Law Sessions With Jennifer Housen’s Podcast

Mortgages Unwrapped: Understanding the Rights and Duties of Mortgagees

Subscriber Episode • • Jennifer Housen • Season 9 • Episode 4

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Mortgage law gives enormous power to lenders, yet this power is balanced by legal duties and the mortgagor's rights to relief in certain circumstances.

• Mortgagees have a duty to get the best price when exercising power of sale
• Mortgagors remain liable for any shortfall for up to 12 years
• Sale proceeds must be distributed in a specific order under the Law of Property Act
• Mortgagees can take possession as soon as a mortgage is created
• The Administration of Justice Act allows courts to postpone possession proceedings
• Courts can now consider payment of arrears over the entire mortgage term
• Alternative remedies include appointing a receiver and foreclosure
• Special rules apply to equitable mortgages and tacking


💡⚖️ Let’s learn the law together—one session at a time!

Speaker 1:

Welcome back to this final respect of the power of sale arising and then the exercise of the power of sale. We did consider also the situations where the mortgagee has a duty, or rather the extent to which the mortgagee has a duty to the mortgagee. Now the mortgagee, as I mentioned, ought to use his best efforts and endeavours, of course, to get the best price for the property, because this is not the bad old days where you can just sell it for what you want or keep the money as the mortgagee. You still owe the mortgagee a duty of care to the extent that it is set out in Cookmere Brick. Now the mortgagor. If there is a shortfall so let's say £100,000 is owed on the property and the mortgagee gets £90,000, the mortgagor still has an obligation, so the homeowner still needs to pay off that $10,000. Reminder that any contracts in relation to land law can be brought up to 12 years after. So it means that if you don't have the money now and in another seven, eight years you are better off and things are going well for you the mortgagee can certainly bring an action in order to get his money back. One of the things that the mortgagee cannot do is to sell the property, of course, to himself or to a nominee in trust for himself, or he can't sell it to his agent.

Speaker 1:

What happens with the proceeds of sale? Well, under the Law of Property Act 1925, section 105, regards the mortgagee as a trustee for the proceeds of sale. Now, the proceeds in the hands of the mortgagee must be applied in a particular order and generally you will get all the costs associated with the sale being paid, because of course that is what you know, meant that the property was then liquidated to get the monies from that. So in my view, it's always well, it's about the lawyer and the lawyer. I get paid first and the lawyer gets his money, and all the people involved in the sale. But let's go to paying off. In reality, how does the money get distributed? Well, you pay off the total debt, capital and interest owed to any mortgagee earlier in priority who had permitted the property to be sold free from his mortgage, discharging any cost of sale and any attempted sale. Then you discharge a total debt, capital and interest owed to the mortgagee next in priority and then the balance is paid again in priority of any subsequent mortgagee, till of course there is none, and then it goes to the mortgage, or so the mortgage or does get the balance of what there is, less of course, what he has paid out.

Speaker 1:

We have spoken about the um, the uh duty of the power of sale arising and exercising. Well, the mortgagee generally takes possession prior to exercising the power of sale. But there is a possibility that if the property is not sold, for example, then the mortgagee actually possesses, not on the basis of possession being given up to him or being delivered up to him by the mortgagor. It may very well be that, let's say, for example, he's passing by on, the property is empty. There's not in the subsequent to say for him getting the power of sale being exercised in his favor, sorry, arising in his favor. He can actually go into possession.

Speaker 1:

Now, in Four Maids and Dudley Marshall properties, justice Salmon said that a mortgagee may go into possession before the ink is drawn on the paper, unless, of course, there's a clause in the mortgage deed contrary to that. So the point is that remember at the beginning how the law says that a mortgage is made and a mortgage arises by the mortgage or the homeowner giving a charge over the property. The kind of charge he gives over the property is a lease. And it is precisely because he has a lease that the mortgagee can then get possession. The mortgagee does not need to default for possession to take place. It arises as soon as the mortgage is created and, as I say, go back to the 3,000-year lease analogy.

Speaker 1:

Normally, though, the mortgagee will exercise their power of sale on vacant possession and generally, as I said, possession is preliminary to sale. Now, the normal way for the mortgagee to get possession is a court order, so as not to fall foul of the criminal law at 1967, because you don't want somebody to be put in fear. So you get a court order. They know exactly what's happening. Equally, as I said before, you will look at the mortgagee getting possession in circumstances where the mortgagor has given it up to them or they've gotten a court order.

Speaker 1:

Now, this court order is important because one of the ways that a mortgageor may seek relief as we'll see shortly is by section 36 of the Administration of Justice Act. But the point is that, in order to engage that relief by the mortgagor, a court order must have been used. This will become clearer in a minute. So the point, of course, is possession can be obtained generally with a court order, not necessary, for example if, say, the mortgagorsurs have left the premises. But that's the general route.

Speaker 1:

Now the administration of justice act, section 36, says that the court has discretion to postpone or suspend possession proceedings where the mortgageeur is likely to be able to pay any sums due under the mortgage. Then the mortgagee will not get an order for immediate possession if the mortgagor can show that he's likely to catch up with the installments. Now the point I was making was that for that to engage it is a requirement that a court order has been used, because if a court order has not been used then that particular section cannot be engaged. And a case is Roper Gulach and Barker's Bank, a 2000 case. And it puts this into context because if you're seeking relief because your circumstances have become better, you may not be able to do so under Section 36. Now the Administration of Justice Act 1973, section 8.1, redefined any sums due and it actually reversed a case of Halifax Building Society and Clark clark. Well, the decision in halifax building society and clark in 1973, because what section 8 does is of the 1973 act. It amends, uh, the administration of justice act 1970 and it states that an adjournment of possession proceedings or a suspended possession order can be granted if it is likely that within a reasonable period the mortgageeur will be able to pay off the arrears of installment and meet any further installments which become due within a period reasonable period of time. The case for that proposition is cheltenham and Gloucester Building Society and Norgan in 1996.

Speaker 1:

Now the courts had to consider certain things in determining a reasonable period of time, and what they considered was how much can the mortgagor afford to pay both now and in the future? How long are the mortgagor's temporary difficulties in meeting their obligations likely to last? Why did the arrears accumulate? How much is left on the original term? When is the principal due to be repaid? Should the courts exercise its power to disregard accelerated payments, is it reasonable to expect the mortgagor to recoup the areas of the interest either over the whole of the original term or within a shorter period of time?

Speaker 1:

Now, the whole idea of this is if, for example, a mortgagee gets possession, if, for example, a mortgagee gets possession, if, for example, the power of sale arises and if, for example, the mortgagee is now going to exercise the power of sale and sell the property, but just before that happens the mortgagor obtains employment, well, let's assume he's two years in arrears. What is the court's position? It used to be that if you couldn't pay it off within a reasonable period of time, then unfortunately you're not going to get relief under the Administration of Justice Act. But that is what I'm saying has changed, because it used to be that within a short period of time. I'm saying has changed because it used to be that within a short period of time you had to pay it off and if you couldn't, no relief. Section 8 of the later act has obviously changed this. How Well, let me clarify.

Speaker 1:

Imagine that my mortgage payments are £500 per month. I have become unemployed and I've been unemployed for two years. I am now in arrears by £12,000. And let's also say that I have 10 years remaining on my mortgage. I get a job for, let's say, £1,000 a month and I ask the court to postpone sale. Yes, so the power of sale arises. My relief is asking the court to postpone sale In the postponement of the sale.

Speaker 1:

Well, the previous position was that if I could not pay it off in a reasonable period, which normally used to be, say, one to two years, then I could not get relief. Now, if you imagine I have been unemployed, I would no doubt have incurred debts. Even if I were given two years to pay it off, that would be £500 per month on top of my current bills. So if I get a job, as I say, for my £1,000. The current mortgage payments with their ears would wipe out my entire income, and I couldn't even pay the electricity or the gas. But with the new position, the court would consider payment over the remaining life of the mortgage, which is 10 years, and allow me to pay, say, £1,200 per year, amounting to an extra £100 per month, which seems somewhat fewer, which would mean I would still be paying my £500 mortgage a month, plus the £100, £600. I still have something to live on.

Speaker 1:

Now, where the mortgagee possesses and exercise the power of sale is their relief for the mortgagee and that is what I'm talking about here is that you can look at Section 36 of the AJA as amended, or you can also look at the Consumer Credit Act 1974, Section 138, which says the court has power to reopen extortionate credit bargains under Section 137. The point here, though, is it depends on how much money is borrowed. So let's say somebody has a second mortgage for, say, £15,000. This would help them if, for example, the interest rate is exorbitant, but the top limit is about £25,000. So if your second mortgage is around £90,000, this section is unlikely to help you.

Speaker 1:

A party may also consider his matrimonial home rights under land law in relation to whether or not, because a mortgagee has a lease, it means that he is a purchaser of an interest in land, and again he must be able to find a purchase of an interest in land, and again he must be a bona fide purchaser of a value without notice, and so on. Now another remedy, of course, is appointment of a receiver. This is usually used to recover the interest owed rather than ending the mortgage. The mortgage's right to appoint a receiver is often expressly included in a mortgage but in any event such a power will be implied into every mortgage by deed and this power is under Section 101.

Speaker 1:

Foreclosure, of course, virtually a right to confiscate the mortgager's right to his property to take without his permission, rarely used by the mortgagee. It is the most draconian and it requires a court order to undertake. You must get a court order to undertake this and of course the legal date of redemption must have passed and the court action is undertaken. Very, very rarely used in the UK, used a lot in the USA, and what foreclosure does is basically to abrogate any right of the mortgageeurs, and it also abrogates his equitable right of redemption. Now, what if you have an equitable mortgage? Well, everything is more or less the same. You can sue for the money. Foreclosure is also available. Power of sale, though, only applies to mortgage by deed and so may not be available for your equitable mortgage, but commentators have said why not? It seems more or less the same. Similarly, a similar situation with possession Again it's equitable Should have been that it's available.

Speaker 1:

When you look at equity, for example, if you're looking at equitable mortgages, it says where the equities are equal, the first in time prevails Makes sense. But when we are looking at it from the legal position, you want to look at the unregistered land scenario. Remember that we are now in a situation of compulsory registration, so it will of course go in by way of being compulsory registered, but please be reminded that compulsory registration only kicked in in 1990. So anything before that is still subject to the unregistered land conveyancing rules. And what you're looking at there is that under the Land Charges Act, section 2.4, you normally are looking at registration. If you don't, then you're unlikely to bind a subsequent purchaser and in that regard you won't have any kind of recourse. You certainly can have it as a C1 land charge, maybe a general equitable charge, depending. Maybe a C3, depending if you didn't have a legal mortgage With registered land. Section 27 LRA says it ought to be substantively registered, but if it's an equitable mortgage then put it on as a notice under section 34.

Speaker 1:

And finally, tacking Tacking, part of most syllabus. But what you will have to consider with tacking this is how tacking work. When you're looking at two or more mortgages to the same lender, you're seeking to join them, particularly where you have an intervening lender. So let's say, first mortgage to Bank A, second mortgage to Bank B, third mortgage to Bank A. What happens in a situation, for example, where you're looking to exercise the power of sale bank A? Is it that bank A is going to get his first and third mortgage? Well, it depends, because you have to look at whether, when bank B's mortgage was, it then extended its second loan and took a mortgage after Bank B's, because that may stop them being able to adopt both and take ahead of Bank B. So, equally, if you consider that there is one agreement with Bank A for the mortgage, it's just that part of the monies was advanced and then they got a mortgage from Bank B and the balance of Bank A's money was then advanced.

Speaker 1:

You can actually tack it on and it will take precedent. In unregistered land, of course, you're looking at section 94 of the Law of Property Act that deals with this area. As I say, the tacking usually will look at the notice that the party advancing the monies on the mortgage has had, because if he has had notice, it is likely that he will be bound even if there is an intervening mortgagee. Now, as it relates to registered land after the 2002, the position is somewhat similar. Section 49 one is the rule that provides for it and it says that notice there is important. It talks about, in addition, that even after the first mortgage has received the notice, the first mortgagee can go on to tack further advances if the first mortgage was under an obligation to make further advances or had fixed a minimum amount. So look at tacking and certainly this point takes us to the end of this session on mortgages and as such, you now have the completion and the totality of what is included as it relates to mortgages and land law.