Mortgages

Introduction

A ‘mortgage’ is an interest in property granted by the borrower (person or businesses) to the lender (normally banks, co-operative banks, and building societies) as security for the repayment of a loan. A mortgage is also a transfer of land as a security for the payment of a debt or the discharge of an obligation.

Important Terms

The borrower of a mortgage or loan is also referred to as the mortgagor

The lender of the money/loan is also referred to as the mortgagee

Creation of Legal Mortgage (Un-registered land)

A mortgage of freehold land is created by a grant of long lease or where the land is leased the mortgage can be created by a grant of a sublease.

Example

Sue is the owner of Orchard Farm House which is freehold she can obtain a mortgage by creating a long lease normally for a maximum of 25 years.

Sue holds 60 years of lease on  Orchard Farm she can obtain a mortgage or grant an interest in the farm to a lender by creating a sublease normally for a maximum of 25 years.

Creation of Legal Mortgage (Registered land)

Where the land is a registered land (please refer to registered land) a mortgage is created by way of a charge in charges register.

Land Registration Act 2002 section 23 provides that the charge by deed by way of a legal mortgage is the only form of mortgage which can be used for registered land.

Sample clause:

‘The Borrower charges the property by way of the legal mortgage with a payment of all the money payable to the Lender under the mortgage conditions.’

Formalities

  • A deed is required as per (s.52 LPA 1925)
  • Registration if the borrower’s land is registered land (s.27 LRA 2002)
  • Registration if it is a first mortgage  and the borrower’s land is subject to  first registration as well (s.4 LRA 2002)

Lack of Formalities

Whenever the contracting parties fail to fulfil the formalities it will give rise to a mortgage of an equitable interest

  • Failure to register a legal mortgage in registered land will give rise to an equitable interest
  • The parties contract to create a legal mortgage but never then do so, and the contract
    • complies with section.2 Law of Property (Miscellaneous Provisions) Act 1989
    • is specifically enforceable will also give rise to equitable interest
  • There is a written mortgage but not made by deed/the deed is defective, and the mortgage
    • complies with section.2 Law of Property (Miscellaneous Provisions) Act 1989
    • is specifically enforceable will also give rise to equitable interest

General Provisions in Mortgage

General Provisions in Mortgage include:

  • Repayment of the loan, its terms and conditions
  • The details of property itself, such as,
    1. maintenance
    2. insurance
    3. leasing
  • The lender’s rights & remedies
 
 

Mortgagor’s Rights

Right to Redemption

  • Mortgagor has the right to redemption subject to the obligations of the mortgage
  • The right to redemption is the right to repay the mortgage and to have in return the property released from the charge upon it i.e. the discharge of the mortgage.
  • The right to redeem the mortgage is said to be inviolable, i.e. “once a mortgage always a mortgage”. This can be expressed through the phrase “no clogs on the equity of redemption”
  • Further aspects to be considered are that the right to redeem must not be excluded and the right to redeem can be postponed as well
  • The mortgagor could redeem the mortgage at any time after the contractual date for redemption had passed.
  • Mortgage deeds will contain a date for redemption in the deed itself, usually 6 months after the commencement of the mortgage. Therefore, once this date has passed the mortgagor can at any time redeem or pay off the outstanding loan and redeem the mortgage
 
 

Important

A mortgagor who is in negative equity can sell his/her property in exceptional circumstances

Collateral Terms of the Mortgage

  • The mortgage may contain terms which give the mortgagee certain additional advantages but these will be void if they are
  1. unfair or unconscionable
  2. unfairly restrict redemption
  3. in restraint of trade
  • Any burdens that are imposed on the property which will continue after the date of redemption are viewed with disfavour by the court.
  • The principle is that the mortgage should provide security only for the loan and that on redemption the mortgagor should recover the property with no continuing restrictions

Example

A petrol/oil company who advance money by way of a mortgage to a garage owner on the basis that the garage owner will then buy their petrol solely from that petrol company.

Therefore, the petrol company are acquiring an advantage which is collateral to the mortgage.

The general rule is that such advantages can be valid so long as a mortgage exists but generally should not continue beyond the redemption of a mortgage

Obligations of Mortgagee/Lender

The mortgagee must

  • Ensure the parties are advised by a solicitor of their choice
  • Communicate directly with each party separately
  • Obtain the solicitor’s written confirmation that full advice is given
  • Solicitor can be the same for both parties if there is no conflict of interest.
  • The solicitor must provide the co-owner with the full facts of the case as well

Lender’s right to Possession

  • A lender has an inherent right to possession of the property
  • The lender/mortgagee has the right to insure the property and this is something that all mortgagees will do as it provides additional security for their security for the loan.
  • The law gives the mortgagee/lender the right to insure at the mortgagor’s expense and usually, there will be an express term in the mortgage deed regarding the insurance of a property
  • 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
  • The lender has to obtain a possession order from the court in order to obtain possession of the residential property as it is a criminal offence for the mortgagee/lender of a residential property to unlawfully deprive a residential occupier of his occupation

However, Courts may have powers 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

Important

A borrower/mortgagor can ask the court to suspend the possession proceedings brought by a lender/mortgagee who can show that he/she is very likely to pay any sums due under mortgage or to remedy any default within a reasonable time period

The sums due referred above relate only to the mortgage arrears and not to the total outstanding balance of the mortgage

Likely represents the realistic chance of repaying the arrears and court normally decide what is reasonable time period by considering all the relevant circumstances of the mortgagor.

  • Mortgagors can also apply to the court under section 36 of the Administration of Justice Act for an order to postpone possession to enable them to have time to sell the property themselves to clear the outstanding mortgage debt. This concession is only granted by the court and is only granted where there is a real prospect of a quick sale of the land

Lender/Mortgagee’s Remedies

The lender has the following remedies:

  • Power of sale
  • Foreclosure
  • Appointment of a receiver
  • Sue on borrower’s/mortgagor’s promise to repay

Lender’s Conduct of Sale

  • A lender is not a trustee of the power of sale for the borrower/mortgagor
  • A lender has no duty to exercise power and no duty as to the timing of the sale; but
  • A lender has a duty to take reasonable care to obtain market value on the sale of the property after repossession
    • duty lies in equity, not negligence, which means a lender cannot be sued for compensation where the lender has sold the repossessed property for a lower value than market value
    • However, the lender must act in good faith and there should not be any issue of conflict of interest
    • The lender cannot sell the property back to itself or to any other person who is associated with the lender

Effect of sale on mortgagor

  • The borrower’s/mortgager’s right to redeem the mortgage is destroyed as soon as the contract for sale is made
  • The new buyer receives the borrower’s/mortgager’s full estate (freehold or leasehold as the case may be)

Proceeds of Sale

  • Pay off any mortgage with priority
  • Pay costs properly incurred in arranging the sale
  • Discharge own mortgage debt
  • Pay any balance to the borrower/mortgagor or the other person entitled to the mortgaged property

Disclaimer

While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legalally does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.

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