MORTGAGE (SHORT NOTES)

INTRODUCTION :

In the given proposition of A & B, it is to be determined that what rights and

obligations can both the relies on, in the given mortgage agreement.

For that it is to be determined that whether the mortgagor can prove, any of
term of the mortgage agreement as a “clog & fetter at equity”, and therefore
invalid.

The examination will also be extended on the issue that what are powers of
the mortgagee which he can use in the given circumstances, mostly
importantly the right of possession, and the power of sale.

RIGHTS OR MORTGAGOR :

1. Contractual Right to Redeem :

The Mortgagor has right to end the mortgage agreement (end that contract)
on a date specified under the mortgage agreement.

2. Equitable Right to Redeem :

The Mortgagor’s right to end the mortgage agreement, also lies at equity
whereby he can end the mortgage agreement even after the date specified in
contract has passed.

3. Rules against Irredeemability :

Mortgagee not allowing the mortgagor to redeem the mortgage agreement

until a specific agreed date.
 o Knightsbridge Estates Trust Ltd v Byrne :

Mortgage between 2 large companies. The legal date of redemption was set 40
years in the future. It was argued by the mortgagor that a postponement of
the contractual right of redemption is only permissible for a ‘reasonable’ time
is not well-founded

Held : The term stipulating the date of redemption was valid. The agreement is
made between competent parties acting under expert advice and knowing
their own business best

o Fairclough v Swan Brewery :

F held a 17 year lease of a hotel, of which S was the landlord. S lent F money on
the security of the his lease. The contractual date of redemption was fixed for
6 weeks before the lease was due to expire. As the equitable right to redeem
does not arise until the contractual date has passed, the mortgage was
effectively irredeemable for the duration of the lease. Dispute arose when F
sought to redeem the mortgage over the lease ahead of the date of
redemption.

Held : F was entitled to redeem the mortgage; the provision preventing

redemption until 6 weeks before lease expiry was void.

4. Mortgagee attempting to purchase the mortgage property :

It can either be done through an ‘option to purchase’ or a ‘right of first refusal’.

o Samuel v Jarrah Timber :

The mortgagor company borrowed money on the security of its debenture

stock. At the same time, it granted the lender/mortgagor an option to
purchase the debenture stock at 40% of price within 12 months.

Held : The option was invalid. This case is governed by the rule that ‘a
mortgagee is not allowed at the time of the loan to enter into a contract for
the purchase of the mortgaged property’.
 o Warnborough Ltd v Garmite Ltd :

The mere fact that contemporaneously with the grant of a mortgage over his
property the mortgagor grants the mortgagee an option does not more than
raise the question whether the rule against clogs applies. The court has to look
at the substance of the transaction to inquire the true nature of the bargain,
which requires examining all the circumstances including oral evidence.

So the “Right of First Refusal” also do not amount to a clog and fetter art
equity.

5. Collateral Advantages (Solus Ties) :

Mortgagee demanding an extra benefit from the mortgagor in the agreement.

o Kreglinger v New Patagonia Meat :

Under the terms of a mortgage, the mortgagor promised that he would sell his
sheepskins to no one but the lender (right of pre-emption) for 5 years
regardless of when the loan was repaid.

Held : The right of pre-emption was valid as a contractual right independent of

the mortgage. To render the obligation invalid the obligation must based on its
substance to be part of the terms of the mortgage and to have really cut down
a true right of redemption.

o Esso Petroleum Co Ltd v Harper’s Garage :

The defendant ran two garages under solus agreements with the plaintiffs who
complained when the defendants began to purchase petrol from cheaper
alternative sources. The House was asked whether the solus agreements were
be regarded in law as an agreement in restraint of trade.

Held : the exclusive dealing agreements were within the restraint of tradedoctrine
because Harper had given up a right tosell other petrol, thetie of 21 years went
beyond a reasonableperiod, and therefore that restraint agreement was void.
 6. Unconscionable Interest Rate &Terms :

o Multiservice Book-binding v Marden :

A bookbinding company took out a mortgage of £36,000. The interest rate of

the loan was linked to the value of the Swiss Franc and 2% above bank rates.
The devaluation of the pound mean that the company would have to pay
£45,000 in interest.

Held : The term was valid. Although the term was unreasonable it was not void
for being oppressive or unconscionable. ‘Mere unreasonableness is not enough
to invalidate a term of a mortgage contract, the bargain must be unfair and
unconscionable’.

o CitylandProperties v Dabrah :

D bought a house from P, with some of the balance to be paid by a loan from P
to D, which D was to repay over time in return for granting a mortgage interest
to P. The terms were that if D defaulted, a premium would be added to the
loan, bringing the overall rate of interest to 38% of the loan (the premium itself
was equivalent to a 50% charge on the loan).

Held : the premium was unreasonable in the circumstances and was invalid.
Only the loan + interest was payable.

7. Undue Influence :

Where a contract has been entered as a result of pressure which falls short of
amounting to duress, the party subject to the pressure may have a cause of
action in equity to have the contract set aside.

- Actual undue influence

Actual undue influence, as the name suggests, requires proof that the contract
was entered into as a result of actual influence exerted. The claimant must
plead and prove the acts which they assert amounted to undue influence.
 o Bank of Credit and Commerce International v Aboody :

A husband exerted actual undue influence over his wife in order to get her to
sign a charge securing the family home on the debts owed by the company in
which the husband and wife owned shares. The couple were unable to repay
the mortgage and the bank sought to repossess the home. The wife sought to
have the mortgage set aside on the grounds that it was procured by actual
undue influence of the husband.

Held : The husband had exerted actual undue influence on the wife. However,
the transaction was not to the manifest disadvantage of the wife since she
owned shares in the company.

- Presumed undue influence

There was a relationship which as a matter of law gives rise to a presumption

of undue influence. The transaction is one which can not readily be explained
by the relationship of the parties.

o Lloyds Bank v Bundy :

A father secured the debts of his son's business on his farm which had been in
the family for generations. The father and son had both banked at the branch
for many years and relied on advice given. The son's company also banked at
the same branch and the bank manager was aware of the dire financial
position of the company. The bank had allowed the son to run up an overdraft
exceeding security given thus far and was fearful that the company would go
under leaving them with an unsecured debt. The bank manager and the son
called at the farm with the forms already filled in. The father was told of the
amount of the charge which was £11,000 and exceeded the value of the farm
and he was also required to give a guarantee. The father agreed to sign in
order to help his son. He was not given the opportunity to think it over or to
obtain legal advice.

Held:There was a relationship of trust and confidence between the father and
the bank manager giving rise to a presumption of undue influence under class
2 b. The charge and guarantee were therefore set aside.

o Royal Bank of Scotland v Etridge : (Etridge Protocol)

The case concerned a number of conjoined appeals concerning banks seeking

possession of homes where a wife had signed a charge or mortgage agreeing
to secure the debts of the husband on the family home. The House of Lords
reviewed the current authorities and restated some of the principles.

- Mortgagee will need to explain the nature of the documents and the
practical consequences these will have for the wife if she signs them.

- He will need to point out the seriousness of the risks involved, the
purpose of the proposed new facility, the amount and principal terms of
the new facility, the amount of her liability under her guarantee, etc.

- He will need to state clearly that the wife has a choice. He should check
whether the wife wishes to proceed.

- He must then get a consent form signed from the wife, stating clearly
that she is consenting to the mortgage.

RIGHTS OF MORTGAGEE :

1. Power of Sale :

Section 101(1)(i) of the Law of Property Act 1925 :

Mortgagee has the equitable right to sell the mortgaged property mortgagor
defaults a month instalment.

Section 103(1) of the Law of Property Act 1925 :

Mortgagee’s right of sale becomes exercisable if any of three conditions is met,

- The mortgagee must serve a notice that payment is required on the

mortgagor and this default continues for three months
- The interest payable is two months in arrears;
- A covenant of the mortgage deed has been breached.
 o Cuckmere brick Co Ltd v Mutual Finance :

Auctioneers failed to advertise the existence of planning permission for the

land. The mortgagors sued the mortgagees for improperly exercising its power
of sale.

Held :When exercising the power of sale a mortgagee is free to decide when to
sell but is under a duty of good faith and duty to take reasonable care to obtain
the true market value at the time of sale. The mortgagee breached the duty it
owed to the mortgagees by failing to obtain the true market value of the land
at the time of sale.

Sec 105 Law of Property Act 1925 :

Distribution of the sale money must be made in a pattern,

- The payment of any money required to discharge encumbrances prior to

the mortgage which the sale is not subject to,
- Payment of costs and expenses incurred in arranging the sale,
- The amount required to discharge the mortgage debt, including interest
and any other payments required,
- The balance is to be paid to the mortgagor or anyone else entitled.

Sec 91(2) of Law of property Act 1925 :

The court, on the request of the mortgagee, or of any person interested either
in the mortgage money or in the right of redemption …… may direct a sale of
the mortgaged property, on such terms as it thinks fit, including the deposit in
court of a reasonable sum fixed by the court to meet the expenses of sale and
to secure performance of the terms.

o Palk v Mortgage Services Funding :

Following default, the mortgagee M sought to take possession, to lease it and

wait for a better time to sell since the market price was exceeded by then
outstanding debt. The mortgagor P wished to sell immediately as leasing would
increase the debt since the rent exceeded the interest per year.

Held : P’s claim succeeded; sale was ordered at P’s instance under s91 LPA
1925. The court can order a sale under s91 LPA 1925 on application by
mortgagor despite negative equity in property.
 2. Right of Possession :

o Birmingham Citizens Permanent BS v Caunt :

The district registrar had granted an adjournment to proceedings for

possession by the mortgagee (C) against the mortgagor (D), who had
defaulted. C appealed.

Held : Appeal allowed, order for possession granted. The right to possession of
a mortgagee is exercisable at any time, without the need for default by the
borrower. But the court may recognise an implied term limiting possession to
the event of default under the common law.

o White v City of London Brewery Co :

A mortgage on a pub was executed in favour of the brewery supplying the pub
by the owners. The brewery (the mortgagees) took possession of a pub and let
it as a tied house. Substantial profits were made from the supply of beer to the
tenant. Owners claimed that they were entitled to the profits

Held : A mortgagee in possession is of mortgaged property accountable to the

mortgagor for any excess profits and rent, but not applicable in this case. The
owners were not entitled to the profits since the profits were from the
brewery’s business and not carried on upon the mortgaged premises.

Sec 36 Administration of Justice Act 1970 :

If the property includes or is a dwelling-house, the mortgagee will have to

produce an application for possession, and the court will decide what action to
take. Again, if the mortgagor may be able to pay the debts within a reasonable
time the possession will be postponed.
 o Ropaigealach v Barclays Bank:

The plaintiff was not residing in the property at the time when the defendant
took possession and sold the property at auction. The plaintiff sought the
determination of the court on whether the defendant had been entitled to
take possession without first having sought and obtained an order of the court.

Held : The court held that section 36 of the Administration of Justice Act
1970 did not require the defendant to obtain such an order for possession.

3. Appointment of Receiver :

Sec 101(1)(iii) of the Law of Property Act 1925 :

The parties may appoint a receiver when the dispute of sale and possession
arises. The receiver must be appointed by written document executed by the
mortgagee, and this receiver becomes an agent of the mortgagor (not the
mortgagee).

Meaning that the mortgagee will not be liable for the inappropriate sale made
by the receivers, neither for profits if the property is in possession of the
receiver.

4. Right of Foreclosure :

right through which a mortgagee can obtain a decree to get the amount
lawfully due to him.

Sec 67 of the Transfer of Property Act :

- The mortgage amount becomes due

- The mortgagor has not obtained a decree for exercising his right of
redemption
- The mortgagor has not paid back the mortgaged money
o The mortgage deed should not contain a clause to the contrary.
 o Re Farnol Eades Irvine & Co :

The plaintiff was a debenture-holder who claimed, inter alia, forpayment of

the amount secured, foreclosure or sale and appointment of a receiver and
manager of the company. The plaintiff had made no application under
the Courts (Emergency Powers) Act 1914 to bring or proceed with the action
and the defendants objected that such an application had not been made.

Held : there was no reason to prevent a man from taking steps to obtain an
order of foreclosure from the Court.