Mortgages

Mortgage = security for a loan, the purpose of the loan being the pruchase of land. The land provides the loan security

Mortgagor = the borrower

Mortgagee = the lender

If the mortgagor can't repay the loan, the mortgagee can take possession of teh land and sell it to recover what it is owed

More than one debt can be secured against same piece of land --> recouped from its value in chronological order

Mortgages as rights in rem --> ecnoomic case for inclusion in numerous clausus -->
- secured loans, in presenting a lower risk will be at lower rates of interest
- ability to make them facilitates greater investment and all the good that this entails

Complex rules on mortgages --> result of balance struck between competing considerations

LPA 1925 subsection 85(2)(a), 87(1)(a) --> mortgage over freehold estate is protected as if it holds a 3000 year lease

LPA 1925 subsection 86(1) --> mortgage over leasehold estate - mortgagee takes estate at least one day shorter than mortgagor's lease 

2002 -->

• charge is only form of mortgage of registered land
• despite name change, such mortgages should have same effect as mortgages by 3000 year lease
• criticism of this as in practice making little difference, and showing how the law is confused and should only grant pure security interests over land

Equity's insistence that a mortgage gives only security rights 

Lease v security rights --> very different things --> by further rules these inappropriate consequences of a lease are substantially removed, os as to produce an approximation to a pure security right after all --> idea of a lease comes from history of mortgages

Right in rem -->

• in theory enforceable not only against mortgagor but also against nearly all TP seeking to establish rights in the land
• if mortgagor defaults and mortgagee seeks to take possession of land, it can - because it's a disponee for value - take the land free of any existing equitable interests in it, unless those interests have been protected by registration or are overriding interests 
• mortgage takes precedence over a disposition of land short of a transfer
  • TP won't be able to prevent you from repossessing by pointing to his interes, and if you sell TP will have no claim against you to a share of the proceeds (although he will have a claim against me to a share of the balance that you pay me after deducting what is due to you)

But in practice does not bind transferee of land --> expect debt to be redeemed using purchase money, so that transferee takes property free from mortgage 

NB - to bind a disponee, rules in LRA 2002 must be observed

• mortgage has to be registered to exist at all
• serves to make it bind
• cannot operate as overriding interest
• appropriate as arises in organised way

Mortgagor usually the weaker party --> larger estate in land but keeping the estate is conditional on satisfying mortgagee's terms

General need to guard against possible exploitative practices --> much of law of mortgages aimed at preventing mortgagees taking unfair advantage of their superior bargaining power

Mains ways in which law guards against mortgagees exploiting mortgagors are through:
- rules against impeding redemption
- rules regulating the imposition of collateral advantages
- rules regulating high interest rates

None of these cateogries of rules is especially robust

Some treat this as evidence of judicial bias towards interests of economically privileged

But message from case law is that strong economy shouldn't discourage mortgage lending --> danger of rigid rules on redemption, collateral advantages and interest rates is that they could adversely affect property market

Judges don't so much favour mortgage lenders as worry about setting precedents which might inhibit mortgage lending

Mortgagees might try to intefere with mortgagor's right to redeem the mortgage. Courts are generally suspicious of such attempts. But right isn't sacrosanct -->

Samuel v Jarrah --> mortgagee reserved an option to purchase mortgage property at any time within period of mortgage --> invalid because if option were exercised the mortgagor's objective in taking out mortgage would be negated

Jones v Morgan - if parties agree to such an option in a contract separate from the mortgage then, irrespective of possible inequality in bargaining power, this will be valid 

General principle = there should be no complete impediment to mortgagor redemption 

But mortgage lenders aren't stopped from making it difficult for mortgagors to redeem e.g. through early redemption penalties 

Furthermore, position/status of mortage lender might be relevant --> Knightsbridge Estates v Byrne -->
- mortgage contained term stipulating that mortgage coulnt' be redeemed within 40 years of its commencement --> term upheld
- because mortgage lender wasn't a bank/building society but a company which depended for its survival on interest repaid on a relatively small number of mortgages
- if mortgagors paid off their mortgages early, the interest repayments - the most important source of company's revenue - disappeared

Solus agreement = give the mortgagee not only te advantage of the interest on teh loan but also the colalteral advantage of the mortgagor marketing and selling their product 

Historically struck down because they were an additional right (these were unenforceable)

Since turn of 20th century some collateral advantages have been upheld --> no overt abandoment of idea that mortgage must give no more than security, but courts have sometimes recognised collateral advantages as valid despite their seeming to have just that effect

So the agreements can be valid --> but 2 provisos

(1) a mortgagee can't continue to enforce the agreement once the redemption date has passed, unless the parties have made an agreement separate from mortgage which enables this

(2) such agreements have tended to be upheld only when they run for fairly short period, e.g. in region of 5 years

E.G - Esso Petroleum v Harper's Garage - 2 solus agreements --> 5 year agreement upheld but 21 year agreement constituted a restraint on trade owing to its duration

Position of courts is that it's simplistic to assum that mortgagor is alwasy a vulnerable party in these arrangments. Mortgagor usually dervies signfiicant advantages from them, and so some degree of tie-in is acceptable

Alleged justifications for approach clustered into 2 approaches

APPROACH 1

• law of mortgages applicable but particular CA contravenes none of its principles
• principle against which approach measure CA is principle requiring that security must always be redeemable
• CA valid if it is express to end not later than date when loan is reapid
• CA even if expressed to extend beyond redemption is valid if security interest can nonetheless lift from the land
• Weakness --> principle against which appraoch measured it correct but too narrow
  • broader idea = mortgage must give only security rights
  • evidence of broader idea = rule that lender's sale power cannot be used for any other purposes than to recoup the debt
  • under broader idea CA unacceptable because they give lender more from mortgage than security alone

APPROACH 2

• in appropriate circumstances the parties' deal for CA does not form part of mortgage trasnaction at all --> unaffected by law of mortgages
• when is CA separate from mortgage?
  • established on different days
  • on same day but in separate documents
• other decisions assert that a tranaction may place me under a debt to you and give you a right of resort to my land for the recoupment of that debt, an dyet not be (or count for this purpose as) a mortgage 
  • treat the classification of such trasnactions as a matter for parties' intentions
  • emphasis of transaction --> loan = mortgage; CA = not mortgage
  • unstable decisions
    • in effect allow parties to opt out of law of mortgages
    • use a highly subjetive tool to discern choice made

Most obvious way mortgagees might exploit mortgagors = setting high interest rates

Financial Services Markets Act (FSMA) 2000 
- requires lenders to lend in a 'responsible' way, taking account of borrower's ability to repay and not setting interest rates of imposing charges which are 'excessive' as compared with those prevailingin the market
- applies to all mortgages entered into since 31 Oct 2004
- no definition of 'excessive'
- FMSA Handbook provides example of good lending practices
- use of vauge owrding due to necessary flexibility --> e.g. interest rates fluctuate

Consumer Credit Act 1974, s 140
- mortgages entered into before FMSA commencment date
- courts have power to reopen and rewrite mortgage agreements if the terms are 'exorbitant or otherwise grossly contravene ordinary principles of fair dealing'
- but courts recognise that a mortgage lending has to be encouraged --> if court doesn't think that there's anything arbitrary or iresponsible about the interest rate that's been set, it will be upheld

Even since the enactmen tof FMSA, courts accpet the princple that high rate of interest charged by mortgagee is not necessarily a sufficient condition for settin g a mortgage aside as excessive --> usually offer at least one of two standard reasons for this:

(1) because the financial situation/credit history of the mortgagor may be such that it is commercially justifiable for the lender to set an unusually high rate

(2) because the mortgagor was borrowing to finance commercial property, and commercial borrowers might be expected to be more realistic about the risks of borrowing at high interest rates

DAMAGES

If mortgagee can't pursure rights as a secured creditor, it might still be able to sue the mortgagor

The mortgagee might also want to sue mortgagor where mortgagee has exercised its rights as a secured creditor but the slae at market value hasn't generated sufficient money to cover the debt (negative equity) 

SALE

Ability to transfer the freehold rests on 2 foundations:
- nature of a charge --> allows you to have resort to charged asset if debt in question is not paid
- detail that relevant rules put into 'have resort to' --> in present context provide for you yourself to sell, and give meaning to this by stipulating that although you do not hold the freehold ownership, your sale nonetheless transfers it

Availability of right to sell --> If mortgagor can't pay any sums due within a reasonble period, the mortgagee can exercise the power of sale (s103 LPA 1925) --> In broad terms if I have missed 2 months' interest payments, or if the mortgage allows you to demand immediate rpayment if I default at all, and you do so, giving me three months to comply, which I do not

Apparent sterness to borrwer mitigated in 2 ways (which would be justified as proportionate in HR if any articles were interefered with):
(1) building society/banks tend not to proceed to sale so quickly, preferring instead to investigate possibility of achieving repayment after all by rescheduling the debt over the remaining mortgage period
(2) hard to sell unless you first gain possession --> ability to obtain possession narrower than theoretical right to sell 

(1) there must be a GENUINE SALE

• in your conduct of actual sale but in no other respect, you must take reasoanble care to obtain a 'fair' or 'true market' or 'proper' price
  • would have to compensate where: 
    • inadvisable accept poor first offer
    • neglect to market house properly
  • but not where
    • make a damaging decision about timing of any sale or about investing in improvement
• mortgage lenders can't sell to themselves --> such sales are 'sham' transactions
• but they can sell to associated persons or companies, so long as the transaction is fair --> Tse Kwong Lam v Wong Chit Sen 
• Criticism
  • difficulties with distinctionb etween actual sale and other aspects of sale process
  • poss to find judicial assertions that eithe rcare is not required even in actual sale adn others that care is requiredin both actual sale and other aspects of sale process
  • Palk v Mortgage Services Funding plc
  • rule should be the same as regards all mortgagee's decision about sale --> but what form would this take?

(2) mortgagee must act in GOOD FAITH

• will do so if act genuinely so as to recoup the amount I owe you, no matter how much you harm me in the process but not if you aim gratuitously to cause me loss
• mortgagee under a duty to take reasonable care to avoid mortgagor
• central point is that mortgagee can't simply seek to sell at a price that only covers its prospective losses
• proceeding in good faith doesn't mean having to wait until market picks up beofre selling --> simply means getting best price to be expected under current market conditions
• presumed (though not required) under FSMA s13(6) that a sale should take place as soon as possible --> presumption being that this is in best interests of mortgagor

FORECLOSURE

To foreclose = lender simply becomes owner of house in borrower's place

Problematic where house worth more than I owe you --> remainder share cannot be transferred to borrower

Recognising its unsatisfactoriness, courts decided to allow it with rider that it can be 'reopened' --> lender ordered to return property to borrower if at some later point the borrwer unexpected manages to pay after all
-- Right to reopen = right in rem --> effective against disponees
-- these measure damaged exploitaiblity of foreclosed land

Modern rule = if a lender seeks to foreclose, the court can order sale instead --> amazing for court to do otherwise --> therefore foreclosure is redundant and should be abolished altogether

Normal to leave borrower in possession

If lender wants to sell land to pay off debt they will have to take possession first, evicting borrower so as to have no problem about offering it for sale with vacant possession --> 'repossession'

Basic rule has one qualification --> borrower can hold on to possession if he will immently be repaying the whole outstanding debt -->

• but 2/3 months max time allowed under this qualification
• if borrower proposes to repay by selling the land, sale will need to be at an advanced stage before court will view porposal as sufficiently solid
• qualification best regarded as procedural matter, designed to prevent pointless cost and upheavl of evicting borrower and installing lender for only a few weeks

Basic rule subject to normal restrictions of equity --> designed to ensure that a mortgage arragnment gives lender only security right --> only 2 reasons why lender may need to possess borrower's land -->
(1) so as to maintain the lands value, so that it continues to secure the amount of debt in question
(2) as a prelim to extracting the value of the debt from it (as a prelude to sale, in order to be able to sell with vacant possession)

2 riders on basic rule --> partly align it with these principles

Reformulated in accordance with the principles by CA in Q v M, but many refuse to accept this decision

RIDER 1

Modern lender can charge interest, so does not need posession in order to generate a return on his loan --> if he takes possession he is not allowed to keep the financial benefits of doing so --> must pay borrower the profit he makes or could make from it

RIDER 2

Administration of Justice Act 1970, s 36

• court should noramlly refuse possession if borrwer seems likely tob e able to pay debt over a period up to planned term, and land's value is sufficient to secure outstanding debt in meantime
• if lender denied possession under this rule, any further lapses by borrwer normally result in immediate eviction 
• confined to domestic residences
• applies only where lender sues for possession, not wheer he enters in borrwer's absence and prevents borrower from returning; nor where he sells, leaving purchaser to take possession 
• this is likely to make lender's repossessio of borrower's home proportionate, assuming it engages ECHR rights at all --> but only for a domestic residence

Administration of Justice Acts

• In case of residential properties, courts have a discretion under the Administration of Justice Act 19970, s36 to postpone a court order for possession if it appears that the mrotgagor is likely to be able to pay any sums due within a reasonable period
• this stat provision = flawed --> default clause in many mortgages that if you miss a particular number of repayments then at that stage you're in default and that means you're liable to repay the entire loan immediately --> e.g. Halifax Building Society v Clark
• Parliament remedied the problem with AJA 1973, s8(1) --> 'any sums due' only applies to arrears and not the amount that the mortgage says is payable on default
• no s8 jurisdiction if the mortgage lender takes possession without the need for a court order
• 'within a reasonable period' --> Cheltenham --> must present to court a detailed financial plan which, if implemented, would result in entire mortgage loan, inc arrears, being paid off by end of mortgage term
• but if mortgagor can't come up with a convincing repayment plan, the most likley outcome is that there will be no postponement of possession and mortgagee will go ahead and exercise right to possess 

Quennell v Maltby 

• lender wished to take possession of mortgaged land for reasons unconnected with obtaining repayment of debt
• court refused -->
  • referred to overarching equtiable principle
  • on that basis asserted that possession can be had only where it is sought for that purpose, and represents a reasonble way of delivering it
• suggests that even where a lender sought to recoup his loan, he could nonetheless not take possession unless this was a proportionate means to that end
• decision is isolated and has been rejected by many
• reasoning for rejection not good enough --> it conflicts with HR and is inconsistent with overarching equitable principle

Reconciling sale and possession

• rules for possession are narrower and more favourable to borrower
• disparities are unnecessary and unjustified
• where s36 applies law seems to suggest that lender can sell more often than he can claim possession in order to do so
• alignment of rules should be on lines of possession rule --> nothing wider can be justified
• diverge too in case of negative equity

Undue influence is a vitiating factor which convinces a court that a person's consent to a trasnaction ought not to be treated as the express of that person's will 

Barclays Bank v Obrien 

RBS v Etridge 

Unconscionability

• profile for mortgages may differ from other types of contract
•  straightforward exploitation of superior bargaining power may be sufficient
• appears to be no warrant for this difference
• does not opearte in all or nothign way thtat other vitiating factors do --> can be rewrriten into an acceptable form by courts