18.3 Mortgages

18.3 Mortgages

Quick Answer: A legal mortgage is a proprietary security: in modern practice a charge by deed over a legal estate, completed by registration if the title is registered. The borrower keeps the equity of redemption. Terms that clog that equity, or that were procured by undue influence without the Etridge steps, may be unenforceable. Once the power of sale is exercisable, the lender may sell but must take reasonable care to obtain the true market value. Other people in the land — a beneficial co-owner in actual occupation, or a spouse with home rights — can take priority if they are not overreached or protected.

This independent OpenExamPrep section covers FLK2 Land Law on mortgages: enforceability of terms, priority, the lender's powers and duties, and protection of mortgagors and other third parties. Transactional mortgage processing in a conveyancing file belongs in Property Law and Practice; the doctrine below is what those files rest on.

Creation and the equity of redemption

A legal mortgage of a legal estate is made by deed (LPA 1925 ss.85–87). The everyday form is a charge by way of legal mortgage. For registered land, owner's powers include charging the estate (LRA 2002 s.23), but the charge is a registrable disposition and is not a legal charge until registration (s.27). Until then it is equitable only. An equitable mortgage can also arise from a written contract that complies with section 2 LP(MP)A 1989, or from an unsuccessful attempt at a legal charge.

The mortgagor retains the equity of redemption: the right to redeem by paying what is properly due and to have the charge discharged. Once a mortgage, always a mortgage. A term is a clog if it destroys or makes illusory that right. An option for the lender to purchase the charged land, inserted in the mortgage itself, is the classic clog (Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323), unless it is a genuinely independent bargain. Collateral advantages that end on redemption are often valid (Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25). Postponing the contractual redemption date is not automatically void: Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441 upheld a long postponement between commercial parties, whereas Fairclough v Swan Brewery Co Ltd [1912] AC 565 struck down a postponement that lasted until the dying days of a long lease and left no realistic redemption. On SQE1, ask whether the borrower can still get the land back, unencumbered, by paying what is due, or whether the lender has tried to turn security into an ownership trap.

Other enforceability controls sit beside the clog doctrine. Undue influence and misrepresentation can set aside a charge as against a surety (typically a spouse charging the home for business debts of the other). Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 tells the lender what 'reasonable steps' look like: insist on a solicitor; communicate directly with the surety; require the solicitor to confirm that the nature and practical effect have been explained in a private meeting; and not to rely on a casual 'I am happy to sign' at the counter. Consumer and regulatory overlays (a regulated mortgage contract under FSMA 2000, MCOB, unfair-terms controls) can also affect enforceability, but the land-law core remains clogs, undue influence, and priority.

Priority

Registered land. A registered charge's priority against another registered charge is generally the order of registration, not the order of the deeds (LRA 2002 s.48). A later purchaser or chargee for valuable consideration takes subject to entries on the register and to overriding interests, but free of unprotected minor interests (s.29). Tacking of further advances is tightly controlled by section 49: the lender may tack if the obligation is on the register, if the intervening chargee agrees, or if the lender had no notice of the intervening charge. Overriding interests are the usual SQE sting: a beneficial co-owner in actual occupation may take priority under Schedule 3 paragraph 2 unless enquiry was made and the occupation was not reasonably obvious, or unless the interest was overreached.

Unregistered land. A first legal mortgagee who takes the title deeds has a legal mortgage that binds the world. A later legal mortgage without the deeds is a puisne mortgage and must be protected as a Class C(i) land charge. Equitable mortgages and certain other charges use Class C(iii). Failure to register the correct land charge makes the interest void against a purchaser of a legal estate for money or money's worth.

Abbey National Building Society v Cann [1991] 1 AC 56 destroys the 'scintilla temporis' argument: a person who only ever acquires the land already mortgaged cannot claim an occupation interest that predates the mortgage in that split second of completion.

Lender's powers and duties

The statutory toolbox in LPA 1925 ss.101–109 is implied into mortgages made by deed, unless excluded.

Possession. A legal mortgagee may take possession 'before the ink is dry' (Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317) unless the mortgage or statute restricts that. Peaceable possession of empty premises is possible (Ropaigealach v Barclays Bank plc [2000] QB 263). Forcing entry against an occupier is not. Taking possession is a prelude to sale or to collecting rents, and it brings a duty to account.

Sale. The power of sale arises under section 101 when the mortgage money has become due. It becomes exercisable under section 103 only if (i) notice requiring payment of the mortgage money has been served and default has continued for three months, or (ii) some interest is at least two months in arrear, or (iii) there has been a breach of some other provision of the mortgage or of the 1925 Act. Until the power is exercisable, a sale does not pass title under the statutory machinery. Once exercisable, section 104 protects a purchaser who acts in good faith. The mortgagee is not a trustee of the power, but Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 imposes a duty to take reasonable care to obtain the true market value at the date of sale. The lender may sell in the condition the property is in and need not spend money improving it (Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409), but it must not wreck the price by a careless auction, a failed advertisement, or a sale to a connected buyer at an undervalue. Surplus proceeds are held on trust: section 105 ranks subsequent incumbrancers and then the mortgagor.

The court may order sale instead of foreclosure (s.91). Palk v Mortgage Services Funding plc [1993] Ch 330 used that jurisdiction to protect a borrower where the lender's strategy would have increased the debt. Receiver. Section 109 typically makes a receiver the agent of the mortgagor, which is why appointment of a receiver is often more attractive to the lender than going into possession. Foreclosure remains theoretically available and extinguishes the equity of redemption, but it is rare; the court commonly orders sale instead.

Protection of mortgagors and other third parties

The borrower. Beyond the equity of redemption, a lender who seeks a possession order in respect of a dwelling-house faces section 36 of the Administration of Justice Act 1970. If the borrower is likely to pay the sums due within a reasonable period, the court may adjourn, stay or suspend the order. Section 8 of the Administration of Justice Act 1973 treats instalment mortgages as allowing the court to look at arrears rather than the whole accelerated capital, provided the borrower can also pay current instalments. That jurisdiction is a possession-hearing protection; it is not a rewrite of section 103, and it does not apply to a purely peaceable re-entry of empty premises (Ropaigealach).

Sureties. Etridge is the land-law protection for the spouse, partner or parent who is not the real borrower. If the lender fails to take the reasonable steps, it may be fixed with constructive notice of undue influence and the charge may be set aside as against the surety.

Beneficial co-owners. Williams & Glyn's Bank Ltd v Boland [1981] AC 487: a beneficial interest coupled with actual occupation can override a later registered mortgage. City of London Building Society v Flegg [1988] AC 54: payment to two trustees overreaches that beneficial interest (LPA 1925 s.2; LRA 2002 s.27 for dispositions by trustees), so occupation no longer preserves priority. Always ask: was capital money paid to two trustees? If yes, the occupier's claim is against the trustees and the proceeds, not against the lender's security. If one trustee only, Boland remains live.

Home rights. A spouse or civil partner who is not a legal owner has statutory home rights under the Family Law Act 1996. Those rights need a notice (registered land) or a Class F land charge (unregistered land). They are not an overriding actual-occupation interest of the Boland type.

Worked example

H is the sole legal owner of the family home, held on trust for H and W equally. W lives there. H charges the house to Bank by registered charge to secure his company's overdraft. Bank never asks who lives at the property and never writes to W. The company defaults. Interest has been unpaid for three months. Bank wants to sell.

The power of sale has likely become exercisable because interest is at least two months in arrear (s.103), even without a three-month capital notice. Sale still requires Cuckmere care. Priority is the sharper issue: W's beneficial interest plus actual occupation can override under Schedule 3 paragraph 2 unless overreached. There was only one trustee, so no overreaching. Bank's failure to make enquiry is the Boland pattern. If instead the charge had been a surety charge over a house in H and W's joint names to secure H's business, the Etridge protocol would be the first question, not Schedule 3.

Exam traps

Do not conflate the power of sale arising (s.101) with it becoming exercisable (s.103). Do not treat foreclosure as the usual remedy. Do not let a lender sell at a knock-down price to an associated company and keep the shortfall claim as if Cuckmere were optional. Do not give an occupying beneficiary priority if two trustees received the mortgage advance. Do not apply section 36 AJA 1970 to a commercial warehouse, or assume it rewrites the statutory power of sale itself.