Mortgages — SQE1 FLK2 Land Law

January. A bank lends £200,000 against a registered house and takes a charge by deed. Its solicitor mislays the application to the Land Registry. March. The same owner borrows £50,000 from a finance company, which takes its own charge and registers it inside a week. The bank finally registers in April. She defaults on both, and the house sells for £180,000. Who is paid first?

The finance company. All of it, before the bank sees a penny. This is Mortgages, and that is the lesson underneath the whole topic. What you have on paper is not what you have against the world. Keep that bank in mind. We come back to it.

Here is the route. What a mortgage is, and the two ways to create one. Then registration, and why a deed alone is not enough. Then priority, registered and unregistered. Then clogs on the equity of redemption. Then the lender's three remedies: sale, possession, and a receiver. And last, what protects the borrower and the people living with them.

Start with the shape of it. A mortgage is a security interest in land. The borrower, the mortgagor, keeps ownership. The lender, the mortgagee, gets rights over the property to secure the debt. Default, and the lender can take possession, sell, or appoint a receiver. Ownership never moves to the lender.

Creating a legal one. Section 85 of the Law of Property Act 1925: a charge by deed expressed to be by way of legal mortgage. Learn that phrase. The deed, and the words. A document headed loan agreement, signed and witnessed, is not a deed at all. A deed has to make clear on its face that it is intended to be one.

And on registered land the deed is only half the job. A charge is a registrable disposition. Until the registration requirements are met it does not operate at law. That is s.27 of the Land Registration Act 2002. Before registration the lender has an equitable charge. Not nothing. But not a legal charge either.

Which is exactly what went wrong in January. The bank had a deed. It did not have a registered charge, so what it held was equitable, and unprotected. Everything that follows flows from that.

Equitable mortgages, then. The route now is a document complying with s.2 of the Law of Property (Miscellaneous Provisions) Act 1989: signed writing containing all the agreed terms. Equity treats as done what ought to be done, so a signed agreement to charge the land is itself a good equitable mortgage.

And here is what the 1989 Act killed. Handing over the title deeds. For centuries a deposit of deeds created an equitable mortgage on its own, and the courts have held that s.2 put an end to it. No signed writing, no security. On registered land it is worse, because there are no title deeds to deposit.

So a lender who keeps a bundle of deeds in a safe, with nothing signed, is an unsecured creditor. It can sue on the debt. It has nothing over the house.

Priority now. On registered land, forget first in time. A registrable disposition made for valuable consideration and completed by registration takes priority over any earlier interest that was neither protected on the register nor overriding. Section 29 of the Land Registration Act 2002. Once both charges are registered they rank in the order the register shows, under s.48.

So the finance company registered in March, gave value, and knew nothing. The bank's earlier equitable charge was unprotected, and s.29 postponed it. The bank's charge is not void. It is simply second, and on a sale at £180,000 against £250,000 of lending, second means very little.

The bank could have prevented all of it two ways. Register promptly. Or lodge an official search, which gives it a priority period.

Unregistered land runs on a different engine, the Land Charges Act 1972. A legal mortgage not protected by the title deeds, what lawyers call a puisne mortgage, is registrable as a Class C one land charge. An equitable mortgage of a legal estate is a Class C three general equitable charge.

Miss the registration and the charge is void against a later purchaser for value, and purchaser includes a later lender. And notice is irrelevant both ways. An unregistered charge is void however much the later lender actually knew, under s.199 of the Law of Property Act 1925. A registered one binds the later lender even if it never searched, because registration is deemed actual notice, under s.198.

Now the borrower's side, and the oldest idea in mortgage law. The equity of redemption. The right to get the property back on paying principal, interest and costs. It survives the contractual redemption date. It survives default. Santley v Wilde put it best: once a mortgage, always a mortgage.

Any term that prevents or unduly restricts redemption is void as a clog. The classic illustration is a public house. A publican mortgaged his leasehold pub to a brewery and covenanted to sell only the brewery's beer for the whole of the lease, expressly continuing after the loan was repaid.

He repays. Is he still tied?

No. The case is Noakes & Co v Rice, and the covenant was void so far as it operated after redemption. He pledged a free house, and he is entitled to get back a free house. That is the test. Not whether the advantage is collateral, but whether it survives redemption.

A tie for the life of the mortgage only is a different matter, and is generally good. Collateral advantages are not void as a class. The modern court asks three things. Was the term taken at the same time as the mortgage? Is it unconscionable? Is it inconsistent with the right to redeem?

Nor is the rule absolute about cost. An early repayment charge that reflects the lender's real funding cost is an ordinary commercial term. Redemption that is more expensive is not redemption that is prevented. Equity strikes down a term that destroys the right, not one that puts a price on it.

The lender's remedies. Three of them. Sale under s.101 of the Law of Property Act 1925. A receiver under s.109. And possession, which comes from the charge itself. Take sale first, and the distinction that decides more exam questions than anything else here.

The power arises when the mortgage is made by deed and the mortgage money has become due. That is all. Section 101. Whether the lender may actually sell is a separate question, and s.103 answers it. Notice requiring repayment served and three months' default. Or two months' interest in arrears. Or breach of another term.

Arises, and exercisable. Two different moments. The gap matters to a buyer, because s.104 says that where the power has arisen, the buyer's title cannot be attacked on the ground that it was not exercisable. Sell too soon and the sale still stands. The borrower's remedy is damages against the lender.

Now the duty. A surveyor values a repossessed house at £200,000 and says the particulars should mention last year's planning consent for an extension. The bank uses one agent, advertises for a fortnight, says nothing about the consent, and takes £150,000 from the first person through the door. Liable?

Yes. Cuckmere Brick Co is the case, and the duty is to take reasonable care to obtain the best price reasonably obtainable at the time of sale. Not the highest price imaginable. The best reasonably obtainable. Suppressing the very fact its own surveyor said would raise the price is a plain breach.

But hold two limits alongside it. The lender is not a trustee of its power of sale. It picks its own moment and need not wait for a better market. And against an unconnected buyer the sale stands anyway. The borrower gets damages, not the house.

Sell to a company the lender is interested in, and the picture changes. A lender cannot sell to itself. Where it is interested in the buyer, the burden flips: it must prove good faith and reasonable precautions to get the best price. Fail, and the sale can be set aside against that company.

And the proceeds are held on trust. Section 105. Costs of sale, then the lender's own debt, then the residue to the person entitled, which means the next lender in line, not the borrower. Pay a surplus to the borrower with a second charge on the register, and you pay it twice.

Possession. A legal mortgagee is entitled to possession by virtue of its charge, and for empty or commercial property no court order is needed. Change the locks. That is genuinely the law.

The limit is criminal, not civil. Using violence to secure entry, while someone on the premises is opposing it, is an offence under s.6 of the Criminal Law Act 1977. So an occupied home has to be recovered through the court, and the mortgage is no defence to that section.

Which brings in the protection that matters most. Section 36 of the Administration of Justice Act 1970. Where a lender claims possession of a dwelling-house, the court may adjourn, stay, suspend or postpone, on such terms as it thinks fit. The condition is that the borrower is likely to be able, within a reasonable period, to pay the sums due.

Two refinements. For an instalment mortgage, s.8 of the Administration of Justice Act 1973 cuts the sums due down to the arrears alone, not the whole capital. And the reasonable period is generous: in Norgan the Court of Appeal held the starting point is the whole of the remaining mortgage term.

So a couple £9,000 behind after a year of illness, back in work, offering the full instalment plus £50 a month over eighteen years, are well inside the discretion. There is no arrears ceiling that removes it, and no two-year rule.

But taking possession is dangerous for the lender, and here is why. A mortgagee in possession accounts on the wilful default basis. Not just for what it receives, but for what it would have received but for its own neglect, and for deterioration its neglect allows.

White v City of London Brewery Co is the picture of it. A brewer in possession of a mortgaged public house let it as a tied house, and had to account for the higher rent a free house would have fetched. Collect no rent, ignore a leaking roof, and you answer for both.

Which is why lenders appoint receivers instead. Section 109. Where the mortgage is by deed and the money is due, the lender may appoint a receiver of the income, who collects the rents and applies them to the debt.

And the trick is in the tail. The bank chooses him. The bank appoints him. The builders he engages are left £30,000 out of pocket. Who owes them?

The borrower. The receiver is deemed to be the agent of the mortgagor, and the mortgagor alone is responsible for the receiver's acts and defaults unless the deed says otherwise. That statutory agency is the whole point. It keeps the lender clear of the liabilities a mortgagee in possession would carry.

Last, the people the lender did not lend to. Overreaching first. Where trustees of land sell or charge it, the beneficiaries' interests are swept off the land and onto the money. But only if the capital money is paid to at least two trustees or a trust corporation. Sections 2 and 27.

Pay the whole price to one trustee and nothing is overreached. A beneficiary in actual occupation then has an interest that overrides the disposition, and the buyer takes subject to it. One signature short, and the whole protection fails.

Then spouses. A husband or wife with no beneficial interest still has home rights under s.30 of the Family Law Act 1996. That is a right not to be evicted without the leave of the court. Those rights bind a lender only if protected by a notice before the charge, and they cannot override through occupation.

But even where the notice comes too late, two things survive. The lender must accept those payments as though the borrower had made them. And under s.55 she may be joined in the possession claim, so the court can exercise its s.36 discretion on the strength of what she can pay.

The borrower has a weapon too. Under s.91 of the Law of Property Act 1925, anyone interested in the equity of redemption may ask the court to order a sale. The court may do so over the lender's objection. In Palk v Mortgage Services Funding the Court of Appeal ordered exactly that. The lender there wanted to let the house and wait, while interest rolled up faster than rent came in.

One last thing people get wrong. Selling the house does not end the debt. The personal covenant to repay survives the sale, so a lender that recovers £158,000 against a debt of £190,000 can sue the borrower for the £32,000 shortfall. The remedies are cumulative, not alternative.

A word on how this is tested. SQE1 will not ask you to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn what the sections do. The names are pegs to hang them on.

If you keep only three. Sections 101 and 103, because arising and being exercisable are different moments and the gap is where the marks are. Cuckmere Brick Co, because selling is not free: the duty is the best price reasonably obtainable. And Santley v Wilde, because once a mortgage, always a mortgage.

Four traps. One: a deed is not a legal charge. On registered land you need the words expressed to be by way of legal mortgage, and you need registration. Miss either and what you hold is equitable, and an equitable charge is only as good as its protection on the register.

Two: the lender is not a trustee of its power of sale. It may choose its own moment, it need not wait for a better market, and against an unconnected buyer the sale stands even if the duty was broken. Damages, not the house.

Three: not every hard term is a clog. Early repayment charges that reflect the lender's real cost are enforceable. The rule bites on terms that prevent or unduly restrict redemption, not on terms that make it dearer.

Four: self-help possession is real, but narrow. An empty warehouse, yes. A family at home refusing entry, no. And where the mortgage secures a regulated agreement, s.126 of the Consumer Credit Act 1974 requires a court order whatever the property.

Quick check. A lender takes a charge by deed over a shop to secure £80,000. The deed fixes one repayment date, 1 June, with no instalments and nothing that alters the statutory powers. The borrower pays nothing on 1 June and nothing after. By 1 September the interest is more than two months in arrear. The lender has served no notice requiring repayment at any point. When did the statutory power of sale first arise?

Three candidate answers. One: when the charge was executed, because the power is implied into every mortgage made by deed. Two: on 1 June, when the date fixed for repayment passed and the money became due. Three: on 1 September, when the interest first fell more than two months into arrear. Pause here if you want a moment.

The answer is two. Section 101 implies a power of sale into every mortgage made by deed, but the power arises only when the mortgage money has become due. Here that was 1 June. The deed supplies the power. It does not bring it into existence.

Why the others fail. September is when the power became exercisable, under s.103, on two months' interest in arrear, and it got there without any notice being served. Notice is only one of the routes to exercisability, never a condition of the power arising. Arises, then exercisable. Two moments, in that order.

Five things to take away. One: a legal mortgage is a charge by deed expressed to be by way of legal mortgage, and on registered land it is not legal until it is registered. Two: priority is about protection, not about who lent first. Our January bank had a deed, and lost to a lender that came second and registered first.

Three: once a mortgage, always a mortgage, and a term that survives redemption falls away with it. Four: the power of sale arises when the money is due and becomes exercisable under s.103, and the duty on sale is the best price reasonably obtainable. Five: possession is dangerous for the lender, which is why receivers exist, and the receiver is the borrower's agent. Next time, Leases, Creation and Characteristics.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.