mortgages

Question 1

Who is the mortgagee?

Answer 1

The lender who loans money to fund the property purchase

Question 2

Who is the mortgagor?

Answer 2

The borrower who grants rights over the property as security for the loan. These rights include the right to possess and sell the property in the event of default.

Question 3

Which of the following statements correctly describes the likely outcome for a low risk borrower?

They will be charged a low interest rate

A bank is unlikely to loan money to a low risk borrower

They will be charged a high interest rate

Answer 3

They will be charged a low interest rate

Question 4

What are the formalities for a legal mortgage?

Answer 4

Deed + Registration. Then the mortgage deed must then be registered at the Land Registry: LRA 2002, s 27(2)(f).

Question 5

What happens if the legal mortgage is not registered?

Answer 5

If it is not registered, the mortgage will not take effect as a legal mortgage in the land (s 27(1)) but could still be an equitable interest.

Question 6

How is an equitable mortgage created?

Answer 6

be in writing and signed by the grantor in order to be validly created.

Question 7

What would only be an equitable mortgage?

Answer 7

Where the borrower holds an equitable interest in the land (ie they are not a legal owner, eg a beneficiary in a trust of land), any mortgage of that interest will be equitable in nature.

Question 8

What form is used to discharge a mortgage?

Answer 8

A DS1 form is used to discharge a mortgage over the whole of the land in a title.

Question 9

What form is used if only part of the mortgage is being discharged?

Answer 9

A DS3 form

Question 10

What is equity of redemption?

Answer 10

The equity of redemption is the name given to the bundle of rights which the borrower has

Question 11

What are the rights in equity of redemption?

Answer 11

here are four basic rights:
the equitable right to redeem the loan
protection from clauses which postpone or prevent redemption
protection from clauses which give collateral advantages to the lender
protection from unconscionable terms in mortgage deeds

Question 12

Can redemption be postponed?

Answer 12

Redemption can only be postponed if the borrower gains some benefit from any ‘lock in’ and gets back exactly what was mortgaged

They may allow a lender to postpone the date, but bear in mind the equitable rule that there must be no clog or fetter on the equity of redemption. Whether the right to redeem is rendered valueless is a question of fact and degree.

Question 13

Options to purchase for the mortgagor?

Answer 13

Options for the lender to purchase the property will be void unless they are genuinely part of an independent transaction

Question 14

When are collateral advantages void?

Answer 14

• Collateral advantages will be void if they extend beyond the mortgage term unless they are genuinely part of an independent transaction.

Question 15

What are collateral advantages?

Answer 15

Lenders are entitled only to the repayment of capital advanced plus interest. If a lender tries to extract additional value from the borrower, the offending term in the mortgage deed may be struck out as being contrary to the equity of redemption. he mortgage is not to be regarded as an opportunity to take anything from the borrower other than the repayment of money. A collateral advantage will be struck out if it is unconscionable, in the nature of a penalty, or if it is repugnant to the equitable right to redeem.

e.g. The borrower mortgaged his leasehold pub to a brewery. The pub was a freehouse, meaning that beers from any brewery could be sold there. The mortgage included a solus tie requiring the borrower to sell only beer brewed by the lender. This tie was to last for the lease term, even if the loan had been repaid.

Question 16

When will unconscionable terms be struck out in mortgages?

Answer 16

Unconscionable terms must be more than simply hard bargains: they must be imposed in a morally reprehensible way, for example in a way which takes advantage of the borrower’s vulnerable position

Question 17

In Knightsbridge V Byrne, the court examined a clause which postponed the legal date for redemption. What was the outcome of the clause?

The clause was upheld because once the loan was repaid, the borrower would get back what he had mortgaged and during the mortgage he had had the benefit of a low interest rate.

The clause was struck out because once the loan was repaid, the borrower would get back an estate which was worth much less than at the time of the mortgage.

The clause was upheld because it was a commercial bargain made between two experienced business parties.

This clause was struck down because the ‘lock-in’ was deemed to be a clog or fetter on the equity of redemption.

Answer 17

The clause was upheld because once the loan was repaid, the borrower would get back what he had mortgaged and during the mortgage he had had the benefit of a low interest rate.

Question 18

When might an option for the lender to purchase the mortgaged property be upheld?

Answer 18

When it is granted in a substantially separate transaction.

Question 19

Which one of the following statements on solus ties is true?

The solus tie will not be permitted in a commercial transaction if the tie extends beyond the mortgage term even if it is a genuinely separate transaction.

The solus tie will be permitted in a commercial transaction where the tie ends after the mortgage term ends.

The solus tie will be permitted in a commercial transaction if the tie ends before or at the end of the mortgage term.

Answer 19

The solus tie will be permitted in a commercial transaction if the tie ends before or at the end of the mortgage term.

Question 20

When does the equitable right to redeem arise?

Answer 20

On the day after the legal date for redemption has passed.

Question 21

A mortgage loan contains a a legal date of redemption which falls 2 months before the end of a 25 year mortgage term. Which one of the following rights which make up the equity of redemption is likely to be relied upon here by the mortgagor to have the clause thrown out by the courts?

Answer 21

No postponement or prevention of redemption

Question 22

In Barclays Bank v O’Brien, why was the bank unable to enforce its charge against Mrs O’Brien?

The bank had unduly influenced Mrs O’Brien into signing the charge without ensuring she was fully informed.

Mr O’Brien had unduly influenced his wife to sign the charge without ensuring she was fully informed.

The bank had constructive notice of Mr O’Brien’s undue influence and failed to take reasonable steps to ensure that Mrs O’Brien was fully informed.

Answer 22

The bank had constructive notice of Mr O’Brien’s undue influence and failed to take reasonable steps to ensure that Mrs O’Brien was fully informed.

Question 23

In RBS v Etridge, the court extended the scope of the principles of constructive notice of undue influence. Which one of the following is the most accurate statements of the effect of this case?

The principles are relevant where the relationship between the person claiming undue influence and the debtor is one of husband and wife and civil partners.

The principles are relevant in every case where the relationship between the person claiming undue influence and the debtor is non-commercial.

The principles are relevant where the relationship between the person claiming undue influence and the debtor is one of husband and wife.

Answer 23

The principles are relevant in every case where the relationship between the person claiming undue influence and the debtor is non-commercial.

Question 24

In addition to a relationship of trust and confidence, what else must be shown for a claim of undue influence to succeed?

A transaction which involves fraud.

A transaction which involves misrepresentation.

A transaction which requires explanation.

Answer 24

A transaction which requires explanation.

Question 25

One of the situations where undue influence may arise is where there is a relationship of influence of which unfair advantage is taken. There are a number of relationships where there is an irrebuttable presumption that one party has influenced the other. Which ONE of the following is NOT within that number?

Trustee and beneficiary

Solicitor and client

Doctor and patient

Parent and child

Husband and wife

Answer 25

Husband and wife

Correct. In cases where undue influence is claimed, it will not be presumed but will need to be positively shown.

Question 26

How is priority for legal mortgages determined?

Answer 26

Priority of legal mortgages is determined by registration.

Question 27

How is priority for equitable mortgages determined?

Answer 27

determined by creation.

If an equitable mortgage is protected by the entry of a notice at the Land Registry, it will rank in priority to a subsequent lender, even if that subsequent lender holds a legal mortgage.

If an equitable mortgage is not protected by the entry of a notice at the Land Registry, it will rank in priority to any subsequent equitable mortgage, but a subsequent legal mortgage will take priority once registered.

Question 28

Can lenders agree the order of priority?

Answer 28

Yes, lenders can expressly agree between themselves the order of priority.

Question 29

Where a borrower has created three equitable mortgages, in favour of three different lenders, on consecutive days, how do we work out which takes priority?

Priority between equitable mortgage depends on the order in which they are created.

Priority between equitable mortgages depends on the order in which they are protected by registration.

Priority between equitable charges depends on the order specified in the mortgage deeds.

Answer 29

Priority between equitable mortgage depends on the order in which they are created.

Correct. Equitable mortgages do not have to be registered in order to be created properly. LRA 2002, s28 which relates to equitable interests, says that equitable interests take effect in the order in which they are created.

Question 30

An equitable mortgage can be (but does not have to be) protected by entering a s32 Notice on the Charges Register. If an equitable mortgage has been protected, what does that mean in terms of priority?

Answer 30

It takes priority over ALL subsequent mortgages, whether legal or equitable.

Question 31

Where a borrower has created three legal mortgages, in favour of three different lenders, on consecutive days, how do we work out which takes priority?

Priority between legal charges depends on the order specified in the mortgage deeds.

Priority between legal charges depends on the order in which the deeds are executed.

Priority between legal charges depends on the order in which they have been registered

Answer 31

Priority between legal charges depends on the order in which they have been registered

Question 32

What rights and remedies may a lender exercise?

Answer 32

The lender may:
- sue for the contractual debt, although this is of limited use if the borrower is already in arrears;
- take possession of the property as a precursor to selling it with vacant possession;
- sell the property and apply the proceeds towards the outstanding debt;
- appoint a receiver to generate income from the property to pay towards the outstanding debt; or
- apply for foreclosure, but this is very rare, and a sale would usually be ordered instead.
In exercising its rights, the lender must comply with its duties to the borrower.

Question 33

What is contractual debt action with regards to mortgages?

Answer 33

If the value of the mortgaged property is less than the outstanding mortgage debt, there is said to be negative equity. The lender may take possession of and sell the property, but if the sale proceeds so not cover the outstanding debt, the lender will wish to pursue a personal debt action against the borrower for the shortfall.

Question 34

What is the limitation for contractual debt action with regards to mortgages?

Answer 34

if the mortgage has been created by deed, as all legal mortgages must be, then the period for recovery of the debt stated in the deed (the capital) is twelve years. The limitation period for recovery of interest is six years.

Question 35

Why may a mortgagor want to possess the mortgaged property?

Answer 35

Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower. Vacant possession makes a property more attractive to a potential buyer and will enable a higher price to be obtained.
Possession will enable the lender to manage the property and derive an income from it. The income can then be used to reduce the outstanding mortgage debt

Question 36

What is the procedure for sale for mortgages?

Answer 36

The power of sale must have arisen in accordance with statutory rules;
the power of sale must be exercisable in accordance with statutory rules; and
The lender must fulfil its duties on sale which have largely arisen from case law.

Question 37

What is a reciever?

Answer 37

A receiver acts as manager of the mortgaged property if the lender does not wish to take possession or to sell.

Question 38

What does a he receiver do?

Answer 38

he receiver is deemed to be the borrower‘s agent.

A receiver must act with due diligence, subject always to the main duty of paying off the mortgage debt

Question 39

What is foreclosure?

Answer 39

It allows a lender to take the mortgaged property in satisfaction of the debt, meaning that the freehold will vest in the lender, and the borrower will lose all rights to the property.

Question 40

How would a lender view foreclosure?

Answer 40

the procedure is lengthy and complex

Question 41

How would a borrower view foreclosure?

Answer 41

From the borrower’s point of view, there are some advantages in that an order of foreclosure extinguishes all other mortgages secured on the property. It also extinguishes the mortgagor’s contractual debt, so the lender cannot pursue the borrower for any surplus debt over and above the value of the property.

Question 42

The legal lender has the right to sue the borrower in person for the contractual debt. What is the limitation period for a contractual debt for a legal mortgage?

Answer 42

12 years for capital and 6 years for interest.

Question 43

What is the consequence if a lender exercises its power of sale under a legal mortgage, but the sale proceeds are insufficient to discharge the mortgage debt?

Answer 43

The lender may sue the borrower in contract for the outstanding debt.

Question 44

To whom does a receiver owe a duty to act with due diligence?

Answer 44

The borrower.

Question 45

What is the purpose of the Pre-Action Protocol 2008?

Answer 45

It sets out an expectation that lenders will explore alternative arrangements with a borrower before taking possession of residential properties.

Question 46

When does the right to possess a mortgaged property arise?

Answer 46

Legal lender has a right to possess mortgaged property from the outset

Question 47

What steps which a court will expect a lender to have taken before resorting to possession of residential property?

Answer 47

• Possession proceedings must have started
• The mortgaged property must be fully or partly residential
• Borrower must be able to pay ‘any sums due’
• ‘within a reasonable period’
• Subject to such conditions ‘as the court thinks fit’

Question 48

Can courts postpone possession?

Answer 48

• Courts have a statutory jurisdiction to postpone possession for a long period if the property is residential or partly residential

AJA s 36 gives the court the power to postpone possession of residential property if all sums due can be paid within a reasonable period

Question 49

What does ‘within a reasonable period’ mean for teps which a court will expect a lender to have taken before resorting to possession of residential property?

Answer 49

InCheltenham & Gloucester Building Society v Norgan [1996] the Court of Appeal said that the starting point for pinpointing a ‘reasonable period’ was the remainder of the mortgage term.

Question 50

When does the mortgagee acquire the right to possess mortgaged property?

Answer 50

Immediately the mortgage deed is signed.

Question 51

Why might a lender choose to apply to the court for an order for possession?

Answer 51

To avoid possible criminal proceedings following allegations of use of force to gain entry to premises.

Question 52

AJA 1970, s 36 enables a court to postpone an order for possession provided that the borrower can pay ‘any sums due’ within a ‘reasonable period’. Which of the following best explains this?

Answer 52

The borrower must pay the arrears before the end of the mortgage term.

Question 53

Will a court postpone an order for possession to allow the borrower to sell the property?

Answer 53

Yes, if there is firm evidence of an imminent exchange of contracts.

Question 54

What happens if there is an express right to sell?

Answer 54

Most mortgage documents will include an express power of sale and will set out exactly how and when the power will be exercised. The lender will not need to rely on any statutory provisions, although it will be subject to duties on sale, in the same was as a lender relying on statutory powers.

Question 55

What happens if there is no express right to sell?

Answer 55

will be implied under LPA 1925, s 101 when the mortgage is legal.

Question 56

When does the statutory right to sell arise?

Answer 56

‘when the mortgage money has become due’ This is the earlier of the first instalment of capital payable, or the legal redemption date.

Question 57

When does the right to sell arise?

Answer 57

The right become exercisable either when the mortgage document expressly states, or when one of the criteria in LPA 1925, s 103 has been met

Question 58

What is the criteria where is 1 exists then there is the statutory right to sell?

Answer 58

If the power arises under LPA 1925, s 101(1)(i), the power will become exercisable only when at least one of the criteria in s 103 applies:
1) Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted - No arrears are necessary here: the lender can request the full loan at any time!
2) Interest is unpaid and arrears for at least two months. This does not mean that two months’ interest must be owed: there must be some interest outstanding for two months: it does not need to be a large sum!
3) There has been some breach of another mortgage provision such as a covenant to keep the mortgaged property insured or in good repair. Examples: failure to insure the property or allowing it to fall into disrepair: basically something which could affect the value of the security.

Question 59

What duties does the lender have when selling the property?

Answer 59

When exercising its right to sell, the lender has duties to act fairly to the borrower in as to the method of sale and obtaining a fair price for the property.

The lender is not under a duty to improve the proper or delay a sale

Question 60

When selling, which of the following statements best expresses the lender’s duty as to the timing of the sale in a slow market?

The lender must sell immediately the right to sell becomes exercisable.

The lender must delay the sale if there is any prospect of planning permission being granted.

The lender must wait a reasonable time for an upturn in the market.

The lender has an unfettered discretion as to when to sell and need not delay.

Answer 60

The lender has an unfettered discretion as to when to sell and need not delay.

Question 61

The lender owes the borrower a duty to take reasonable care to obtain the true market value for the property. Which of the following is the most accurate statements of what ‘true market value’ means in this context?

The lender owes a duty to carry out repairs and improvements to the property to obtain the highest possible price.

The lender must obtain the maximum possible price in that particular market but need not delay sale.

The lender cannot be expected to achieve the perfect sale price, but the price must be in the correct bracket.

Answer 61

The lender cannot be expected to achieve the perfect sale price, but the price must be in the correct bracket.

Question 62

A property has two charges secured on it. The second lender sells under the right of sale. Which of the following represents the correct procedure?

The first loan is redeemed first, then the second loan, and any surplus proceeds are divided proportionately between the first lender and the second lender.

The second loan is redeemed first, then the first loan, with any surplus being paid to the borrower.

The first loan is redeemed first, then the second loan with any surplus being paid to the borrower.

Answer 62

The first loan is redeemed first, then the second loan with any surplus being paid to the borrower.

Question 63

A lender loans money to a borrower in return for a charge by way of legal mortgage over the borrower’s registered land. The interest rate for the loan is 10% above the Bank of England’s base rate.

Which of the following statements best sets out the circumstances in which the interest rate is most likely to be held to be unconscionable?

The land is a freehold estate, the borrower is a residential owner and has also received legal advice.

The land is a freehold estate, the borrower is a commercial owner and both lender and borrower are individuals.

The land is a leasehold estate, the borrower is a residential tenant and the loan is to pay for the extension of the leasehold term.

The land is a leasehold estate, the borrower is a commercial tenant and has also received legal advice.

The land is a freehold estate, the borrower is a residential owner and the loan is to fund the borrower’s business expansion.

Answer 63

The land is a leasehold estate, the borrower is a residential tenant and the loan is to pay for the extension of the leasehold term.

This is correct and the facts are akin to the case of Cityland v Dabrah (1968). As with this case, if the property is a leasehold and the borrower is a residential tenant who needs the money to extend the length of the lease, there is a risk that the lender could take advantage of the borrower’s circumstances and impose a higher interest rate. The borrower is more likely to agree to unconscionable terms to ensure the loan is made.

Question 64

Five years ago, a business owner needed to borrow money to expand their business. The business owner granted a first legal mortgage over the registered freehold of their home to a bank as security for the loan. The ten year repayment mortgage was granted by deed, included an express power of sale and the legal date of redemption was set for one month after the mortgage was granted.

The mortgagor’s business has been struggling recently and they have been unable to pay the last three mortgage instalments.

Which of the following options represents the best advice to the lender in respect of enforcing the security?

The lender is not entitled to enforce the security on the facts.

The lender should appoint a receiver and initiate a debt action against the mortgagor because the power of sale has not yet arisen.

The lender should take possession through self-help, rather than applying for a court order, and then sell the property.

The lender should apply for a court order to obtain possession and then sell the property. However, the mortgagor may apply to have the possession order postponed.

The lender should apply for a court order to obtain possession and then sell the property. The mortgagor will not be able to apply to have the possession order postponed.

Answer 64

The lender should apply for a court order to obtain possession and then sell the property. However, the mortgagor may apply to have the possession order postponed.

This is correct and is the best answer. It is advisable for the lender to apply for an order for possession, rather than exercising self-help and it is true that the mortgagor can apply to have the possession order postponed under section 36 Administration of Justice Act 1970. The other options are less correct because possession through self-help is rarely if ever advisable with regard to residential property, the Administration of Justice Act 1970 would apply here as the mortgaged property is a dwelling, and the facts indicate that the power of sale has arisen and is exercisable (in addition to the fact that it would not make sense to appoint a receiver here).

Question 65

Last year, a business owner granted to a lender a legal mortgage over the business premises to secure a capital and interest repayment loan. The mortgage deed did not mention any power of sale for the lender. The business is declining and the owner has not made any mortgage payments for four months. Today, the owner received a letter from the lender stating that the lender intends to sell the property and recover the money due from the sale proceeds.

Which of the following statements best explains whether the lender has a right to immediately sell the property?

The lender can sell the property as the legal date for redemption has passed

The lender can sell the property as the power of sale has arisen and has become exercisable on the facts

The lender cannot sell the business owner’s property as there is no express right for the lender to do so

The lender cannot sell the business owner’s property without first complying with the Pre-Action Protocol for Possession Claims 2008

The lender cannot sell the property until three months pass after the letter warning of the sale has been received

Answer 65

The lender can sell the property as the power of sale has arisen and has become exercisable on the facts

This is correct: if there is no express power of sale in a mortgage deed (as here) then the statutory provisions in LPA 1925 apply and s 101 will give the lender such a right in a legal mortgage.
The right has arisen as one instalment of capital became due as soon as one payment had been missed: Payne v Cardiff; and the right is exercisable as some interest has been in arrears for two months: LPA 1925, s 103(ii).
As the right has become exercisable due to the missed interest repayments, there is therefore no need for the lender to serve a 3 month written warning/notice of the sale. The legal date for redemption, which is the earliest date on which the borrower can redeem the mortgage, has nothing to do with the lender’s right to sell.

Question 66

The owner of a registered freehold property, used as a venue for weddings and parties, grants a legal mortgage over the property in favour of a lender as security for a loan. The mortgage deed contains the following terms:

(i) the lender may use the property free of charge for their annual Christmas party until the end of the mortgage term; and

(ii) the lender has an option to purchase the freehold until the end of the mortgage term.

Which of the following statements is correct in respect of the validity of the mortgage terms?

Term (i) and term (ii) are both unenforceable terms and likely to be struck out by a court.

Term (i) and term (ii) are both enforceable terms and likely to be upheld by a court.

Term (i) is an unenforceable collateral advantage but term (ii) is likely to be upheld by a court.

Term (i) is an enforceable collateral advantage but term (ii) is inconsistent with the right to redeem the mortgage.

Term (i) and term (ii) are both unenforceable terms and likely to be rewritten by a court.

Answer 66

Term (i) is an enforceable collateral advantage but term (ii) is inconsistent with the right to redeem the mortgage.

This is correct.
Term (i) is a collateral advantage but as it expires at the end of the mortgage term and as long as it is not onerous or in the nature of a penalty, it is likely it will be upheld by the court.
Term (ii) gives the lender the option to purchase the freehold at any time during the term and is likely to be struck out as this prevents the borrower from being able to redeem their property.

Question 67

A borrower and lender enter into a document, which is described as a ‘mortgage deed’. The document purports to grant a mortgage over the borrower’s registered legal freehold. The agreement is signed by both the borrower and lender, witnessed and then dated. The lender does not do anything further with the document.

Which of the following options best describes what kind of mortgage (if any) has been granted by the borrower?

The borrower has granted a legal mortgage because the statutory requirements of a deed have been met.

The borrower has not granted a mortgage because the document does not comply with the statutory requirements of a deed.

The borrower has granted an equitable mortgage because it is a mortgage of an equitable interest in the land.

The borrower has granted an equitable mortgage. Equity will recognise the ‘failed legal mortgage’ as a ‘contract to grant a legal mortgage’.

The borrower has not granted a mortgage because the document has not been registered.

Answer 67

The borrower has granted an equitable mortgage. Equity will recognise the ‘failed legal mortgage’ as a ‘contract to grant a legal mortgage’.

This is correct. Although a valid deed has been created on the facts - the document complies with LP(MP)A 1989, s 1 - it has not been registered by the lender. No valid legal mortgage has therefore been created on the facts. Equity will, however, recognise this an equitable mortgage in the circumstances. The document complies with LP(MP)A 1989, s 2 and equity will therefore recognise it as a ‘contract to grant a legal mortgage’. An equitable mortgage does not need to be registered to be validly created.

Question 68

A couple recently bought a holiday home in the Alps. In order to fund the purchase, they borrowed money from the bank and secured the loan by granting to the bank a legal mortgage over the freehold of their home in England.

Which one of the following options best describes whether the lender would have been put on notice of possible undue influence in the circumstances?

The lender would not be put on enquiry of undue influence because the lender has taken the necessary steps to bring home the risk of the mortgage

The lender would be put on enquiry of undue influence because the couple are buying a property in a different country

The lender would not be put on enquiry of undue influence because the loan is for the joint benefit of the couple

The lender would be put on enquiry of undue influence because there is more than one borrower

The lender would not be put on enquiry of undue influence because there is no relationship of trust and confidence between the couple

Answer 68

The lender would not be put on enquiry of undue influence because the loan is for the joint benefit of the couple

This is correct. The lender would not be put on enquiry of undue influence because the loan is for the joint benefit of the couple. In CIBC Mortgages plc v Pitt the House of Lords confirmed that a lender would not be put on notice that there is a risk of undue influence where a transaction is ostensibly for a couple’s joint benefit, as it is on the facts here.