Mortgages

Question 1

Is a mortgage capable of being legal?

Answer 1

Mortgages are capable of being legal interests in land. They are listed in s 1(2)(c) LPA 1925 and described as a charge by way of legal mortgage.

Question 2

What formalities are associated with creating a mortgage?

Answer 2

A deed is required to create a legal mortgage in relation to a legal estate. where the document lacks the requirements of a deed, equity may intervene and recognise an equitable mortgage.

A mortgage can be created over an equitable interest. This would need to comply with s 53(1) LPA 1925 – in writing and signed.

Question 3

What is a mortgage?

Answer 3

Interest over land granted as security for a loan. If the borrower fails to repay the loan, the lender can enforce its security

Question 4

What does possession mean?

Answer 4

Either taking physical possession (by ousting the borrowers) or where the property is let, directing that the tenants pay their rent to the lender.

Question 5

When will the right of possession be exercised?

Answer 5

In practice, lenders will only exercise the right if the borrower is in default and as a pre-cursor to exercising the power of sale or the appointment of a receiver.

Question 6

What does the lender have to do prior to issuing possession proceedings?

Answer 6

Where the property is residential, the lender must comply with the pre-action protocol. This promotes an open dialogue between lender and borrower to attempt to resolve any arrears prior to seeking possession.

Question 7

What can a residential borrower do in response to the lender issuing possession proceedings?

Answer 7

Under s.36 AJA 1970 the borrower can ask the court to exercise its discretion to adjourn proceedings, suspend execution, or postpone the date for possession. The court will not exercise its discretion unless the borrower can provide a detailed financial plan demonstrating that they can pay both the mortgage instalments as they fall due and any arrears.

Question 8

What duties do lenders owe when they take possession of rental income?

Answer 8

The lender must account to the borrower for any sum beyond that which is due to them and manage the property with due diligence, accounting to the borrower for any income that should have been received had the property been managed correctly.

Question 9

What are the circumstances in which a power of sale may be exercisable?

Answer 9

The power of sale must either be expressly stated within the mortgage deed otherwise, it is implied into every legal mortgage.

The power of sale must have arisen because the legal date for redemption has passed (usually one month into the mortgage term) or any instalment of the mortgage money has become due under an instalment mortgage.

The lender has given the borrower notice to repay the entire loan amount and the borrower has not paid the sum for three months after such notice; or interest is in arrears for two months after becoming due; or the borrower has breached a term of the mortgage (other than the covenant to pay the mortgage money or the interest thereon).

Question 10

What are the lender’s duties on sale?

Answer 10

A lender must act in good faith and not cheat borrowers (eg the property must be properly advertised and the lender cannot sell hastily at a knock down price and take reasonable care to obtain the true market value of the property at the date of sale. Lenders are not under any obligation to delay the sale in order to maximise the price of the property.

Question 11

What happens if the lender fails to obtain the true market value upon sale?

Answer 11

It must account to the borrower (and all others with an interest in the equity of redemption) for the difference. The onus of proof is on the borrower to show that there has been a breach of the duty of care.

Question 12

What is the effect of sale?

Answer 12

The buyer takes the whole estate free of any estates or interest which the selling lender took priority over but subject to any estates and interest which took priority over the selling lender.

Question 13

How must a selling lender deal with the proceeds of sale?

Answer 13

(a) the costs of redeeming any prior mortgages (ie mortgages with priority over the selling lender’s mortgage)

(b) the lender’s expenses of sale

(c) the lender’s own mortgage

(d) the balance (if any) to the person(s) entitled to the equity of redemption (ie a subsequent lender and/or the borrower).

Question 14

What is a debt action?

Answer 14

An action for repayment on the borrower’s covenant to pay. The legal date for redemption must have passed before action can be taken

Question 15

What is the limitation period for a debt action?

Answer 15

Six years for the recovery of interest and twelve years for the recovery of capital.

Question 16

When will a receiver be appointed?

Answer 16

A lender will usually only appoint a receiver if the property subject to the mortgage is producing income, for example let to tenants.

The power arises in the same way as the power of sale.

Question 17

How must the income obtained by the receiver be applied?

Answer 17

It must be used to pay outgoings on the property, interest on any prior mortgages, insurance premiums, repair costs and their own costs, interest on the current mortgage, capital on the current mortgage, and the balance to the borrower.

Question 18

Liability of the receiver.

Answer 18

The receiver is the agent of the borrower and the borrower is solely responsible for the acts of the receiver. The practical effect is that the borrower has no recourse to the lender for the acts or omissions of the receiver.

Question 19

What are the duties of a receiver with respect to both the borrower and the lender?

Answer 19

To ensure that their personal interests do not conflict with their role as a receiver.
Therefore, a receiver cannot purchase the mortgaged property in a personal capacity.

To act in good faith in the course of their appointment

To act with reasonable competence. What this means depends on the nature of the particular property.

To take reasonable care to obtain the true market value of the property at the date of sale (if the receiver has the power of sale)

The receiver may (but is not obliged to) take steps to increase the value of the property (ie obtaining planning permission or letting the property).

Question 20

When is foreclosure available?

Answer 20

Foreclosure is available by an application to the High Court once the legal date for redemption has passed.

Question 21

What is foreclosure nisi?

Answer 21

Directing the preparation of accounts of what is owed followed by a period of (usually) six months in which to pay

Question 22

What is foreclosure absolute?

Answer 22

Has the effect of vesting title to the property in the lender and extinguishing the equity of redemption held by the borrower.

Question 23

What is the effect of foreclosure?

Answer 23

If the property is worth more than the sum owed, the lender is entitled to keep the surplus. Conversely, if the property is worth less than the sum owed the borrower is released from liability.

Question 24

How is a borrower protected from the effect of foreclosure?

Answer 24

The discretion of the court to re-open foreclosure proceedings, in exceptional circumstances, even after the foreclosure absolute order

Where the property is a dwelling house, the borrower may seek to adjourn the foreclosure proceedings by means of an application under the AJA 1970

An application to court for a judicial sale under s 91(2) LPA 1925. This will preserve the equity of redemption in favour of the borrower. Such an application can be made by any person with an interest in the equity of redemption. For example, another mortgagee.