5. Mortgages

Question 1

What is a mortgage?

Answer 1

• Lender provides money as a loan
• Borrower provides security by creating a mortgage over the property in favour of the lender.

Question 1

What is the status of the borrower’s legal estate when a mortgage is created?

Answer 1

When a mortgage is created, the borrower still holds the legal estate (freehold or leasehold) subject to the mortgage, making the mortgage a third party right over the land.

Question 2

What does the creation of a mortgage allow the lender to do?

Answer 2

The creation of a mortgage allows the lender to enforce its security against the borrower.

Question 3

Is a mortgage capable of being legal?

Answer 3

• Yes - capable of being legal interests in land
• Can be described as a ‘charge by way of legal mortgage’

Question 4

What is the legal requirement for creating a mortgage concerning a legal estate, and how does equity address cases where the document does not meet these requirements?

Answer 4

To create a legal mortgage for a legal estate, a deed is required.

If a document, lacks the requirements of a deed, equity may recognize an equitable mortgage.

requirement for deed:
* * * n writing;
* * * * clear on its face that it is a deed;
* * signed;
* * witnessed (by one witness); and
* * delivered

Question 5

Can a mortgage be established for an equitable interest, and what are the prerequisites for this?

Answer 5

Yes, a mortgage can be created over an equitable interest

This requires compliance with s 53(1) LPA 1925 - must be in writing and signed.

Question 6

What are the remedies available to a lender of a legal mortgage?

Answer 6

• possession
• the power of sale
• debt action
• appointing a receiver
• foreclosure

Question 7

What are the two remedies a lender can exercise to bring a mortgage to an end?

Answer 7

Power of Sale + Foreclosure

either one

Question 8

How is the lender’s right to possession used?

Answer 8

Usually used as a precursor to the exercise of another remedy - either exercising the power of sale or appointing a receiver.

Question 9

Does the borrower need to be in default for the lender to exercise their right to possession?

Answer 9

No - but in practice a lender will only exercise this right if the borrower is in default.

Question 10

What are the two meanings of possession?

Answer 10

1. Taking physical possession (ousting the borrowers); or
2. Where the property is let, directing that the tenants pay their rent to the lender (rather than the borrower).

Question 11

Does a lender need a court order for possession?

Answer 11

If they can retake possession without breaching s 6 of the Criminal Law Act, a court order is not needed.

Question 12

What are possession proceedings for a residential property?

Answer 12

• Lender must comply with pre-action protocol
• Attempt to resolve any arrears prior to seeking possession
• Weighted in favour of enabling the borrower to continue to make payments and live in the property.

Question 13

What is the effect of section 36 AJA on possession proceedings?

Answer 13

Allows the borrower to ask the court to exercise its discretion to:
* adjourn proceedings; or
* on making an order for possession, suspend execution or postpone the date for possession.

Question 14

When does section 36 AJA apply?

Answer 14

• lender has started proceedings;
• property includes a dwelling-house; and
• borrower is likely within a reasonable period to pay arrears

his suggests that there is a reasonable expectation that the borrower will be able to catch up on missed payments soon.

Question 15

What does a reasonable period for the purposes of section 36 AJA include?

Answer 15

Includes the full remaining period of the mortgage

Question 16

For section 36 AJA to apply what does the court need?

Answer 16

Proof from the borrower, in the form of a detailed financial plan, demonstrating that they can pay both the mortgage installments as they fall due and any arrears.

Question 17

In regards to possession, what can the lender do where the property subject to the mortgage is producing income?

Answer 17

Lender can use the income to pay debt owed

Question 18

What is a lender’s strict duty to account?

strict duty to account is why lenders prefer to appoint a receiver in relation to an income-
producing property

Answer 18

For a lender to use income from a property to pay debt owed, they 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.

lender required to account for all income generated and must also recognize and inform the borrower of any income that could have been generated through better management practices.

Question 19

What are the requirements of a power of sale?

Answer 19

Power of sale must:
* exist;
* have arisen; and
* become exercisable.

Question 20

How can a power of sale exist?

mortgagor is borrower/// mortgagee lender

Answer 20

Either be:
* expressly stated within the mortgage deed; or
* implied into every legal mortgage.

when The mortgage is capable of being legal (s 1(2)(c) LPA 1925) and has been made by deed
(s 52(1) LPA 1925) in accordance with s 1 LPMPA 1989. The power of sale is implied into every
mortgage created by deed

Question 21

How can a power of sale arise (two ways)?

Answer 21

For the power of sale to have arisen, the mortgage money must be due.

1. Legal date for redemption has passed
2. Any installment of the mortgage money has become due

legal date for redemption has passed (usually one month into the mortgage term)

Question 22

How does a power of sale become exercisable?

Answer 22

Either:
1. Set out expressly in mortgage deed; OR
2. Lender will rely on one of the following:
* lender gives notice to borrower to repay entire debt + borrower has not paid 3 months after notice; OR
* borrowers fails to pay 2 months of mortgage payments; OR
* borrower breached a term of the mortgage (other than non-payment of mortgage money/interest)

Question 23

What does the lender check on sale (power of sale)?

Answer 23

check that the power of sale has arisen + become exercisable

Question 24

What does the buyer's check on power of sale?

Answer 24

check that the power of sale exists + has **arisen**.

Question 25

What are the lender's duties on power of sale?

Answer 25

1. act in good faith and not cheat borrowers 2. take reasonable care to obtain the true market value of the property at the date of sale (but no obligation to delay sale)

Question 26

What is the equity of redemption?

Answer 26

the equitable right for the borrower to recover the assets subject to the mortgage upon repayment of debt.

Question 27

What must a lender do if they fail to obtain the true value of a property in a power of sale?

Answer 27

Account the difference to the borrower.

Question 28

What is the effect of a lender exercising their power of sale?

Answer 28

The property buyer acquires the borrower's entire estate: * Free of any estates or interests, such as other mortgages, that the selling lender had priority over. * Subject to any estates and interests that held higher priority over the selling lender's claims.

Question 29

What are the steps for distributing proceeds of sale when a lender exercises its power of sale?

Answer 29

The selling lender, acting as a trustee, must distribute the proceeds of sale in the following order: 1. the costs of redeeming any prior mortgages (those with higher priority than the selling lender's mortgage). 2. the lender's expenses related to the sale. 3. the lender's own mortgage. 4. any remaining balance is given to the person(s) entitled to the equity of redemption, which may include subsequent lenders and the borrower.

Question 30

What is the effect of a debt action?

Answer 30

Lender can recover debt by an action for repayment on the borrower's covenant to pay, so long as the legal date for redemption has passed. ## Footnote A borrower takes out a mortgage loan of £200,000 from a lender to purchase a home, agreeing to make monthly payments over a 25-year period. Default on Payments: After a few years, the borrower faces financial difficulties and misses several mortgage payments. The lender sends reminders and notices of default but does not receive any payment from the borrower. Legal Date for Redemption: The mortgage agreement specifies that the borrower must repay the loan in full by a certain date, say January 1, 2024. This is the legal date for redemption. Post-Redemption Date: By February 2024, the borrower has still not paid the outstanding balance, which has accumulated to £195,000 due to missed payments and accrued interest. Lender's Action for Repayment: The lender can now initiate a court action to recover the £195,000 owed under the borrower's covenant to pay. This action may involve filing a claim in the County Court for the amount due.

Question 31

What is the effect of The Limitation Act 1980 on the lender's ability to recover debt?

Answer 31

Limits it to: * 6 years for the recovery of interest; and * 12 years for the recovery of capital.

Question 32

When can a lender use a debt action? | debt action for whole debt

Answer 32

In cases of negative equity after a lender's power of sale, if the proceeds are insufficient to cover the debt, the lender can legally chase the borrower for the remaining amount through a debt action. ## Footnote egative equity is a deficit of owner's equity, occurring when the value of an asset used to secure a loan is less than the outstanding balance on the loan

Question 33

What are the requirements for appointment of a receiver?

Answer 33

Power to appoint a receiver must: * exist; * have arisen; and * be exercisable. Appointment must be in ***writing*** and at the lender's discretion.

Question 34

When will a lender appoint a receiver?

Answer 34

If the property subject to the mortgage is producing income.

Question 35

What is the effect of appointing a receiver?

Answer 35

receiver has the power to demand and receive income from the property

Question 36

Does the LPA 1925 grant a receiver any power of sale?

Answer 36

No - this has to be included in the terms of the mortgage.

Question 37

In the context of a receiver appointed by a lender, who is considered the agent of the borrower?

Answer 37

The receiver is regarded as the agent of the borrower, and the borrower is solely responsible for the receiver's actions.

Question 38

What is the practical effect of a receiver being the agent of the borrower, especially in terms of the borrower's recourse to the lender for the receiver's actions?

Answer 38

The borrower cannot hold the lender accountable for the receiver's acts or omissions.

Question 39

Why is the appointment of a receiver more attractive than possession to a lender?

Answer 39

Because it shifts the duty to account and liability to the receiver.

Question 40

What are the duties of a receiver?

Answer 40

**1. Duty to Avoid Conflicts:** A receiver must ensure that their personal interests do not conflict with their role as a receiver. This means they cannot purchase the mortgaged property in a personal capacity. **2. Duty to Act in Good Faith:** A receiver is obligated to act in good faith throughout their appointment. **3. Duty of Competence:** A receiver must act with reasonable competence. The specific standards for competence depend on the nature of the property involved. **4. Duty to Determine True Market Value:** When the receiver has the power of sale, they are required to take reasonable care to obtain the true market value of the property at the date of sale. **5. Discretion to Increase Property Value:** The receiver may, but is not obligated to, take steps to increase the value of the property.

Question 41

Who do the receiver's duties extend to?

Answer 41

Any person with an interest in the equity of redemption

Question 42

What takes precedence when the interests of the lender and the borrower conflict in a receiver's role?

Answer 42

In cases of conflicting interests between the lender and the borrower, the receiver is allowed to prioritize the interests of the lender over those of the borrower.

Question 43

When can the lender apply for foreclosure?

Answer 43

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

Question 44

What is the two stage process of foreclosure?

Answer 44

1. Foreclosure Nisi 2. Foreclosure Absolutw

Question 45

What is the process of the initial stage of foreclosure - Foreclosure Nisi?

Answer 45

* involves the preparation of accounts to determine the amount owed. * followed by a six-month period during which the borrower can make the necessary payments.

Question 46

What is the process of the second stage of foreclosure - Foreclosure Absolute?

Answer 46

* title to the property is transferred to the lender; and * extinguishing the borrower's equity of redemption, effectively giving ownership to the lender.

Question 47

What happens when a property is worth more than the debt owed in a foreclosure situation?

Answer 47

The lender is entitled to keep the surplus.

Question 48

What is the outcome when the property's value is less than the debt in a foreclosure situation?

Answer 48

The borrower is released from liability. *Hence, lender would not use this remedy is not used when there is negative equity.*

Question 49

How is the borrower protected from the harsh effect of foreclosure?

Answer 49

The borrower has three key protections: * The court may re-open foreclosure proceedings in exceptional circumstances, even after a foreclosure absolute order. * In cases involving a dwelling house, the borrower can adjourn foreclosure proceedings through an application under the AJA 1970. * A judicial sale application under s 91(2) LPA 1925 can be filed in court, preserving the borrower's equity of redemption, and this can be initiated by any party with an interest in the equity of redemption. ## Footnote foreclosure transfers legal title to the lender, eliminating the borrower's right to redeem the property, whereas an application for a judicial sale preserves the equity of redemption, allowing the borrower or other interested parties to sell the property while still retaining the right to reclaim it by paying off the debt.

Question 50

protect equitable mortagges

Answer 50

Registered land - To ensure priority  equitable mortgage must be protected by way of notice on the title deeds. o If done so, it will take priority over any later mortgage. Equitable mortgages need to be protected by registration of a C(iii) land charge and if this is done then it will take priority over all later interests. o If not done so, mortgage will be void against any future purchaser for valuable consideration. ## Footnote D(ii) is restrivtive covenant

Question 51

residential property

Answer 51

Where the mortgaged property is residential and occupied, the lender will need a court order in order to take possession, but this in itself will not end the mortgage