#19940 - Pq Map Mortgages - Land Law

Mortgages

Step 1: Creating the mortgage

• S87 LPA 1925: Only way to create a mortgage. Created by deed and needs to be registered as a charge

• s27ss2, LRA 2002. If missing, you will have an equitable mortgage which won’t bind the world.

• Freehold: LPA 1925 s85(1): mortgagee holds 3000year lease over mortgaged land. Doesn’t get freehold.

• Leasehold: LPA 1925 s86(1) Mortgagee takes an estate at least one day shorter than the mortgagor’s lease.

• In this way, the lender gets a right in rem (this is a charge), enforceable against the mortgagor and other parties.

Step 2: Rights of the Mortgagor (Borrower)

3 main rules for protecting mortgagor:

1. Rules against impeding redemption

1. General Rule – The Mortgage cannot be made irredeemable

Fairclough v Swan Brewery [1912]:

• A mortgage is not a conveyance, but a security for a loan. Any provision causing the mortgagor to give up his right is void.

Jones v Morgan (2011)

• Any undue postponement/limitation on M’s right to redeem will be unenforceable.

• The right to redeem cannot be limited to certain people or certain periods of time

Dixon Residential mortgage provision stopping M from redeeming for 20y unless M pays addition 15% “redemption fee” is likely to be void. Tending towards irredeemability.

Samuel v Jarrah Timber [1904]

• Mortgagee reserved option to purchase property any time within period of mortgage.

• If not invalidated, Mortgagor’s objective (purpose of mortgage) would be negated.

2. However, a mortgagor can still make it difficult for a mortgagee to redeem

Knightsbridge Estates v Byrne [1939]

• Principle: Position & status of the lender should be considered. Term can’t be illusory.

• Mortgage term prevented redemption within 40y. The term was upheld. The Mortgagee was a small company (not bank), depending on a few mortgages. If clients redeemed early, the interest repayments (revenue stream) would disappear

3. Right to redeem isn’t sacrosanct in collateral contracts. But courts suspicious of interference with the right

Samuel v Timber: A provision allowing Mortgagee to purchase property is void.

Jones v Morgan [2001]: Collateral Contract

• Such an option in “a collateral contract”, separate & independent from mortgage is valid.

• Rationale: shows this was done deliberately. If in mortgage contract, M not realised.

• Here, (invalid) document was treated as a variation of the mortgage and as part of it.

Warnborough Ltd v Garmite (2003)

• This is a question of substance, not form. What appeared to be a purchase clause was actually a complex sale and repurchase transaction.

2. Rules regulating the imposition of collateral advantages (solus agreements); and

1. Mortgagee may try to make Mortgagor sell its products as a condition of the. Usually unfair: double advantage.

Kreglinger [1914]

• Valid: not oppressive or unconscionable, both parties commercial, price negotiated, set out in contract separate to the mortgage.

2. The duration of the solus agreement is relevant. Usually, mustn’t run for entire length of the mortgage

Esso v Harper’s (1965)

• 2 mortgages w/ solus agreements, one running for 5y (valid), other for 21 (restraint on trade). Anti-competitive when compelling sale of Mortgagee’s product only. Ok if other’s stuff sold too.

• This is also the position taken by the CJEU when interpreting art.101 TFEU.

3. Rules regulating high interest rates and unconscionable terms

1. Unconscionable Terms (bad bargain)

Multiservice Bookbinding Ltd v Marden (1979)

• Principle: Unreasonable interest rate not enough, bargain had to be unconscionable.

• A term will be unconscionable (and unenforceable) where it is in substance objectionable and imposed in a morally reprehensible manner.

• Consider: size of interest rate, nature of the parties, their commercial experience, and the context within which the loan was granted.

Cityland v Dabrah: Unconscionable term: interest rate amounted to 57%. Placed fetter on right of redemption.

Jones v Morgan: Bad bargain: mortgage itself wasn’t unconscionable because M had legal advice & options.

Dixon: Courts have jurisdiction to intervene in mortgages on unconscionability grounds.

2. High interest rates

FSMA 2000 requirements (entered after 31/10/04)

• The FSMA requires lenders to: (doesn’t/can’t define “excessive”): Lend in a ‘responsible’ way, take account of the borrower’s ability to repay and avoid setting ‘excessive’ interest rates (or charges) as compared with rest of market.

CCA 1974 s140 : Interfere if terms ‘exorbitant or otherwise grossly contravene ordinary principles of fair dealing’.

Good lending practice:

FCA’s MCOB Handbook: Provides examples of good lending practice (but no hard rules 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

Multiservice Bookbinding Ltd v Marden [1979]

• Interest rate was 25% higher than normal, upheld anyway. This is because parties agreed to index-link loan to CHF, not GBP.

• Significance was attached to the fact that both parties were business-people.

Davies v Directloans [1986] 2 All ER 783

• Mortgage lender raised interest rate to 22% on a 10-year mortgage (standard repayment interest rate was 6%). Held not exorbitant under the CCA.

Paragon Finance v Nash [2001]

• Base rate of interest dropped but PF kept interest rate high. Valid.

• CA held: a) mortgage lenders can’t alter or maintain interest rates unreasonably, but also b) PF wasn’t unreasonable in maintaining interest rate charged to N.

• Fine to raise interest rates so high, that borrowers seek refinance elsewhere.

However, note:

• Falco Finance v Gough [1999]

  • 16.9% interest rate raised to 19.5% on default: unfair. Outlier case.

  • Look at this case to see the difference with Paragon. Unfair because: interest payable on loan’s whole amount & period resulting in considerably higher interest than standard calculation method + ambiguously stated.

Step 3: Rights of the Mortgagee (Lender)

Power of sale: before a sale, the mortgagee will often want to take possession of the house & want it vacated

Horsham Properties v Clarke and Beech (2009)

• Mortgagee can sell property to X, even if mortgagor remains there s101(i) LPA

• Mortgagee sold house, making M a trespasser in own home. Didn’t violate HRA.

• Couldn’t rely on s36, AJA 1970, because it’s for when mortgagee seeks possession.

Ropaigealach v Barclays Bank (1999)

• Mortgagee has immediate right to possession upon signing of mortgage, even without court order. But, it cannot use or threaten force (reason to seek court order).

• M can take possession whenever, even if B isn’t in default, subject to provisions/statue

White v City of London Brewery (1889)

• A mortgagee in possession of the mortgaged premises will be called to account strictly for any income generated by their possession

• Owe money to Mortgagor if income received > money owed. Commercial Ms don’t seek possession.

What can the mortgagor do to stop possession:

Element 1: Can Mortgagor postpone Mortgagee’s s right to possession, via statutory restriction?

Discretion to postpone court order

Administration of Justice Act (AJA) 1970, s 36: Discretion to postpone/suspend court possession order if mortgagor can pay ‘any sums due within a reasonable period’.

• Only for residential properties, status assessed when possession was sought (RBS v Miller)

• It only applies to orders for possession by the mortgagee. (Harsham Properties)

• If the mortgagee takes possession without a court order it will not apply (Ropiagelach)

• Any due sums = arrears, not entire loan. (clarified in s8(1) AJA 1973).

1. Meaning of reasonable period

Cheltenham & Gloucester B Soc v Norgan [1996]

• Principle: For s36 protection M must present a detailed financial plan which shows their ability to repay the entire loan + arrears, by the end of the mortgage term.

• Reasonable period=whole term of the mortgage (Waite LJ), could be less or more

• Consider whether Mortgagee’s security is put at risk due to postponement.

• If M defaults again, end of the line. How much can M reasonable afford to pay?

Bristol & West BS v Ellis (1996)

• On credible repayment plan, it would’ve taken M 98y to repay. M asked to postpone 5y so son could finish school. CA rejected, as M’s debt would’ve risen substantially.

2. However, note forbearance (action of refraining from exercising a legal right, especially enforcing the payment of a debt)

MCOB s 13, enforceable by FSMA s138(1))

• s36 & Cheltenham & Gloucester B Soc v Norgan apple less often because FCA requires mortgagees to explore debt rescheduling options before s36, when borrowers struggle to meet repayments.

• Lenders are expected “not to repossess the property unless all other reasonable attempts to resolve the position have failed” (MCOB para 13.3.2A). eg payment holidays due to COVID.

3. If mortgagor was going to sell the house

N&P Bank v Lloyd

• If firm evidence of sale that would cover full mortgage amount (Krausz (1997)), court can postpone possession under s36. Not enough if sale ‘might’ occur.

4. Other limitations on right of possession

Massey (1997): Can’t grant possession if 2 JTs and mortgage binding on...