Mortgages
- Secured lending involves a borrower of money offering some form of collateral to the lender.
- If you put up some collateral for a loan but can't pay the loan back, the lender (the secured creditor) can sell off the collateral to recover the money it is worth.
- If it was a contractual claim, they'd have to 'join the queue' of other creditors trying to recover.
- Estates in land can be used as collateral.
- The collateral is usually worth more than the value of the loan, putting the creditor in a good position.
- Rather than using tangible goods (removable items like a ring or a watch), land requires a right to be granted since it cannot be physically possessed and retained by a creditor: a mortgage or a charge.
- Mortgages and charges usually come under the term mortgage because they are similar.
- Lender: mortgagee and chargee
- Borrower: mortgagor and chargor (this is because they are granting the mortgage)
- This is often for first-time house-buyers: money is lent from the secured creditor to the buyer who buys the home and simultaneously grants a mortgage over the loan
- Small businesses who wish to raise money to finance the business have few ways of doing so without going to the bank and putting up their own homes as collateral.
- Under the Law of Property Act 1925, a legal mortgage cannot be created by the pre-1926 method of conveying the estate to a mortgagee. It is conferred instead by granting them a leasehold estate over the land.
- The leasehold estate terminates when the loan is paid off.
- It is 'nothing more than a fiction' - not a tenant/landlord relationship
- To create a charge, you execute a deed and express it to be by way of legal mortgage.
- A legal charge gives the creditor a 'bundle of rights' on the land.
- If you have a registered estate you can only use the charge method (Land Registration Act 2002).
- If you are an equitable owner you can mortgage your equitable interest in the estate.
- 'Equity looks upon as done that which ought to be done.' Walsh v Lonsdale 1882: equitable mortgage is made when the contract is created
- Mortgagees have priority over any beneficial interests that may exist in the estate.
- If the property is sold, the mortgagee recovers their monies owed from the sale price in priority to the beneficiaries.
- A legal mortgagee will have priority over:
- the beneficial interests of the legal owners who executed the mortgage, save for the beneficial interests of any legal owners who can make out the Etridge/O'Brien defence;
- any other beneficial interests in the mortgaged land that arose
(ii) at the same time as the mortgage was executed (as with land purchased with a mortgage); or
(iii) before the mortgage was executed (i.e. where the land was re-mortgaged), provided that either the conditions for 'overreaching' are met or that the interest does not otherwise bind.
- 2(ii): Abbey National BS v Cann 1991
- Two or more legal owners executing the mortgage, overreaching occurs. If overreaching does occur the bank has priority. If this doesn't happen (only if there's one legal owner)
- "A is the legal owner of Bleak House. A holds on trust for himself and his wife B at equity as 50:50 tenants in common. A grants a legal charge over Bleak House to Woodcourt Bank. B consents to the mortgage."
- Both legal mortgagees and chargees have a right to take possession of the mortgaged premises (Four-Maids Ltd v Dudley Marshall (Properties) Ltd 1957).
- The lender can use reasonable force to take possession and there's nothing you can do about it: if you resist you are a trespasser!
- There are multiple restrictions on the exercise of the lender's right.
- The lender can't exercise its right unless there is a default on mortgage payment (this can be express, or implied by the courts).
- If you are in default, you have to pay the whole mortgage off.
- It's inadvisable for the lender to try and take possession itself, but if they get a court order it is easier.
- It's a criminal offence to use/threaten violence to secure entry into premises Criminal Law Act 1977 s 6.
- If the mortgage is over land that is or includes residential premises, a court can postpone the right to possession under s 36 Administration of Justice Act (AJA) if the borrower brings their payments up-to-date within a reasonable period and supply a financial plan to show how the repayments are to be met; if the mortgagor responds by seeking a sale, if the proceeds will be sufficient to cover the full mortgage and there's a realistic prospect of a sale.
- Ropaigealach v Barclays 2000: Mortgagors were in default (knocks out defences A and B of express/implied term that there must be a default). Bank took peaceable possession of the property whilst the mortgagors not in residence (no restriction on criminal law as they are not there so there's no threat of violence). CA held that s 36 implied that you had a to seek a court order. It was held that that is not the case; Barclays could take the property.
- Horsham Properties Group Ltd v Clark 2009: Mortgagor in default. Mortgagee exercised power of sale (s 101 LPA), which overreaches (s 104 LPA). Purchaser entitled to possession order without protection of s 36 for mortgagor. No human rights incompatibility. Clark had no defence.
- If the mortgage is over land that is or includes residential premises, a court can postpone the right to possession under s 36 Administration of Justice Act (AJA) if the mortgagee seeks a court order for possession and the court postpones it under its inherent jurisdiction; if the mortgagee seeks possession and the property is in negative equity and want to sell it yourself the court, in special circumstances, may let you; if some other limited statutory regime prevents the taking of possession; if there is a beneficiary in the land; and if a mortgagee doesn't comply with relevant protocols, such as the FSMA 2000.
- The mortgagor has a legal right to redeem the mortgage; an equitable right to redeem the mortgage; the right to have the mortgage set aside as against them in the circumstances outlined in Bank of Scotland Plc v Etridge (No 2) 2000.
- You lose the right to get your land back if you don't pay: pre-1926, to create a mortgage you give the estate to the mortgagee and they give it back upon redemption. There ceases to be a legal obligation if the mortgagor doesn't pay.
- Under equity, you can get the loan monies, go to the Court of Chancery and get the mortgagee to give the land.