#19932 - Mortgages - Land Law

Mortgages

Mortgage = security for a loan, purpose of the loan being to finance the purchase of land, which provides the loan security.

• Mortgagor = the borrower.

• Mortgagee = the lender (traditionally a building society or bank).

• The mortgage is a loan with security attached. The land is the security for the loan. You can buy the land with the loan, but if you default on the loan, mortgagee gets the land from you because of security. They can take possession of the land and sell it to recover what is owed.

Key problems

• Mortgagor can’t meet the repayments - how long will the law tolerate not repaying

• Mortgagor wants to pay off (redeem) the mortgage before the redemption (completion) date.

  • Mortgage lender does not want this because the longer this continues, the more they get for interest

• Mortgagor’s partner complains that the mortgagor obtained her consent to the mortgage through undue influence.

  • In the event that you fail to pay your mortgage, your partner is not going to complain and say that they are in actual occupation - forgo their ability to claim an overriding interest

Mortgage creation

• LPA 1925, s 85(1)L When a mortgage is created over a freehold estate, the mortgagee is protected as if it holds a 3,000 year lease in the mortgaged land: So the lender doesn’t get the freehold (what the mortgagor has) but gets the next largest legal estate conceivable.

  • Ensures that they both have a legal estate

• LPA 1925, s 86(1): If the mortgagor holds a leasehold estate, mortgagee takes an estate at least one day shorter than the mortgagor’s lease ensures that nobody apart from the mortgagor will have a bigger right to the estate than the mortgage lender.

• Why should the mortgagee have a legal estate in the mortgaged land? Why not just say that a mortgage is a loan, a contractual condition of which is that the land is security?

  • Because mortgagee wants a right in rem, enforceable not only against mortgagor but also against other parties seeking to establish rights in the land.

• The fact that the mortgagee has a legal estate over the mortgaged land means that it’s a disponee for value and so its rights in the land should take priority over other parties’ rights (thoughWilliams & Glyn’s Bank v Boland where the court can rule in favour of the person with the overriding interest

  • Courts have the discretion

  • s15D TOLATA: where there is a dispute in land, court must take into account the interests of secure creditors

Position and rights of the mortgagor

• The mortgagor is usually the ‘weaker party’. Although she has the largest legal estate in the land, keeping that estate is conditional on paying off the mortgage.The fact that the mortgage relationship is one of debt between an economically weaker and an economically stronger party means that there is a general need to guard against possible exploitative practices. Much of the law of mortgages is aimed at preventing mortgagees taking unfair advantage of their superior bargaining power.

• There are three main sets of rules aimed at protecting mortgagors:

1. Rules against impeding redemption

• Redeeming mortgage = bringing it to an end

• Mortagor wants to redeem the mortgage but mortgagee does not want that because of increasing interest monthly

2. Rules regulating the imposition of collateral advantages; and

• Not just interest, there will sometimes be commercial mortgages where a mortgage is provided but they will sell their products. Problem as it places companies in a position that in market terms, they are not competitive

3. Rules regulating high interest rates.

• Charging high interest rates when you default on the mortgage

• All three categories of rules give mortgagees considerable leeway in their dealings with borrowers BUT these rules are flexible

• The abiding message from case law is that a strong economy shouldn’t discourage mortgage lending, From this perspective, judges and parliament haven’t so much favoured mortgage lenders as tried to avoid creating rules which inhibit mortgage lending.

1. Impeding redemption

   • Sometimes, mortgagees try to interfere with the mortgagor’s right to redeem the mortgage.

   • Courts are generally suspicious of such attempts. But the right isn’t sacrosanct. So:

   • Samuel v Jarrah [1904]: mortgagee reserved an option to purchase the mortgaged property at any time within the period of the mortgage. Held invalid. If the option were exercised, the mortgagor’s objective in taking out the mortgage would be negated …

     • Cannot make mortgages unfair in a way that is contrary to public policy or equitable principles

   • But compare Jones v Morgan [2001]: suggested that if the parties agree to such an option in “a collateral contract” [61], separate from the mortgage (in Jones the majority thought there wasn’t such an option whereas Pill LJ thought there was), then it’s is prima facie valid. (Obiter)

     • Mortgages tend to be complicated documents, and so it’s conceivable that a mortgagor could waive a right to redemption contained in a mortgage without realizing. But if the waiver takes effect because the mortgagor has signed a separate contract specifically forsaking the right, a court will (absent evidence of duress) presume this to have been done deliberately.

   • The general principle: there should be no complete impediment to mortgagor redemption – i.e., if you can pay off your mortgage you should be allowed to pay it off: Fairclough v Swan Brewery [1912]

   • But mortgage lenders aren’t stopped from making it difficult for mortgagors to redeem:

     • e.g. through early redemption penalties (e.g. mortgagor to pay extra 10,000 if loan fully repaid within fixed-rate loan period).

   • The position and status of the mortgage lender can also be relevant …

   • Knightsbridge Estates v Byrne [1939] (bespoke mortgage)

     • Mortgage contained term stipulating that it couldn’t be redeemed within 40 years from commencement.

     • The term was upheld. Knightsbridge Estates made it clear that in the mortgage, it had to run for its entire length.

     • The mortgage lender wasn’t a bank or a building society but the company’s survival which depended on the interest repaid on a relatively small number of mortgages. If its mortgagors paid off their mortgages early, the interest repayments – the most important source of the company’s revenue – disappeared. (This is why the company stipulated that its mortgages had to run for 40 years.)

2. Collateral advantages

• Sometimes, mortgagor and mortgagee will be in the same line of business e.g. pubs + breweries, petrol stations + oil companies.

• The mortgagee might try to make it a condition of the mortgage that the mortgagor sells its product (solus agreement)

• 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.

• In the C19th, the courts didn’t allow solus agreements. But things changed in the C20th. The market said otherwise and judges recognized that though these agreements tie the mortgagor to selling the mortgagee’s product, the mortgagor usually gets a favourable loan rate in return.

• The turning point: Kreglinger v New Patagonia Meat & Cold Storage Co. [1914]: HL held that a five-year tie in arrangement wasn’t oppressive and unconscionable given that both parties were commercial actors, that the lender had negotiated a price for the tie-in arrangement, and that the terms of the tie-in were set out in a contract separate from the mortgage.

• Solus agreements upheld after Kreglinger have tended to be of a similar duration to the one at issue in that case:

  • Esso v Harper’s Garage [1965](two mortgages with solus agreements, one running for 5 years, the other for 21. 5-year agreement held valid, but 21-year agreement held to be in restraint of trade).

• Problem: how long can these arrangements last for? Can they last for the entire duration of the mortgage?

  • Although Esso allowed 5 year agreement and did not allow 21 year, what about the middle ground? Still vague

• The courts haven’t treated solus agreements as anti-competitive when they commit the mortgagor to selling the mortgagee’s but not only the mortgagee’s product (note: this is also the position taken by the CJEU when interpreting art. 101 TFEU).

3. High interest rates

• Most obvious way mortgagees might exploit mortgagors is setting high interest rates. e.g. by increasing interest rates on default.

• Today, the legislation regulating mortgage rates is the Financial Services and Markets Act (FSMA) 2000, as administered by the Financial Conduct Authority (FCA).

• The FSMA requires lenders 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 which are ‘excessive’ as compared with those prevailing in the market. (This legislation applies to all mortgages entered into since 31 October 2004.)

• The FSMA provides no definition of ‘excessive’.

  • ‘Excessive’ is a subjective term

  • Interests rates change so cannot have a threshold

• Instead, FCA’s Mortgages: Conduct of Business Handbook (MCOB) provides examples of good lending practice (such as making mortgagors fully aware of their liabilities and not imposing hidden charges).

• Courts rarely interfere with high interest rates, even when interest rates in the economy have been high. This is because:

  • mortgage lending is to be encouraged; and

  • truly excessive interest rates are rarely set on secured loans (interest rates on secured loans are usually lower than they are on unsecured loans because the security makes them a lower risk).

• And...