Formative Assessment

Property law Answer and Feedback

STUDENT ANSWER
With a commercial mortgage, statutory protections are minimal. As Posh Pickles (PP) insisted on
a legal mortgage, it is assumed it is formally created (s23(1)(a) Land Registration Act 2002 )(LRA)
by deed and has been registered as a charge at the Land Registry (s27(2)(f) LRA).
To have oppressive/unconscionable mortgage terms struck out, the term must be more than
merely unreasonable, it must be imposed morally reprehensibly (Multiservice Bookbinding v
Marden 1979). In Multiservice linking the interest rate to the Swiss franc was upheld as valid, as
bargaining power equality existed and since the Lender was anxious to preserve capital value,
the hard bargain was held fair. The Court assesses the term on the parties’ equality of bargaining
power (Cityland & Property v Dalbrah 1968); the mortgagor’s experience; and whether mortgagor
received independent legal advice. Linking to the Bank of China’s standard rate, could lead to
seemingly unfair large interest payments due to currency value fluctuations, however more
information is required to determine whether the term is enforceable. Where Ian received
independent mortgage advice, it may be hard to demonstrate the term was imposed
oppressively (Jones v Morgan 2001). Whilst the power to vary interest rates is subject to an
implied term, that it would not be exercised improperly/capriciously, this does not prevent the
lender acting for genuine commercial reasons (Paragon Finance v Pender 2005).
A key mortgage principle is that a mortgagor should never be prevented from getting their full
property back. Redeemability lies at the heart of what a mortgage is; the function being that the
security is released upon repayment of the debt. Where an option to purchase is obtained as
part of the mortgage transaction, the option is usually void, irrespective of whether oppressive
or not. A mortgage should not include clauses preventing the mortgagor from being able to
ever repay the loan/get property back. (Samuel v Jarrah Timber 1904). If allowed, the mortgagor
would lose the option to receive back their entire property, creating a clog to the equity of
redemption. Where an option is created independently of mortgage transaction (even where
related to mortgaged property), the option may be upheld as valid (Reeve v Lisle 1902). It often
depends on the facts as to whether the option and mortgage are truly separate transactions.
Where the right to purchase some/all of the mortgaged property forms/can be seen as part of
mortgage transaction, the right will be held as void (Jones 2001). Though, the mere fact that the
purchase property option is granted simultaneously with the mortgage does not mean it is a
clog. The court must look at the true nature of bargain made by the parties (Warnborough v
Garmite 2003), beyond the transaction label, timing and ascertain the substance. The court will
assess the overall character where there is a composite transaction (Brighton & Hove CC v Audus
2009). All this said, the option to purchase is not the same as the right of pre-emption, as in Ian’s
case, which effectively provides for right of first refusal to buy land before another. This is
because the mortgagor retains ownership/control over the security and can decide what to do.
Under pre-emption to purchase, a mortgagee cannot force the mortgagor to sell and the effect
is not to render the mortgage irredeemable. On Ian’s facts, as this is a pre-emption to purchase

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rather than an outright option to purchase, it is unlikely that this term would be held as
repugnant and so would be enforceable. Although, in light of Jarrah it is likely that the term
could only be enforced for the mortgage duration and not beyond redemption.
Mortgage term (iii) is a collateral advantage or solus tie. Equity is often wary of collateral
advantages as they go against the principle that a mortgage only relates to mere loan security.
Where an advantage is set to continue after mortgage redemption, it will usually be deemed
void as continued advantage would hinder the mortgagor recovering property in an
unencumbered state upon redemption (Noakes v Rice 1902). Mortgage parties can agree to a
collateral advantage to last beyond the mortgage duration providing the clause is reasonable
and they have acted freely (Krelinger v New Patagonia Meat Co 1914). Where collateral advantage
ends upon mortgage redemption, provided they it is not imposed oppressively or
unconscionably, it will be upheld (Biggs v Hoddinott 1898). There is no rule in equity that
precludes collateral advantages, unless such terms are: unfair/unconscionable; a clog on the
equity of redemption; inconsistent with the right to redeem. However, such advantages should
be reached in transaction truly independent of the mortgage agreement (Jones v Morgan 2001).
As the collateral advantage is actually contained within mortgage agreement in Ian’s case, this
could be indicative that it’s not independent. It is important to consider whether the transaction
stands effectively up on its own terms. Mortgagor Ian, is only selling the pickles he wants to sell
and receives full market price and is not being forced to buy more than he needs, nor paying
more than market rate. In this instance, it is likely the term would be enforceable. Though it
would important to consider whether it is a restraint of trade, which it could if perhaps PP does
not stock all pickle types Ian wants. Some collateral advantages are void based on the
contractual principle that an agreement must not impose unreasonable trade restrictions. The
term’s validity relating to solely buying the mortgagee’s products may depend on duration (Esso
v Harper’s Garage 1968). In Ian’s case it is only for the mortgage duration. Something else to
consider, would be whether such collateral agreement is against EU competition law Art 101
TFEU (Courage v Crehan 2002). The court’s allow for a great deal of freedom to contract, and as a
commercial contract, the courts would look to recognise possible commercial realities. As above,
for an oppressive/ unconscionable term to be struck out, it must have been imposed in a morally
reprehensible way (Multiservice).
The mortgagee’s right to possession occurs even before mortgage default, “before the ink is dry
on the mortgage” (Four Maids v Dudley Marshall 1957) though typically such right is expressly or
impliedly postponed until a default occurs. The mortgagee’s right to enter into possession of the
mortgaged property is protected strictly at common law (Birmingham Citizens Permanent
Building Society v Caunt [1962]). Possession is possible without court order, mortgagee PP would
be advised to avoid any criminal liability under Criminal Law Act 1977 (Ropaigealach v Barclays
1999). Where a court order is sought, and the mortgaged property includes a dwelling house, as
defined s39(1) Administration of Justice Act 1970 (AJA), this becomes subject to s36 AJA. S36
gives the court discretionary power to adjourn proceedings or suspend the possession order,
where the mortgagee brings an action claiming possession. It is unclear whether Ian’s flat is part
of the mortgaged property but, assuming it is, it would satisfy the “part thereof which is used as
a dwelling”. However, the court’s s36 discretionary power only may be exercised when it appears
likely the mortgagor may “within reasonable period” pay “any sums due under the mortgage”.
The starting point for the “reasonable period” would be the remaining mortgage term (C&G v
Norgan 1996) and for “sums due” Ian would need to convince the court that he can make a
reasonable attempt to pay off the arrears in the reasonable period, but also that he can meet
future payments (First National Bank v Syed 1991). If this seems unlikely, the court will not
exercise this discretion. The Court will consider Ian’s current financial position (no speculative
windfalls) and Ian should therefore provide a detailed financial plan as to how sums will be paid

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(National Provincial Building Society v Lloyd 1996) likely including details of his taxi-driving
income. Providing Ian can convince the court he has a realistic prospect, he may be able to get a
stay, suspension or postponement of the possession by PP.
Normally expressly included in the mortgage, (otherwise implied by s101 Law of Property Act
1925 (LPA), provided the mortgage is made by deed (assumed as stated it’s a legal mortgage)
PP, has the power to sell the property, when the mortgage money has become due, or where
due in instalments, when at least one instalment is in arrears (Payne v Cardiff RDC 1932). In
theory, the mortgagee’s power of sale occurs without court order, though expert advice should
be sought (Tse Kwong Lam v Wong Chit Sen 1983). The power is exercisable under s103 LPA 1925,
when 3 months have passed since notice of required payment served; if interest repayments due
are in arrears for two months or a mortgage deed provision breach. This has been deemed not
to violate the European Convention on Human Rights Articles (Horsham Properties Group v Clark
2009), (Harrow LBC v Qazi 2004). Though recent developments suggest debtors must have the
opportunity to contest sales before an independent tribunal (Manchester CC v Pinnock 2010).
Proceeds are distributed under s105 LPA in a specified order, held in trust and applied by the
mortgagee, first to pay all costs/expenses incurred by the sale, then to discharge the mortgage
money and any residual money will then go to Ian. PP are unable to purchase the property
themselves or through an agent (Martinson v Clowes 1882) unless court directed (Palk v Mortgage
Services Funding 1993). They could sell to an associated person or substantial shareholding
company but the burden to show the transaction is in good-faith would fall to them (Tse Kwong).
PP have an equitable duty to obtain a fair and true market value/best price. Ian may choose to
be proactive and could apply to court for an order of sale himself under s91 LPA. In Palk it was
held that the court has wide discretionary power/jurisdiction to sell the mortgaged property
independent of the mortgagee’s right to do so. However, once PP have taken possession it may
be too late, and the court will not allow Ian to remain in possession and sell property himself
even though he may be able to achieve better price, also where a sale is proposed, the court
must be satisfied the proceeds will discharge full debt (C&G v Krauz 1997). s91 power only exists
under the power granted to the court under s36 AJA which is only exercisable to allow the
mortgagor to pay off instalment arrears, but not through the sale of the mortgaged property.
However, as described above, Ian may be able to apply under s36.

EXAMINER FEEDBACK
Student mark: 78

Strengths
Is this a commercial mortgage only? Or a commercial/residential one?
Your discussion of the interest rate brings up an interesting concept. What is morally
reprehensible? Morals are terribly subjective things, which the law does not like really – do you
mean unconscionable? Otherwise you dealt with the interest rate well.
You discussed an option to purchase in some detail before distinguishing it from a right of pre-
emption. Normally I would suggest that the option discussion was irrelevant given the question
but the manner in which you compared the two justified the discussion and was very good. And
correct, incidentally!
I certainly cannot fault your discussion of the solus tie, very good.
Not as good as the mortgagee’s right of possession though. This was as comprehensive as this
tight word limit would allow and you provided ample authority. Excellent.

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Your discussion of the sale and proceeds thereof, went beyond the question, so there was no
immediate need for all that information but clearly you have a very good understanding of the
area

Areas for improvement

This was really very impressive, well done. I hope you keep this going and achieve the grade of
which you are clearly capable. But getting a good mark in the formative doesn’t matter, does it!
So the question is how to improve?
To add 'meat' to your argument, see if you can incorporate secondary authority - an opinion
from an article published in a legal journal (for Land Law, try the Conveyancer and Property
Lawyer as a start – you can access it through Westlaw or Lexis Nexis if you have access?)’ That
enables you to have a critique of the law as it stands or the way it is applied; and it attracts great
credit.

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