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Mortgages Notes

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Land 4- Mortgages Introduction A mortgage can only take place in two ways (s.85 LPA):


A demise for a term of years absolute, subject to a cessor on redemption (i.e. a lease to the mortgagee for 3000 years if no term is stated in the agreement, subject to a right of redemption i.e. a right to end the lease once all the money is paid back). The legal right to redeem expires on the contractual 'date for redemption', but an equitable right to redeem persists after this date, meaning that if the mortgagee exercises his power to sell (see below) and there is a positive difference between the proceeds of the sale and the money owed to the lender is owned by the mortgagor (positive equity) whereas if the proceeds are less than the amount owed, the borrower still owes money to the mortgagee (negative equity).


A charge over the property (this is the only method permitted for registered land-s.23 LRA): This is a security right, meaning that if the mortgagor goes bankrupt and cant repay, the mortgagee gets priority in bankruptcy by having resort to the property subject to the charge (i.e. the right to sell it) and use the proceeds towards repayment. This is a right to compel the owner to use the property in this way, but keeps legal title to the property/its proceeds with the mortgagor, so that any excess money goes back to him. If

the loan is paid off by the contractually agreed date then the security ends. BUT the law views a charge over land as equivalent (i.e. conferring the same rights and powers) to a 3000 year lease from the mortgagor to the mortgagee (s.87 LPA). Legal Charges can be registered (s.40 LRA 2002), which protects their priority over other interests.


NB historical pre-LPA 1925 approach was for the mortgagor to confer freehold title on mortgagee subject to the right of redemption. If redemption not made in common law by date of redemption then the freehold would be kept by the mortgagee at common law. However equity viewed the arrangement in reality as a loan with security, and therefore created the equitable right of redemption (the 'equity of redemption), which lasted beyond the date of redemption, so that if the mortgagee sold the house, thus making up any outstanding amounts still owed by the mortgagor, then the mortgagor was entitled to the money representing the difference between what he still owed and what the sale produced (positive equity).

The idea of a mortgage Fairclough v Swan Brewery [1912] AC 565: P bought a property from X who had given a mortgage to D. The mortgage had included a term stating that it could not be paid off (and hence the interest redeemed) until the last six weeks of the 21 year lease. HL held that this contradicted the requirement of redeemability of the mortgage. Lord Macnaghton: "equity will not permit any device or contrivance being part of the mortgage transaction or contemporaneous with it to prevent or impede redemption." Knightsbridge Estates v Byrne [1939] Ch 441: P mortgaged property to D on the basis that payment would take place at a set rate of interest per year over 40 years. CA held that this did not contradict the requirement for redemption. Sir Wilfred Greene MR: A term postponing repayment (and redemption) over a long period of time is not necessarily a clog on redemption and does not have to be for a "reasonable" time only, as this would be an impediment to business. However he acknowledges that "where the contractual right of redemption is illusory, equity will grant relief by allowing redemption", as established in Fairclough. "Equity may give relief against contractual terms in a mortgage transaction if they are oppressive or unconscionable". Creation LPA 1925: S.85: (1) Mortgages have to allow redemption. (2) a first mortgage = 3000 year lease; a second mortgage is one day longer. S.205(xvi): Mortgage" includes any charge or lien on any property for securing money or money's worth; "legal mortgage" means a mortgage by demise or subdemise or a charge by way of legal mortgage and "legal mortgage" has a corresponding meaning LP(MP)A 1989 s 2: (1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each. (2) The terms may be incorporated in a document either by being set out in it or by reference to some other document. (3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract. (4) Where a contract for the sale or other disposition of an interest in land satisfies the conditions of this section by reason only of the rectification of one or more documents in

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