Mortgages

Question 1

What is a mortgage

Answer 1

A mortgage is a loan contract with proprietary right attached to protect lender if the borrower fails to make repayment. These are described as security for the loan. If the loan is not repaid then the lender can take the property to pay off what is owed

Question 2

Rights of mortgagee

Answer 2

Acquires property rights in the land that is acquired with the loan money. If the mortgagee registers their land at the Land register, then it will be protected against the rest of the world. If not it will be protected by equity. The mortgagee can rely on these rights to seize the property if the borrower fails to make their repayments

Question 3

Rights of the proprietor of land when mortgage used to pay for it

Answer 3

• First, when a person buys the land with a mortgage, the purchaser of that land becomes the owner of the fee simple. So the holder of that legal estate, retains it, despite the mortgage. The lender must register their mortgage at the Land Registry for it to be protected.
• Second once the debt has been repaid, the borrower is entitled to take an unencumbered right over the land: ie. the mortgage disappears once the loan has been repaid in full. The term used to describe the loan being repaid in full is that the mortgage is ‘redeemed’. The right to have the mortgage disappear once the mortgage has been redeemed is known as the equity of redemption

Question 4

Types of mortgage

Answer 4

Repayment mortgage – used frequently for the purchase of residential property and finance commercial activities. Mortgagor borrows a capital sum and agrees to pay it back, plus interest, over a fixed period of time. Capital and interest paid back in instalments. At the end of the period the mortgage is redeemed, registered charge is discharged and mortgagor owns property absolutely

Endowment mortgage – Mortgagor borrows a capital sum for a fixed periods. This accumulates interest and the mortgagor repays that interest in regular monthly instalments. Mortgagor also enters an endowment policy whereby they pay a regular sum towards the endowment which will mature and generate enough capital sum to pay off the capital mortgage debt.

Current account mortgage – Lender will agree an overdraft facility on a bank current account to the value of the mortgage. Lender will provide these monies for the purchase of the property in the normal way and borrower pays funds into the mortgage current account

Secured overdraft – lender promises to make an overdraft facility available and the borrower may draw monies up to this limit as and when needed.

Question 5

Legal mortgages and charges

Answer 5

LRA s23 provided that a legal mortgage can take effect only as a ‘charge by way of legal mortgage’ in relation to registered land. Previously mortgages could have taken effect by way of lease. Long lease method. However not after 2003. After introduction of LRA 2002, a legal mortgage is only created over a freehold by a charge by deed expressed by way of legal mortgage.

This means, that the mortgage must be created by means of a particular kind of document known as a deed. The mortgage must create a charge over the property in favour of the lender, and the specific form of that charge must be a mortgage.

Such a legal charge is a registrable disposition which can, and for legal effect must, be registered.

Question 6

How to create equitable mortgages

Answer 6

1. Where a mortgage is created over an equitable interest
2. Where the mortgage is an informally created mortgage (i.e. one which does not comply with the formalities)
3. Where the right that is created is an equitable charge (i.e. a charge which is not in the form of a mortgage)

Question 7

First National v Hegerty

Answer 7

A husband and wife were joint owners of legal and equitable interest held on statutory trust for sale. The husband dishonestly obtained a mortgage by forging his wife’s signature on the mortgage document before he then left the country with the loan money. The question was whether his wife retained rights in the property which overrode the rights of the mortgagee under the forged document. It was held that the mortgagee could not proceed against the wife because she had never actually been a party to the mortgage. It was held that the lender could not overreach the wife’s equitable interest in the property because there had never been any dealing with two people. The law on co-ownership found that the fraud committed by the husband has severed the co-ownership right that existed between the husband and wife and consequently, the husbands interest could be treated separately to the wife’s rights. The severance brought the existing co-ownership to an end. Therefore, the question became whether or not there was possibility to proceed against the husband’s half share in the house. It was held that the equitable mortgage created between the husband and lender over his half-share was effective and therefore the lender could enforce its rights over his half of the property. Thus, the bank was able to apply for an order to sell the property on the basis that it was a person with an interest in the property.

Question 8

Thames v Campbell

Answer 8

Different outcome was reached. A letter ws sent by a lender to its customer to create an overdraft for the customer which was expressed “to be secured”. It was held that that suggested the rights would be secured in the future not in the present tie. Consequently, it was held that this did not amount to anything more than a promise to create an equitable mortgage in the future, but it created no rights immediately. Here, one spouse’s failure to obtain the consent of the other spouse to the mortgage meant that it could not be an equitable mortgage.

Question 9

Ahmed v Kedrick

Answer 9

A purchaser in good faith acquired the property from a husband who fraudulently signed his wife’s name on the documentation. This constituted severance of that married couples joint tenancy. It was held that only the husbands half share was bound by this transaction. The wife’s share was not recoverable by the plaintiff.

Question 10

Penn

Answer 10

A husband was in a conspiracy with a purchaser of the property. The property was sold without the wife’s knowledge. It was held that there was no severance of the couple’s joint tenancy and no right fort the purchaser over the property because he had colluded in the husband’s fraud.

Question 11

Enforcement of mortgagees rights against co-owners

Answer 11

The Trusts of Land and Appointment of Trustees Act 1996 section 14 provides that any person with an interest in the property can seek an order for sale from the court. Therefore, a mortgagee is a person entitled to seek an order for the sale of the property. Ordinarily, in cases like Lloyds Bank v Byrne, the mortgagee receives an order to sell the property. It is rare in cases in which the sale of property is not ordered

Question 12

Abbey National

Answer 12

A mother transferred property into the names of both her and her daughter for them to occupy during their lifetime. However, the daughter borrowed money mortgaged on that home without her mother’s knowledge. It was held that there had been a collateral purpose in the purchase of the house i.e. to provide the mother with a home for the rest of her life, alongside her daughter. Therefore, it was held that the mortgagee could not acquire better title to the property than the daughter. The daughter was bound by the mothers interest. Therefore, the court would not allow the trustees for sale to ignore the requirement of consent from the mother and a sale of the property was not ordered.

Question 13

Summary mortgagee rights against co-owners

Answer 13

The outcome, in practical terms, is the following. A mortgagee can seek a sale of the property under s14 TOLATA 1996. However, if the mortgagor had dishonestly taken out the mortgage, as in Hegerty, then the mortgagee will only be able to proceed against the mortgagor’s severed half-share in the property. The impact of that will be that the mortgagee is entitled to a sale of the property in more circumstances. The mortgagee will only receive a half of the sale proceeds. However still unfair on the other co-owner because they lose their home and only have half of the market value of that property in cash – they cannot buy a house of the same value in the same neighbourhood.

Question 14

Rule of equity of redemption

Answer 14

At one level, the rule is simple: all mortgages must leave the borrower with unencumbered title once the mortgage debt has been paid off, or else the mortgage contact is void.

By unencumbered title it means that the borrower must have all of their property rights in the land free of any obligations to the lender once the mortgage debt has been repaid.

Question 15

What is no equity of redemption

Answer 15

Consequently, a mortgage contract will be void if it is interpreted as the obligations of the mortgage contract continuing in existence after the mortgage has been redeemed. If the loan debt is paid off but the borrower still owes obligations to the lender, then that will usually void the contract. The mortgagors right is the ‘equity of redemption’ – i.e. a right granted by equity to ensure that the mortgagee’s rights disappear once the mortgage is redeemed. Preventing the mortgage from being redeemed is known as a ‘clog’ or a ‘fetter’ on the equity of redemption.

Question 16

Type of clog

Answer 16

Irredeemability
Postponement of redemption
Collateral Advantages

Question 17

Samuel v Jarrah

Answer 17

Important early case concerned Mr Samuel who lent £5000 to the borrower. The loan was secured on debenture stock. The mortgagee was given an option to purchase all or part of that debenture stock. It was argued that this would make the mortgage irredeemable because once the debenture stock was purchased, then it would be impossible to recover it even if the mortgage loan was redeemed. It was held that there was a strict rule against irredeemability and that strict rule must be upheld. Lord Macnaghten held that it was unfortunate on these facts that the two agreements were entered into together on the same day.

It was held, on these facts, that even though there were arguably two separate agreements, the fact that the were created so close together in time was taken to mean that it was one composite agreement which would prevent the mortgagor from getting their debenture stock back even if they paid the mortgage off in full. Therefore, upholding this rule as a strict one, the mortgage would be void.

Question 18

What Lord said what Samuel

Answer 18

Lord Lindley set out the general rule to the effect that:
“no contract between a mortgagor and a mortgagee as part of the mortgage transaction as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security”

Question 19

Reeve

Answer 19

There was a mortgage agreement and a ship was part of the security. Thus, if the borrower failed to make its repayment, the lender could seize the ship. At a later date, an offer was put to the mortgagor that he be granted an option to buy a share in a partnership, that the ship be transferred to the assets of the partnership and that the mortgagor not be required to repay the remainder of the mortgage. The mortgagor argued later that this second agreement was a cog in the equity of redemption because the ship was transferred away from him and therefore he would not be able to recover it. It was argued that this made the mortgage irredeemable. However, it was held that these two agreements were separate and therefore valid. The agreements had been created at different time and therefore it was not the mortgage contract that was taking the property from the mortgagor, but rather a second different agreement he created.

Question 20

Knightsbridge

Answer 20

A deed of mortgage provided that repayments could only be made every six months and that they must be paid over a period of 40 years. However, only 6 years into the mortgage agreement, the mortgagor wanted to pay off the mortgage. The mortgagee refused to accept repayment. It was held at fist instance in the High Court that this provision that interest payments must be made for 40 years, constituted a clog on the equity of redemption. The court considered it was onerous on the mortgagors and should therefore be void. However CoA overturned the decision of the High Court. The CofA held that this was not a clog on the equity of redemption because the parties were businessmen who had been properly advised and who had knowingly created a mortgage contract between them with an understanding of what they were proposing to do. It was held that the court could not introduce notions of reasonableness to the agreements of commercial people because it is not their place and commercial people are free to contract. It was held that the courts may intervene if the terms are oppressive or unconscionable. Thus, because this involved two parties of equal commercial bargaining power, who created the clause to that effect, the parties should be bound by their contract. Shows the determination of English court to allow commercial parties to be free to contract for whatever they like.

Question 21

Fairclough

Answer 21

The mortgagor took out a mortgage with the brewery with reference to the provision of licensed premises. The agreement stated that the loan could not be redeemed, rather the moneys had to be paid in perpetuity throughout the mortgagor’s terms at the premises. There was a covenant requiring that beer be bought only from the brewery. It was held that this was a clog on the equity of redemption. The general principle was held by Lord Macnaghtern to be that ‘equity will not permit contrivance to prevent or impede redemption.’ In this instance, the requirement that beer must be bought from the brewery and that the publican must pay money to the brewery forever were clear devices to make sure the mortgage would not end.

Question 22

Cityland

Answer 22

The mortgage contract provided that if the mortgage was redeemed within 6 years of its creation then the mortgagor was required to pay a premium which was greatly in excess of market investment rates for the time. It was held that the premium was so large that it rendered the equity of redemption ‘nugatory’. So large was the payment that it would deter early redemption of the mortgage and therefore was a clog on that equity. It was held generally that there was no objection in principle to contractual provisions for collateral advantages; rather the court will look at the nature of the collateral advantage in the circumstances.

Question 23

Bookbinding

Answer 23

There was a mortgage granted over a business premises with the payment of interest. It was provided that interest was payable on the full capital amount regardless of any redemption during the term. I.e. even if the mortgagor repaid part of the capital they would still have to pay an amount of interest as if no capital had been repaid. It was also provided that the interest was compounded and the mortgage could not be redeemed within 10 years. The amount of interest was also linked to movements in the Swiss Franc against the sterling. The value of the sterling plummeted and therefore the rate of interest greatly increased. It was held that a collateral stipulation in a mortgage that does not clog the equity of redemption is permissible unless it can be shown to be unfair or unconscionable. That the term might appear to be unreasonable is not enough to make it impermissible. In that situation, even though the amount of interest was large. It was found the parties were of equal bargaining power and therefore the term was acceptable. Again we see the courts developing the idea that commercial people of equal bargaining power will be held to their bargains.

Question 24

Noakes

Answer 24

A mortgage contract provided that the mortgagor was obliged to continue to buy all of the beer that they sold from the mortgagee even after the redemption of the mortgage created between the parties. There was an advantage to the mortgagee because it has secured a buyer for the beer. The question was whether this advantage was acceptable or not. It was held this was a void collateral advantage because the principle of equity of redemption requires that once the mortgage amount is paid off, then there should be no obligation to continue to provide security or make payments.

Question 25

Kreglinger

Answer 25

A different approach was taken. In that case, a mortgage was created between a firm of wool-brokers and a firm of meat-packers. There was cleat commercial synergy here: one firm wanted sheep’s wool, the other sheep’s meat. Wool-brokers mad a loan to the meat-packers. Contract provided that the loan could not be redeemed for five years after its creation. The contract contained other provisions. Importantly, the meat-packers contracted that as part of the agreement, they would sell their sheepskins to no-one other than the lender wool-brokers. The wool-brokers would therefore profit from a mortgage loan to the meat-packers and would provide itself with a regular source of sheepskins for the business. It was held this was indeed collateral to the mortgage but, it was held this provision was in fact a condition precedent to the wool-broker entering into the mortgage in the first place. i.e. the wool-broker would not have made the loan unless the meat-packer agreed to sell its sheepskins to the lender. Therefore not a clog. (Commercial, =)

Question 26

Remedies

Answer 26

Debt Action
Appointing Receiver
Foreclosure
Power of Sale
Possession

Question 27

Debt Action

Answer 27

It is the very nature of a mortgage as a contract of loan between the parties that the mortgagee has an action on the mortgagor’s express contractual promise to repay the money owed. Such contractual term forms part of every mortgage. In short the mortgagor will promise to repay the sum due on a certain date plus accrued interest. This is the legal date of redemption, and as soon as this date has passed the mortgagee has a personal action on the contract for repayment of the sum owed. If the mortgagor fails to repay the mortgagee can have the personal judgement debt satisfied in the normal way, including execution against the property of the mortgagor or by making the mortgagor bankrupt (Alliance & Leicster v Slayford). This remedy is useful if, after default by the mortgagor, a sale of the mortgaged property failed to realise enough money to pay off the debt.

Question 28

Receiver

Answer 28

The ability of a mortgagee to appoint a receiver to manage and administer the mortgaged property is another method by which it can recover the interest owned. Right often expressly included in the mortgage contract, but in any event, such a power will be implied into every mortgage by deed s101. Only exercisable in those circumstances in which the power of sale becomes exercisable and often alternative to that remedy. Duties of receiver may generally be regarded as similar to those imposed on a selling mortgagee. An advantage of this is that it avoids the dangers of the mortgagee taking possession of the property themselves. This is because the receiver is deemed to be the agent of the mortgagor, not the mortgagee, with the consequence that any negligence in the administration of the property is not attributable to the mortgagee, neither is the mortgagee liable to account for any income generated by the receiver. Receiver owes an equitable duty to the mortgagor to manage the property properly and will be liable to pay compensation if they breach this duty (Medforth v Blake).

Question 29

Foreclosure

Answer 29

Once the most powerful remedy in the armoury of the mortgagee, although in modern land law it is no longer used. Successful foreclosure would extinguish the equity of redemption and result in the transfer of the mortgaged property to the mortgagee, free of any rights of the mortgagor. Never used, courts would follow right to sale

Question 30

Stat power of sale

Answer 30

s101 LPA

Means subject to any express provision in the mortgage itself, a mortgagee will be able to sell the mortgaged property and use the funds to satisfy the debt.

Question 31

Two conditions for power of sale

Answer 31

Power of sale must have arisen. Arises as soon as the legal date for redemption is passed or when one instalment is in arrears

Must become exercisable. This occurs by conditions in s103 satisfied. Either notice requiring payment of whole mortgage money has been served by mortgagee and mortgagor in 3 months of arrears, or interest under the mortgage is in arrears and unpaid for two months after becoming due or mortgagor has breached some provision

Under s105 the sale proceeds must be used to discharge the mortgage debt and balance held on trust for mortgagor.

Question 32

second power of sale

Answer 32

s91

Question 33

Case for s91

Answer 33

Palk

Question 34

Palk facts

Answer 34

In Palk v Mortgage Services, it was held that the mortgagor can seek a sale of the property. In that case, the mortgagee had sought to take possession of the property but to delay sale until the price of the property rose to meet the mortgage debt. The sale price achievable was £283,000 and the amount needed to redeem the mortgage as £358,000. The mortgagee has refused to consent to the sale at the lower price. Nicholls VC considered that this was oppressive of the mortgagor because it requires the mortgagor to become a speculator on the future performance of the property market. Interestingly, his lordship held that “there is a legal framework which imposes constraints of fairness on a mortgagee who is exercising his remedies over his security” and that the mortgagee’s duties have become “analogous to fiduciary duty.” This idea that there is a quasi-fiduciary duty contrasts the decision in Cuckmere.

Question 35

Exercising the right of sale

Answer 35

The mortgagee has a right of sale but there are rarely any controls on its exercise

Question 36

Cuckmere

Answer 36

The mortgagee exercised their right of sale with permission. However, they sold the property on the basis that is carried planning permission to build 33 houses, whereas it actually had a right to build 100 flats. The price for selling with permission to build houses was £44k whereas the price estimated for permission to build flats was £65. The question arose before the court whether there was a responsibility to get the best price. It was held by Salmon LJ that the mortgagee is not a trustee of its power of sale but a trustee only of the proceeds of sale. That means the do not have to act as a fiduciary in seeking the best possible price for the property like a trustee would ordinarily have to do. Rather the mortgagee has the power to sell whenever he wants at the highest price offered, except where this is the result of his own negligence. So the mortgagee can give preference to their own interests because they are not acting as a trustee for sale. There is however, a duty on the mortgagee to obtain the “true market value” on the date when the property is sold.

Question 37

Tse Kwong Lam

Answer 37

The mortgagor constructed a large building in Hong Kong with a loan from the mortgagee. The mortgagee went into possession when the mortgagor fell into arrears and then auctioned the property. The auction was peculiar.

• The mortgagee’s wife was the only bidder at the auction bidding on behalf of a company which she controlled with the rest of her family.
• There was no competitive bidding and this led to a claim for improper sale at an under-value.
• It was held by Lord Templeman that a mortgagee is not prohibited from selling to a company in which she is interested but she must take precautions to obtain the best price available at the time of sale.

On these facts however, the mortgagee and his family owned all of the company’s shares. Therefore the onus is on him to show that he acted fairly and did the best to obtain the best price reasonably obtainable for the borrower.

Here, the circumstances pointed to an improper use of the power of sale.

Mortgagee must act through a prudent vendor, show the sale was in good faith and that they took precautions to ensure that the best price was obtained.

On these facts it was found that the mortgagee had failed to show he had “in all respects acted fairly to the borrower”

Question 38

Final case for exercising right of sale

Answer 38

Silven Properties Ltd v RBS

Question 39

Silven

Answer 39

That when and if the mortgagee does exercise the power of sale, he comes under a duty in equity to the mortgagor to take reasonable precautions to obtain the fair or true market value for the mortgaged property at the date of sale. The remedy for the breach of this duty is not common law damages but an order that the mortgagee account to the mortgagor not just for what he received but for what he should have received. This statement by Lightman J identifies that this is an equitable duty borne by the mortgagee when exercising the power of sale. The remedy for any failure here is the equitable remedy of account.

Question 40

Right to possession

Answer 40

The right of possession is a right which the mortgagee has to throw the borrower out of their home and, for example, rent the property out in the meantime. Clearly this means the borrower has nowhere to live and they still have mortgage debt. Any rent received will be used to defray the mortgage debt, but it might not achieve much more than paying off part of the interest.

Question 41

Four Maids

Answer 41

The concept of possession is described in this case as being a right in the mortgagee as the holder of a legal interest in the property under s1(2)(c) LPA from the date that the mortgage is created. Consequently, the mortgagee can enter into possession of the property ‘as soon as the ink is dry’ unless the contract provides to the contrary.

Question 42

Skelton facts

Answer 42

The claimant bank sought repossession of the defendants’ dwelling house in terms of a legal mortgage. The mortgage in favour of the bank was as continuing security for the liabilities to the bank of a construction company.

Question 43

Skelton findings

Answer 43

The mortgagee always has an unqualified right to possession except where there is a contractual or statutory right to the contrary.

Question 44

Western Bank v Schindler

Answer 44

In this case, a loan was given for the purchase of a house, secured by a life endowment policy belonging to the mortgagor. The mortgagee sought possession when there was a lapse in the life policy payments, even though there had been no default

Question 45

Schindler

Answer 45

Held that, in spite of a term in the mortgage contract that there was not required to be any payment on an endowment mortgage within the first 10 years, the CoA nevertheless allowed the mortgagee to take possession within that time to protect its security. The idea that the right of repossession takes effect as soon as the ink was dry on the contract was instrumental here.

Question 46

Final case with different approach

Answer 46

Esso v Alstonbridge Properties
Different approach taken. Held that an implied term can be inferred into a mortgage contract that the mortgagor can remain in possession unless they default on their repayment obligations. This approach seems to be more enlightened as this areas concerns making people leave their homes.

Question 47

Rights of the mortgagor

Answer 47

Right of repossession is extreme power, thus there are statutory grounds for mortgagors to resist repossession. Applications made to the courts pleading that clients will be able to make their mortgage repayments some time in the future. Statute provides the courts with a discretionary power to delay (or stay) the operation of such a right of possession where the court considers that the mortgagor would be able to make repayments within a reasonable time.

Question 48

Two provisions for rights of mortgagor

Answer 48

S36 of the Administration of Justice Act 1970 provides a general power for the court to adjourn or suspend an order where the mortgagor is likely to be able to pay off their arrears which are due under the mortgage within ‘reasonable time’

S8 of the Administration of Justice Act 1973 provides that if there is a provision in a mortgage contract that a mortgagor must repay the principal in the event of default, then the court may ignore a provision for such early payment; a court shall not exercise its powers under s36 unless it appears the mortgagor will be able to pay any amounts of outstanding principal and interest within a reasonable period, and be able to meet future payments under the mortgage at the end of that period.

Question 49

Reasonable time cases

Answer 49

Cheltenham and Gloucester Building society v Norgan
First Middlesborough Trading v Cunningham
Western Bank v Schindler

Question 50

Norgan

Answer 50

The court considered the meaning of reasonable period in the context of repossession of mortgaged property, for the purposes of s36 of the AOJA 1970 and s8 AOJA 1973. Here, Christina Norgan, the appellant, had lived in a farmhouse with her husband and five children for 20 years. She and her husband had the house transferred into her sole name in return for raising a mortgage to finance her husband’s business. The mortgage provided for the capital sum to be paid at redemption with monthly payments of interest. The mortgage provided that the mortgagee could repossess the property where it fell into one month of arrears. Mr Norgan’s business fell into trouble and Christina Norgan could not maintain the repayments. The mortgagee sought to repossess the property. The judge at first instance had adopted a period for repayment of four years in exercising his discretion. Christina Norgan appealed on the basis that the judge had erred in his choice of reasonable period: she thought the court had picked a reference period that was too short. The CofA overturned the decision on the basis that 4 years was unrelated to the total mortgage term of 13 years. CofA decision was that a trial court should take into account the whole of the remaining period of the mortgage in deciding on a reasonable period. Consequently, the common practice of setting a period less than the full term of the mortgage (typically one or two years) ought to be discontinued.

Question 51

Cunnningham

Answer 51

This interpretation read the expression ‘sums due’ in the legislation as being the whole outstanding amount of the mortgage debt. The court considered that it followed a reasonable period would be the remaining time to expiry of the mortgage.

Question 52

Schindler

Answer 52

Where the mortgagee was seeking repossession as of right, not because there were any arrears. The mortgagee was seeking to recover possession as soon as the ink was dry on the contract. This interpretation revolved around a reasonable period of time to ‘find the necessary money or remedy the default’ which need not necessarily bear any relation to the expiry of the mortgage. Rather the court could simply dream up a period of time it thought appropriate.

Question 53

Analysis of reasonable time

Answer 53

The approach set out in First Middlesborough, is more in tune with the importance of keeping the owner of property in occupation. Where the occupier is given the remained of the life of the mortgage to make good any payments. To support his decision, Waite LK referred to the judgement of Buckley LJ in Schindler, where his lordship held that ‘the specified period might even be the whole remaining prospective life of the mortgage.’ This approach complies the assertion that the law should emphasise the occupier remaining in occupation. There is support for the Court of Appeal’s preference in Norgan that the term reasonable period should take into account the remaining time left to run on the mortgage. More generally, in his lordships opinion, it is not possible in logic to fix a period without reference to the original term of the mortgage. Therefore, Evans LJ agreed with Scarman in First Middlesborough that there is an assumption that the remainder of the mortgage term is the appropriate reasonable period.

Question 54

Equitable relief

Answer 54

There is a possibility for equitable relief for a mortgagor as was set out in Quennell v Maltby. In that case, the mortgagor had a house worth £30k which secured a mortgage of £2,500. The mortgage contract precluded any letting of the premises. Nevertheless, the mortgagor let out the premises in contravention to that provision. The tenants under that lease were protected by the Rent Act 1977, but the lease did not bind the bank. The mortgagor tried to get the bank to exercise its right to possession so he could sell the property with vacant possession. It was held that the court must look to the justice of the case. On these facts it was held that equity would not interfere with the legal effect of the case bit it will prevent the mortgagee from exercising its rights where that would be unconscionable. The mortgagee’s rights should only be exercised for the bona fide protection of security not for collateral purposes like obtaining vacant possession. Therefore it was held than an unconscionable purpose behind the exercise of a right of sale could lead to it being refused.

Question 55

Key problem in cases of UI or Misrep

Answer 55

Key problem in practice has been the situation in which a borrower under a mortgage contract needs to convince their partner or cohabitant to sign the mortgage and does so using threats, undue influence, misrepresentations and lies etc. The courts have held that the use of misrepresentations and undue influence can cause the mortgage lender’s rights to be set aside against that partner or cohabitant

Question 56

Facts of O’Brien

Answer 56

Mr O’Brien was a chartered accountant and he also had a shareholding in a company in which he was an auditor. The company was experiencing financial difficulty and the bank wished to find security for the company debts. Mr O’Brien offered the matrimonial home as security. He told his wife that the charge was limited to £60,000 and that it was only to last for a few weeks. Initially the wife refused to sign but was later persuaded to sign as the husband told her that the company would fail if she did not and that her son, who also had an interest in the company, would lose his home. In fact the charge was not limited in the amount or time. The wife agreed to sign the charge.

Question 57

What did O’Brien hold

Answer 57

The wife was successful with regards to misrepresentation. The charge was set aside as the bank had constructive notice of the misrepresentation and failed to take reasonable steps to ensure that the charge had been obtained without influence or that Mrs O’Brien was aware of the full extent of liability.

Lord Brown Wilkinson introduced the concept of constructive notice and found t follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife’s agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife’s rights.

Question 58

Facts of CIBC v Pitt

Answer 58

Mr Pitt wished to purchase some shares on the stock market. He pressured his wife into signing a mortgage of £150,000 securing the family home. The stated purpose of the loan was to purchase a holiday home and pay off the existing mortgage. The husband used the money to purchase shares and then used those shares as collateral to purchase further shares. Case shows undue influence

Question 59

Two types of UI

Answer 59

Actual Undue Influence – arises in situations in which someone exerts real pressure over another person, perhaps in the form of threats of physical intimidation

This requires evidence of some real influence exercised over the claimant (as in CIBC v Pitt)

Presumed Undue Influence – refers to situations in which the law presumes that there is something about the situation in which UI is such a real possibility that the mortgage lender ought to check whether oR not it has occurred.

Notice of presumed UI will arise (Seemingly) in situations in which there is a special relationship between the claimant and the mortgagor which ought to put the mortgagee on notice.

Question 60

Banks duty

Answer 60

Line of cases in CofA and High Court that diluted the obligations on the bank.

First O’Brien - reasonable steps to ensure the co-signatory has received independent advice and nor been unduly influenced or made victim of misrepresentation

Massey - Ms Massy had been persuaded by her partner to charge her property as security for his overdraft with the mortgagee. The bank interviewed them together but Ms Massey was advised by the mortgagee to seek independent advice. This advice was given in her partner’s presence. The CofA held that the mortgagee was required only to see that advice was sought by the spouse, not to ensure the advice was properly given. Steyn LJ held: “in these circumstances nothing more was required of the bank than to urge or insist that Ms Massey should take independent advice” , thus the test was widened to ‘urge or insist’

Banco - In Mann, the issue arose where the solicitor appeared both for the borrower and the company for which the loan was sought and it was unclear whether the co-habitee had received separate advice. Morritt LJ held that the position must be considered from the point of view of the mortgagee at the time. On the facts of Mann the mortgagee had been shown a certificate that the cohabitee had received legal advice and therefore regarded this to be sufficient demonstration of the co-habitees agreement to the charge

Barclays bank v Colement - Thus it seems now, only a signed document saying they had received separate legal advice is necessary

Question 61

Liability of the bank

Answer 61

The mortgagee will not be bound by UI or misrep where the mortgagee has taken reasonable steps to find out the signatory’s rights (O’Brien). Reasonable steps will be said to exist in circumstances in which the claimant has received, or signed a certificate asserting they have received, independent legal advice as to the effect of the mortgage or surety they are signing (Massey).

CofA in Massey held that the obligation on the bank was to ‘urge or insist’ that the third party signatory took independent advice about the contract. This is something less than the duty to take reasonable steps set out in O’Brien. This approach was accepted in essence in RBS v Etridge. This had very important effect in practice that banks would simply focus on ensuring that all signatories signed a certificate to the effect that they had received advice from a solicitor. Typically that solicitor will have acted for the bank and each of the signatories. Signficantly this had the effect of shifting the rights of the co-signatory away from an ability to protect their home by setting aside the mortgage and replacing those rights with a mere right to damages in tort against the solicitor if the solicitor failed to give proper advice (Halifax Mortgage).

Question 62

Liability of solicitors

Answer 62

All that is required in the wake of Massey is to urge the proposed surety to seek independent advice. Where the advice is taken, the mortgagee is not responsible for the advice that is given. That is a matter for the solicitors professional judgement and a matter between him and his client. As was said in Serter, any deficiencies in this advice are the responsibility of the solicitor on general tortious principles. This has important impact on the signatory to the mortgage: on enforcement they can lose their home and only have a claim in tort for damages against the solicitor.

Question 63

The remedy following UI or Misrep

Answer 63

In circumstances in which the claimant had knowledge of a part of the mortgage or surety, but did not know the full amount of the liability, the claimant will nevertheless be entitled to have the mortgage set aside in toto (TSB Bank v Camfield). The only exception to that principle will be where the claimant has nevertheless taken some benefit from the transaction – in which case the claimant will be required to account to the defendant for that benefit

Question 64

TSB

Answer 64

the CofA considered the contention that a co-habitee could set aside the mortgage in toto against a mortgagee who has constructive notice of the UI exerted over her. Nourse LJ accepted that the right to seT the mortgage aside in toto against the mortgagor, must also apply against the mortgagee to the same extenet.

Question 65

Piddington

Answer 65

There a husband used money lent on security against the matrimonial home to secure an overdraft. The co-habitee had been informed that the money was being used for roof repairs. It was found that there has been UI exerted over the co-habitee co consent to the charge and that the mortgage had not established whether or not the co-habitee had taken independent advice. Pere Gibson LJ, held that the mortgage must be set aside in toto.