Mortgages are an important area of Land Law. On my university course, only Legal Mortgages are covered, and therefore I will not be discussing Equitable Mortgages.
Secured loans are ones that can be protected so that if the borrower defaults on payments, the lender has the right to repossess. In this case, it will be possessing the land. A legal mortgage is a secured loan. However, if it is not registered, then it will not be protected and therefore be unsecured. Unsecured loans are where the lender will not be allowed repossess if the borrower defaults on payments.
Due to increasing house prices, and gradually paying off the mortgage, at some point, land itself should be worth more than the remaining debt that needs to be paid. This is called equity on a property. Once land gets to this point, the borrower can take out another mortgage on the property if they wish.
Mortgages are a legal interest in Land- Section 1.2 LPA 1925. This means that it must be created by way of Deed- Section 52 LPA; which must comply with section 1 LP(MP)A which requires the deed to:
- Be clear on the face that it is a Deed
- Be validly executed
- Signed by both parties, Witnessed, and Delivered
As a Registerable Disposition, a mortgage will have to be registered to become valid as a mortgage. This is common practice for mortgages to be registered, and usually there is no problem with this. It will be registered under the Charges register, and will have 2 entries; the first explaining that there is a charge by way fo mortgage on the property, the second explaining who the has the benefit to the mortgage.
In commercial situations, a mortgage granted to a company will have to be registered at Companies House.
When grating a mortgage, the mortgagee may decide to impose a restriction on the property. This is common practice and will impose a restriction on any dealings with the land without their permission, which can also include grating 3rd party rights over the land. Therefore, if title were to change without permission, the new owner would be allowed to have their name put on the register as the registered proprietor of the house.
Rights of the Mortgagor on Early Payments
One right a mortgagor will always have, is the right to repay early. Mortgages are affected by the strength of the currency, and therefore will rise and fall with the interest rate that gets set from the Bank of England. Therefore, by repaying early the mortgagee will incur an early redemption penalty, thus making the mortgagor repay more, as they would have potentially lost out on the potential interest they would receive.
Remedies if the Mortgagor Defaults Payment
Debt action– the mortgagee could apply to court and receive a debt action. this will force the mortgagor to pay the mortgagee. Although this is a seemingly good option, in reality, the reason why the mortgagor will default, is because they do not have the money to pay.
Appointing a receiver (taking possession for sale or let) – this is a statutory implied term, but will most likely be in the mortgage agreement. The right to appoint a receiver must have arisen, and become exercisable by one of three ways. If it has arisen, the date redemption has passed- s101(1)(iii). It has become exercisable when; notice has been served, and 3 months of no payment thereafter, or any interest is at least 2 months in arrears, or a mortgage term has been breached- S103.
A receiver must be appointed in writing- s109 LPA. The job of a receiver is to work as the manager of the mortgaged property. Although appointed by the mortgagee, they work as an agent for the mortgagor in order to sort out payments, or sell the property. A mortgage company will always take possession rather than appointing a receiver as it is a less onerous, however they will appoint a receiver as they will not want to be personally liable for mismanagement of property. By appointing a receiver, the aim is to repay the outstanding debt by generating profit from the property, or to sell the property all together to generate the income.
The receiver must pay money generate from the property or sale in order of:
- Out goings on the property
- Insurance premiums in respect of the land and their own fees
- The mortgagee’s interest on loan
- The mortgagee’s capital, if the mortgagee agrees
- Any left-over goes to the mortgagor.
Receivers are generally only used in commercial mortgages.
Foreclosure– This method is rarely used. A court order is required for foreclosure. The idea of foreclosure is to vest the mortgagor’s estate in ownership of the mortgagee’s hands in repayment for the debt- s88 and s89 LPA. If the property is worth more than the outstanding mortgage, the mortgagee will not be required to pay anything to the mortgagor. This is unfair and one reason it is rarely used, and when it is, it will only be used when the property is in negative equity. Another reason it may not be used is that the property may be redeemed after the foreclosure has gone through. The court can reopen the situation after foreclosure has been granted looking at the circumstances of the mortgagor, such as in the case of Campbell v Holyland.
Taking possession– the most common final remedy for the mortgagee is taking possession for sale, implied into every mortgage through s101(1)(i). This is done in order to recoup the debt that is owed to them. In order to take possession, it must have Arisen and become Exercisable just like when appointing a receiver.
The mortgagee does not have to make an application to the court- s91(2), but will anyway in order not to be liable Under the criminal Law Act s6 for unlawful eviction. The mortgagor is protected even further under s104, which makes the mortgagee do everything they can in order to help the owner make payments. The Pre-Action Protocol for Possessions Claims Based on Mortgage Arears is a way the mortgagee can try to help the mortgagor resume payments on the property.
The mortgagee will always want the mortgagor to resume payment. This is because whichever method is used to get the debt back, is onerous. Therefore, it is the best interests of all parties to try to repay the debt without making any court orders, therefore when hitting financial difficulty, it is always important to aware the mortgage company. In this respect, the mortgagor is protected by the fact that the mortgagee does not want to take possession and will only do so if there is no other way to get their money back as they will incur costs.
The mortgagor, through equity will always have the right to redemption after the date of redemption, which did not used to be the case. Because of this right, the mortgagee can be sued in negligence if they wrongfully take possession.
When granted an on order for sale the mortgagee must distribute the money in a specific order:
- Anyone lender that has priority
- Expenses of sale e.g. solicitors/conveyancer’s
- The remaining payment on their loan
- Any further loans that are below in priority
- Any further proceedings go to the mortgagor
Priority is quite simply the order in which the loans companies are register. It does not matter when the loan on the property was created, the date of registration is the key date, and the one which will rank lenders in priority.
Third Party Rights over Mortgaged Properties
Any interests from third parties that were in force and binding before the date of purchase on the property will still always run with the land. However, with the restriction put in place on the register that potentially limits any dealings on the property, any rights that were not given permission from the mortgage company, will no longer run with the land.