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Modern Land Law

Clearly, it is dangerous to draw firm conclusions from these arguments. Many academics see the concepts as virtually indistinguishable as concepts while recognising that in practice they are used in different types of case. Other academics maintain that the concepts are inherently different, albeit that in some cases they overlap. The latter view appears to have been adopted by Lord Walker in Stack v. Dowden.

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LICENCES AND PROPRIETARY ESTOPPEL

The essential nature of a licence

There are no formal requirements for the creation of a ‘licence’ as such. A licence is given by the owner of land (the licensor) to some other person (the licensee), permitting them to do something on the owner’s land. Without such permission, the activity would amount to a trespass. A licence may be given for any lawful purpose and not only to someone who also owns land. Crucially, the traditional view of licences is that they are not proprietary in nature.

Types of licence

A bare licence is a permission to enter upon the land given voluntarily by the owner who receives nothing in return. A bare licence lasts only for so long as the licensor wishes, terminable on reasonable notice.

A licence coupled with a grant’ is a permission that enables a person to exercise some other right connected with the land, usually a profit à prendre. A contractual licence is granted to the licensee in return for valuable consideration. It is founded in contract and the normal remedies for breach are available in the event of a failure to carry out its terms. The effect of these remedies can be to make the licence de facto irrevocable between the parties throughout the contractual period of the licence. Contractual licences are not interests in land. Notwithstanding this, a contractual licence can take effect against a purchaser of land by means of a personal constructive trust.

An estoppel licence may arise out of a successful plea of proprietary estoppel. It is an interest in land only if ‘the estoppel’ itself is regarded as a new species of property right. This appears to be the predominant view and is given effect to in section 116 of the LRA 2002 when the estoppel is uncrystallised.

The role of proprietary estoppel

Proprietary estoppel can provide a defence to an action by a landowner who seeks to enforce his strict rights against someone who has been informally promised some right or liberty over the land. Second, proprietary estoppel can generate new property interests in favour of a claimant. It can be a shield or a sword.

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Conditions for the operation of proprietary estoppel

The modern doctrine of Taylor Fashions v. Liverpool Victoria Trustees (1982) is that there must be:

1An assurance. The form of the assurance is irrelevant and it may be implied from conduct so long as the landowner is aware, or ought to have been aware, that the claimant is relying on the assurance.

2Reliance on the assurance. This can be assumed from the fact that the claimant acted to his detriment. The assumption can be rebutted by evidence that the claimant would have behaved the same way irrespective of the landowner’s assurance.

3Detriment. This may take many forms, providing it is not minimal. It may involve expenditure on the land, work undertaken in connection with the land or work undertaken for the landowner without pay or at less than market pay, or lost opportunities.

4Such circumstances that it would be unconscionable to allow the landowner to escape from his promise. Unconscionability is the reason why oral assurances can be enforced despite non-compliance with normal formality requirements. If the facts do not reveal unconscionability, then a simple assurance, reliance and detriment on their own cannot generate an estoppel.

What is the result of a successful plea of proprietary estoppel?

If a defendant establishes the proprietary estoppel in an action by the landowner, the landowner’s claim will be dismissed and the defendant will be left to enjoy the right that the landowner was seeking to deny. If the estoppel is established by a claimant seeking to enforce a right against a landowner in consequence of an assurance, the court can award the claimant any remedy it deems appropriate, though probably not in excess of that which was actually promised. The aim of the remedy is to remedy the unconscionability and to the minimum necessary to satisfy the equity.

The nature of proprietary estoppel and its effect on third parties

This has now been settled by section 116 of the LRA 2002. If the estoppel is uncrystallised before the transfer of the burdened land, then it is a property right capable (subject to registration principles) of binding a third party. If the right is crystallised in a proprietary way before such transfer, the same is true. If the right is crystallised in a personal way before transfer, it remains a personal right.

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CHAPTER 10

THE LAW OF MORTGAGES

A mortgage is an extremely versatile concept in the law of real property. For most people, a mortgage signifies the method by which they may raise enough capital to purchase a house or other property. However, the use of a mortgage to finance the purchase of property is a relatively recent phenomenon, and mortgages have been used as security for the repayment of a debt owed by the landowner, or for the performance of some other obligation, for much longer.

10.1 The essential nature of a mortgage

There are several different aspects to a mortgage, the most important of which are discussed below. As we shall see, a mortgage is a legal concept that partakes both of the law of contract and the law of real property. This duality provides the basis for the versatility of the mortgage in the modern world of property ownership, property investment and capital finance. It gives the mortgagee – the lender – a proprietary right that it can shape to its own use depending on its particular requirements and it provides the mortgagor – the borrower – with a relatively economic and efficient way of turning an immoveable asset (their land) into a liquid one (its cash value).

10.1.1 A contract between borrower and lender

Like many other concepts in the law of real property, a mortgage is also a contract, this time between the borrower and the lender. Usually this contract is express – as where the parties negotiate and execute a mortgage by deed based on the standard terms and conditions of the lender – but sometimes it is implied, as where the court decides that the conduct of the parties in relation to an asset (i.e. land) amounts to a mortgage (or ‘charge’), whether or not this was the intention of the parties or spelt out in their agreement. In the typical mortgage of land, with which this chapter is concerned, the borrower of money (the mortgagor) will enter into a binding contract with the mortgagee (the lender, often a bank or building society), whereby a capital sum will be lent on the security of property owned by the mortgagor. Moreover, as a matter of contract, the mortgagor and mortgagee are free to stipulate whatever terms they wish for repayment of the loan, the rate of interest, and so forth. Consequently, one of the remedies available to a mortgagee, when faced with a mortgagor who will not or cannot repay the loan, is to sue the

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mortgagor personally on the contract for repayment of the sum borrowed, plus interest and costs.1 On the other hand, and as we shall see, the contractual nature of a mortgage is not always consistent with its status as a proprietary interest in land under the control of the court of equity. Thus, where contractual obligations freely undertaken by the parties to a mortgage are in conflict with the essential nature of a mortgage as a proprietary concept, it is the role of the courts to asses which will gain the upper hand – contractual term or property right?

10.1.2 An interest in land in its own right

Although the mortgage is a contract, and the parties to it are subject to contractual rights and obligations, it also constitutes a proprietary interest in the land over which it (the mortgage) takes effect. Thus, under a mortgage, the mortgagee obtains a proprietary interest in the land with all that this entails, and the borrower retains an ‘equity of redemption’ – itself a proprietary right – which encapsulates his residual rights in the property.2 In fact, both mortgagee and mortgagor may transfer their respective property interests under the mortgage to third parties and this often occurs when a bank transfers its ‘mortgage book’ to another lender. In addition, the proprietary nature of a mortgage brings with it the intervention and attention of equity and, as noted above, this can result in a conflict between the mortgage as an interest in land and the mortgage as the creation of a contract.

10.1.3 The classic definition of a mortgage

At its root, a mortgage is security for a loan. The inherent attribute of a mortgage of real property is that it comprises a transfer (conveyance) of a legal or equitable interest in the borrower’s land to the mortgagee, with a provision that the mortgagee’s interest shall end upon repayment of the loan plus interest and costs. The lender’s contractual rights (including the right to sue for the debt) are thus supported by a proprietary interest in the land.3 However, it is a fundamental principle of the law of mortgages that ‘once a mortgage, always a mortgage’, even if this contradicts the terms of the contract between

1See, for example, the discussion in Alliance & Leicester v. Slayford (2001).

2Today, the modern method of creating mortgages – the use of ‘a charge’ – does not actually transfer an interest in the land to the mortgagee. However, the legal mortgagee under ‘a charge by deed by way of legal mortgage’ is treated as having such a right for all purposes (section 87(1) of the LPA 1925) and such charges are registrable under the Land Registration Act 2002.

3Santley v. Wilde (1899). Even though all modern mortgages are created by a ‘charge by deed by way of legal mortgage’, the mortgagee is treated as if he has acquired such an interest and gets ‘the same protection, powers and remedies’ as a mortgagee who does in fact take conveyance of an estate – section 87(1) of the LPA 1925.

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the parties. In other words, the borrower has the right to have their property returned in full once the loan secured on it has been repaid and any clause of the mortgage which destroys that right will be struck out as inconsistent with the essential nature of a mortgage.4 Consequently, the proprietary nature of the mortgage lasts only for so long as the debt remains outstanding, and the mortgagee’s remedies (which can be proprietary or contractual in nature) endure only so long as the borrower owes money or the mortgage still exists.

10.1.4 The mortgage as a device for the purchase of property

In recent years, the mortgage has come to the fore as the major device by which individuals may finance the purchase of property. Of course, the mortgage is still security for a loan, but now the purpose of the loan is to purchase the very property over which the security is to take effect. Necessarily, this has given rise to some conceptual problems, not least that the purchaser must actually own the property before he can create a mortgage over it, but, of course, he cannot own it until he has the money to pay for it and this the mortgage will provide! In formal terms, this problem is dealt with by the transfer (i.e. the completed sale) of the estate in the land to the new owner, followed immediately thereafter by the execution of a mortgage over that property and a transfer of the purchase price to the vendor. This is simple enough, but it does mean that logically there is a ‘time gap’ between the purchaser acquiring the property and the execution of the mortgage over it. This is known as a scintilla temporis – a sliver of time. In practice, this scintilla temporis may only be a matter of a few minutes or moments, but it has the potential to create problems. For example, if the new owner holds the land on trust for another person (e.g. their spouse or partner5), the moment that the new owner acquires title, the equitable owner’s interest also springs into life. Such an equitable interest would, therefore, come into existence a few moments before the mortgage takes effect and thus have the potential to take priority over the mortgagee’s interest (because it arose first).6 Figure 10.1 will make this clear.

Fortunately, this logical problem has now been solved in a practical way. According to the House of Lords in Abbey National Building Society v. Cann

(1991) as a matter of law, there is no scintilla temporis between a purchaser’s acquisition of title to a property and the subsequent creation of a mortgage

4Jones v. Morgan (2001).

5For example, because the equitable owner has contributed to the purchase price, or contributed to the purchase price of a previous property whose proceeds of sale are being used to buy this one – see generally Stack v. Dowden (2007) and Chapter 4.

6For example, as an interest which overrides through discoverable actual occupation: Chapter 2.

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Figure 10.1

over that property that has enabled the purchase to take place. Consequently, any potential equitable interest held by another person must always rank second in time to the mortgage, and cannot take priority over the mortgagee.7 For all practical purposes this must be correct, for it is only a reflection in law of the real situation; that is, that the property would not have been purchased at all without the mortgage and, therefore, the interests of all the owners of the property (legal and equitable) should give way to the rights of the mortgagee.8

10.1.5 Types of mortgage

The contractual nature of a mortgage means that each mortgage is potentially unique depending on the needs of the particular mortgagor and mortgagee. The following is a non-exhaustive list of the different types of mortgage in general use, although it must be remembered that all are ‘mortgages’ within the Law of Property Act (LPA) 1925 and are governed by that Act and the principles of registration found in the Land Registration Act 2002.

1The ‘repayment mortgage’ is used most frequently for the purchase of residential property. The mortgagor borrows a capital sum and agrees to pay back that sum plus interest over a fixed period of time. The capital and interest are paid back in instalments, with (usually) the early instalments representing pure interest, and the later instalments comprising a greater and greater capital element. At the

7See for example, Leeds Permanent Building Society v. Famini (1998).

8Even if it were otherwise, it would be arguable that the equitable owner had impliedly consented to the mortgage, this being necessary for the very acquisition of the ‘their’ land (Cann).

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end of the period, the mortgage has been redeemed (paid off), the registered charge is discharged and the mortgagor owns the property absolutely.

2The ‘endowment mortgage’ is also used frequently for the purchase of residential property. The mortgagor borrows a capital sum for a fixed period (usually 25 years). This accumulates interest and the mortgagor repays that interest in regular monthly instalments. No part of the instalments goes towards repaying the capital sum. However, the mortgagor also enters into an ‘endowment policy’ (i.e. a savings plan), whereby he pays a regular sum towards the purchase of an ‘endowment’, which will mature at the same time as the mortgage period ends. The endowment should realise a large enough capital sum to pay off the principal mortgage debt at the end of the period and, possibly, leave a sum of money for the mortgagor. However, if, when the endowment policy matures, it does not realise enough to pay off the capital debt, the mortgagor must provide the balance from other funds or remortgage and continue to pay instalments.

3The ‘current account mortgage’ is a relatively new type of mortgage that may be advantageous to borrowers whose only or principal debt is a mortgage. The lender will agree an overdraft facility on a current bank account to the value of the mortgage. The lender will provide these monies for the purchase of property in the normal way (or for other property related use such as extension) and interest will be charged at the prevailing rate. The borrower will pay funds into the mortgage current account (e.g. a monthly salary) and some of these funds will pay the interest and/or capital repayments and will be taken by the lender. Any surplus funds will go towards paying off the debt. This has the advantage that the mortgage debt decreases the more that surplus funds are paid into the account. Further, given that interest will be payable only on the actual mortgage debt, the borrower pays less interest over the period of the mortgage (assuming the capital debt is decreasing) than with a conventional repayment/endowment mortgage. This is even more the case if the borrower overpays the agreed instalments, as this further reduces the capital debt and the interest. Moreover, as the lender has promised an overdraft facility to the level of the original mortgage, the borrower can draw on the current account up to this limit (in effect recover any surplus paid) should the need arise.

4The secured overdraft is common where funds are required for commercial purposes, as where a businessman uses the family home to raise finance for his company. In essence, the lender promises to make an overdraft facility available and the borrower may draw

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monies up to this agreed overdraft limit as and when they are needed. No lump sum is paid, interest is charged on the amount of the actual debt and the total amount owed varies according to the level of current indebtedness. Hence the value of the mortgage secured over the land fluctuates (or ‘floats’) in line with the indebtedness, as in State Bank of India v. Sood (1997).

5The ‘charge’. As we shall see, mortgages are commonly created by the use of a charge.9 A ‘charge’ does not refer to a specific type of mortgage, but rather to the manner in which any type of mortgage may be created. It is mentioned here because many judicial decisions refer to a mortgage of land as a ‘charge over property’, irrespective of whether the actual mortgage is a repayment, endowment or other type of mortgage.

10.2 The creation of mortgages before 1925

Although it is uncommon for mortgages to exist today that were created before the Law of Property Act 1925, a brief discussion of how these mortgages were created will help understand why modern mortgage law is constructed as it is. Before 1 January 1926, if an owner of a legal or equitable estate in land wished to raise money on the security of that land, the borrower’s entire interest in the property was usually conveyed in full to the lender. In other words, the borrower divested themselves entirely of their interest in return for the loan. Of course, the mortgagee promised to reconvey the land on repayment of the principal (i.e. the capital sum), interest and costs but, importantly, the mortgage contract allowed the mortgagee to keep the borrower’s land if he failed to repay the loan on the date stipulated in the mortgage contract. This date, known as the ‘legal date of redemption’, was crucial, and the consequences for the borrower of missing payment on that date were theoretically severe. To a large extent, however, the position was mitigated by the intervention of equity. Applying the policy that ‘once a mortgage, always a mortgage’, an ‘equity of redemption’ was held to exist, whereby the borrower was entitled to a reconveyance of his property should he pay the full sums due under the mortgage, even though the ‘legal date’ for redemption had passed. This was simply an aspect of the rule that a mortgage really was security for a loan and did not represent an opportunity for the mortgagee to obtain the property of a solvent mortgagor if the debt could be repaid. Importantly, however, the mortgagor conveyed everything to the mortgagee, so that there was no estate remaining in the borrower that could be used to create second or subsequent

9This method is now mandatory for legal mortgages of registered titles, see section 23(1) of the LRA 2002 and below.

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mortgages and the mortgagor had to take positive steps to recover their estate should it not be reconveyed on redemption of the mortgage.

10.3The creation of legal mortgages on or after 1 January 1926

The LPA 1925 made significant changes to the ways that mortgages could be created. The overall intent was to ensure that a mortgagor retained the fullest interest possible in their own property, even when seeking a mortgage of it, providing that the mortgagee had suitable remedies in the event of a failure to repay the loan. In general terms, as a consequence of the reforms of the LPA 1925, a mortgage of a legal estate does not occur through the transfer of the mortgagor’s entire interest in the land to the mortgagee. However, the mortgagee is given some lesser proprietary right in the mortgagor’s land appropriate to the type of mortgage created. Furthermore, since 13 October 2003 – the entry into force of the Land Registration Act 2002 – mortgages of registered titles may be created only by the use of a ‘charge’ and thus the long leasehold method described below is available only for land of unregistered title.10

10.4Legal mortgages of freehold property: unregistered land and registered freehold titles mortgaged before 13 October 2003

Under section 85(1) of the LPA 1925,11 there are two methods of creating a legal mortgage of an unregistered freehold estate and these two methods also could have been used to create a mortgage of a registered title before the entry into force of the LRA 2002. For the avoidance of doubt, section 85(2) also provides that these two methods cannot be circumvented (where they are still available) and it is impossible to create such a mortgage by a conveyance of the mortgagor’s entire interest to the mortgagee.

10.4.1 The long lease method

The first method is where the mortgagor grants the mortgagee a long lease over the land with a provision for the termination of the lease on repayment of all sums due under the loan. In technical terms, the mortgagor will ‘demise a term of years absolute’ to the mortgagee ‘subject to a provision for cesser

10In fact, mortgages of unregistered titles will almost invariably take the form of a charge and, of course, trigger compulsory first registration of title. Even for registered land mortgaged before the entry into force of the Act, the ‘long lease’ method would rarely be employed.

11This does not apply to mortgages of registered land executed on or after 13 October 2003.

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