Law of Property

Lecture 22
Mortgages 1: Creation
Percent of owner-occupied housing
(HM Treasury 2017 Report)

• Romania 96.8%
• Singapore 90.7%
• Spain 77.1%
• Italy 72.4%
• Canada 66.5%
• US 64.4%
• UK 63.4%
• Japan 61.7%
• France 64.9%
• Denmark 62.2%
• Germany 51.7%
 Why mortgages?

• Average mortgage interest rate 4.2%

• Average credit card interest rate 19.0%

• Average store card interest rate 24.0%

• Average payday lender interest rate 400.0%

 Wealth creation

The Office for National Statistics said that new

entrants to the housing market paid an average of
£187,000 during the month – £14,000 more than
in the same month of 2012. The average price paid
by movers was higher, at £284,000, which was
5.3% up on 12 months previously, while the
average increase across the board was 5.4%
The Guardian, Tuesday 14 January 2014
 Money matters
“Total value of UK’s housing stock
reached 7.29 trillion in 2018”
14/01/2019 Business Matters

Total value of residential lending in

UK was £1,395.5 billion in 2017
Bank of England FCA press release 13/03/2018
Always read the small print.

6
A mortgage is not an ownership interest
Credit crunch
 Other kinds of security
• Lien

• Pledge
– Pawn broking
– Bailment

• Charge
– and charging order
 Terminology

Mortgage: (Latin: mortuum vadium; Old French:

mort + gage: ‘dead pledge’): possession of
property (land) given to lender as security for
repayment of loan, subject to a covenant to re-
convey the property when the borrower repaid the
loan; or if the borrower defaulted, the lender kept
the property - whereupon the pledge was ‘dead’.
The Money-Lender and his Wife, 1540, Marinus Van Reymerswaele, Museo del Prado, Madrid.
 Terminology, cont’d
• Mortgagor/Chargor = borrower (the grantor
of the mortgage);
• Mortgagee/Chargee = lender (the grantee of
the mortgage; receives the mortgage on the
property);
• Common misuse: ‘I got a mortgage from
Bank X’ – no, you granted a mortgage to the
bank (in exchange for a loan).
 Change in 1925
• Pre-1926: mortgagor (borrower) conveyed title to
mortgagee (lender), who then owned the property
subject to the the mortgagor’s equity to redeem the
property (i.e., have it re-conveyed to her) once the debt
was paid.

• Post-1926: s 85 LPA: “charge by way of legal mortgage”

– mortgagor keeps the title and grants a charge on the
estate to the mortgagee. The equity of redemption
remains, but it is the right of the mortgagor to free her
estate from the charge on repayment of the debt.
 Modern mortgage: “Charge by deed
expressed to be by way of legal mortgage”

• Borrower (mortgagor) remains the legal and

beneficial owner, but grants by deed a legal interest
to the lender (mortgagee) which gives the latter the
same rights and remedies as if he had a mortgage by
demise: s 87(1) LPA 1925.
• If the mortgagee sells the property after default by
mortgagor, he is able to vest the freehold or
leasehold in the purchaser: ss 88-89 LPA 1925
(even though he hasn’t actually got the estate: an
exception to nemo dat).
 Right to possession

Four-Maids Ltd. V Dudley Marshall (Properties) Ltd

[1957] Ch 317

Harman J: “…the right of the mortgagee to

possession in the absence of some contract has
nothing to do with default on the part of the
mortgagor. The mortgagee may go into possession
before the ink is dry on the mortgage unless there is
something in the contract, express or by implication,
whereby he has contracted himself out of that right.”
14
 Why possession?

• M’ee entitled to protect the value of his security.

• Once in possession, m’ee is liable to account for any

income generated.

• M’ees prefer to keep the m’or in possession and to

take possession only in order to sell or to prevent
waste.

15
 Priorities: Registered land
• LRA 2002 s 27(2)(b)(f)
– Grant of a legal charge required to be completed by
registration.
– If not, then…
– S 27(1): it does not operate at law. See Barclays Bank v
Zaroovabli (1997).
– Acquisition mortgages: mortgagee’s interest always take
precedence: Abbey National v Cann [1991] 1 AC 56.

• s 30 – the priority of a registered disposition of a charge

is protected.
 Equitable mortgages arise by…
• Mortgage of equitable interest. It is a derivative
interest, so its nature depends on the interest over
which it is granted.

• Specifically enforceable contract: s 2 LP(MP(A 1989

plus Walsh v Lonsdale doctrine.

• Dealings by one co-owner:

– Forgery cases: National Security v Hegarty (1984), Ahmed
v Kendrick (1988), Thames Guaranty v Campbell (1985).
Slade LJ in Thames Guaranty [1985] at 235:

“It is a well-established principle of equity that

where, in the course of concluding a contract, a
person has represented that he can grant a
certain property, or is entitled to a certain
interest in that property, and it later appears that
there is a deficiency in his title or interest, the
other party can obtain an order compelling him
to grant what he has got…”
[nemo dat…]
First National Securities Ltd
v Hegerty
(1984)

• H & W bought house in joint names as JTs.

• H forges W’s name on charge to lender.
• H & W split, and H purports to renounce interest so it falls to W.
She does not know that it is charged to NS Ltd.
• H defaults, NS Ltd seeks possession, W resists and seeks to have
charged removed.
• The forgery acted to sever the JT into a TC.
• But W then received H’s, which was encumbered by the charge,
could she take the share without the encumbrance?
• No, she had to accept the charge if she wished to accept the
husband’s share.
 Bingham J in Hegerty
at 142: “The beneficial interest of the husband and wife in the house was as
joint tenants or more probably, since it seems likely that they contributed
unequally to the purchase price, as tenants in common... Since the wife was
not a party to the loan agreement with the lenders, she incurred no liability in
respect of it. The agreement took effect as if it was the husband's alone…Since
the wife did not execute the legal charge to the lenders, she incurs no liability
under that instrument either.

It does however seem to me that the instrument may, none the less, have had
two effects. If the husband and wife were up to then equitable as well as legal
joint owners of the house, I think that this disposition by the husband was a
sufficient act of alienation to sever the beneficial joint tenancy and convert the
husband and wife into tenants in common… [and second, it created a valuable
equitable charge over the H’s equitable interest.”
 Bingham J in Hegarty
“The lenders parted with £3,000 to the husband. They
took what appeared on its face to be a valid legal charge
on the house… The husband has no grounds for
resisting an order and his declaration of willingness to
resign his interest to the wife must be regarded as a
piece of self-interested effrontery. Of course, … I do
not think, however, that the wife can complain very
strongly of her inability to acquire a beneficial
interest which the husband was, during the
marriage, free to charge and did his best to convey to
the lenders for good consideration.”
 Ahmed v Kendrick (1985)
• Mr Ahmed forged W’s name on both
the purchase and the acquisition mortgage in favour of
Cheltenham & Gloucester Building Society.
• W left H.
• H stayed in home and purported to sell it to Kendrick, forging
his wife’s signature.
• Held, that
– W had adopted the charge by accepting the purchase of the house in
her name;
– The sale to K only had the effect of passing H’s equitable interest to
him. Therefore, W held the house on trust for herself and the
defendant K, and subject to the mortgage.
 Note!
Failure to register means charge does not bind
purchaser or take priority over later, registered
interest, BUT it is still binding on borrower,
who holds proceeds of sale on constructive
trust for lender: Barclays Bank v Buhr [2001]
EWCA (Civ) 1223.
(However, weak decision as it protects careless
lender against later, unsecured creditors.)
 Equity of redemption
• Right to discharge debt by repayment.
• Or, “once a mortgage, always a mortgage”.
• Contracts will specify date of legal redemption at six months
after creation of the charge, but m’or always takes longer, as
is expected.
• After this date, the m’ee may seek contractual remedies.
• Equity allows m’or to redeem at any time after the date of
redemption and this is the equitable right to redeem.
• Recognises fact that the mortgage, however much it
resembles an interest in land, is really security for a loan, so
it must always be able to be terminated by the m’or by
repayment of capital, interest, and costs.
 Problem of debt
“Necessitous men are not, truly
speaking, free men but, to answer a
present exigency, will submit to any
terms that the crafty may impose upon
them”
– Lord Henley LC
Vernon v Bethell (1762) 2 Eden 110 at 113.