Mortgages: Protection Of The Mortgagor

Front 1

Equity of redemption

Back 1

What is encapsulated with the terms "equity of redemption" and "equitable right to redeem"?

Hint 1

A mortgagor must be able to pay the mortgage off so that his land can be free from the mortgage. There are several equitable principles which highlight the rights of the mortgagor.

In Santley v Wilde (1899) the court stated that a mortgage is a "transaction under which land or chattels are given as security for payment of a debt"

The courts have stated that "once a mortgage, always a mortgage" (Seton v Slade (1802)) and that there should be "no clogs or fetters on the equity of redemption"

Consider the following:

1) Undue postponement of redemption

Postponement even for a relatively long time may be valid but not if it renders the property virtually worthless or unmarketable (compare Knightsbridge Estates Ltd v Byrne (1939) with Fairclough v Swan Brewery Co Ltd (1912)). Note that long postponement may not be permitted for residential mortgages where there is far more possibility of inequality of bargaining power. The court in Knightsbridge Estates Ltd v Byrne (1939) stated that it will not interfere with commercial arrangements at arms length provided there are no oppressive or unconscionable terms.

2) Options to purchase

Generally, an option to purchase within the mortgage deed is not valid (Samuel v Jarrah Timber & Wood Paving Corporation Ltd (1914) but not if it was entered into after and separately to the mortgage deed (Reeve v Lisle (1902)).

3) Collateral advantages

Generally, a collateral advantage which exists beyond the date of redemption is void (Noakes v Rice (1902)). However, if it is not unfair or unconscionable and does not clog the equity of redemption it may be valid, as in Kreglinger v New Patagonia Meat & Cold Storage Co Ltd (1914).

4) Restraints of trade

If these are not unreasonable then they may be valid, as in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd (1968). However, note if the parties have unequal bargaining power this may be unconscionable (Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd (1985)).

5) Excessive interest rates

This is only subject to any oppressive or unconscionable terms. Note Cityland and Property (Holdings) Ltd v Dabrah (1968) where it was held that there was inequality of bargaining power and the interest rate was unduly excessive. In Multiservice Bookbinding v Marden (1978) the interest rate was index linked and although was found to be quite high was not unconscionable in light of the equality of bargaining power.

6) Consumer Credit Act 1974 and 2006 and FSMA 2000

CCA 1974, as amended by the CCA 2006 replaced the "extortionate credit test" with the "unfair credit relationship" test. ss140A and 140B CCA 1974 give the courts wide powers to vary credit agreements because of unfair terms, the way in which it is exercised and any other power in favour of the creditor. FSMA 2000 applies to all first residential mortgages and encourages responsible lending practices. A lender must be properly authorised and regulated and credit checks must be carried out by the lender.

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Front 2

Describe the rules regarding undue influence in mortgages

Back 2

Undue influence is an equitable doctrine that seeks to prevent the exploitation of the vulnerable. It was found in Barclays Bank plc v O'Brien (1993) where a mortgage taken out by the husband relating to his business was secured against the family home and the wife was not adequately warned to get independent legal advice or told of the risks.

The court in Royal Bank of Scotland plc v Etridge (No 2) (2001) looked extensively at undue influence. There was a distinction made between different categories or levels of undue influence, ranging from actual coercion to cases where there was a relationship of trust and confidence with a transaction which called for an explanation. In these cases, the lender is always put on enquiry whether undue influence might arise and there is usually a presumption of undue influence in cases between parents and their children, trustees and beneficiaries and certain professionals with their clients or customers. In these cases, the lender must advise the borrower or guarantor of the need to get advice from an independent solicitor in private, and the solicitor must produce a certificate so that the lender can confirm that the advice given was adequate, as in National Westminster Bank v Breeds (2001).

A classic recent case was Hewett v First Plus Financial Group (2010). In this case, the husband secured a loan against the family home. He got into financial difficulty and the bank sought to repossess. It transpired that Mr Hewett was having an affair at the time and the court held that had she known about this she could have made a more informed choice.

Front 3

Explain priority of mortgages in registered and unregistered land

Back 3

1) Registered land

In registered land, the priority of legal mortgages depends on the date of registration (the first registered will take priority). The priority of mortgages of equitable interests depends on Dearle v Hall (1823). Other types of equitable mortgages in registered land will be subject to the rule of the first in time will prevail unless there is fraud or misrepresentation (i.e. the first created will take priority).

2) unregistered land

Legal mortgages bind the world and a first legal mortgage is protected by deposit of title deeds so this will take precedence. Second legal mortgages must be protected by a Class C(i) land charge. The rules on priority here differ depending on whether you look at s4(5) LCA 1972 or s97 LPA 1925. Under s4(5) the non-registration of a puisne mortgage is not binding on a purchaser for valuable consideration until it is registered. Under s97 every puisne mortgage shall rank according to the date of registration as a land charge.