Land - mortgages PDF

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Land – Mortgages 

Mortgage is a proprietary interest in land given by the mortgagor as security for a loan. Mortgagor receives a loan in return for giving the mortgagee the security over his land  Mortgagor – land owner/ borrower (person who creates the promise to pay back the money)  Mortgagee – bank/ lender

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Santley v Wildey – a mortgage is a conveyance of land as security for the payment of debt o Loan of cash secured by the lender given proprietary rights over the property as security by the borrower o Lender in a privileged position if borrower goes bankrupt

Need to determine whether, in respect of the status of the mortgagee (legal or equitable), and its enforceability, whether any undue influence has occurred, the legal rights, the mortgagee’s duties when selling the property and the priority of receivership. 1. Explain what mortgage is and define terms 2. Is the mortgage legal or equitable? 3. Are the mortgage terms enforceable? - Issues in question - Bring in regulation here 4. Co-owners consent – has the lender taken adequate precautionary steps? 5. What powers does the lender have (remedies)? 6. In exercising those powers, what duties does the lender own? Formalities – legal or equitable mortgage? Legal   

Mortgage is capable of being legal – on the list of legal interests – S1(2) LPA 1925 o Equitable interest can never become a legal mortgage Must be created by deed to be legal – S52 LPA 1925 o Deed defined in S1 LPMPA 1989 – clear on face, delivered/dated, witnessed Must be substantively registered on the charges register to be protected against a purchaser for valuable consideration – S27(2F) LRA 2002 o If unregistered, S4 LRA 2002 kick-starts registration process o Once registered, if you buy a freehold property and the seller hasn’t paid of mortgage debts, the proprietary rights will still exist and bind the new owner

Equitable 

A mortgage will be equitable if either: o Not legal, but there is a valid estate contract to create a mortgage – in writing, signed by both parties, and containing all agreed terms (S2 LP(MP)A 1989)

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Failed legal deed – not registered or compliant No longer possible to create an equitable mortgage by depositing title deeds – United Bank o Land-owner only had an equitable interest o Intend to create an equitable mortgage because its limited – relying on discretion of the court. Valid transfer of an equitable interest by: o S2 LPMPA 1989 compliant contract; and o Signing of the transfer of the equitable interest by the mortgagor – S53 1C LPA 1924 Must be registered on charges register for protection against a purchaser for valuable consideration – S32 LRA 2002 notice/S29 o If unregistered, the mortgagee/lender takes the title deeds instead of registration – C(iii) land Charge/S4(5) LCA 1972

Puisne Mortgage   

Land can be mortgaged more than once Second mortgage = puisine mortgage Must be registered as C(i) at the Land Charges Department or they will not be binding

Substantive issues re mortgages (nb - don’t go through them all in exam – only those that are applicable)

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Enforceability: Are all the terms enforceable? Undue influence: Has the lender taken precautionary steps? Remedies: Lender’s powers in enforcing a legal mortgage Lenders duties Priorities of mortgages – who gets repaid first?

Are all the terms enforceable? Mortgage should be solely security for a loan, with no extra benefit or terms added -

Postponed legal date of redemption Options to purchase Collateral terms Interest rates & unconscionable terms

Postponed legal date of redemption  

Legal date of redemption – date when the borrower must repay the mortgage loan Equitable date of redemption – borrower’s right to repay the mortgage after the legal date of redemption has passed o Will have promised to repay capital and interest over the mortgage term (c.25 years) o Borrower doesn’t have to keep mortgage outstanding for that length of time

o Date set out on the deed - Legal Redemption Date - usually occurs 6 months after mortgage was granted… the borrower’s contractual right to redeem o Gives borrower right to pay back money that day - limited value as it arises too soon o If the borrower is unable to pay back on the date of the Contractual Right to Redeem, at common law he will have to wait until the end of the mortgage term to pay it of o Flexible approach - if borrower can pay back loan, he should be able to pay it back at any date after the contractual date for redemption has passed o Will last for the whole of the length of the mortgage term after the date 

Rule: Must be no impediment (clog) on the ‘equity of redemption’ – covers many rights of the borrower (have to repay capital & interest) o Equitable right to redeem o Prevention/postponement of redemption o Collateral advantages o Unconscionable terms o Undue influence  Value of the property without the mortgage less the outstanding debt - difference between value of house and the outstanding loan  No ‘clog’ on the equity of redemption - court will take steps to protect borrowers against unfair treatment by the lenders

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Redemption cannot be prevented altogether - any term which attempts to stop the borrower from redeeming will be void – Toomes v Conset Redemption can be postponed if the date of redemption is not so far in the future as to render the right to redeem illusionary – question of degree o Fairclough v Swan Brewery – postponed until 6 weeks before end of a 17.5year lease = a clog o Knightsbridge Estates v Byrne – 40-year postponement was upheld because it was a commercial arrangement of a freehold and had been used to negotiate a better rate of interest Factors used by court to determine whether the right of redemption has been rendered illusory: o Interest rate on the loan; o Whether the mortgage is residential or commercial

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As long as right remains a real right to redeem, and not an illusion - borrower must get back at the end what they originally mortgaged 

Knightsbridge Estates- legal right of redemption 40 years after the mortgage was granted… borrower wanted to redeem early, and asked court to declare it was invalid. Court refused, saying that it was an arm’s length business transaction, and the borrower’s knew what they were involved in. Not unconscionable/oppressive. Interest rate was low - advantages for locking themselves into the long term mortgage o Mortgaged property was freehold and would therefore not be devalued by the postponement.

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Fairclough v Swan Breweries - a leasehold property, and the mortgage was in favour of the brewery. Leasehold had 17 years left when mortgage was granted. Legal date in mortgage document said it couldn’t be redeemed until 6 weeks before the end of the lease. Borrower wanted to repay earlier - if clause had been upheld, the borrower wouldn’t get back what they had mortgaged (a lease with 6 weeks to run) o Postponement deemed a clog in the equity of redemption Equity wants to protect borrower’s right to redeem loan

Options to purchase Rule: a mortgage should be solely a mortgage with no other additional conditions attached o ‘once a mortgage, only a mortgage’ – Kreglinger v New Patagonia, per Lord Parker 

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Option void where: o It interferes with/prevents the borrows right to redeem o It is granted simultaneously with the mortgage (Samuel) If lender exercises this option, it prevents borrower from repaying the loan at all as the lender has now bought it o Samuel v Jarrah Timber – An option in a mortgage deed will be void/invalid. o Reeve v Lisle - Might only be valid if granted afterwards, in a separate agreement Where a mortgage and option are part of a broader transaction (i.e. sale purchase, refinancing agreement), the court will attempt to determine whether the transaction is essentially a mortgage of just an element in the transaction o Warnborough v Garmite - mortgage and option granted on same day. Option part of a separate purchase deal (not a clog on the equity of redemption) and was allowed to stand o Broader than a mortgage = option is valid o Same transaction = option is invalid Label is invalid – court looks at its substance, not it’s form To be valid, option must comply with S2 PMPA 1989 requirements for a valid estate contract – signed by both parties, containing all relevant terms

Collateral Ties/Advantages  

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Collateral ties – supplementary obligations imposed on mortgagor in addition to basic mortgage terms Rule: a mortgage should not be used as an instrument to which collateral ties can be attached o Should not be an opportunity for lender to gain other advantages Collateral ties will be removed from a mortgage agreement where they: o Represent an impediment on the equitable right of redemption; o Are penal in natural; or o Are in restraint of trade (Esso Petroleum v Harpers Garage) 1. Must stop when mortgage is repaid

o Where a part of the mortgage, it must not last longer than the date of redemption  Noakes v Rice- agreed to only sell lenders spirits. Applied for the full lease, even if the mortgage had been repaid - devalued property. What had been a free house was a tied house on the redemption, reducing its value. Collateral advantage will not normally be permitted beyond date of redemption.  Biggs v Hoddinott - pub landlord mortgaged the freehold of a public house to a brewer in exchange for a loan. The landlord covenanted to buy beer only from the brewer for the duration of the mortgage. The mortgage could not be redeemed for five years. After two years the landlord stopped buying the brewer’s beer and argued the solus tie (or trade tie) was a clog on the equity of redemption. Deemed a reasonable trade bargain and equity could not set it aside. Collateral advantage that is not unconscionable and doesn’t continue beyond redemption date will be upheld by court 2. Genuinely independent of mortgage transaction o In independent transactions (not linked in any way to mortgage, separate document), a court may permit a collateral tie to extend beyond the date of redemption – Kreglinger v New Patagonia  Woolbrokers loaned a meat preserve company £10,000. The company mortgaged all its present and future property (a floating charge) to secure the loan. The woolbrokers agreed not to demand repayment until September 1915, as long as interest was paid. The company could pay of the loan at any time, giving one calendar month’s notice; it did so in January 1913. The agreement gave the woolbrokers a right of first refusal to buy at market rate all of the company’s sheepskins until August 1915.  Allowed to extend beyond date of redemption as it was between two parties of equal bargaining powers – clearly their intention that the right of first refusal should be continue, be an independent transaction, created separately from mortgage. o Can still be struck out if found to be an essential part of the mortgage within that transaction 3. Must not be unconscionable Interest Rates & Unconscionable terms Rule: a mortgage’s interest rate must be ‘unfair and unconscionable’ to be struck out by the courts  Must be more than simply ‘unreasonable’ – interest rate 4% or higher than the prevailing BoE base rate will raise an issue of unconscionability  Courts strike down: o Penal rate of interest; or o One that conflicts with CRA 2015, Unfair Terms in Consumer Regulations 1999, or Consumer Credit Act 2006

Penal 

Tough terms/’hard bargain’ will not alone be enough to raise issue of unconscionability – the rate/term must be penal (Holles v Wyse) o Penal where it bears no relationship with a lender’s pre-estimate of loss that could be incurred in the event of default

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Justifying a higher than usual IR to borrower: o Poor credit history of borrower  Davies v Directloans – even though rate was 4.6% above high street lenders, a 21.6% interest rate was allowed because the mortgagor had a bad credit history. Highlights how court will consider whether mortgagor is high risk. o Financial difficulties of borrower  Paragon Finance v Nash – rates were 2-4% above high street lenders, but firm was allowed to set this to take its financial difficulties into account

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Things to consider: o Good or bad faith o Enders bargaining power (unfair if significant imbalance) o Commercial or residential

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Term less likely to be viewed as unacceptable in a commercial mortgage than a residential one – Multiservice Bookbinding v Marden o Contrast with Cityland (below)– courts much less likely to intervene when parties have equal bargaining power o IR was variable depending on Swiss Franc exchange rate o £36,000 loan, 2% above bank rate, could not be redeemed for 10 years. o Pound depreciated and repayments rose. Payments linked to Swiss franc – plaintifs argued that was unconscionable o Because borrower was experienced, he was considered to have appreciated the risk so than a 16% IR was upheld o High IR not the issue necessarily – it’s how high the IR is above the BoE rate at the time concerned o Upheld as it was a commercial bargain between two parties of equal bargaining power o No question of sharp practice – just a hard bargain Flat IRs for whole mortgage terms seen as unfair – Falco Finance v Gough

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Dual Interest Rates  

Dual IRs likely to be considered unconscionable Cityland v Dabrah - IR of 19% which rose to 38% upon borrower’s default was struck out as unconscionable and reduced to 7%

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o Defendant was the plaintif’s tenant for 11 years. Upon the expiry of the lease, the plaintif ofered to sell the property to the defendant. The defendant took a loan from and granted a mortgage to the plaintif in order to fund the purchase. o The interest rate was not clearly stated in the mortgage agreement, but it was calculated to have been 19 per cent per annum based on the division of the premium into instalments. The premium amounted to 57 per cent of the value of the loan and it became payable in its entirety upon default o Gof J replaced the 19 per cent interest rate with 7 per cent. In reaching his decision that the interest rate was unconscionable, he emphasised the inequality of bargaining power. Falco Finance v Gough – 8.99% IR rising to 13.99% upon the borrower falling into arrears was struck out as unconscionable. Court said 5% penalty did not reflect the actual financial loss the lender would incur in the event of default by the borrower o If borrower late by even one day, rate of interest increased by 5% for the whole of the rest of the term o Held to be unfair under UTCCR (now CRA 2015) o Must be immoral

Regulations Three acts which apply to mortgage terms   

Financial Services and Markets Act 2000 – covers first time legal residential mortgages Consumer Credit Act 2006 – covers mortgages other that first time residential mortgages. In both, rate must not arise from an unfair relationship CRA 2015 – covers unfair terms in mortgages o must not be an unfair term – contrary to good faith, arising from imbalances in party’s rights. S62(1). o Only applies between traders and consumers – only relevant to retail banking

Undue influence Question of whether there has been undue influence & whether lender took precautionary steps - Undue influence - Reasonable steps - Enquiry Undue influence Rule: co-owner to a mortgage must not be unduly influenced to enter into the mortgage agreement, otherwise the lender may be bound by the co-owner’s equitable interest if they attempt to take possession of the property – Williams & Glyn’s Bank v Boland  

Co-owner’s consent must be fully informed and freely given Consent can be: o Express; or

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o Implied – Bristol and West Building Society v Henning Examples of undue influence: o Avon Finance v Bridger – owner misled the co-owner about the nature or type of mortgage. Son misled elderly parents into thinking they were signing documentation connected with original mortgage, not a new one o Kingsnorth Trust v Bell – false assurances being used as a means of inducing consent o Hewett v First Plus – non-disclosure of an extra-marital afair

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To avoid a situation of undue influence arising and being put on enquiry, lender should take reasonable steps to ensure co-owner is fully informed of their role in guaranteeing mortgage involves o Insist co-owner takes precautionary steps (Kingsnorth Trust v Bell)  E.g. get independent legal advice in borrower’s absence – RBS v Etridge  Lender is not responsible for advice’s nature of quality  Lender also expects solicitor will perform duties adequately even where acting for both husband and wife – entitled to assume solicitor has done job properly - Bank of Baroda v Raerel; Barclays Bank v Thomson o Write directly to co-owner – Coldnull v Gallon RBS v Etridge (No. 2) o What does bank have to advise a spouse in order to make sure they can’t argue undue influence? o A spouse must be advised of:  The efect of the document,  The seriousness of the risk, and  The fact that they can say no re-signing of the document o Lender has to show borrower has been properly advised of the risk of consenting and insist she takes independent legal advice in husband’s advice

Enquiry 

If lender has failed to take reasonable steps, he may be put on enquiry if he should have been aware: o That the transaction could have involved undue influence – CIBC Mortgages v Pitt  Husband and wife mortgaged home to pay for a new holiday home  Husband used money not to buy the new holiday home, but to speculate on the stock market  Tried to argue undue influence  Court held she couldn’t argue this because the original loan was for their joint benefit - not simply for his business benefit  Nothing on the facts that should have alerted lender to take extra steps to make sure she knew what she was doing  Lender will not be put on enquiry where mortgage at least seems to be for the benefit of both parties

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o That it was likely in his eyes that improper means may have been used to obtain co-owner’s consent – Bank of Scotland v Bennett o That the mortgage was not for the co-owner’s benefit – Barclay’s Bank v O’Brien  O’Brien entered into mortgage over the matrimonial home for the husband’s business  O’Brien lied to his wife about size and term of the loan- said she had to sign document, and that it was for a short term loan only  Said it was for £60,000, actually £135,000  Husband’s business failed - bank tried to repossession the property  Successfully argued that mortgage was unenforceable because of her husband’s undue influence over her  Argued that bank had constructive notice of this - should have realised that she only entered the transaction because he wanted her to  Bank should have made sure she entered the arrangement of her own free will  She didn’t do so, and therefore the bank was bound by her interest in the property and they couldn’t repossess it  Lender needs to be aware of situations where loans are granted not for the benefit of all borrowers  Where borrower’s personal or company debts are guaranteed by the coowner  A non-commercial party guarantees the borrower’s debts (e.g. where parents guarantee a child’s mortgage) Thompson v Foy – whether a lender is put on enquiry depends on the nature and context of the relationship Once on enquiry, lender must show it took reasonable steps to help claimant appreciate the risk involved in giving the guarantee – RBS v Etridge o eight separate appeals. In seven of these appeals, a wife had agreed to mortgage her interest to a bank, as security for a loan to benefit her husband. In each case, the bank had understood the wife to have ...