I. The nature of mortgages
1. Morgages are one form of real security (as opposed to personal security - as where a person stands surety for a debt).
Real security may also take the form of pawning (this is for chattels only).
The term 'mortgage' derives from an ancient practice by which the borrower conveyed the land to the lender with a proviso for reconveyance should the loan be paid by a certain date; if the loan was not repaid on time the land became a 'dead pledge' ('mortgage') forever to the borrower, for it became the property of the lender. Mortgages are no longer created that way.
2. Forms of mortgages
The forms they take today are largely the creation of the Property Acts. They fall into two main groups:
a) Legal mortgages may take two forms:
aa) Mortgages by way of demise (lease): The freeholder will grant the lender by way of deed of term of years absolute (usually for 3,000 years) with the proviso that if the principal loan and interest are paid by a certain date (usually six months from the loan), the term of years shall cease to have effect. The lender will become absolutely entitled to his 3,000-year term once the agreed date for repayment is past; neither will the loan usually be intended to be repaid by the agreed date. A leaseholder may likewise mortgage the property if he sub-lets it to the lender; the sub-demise will usually be ten day shorter than his own lease.
A further mortgage may be created by granting a term of 3,000 years and one day, respectively by sub-letting the property a second time for a period nine days shorter than one's own lease.
bb) Charge by way of legal mortgage: By deed, a charge is created by way of legal mortgage without the indication of any term of years thereby created. Once executed, it gives the same reciprocal rights as a mortgage by way of demise.
This also applies to leaseholders.
A further mortgage may be created in the same manner.
b) Mortgages of equitable interests can only be equitable; whereas mortgages of legal interest can be both legal and equitable.
aa) Equitable mortgages are created by way of an assignment of the equitable interest concerned, with a proviso for redemption upon payment by the mortgagor of principal and interest. The assignment must be in writing.
bb) 'Equity looks on that as done which ought to be done'. If in consideration of money advanced, A agrees to grant B a legal mortgage, but fails to do so, B has a form of equitable mortgage, which the courts will uphold, provided he can evidence the agreement in writing or supported by a sufficient act of part performance.
cc) An equitable mortgage also arises where title deeds are merely deposited with someone, other than the owner, as security for a debt, without any formal mortgage document. It is however advisable for the mortgagee to insist upon a the execution of a memorandum under a seal (i.e. a deed), because this will give him a better remedy.
dd) An equitable charge (!) arises whenever there is a written agreement to treat property as security for a debt.
3. Mortgages of registered land
Where a holding is registered the two more important ways of mortgaging it are:
a) By way of registered charge: This is a legal interest which can only be created by deed. It may take the form of mortgage be demise (freehold) or sub-demise (leasehold) or by way of charge by way of legal mortgage. Such a charge will only become a legal estate by entry on the register. When it is so entered the mortgagee receives a 'charge certificate' and the land certificate is deposited at the Land Registry during the continuance of the mortgage.
b) A registered proprietor may create a mortgage by depositing the land certificate with the mortgagee; this (provided that written notice is given to the Land Registry and an appropriate entry is made on the register) will give the mortgagee an effective lien similar to an equitable mortgage.
II. The rights of the mortgagor
1. The right to redeem
a) Common law: the mortgagee obtaines an indefeasible right to his lease or to the property.
b) Equity: 'Look at the intent rather than the form'. A mortgage is in essence no more than a security as opposed to a conditional contract of 'sale'. Equity gave the mortgagor an equitable right to 'redeem' (recover) the land at any time until sale or foreclosure by the mortgagee, provided he has repaid the principal loan with interest to date.
No matter how a loan/mortgage agreement is cloaked ('lease in return for a loan'), equity will insist what is 'Once a morgage, [is] always a mortgage'. The 'equity of redemption' is inviolable.
c) Equity further insists that there must be 'no clog on the equity'. This means two things:
aa) Where the agreed perdiod of repayment is unreasonable long, such a covenant will not be countenanced by a court. In a business agreement, a repayment period of 40 years for a L 310,000 loan at 5.25 % upon a mortgage of some very valuable property in London was reasoble: KNIGHTSBRIDGE ESTATES v. BYRNE (1939). But in a private agreement for a small loan upon property of little value this would not be upheld. Where a transaction as a whole is illegal, the right to redeem is granted at any given time.
bb) Once the money has been repaid and the land 'redeemed' the matter is at an end. The mortgagee must not reap other collateral advantages.
But this rule is relaxed where both parties are on equal bargaining terms:
MULTISERVICE BOOKBINDING LTD. v. MARDEN (1979) - the sum to be repaid had been linked to the Swiss Franc, which meant that the mortgages had to repay an amount considerably greater (in Sterling) than the actual amount of the loan.
2. The right to grant leases
Where, as normally will be the case, the mortgagor is in possession of the land, he has a limited right to lease it.
III. The powers and remedies of the mortgagee
1. The right to enter possession
The lease granted is a security; the mortgagee will normally not take advantage of it. He may do so, however, in or- der to keep down interest on the loan by paying himself out of the rents and profits arising from the land. But the court will exercise stringent supervision over him; he is strictly accountable, not only for what he actually re- ceives, but also for what he ought to have received by the exercise of due diligence. A court order is not necessary unless there is a regulated agreement which falls under the Consumer Credit Act 1974.
2. The right to foreclose
Equity: If a debt be unpaid for an unreasonable time beyound the agreed repayment period, the mortgagee may 'fore- close' by obtaining an order of the court that the land shall become his unless payment in full is made by a certain date.
The order becomes 'absolute' and the mortgagor loses all rights to the land unless he can persuade the court to re-open the order at a later date.
3. The right to sell
Under certain conditions, he has a statutory power to sell the whole of the mortgagor's interest in the land. He is not al- lowed to keep any surplus proceeds arising from the sale. He owes (similar to a trustee) a duty of care to the mortgagor; he has to obtain a reasonable price for the land. A court order is not necessary unless there is a regulated agreement which falls under the Consumer Credit Act 1974.
4. The right to sue upon the personal covenant
The repayment covenant is an ordinary contract. The morgagee may sue for repayment any time after the expiry of the repayment period.
5. The right to appoint a receiver
With a view to obtaining repayment of the interest, the mortgagee may exercise a statutory power of appointing a recei- ver to receive on his behalf the rents and profits arising from the land. The receiver is deemed to be the agent of the morgagor, and the mortgagee thus avoids the disadvantage of strict accountability to which, if he were to enter into possession, he would be subject.