MORTGAGES

Introduction

A mortgage of land is a contract by which legal or equitable interest in the borrower's/mortgagor's land
is conveyed to the lender/mortgagee under a condition that mortgagee’s interest shall lapse(end) upon
repayment of loan plus interest and costs (both mortgagee and mortgagor have an interest in
mortgagors land). Since its a contract, the commercial principle of freedom of contract applies, i.e. the
mortgagor and mortgagee are free to stipulate whatever terms they wish for repayment of loan, the
rate of interest and so forth. 

However, law prohibits the mortgagee to add terms which are harsh or otherwise
unconscionable(unfair). At the same time, law gives various rights to mortgagee(lender). Law insists on
striking the balance between rights of mortgagee and mortgagor. 

Rights of mortgagor:
Mortgagor has an equity of redemption – bundle of rights. It is a total of mortgagor’s rights in the land
that is subject to a mortgage. This interest (equity of redemption) gives mortgagor various rights.
 The right to redeem the mortgage
 The right to scrutinize the collateral advantages to the mortgagee
 The right to object to unconscionable terms
 The right to sell the land
 The right to further mortgage the land

1) 1st right -The right to redeem the mortgage:

The most important right is the right to redeem the mortgage. Mortgagor has a right to redeem, i.e. pay
off the mortgage (all the costs, interests etc.) to encumber his land (to remove the burdens of the land).
Mortgagor or mortgagee may specify the date of redemption in their mortgage contracts. IF they have
specified the date, it is known as the legal date of redemption.
The mortgagor has a right to redeem the mortgage at ANY time, within this period. However, if they
have not specified any date, the common law says hat the legal date of redemption is 6 months of the
date the mortgage is granted.
Thornborough v baker: The mortgagor has a right to redeem the mortgage at any time after the legal
date of redemption, i.e. specified date OR 6 months have passed. This is known as equitable right of
redemption.
Non-payment of mortgage at the legal date of redemption doesn’t result in the loss of land (previously
the land was lost if the mortgagor didn’t redeem [repay] on the legal date of redemption. Hence, in this
case equity applied maxim “once a mortgage, always a mortgage” and held that a mortgage is just a
security for the loan and it should not be an opportunity for the mortgagee to obtain the mortgagor’s
land.
Side note: If the legal date of redemption passes, only remedies for breach of contract/ mortgage are available to the mortgagee.
General rule:
Any term which is a clog/barrier/fetter/obstacle/restriction on the mortgagors legal and equitable right
to redeem is void/invalid and is liable to be stuck off the mortgage contract.

 1st issue in exam 

The issue (1) in exam would be that whether the term set out in mortgage contract between mortgagor
and mortgagee amount to a clog/fetter on the mortgagor's right to redeem?
Examples of terms which may/may not amount to a clog/fetter on the right to redeem the mortgage.
1- a term which gives the mortgagee an option to purchase the mortgaged property MAY amount to a
clog and consequently held void.
In such cases it must be determined that whether the agreement is question is mortgage contract AND
(+) whether the option to purchase is given in that mortgage contract.
To determine whether the agreement is a mortgage contract, in Warn borough V Garmite, it was held
that reference should be made to the substance of the contract and not to its label. This means that it
should be objectively decided whether an agreement was a mortgage contract/agreement (an
agreement giving the loan n holding the land as a security) without considering the name given by the
parties. 
Reeve v Lisle: the parties entered into a series of agreements for loans and partnerships. The option to
purchase was granted in a contract other than the mortgage contract. Mortgagor failed to repay the
mortgage payments. So, mortgagee sough to exercise their option to purchase the land. 
Issue: whether the option to purchase the land amount to a clog/fetter and was therefore void?
Principle: if the option to purchase the mortgage property is freely given in a separate and independent
agreement from the mortgage agreement, then the option would not amount to a clog on the
mortgagors right to redeem and hence would not be void (would be valid) since mortgage is a contract
at heart and principle of freedom is of great importance.
On the facts, the option was valid since it was given in a separate contract from the mortgage contract.
Warnborough v Garmite: the option to purchase was granted under a sale & purchase contract and not
under a mortgage contract therefore option was valid.

 2nd Issue in exam

Samuel v Jarrah Timber: if the option to purchase the mortgaged property is given in the mortgage
agreement/contract, the option amounts to a clog and is void.
On the facts, the option was part of the mortgage agreement

Jones V Morgan.
The mortgage agreement was entered in 1974 and new agreement was entered into in 1997 whereby
the right to buy half of the mortgagor's land was given to the lender.
Held: the court held that the new agreement was NOT separate from the mortgage agreement and it
was an amendment of the original agreement so the option was considered as part of the original
mortgage agreement. Hence, it amounted to a clog and was held void (it was struck off).
However, it must be noted that court in Jones (Lord Philips MR) disapproved of the Samuel precedent.
He stated that the doctrine of clog doesn't serve a useful purpose and should be better removed from
the law.

So, in Warnborough v Garmite, it was held that if option to purchase the mortgage property is given in
the mortgage agreement, the option wouldn't always amount to a clog. It is necessary to look at the true
nature of the bargain by the parties. This means that the court will look into comparative bargain
powers of the parties and whether there is a payment of fair price for the option or whether the option
was freely negotiated. 

If the mortgagor has less bargaining power (not a commercial entity), or an option is not a freely
negotiated, or the payment is not a fair price for the option, the option would amount to a clog and
would be void. 
If, however the parties have an equal bargaining power (commercial mortgage) - examinable situation
OR the option is freely negotiated, the option is valid. 
Exam note: since the contract in exam would mostly be commercial, you'd say that the option to purchase is not a clog on right to
redeem the mortgage and hence isn't void (valid n enforceable). It is for this reason why doctrine of clog is rarely useful as stressed
by Lord Philips MR in Jones. Some academics argue that in Samuel also the term would've been valid as the parties were
commercial if there had not been a technical inconsistency in the mortgage contract. 

Second term - term postponing the right to redeem the mortgage. 

General rule: this type of term may be valid (not void) if it is not harsh and unconscionable(unfair) OR if
is not making their right to redeem the mortgage illusory (delusional) since mortgagee must be allowed
to earn the interest on the loan. The important factors to think about are the comparative status
(bargaining powers) of the parties, title involved (leasehold or freehold interest). In case of equal
bargaining power or freehold land, the postponement for a longer time is permitted as the right to
redeem is not illusory. 
(Free holder can enjoy his whole land free of mortgage) 
Situation 1: Knightsbridge V Byrne: the term(period) of mortgage was 40 years and the contractual date
of redemption was set 40 years in future. It was held that since the parties were commercial having
equal bargaining power and the mortgage land was freehold interest, the postponement was
permitted. 

Situation 2: however, if the parties don't have an equal bargaining power OR the land is leasehold
interest, the postponement for a longer period will be void(invalid) since the terms will be harsh or the
right to redeem will be illusory (mortgage considered effectively irredeemable) 
Fairclough v swan: F held a 17year lease on the restaurant and borrowed money. He put the leasehold
interest on the security. the contractual date of redemption was set to be just few days before the lease
was due to expire(postponed). On the facts since the land was a leasehold interest, the postponement
for a longer period was held void as it was harsh and right to redeem was made illusory. (The mortgage
was effectively irredeemably)

2) 2nd right – Mortgagor has a right to remove collateral (separate advantage)

Note: issue in exam would be that whether a term in question amounts to collateral advantage
Old case: Bradley v Carrit (1903)
It was an equitable principle that there should be no conditions/ collateral advantages favoring lenders
such as (terms giving the mortgagee some advantages in addition to their security) i.e. a  term obliging
the borrower to 50%of his supplies from the lender/ to give preferential treatment to the lender
attached to the mortgage since mortgage is merely security for a loan that ends when its reason(the
money has been repaid). 
Mortgage should be free from conditions/collateral advantages. Hence such collateral advantages were
struck down by the courts as being clogs or fetters on the mortgagor's equity of redemption
(mortgagor's interest subject to the mortgage).
Note: The aforementioned case is old. Don’t apply in proposition question.
Current law: However, now the law is that conditions/collateral advantages which end with redemption
(repayment) are valid and enforceable if:
1) if they're not unconscionable(unfair)
and
2) they're not restraint/obstacles to trade, i.e. a term tying the owner of petrol
station(mortgagor) to buy his supply of petrol from the mortgagee (oil company).

Clauses which are a restraint in trade are valid if they're reasonable and are protecting a public interest.
This general rule reflects that courts have upheld freedom of contract. To determine whether they're
unconscionable or whether they're restraining the trade, the court will look at the comparative
bargaining powers of the parties and the public interest which the clauses are protecting.
In commercial setting(mortgages) the parties have equal bargaining power so the courts don't find the
collateral advantages as restraining the trade hence they're enforceable. 

Kregliner V Newtragonia
It was held that where the collateral advantage persists beyond redemption, i.e. continuing obligation to
take supplies from the lender even though the mortgage has ended" may be acceptable where the
borrower’s land returns to them in the same form that it was mortgaged. It seems that such collateral
advantages neither restrict borrowers use of the land nor hinder redemption of mortgagor hence they
are truly collateral (separate from mortgage contract) and hence are not objectionable. 
However, in NOAKES V RICE, it was held that if the collateral advantage is a permanent fetter (continue
buying ALL the supplies) from the mortgagee even after the redemption is invalid hence unenforceable. 

Side note: courts are less willing to find collateral advantages as clogs on equity of redemption in commercial settings hence doctrine of clog
doesn't serve useful purpose and should better be remembered from the law

3) Mortgagor has a right to remove unfair terms – 3 rd Right

I.e. terms specifying high interest rate. 
Whether the term in question amounts to oppressive or unconscionable?

General rule: 
City-land v Dabrah, Multiservice book-binding V Marden, Alex Lobb v Total co, Jones v Morgan.
It was held that oppressive doesn't mean an unreasonable term but it is an objectionable term which is
imposed by 1 of the parties in a morally reprehensible manner. i.e: by exploiting their dominant
bargaining position. 
In commercial contracts since the parties have equal bargaining power, the courts are reluctant to find
their terms oppressive and unconscionable.

Multiservice book-binding V Marden (facts)

Plaintiff took loan from the defendant to purchase new premises and put the business land on
mortgage. Term in the mortgage agreement linked the mortgage interest rate with the exchange rate
between the pound(currency) and swiss franc. There was a change in exchange rate which caused
significant increase in the rate of interest. Whether the term was unconscionable or oppressive?
Held: although the term was unreasonable but it was not imposed by the mortgagee in the morally
reprehensible manner as the parties were commercial. Both were business men having equal bargaining
power and the mortgagor had an access to the legal advice. Hence the term was not unconscionable and
was enforceable. 
Cityland v Dabrah (facts): mortgagor was a domestic borrower. He borrowed money to purchase his
home and put his home as security. Mortgage agreement imposed a very high interest rate. Mortgagor
was young, inexperienced and acted in hurry. It was held that the term was unreasonable and was
imposed by the mortgagee in a morally reprehensible manner (the parties didn't have equal bargaining
power). 
In addition to equitable safeguards (cases), residential mortgages have become increasingly subject to
statutory protection.
I.e. Financial services and Markets Act 2000 protect first mortgages (pehli mortgage) of residential
properties where the property is occupied by the borrower. Financial conduct authority (FCA) has been
responsible for regulating such mortgages. 
Consumer Credit Act 1974 (CCA 1974) protected 2nd mortgages and mortgages for other purposes for
example buy to-let mortgages (mortgage loan to buy the property specifically to rent it out). It applies
where one party is an individual. It was historically aimed at protecting borrowers with low credit
rating). It is now regulated by FCA. 

The Act allowed the court to reopen extortionate credit bargains

o 1st case under this act

Davies v direct loans co: the mortgagee imposed a rate if 26.1 percent at the time when market rate was
17%. It was held that although the parties didn’t have equal bargaining power. One party was individual,
the mortgagor's credit history was poor and the risk was taken by the lender. Hence the high interest
rate was justified. The term was not an extortionate credit bargain

- Falco finance V Gough.

Mortgagor borrowed money from the mortgagee who imposed a standard flat annual interest rate of
13.9% discounted to 8.99% but this 5% discount was permanently lost if mortgagor defaults on any of
his payments 
It was held that it was impossible for any borrower to make all payments exactly on time and the
deferential between 2 rates had no link with the loss that lender would incur as a result of mis payment.
Moreover, the flat rate basis meant that the interest was payable on full loan amount for the whole
mortgage term regardless of how much capital had been repaid. This term was harsh, unremitting and
evil and hence extortionate credit bargain under CCA 1974.

- Paragon Finance v Nash:

it was held that lender has discretion to vary interest rates but there’s an implied term in the mortgage
contract that they should not exercise their discretion for an improper purpose, arbitrarily or
capriciously. Essentially, they can vary the interest rates for their genuine commercial (financial) needs.
On the facts the interest rate of 2to4% above those on the high-street was not extortionate credit
bargain under CCA 1974 since the lender took its commercial needs into account, i.e. financial difficulty. 

- Paragon finance v penger:

Nash was affirmed.

The court must take into account

1- comparative bargaining powers 
2- financial pressure on borrower
3- creditworthiness/ credit rating of borrower
4- risk to the lender
5- loss to the lender in case of missed payment.
6- commercial (financial) needs of the lender.

Now CCA 2006 amends CCA 1974 and replaces the concept of extortionate credit bargain with the
concept of an Unfair Credit relation. 
The act allows the court to see whether the mortgagee/mortgagor relationship amounts to an unfair
relationship i.e. whether mortgagee’s behavior towards mortgagor was unfair. 
The act hasn’t defined unfair credit relationship n leaves it to the court to decide on individual facts. The
relevant factors are the same, i.e. as above.
Advantage: the court has a wide discretion to decide whether any relation amounts to a unfair
relationship and has wide powers, i.e. the court may strike down the terms/order creditor to take or
refrain from taking a particular course of action.
Disadvantage: this act is wrong from the perspective of certainty of law.

This act claims to give individual/domestic mortgagor more protection however it remains to be seen
how the new legislation will develop.

•Powers of the mortgagor 

Mortgagor has certain powers under statute.
1) s91 LPA 1925 gives a power to mortgagor a power to enforce their right to redeem in the courts (they
can obtain order to redeem the mortgage) 
2) s91 gives the mortgagor a power to apply to the court to obtain an order for sale of goods mortgaged
p5roperty. 
Palk v Mortgage services: the court has exercised its discretionary widely and ordered even if proceeds
of sale didn't pay off the mortgage debt. Palk is also thought to stand for the proposition that court will
exercise discretion to order sale even if mortgagee is seeking possession of property due to mortgagor’s
inability to pay for the debt. 
Criticism: this wide discretion adversely affects the rights of mortgagee, i.e. their right to possess to
possess the mortgaged property.

•Rights of the mortgagor.

1) Debt action:
Mortgage is a contract hence mortgagee has a right to bring an action against the mortgagor if he fails
to pay the due installment to recover his debt but only after the legal date of redemption (contractual
date/ or 6months in default) has passed. This action can be brought within 12 years from the date of
default. 
o Advantage of this action: if sale of the mortgaged property produces less money n the
mortgagor has other valuable assets then this action is of great use for mortgagee.
o Disadvantage: this action is of little use since if the mortgagor didn’t pay the due installments,
they're unlikely to pay on this action. (No use in cases where the mortgagor is bankrupt). 

2) Right to possess the mortgaged property (imp-essay Q)

Fourmaids v Dudely Marshall:
Mortgagee gets a right to possess the mortgaged property as soon as the mortgage is made or "before
the ink is dry on the mortgage" mortgagee can exercise this right even if the mortgagor is not in default.
Since what is the use of the security if creditor cannot realize it easily. Mortgagees don’t have this right if
they have either expressly or impliedly given it up in the mortgage contract. 

 Consequences of possessions by mortgagee:

Mortgagees after possession of property gave a duty to account for any rents and profits and shortfall
between actual income and reasonably expected income to the mortgagor. Hence in practice
mortgagees rarely enter into possession of the mortgagor property. Except when they intend to sell the
land.

 Restriction/limitations on the mortgagees right to possess the mortgaged property:

This right of the mortgagee can have adverse consequences on the mortgage. It can render the family
homeless. Hence there are some statutory, judicial and academic restrictions on the mortgagees right to
possess 
In residential mortgages, mortgagors are in possession of the land hence mortgagees apply to the court
to apply to the court to obtain possession of the property. 
S36 of Administration of Justice Act. 1970 as amended by s8 of Aja 1973 states that the court has a
discretion to suspend, postpone(adjourned) an application by mortgagee for possession of a dwelling
house at the time of possession not making of the mortgage contract. If it appears that the mortgagor
would be likely to be able to pay within a reasonable within a reasonable time any money due under the
mortgage contract or to remedy some other default.

Cases held that the reasonable time is 2years. S 36 of Aja 1970 as amended by AJA 1973 apparently
benefits the mortgagor. (It shows that mortgagees don’t have a right to possess but they can be granted
possession as a remedy only if the court thinks fit.

However, this is not the case because:

1- The court can only postpone possession proceeding/exercise discretion where mortgaged property is
a dwelling house and not a commercial premise. 
2- the court is only involved (s36 is only relevant) when the mortgagee takes possession thru the court.
By making application to court. If mortgagee takes a possession by itself the court have no power to
suspend /postpone the proceeding since s36 doesn’t apply
Ropaigealach v barclays back.

3- The reasonable time is 2 years in most cases. Also, the courts cannot postpone if there is no possibility
of making payment within a reasonable time at the time of possession proceeding. 
Counter argument: in Cheltenham v Norgan: in this case the court favored domestic borrower. CA
allowed the whole remaining term of the mortgage (13 years) for the mortgagor to clear the default. 13
years were treated as reasonable time since court stated that s36 didn’t define reasonable time.

Subheading
Judicial/academic limitations on the right possess:
1- Quenell v Maltby: it was stated in obiter that the court of equity could restrain a mortgagee from
taking possession where there is no bonafidae (justifiable) reason for doing this. This is in direct conflict
with mortgagees right to possess the mortgaged property. If this is true then right can only be used a
remedy, i.e. If court thinks that possession is sought for bonafidae purpose. This approach was followed
by: 
Albany v massey.
Cukuroba v alfa

2- Mortgage Services Funding V Palk: court of appeal held that the court has a discretion to postpone
possession proceeding if an application for sale is made by the mortgagor under s91 LPA 1925 and order
sale whether or not the sale would pay off the entire debt.

However, in Cheltanham v Krauz: CA held that court can only postpone proceedings under s36 Aja 1970
as amended by s8 AJA1973. However, palk wasn’t overruled by CA so the matter isn't certain(clear). 

Conclusion: if palk is followed, the right of the mortgagee to possess the land becomes an artificial right which can only be
exercised as a remedy at the discretion of the courts. 

3- Mortgagee cannot exercise his right to possess if the land is co-owned and the mortgage bind all.
Williams v Boland. 

4- Right to possess can be exercised only within a limitation period. 12 years under limitations act 1980. 

5- Downsview v First city Corp.

Court held that equitable court can prevent the mortgagee to exercise his right to possess if the
mortgagee abuses his right. I.e. uses his right for purpose other than to enforce payment for example
when the mortgagor doesn’t default his payment 

Considering all these limitations, mortgagees right to possess can only be used as a remedy and cannot
be used as of right. 

•3rd power of mortgagee: Power to sell the property 

S101 LPA 1925 states: 

a- when the mortgage is made by deed 
b- the mortgagee gets a power to sell the mortgaged property without applying to the court. 

However, s103 LPA 1925 states that mortgagee can exercise this power only if one of the 3 condition are
fulfilled:
1) if mortgagee serve a notice of mortgage payment to the mortgagor and the mortgagor didn’t
comply with the notice. I.e. defaulted in mortgage payments for 3months or 
2) if mortgagor didn’t pay interest for 2 months after it became due for instance interest becomes
due on 3rd April and the mortgagor doesn’t pay until 3rd June mortgagee can exercise his power
sell mortgage property or 
3) if mortgagor breaches any important term (condition) of the mortgage agreement. I.e. where
mortgagor doesn’t make repairs of the mortgage land. (Ladsky v TSP bank). 

Cases under this 3rd power 

o Cheltanham v Krausz: it was held that it was well established law that mortgagee can exercise
the power whenever he chooses to do so and for his own purposes. It doesn't matter that the
sale would be improper for the mortgagor because they’re in negative equity (indebtness when
market value of the property falls below the outstanding amount of mortgage secured on it). 
 o Meftah v TSP: it was reiterated that mortgagee can choose the most convenient time for sale. It
doesn’t matter that the waiting may have achieved a better or higher price. 

However, Cuckmere v mutual finance, it was stated that in exercising the power the mortgagee has a
duty to act in good faith and to take reasonable steps in obtaining the true marker value(not best price)
at the time of the sale. On the facts the mortgagee sold the property for 44000 pounds whereas as per
judges 65000 was the price that could and should have been obtained for the land (true marker value
was 65k pounds). Since the mortgagee didn’t take reasonable care (didn’t describe the land correctly
while advertising at auction) to obtain the true market value, they breached their duty and were found
to be negligent. - DUTY TO OBTAIN THE TRUE MARKET VALUE. 

o Tse Kwong v Wong: mortgagee has a duty to carry out true sale. They can’t purchase the
mortgaged property them self or via an agent. Although they can sell it to a company in which
have an interest but they must comply with the above duties - obtain true market value. 

EFFECT OF SALE UNDER S101 S105 (underlined part to be confirmed)

LPA 1925 s105 states that mortgagee has to 1st discharge off the mortgaged money/interests and then
has to give the residue to the mortgagor(s). 
Purchaser takes the whole of the land free of any interest of the mortgagor. He’s only bound by the
interest of the prior mortgages. 

POWER TO SELL under s91 LPA 1925 

S91 states that: 
1- when the mortgage isn’t made by deed 
2- mortgagee can apply to the court for the sale. 

•4th power of mortgagee – Right of Foreclosure 

Under s 88(2) and s89(2) of LPA 1925 the mortgagee may apply to the court to obtain an order of
foreclosure. If the mortgagor breaches any term of the the mortgage agreement.
Foreclosure extinguishes the mortgagors interest in the property and transfers it to the mortgagee. If
the interest is freehold, mortgagors freehold interest vests in the mortgage. If its leasehold interest,
mortgagors leasehold interest vests in the mortgagee.
 Most powerful remedy
However, when an application of foreclosure is made the court may order sale of the mortgaged
property under s91 ss2 of LPA 1925 if it thinks fit. Courts usually order sale. This section. I.e. s91 ss2
protects the interests of mortgagor n shows why the foreclosure is so rare that it is practically
nonexistent as a remedy in England. In fact, law commission has recommended to abolish it.

•5th power of mortgagee - Power to appoint a receiver(agent)

S101 LPA 1925 states that:
a) when mortgage is made by deed
b) mortgagee gets the power to appoint a receiver without applying to the court for the
management of the property (to receive all income [rents]). 
S103 LPA 1925 states that mortgagee can exercise this power only if 1 of 3 conditions are fulfilled
Advantages of this power:
This power is useful when the mortgagee neither want to sell land nor wants to enter into possession of
the land (duty to account for profits).