This article explains how conveyancing is affected when a property is mortgaged; either as a joint tenant or tenancy in common and the circumstances under which a lender may/may not obtain possession of land.
What are Property Mortgages?
It is a transaction wherein a borrower (also called mortgagor) transfers as security his equitable or legal interest in a property to a lender (also called mortgagee) in return for money that is obtained as a loan. More than one mortgage can be created over the same property; but generally earlier mortgages will have priority over the ones obtained later.
For a mortgage to gain legal effect, it must be created by a deed and registered to gain a legal interest in the property. A mortgage on a registered land should be registered as a charge on the charges register of the borrower’s title. Legal interest cannot be obtained unless this is done. In the case of an unregistered land, the first legal mortgage over the freehold property is said to trigger the first registration of the title to the land.
The mortgage registration thus obtained is registered as a charge in the charges register of the title. The mortgage becomes a reason for the registration of that property and all mortgages that follow this first mortgage will not be considered for first registration. In the event of a problem in future, the first registered mortgage shall be valid against subsequent mortgages.
The Power of Sale
General:
While a lender has several remedies against a borrower who has defaulted in payments, the right to sell is undoubtedly the most important of all. Such a power of sale arises when the payment is past the payable date. Most mortgages include a condition that the power to sell arises as soon as the mortgage is created, but under S 103 of the LPA 1925, this power cannot be exercised until:
- the borrower has defaulted in his payment for three months,
- he has not paid the interest for two or more months, or
- he has broken some provisions mentioned in the mortgage.
An agreement contrary to the above mentioned points can always be made. In fact, it now common for most mortgage agreements to say that the power of sale is exercisable from the creation of mortgage.
When a buyer buys from a mortgagor exercising his power of sale, he is said to take a good title if the power of sale has arisen. He need not check if the power has become exercisable. However, the lender shall be liable to the borrower for wrongful exercise of power.
Effect of Exercise of Power of Sale:
When a lender exercising his power of sale sells the property, the purchaser is conferred with the borrower’s legal title subject to the incumbrances that were in existence prior to the mortgage. However, he is not subject to incumbrances occurring after the mortgage. For instance, if there are three rights on the property- an easement of right, mortgage 1, and mortgage 2, and lender 1 decides to sell off the property, the sale is only subject to the easement as it was registered prior to the mortgage. The buyer gets the property free from the second mortgage.
The lender who exercises his power of sale makes use of the money obtained after sale of property to pay off expenses of the sale and his own mortgage. The remaining money is handed over to the lender who is second in priority. This continues until all mortgages have been paid. Any money that remains is given to the borrower. But if the money obtained from the sale is not sufficient to clear all debts, any disappointed lender who is yet to be paid can sue the borrower.
A lender who has the statutory power of sale cannot override a prior mortgage, but the power allows him to sell the property free of this prior mortgage. In order to carry out this promise, the selling lender will have to pay and settle the prior mortgage from the proceeds of the sale before he could recover his dues.
If the borrower has occupied the mortgaged property, the lender will first have to obtain an order of possession from the court, and then proceed to make sale.
Property Mortgage in the Residential Context
Suspension of Possession
The Administration of Justice Acts 1970 and 1973 aims to protect mortgages of dwelling houses when a lender brings a claim for possession. Thus, when the court is reasonably satisfied that the borrower is likely to be able to repay the mortgage dues within a reasonable time, or can correct any breach of any obligation in the mortgage, it may adjourn the proceedings. And if an order of possession is passed, it may suspend the order for a period that it deems to be reasonable.
Sometimes instalment mortgages may have a provision that if any instalment is unpaid, the entire principal amount shall become instantly due. In the instance of such a provision, the buyer generally has to only satisfy the court that he can pay off the outstanding amount (in instalments) within a reasonable time and is not required to pay the entire money.
The Borrower’s Spouse, Civil Partner or Cohabitee
When husband and wife/ civil partners/co-habitees co-own a property, it is obvious that both would have executed the mortgage; thus both would be evicted from the property.
But if legal estate is owned only by one person, the lender would have to consider the rights of the spouse/civil partner/ cohabitee. There are two main reasons why they need to consider these rights:
- The other spouse/partner/cohabitee may have an equitable interest thereby preventing the lender from getting an order for possession against that person. When the person is a beneficiary of a trust of land, the court would recognise his/her right to occupy the land and hence refuse an order for possession.
- Also, even if the lender succeeds in obtaining vacant possession, it will have to share the proceeds of the sale with the spouse/partner/cohabite. Besides, the spouse/partner also has a home right (even without co-equity) that protects him/her.
Undue Influence:
Rules under this subject are aimed to protect spouses/partners/co-habitees from the use of undue influence on the part of the lender. If it is proved that undue influence was used, the borrower can claim that he/she is not bound by the mortgage and can have it set aside.
Let us illustrate this point in light of the following example: A husband and wife who live in their family home decide to borrow money to raise finance for the husband’s business. The wife who was initially against this idea later relents to her husband’s persuasion and signs the mortgage documents in favour of the bank. Under these circumstances, the bank will have to take reasonable steps to ensure that the wife’s consent is informed and that she understands the nature and the effect of the transaction.
This principle not only covers relationship between spouses, partners or cohabitees, but in all cases where there is an emotional relationship or when a co-owner places trust and confidence on the borrower.
It is also applicable when the co-owner is required to execute the mortgage because he/she is a co-owner in legal estate, and when asked to sign a form of waiver because he/she is assumed to have equitable interest in the estate.
Leases of Mortgaged Property
The tenant of a mortgaged property that is leased will have to be informed if the lease is binding on the lender seeking to exercise a power of sale. If the lease is not binding, the lender is free to evict the tenant and then arrange for the property to be sold. Primarily, this depends on whether the lease was given prior to, or after the mortgage.
If the borrower has leased the property after the mortgage, under S. 99 of the LPA 1925, he has the power to grant leases that bind the lender on the condition that the lease fulfils certain criteria. But such a scheme is unpopular with lenders who seek to remove this power through a provision in the mortgage deed. Alternatively, if the lease was given without the consent of the lender, he can obtain permission from the court to evict the tenant and take possession of the property. Thus, the tenant shall have no rights over the property.
sizePhoto courtesy: Kevin Shortner
