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Mortgagor - the borrower
Mortgagee - the lender
People often refer to purchasers as obtaining a mortgage, however this is technically inaccurate. The purchaser will obtain a loan, however the mortgage is the security interest, and it is the purchaser who creates it in favour of the lender
What is a mortgage?
A mortgage is a security interest. If A is under an obligation to B (normally a debt), then A
may secure the obligation by giving rights over property to B. The advantage to B is plain: if
A is unable to pay the debt, then B can sell the secured property and use the proceeds to pay off the debt.
A will therefore find it easier to obtain a loan and the rate of interest will be much lower than if the loan were unsecured
Today nearly all mortgages take the form of a legal charge, though the mortgage has undergone a confused history.
The LPA 1925 established that, instead of the fee simple, the mortgagee of land could have no more than a lease
This would be a lease for 3000 years where no term was specified
The LPA 1925 also introduced the mortgage by legal charge. According to this, the mortgagee would receive no property right such as a fee simple or lease, but would receive a pure security right
BUT: this is immediately compromised by defining the rights of the mortgagee as being identical to those as if there had been a lease for 3000 years - a legal charge, then, is a legal interest in property
The LRA 2002 made it impossible to create a mortgage by demise (by lease)
in registered land and thus nearly all mortgages are today created by legal charge
There are two standard forms of mortgage which are used to finance a house purchase:
(a) Repayment mortgage - a constant monthly payment (subject to interest rate changes) over an agreed period, which may be up to 40 years
(b) Interest-only mortgage - constant monthly payments which only pay off the interest on the borrowed amount, not the borrowed amount itself How are mortgages acquired?
There are two requirements for the creation of a mortgage (and a third that is almost always essential):
(a) Deed -
a. s23(1)(a) LRA 2002
(b) An intention to create a mortgage -
a. It will normally be clear that a mortgage is intended from the deed agreement, however sometimes the document may take the form of an old absolute transfer.
i. In this situation the courts will look towards the substance of the transaction
1. Despite s85 preventing the creation of mortgages other than by lease or legal charge, s85(2) provides that an express conveyance of the free simple on mortgage takes effect as a lease for 3000 years a. In Grangeside Properties Ltd v Collingwood Securities
Ltd, the Court of Appeal held that this subsection applies equally well where the mortgage is proved from extrinsic evidence i. Harman LJ said that "Once a mortgage always a mortgage and nothing but a mortgage has been a principle for centuries"
2. BUT: s85(2) no longer operates as legal mortgages cannot be created by demise. It now must be the case that the register must be conclusive that the fee simple is vested in the lender a. Thus, the court in HSBC Bank plc v Dyche held that there was a CICT binding the lender where such a transfer did take place i. This decision can be criticised as bringing the complicated rules of overreaching into mortgages
(c) Registration a. Per the LRA 2002:
i. s27(2)(f) - the grant of a legal charge must be registered ii. s4(1)(g) - the creation of a first legal mortgage of a qualifying estate must be registered
Difficult situations often arise between husband and wife, where a husband will mortgage the house without telling the wife, and the husband ultimately defaults on his mortgage repayments.
There will be no effective mortgage if the signature is forced or if consent is negated by the defence of nonest factum. The difficulty arises where there is a signature but no comprehension of its effect. There are two routes by which a mortgage of this kind might be attacked:
(a) Inequality of bargaining power - this involves argues that the mortgagee, usually a bank, owes a direct duty to the parent or wife in question a. This rarely succeeds, despite attempts by Lord Denning to introduce a principle of inequality of bargaining power the House of Lords rejected this
(b) Undue influence -
a. Previously, a tripartite structure governed the question of undue influence per Lord Browne-Wilkinson in Barclays Bank plc v O'Brien b. This test proved too difficult for the courts to apply and thus was replaced by
Lord Nicholls in Royal Bank of Scotland plc v Etridge (No 2)
There are two types of undue influence:
(a) Actual undue influence - this occurs where C proves that a relationship of undue influence existed at the time of entering in to the relevant transaction -
a. in Libya Investment Authority v Goldman Sachs International, Rose J
identified two strands of actual undue influence:
i. Where there has been an improper threat or inducement - in Etridge
Lord Nicholls said that actual undue influence 'comprises overt acts of improper pressure or coercion such as unlawful threats'
ii. Where the relationship of influence must have been such that C could not have exercised his free will
1. In Williams v Bayley Lord Westbury emphasised that B had not acted as a free and voluntary agent due to the threats relating to his son's criminal acts
2. The courts have asked whether C was the "mere puppet" of D
(Lloyd's Bank Ltd v Bundy)
b. It does not need to be that case that the undue influence was the but-for reason for entering the contract, simply being a reason will be sufficient
(BCCI v Aboody)
(b) Presumed undue influence - this occurs where C proves primary facts which leads to a rebuttable presumption of further facts necessary to ground an undue influence claim a. In RBS v Etridge (No 2), Lord Nicholls asserted there two be two facts to be proved in order to form the rebuttable presumption i. A relationship of trust and confidence - certain relationships will automatically be placed under this heading: (i) parent and child, (ii)
guardian and ward, (iii) trustee and beneficiary, (iv) trustee and beneficiary, (v) solicitor and client, and (vi) medical adviser and patient
1. A husband and wife relationship is not immediately treated as such 2. In National Westminster Bank v Morgan the HoL was not satisfied that the relationship went beyond the normal business relationship between banker and customer ii. That the transaction calls for explanation - per Lord Nicholls in
Etridge, the question is whether 'the gift is so large as to not be reasonably accounted for on the ground of friendship, relationship,
charity or other gift'
b. The most common way of rebutting the presumption of undue influence is to show that C received independent legal advice to ensure that he understood exactly what he was doing at the time that he entered in to the transaction i. The archetypal case sees a husband (D) attempt to raise money for the purpose of assisting his business. The bank will only lend in exchange for a charge or security or over the family's home, which D
owns jointly with his wife (C). C agrees. Per Etridge, the contract between the bank and C maybe set aside even though the undue influence was exerted by D, so long as the bank had actual or constructive knowledge of D's undue influence
1. Lord Browne Wilkinson established three main elements for establishing constructive notice of the undue influence:
a. The bank is aware of the relationship of trust and confidence between C and D
b. The transaction, on its face, must not be to the financial advantage of C
c. The bank failed to take reasonable steps to be satisfied that the transaction was freely entered in to by C
i. Reasonable steps include:
1. Advising independent legal advice after a private meeting with C
2. And insisting upon such advice if further facts indicating undue influence are known to the bank ii. If the bank ensures such advice then they are not responsible for defective legal advice
How does a mortgage protect the mortgagor?
The mortgagor has the following protections available to him:
The Right to Redeem
We should distinguish between three difference senses of the right to redeem (that is, a right to pay off the loan and terminate the mortgage):
(a) Legal right to redeem -
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