Property: Mortgages

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Formalities for creating legal mortgages by "charge of deed": S.87 Law of Property Act 1925. Prior to 2003 it was possible to create legal mortgages through long (3000 year) leases but the Land Registration Act 2002 has abolished this).

The Law of Property Act 1925 provides the mortgagor's statutory rights in addition to their equitable right of redemption.

Rights under S.36 Administration of Justice Act 1970 (as amended by S.8 Administration of Justice Act 1973). Where a mortgagee is seeking possession of a residential property, mortgagors have a degree of protection by the court to postpone or suspend applications where the mortgagor is able to "pay any sums due...within a reasonable period".

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Section 91: gives the mortgagor power to redeem the mortgage which can be enforced by the court.

Section 91(1) and (2): mortgagor can apply to the court for an order for sale of the property. Important where the mortgagor cannot pay the installments. A sale at this time, even if it does not realise enough money to pay off the mortgage, will at least stop the sum increasing for the mortgagor. Palk v Mortgage Services Funding (1993).

Section 98: gives the mortgagor power to claim possession of the mortgaged land where the mortgagee does not claim possession.

Section 99: gives the mortgagor power to lease the property for certain purposes and the power to accept surrenders of existing leases. However this power may be limited or modified by the terms of the mortgage agreement.

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“Any sums due”: most mortgages include a clause stating if the mortgagor falls into arrears then the whole mortgage debt becomes payable. However, under S.8 AJA 1973 the court has discretion to treat “any sums due” as being merely the overdue payments and not the entire debt: Halifax Building Society v Clark (1973).

“Reasonable period”: rest of the mortgage term - Norgan. The court’s discretion to postpone or suspend the making of a possession order depends upon it having some evidence that the mortgagor will be able to pay off the arrears - if the mortgagor is unemployed and has no apparent prospect of finding another job then the court has no alternative but to make the order. In such a case suspension it might still be possible if the mortgagor proposes to sell for the monies due to be paid within a reasonable time: Cheltenham v Norgan (1996); First National Bank v Syed (1991).

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S.36 not assist a mortgagor where:

1. S.36 operates where the mortgagor simultaneously asks the court for an order for sale under S.91 LPA 1925. The S.36 jurisdiction enables the court to postpone possession where a sale will clear the mortgage debt.

However, not where a sale won't produce enough to pay off the debt: Palk v Mortgage Services Funding plc (1993); Cheltenham v Krausz (1997).

2. Where residential premises are unoccupied, the mortgagee’s statutory right to possession means it doesn't require a court order for possession before selling the property. Where someone is in possession, failure to obtain a court order could render the mortgagee liable to criminal prosecution under S.6 Criminal Law Act 1977.

3. The consequence for the mortgagor of there being no possession proceedings, is that he is denied the opportunity of applying for relief under S.36.

Ropaigealach v Barclays Bank (1999): refuses relief and property unoccupied.

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Remedies for Mortgagee:

Action in contract to recover the debt:

Mortgagee may sue a mortgagor under their personal promise to repay. It's an alternative to a charge against the property or an additional action alongside possession if the value of the property has gone down. If the mortgagor has other assets the mortgagee may claim these to recover a part of the shortfall. Mortgagee may bring a personal action against the mortgagor because it's an action of debt. The mortgagee has no obligation to mitigate its loss and cannot be compelled to seek a sale or to exercise remedies.

However, Mortgage Lenders Protocol 2009 requires mortgagees to discuss ways to avoid possession proceedings with mortgagors.

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Appointment of receiver: S.101 LPA 1925

Usually there is an express power under the mortgage allowing the mortgagee to appoint a receiver to manage the property. Implied power given under S.101 LPA to mortgages created by deed. The receiver is seen as the agent of the mortgagor so the mortgagee is not liable for negligence in the administration/management.

Foreclosure: S.88 LPA 1925

An equitable remedy which extinguishes the borrower’s equitable right to redeem and results in the transfer of the mortgagor’s estate to the mortgagee so that it becomes the absolute owner of the property. It's subject to a restrictive procedure which limits its usefulness and is rarely sought. A foreclosure order is made in two stages - a “nisi” order (subject to repayment by the mortgagor) and then, six months later (assuming no payment is made), an absolute order.

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Possession:

Mortgagee is granted an estate in the mortgagor’s land which automatically gives the mortgagee a right to possession.

Mortgagees can take possession even when the mortgagor is not in default: Four Maids v Marshall (1957) - Lord Harman. In practice it's unlikely with residential mortgages. If a mortgagee takes possession of the property, it is under a duty to manage the property to achieve maximum return and to account for that income to the mortgagor.

Where the mortgagee failed to obtain appropriate return for the property then the mortgagee may be held liable to pay for the shortfall: White v City of London Brewery (1889).

Limitations on Possession: S.36 Administration of Justice Act 1970 places limitations on a mortgagees power of possession by giving the court the power to suspend, adjourn or postpone a possession order application.

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Power of Sale:

Statutory power of sale implied into every mortgage made by deed under S.101(1) Law of Property Act 1925 unless there is a contrary intention. The statutory power arises in favour of the mortgagee under S.101 once the legal date of redemption is passed (normally 6 months from the date of the deed).

Power must be exercisable under S.103 LPA: notice served and in 3 months of arrears or 2 months of interest not paid or there's a breach of the mortgage deed or the LPA.

If the mortgagee sells after the power of sale has arisen but before it has become exercisable, then the purchaser takes free of the mortgage unless the mortgagor can establish that the purchaser had notice of the mortgagee’s fault - S.104 LPA.

Proceeds of sale are governed by S.105 and must be used by the mortgagee to discharge the costs and charges of the sale, then the mortgage debt, interest and costs, and finally any remaining balance for the “person entitled” under the mortgage (mortgagee under a subsequent mortgage and finally the mortgagor).

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Mortgagees power of sale:

- Duty of care to obtain the best price reasonably obtainable: Cuckmere Brick v Mutual Finance (1971). Rent review to obtain best price otherwise must account for losses - Knights v Lawrence (1993).

- Liable to pay damages equivalent to that which would have been obtained. Negligent in the manner and conduct of the sale or the advertising of the property (Cuckmere). There is no liability if the price obtained is within an acceptable bracket for valuation: Michael v Miller & Another (2004).

- May sell by auction (risk of lower price).

- May sell property to itself or its agent with the court’s sanction, otherwise it risks the sale being set aside: Williams v Wellingborough Council (1975).

- May sell to a company in which it has an interest provided that the sale is for the best price obtainable: Tse Kwong Lam v Wong Chit Sen (1983).

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Professor Squelch argues that the "mortgagee has a duty to act in good faith when exercising the power of sale".

Professor Dixon states in his Law of Modern Property book that "the contractual nature of a mortgage is not always consistent with its status as a proprietary interest" under the courts equitable jurisdiction (to the benefit of the mortgagor).

Professors Nield and Hopkins argue that Article 8 of the Human Rights Act 1998 provides mortgagors with an independent right to peaceful enjoyment and the right to possess their homes. Therefore, mortgagors are better protected to prevent homelessness and injustice.

Duty to rebut the presumption of undue influence - Barclays v O'Brien (1992). Should provide independent legal advice - Bank of Scotland v Etridge (2001).