Creating a Mortgage Lecture - Hands on Examples
This section will give you a change to review your knowledge of mortgages by assessing a practical scenario covering many of the issues you might face in relation to a mortgages exam question or coursework. You should have knowledge of the different types of mortgages, how they are created, the rights of the mortgagor and mortgagee, the remedies of the mortgagee, the protection for the mortgagor, the liabilities, how a mortgage is ended and priorities where there are two mortgages. The information from this chapter will allow you to answer this question fully with reference to relevant legal principles and cases.
Identifying a mortgage question should be straightforward. You will be looking for a scenario where an individual has borrowed money off a lender of some sort and in return a lien has been created over some kind of property the individual owns (likely to be their land).
It is difficult to develop a catch-all approach to mortgage questions, as there are various distinct areas, you will need to learn how to identify each separate issue, for example, are you looking at the remedies of the mortgagee or the rights of the mortgagee?
Scenario
Rob inherited a property from his parents 20 years ago. The property is unregistered land, and is free from any other interests. Rob wants to start his own business up so needs quite a large loan. He is considering mortgaging his unregistered property in order to raise the funds required.
If Rob creates a legal mortgage over his unregistered property, is there anything important he will need to do once the mortgage has been granted?
Rob negotiates a mortgage deal with Mortgages R Us bank. Rob intends to create a business that sells computers. As it happens, Mortgages R Us own a company who sell computer processors. The bank insist on a term which requires Rob to buy computer processors from Mortgages R Us’ company. The mortgage agreement is a six year agreement. Rob ends up winning the lottery and pays his mortgage off after only three years.
Can the bank enforce the term requiring Rob to buy computer processors from them, and what effect does the paying off of the mortgage have on the agreement?
Rob eventually runs out of money due to a gambling addiction and re-mortgages his property to fund his gambling. Unsurprisingly, he defaults on his mortgage repayments.
What is the favourable remedy for the bank and what steps must they take before they can take action? What will happen to the money from the sale of the property?
Before he defaulted on his mortgage repayments, Rob actually put a second mortgage on the property. The two banks are now arguing over who should get priority. Mortgages R Us’ charge came first, but was not correctly registered. The second mortgage was with Lenders 24/7, who did register their charge correctly.
Which mortgage takes priority?
- The grant of a legal mortgage over unregistered land is a trigger for first registration of the property as per S4(1)(g) of the Land Registration Act 2002. Therefore, he will need to register his property with the land register. Furthermore, the charge must also be registered.
- This term of the mortgage provides a benefit to the mortgagee. The basic rule in relation to these terms is that they are enforceable so long as they don’t breach competition law, but are usually only valid for the duration of the mortgage as per Biggs v Hoddinott. In this case, there are not enough facts to know whether it breaches competition law, therefore we can assume the term is valid and enforceable.
However, as Rob pays off the mortgage early, it may be suggested that the term would be unenforceable once the mortgage is redeemed. The case of Kreglinger v New Patagonia Meat & Cold Storage Co Ltd. Involves an example of this with similar facts. The court held that the agreement would continue for the full period despite the early redemption of the mortgage, as the term was reasonable, for a short period and could be seen as a separate agreement to the mortgage. The same would seem to be applicable to this term. In the case, it was a five year agreement and it was redeemed after two years, therefore the similar time scales would suggest the same outcome. The agreement does not seem oppressive or unconscionable either, therefore it would be valid (Cityland & Property (Holdings Ltd) v Dabrah)
- The bank may use the remedy of foreclosure, which involves taking possession of the property. However, a court order is required and Rob would be able to prevent foreclosure under S91(2) of the Law of Property Act. Therefore, the favourable remedy for the bank is possession and sale. This involves the bank taking possession of the property and selling it to repay their debt. In order to effect this, the bank must serve a notice on Rob that payment is required and the failure to repay must continue for three months, or the interest payments must be two months in arrears.
Once the bank take possession of the property and sell it, the proceeds of sale must be distributed as per S105 of the Law of Property Act 1925:
- Payment to discharge any encumbrances prior to the mortgage
- Payment of costs/expenses arranging the sale
- Discharge of the mortgage debt plus interest
- The balance (if any) must be paid to Rob.
- The land is registered, therefore, S28 of the Land Registration Act 2002 applies. The general rule is that the first mortgage takes priority unless an exception applies. The S29 exception will apply in this case, because Mortgages R Us have incorrectly registered their charge. This means that Lenders 247 have priority, and will be able to get their debt repaid before Mortgages R Us’. This is assuming the mortgage with Lenders 247 was a disposition for value.
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