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Free 2.1 Law Essay

John & Marie, who are married, live in 'Beecroft', Bucksbridge with their three children. 'Beecroft'is registered at HM Land Registry with Title Absolute in John's sole name.

John & Marie, who are married, live in 'Beecroft', Bucksbridge with their three children. 'Beecroft'is registered at HM Land Registry with Title Absolute in John's sole name. Marie neither contributed financially to the purchase,nor to the household expenses. Bucksbank have a charge by way of legal mortgage registered in the charges register of 'Beecroft'. John is a self-emloyed landscape gardener, but lately his business has not been doing very well. Marie does not work. John has not been able to pay the mortgage installments to Bucksbank for the last six months and has received several letters from them demanding payment. Advise John and Marie How would this advice differ had 'Beecroft' been unregistered land?

A mortgage has been defined as "a conveyance of land…as security for the payment of a debt or the discharge of some other obligation". Traditionally there have been a number of methods of creating a mortgage . Had 'Beecroft' been unregistered land, the mortgage would have been created by a charge by deed by way of legal mortgage under s.87 of the Law of Property Act 1925. This involves the mortgagor executing a deed which declares that he is charging his land by way of legal mortgage with the repayment of the sums specified. This has the same effect as if the mortgage was made by lease or sublease . Such a mortgage can be used to charge both a freehold or leasehold estate and has the advantage that in the latter instance there will be no breach of any covenant against subletting. The device of the legal charge has to be used when dealing with registered land. Section 23(1)(a) of the Land Registration Act 2002 expressly excludes the power of the owner to make a disposition by way of mortgage by demise or sub demise. Accordingly, a legal charge is the only form of mortgage used in respect of registered land. As is usual under the registration regime, the execution of the deed will not of itself create the mortgage, this only occurs upon the requisite registration of the charge. It is possible that the creation of the mortgage itself triggered compulsory first registration of the estate by virtue of the provisions of s.4(1)(g) of the 2002 Act.

Bucksbank will in these circumstances be concerned that in the event of John being unable to make good the arrears and fulfil his remaining obligations under the mortgage they should take steps to protect their security and recover their debt. This is usually achieved by a recovery of possession and sale of the property. Possession is an important prerequisite to this since it will be necessary to preserve the property and give vacant possession to any subsequent purchaser. There are a number of provisions which will protect John and Marie at least in the short term. The bank cannot simply retake possession by force since this would almost inevitably involve the commission of a criminal offence such as those contrary to ss.5 and 6 of the Criminal Law Act 1977. Since the land in question is a dwelling-house, s.36 of the Administration of Justice Act 1970 will provide an opportunity to escape an immediate order for possession if the circumstances are deemed to justify it (see below). The power of the mortgagee to sell the land will usually arise under an express term in the mortgage deed but in any event it is implied into every mortgage made by deed by virtue of s.101(1)(i) of the Law of Property Act 1925. The power arises when the mortgage money becomes due but it does not become exercisable until one of the conditions prescribed by s.103 of that Act has been met which are:

• The service of a notice requiring payment on the mortgagor and continuing default for three months thereafter;
  
• Some of the interest payable is at least two months in arrears; or
  
• There has been a breach of a covenant in the mortgage deed other than one relating to the payment of money.

So far as preventing an order for possession is concerned, John and Marie may be assisted by the decision of the Court of Appeal in Cheltenham & Gloucester Building Society v Norgan . This concerned a mortgage containing the standard terms that if any monthly instalment should be in arrear and unpaid for one month, the building society would be entitled to take possession of the property. A possession order obtained by the lenders was suspended twice before a possession warrant was issued. There were two subsequent suspensions but the arrears remained substantial before the judge issued a warrant and refused the plaintiffs' cross-application for further suspension on the ground that they would be unlikely to be able to pay the arrears within a "reasonable period". The previously harsh approach of the common law to allowing time for arrears to be cleared was mitigated by the passage of s.36 of the Administration of Justice Act 1970 which provided that the court faced with an application for possession could adjourn the proceedings, stay or suspend execution of a judgment or order for possession or postpone the date for delivery of possession for such time as the court considered reasonable where it appeared that "the mortgagor is likely within a reasonable period to pay any sums due under the mortgage…".

The initial application of this relief was restricted in Halifax Building Society v Clark in which Sir John Pennycuick VC held that the phrase "any sums due under the mortgage" applied to the whole mortgage debt. This severely limited the range of cases in which such relief would be available since, as Oliver LJ commented in Habib Bank Ltd v Taylor , "if the mortgagor was already in difficulties with his instalments, the chances of his being able to pay off the whole principle as well in a reasonable time must be considered fairly slim". This was mitigated by the passage of s.8 of the Administration of Justice Act 1973 which allowed the court to treat the "sum due under the mortgage" as being only the arrears of instalments or interest regardless of the fact that according to the terms and conditions of the mortgage the whole loan becomes payable immediately on default. Hitherto, no guidance had been given as to the meaning of repayment "within a reasonable period" but the commentary to the 1995 edition of the Supreme Court Practice (Vol. 1, para.88/5/96) suggested that in practice this should be a period of at least two years and in appropriate cases may be a "much longer time". By the time of Norgan it had become accepted that the "practice of convenience" adopted by most District Judges was to allow a period of between two and four years and it was the application of that "rule of thumb" which ay at the heart of the appeal. Waite LJ weighed the conflicting arguments of favouring such a principle with the ethos of avoiding repossessions and consequent homelessness where it was practical and realistic to afford the mortgagors the opportunity of doing so. His Lordship (at 354-5) acknowledged the argument that the process of allowing the opportunity to repay arrears over the whole of the remaining repayment period would require far more detailed calculation and assessment of the mortgagor' ability to pay than had hitherto been the case but felt that this "should not be allowed…to stand in the way of giving effect to the clearly intended scheme of the legislation". He further prayed in aid the undesirability of refusing such relief when the end result would be further multiple applications for possession and suspension. Evans LJ, concurring, issued (at 358) a helpful practical checklist of factors which should be considered in assessing what might be a "reasonable period" which included the reasons for the accumulation of the arrears, how much the borrower could reasonably be expected to pay now and in the foreseeable future and whether there were any reasons affecting the security of the lender which should influence the payment period. Norgan has been given a cautious welcome by commentators who make the point which John and Marie should take to heart that a Norgan readjustment is so radical a step as to probably represent a "one-off" opportunity and will probably only be available to borrowers who are able to present a sensible, workable budget in circumstances in which the security of the lender will not be prejudiced. Morgan (Op. Cit., p.557) concludes:

"While Norgan has been heralded as a boon to borrowers, it would be naïve to think that the decision will do any disservice to institutional lenders."

Thus on the facts as presently stated John and Marie may well encounter difficulty in availing themselves of this authority. John's business has been failing for some time and Marie does not work. Accordingly, as presently advised, they are likely to have difficulty in convincing a District Judge of their ability to meet the arrears even if they are allowed the whole of the remainder of the term in which to do so.

If such a possibility is not viable, there are certain further protections available to John. It was held in Target Home Loans Ltd v Clothier that an order for possession with a view to sale by the mortgagee can be delayed if the court believes that the mortgagor may obtain a higher price if he were allowed to sell the property himself. However, this approach (in common with the use of the powers under s.36 of the Administration of Justice Act 1970) was cautioned against in Cheltenham and Gloucester plc v Krausz in circumstances of negative equity. Once again, the ability of the mortgagor to protect his security is seen to be regarded as a prime consideration.

Upon a sale, the mortgagor is under a duty to take reasonable care to obtain a proper price. (This is a statutory duty now imposed upon Building Societies by Schedule 4 of the Building Societies Act 1986.) It was held in Predeth v Castle Phillips Finance Co that if a property is sold at a "knock down" price without exposing it properly on the market for sale, the mortgagee will be liable to the mortgagor. If Bucksbank eventually sell 'Beecroft' they will become a trustee of the proceeds of sale and s.105 of the Law of Property Act requires that the proceeds be applied in the following order:

• Payment of any sums needed to discharge any encumbrance prior to the mortgage and to which the sale was not made subject;
  
• Payment of the costs and expenses of the sale;
  
• Discharge of the mortgage debt including any interest and other sums due.

The balance will then be payable to John. However, if this is a "negative equity" situation in which the sale does not produce sufficient sums to repay the mortgagee, Bucksbank will still be able to sue John for the balance of the debt . The "sting in the tail" of this principle is that because a mortgage created by a deed is a "specialty", the limitation period in respect of such proceedings is 12 years as established in Bristol & West v Bartlett . Thus even if John were able to escape repossession in the manner which is becoming increasingly common (i.e. by voluntarily surrendering possession of the property to the bank) the outstanding debt could be recovered from him for many years to come.

It is also necessary to consider Marie's position. As the spouse of John, Marie has rights of occupation conferred by s.30 of the Family Law Act 1996 since John is entitled to occupy the dwelling by virtue of a beneficial entitlement. These rights are:

• Not to be evicted or excluded if already in occupation; and
  
• With the leave of the court, to enter and occupy if not already in occupation.

By virtue of s.31 of the Act, these rights constitute a charge on the estate or interest of the other spouse. If the land is registered, the charge should be protected by an entry on the register and cannot constitute an overriding interest. If the land is unregistered, these rights should be registered as a Class F land charge pursuant to s.2(7) of the Land Charges Act 1972.

The circumstances of the mortgage to Bucksbank are not described and it is therefore possible that their interest will be prejudiced by Marie's occupation of the property. In the case of unregistered land, the operation of the notorious s.70(1)(g) of the Land Registration Act protects as "overriding" and therefore binding upon a purchaser (or, more pertinently, a lender acquiring an interest by mortgage) "the rights of every person in actual occupation of the land…save where enquiry is made of such a person and the rights are not disclosed". In respect of registered land, Schedule 3, paragraph 2 of the Land Registration Act 2002 Act provides that a registered disposition is subject to an interest belonging at the time of disposition to a person in actual occupation , so far as relating to land of which he is in actual occupation except for:

"(c) an interest -
(i) which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition, and
(ii) of which the person to whom the disposition is made does not have actual knowledge at that time."

These provisions do not create any new rights in land but give overriding effect to any interest already belonging to an occupier which has not been protected by an entry on the register. However, it should be noted that the rights of the person in occupation must amount to a recognised interest in land. This principle was therefore capable of application in Williams & Glyn's Bank Ltd v Boland in which a wife had acquired an interest in her husband's property by contributing to the purchase price. The husband remortgaged the property and the wife resisted possession proceedings on the basis that she had a prior beneficial interest in the land by virtue of a trust resulting from her contributions and the bank, that the bank had failed to establish her occupation by a reasonably careful inspection and that the bank had therefore to take subject to that interest. The result of this is that provided the occupation is discoverable, the purchaser may still be bound by an interest of which he does not know. This decision provided something of a "jolt" to lenders and it thereafter became standard practice to enquire of the existence of any persons in actual occupation and to enquire of them the nature of their interest.

There must be some doubt, however, whether this principle will be of assistance to Marie. Title to 'Beecroft' is in John's sole name. It may well be that the mortgage with Bucksbank was taken out upon the first purchase of the property for the purpose of that purchase. If this were so, the question of an overriding interest does not begin to arise. Even if this were a remortgage situation as in Boland, there is nothing in the present instructions to indicate that Marie has acquired an interest in the land capable of being an overriding interest either under the Land Registration Act 1925 or the more conservative provisions of the Land Registration Act 2002. It is specifically stated that Marie made no contribution to the purchase price therefore no resulting trust would arise. Given that she did not make any contribution to the household expenses either, she would appear unable to argue that a constructive trust arose by implied agreement. By contrast, if her "matrimonial home rights" as described above had been protected in either of the pays described prior to the execution of the mortgage, they would be binding upon Bucksbank as on a purchaser.

Bibliography

Crabb, L., Occupation Rights and Mortgages, Conv. 1993, Nov/Dec, 478-484

MacKenzie, J-A. & Phillips, M., Textbook on Land Law (10th Ed., 2004)

Morgan, J., Mortgage Arrears and the Family Home, LQR 1996, 112 (Oct), 553-557

Oakley, J., Megarry's Manual of the Law of Real Property, (8th Ed., 2002)

Thompson, M., Back to Square Two, Conv. 1996 Mar/Apr 118-125

 

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