Creating a Mortgage Lecture

Introduction

The focus of this chapter will be on the creation of a mortgage. A mortgage is something you will have heard about before, but may not have an understanding of. When an individual wishes to pay for the purchase of a property, it is very unlikely they will have sufficient free assets to buy the property outright. Therefore, they will seek a loan to finance this up-front purchase. In return for the loan, the lender will take ‘security’ over the property. In other words, if the borrower of the money does not pay their loan back, the lender may, subject to the rules on enforcement, sell the property in order to get the money they lent back plus interest. This is called a mortgage. Mortgages can also operate on land already owned. For example, if I own a property outright worth £100,000, I may wish to mortgage this property for a £50,000 loan in order to start my own business. Again, if I fail to pay the loan repayments back, the lender may exercise its power of sale to get their money back.

The terms ‘mortgage’ and ‘charge’ are often used interchangeably. In England and Wales the usual mortgage of registered land is a legal charge. A charge secures the debt without transferring ownership. Other property, including a car, may also be mortgaged. This chapter will focus solely on mortgages that relate to land, you may come across charges of other property in your studies of commercial or company law.

What may seem a basic concept is complicated by the conflicting rights of the mortgagee/chargee (the lender of the money) and the mortgagor/chargor (the borrower of the money). Imagine a scenario where the mortgagor has had a number of financial emergencies in one month; their car has broken down and so has their boiler. Unfortunately, they cannot pay their mortgage repayment on time. Would it be fair if the mortgagee could immediately take and sell the property to get their money back? Clearly not. Therefore, there are various rules and safeguards that we will explore.

What is a mortgage?

The case of Santley v Wilde [1899] 2 CH 474 defined a mortgage as a conveyance of land as security for the payment of a debt or the discharge of some other obligation. As mentioned in the introduction, in its most basic form it is the borrowing of money with security for that debt. If the borrow defaults on the payment, a lender may use the property to recover the sum and any interest. The most common way a lender will do this is by selling the property.

The different types of mortgages

There are a number of differing types of mortgages. The majority of these are no longer used, however, they may still exist and need to be understood. In modern times, the registration of title means that the ‘registered charge’ is most commonly used.

Legal or equitable

The first way a mortgage or charge can be differentiated is by being either legal or equitable. Almost any interest in land can be used as security under a mortgage. However, the type of interest used as security will impact the type of mortgage formed. If a legal interest is used as security, the mortgage can be legal or equitable. However, where an equitable interest is used, for example, an equitable lease, the mortgage can only be equitable.

Pre-1926 mortgages

Although this method of creating a mortgage is no longer possible, it is important to know how it operates in order to understand old case-law. This mortgage would be made by the borrower transferring his legal estate to the lender in exchange for the loan. If the borrower defaulted on a payment, the lender would then sell the property. One of the main issues here was that it would not allow the borrower to place a second legal mortgage on the property if they so-wished, because the lender had legal title of the property. The borrower could still mortgage the equity of redemption. The Law of Property Act 1925 reformed this by creating new forms of mortgages that did not involve the transfer of legal title. These different methods will now be explained.

Legal mortgage under the Law of Property Act 1925 S85

As an alternative to the pre-1926 method of transferring legal estate to the mortgagee, S85 allows the mortgagor of an unregistered freehold to grant a long lease of the property to the mortgagee. The lease will be terminable once the loan is repaid.

The advantage of this method is that the legal title of the estate is retained by the mortgagor, whilst the mortgagee also has an estate with rights in relation to the land. The lease will be created with an extremely long term, for example, 1,000 years, to ensure the lease does not expire before the debt is repaid. There is also a safeguard under S85(2) of the statute which provides that if the pre-1926 method of creating a mortgage is used by transferring legal estate, a first or only mortgage over an unregistered freehold takes effect as a 3,000 year lease. A subsequent mortgage so made takes effect for one day longer than the immediately preceding mortgage term.

This method of creation of a mortgage is advantageous because it allows a second mortgage to be granted over the property. This may be created by granting a lease to a second mortgagee that is longer than the first lease to the original mortgagee.

Legal mortgage of a term of years under the Law of Property Act 1925 S86

Where the legal estate being mortgaged is a lease, the whole term of years would be assigned to the mortgagee pre-1926. Under S86 an unregistered leasehold may be mortgaged by a sublease subject to cesser on redemption and at least one day shorter than the mortgagor’s term. The same advantages as above apply - the mortgagor retains a legal estate, yet the mortgagee has an estate in the land. Similar to above, an attempt to use the pre-1926 method of assigning the lease will give a first or only mortgagee of the unregistered lease a sublease for the term expressed to be assigned, minus 10 days. This period of ten days allows a second sub-lease to be granted for a second mortgage.

Charge by deed under the Law of Property Act 1925 S87

This method of creating a legal mortgage is the method used most commonly today. As opposed to granting a lease or sub-lease over the property to the mortgagee, a deed will be executed by the mortgagor confirming that there is a mortgage/charge over his land by way of legal mortgage, the condition being repayment of the loan plus interest.

S87 gives the same powers and remedies to the mortgagee as would be given if the property had been leased or subleased by S85 or S86.

The S87 method has two main advantages of the S85 and S86 methods. Firstly, it is in a very simple form, a simple deed document; there is no need for leases or subleases as per the other methods. Secondly, particularly relevant to S86, if there is a covenant against sub-leasing the property, the S87 method of creation circumvents this covenant, as there is no actual sub-lease. A separate restriction on charging the lease must still be observed.

Therefore, the S87 method is the most commonly used and is the usual method of mortgage. These charges will usually include a number of covenants, for example, preventing the mortgagor from granting leases. Provisions detailing repayment and interest terms will also be included.

Registered land

A legal mortgage of registered land must take the form of a charge. Under the Land Registration Act 2002 S23(1)(b) the owner has power to charge the estate at law. S23(1)(a) excludes a mortgage by demise or subdemise. Similar to S87, a charge should be created by the completion of a deed. However, in line with other provisions in relation to registered land, the charge must be registered before it will operate at law (S27(1) and (2)(f)). A valid deed may take effect in equity pending registration.

The case of Cityland and Property (Holdings) Ltd v Dabrah [1968] Ch 166 concerned a charge of registered land. A deed must show that the land is charged with payment of the debt. S25 of the Land Registration Act 2002 provides for rules as to form and content. Form CH1 may be used under the Land Registration Rules 2003 rule 103. A paper deed by an individual must be clearly intended as a deed, signed in the presence of a witness who attests the signature (or signed at the individual’s direction in that individual’s presence and in the presence of two attesting witnesses), and delivered as a deed (Law of Property (Miscellaneous Provisions) Act 1989, S1). A digital mortgage complying with S91 of the Land Registration Act 2002 and the applicable Land Registration Rules is also treated as a deed. Where a UK company grants a registrable charge, it must normally also be registered at Companies House within 21 days beginning the day after creation to be effective against a liquidator, administrator or creditor (Companies Act 2006, ss.859A and 859H).

A mortgage obtained by undue influence may be set aside against a lender fixed with notice of it. Where one partner stands surety for the other in a non-commercial transaction the lender is put on inquiry and should take the steps in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, including obtaining confirmation of legal advice to the surety. This also applies to joint borrowing where, on the face of the transaction, a more than trivial part will discharge one borrower’s separate debt and may not benefit the other (Waller-Edwards v One Savings Bank plc [2025] UKSC 22).

First registration

As we know from the previous chapters, one of the aims of modern land law is for all land to become registered, due to the difficulties that come with unregistered land. Unregistered land must be registered when certain things happen with the land. The grant of a protected first legal mortgage is one of those triggers.

As per S4(1)(g) of the Land Registration Act 2002, the creation of a ‘protected first legal mortgage’ of a qualifying estate means the property will then be required to be registered. A qualifying estate here is an unregistered freehold or a lease with more than seven years unexpired. The mortgage must rank ahead of any other mortgage and take effect from its creation as one to be protected by deposit of the title deeds (S4(2) and (8)). The owner normally has two months to apply. Without registration or an extension, the mortgage becomes void at law and takes effect as a contract to create the legal security (ss.6-7).

Following the registration of the estate, the charge must be then registered as per the Land Registration Act. Once registered, the charge will take effect as a charge by deed by way of a legal mortgage - even if it was created in a different manner such as a S85 or S86 mortgage.

Equitable Mortgages

The equitable principle of ‘Equity regards as done that which ought to be done’ can apply to create an equitable mortgage. This principle operates where there has been a specifically enforceable contract to create a legal mortgage but it has not yet been executed as a deed. This will give rise to an equitable mortgage from the date the contract is formed. S2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires the contract to incorporate all the terms expressly agreed in one document or in exchanged contracts, signed by or on behalf of each party. A defective deed may still amount to such a contract. The principle depends on specific performance being available (Walsh v Lonsdale (1882) 21 ChD 9). Damages may be available for breach of a valid contract.

Informal mortgage by deposit of deeds

Historically, equity protected a lender where it was clear that the owner of the property intended to charge their property in relation to a loan. One of the main examples was where the estate owner deposited their title deeds with the lender in return for a loan. The case of Russel v Russel (1783) 1 Bro CC 269 confirmed this.

However, for an informal mortgage to be formed, S2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires there to be an agreement made in writing. This was confirmed in United Bank of Kuwait plc v Sahib [1997] Ch 107, meaning the simple deposit of deeds with the lender is not enough to create a mortgage today. There must be a compliant contract or a separately effective grant of security.

Equitable mortgage of an equitable interest

As was previously mentioned, a legal mortgage cannot be created in an equitable interest. The borrower may assign the equitable interest to the lender subject to redemption, or charge that interest in equity. A disposition of a subsisting equitable interest must generally be in signed writing (Law of Property Act 1925, S53(1)(c)). It does not transfer the legal estate.

Rights of the mortgagor

Now we know exactly how a mortgage is created and the different forms it can take, we can begin to look at the rights of the mortgagor and mortgagee. We will start with the mortgagor.

The right to redeem

The right of redemption refers to the right of the borrower to ‘redeem’ the mortgage once the loan and all of the interest has been repaid. Following this repayment, the mortgage ends and the lender no longer has any right over the property.

Redeeming at law

The right to redeem at law is a contractual right. Therefore, the borrower should turn to the contractual provisions to identify when they can redeem. It may be a certain date and in a certain way. The bargain generally governs redemption at law, subject to statute and equitable limits on its terms - Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25.

Redeeming at equity

The equitable right of redemption is far more relaxed than its legal counterpart. After the contractual redemption date the borrower may still redeem by paying the principal, interest and costs properly secured, until the right is extinguished, for example by a binding sale under the power or foreclosure absolute. This approach is taken by equity as the purpose of the mortgage is to provide security for the loan - once this has been paid, there is no reason why the mortgage should continue to exist.

The equity of redemption

From the creation of the mortgage, the mortgagor owns the ‘equity of redemption’, this must be distinguished from the equitable right to redeem - if you are faced with a question in relation to an equitable redemption ensure to use this terminology. This refers to the mortgagor’s equitable interest in the property, which is an interest in land - Pawlett v Attorney General (1667) Hardres 465.

Protection on the equity of redemption

Equity protects the rights of the mortgagor, and does not allow any arrangement that prevents the mortgagor from redeeming, but a valid independent collateral advantage may continue after redemption. Some of these restrictions will now be considered.

Prevention of redemption

If a provision in a mortgage prevents a mortgagor from redeeming it will be void. For example, as seen in Toomes v Conset (1745) 3 Atk 261 a condition that would result in the land becoming the mortgagee’s absolutely.

This equitable principle even prevents the mortgagee from having an option to buy the property as part of the mortgage, as if exercised, the mortgagor’s right to redeem would disappear. A genuinely independent later bargain is distinguishable (Jones v Morgan [2001] EWCA Civ 995).

Postponement of redemption

A provision that postpones a redemption in such a way that the right to redeem is worthless will also be void. A valid contractual redemption date ordinarily governs when redemption can first be required. For mortgages within FCA rule MCOB 2A.4.1R the borrower has a right to repay early, in full or in part, subject to any permitted early repayment charge.

Other advantages for the mortgagee

The mortgagee may also insist on terms which are unrelated to the actual mortgage, but provide a benefit to the mortgagee. For example, in a commercial mortgage, the mortgagor may agree to only buy their supplies from a company owned by the mortgagee.

These kinds of agreements must not be unconscionable, operate as a penalty or be inconsistent with redemption. Competition law may also apply. A tie can be valid for the duration of the mortgage (Biggs v Hoddinott [1898] 2 Ch 307). Whether it can continue after redemption depends on the nature and terms of the bargain.

Despite the above case, oppressive or unconscionable agreements may be invalid even whilst the mortgage agreement is in effect. An example of this comes from Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166 where in the circumstances an excessive premium on the mortgage was oppressive and was held to be invalid.

Right to grant a lease

A mortgagor may grant a lease which binds the mortgagor but does not bind a prior mortgagee. A charge under S87 does not itself transfer a lease to the mortgagee.

S99 of the Law of Property Act 1925 gives a mortgagor in possession a statutory power to grant qualifying leases binding on incumbrancers. Its conditions include reserving the best rent reasonably obtainable without a fine. Subject to the agricultural exceptions, the mortgage deed or other written agreement may vary or exclude the power. The mortgagee may also consent to the letting.

Right to sue

The mortgagor also has a right to sue in relation to their land, despite the estate being subject to the rights of the mortgagee. Under S98 of the Law of Property Act 1925 a mortgagor entitled to possession or rents may ordinarily sue in their own name for possession, rents or trespass until the mortgagee gives notice of an intention to take possession or receive the rents.

Right to surrender

Under S100 of the Law of Property Act 1925 a mortgagor in possession may accept a surrender to enable an authorised lease to take effect immediately or within one month. The new term must not be shorter than the unexpired term surrendered, and the statutory conditions on rent and any necessary consent must also be met.

Rights of the mortgagee

The right to title deeds and charge certificates

In relation to unregistered land the first legal mortgagee normally has the right to possession of the title deeds (S85(1) and S86(1)). Holding the deeds protects the security but does not make a further mortgage impossible. While the right to redeem subsists the mortgagor can inspect and copy title documents at reasonable times and at their own expense (S96).

As discussed earlier in the chapter, with registered land, a legal charge must be registered. As per Section 27(2)(f) of the Land Registration Act 2002, the charge must be registered with the mortgagees name as the proprietor. Charge certificates ceased to be issued when the 2002 Act came into force on 13 October 2003. Existing certificates have no legal significance.

The right to possession

Under S87 the mortgagee has the protection and remedies of a mortgagee by demise or subdemise. At common law a legal mortgagee ordinarily has a right to possession of the land from the date of the mortgage (National Westminster Bank plc v Skelton [1993] 1 WLR 72). The mortgage terms may defer that right until default, and statutory and regulatory protections can restrict enforcement.

Clearly, it would not be normal practice for the mortgagee to take possession whenever they like. Usually, it is only used prior to the mortgagee exercising their right of sale when the mortgagor has defaulted on repayment. A land mortgage securing a regulated mortgage contract, a regulated credit agreement or another agreement within S126 of the Consumer Credit Act 1974 can be enforced only on a court order. For mortgages within FCA rule MCOB 13.3.2AR, repossession is a last resort after all other reasonable attempts to resolve the position have failed. The residential mortgage arrears pre-action protocol requires the parties to consider alternatives before proceedings. A breathing space moratorium covering mortgage arrears normally prevents enforcement of those arrears without the court’s permission. Current mortgage instalments remain payable (Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020). The protections afforded to the mortgagor will be explored further later in this chapter.

The right to insure

Due to the mortgagee’s interest in the property, they will want to ensure that the property is insured, as damage to the property may reduce the value of their security. Therefore, terms relating to the mortgagor providing insurance for the property are commonplace. In the absence of a contrary intention, S101(1)(ii) of the Law of Property Act 1925 gives a mortgagee under a mortgage by deed power to insure against loss or damage by fire, subject to S108. The premiums paid by the mortgagee will be added to the money owed by the mortgagor.

The right to lease

Once a mortgagee takes possession of a property, they then have a right to lease the property. A lease authorised by S99 binds the mortgagor and prior incumbrancers, subject to the statutory conditions and terms of the mortgage. However, these leases are rare as once possession is taken the mortgagee is usually looking to sell the property

Remedies of the mortgagee

As a mortgage provides security for the loan, a number of remedies are available to the mortgagee in the event of a default of the mortgagor. The most obvious remedy would be a claim under contract law for repayment of the loan. However, the mortgagor evidently does not have the money to pay the mortgage repayments, therefore it is unlikely you will be able to recover the debt from them. Therefore, a mortgage allows for more complex remedies to ensure the security of a mortgage is effective.

Foreclosure

Foreclosure is the process by which a court extinguishes the equity of redemption and vests the mortgaged estate in the mortgagee. The remedy of foreclosure cannot be effected until the right to repayment of principal has fallen due. A failure to pay an instalment of interest does not necessarily make the principal repayable early - Williams v Morgan [1906] 1 Ch 804.

The first step of foreclosure is for the mortgagee to obtain a court order as per Re Farnol Eades Irvine & Co Ltd [1915] 1 Ch 22. An initial order fixes the amount owed and gives a final opportunity to redeem. Only an order for foreclosure absolute cuts off the right to redeem and vests the estate in the mortgagee, subject to interests with priority (S88(2) and S89(2)). The mortgagee can then sell the property. It is interesting to note that if the property sells for more than the debt owed, the mortgagee does not need to pay the balance to the mortgagor. This is one of the main reasons foreclosure is rarely used in modern times, as it is unfair on the mortgagor, another reason for this is that mortgagor has the right to ask for an order for sale rather than a foreclosure under S91(2) of the Law of Property Act 1925, and as you will see when we explore an order for sale it is much preferable.

Possession and sale

We have touched on how a mortgagee will take possession of a property in order to repay his debt, which will usually be by a sale. However, there may be certain circumstances in which the mortgagee may use any income generated from the property to repay the debt. For example, if the property has been let out to a tenant. In these circumstances, a mortgagee may appoint a receiver to manage the land and collect income without the mortgagee itself taking possession. The receiver’s powers and duties are considered below.

Section 101(1)(i) of the Law of Property Act 1925 grants the mortgagee under a mortgage by deed the power to sell the land, unless the deed provides otherwise. The power arises when the mortgage money is due, which is usually the contractual date of redemption. For the statutory power to be exercisable, one of the following conditions in S103 must be met, subject to any variation in the deed:

1. The mortgagee must serve a notice that payment is required on the mortgagor and this default continues for three months; or
2. The interest payable is two months in arrears; or
3. A provision of the deed or mortgage legislation binding the mortgagor or a person who concurred in the mortgage has been breached, other than a covenant to pay principal or interest.

This remedy is advantageous in comparison to foreclosure for a few reasons. Firstly, the statutory power of sale can ordinarily be exercised without a court order, subject to any applicable statutory requirement for enforcement by court order. The sale may be negotiated in any way the parties see fit, it may be through an auction, for example, and the mortgagee may also place conditions on the sale. The sale is also preferable to the mortgagor as the mortgagee may be liable to the mortgagor for loss caused by failing to take reasonable care to obtain the proper price.

The case of Target Home Loans Ltd v Clothier [1994] 1 All ER 439 also provides for an interesting advantage to the mortgagor. The court may delay an order for possession where the evidence shows a realistic prospect that the mortgagor can sell within a reasonable period and pay the sums due. The case of Barrett v Halifax Building Society (1996) 28 HLR 634 concerned a sale by the mortgagor and was doubted in Krausz. A higher price is not presumed. If the property is in negative equity, a proposed sale alone will not satisfy S36 of the Administration of Justice Act 1970 unless the shortfall can also be paid within a reasonable period. The court has a separate discretion to order a sale under S91(2) of the Law of Property Act 1925 even over the mortgagee’s objection (Palk v Mortgage Services Funding plc [1993] Ch 330). Where the mortgagee or its receivers are already taking steps to sell, unusual circumstances are needed for the court to give conduct of the sale to the mortgagor (Fairmont Property Developers UK Ltd v Venus Bridging Ltd [2025] EWCA Civ 1513, [38]-[42]).

What happens once the property has been sold?

When a mortgagee sells a mortgaged property, they transfer good title to the purchaser free of any of the mortgagor’s interests and rights. However, the property will be subject to estates and interests which have priority over the mortgage (S104(1)). By way of example, if a property had been mortgaged twice, once to Bank A, and five years later to Bank B, with Bank A ranking first. If Bank B sold the mortgaged property, the buyer would take subject to the mortgage of Bank A, as this interest existed before Bank B’s mortgage. If Bank A sold the mortgaged property, the buyer would not be subject to Bank B’s mortgage.

You should remember that even where the mortgagee holds only a mortgage term under S85 or S86, or a charge under S87, any purchaser of the land from the mortgagee will obtain the full estate of the land, not just the lease/sublease.

If the mortgagee has sold the property to a purchaser whilst the mortgagor retains occupation in the property, the new owner will be able to obtain an order of possession against the mortgagor.

What happens to the proceeds of sale?

S105 of the Law of Property Act 1925 states that the mortgagee selling the property becomes a trustee of the proceeds of sale. The proceeds of sale must then be distributed in this particular order:

1. The payment of any money required to discharge encumbrances prior to the mortgage which the sale is not subject to;
2. Payment of costs, charges and expenses properly incurred in connection with the sale or an attempted sale;
3. The amount required to discharge the mortgage debt, including interest and any other payments required
4. The balance is to be paid to those entitled, including any subsequent mortgagees in order of priority before any residue goes to the mortgagor (British General Insurance Co Ltd v Attorney-General (1945) 12 LJNCCR 113).

As you can see, this is a huge difference from foreclosure, as the mortgagor will actually be able to retain any balance of the proceeds of sale left after the discharge of the debt.

If the proceeds of sale are insufficient to discharge the mortgage debt after all of the other repayments, the mortgagee retains the power to sue the mortgagor for the remainder of the debt as per Rudge v Richens (1873) LR 8 CP 358. This often leaves the mortgagee out of pocket, as a mortgagor’s only valuable asset is likely to have been the property itself. The ordinary limitation period for an action to recover secured principal is 12 years from accrual of the right to receive it. For arrears of interest it is six years from the date the interest fell due (Limitation Act 1980, S20). A qualifying acknowledgment or part payment may start time running afresh. Separately, where FCA rule MCOB 13.6.4R applies, a lender deciding to pursue a sale shortfall in England or Wales must notify the borrower of that intention within six years of the sale.

Protection for the mortgagor

The process of possession and sale seems fairly straightforward. However, as you can imagine, there are a myriad of situations in which this will be extremely detrimental for the individuals living in the home. If they do not have the funds to pay a mortgage, is it likely they will be able to begin renting another property to live in?

Ability to pay debts

The first protection afforded to the mortgagor is where they can provide evidence that despite being in arrears to the mortgagee they will be able to pay their debts shortly. This may justify postponing possession while the arrears are paid.

Obtaining of possession

Possession is not a prerequisite to exercising a power of sale. Using or threatening violence to secure entry without lawful authority, knowing someone present opposes entry, is an offence under S6 of the Criminal Law Act 1977. Entitlement to possession is not itself lawful authority to use violence. Where possession proceedings are brought, the court’s power to give time to pay is subject to statutory conditions (Cheltenham & Gloucester plc v Krausz [1997] 1 All ER 21).

Dwelling-houses

When a mortgagee brings possession proceedings concerning land consisting of or including a dwelling-house, S36 of the Administration of Justice Act 1970 allows the court to adjourn the proceedings, stay or suspend enforcement of an order, or postpone possession if the borrower is likely within a reasonable period to pay the sums due or remedy another default. It does not apply to a foreclosure action in which possession is also claimed. With an instalment mortgage, S8 of the Administration of Justice Act 1973 allows the court to disregard an acceleration clause. A repayment proposal must be realistic and ordinarily cover current instalments as well as the arrears (First National Bank plc v Syed [1991] 2 All ER 250). Where Part IX of the Consumer Credit Act 1974 applies, a time order under S129 may also allow payment by instalments on terms the court considers just.

Where no statute or term requires a court order, a mortgagee entitled to possession may enter peaceably, as happened when the house was empty in Ropaigealach v Barclays Bank plc [2000] QB 263. S36 does not itself require the lender to bring proceedings.

This protection is not afforded to the mortgagor if they give up possession of the property only to later realise that they may use this protection to delay the sale - Barclays Bank plc v Alcorn [2002] All ER (D) 146

Reasonable period of time

A ‘reasonable’ period of time has been used numerous times in this section. What exactly is this reasonable period? The courts take a holistic approach, considering the circumstances of each case.

Mortgagee’s duty to obtain a proper price

The mortgagor is also afforded protection by the mortgagee’s duty to obtain a proper price for the property. This is highlighted in Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113, where it was compared to a duty of care. A receiver exercising a power of sale also owes a duty to take reasonable care to obtain a proper price.

Protection where the mortgagor has leased the property

If there are tenants of the mortgagor in the property, some further protections apply. Various issues can arise if a covenant of the mortgage was not to lease the property. An unauthorised letting may bind the mortgagor without binding the lender. A lender bound by the letting must respect the occupier’s rights. In England, for private assured tenancies within the Renters’ Rights Act 2025 reforms, Ground 2 of Schedule 2 to the Housing Act 1988 permits possession for a mortgagee’s sale if its conditions are met. The usual notice period is four months.

The Mortgage Repossessions (Protection of Tenants etc) Act 2010 protects occupiers under qualifying unauthorised tenancies, including occupation contracts in Wales. The tenant may ask the court to postpone possession for up to two months. If an order has already been made, the tenant must first ask the lender for a written undertaking to delay enforcement, and the statutory conditions must be met. There are two distinct notices. Under CPR 55.10 the claimant must send notice to the property addressed to the tenant or occupier within five days of receiving the hearing date. Before the order is executed the lender must give the prescribed notice at the property and allow 14 days (S2 and SI 2010/1809).

Mortgagee’s power to appoint a receiver

As previously mentioned, a mortgagee can appoint a receiver of the income of the mortgaged property. The lender need not have taken possession. Wider powers to manage or sell depend on the deed or a court order. They are most commonly utilised in relation to commercial properties but can be used for dwelling-houses.

The right to appoint a receiver may be express but is also implied by S101(1)(iii) of the Law of Property Act 1925. For a mortgage made by deed the statutory power arises when the mortgage money is due. Under S109(1) it cannot be exercised until the statutory power of sale is exercisable, subject to any variation in the deed.

A statutory receiver must be appointed in writing signed by the mortgagee, and this receiver becomes an agent of the mortgagor (not the mortgagee!), under S109(2), unless the deed provides otherwise as to responsibility for the receiver’s acts. Under S109(8), any income generated by the receiver must be applied in this order:

1. Payment of rents, taxes, rates and outgoings affecting the property, followed by annual sums, other payments and interest having priority over the appointing mortgage;
2. payment of the receiver’s commission, insurance premiums properly payable and the cost of necessary or proper repairs directed in writing by the mortgagee;
3. payment of interest on the loan;
4. payment of capital on the loan if the mortgagee directs this in writing; and
5. payment of any balance to the person otherwise entitled to the income or the mortgaged property.

Remedies in equitable mortgages

The remedies we have explored above have focussed on their applicability to legal mortgages. However, some of the remedies face issues in relation to equitable mortgages. Whether a court order is required depends on how the security was granted, the interest charged and the remedy sought. Each remedy shall be addressed in turn

Foreclosure

Even for a legal mortgage, foreclosure requires the permission from the court, therefore, an equitable mortgagee may also seek foreclosure. A mere equitable charge, as distinct from an equitable mortgage, does not itself carry that remedy. You should still bear in mind the disadvantages of foreclosure we explored earlier in the chapter.

Possession

An equitable mortgagee seeking possession may apply to the court. The equitable mortgage alone does not give a right to possession without an order (Barclays Bank Ltd v Bird [1954] Ch 274 at 280).

Sale

The statutory power of sale is only granted to mortgages by deed, therefore does not apply to equitable mortgages automatically without a deed. A mere memorandum evidencing a transaction is insufficient. Without a statutory or express power, the mortgagee may apply to the court for sale (S90 and S91).

Issues may still arise with an equitable mortgage when there is a deed, as Re Hodson and Howe’s Contract (1887) 35 ChD 668 decided that a mortgagee of an equitable interest alone cannot convey the legal estate merely by selling the interest charged. The court may make a vesting order. By contrast, a deed expressed to charge a registered legal estate by way of legal mortgage may carry a statutory power to sell that estate even if the charge was never registered (Swift 1st Ltd v Colin [2011] EWHC 2410 (Ch)).

Appointment of a receiver

The statutory power to appoint a receiver is only applicable where the mortgage is made by deed. In the absence of a statutory or express power of appointment, the mortgagee may apply to court for a receiver.

Liability of mortgagees and other parties

We have touched on the fact that the mortgagee or receiver can become liable to the mortgagor in certain circumstances. For example, if the property is mismanaged, or sold for less than expected. There are various questions to ask; what happens in the case of market slumps, or negligent valuations?

The leading case in this area is Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997. The courts considered the duties of the receivers and the mortgagees.

Mortgagee’s duties

At common law a mortgagee is generally entitled to choose whether to exercise a power of enforcement, subject to any applicable statutory or regulatory duty. They will not be forced to take possession or sell the property if they do not wish to, even if this would benefit the mortgagor.

Duty to take reasonable care of the property

When the mortgagee is in possession of the property, they must take reasonable care of it. This has been confirmed in cases such as Downsview Nominees Ltd v First City Corporation Ltd (No. 1) [1993] AC 295

Not to be a trustee of his powers

A mortgagee is not a trustee of the power of sale and is under no obligation to maximise the benefit of the mortgagor. In other words, once entitled to sell, they need not wait for a better market - Raja v Austin Gray (a firm) [2002] EWCA Civ 1965.

A mortgagee may have a number of motives for choosing to sell a repossessed property at a particular time. A genuine purpose of realising the security is not invalidated merely by an additional motive, but the power must be exercised in good faith and not solely for a collateral purpose - Meretz investments NV v ACP Ltd [2007] Ch 197.

Duty to obtain market value

The Silven case confirmed that the mortgagee has an equitable duty to take reasonable care to obtain a ‘fair’ or ‘true’ market value for the property on the date of sale. The mortgagee need not improve the property or secure planning permission before selling, but must not accept an inadequate price just to cover the debt, as if they had sold the property properly the mortgagor may have been able to recover any of the balance, as per Palk v Mortgage Services Funding plc [1993] Ch 330.

It was suggested in Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 that this duty is a duty in negligence, and the mortgagor could claim damages for negligence. However, modern cases have confirmed the duty is in equity, and the mortgagor may recover loss caused by the breach, usually the difference between the proceeds and the price that reasonable care would have achieved.

Receiver’s duties

Selling the property

The receiver’s duty is identical to what the mortgagee’s would be when selling. They must take reasonable care to obtain a proper market value at the time of sale - Medforth v Blake [2000] Ch 86

Acting in relation to the property

A receiver who undertakes management must exercise those powers in good faith and with due diligence (Medforth v Blake). There is no general duty to sell immediately, wait for a rising market or improve the property before sale (Silven).

Setting aside

A sale to the mortgagee itself may be set aside. Where the purchaser is connected with the mortgagee, the transaction calls for close scrutiny (Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). An undervalue alone will not undo a completed sale to a bona fide purchaser. S104(2) protects the purchaser against irregular exercise of the statutory power and preserves a damages remedy against the person who exercised it.

Ending a mortgage

Formalities

The mortgage will end either if a remedy is used to terminate, or the mortgagor has repaid his debt. On termination by repayment the mortgagor needs evidence of the repayment, so that anybody wishing to buy the land can be sure they buy it free from the encumbrance of the mortgage.

For registered land, the mortgagor will want to remove the charge from the register. HM Land Registry may cancel the charge on an electronic discharge or a discharge in form DS1. Form DS3 is normally used for a release of part.

For unregistered land, a receipt for all the money secured, executed by the appropriate mortgagee and endorsed on, written at the foot of, or annexed to the mortgage, can operate as a discharge without a separate reconveyance (S115 of the Law of Property Act 1925).

Time

Although the mortgagee can be passive, if there is no action for a long period of time the mortgage may be brought to an end - National Westminster Bank plc v Ashe [2008] 1 WLR 710. In Ashe the mortgagee’s right to recover possession had accrued, and 12 years of adverse possession without further payment or effective acknowledgment extinguished its title to the charge (Limitation Act 1980, ss.15, 17 and 29). Mere inactivity is not sufficient in every case. S96(1) of the Land Registration Act 2002 expressly excepts chargees from its protection against time running under S15.

Priorities

There is the potential for land to be mortgaged multiple times. Therefore, mortgagees will want to know about all other interests in the land and which interests have a priority over their interest, for example, if there is a first mortgage on the property, if that debt was discharged first on sale of the property, would there be enough left over to repair their second mortgage debt?

In order to determine which mortgage has priority, you will need to determine who had the interest first, what type of interest it is and exactly what has been mortgaged.

Priorities of equitable interests

The general rule for equitable interests is that if the interests are equal, the one which was made first will take priority. This is fairly straightforward.

Priorities of legal interests

The first thing to consider is whether the title to the estate is registered or not.

For registered title, S28 of the Land Registration Act 2002 sets the general rule for interests affecting a registered estate or charge. As between registered charges, S48 gives priority in the order shown on the register. S49 has separate rules for further advances. The basic rule is the same as equitable ones; the first one created takes priority, unless one of the exceptions apply.

Under S29 a registrable disposition of a registered estate for valuable consideration, once registered, postpones earlier interests whose priority is not protected. It does not postpone earlier registered charges or other protected interests. This is quite confusing so let’s look at a practical example:

1. There are two registrable interests, Charge 1 and Charge 2
2. The basic rule would be that Charge 1 takes priority because it was made first
3. If Charge 1 has no protected priority when Charge 2 is registered for value, Charge 2 will take priority even though it was created later.

There are also two further rules. Firstly, the later disposition must be a disposition for value, in our example above, Charge 2 would have needed to be for value to take priority. Secondly, if the earlier disposition is not registered, but is protected by notice or is a Schedule 3 (overriding) interest, it will take priority despite not being registered.

For unregistered title, there are a number of considerations.

1. A first legal mortgage protected by deposit of the title deeds generally binds later mortgagees. Deposit alone does not defeat an earlier interest with priority.
2. Where a valid equitable mortgage is secured by deposit of title deeds, a later purchaser of a legal estate for value may take free if acting in good faith without notice, including constructive notice. As between equitable interests the first in time normally prevails unless its priority is postponed.
3. A legal mortgage not protected by deposit of title documents is registrable as a class C(i) land charge. A registrable mortgage normally ranks by its date of registration (S97 of the Law of Property Act 1925).
4. An equitable charge not secured by deposit of title documents is registrable as class C(iii) if it falls within S2(4) of the Land Charges Act 1972. This class excludes, among other things, a charge arising under a trust of land or affecting an interest under such a trust. A registrable class C(i) or C(iii) charge is void against a purchaser for value of the land or an interest in it unless registered against the correct estate owner before completion (S4(5)).

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