Mortgages in English law

Last updated

Mortgages in English law are a method of raising capital through a loan contract. Typically with a bank, the lender/mortgagee gives money to the borrower/mortgagor, who uses their property/land/home as security (essentially a reassurance) that they will repay the debt and any relevant interest. If the mortgagor fails to repay, then the mortgaged property which has been used as security may be subject to various mortgagee remedies allowing them to retrieve the debt. Mortgages are an important part of English land law and property law. These concern, first, the common law, statutory and regulatory rules to protect the mortgagor (i.e. the borrower) at the time of concluding the mortgage agreement. Second, English law defines and restricts the process for taking possession of property in the event of default. Third, it places duties on mortgagees (i.e. lenders, like banks) on the price it achieves when selling property.

Contents

Although most of the law relating to mortgages relates to mortgages of land, it is possible to mortgage almost any type of property. Mortgages over personal property are often referred to as 'chattel mortgages', [1] and mortgages over intangible rights are often expressed to operate by way of assignment. [2] Separate statutory regimes also exist in relation to mortgages of ships under the Merchant Shipping Act 1995 and mortgages of aircraft and related parts under the Cape Town Convention.

Technically the term "mortgage" refers to the security interest in the collateral, but in commercial parlance the term is often used inclusively as a reference to the entire secured lending arrangement.

The law of mortgages is notoriously complex. In a 1986 working paper relating to land mortgages, the Law Commission commenced thus:

"The English law of land mortgages is notoriously difficult. It has never been subjected to systematic statutory reform, and over centuries of gradual evolution it has acquired a multi-layered structure that is historically fascinating but inappropriately and sometimes unnecessarily complicated." [3]

Slightly more pithily, Lord Macnaghten once commented in a judgment: "no one, I am sure, by the light of nature ever understood an English mortgage of real estate." [4]

History

Like many aspects of English law, the law relating to mortgages is closely tied up with its historical development. Mortgages have existed in English law since the 12th century, but early English mortgages were largely shaped by usury laws. At the time charging interest was both against the law, and a sin. [5] Accordingly, upon the grant of a mortgage, the mortgagee would come into possession of the land - if the income arising from the land paid down the mortgage debt it was referred to as a live pledge (or vivum vaidum) but if the mortgagee simply took those proceeds and the debt was unchanged it was called a dead pledge (originally a mortuum vadium, which later was replaced by the Norman French, morte gage which eventually became mortgage).

By the 1400s the form of mortgages had changed somewhat - mortgages were still created by transferring ownership of the land to the mortgagee, but the mortgagor remained in possession to work the land. However, on the stated day for redemption the mortgagor had to pay the full amount of the debt, otherwise they would lose their right to redeem and the land would belong to the mortgagee absolutely. This was doubly draconian as not only did the mortgagor lose their land, but the debt remained and still had to be repaid. [6] However, as the law became less restrictive in relation to the charging of interest due to the passage of successive Usury Acts, and as society's attitudes changed, mortgages became more widely used, and the courts of Chancery became increasingly interested in protecting people from the severity of the common law rules relating to redemption.

By developing a series of equitable doctrines the Courts of Chancery increasingly gave greater protection to mortgagors. They held that a mortgagee in possession had to account for all rents received on the property, [7] and provide a degree of protection where the mortgagor was late in repaying the loan. [8] In effect the Courts of Chancery "transformed mortgages from instruments of extortion to a convenient and flexible instrument of commerce." [9]

Even though the effect of a mortgage was to transfer legal title to the mortgagee, the Courts of Chancery recognised that the mortgagor had a separate species of property right in equity, which came to be known as the "equity of redemption". Similar to this, a separate but confusingly similarly named right existed, which was the equitable right to redeem. [10] [11]

In relation to land, the next great reforms were under the Law of Property Act 1925 which restricted mortgages to two types: a mortgage by demise (as to which, see below) and a mortgage by statutory charge. With the passage of time the mortgage by demise has become almost completely obsolete, [12] and today almost all mortgages of land in England and Wales are by way of statutory charge.

Mortgages have also existed in relation to personal property (as opposed to land) for a considerable period of time, although for much of English legal history security over personal property was usually executed by way of pledge rather than by way of mortgage. However, by the Victorian era mortgages of personal property were sufficiently widespread that the legislature enacted the Bills of Sale Acts to try and regulate this area of the law. Mortgages of ships have been regulated by statute since at least 1894, and clearly existed for some time before that. [13]

Creation of a mortgage

While real property may be divided among co-owners and tenants for the purpose of the land's use and enjoyment, taking a mortgage of property primarily serves the purpose of ensuring loans are repaid. Because of the nature of money lending, and frequently unequal bargaining power between banks and borrowers, the law gives significant legal protection to borrowers against the enforcement of unfair bargains. Along with pledges, liens and equitable charges, English law counts a mortgage as one of four main kinds of security interest, whereby a proprietary right that binds third parties is said to arise on conclusion of a contract. It must simply be the contract's intention to make property available to secure repayment. The Law of Property Act 1925 section 85 say that a mortgage requires a deed (under LPMPA 1989 section 1, a document that is signed, witnessed and states it is a deed). Under the Land Registration Act 2002 sections 23 and 27, a notice of a mortgage must be filed with HM Land Registry for the mortgage to be effective. Then, Law of Property Act 1925, section 87 says mortgages confer upon the mortgagee (i.e. the secured lender) the same rights as a 3000-year lease holder.

Protection of borrowers

Equity of redemption

The reason for this reference to "3000 years" is that in a primitive protective measure, the common law said mortgage terms must always allow for the property to be redeemed in the end, when the debt is repaid. In the 18th century decision of Vernon v Bethell [14] Lord Henley LC refused to enforce the conveyance of Vernon's sugar plantation in Antigua to a deceased London lender, Bethell, when Vernon had trouble repaying, even though some exchanges between the two had raised the possibility of giving up the land to satisfy the debt. Given the considerable interest paid already, Lord Henley LC held it would frustrate (or "clog") Vernon's right to redeem property. As he put it protection for the borrower was warranted because "necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them". Accordingly, the rule developed that "once a mortgage, always a mortgage", [15] meaning a mortgage cannot be turned into a conveyance of the property by the operation of terms in an agreement. It means that a lender may at most sell a property to realise its value, but may not take ownership, and the borrower must always practically be able to get back the property. The rule was suspended for companies by the Companies Act 2006 section 739, and was criticised in Jones v Morgan for being inappropriate in commerce, [16] but it still survives as a rudimentary common law method to protecting vulnerable borrowers.

The most relevant protective measure at common law today is the right of borrowers to cancel mortgages if they were misrepresented about the mortgage's terms, or if they entered agreements because of under influence. In the leading case, Royal Bank of Scotland v Etridge (No 2) , a group of appeals all involved a husband allegedly pressuring his wife into signing a mortgage agreement with a bank, where security was over the family home. [17] The House of Lords agreed that undue influence would make a contract voidable, and if a bank should have realised this possibility, it could not enforce the mortgage agreement against the spouse's share of the home. Accordingly, if banks wished to ensure valid mortgages they would need to have confirmation from an independent solicitor that the spouse fully understood the transaction. This ruling was intended to eliminate cases where people do not understand the consequences of mortgages. Alternatively, if despite independent advice, a spouse is still unduly influenced or is misrepresented the facts, he or she will have no recourse against a bank selling the home, but may have a claim against the solicitor for negligence.

Statutory market regulation

Beyond common law, there are three main kinds of statutory protection. First, the Financial Services and Markets Act 2000 codified a system of licensing for mortgage lenders. The Financial Conduct Authority maintains a Code of Practice and enforces compliance with the threat of license withdrawal. Second, the Consumer Credit Act 1974 empowers the Office of Fair Trading to engage in similar regulation of the second mortgage market. Third, the content of mortgage is regulated by ordinary consumer contract protection in the Unfair Terms in Consumer Contracts Regulations 1999. The general thrust of the law is to ensure complete transparency, and to cancel extortionate credit agreements, so that consumers know what they are getting, and do not get an unfair bargain.

Lenders' rights

Mortgagees/money lenders have multiple remedies and powers at their disposal if the mortgagor/borrower defaults on payments. There are five main remedies, including:

  1. Right to Sue
  2. Power of Sale [18]
  3. Power of Foreclosure
  4. Power of Possession
  5. Power to Appoint a Receiver [19]

Power of Sale

The power of sale is implied into the mortgage, therefore not requiring an express term to create the power. [20] However, the power of sale only arises where "mortgage money has become due", [21] and it is exercisable as a result of one or more conditions specified in the Law of Property Act 1925, s103.

When a mortgagee exercises their power of sale, there is a duty to act fairly towards the mortgagor. [22] This duty means the mortgagee must, amongst other things,

Take reasonable care to maximise his return from the property. He must also take reasonable care of the property. Similarly if he sells the property: he cannot sell hastily at a knock-down price sufficient to pay off his debt. The mortgagor also has an interest in the property and is under a personal liability for the shortfall. The mortgagee must keep that in mind. He must exercise reasonable care to sell only at the proper market value. [23]

Moreover, a higher duty of scrutiny will be imposed if a mortgagee sells to a related party. In Tse Kwong Lam v Wong Chit Sen [24] Mr Wong sold property taken from Mr Tse to his wife, after not advertising the auction. The Privy Council advised that while delay in the claim meant the sale should not be set aside, damages could be awarded because of the significant conflict of interest. Lord Templeman emphasised that "a heavy onus lies on the mortgagee to show that in all respects he acted fairly" so the transaction is perfectly fair and equal. [25] Section 88 confirms that a buyer after a sale receives an unencumbered title.

Power of Possession

The power of possession allows a mortgagee to take actual possession of the mortgaged property, and this may be for reasons including a desire to sell the property to retrieve the debt, or for the purpose of handling the property whilst it continues to produce an income. Possession is available the moment the mortgage is created, and importantly does not require any default to be exercisable. However, if the parties agree on restrictions/amendments to the power of possession, it may therefore be altered. [26]

Regarding dwelling-houses and court issued possession orders, the court has the power to adjourn proceedings, and suspend or postpone an order of possession, if it is satisfied "that in the event of its exercising the power [of adjournment, suspension or postponement] the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage". [27] This delay may be for whatever length of time the court believes is reasonable. [28]

The Consumer Credit Act 1974 sections 129-130 does the same for second mortgages. In an anomalous case, Ropaigealach v Barclays Bank plc [29] a bank had auctioned off a (second) house the owning a family was away. Clarke LJ felt unable to apply the AJA 1970, because properly construed, it was only able to halt proceedings when legal proceedings had in fact been launched, and here there were none. In a more borrower-friendly decision, Cheltenham & Gloucester Building Society v Norgan [30] Waite LJ gave guidance that in ordering a plan for repayment, a judge should give "the period most favourable to the mortgagor at the outset", so that repeated applications to court on continuing defaults could be avoided, and so that "the mortgagee can be heard with justice to say that the mortgagor has had his chance".

Further sources

See also

Notes

  1. ↑ Fisher, p. 229.
  2. ↑ Fisher, p. 259.
  3. ↑ "Land Mortgages (Law Com WP No 99)" (PDF). HMSO. 1 August 1986. Retrieved 13 February 2020.
  4. ↑ Samuel v Jarrah Timber and Wood Paving Corporation [1904] AC 323 at 326.
  5. ↑ Megarry, p. 1034.
  6. ↑ Kreglinger v New Patagonia Meat Ltd [1914] AC 25 at 35
  7. ↑ Holman v Vaux (1616) Tot 133; Pell v Blewet (1630) Tot 133
  8. ↑ Salt v Marquess of Northampton [1892] AC 1 at 19
  9. ↑ Megarry, p. 1036.
  10. ↑ Megarry, p. 1037.
  11. ↑ Kreglinger v New Patagonia Meat Ltd [1914] AC 25 at 48
  12. ↑ Pursuant to the Land Registration Act 2002 it was no longer possible to create a mortgage by demise over registered land (although it could be created over unregistered land). By 2019 only 15% of land was unregistered: https://whoownsengland.org/2019/01/11/the-holes-in-the-map-englands-unregistered-land/.
  13. ↑ Merchant Shipping Act 1894, section 31.
  14. ↑ (1762) 28 ER 838
  15. ↑ Seton v Slade (1802) 7 Ves 265, 273
  16. ↑ [2001] EWCA Civ 995
  17. ↑ [2002] 2 AC 773
  18. ↑ Law of Property Act 1925, s101(i)
  19. ↑ Law of Property Act 1925, s101(1)(iii) and s109
  20. ↑ Law of Property Act 1925, s101
  21. ↑ Law of Property Act 1925, s101(1)(i)
  22. ↑ Palk v Mortgage Services Funding Plc [1993] Ch 330, at 337-338
  23. ↑ Palk and Another v Mortgage Services Funding Plc [1993] Ch 330, at 338; another useful case is Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, at 966
  24. ↑ [1983] 3 All ER 54
  25. ↑ See also York Buildings Co v MacKenzie (1795) 3 Paton 378
  26. ↑ Four-Maids Ltd v Dudley Marshall (Proprieties) Ltd [1957] Ch 317, at 320
  27. ↑ Administration of Justice Act, s36(1)
  28. ↑ Administration of Justice Act 1970, s36(2)
  29. ↑ [2000] QB 263
  30. ↑ [1996] 1 WLR 343

Sources

Related Research Articles

A mortgage is a legal instrument which is used to create a security interest in real property held by a lender as a security for a debt, usually a loan of money. A mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

Foreclosure Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

A floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.

Security interest Legal right between a debtor and creditor over the debtors property (collateral)

In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

The equity of redemption refers to the right of a mortgagor in law to redeem his or her property once the debt secured by the mortgage has been discharged.

Tacking is a legal concept arising under the common law relating to competing priorities between two or more security interests arising over the same asset. The concept is best illustrated by way of example.

  1. Bank A lends a first advance to the borrower, which is secured by a mortgage over the borrower's property. The mortgage is expressed to secure this advance and any future advances.
  2. Bank B subsequently lends more money to the borrower and takes a second ranking mortgage over the same property.
  3. Bank A then subsequently lends a second advance to the borrower, relying on its original mortgage.

Note in the UK a lender can take possession of a person's home due to default on a mortgage. This process is incorrectly often known as mortgage repossession; however assets can only be repossessed if the lender was the seller, which is often the case with cars but not usually houses. The correct terminology is possession. The process typically involves obtaining firstly an order for possession in the courts, then an eviction warrant. The eviction is carried out by bailiffs. Once the lender has obtained possession, it can then sell the home to recoup any lost arrears.

<i>Williams & Glyns Bank v Boland</i>

Williams & Glyn's Bank v Boland [1980] is a House of Lords judgment in English land and trusts law on an occupier's potentially overriding interests in a home.

<i>City of London Building Society v Flegg</i>

City of London Building Society v Flegg[1987] UKHL 6 is an English land law case decided in the House of Lords on the relationship between potential overriding interests and the concept of overreaching.

English land law Law of real property in England and Wales

English land law is the law of real property in England and Wales. Because of its heavy historical and social significance, land is usually seen as the most important part of English property law. Ownership of land has its roots in the feudal system established by William the Conqueror after 1066, and with a gradually diminishing aristocratic presence, now sees a large number of owners playing in an active market for real estate. The modern law's sources derive from the old courts of common law and equity, along with legislation such as the Law of Property Act 1925, the Settled Land Act 1925, the Land Charges Act 1972, the Trusts of Land and Appointment of Trustees Act 1996 and the Land Registration Act 2002. At its core, English land law involves the acquisition, content and priority of rights and obligations among people with interests in land. Having a property right in land, as opposed to a contractual or some other personal right, matters because it creates privileges over other people's claims, particularly if the land is sold on, the possessor goes insolvent, or when claiming various remedies, like specific performance, in court.

A glossary of land law contains mostly middle English concepts, which are often found in older judgments, and refer to obsolete rights or remedies.

<i>Medforth v Blake</i>

Medforth v Blake[1999] EWCA Civ 1482 is a UK insolvency law case concerning the duties of a receiver and manager in the United Kingdom, over and above a duty of good faith, as to the manner in which he conducts a business.

<i>Downsview Nominees Ltd v First City Corp Ltd</i>

Downsview Nominees Ltd v First City Corp Ltd [1992] UKPC 34 is a New Zealand insolvency law case decided by the Judicial Committee of the Privy Council concerning the nature and extent of the liability of a mortgagee, or a receiver and manager, to a mortgagor or a subsequent debenture holder for his actions.

<i>Silven Properties Ltd v Royal Bank of Scotland plc</i>

Silven Properties Ltd v Royal Bank of Scotland[2003] EWCA Civ 1409 is an English land law case, concerning the behaviour of receivers appointed under mortgages. It affirmed the proposition that a lender are not required to incur expenses that would likely delay a sale beyond the normal period of marketing.

<i>Cuckmere Brick Co Ltd v Mutual Finance Ltd</i>

Cuckmere Brick Co v Mutual Finance[1971] EWCA Civ 9 is an English tort law case, establishing the lender must publish/promote the materially beneficial key, intrinsic facts as to land in mortgage repossession sales. As it affects the duty of mortgagees, to that extent it can be considered within the periphery of English land law also.

<i>Fairclough v Swan Brewery Co Ltd</i>

Fairclough v Swan Brewery Co Ltd, is a land law case, in which the Privy Council held that restrictions on the right to redeem a mortgage are void. The equity of redemption means that borrowers are able to sell or obtain new mortgage finance promptly and without impinging on other dependent transactions.

<i>Ropaigealach v Barclays Bank plc</i>

Ropaigealach v Barclays Bank plc [2000] QB 263 is an English land law case, concerning mortgage arrears and a rare mortgage over a family home which had a right to enter a home and sell it without a court order.

<i>Cheltenham & Gloucester Building Society v Norgan</i>

Cheltenham & Gloucester Building Society v Norgan [1996] 1 WLR 343 is an English land law case, concerning mortgage arrears.

<i>Palk v Mortgage Services Funding plc</i>

Palk v Mortgage Services Funding plc [1993] Ch 330 was a judicial decision of Court of Appeal of England and Wales relating to the enforcement of mortgages. The case concerned seeking an order for sale of the property through the courts, but it was slightly unusual in that it was the mortgagors who were seeking the order for sale, but the finance company holding the mortgage who were opposing it.

<i>Santley v Wilde</i>

Santley v Wilde [1899] 2 Ch 474 is a decision of the English Court of Appeal in relation to the legal nature of a mortgage, and to what extent a provision in a mortgage may be struck down as a fetter or "clog" on the equity of redemption.

References

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.