedy is used to terminate, or the mortgagor has repaid his debt. On termination by repayment the mortgagor needs evidence of the repayment, so that anybody wishing to buy the land can be sure they buy it free from the encumbrance of the mortgage.

For registered land, the mortgagor will want to remove the charge from the register. Once the registrar has received documents as evidence of the discharge of the mortgage, they will remove the charge from the register.

For unregistered land, the mortgagee must execute a memorandum of discharge which should be endorsed on the back of the mortgage deed. This will be full evidence of a discharge.

Time

Although the mortgagee can be passive, if there is no action for a long period of time the mortgage may be brought to an end - Ashe v National Westminster Bank plc [2008] 1 WLR 710. This period of time is in line with the limit for statutory claims - 12 years under the Limitation Act 1980.

Priorities

There is the potential for land to be mortgaged multiple times. Therefore, mortgagees will want to know about all other interests in the land and which interests have a priority over their interest, for example, if there is a first mortgage on the property, if that debt was discharged first on sale of the property, would there be enough left over to repair their second mortgage debt?

In order to determine which mortgage has priority, you will need to determine who had the interest first, what type of interest it is and exactly what has been mortgaged.

Priorities of equitable interests

The general rule for equitable interests is that if the interests are equal, the one which was made first will take priority. This is fairly straightforward.

Priorities of legal interests

The first thing to consider is whether the title to the estate is registered or not.

For registered title, S28 of the Land Registration Act 2002 governs the priorities of legal interests. The basic rule is the same as equitable ones; the first one created takes priority, unless one of the exceptions apply.

The first exception comes from S29 - if there is a registrable disposition which is registered, the rights of anybody with an interest in relation to that estate before the registrable disposition is created are not effective until after the registration of that disposition. This is quite confusing so let’s look at a practical example:

1. There are two registrable interests, Charge 1 and Charge 2
2. The basic rule would be that Charge 1 takes priority because it was made first
3. If Charge 1 is not registered when Charge 2 is registered, Charge 2 will take priority.

There are also two further rules. Firstly, the later disposition must be a disposition for value, in our example above, Charge 2 would have needed to be for value to take priority. Secondly, if the earlier disposition is not registered, but is protected by notice or is a Schedule 3 (overriding) interest, it will take priority despite not being registered.

For unregistered title, there are a number of considerations.

1. If the mortgagee holds the title deeds of a legal mortgage, it takes priority against all other mortgages
2. If the mortgagee holds the title deeds of an equitable interest, and a later interest is legal, the legal interest has priority unless the mortgagee knew of the earlier interest. If the later interest is equitable, the one created first prevails
3. If the mortgagee does not hold the title deeds of a legal mortgage, it will take priority if registered as a class C(i) land charge
4. If the mortgagee does not hold the title deeds of an equitable mortgage, it will take priority if registered as a class C(iii) land charge

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