A mortgage is a security for a loan, with the purpose of the loan being to finance the purchase of land. The land provides the loan security, so that, if the mortgagor cannot repay the loan, the mortgagee can take possession of the land and sell it to recover the debt.
Mortgagor: the borrower
Mortgagee: the lender (usually, a bank or building society)
The key problems arise when the mortgagor cannot meet repayments, the mortgagor wants to pay off (redeem) the mortgage before the redemption (completion) date, and when the mortgagor’s partner complains that their consent was obtained by undue influence.
Mortgage Creation:
A mortgage is (usually) created by ‘a charge by deed expressed to be by way of legal mortgage’. [1] Therefore, both the borrower and lender have proprietary interests in the land. These interests are transferrable.
The lender doesn’t get the freehold / leasehold estate when they provide the mortgage (because the mortgagor has this), but they have the next largest legal estate.
Mortgages establish a legal estate for the lender. The mortgagee seeks a right in rem is so that they can enforce the mortgage against other parties seeking to establish rights in the land, not merely the mortgagor. This is most important in insolvency cases.
The fact that the mortgagee has a legal estate over the land means that it is a disponee for value, so its rights in the land (should) take priority over other parties’ rights (see priority rules – week 1).
Freehold Estates:
When a mortgage is created over a freehold estate, the mortgage is protected as if it holds a 3000-year lease in the land. [2]
Leasehold Estates:
When a mortgage is created over a leasehold estate, the lender takes an estate at least 1 day shorter than the mortgagor’s lease. [3]
Position and Rights of the Mortgagor:
The mortgagor, by virtue of their need to take out a loan, is usually the weaker party. While they have the largest legal estate, this is conditional on paying off the mortgage.
The law seeks to protect the mortgagor's vulnerability by guarding against possible exploitative practices.
Impending Redemption:
Redemption occurs when the mortgage debt is paid off and the mortgage is completed. Lenders may attempt to interfere with the borrowers right to redeem their mortgage.
Generally, the courts are suspicious of attempts of lenders to interfere with redemption. Mortgages tend to be complicated documents, so it is conceivable that a borrower might waive their right to redemption without realising.
As a general principle, a mortgage cannot be made irredeemable, nor can a provision in the mortgage that provides that the property shall become the mortgagee’s, or give them an option to purchase the property.
However, if the mortgagor's waiver is in a separate contract specifically designed to forsake the right to redemption, the court will likely presume it was done deliberately, enforcing it in the usual way.
In Samuel v Jarrah, the lender reserved an option to purchase the mortgaged property at any time within the mortgage period at full market price. The court held this option to be invalid since the borrower’s objective in taking out the mortgage would be negated.
In Jones v Morgan, (similar to Samuel v Jarrah) the CA suggested in obiter dictum that the option would be valid if the parties agreed to such an option in a ‘collateral contract’ that was separate to the mortgage.
Generally, there should be no impediment to a borrower redeeming their mortgage after the date agreed – if they can pay it off, they should be allowed to. [4] However, lenders are allowed to make it difficult to redeem.
EG: imposing a penalty if the mortgage is redeemed early.
In Knightsbridge Estates v Byrne, the mortgage contained a term stipulating that it couldn’t be redeemed within 40 years from commencement. The lender wasn’t a bank or building society, but a company that depended on the interest repaid on a small number of mortgages. In return for the longer mortgage, the interest rate was lower.
The court upheld the term since, if the borrowers were allowed to redeem early, the interest repayments, which the company relied upon, would disappear.
Collateral Advantages:
Collateral advantages are advantages that the lender gets in addition to interest on repayments.
Solus Agreements:
Solus agreements give the mortgagee not only the advantage of the interest on the loan but also the collateral advantage of the mortgagor marketing and selling the mortgagee’s goods. This usually happens when both parties are in the same line of business.
EG: brewery lending to a pub, which will sell their beer.
In Kreglinger v New Patagonia, the HL held that a 5-year tie in arrangement was not oppressive and unconscionable given that both parties are commercial actors, the lender had negotiated a price for the tie-in arrangement, and the terms of the tie-in were set in a contract separate to the mortgage.
In Esso v Harper’s Garage, there were 2 mortgages with solus agreements – one ran for 5 years, and the other for 21 years. The court held the 5-year agreement to be valid, but the 21-year agreement to be invalid since it restrained trade.
Courts haven’t treated solus agreements as anti-competitive when they commit the borrower to sell the lender’s product but not only the lenders products (they may sell others too).
High Interest Rates:
A mortgage may provide that interest rates may increase on default of repayments.
Lenders are required to lend in a ‘responsible’ way, to take account of the borrower’s ability to repay, and to avoid setting interest rates or imposing charges that are ‘excessive’ compared to the market rate. [5] However, ‘excessive’ was left undefined by FSMA but is monitored by the Financial Conduct Authority (FCA). Instead, the FCA provides examples of good practice. [6]
While the courts may interfere with high interest rates on mortgages, they rarely do. This is because they seek to encourage mortgage lending and truly ‘excessive’ interest rates are rarely set on secured loans like mortgages (they tend to be on unsecured loans).
In Multiservice Bookbinding v Marden, the parties agreed to index-link the loan to the Swiss Franc rather than the UK inflation rate. This resulted in an annual interest equivalent to ~25% above that normally charged at the time in the UK.
The court upheld the agreement, attaching significance to the fact that both parties were businesspersons acting on professional advice.
Browne-Wilkinson J: ‘the plaintiffs [mortgagors], who are businessmen, went into [the bargain] with their eyes open, with the benefit of independent advice, without any compelling necessity to accept a loan on these terms and without any sharp practice by the defendant.’
In Davies v Directloans, the lender raised the interest rate to 22% on a 10-year mortgage when the standard was 6%. The court held this not to be exorbitant.
In Paragon Finance v Nash, the base rate of interest rate dropped but PF kept the high interest rate. The CA held that the lenders cannot alter or maintain interest rates unreasonably, but it wasn’t unreasonable for PF to maintain the interest rate they were charging to N.
In Falco Finance v Gough, increasing the interest rate from 9% to 19.5% on default to be unfair.
Position and Rights of the Mortgagee:
The law also seeks to not discourage mortgage lending to support a strong economy.
Damages for Default:
Due to the contractual nature of the agreement, mortgagees can sue for damages when a borrower defaults on repayments. [7]
This is particularly useful when the order for sale fails to raise enough money to pay off the mortgage debt and the mortgagor has sufficient additional assets to meet the liability. As a personal contractual remedy, this would be valueless if the mortgagor is bankrupt.
Entry into Possession and the Power of Sale:
Lenders may seek possession and sale if a borrower defaults on repayments.
While most mortgages will provision for an express power of sale, it will still be implied into every mortgage made by deed, unless there is a contrary intention. [8]
Possession:
As the lender has a legal estate in the land, they have an immediate right to possession as soon as the mortgage is signed. They, therefore, could exercise their right to possession at any time, even of the borrower is not in default. However, this rarely occurs in practice.
The lender will seek usually possession to make the property vacant before it is sold to recover the mortgage debt. A court order is not required for this, although most borrowers will seek one in cases concerning residential property.
Orders for Possession and Sale:
In the case of residential properties, courts have a discretion to postpone an order for possession if it appears that the borrower is able to pay any sums due (payment arrears) within a reasonable period. [9]
A borrower must present the court with a detailed financial plan which, if implemented, would result in the entire mortgage loan, including arrears, being paid off by the end of the mortgage term. [10]
EG: if a borrower has 13 years left on their mortgage, they may, in addition to repayments, spread out the arrears over this loan period.
In Bristol & West BS v Ellis, on a credible repayment plan, it would’ve taken the borrower ~98 years to pay off the mortgage. The borrower asked to postpone the order for 5 years, so that their son may finish school. The CA rejected this request, because the debt would’ve risen substantially in the 5 year period.
Mortgage lenders are required to explore debt rescheduling options when borrowers struggle to meet repayments. [11]
EG: payment holidays, changing repayment methods, extending repayment terms etc.
Lenders are expected ‘not to repossess the property unless all other reasonable attempts to resolve the position have failed’.
Power of Sale:
Despite the mitigation measures, some borrowers won’t be able to repay what they owe in a reasonable time. Once a court determines this, the lender can seek to exercise their power of sale. [12] This gives the lender the right to transfer legal title to a purchaser, technically overreaching the borrower’s legal title. [13]
When a sale is ordered at the discretion of the court, the mortgagor is likely to lose their home.
Negative equity occurs when the sale cannot cover the debt incurred. In this instance, the lender may also sue for damages (as above) once the land has been sold.
The mortgagee, in exercising their power of sale, must ensure a genuine sale and act in good faith.
Genuine Sale and Good Faith:
Lenders can only possess a property and sell it in order to recover a debt. [14]
Lenders also cannot sell the property to themselves, [15] though they can sell it to associated persons / companies, so long as the transaction is fair.
In Tse Kwong Lam v Wong Chit Sen, a lender sold property to his wife at a barely advertised auction where she was the only bidder. The property wasn’t sold at the market value.
The PC didn’t set the sale aside as the lender ‘in all respects … acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable for the mortgaged property’. Claimant awarded damages for the difference between the price paid and market value.
The mortgage lender is under a duty to take reasonable care to avoid injuring the borrower and obtain the best price reasonably obtainable; [16] they cannot simply sell at a price that only covers their prospective losses. [17]
A sale by open public auctions, even when prices are low, satisfies the duty.
Good faith does not require lenders to wait until the market picks up again before selling. They should seek to get the best price expected under current market conditions. [18]
Mortgages and Undue Influence:
Often, lenders require the borrower, and their partners, signatures on the mortgage so that the partner stands as a surety on the loan. If the borrower fails to meet repayments, the lender may seek possession with a view to selling the property.
The partner may argue that they are a victim of undue influence / misrepresentation when they provided their signature. If this is satisfied, the lender won’t be able to use the partners interest in the property to satisfy the mortgage debt. Additionally, the partner’s interest in the property, coupled with actual occupation, may give the partner an overriding interest that takes priority over the lender’s claim.
In Barclays Bank v O'Brien, types of undue influence:
1 – A overtly misleads or coerces B so they sign,
2 – where the facts suggest A unduly influenced B.
2A – presumption independent of the facts.
2B – substance of the relationship.
Actual Undue Influence (Overtly Misleading or Coercing to Sign):
If actual undue influence can be evidenced, the transaction will be set aside.
Persuasion with full explanation of the risks involved is not undue, even though the influence was actual in the sense that it was causative of the consent.
There is no requirement for the transaction to be ‘manifestly disadvantageous’ in these cases.
Presumed Undue Influence (Facts Suggesting Undue Influence):
Class 2A Cases - Where the relationship between the parties imposes fiduciary duties, it can be presumed that one of the parties agreed because the other holds some special position of expertise or authority.
EG: doctor-patient relationships, but not husband-wife relationships.
Class 2B Cases - Where there is a relationship of trust and confidence, and the relevant transaction was not advantageous to the other party (on its face value, it was ‘manifestly disadvantageous’), it can be presumed that they were unduly influenced because their agreement ‘calls for an explanation’.
Rebutting the Presumption of Undue Influence:
The presumption is not that undue influence exists, but that it will exist if the alleged wrongdoer cannot explain the transaction.
Where undue influence is presumed, the burden of proof shifts. Lenders must establish that the partner was not unduly influenced to rebut a claim of undue influence.
In RBS v Etridge, E used her interest in her matrimonial home as a security for her husband’s debt with RBS. E would not benefit from this. RBS claiming order for sale, but E claiming that her husband unduly influenced her to sign, thus voiding the contract.
The HL held that the lender must show that the partner is aware of the risks involved with the mortgage and that they know, or ought to know, to take independent legal advice before signing. Where this is done, the person cannot claim that they have been unduly influenced.
Note: not applied to existing mortgage arrangements created before the ruling.
While this burdens the lender to show they made sure the partner was not unduly influenced, it is also their defence when the partner alleges that they were unduly influenced to sign. The primary purpose of taking steps to establish independent legal advice is to protect the bank, not stop the undue influence (there may still be a claim against the advising solicitor).
Resources:
References:
[1] See Law of Property Act 1925, s87 [2] Law of Property Act 1925, s85(1) [3] Law of Property Act 1925, s86(1) [4] Fairclough v Swan Brewery [1912] AC 565 [5] Financial Services and Markets Act 2000, or (for mortgages entered into prior to Oct 2004) Consumer Credit Act 1974, s140 [6] Financial Conduct Authority, Mortgages: Conduct of Business Handbook [7] Vedalease Ltd v Cascabel Investments Ltd [2009] 2 EGLR 51 [8] Law of Property Act 1925, s101(1)(i) [9] Administration of Justice Act 1970, s36, amended by Administration of Justice Act 1973, s8(1) [10] Cheltenham & Gloucester B Soc v Norgan [1996] 1 WLR 343 [11] Financial Conduct Authority, Mortgages: Conduct of Business Handbook para 13.3.2A [12] Law of Property Act 1925, s103 [13] Law of Property Act 1925, s2(1)(iii) [14] Quennel v Maltby [1979] 1 WLR 318; Downsview Nominees Ltd v First City Corporation Ltd (No. 1) [1993] AC 295 [15] Williams v Wellingborough Council [1975] 3 All ER 462 [16] Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 [17] Cuckmere Brick Co. v Mutual Finance Ltd. [1971] Ch. 949 [18] EG: Silven Properties v Royal Bank of Scotland [2004] 4 All ER 484
Cases Mentioned:
Samuel v Jarrah [1904] AC 323
Jones v Morgan [2001] EWCA Civ 995
Knightsbridge Estates v Byrne [1939] Ch 441
Kreglinger v New Patagonia Meat & Cold Storage Co. [1914] AC 25
Esso v Harper’s Garage [1965] AC 269
Multiservice Bookbinding Ltd v Marden [1979] Ch. 84
Davies v Directloans [1986] 2 All ER 783
Paragon Finance v Nash [2001] EWCA Civ 1466
Falco Finance v Gough [1999] CCLR 16
Bristol & West BS v Ellis (1996) 73 P&CR 158
Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54
Barclays Bank v O'Brien [1993] UKHL 6
Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44
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