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Modern Land Law

on redemption’. In the typical case, the mortgagee’s lease is usually for 3,000 years, although the mortgage contract will fix an earlier contractual date for repayment and redemption. This earlier date comprises the legal right to redeem and may be a mere six months after the date of execution of the mortgage. However, as was the case before 1926, the mortgagor has an equitable right to redeem the mortgage, and thereby to terminate the long lease, on the payment of all sums due at any time after this legal date has passed. Indeed, this may be recognised explicitly by the inclusion of a right to pay by instalments which necessarily postpones the legal date for redemption. Of course, the grant of the exceptionally long lease to the mortgagee is something of a fiction, but it does have a number of important consequences.

First, the mortgagor retains the legal fee simple throughout the term of the mortgage. The borrower always retains an estate in their own land and the mortgage is more accurately shown to be what it really is – the security for a loan. Second, the mortgagee acquires some proprietary interest in the land, being the leasehold granted to them. This preserves the efficacy of their remedies in the event of non-payment of the mortgage debt. It also means that, as a leaseholder, the mortgagee has a right to possession of the property although, in most cases, this will not be exercised and the mortgagor will be allowed to remain in occupation. Third, it means that the mortgagor may create further legal mortgages of his land, in order to raise further sums. For example, because the mortgagor retains his legal fee simple, it is perfectly possible to obtain another mortgage from another mortgagee by granting a second leasehold over the property for a period longer than the first lease, say 3,001 years. The term granted to the second mortgagee will necessarily always be longer than that granted to the first, as this gives the second mortgagee a notional legal interest in the property distinct from that of the first mortgagee – in our example, one year more. Of course, the actual sum lent on the second mortgage will be calculated by reference to the value of the land, taking account of the debt owed under the first mortgage, but again the mortgagor retains the ultimate fee simple and the second mortgagee also receives a proprietary interest in the land. For example, if land is worth £100,000, the freehold owner (A) may seek a mortgage from XYZ Bank plc in the sum of £45,000. XYZ Bank will be granted a mortgage by way of a 3,000 year lease (with provisions for termination on repayment), and A retains the freehold. A may then seek a second mortgage from PQR Bank plc, who may be willing to lend anything up to £55,000, taking a 3,001 year lease by way of mortgage (with provisions for termination on repayment), A still retaining the freehold. As noted above, however, this method is not available for mortgages of registered titles taking effect under the Land Registration Act 2002.

10.4.2 The charge

The second method of mortgaging unregistered titles (and registered titles) is the charge by deed. Instead of the relative formality involved in granting the

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mortgagee a long lease over the land, the mortgagor may create a mortgage by executing ‘a charge by deed’ (sections 85(1) and 87 of the LPA 1925). This is a much simpler method of creating a mortgage than executing a long leasehold. It is, in fact, the common form of mortgaging land and is by far the most predominant method. More importantly, since the introduction of the LRA 2002, it is the only method of mortgaging a registered title. Consequently, it is dealt with more fully below.12

10.5Legal mortgages of leasehold property: unregistered leases and registered leasehold titles mortgaged before 13 October 2003

As with unregistered freehold land (and pre-LRA 2002 registered leasehold titles), there are also two methods of creating mortgages of legal leaseholds, and these are substantially similar to that used for the freehold. Once again, before 1 January 1926, the leaseholder (the tenant) would assign his entire lease to the mortgagee but, once again, this is not now possible (section 86 of the LPA 1925).

10.5.1 Long subleases

As with freeholds, the first method of creating a legal mortgage of an unregistered leasehold (and a mortgage taking effect before the LRA 2002) is to grant the mortgagee a lease over the property. Of course, given that the mortgagor himself is a leaseholder, the ‘mortgage-lease’ will actually be a sublease (a ‘sub-demise’). This sublease will necessarily be shorter than the lease that the leaseholder has, simply because the mortgagor cannot grant more than they have. In practice, the mortgagee’s term will be 10 days shorter than that of the original leaseholder. For example, if the mortgagor has a lease of 100 days, a first mortgage will operate by the grant of a legal lease to the mortgagee of 90 days. In turn, this will ensure that the leaseholder can grant second and subsequent legal mortgages of the leasehold property by creating further subleases. These additional subleases will be longer than the first mortgagee’s lease (so as to give the second mortgagee a separate interest in the property), but shorter than the mortgagor’s own lease. Using the above example, the second mortgagee will be granted a legal lease of 91 days. Any mortgage that attempts to avoid these provisions, by providing that the leaseholder’s entire term should be assigned to the mortgagee, will operate only as a sublease for a term shorter than that of the mortgagor.13

12Section 10.6.

13Grange side Properties v. Collingwood Securities Ltd (1964).

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10.5.2 The charge

The second method of creating a legal mortgage of a leasehold is to use the ‘legal charge by deed’ under section 87 of the LPA 1925 and referred to above. This is substantially the same as for freeholds, and is the common form. It is discussed immediately below because, once again, it is the only permissible form for registered leasehold titles under the LRA 2002.

10.6Legal mortgages of registered titles under the Land Registration Act 2002

Although before the entry into force of the LRA 2002 it was possible to create legal mortgages by the long lease method, almost invariably the common form was the use of the legal charge. Now, by virtue of section 23(1) of the LRA 2002, the legal charge is the only permissible method of creating a legal mortgage of a registered freehold or leasehold estate. In fact, section 23(1) contemplates two ways in which a registered title may be ‘charged’ so as to create a legal mortgage. The first is the usual ‘charge by deed expressed to be by way of legal mortgage’ and the second is the less common method of simply charging the land with the payment of money.14 However, in practice, it makes little difference which version of the charge is used because under section 52 of the LRA 2002, a charge on the land (the second version) is to take effect as a ‘charge by deed by way of legal mortgage’.

As noted above, the charge by deed by way of legal mortgage is the standard and widespread method of mortgaging legal estates. Under section 87 of the LPA 1925, the charge must be made by deed, and it must be expressed to be by way of legal mortgage; that is, it must declare itself to be a ‘legal mortgage made by charge’. Technically, the charge15 does not confer any proprietary interest on the mortgagee (the ‘chargee’) but section 87 of the LPA 1925 also makes it clear that a chargee obtains ‘the same protection, powers and remedies’ as if the mortgage had been created by a long lease of 3,000 years in the old way.16 This means that for all practical purposes, the legal charge is as effective as if a proprietary right had actually been conferred on the mortgagee and nothing turns on the issue. Indeed, for both borrowers and lenders, the charge represents a quick, easy, economical and simple way of mortgaging land and it is no surprise that the Land Registration Act 2002 determines that it should be the only method of creating mortgages of registered estates on or after 13 October 2003.

14Section 23(1)(b) of the LRA 2002. Cityland and Property (Holdings) Ltd v. Dabrah [1968] Ch 166.

15In both versions.

16Regent Oil Co v. Gregory (1966).

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10.7Registration of legal mortgages under the Land Registration Act 2002

Before the legal mortgage actually can take effect as a legal interest over a registered title, it must be registered as a ‘registrable charge’ against that title.17 This registration will show the mortgagee as the proprietor of the charge and will ensure both that it takes effect as a legal interest and that it amounts to a ‘registered disposition’ for the purpose of obtaining priority for the mortgagee over prior rights – except registered interests and overriding interests (section 29 of the LRA 2002). Consequently, in the absence of such registration, the mortgagee only has an equitable interest and may lose its right to priority over the land in the event that the mortgagor disposes of the legal title by a registered disposition.18 This is the natural consequence of the registration system: properly created legal mortgages need registration to ensure their existence and priority as a legal interest.19

Of course, in the normal course of events, the mortgagee will ensure that the mortgage is registered and such registration is no more than an administrative act for institutional lenders. Indeed, come e-conveyancing, the registration of mortgages will occur simultaneously with their creation and this will be done electronically so streamlining the procedure and ensuring that mistakes in the registration process become less common.20 It will also eliminate any lingering issues that remain over the ‘registration gap’ – that is, the possibility that an interest adverse to the mortgagee will be created and gain priority in the time it takes for the mortgagee to send in its mortgage for registration.

10.8 Equitable mortgages

The above sections have discussed the creation of mortgages where the borrower owns a legal estate in the land and it is this that is mortgaged formally in return for a loan. The result is a legal mortgage. By way of contrast, it is perfectly possible to create equitable mortgages of land and these may arise in a variety of circumstances. In simple terms, a mortgage may be ‘equitable’ either because the borrower originally has only an equitable interest in the land, or

17Sections 25 and 27 of the LRA 2002.

18This might be a registered sale of the land or a properly registered legal mortgage.

19See, for example, Barclays Bank v. Zaroovabli (1997), where failure to register the mortgage meant that it lost its priority to a subsequently created legal lease of the land. In Leeds Permanent Building Society v. Famini (1998), the mortgagee was more fortunate in that although it had failed to register its mortgage, the later lease was itself equitable and so the rule that ‘the first in time prevails’ became operative and the prior equitable mortgage prevailed.

20Section 93 of the LRA 2002. It is likely that the creation of legal mortgages will be one of the first transactions specified for e-conveyancing under the relevant Rules.

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because the borrower has a legal interest, but the mortgage is not executed with the formality required by statute for the creation of a ‘legal’ interest.

10.8.1 Mortgages of equitable interests

It may well be that the potential mortgagor only has an equitable interest in the land, as where they are an equitable owner behind a trust of land,21 or have only an equitable lease.22 Necessarily, it follows that any mortgage of that equitable interest will itself be equitable. The mortgagor can mortgage only that which they own. The Law of Property Act 1925 and the Land Registration Act 2002 have not affected this matter to any great extent and mortgages of equitable interests are still carried in to effect by a conveyance of the whole of the mortgagor’s equitable interest to the mortgagee. This will, of course, be accompanied by a provision for retransfer of the equitable interest when the loan is repaid (William Brandt v. Dunlop Rubber). Importantly, however, given that a mortgage of an equitable interest is achieved through a transfer of it (a ‘disposition’) to the mortgagee, there are still certain formalities to be met. There is no need to use a deed,23 but because the mortgage will be a ‘disposition of a subsisting equitable interest’ (i.e. the equitable interest of the mortgagor), it must comply with section 53(1)(c) of the LPA 1925. This requires the mortgage of the equitable interest to be in writing, on penalty of voidness.24

10.8.2 ‘Informal’ mortgages of legal interests

As we have noted above, a legal mortgage of a freehold or leasehold is usually accomplished by the execution of a legal charge by deed that must then be registered. It is perfectly possible, however, for the mortgagor and mortgagee to create a mortgage of a legal interest by ‘informal’ means: in other words, either by not using a deed or by failing to register the deed that they do use. In the former case, the parties might choose deliberately (but usually unwisely) not to use a deed, and in the second example, registration may be omitted by error or negligence. However, whatever the reason for failure to

21For example, Banker’s Trust v. Namdar (1997) and see Chapter 4.

22A lease of sufficient length to be a good security is likely to have been created with professional advice and thus likely to be legal. Consequently, equitable mortgages of equitable leases will be a rarity.

23However, a deed will often be used so as to import the power of sale in the event of default by the mortgagor, section 101(1) of the LPA 1925.

24In Murray v. Guinness (1998) the court appears to have held that the creation of an equitable charge (as distinct from an equitable mortgage proper) did not have to be in writing under section 53(1)(c) of the LPA 1925, because technically no interest in land is actually transferred to the chargee under a charge. However, even if this is accurate, it may well be that an equitable charge will be caught by section 2 of the LPA 1989 as equivalent to a contract for the disposition of an interest in land – a security interest and require writing for that reason: see Kinane v. Alimamy Mackie-Conteh (2004).

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comply with the various formalities for the creation of a legal mortgage, these ‘informal’ mortgages can in appropriate circumstances take effect as an equitable mortgage of the legal estate.

Where the ‘informality’ arises because of a failure to register the mortgage as required, the mortgage is equitable by force of statute (section 27 of the LRA 2002).25 Where no deed has been used at all, the mortgage will be equitable only if it complies with the less stringent requirements for the creation of equitable interests – that is, there must be a written instrument within section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This is because the written instrument is treated as a valid contract for the creation of a mortgage within section 2, which if specifically enforceable, can take effect as an equitable mortgage under Walsh v. Lonsdale (1882).26 Of course, if either the requirements of a written contract or specific enforceability are not met, the mortgage will be void at both law and in equity, unless it can be saved by the doctrine of proprietary estoppel.27

10.8.3 Mortgages by deposit of title deeds

Before the Law of Property (Miscellaneous Provisions) Act 1989, it was also possible to create an equitable mortgage by depositing the title deeds of the property with the mortgagee. The deposit of the mortgagor’s title deeds was treated as both evidence of a contract (as above) and ‘part performance’ of that contract under the then operative section 40 of the LPA 1925.28 This was, of course, a very informal but relatively efficient way of creating a mortgage, and the mortgagee was protected because it held the documents of title, so preventing the mortgagor from further dealing with the land. After 1989, however, contracts for the disposition of any interest in land (i.e. to create a mortgage) must be in writing and this cannot be presumed to exist from the deposit of title deeds. Consequently, although some commentators have argued that the enactment of section 2 of the 1989 Act was not intended to do away with this informal method of creating equitable mortgages, the Court of Appeal in United Bank of Kuwait v. Sahib (1996) has confirmed that deposit of title deeds is an attempt to create a mortgage by unwritten contract and is therefore void. No such mortgage can be created. This is unfortunate and makes matters much less convenient for both borrower and lender – especially for short-term loans – but at least it is consistent with the policy

25In Cheltenham & Gloucester plc v. Appleyard (2004), the mortgagee was unable to register its mortgage because of difficulties with a prior lender and so was effectively forced to take an equitable mortgage.

26For example, Parker v. Housefield (1834).

27See section 10.8.4 and then Chapter 9 generally.

28Re Wallis (1974).

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behind the 1989 Act of bringing more formality to dealings with interests in land. Of course, if the mortgage was created by deposit of title deeds before 27 September 1989,29 it remains a valid equitable mortgage.

10.8.4 Mortgages by estoppel

As we have seen in Chapter 9, proprietary estoppel may operate to give a claimant an interest in land even though the claimant cannot produce the deed or written instrument that is normally required to establish a proprietary right. Moreover, we also know from Jennings v. Rice and cases before it, that the court has an equitable jurisdiction to grant the remedy that is necessary to remove the unconscionability that triggered the estoppel – sometimes described as the minimum equity to do justice between the parties.30 There is no reason why this remedy should not be such so as to give the claimant an equitable mortgage over the defendant’s land, even despite the absence of formality. This is unlikely to be the case where the defendant landowner has made some unspecific promise to the claimant,31 but what if the defendant has done some act which leads the claimant to believe they actually have a mortgage and the claimant acts on that belief?

As we know from Taylor Fashions v. Liverpool Victoria Trustees (1982), if one person promises an interest in land to another, and that is relied upon to their detriment, equity will enforce the promise and can give effect to the claim of the promisee. So, if a lender has actually advanced money on the basis of a promise (either given orally or represented by the deposit of title deeds), it is possible that the mortgage will be enforced despite the absence of any formality. The difficulty is, of course, that to use estoppel in these circumstances appears to be sidestepping the statutory imposed requirement of formality – after all, the lender will have an action in debt for recovery of the money and why should estoppel be used to create a proprietary claim simply because the parties failed to use the proper formalities? The answer is that estoppel can operate in these circumstances not simply because formalities were not used, but because it would be unconscionable in the circumstances to deny the mortgage. Thus, in Kinane v. Alimamy Mackie-Conteh (2005), the Court of Appeal accepted that the claimant had a mortgage by estoppel because he had lent money to the claimant on the faith of an assurance that a valid mortgage would be forthcoming. When that mortgage did not materialise – the written agreement attempted by the parties did not comply with section 2 of the 1989 Act32 – estoppel stepped in. In particular, the court specifically

29The date on which the LPA 1989 entered force.

30Wormall v. Wormall (2004).

31It might still generate an estoppel, and some other remedy, but the recognition of a mortgage is most unlikely.

32It was signed by the mortgagor, but not also by the mortgagee.

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decided that a failed contract could indeed form the basis of the assurance necessary to support an estoppel. Critically, this was not to be regarded as the avoidance of statutory formalities, because there was nothing to prevent a failed contract from forming an assurance if there was unconscionability.33 Thus, in the words of the court, ‘The cause of action in proprietary estoppel is thus not founded on the unenforceable agreement but on the defendant’s conduct which, when viewed in all relevant aspects, is unconscionable’. In this case then, the rare specimen of a mortgage created by estoppel was accepted by the court because of the unconscionability of the borrower in leading the lender to believe that a valid mortgage did exist.34

10.8.5 Equitable charges

Finally, mention must also be made of the equitable charge, a completely informal way of securing a loan over property. This requires no special form of words, only an intention to charge property with a debt.35 Such a method is extremely precarious, and is not often used deliberately for either commercial or residential mortgages. As noted above, however, there is a doubt as to what type of formality is required for such a mortgage. Murray v. Guinness (1998) suggests that because such a charge does not technically involve a disposition of an interest in land, it need not comply with section 53(1)(c) of the LPA 1925. However, whether this means that no written formalities are required at all has been questioned – without any conclusive answer – in Kinane v. Alimamy Mackie-Conteh (2005) where Arden LJ ponders whether such a charge might nevertheless fall within section 2 of the LPA 1989 and thus require a written instrument under this statute.

10.8.6A problem with equitable mortgages and equitable charges over land

An equitable mortgage suffers from the same vulnerability that affects all equitable rights in land; that is, the equitable mortgagee may lose his priority over the land because of a subsequent sale or disposition of a legal estate.36 Therefore, the equitable mortgagee must act to protect his interest.

33Thus the court was able to distinguish the House of Lords decision in Actionstrength Ltd v.

International Glass Engineering SpA (2003).

34If the estoppel mortgagee brings a claim based on the estoppel itself (rather than seeking to enforce the equitable mortgage), the court might order the borrower to grant a formal mortgage to the lender – thus the estoppel is crystallised by the grant of a legal mortgage.

35National Provincial and Union Bank of England v. Charnley (1924).

36Before the LPA 1989, an equitable mortgagee by deposit of title deeds was in practice protected because no other dealings with the legal title could be carried out while the deeds were in the mortgagee’s possession.

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1If the equitable mortgage exists over unregistered land, it is registrable as a class C(iii) land charge under the Land Charges Act 1972. If then so registered against the name of the estate owner who granted it (i.e. the mortgagor), it is binding on all subsequent transferees of the land over which the mortgage exists. This

means, of course, that the mortgagee will be able to exercise his rights against the land in priority to the new owner. However, if not so registered, the mortgage will be void against any

purchaser for valuable consideration of a legal or equitable interest in the land.37 It will remain valid against someone who does not ‘purchase’ the land, such as the donee of a gift, devisee under a will or a squatter.

2In registered land under the Land Registration Act 2002, the equitable mortgagee should seek to protect his mortgage by means of the entry of a Notice against the mortgaged registered title.38 This will ensure its protection against any later registered disposition of the legal estate, including a later legal mortgage (sections 29 and 30 of the LRA 2002) although even an unregistered equitable mortgage will retain priority over a transferee who does not give valuable consideration, such as the donee of a gift or person who inherits under a will or on intestacy (section 28 of the LRA 2002). Failure to secure this protection will cause the mortgagee to lose priority in favour of a properly registered purchaser of the land or later legal mortgagee unless the equitable mortgagee also happens to be in discoverable actual occupation under paragraph 2, Schedule 3 to the Act and thereby claim an overriding interest. Although not impossible, this last is unlikely and it would be unwise for an equitable mortgagee to rely on this protection. Note, however, that when full electronic conveyancing is in force, the equitable mortgage of registered land is likely to be one of those interests specified under section 93(1)(b) of the LRA 2002 that will not exist at all unless it is entered electronically on the register of title. Thus the existence of an equitable mortgage will coincide with its protection.

10.9 The rights of the mortgagor: the equity of redemption

The dual effect of a mortgage as a contract between lender and borrower and as the occasion for the creation of proprietary rights between the parties means

37Land Charges Act 1972, sections 2, 4.

38Given that the mortgage will usually have been granted by the mortgagor deliberately, an Agreed Notice may be used. A restriction should also be entered whose effect is to alert the mortgagee of any proposed dealings with the legal title by the mortgagor.

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that the mortgagor (and the mortgagee) may have rights in contract and rights in property. A court of equity is always willing to protect the mortgagor’s property rights in the face of unconscionable dealing by the mortgagee. Indeed, we should remember that whatever the contract says, a mortgagor under a legal mortgage always retains paramount legal title to the estate they are mortgaging. The owner of a legal freehold or leasehold never conveys all that they have to the lender when the mortgage is created.39

10.9.1 The contractual right to redeem

As a matter of contract, the mortgagor has a contractual right to redeem the mortgage on the date specified in the mortgage contract. This is the legal date for redemption. Where it is still employed,40 this is usually six months from the date of execution of the mortgage, although it may be any date specified by the parties, subject to the ‘clogs and fetters’ rules discussed below.41 Obviously, it is rare for a mortgagor to redeem on the legal date for redemption; after all the parties expect the mortgage to endure for some time and for interest to be paid on the capital debt outstanding. Moreover, due to the intervention of equity, the mortgagor has the right to redeem the mortgage on any later date after the legal date for redemption has passed on the payment of the principal debt, interest and costs. This right to redeem beyond the date fixed by the contract is known as the ‘equitable right to redeem’. Of course, the relevance of the passing of the contractual date for redemption – whether fixed or determined by reference to the payment of instalments – is that its passing can trigger the availability of the mortgagee’s contractual remedies under the mortgage. As we shall see when considering the remedies of the mortgagee, the actual date on which the monies become owed under the contract is important for setting the limitation period within which the mortgagee can sue on this contract for recovery of the debt.42

10.9.2 The equitable right to redeem

At one time, if the mortgagor did not redeem on the legal date for redemption, the property was lost. A few days or even hours late entitled the mortgagee to keep the property even if its value was far greater than the loan secured on it. Obviously, here was great opportunity for abuse and unfairness.

39However, as we shall see, default by the borrower may well result in him losing his paramount legal title.

40Many modern mortgages no longer employ the device, being content to contract for repayment by instalments whereby one missed instalments makes the borrower liable to repay the entire loan.

41Section 10.9.3

42Wilkinson v. West Bromwich Building Society (2004).

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