A Critical Analysis of Mortgagee and Mortgagor Rights in Light of Cheltenham

This essay critically analyses the statement made by Lord Justice Hoffman in Cheltenham and Gloucester Building Society v Grattidge on the right of the mortgagee to the judgement for whatever sum of money is due and payable under the terms of the mortgage which can allow the mortgagee to exercise all his remedies concurrently. This essay analyses this in the context of the rights and remedies of the mortgagor and mortgagee and how the case law after 1993 has applied these rights and remedies. The essay argues that the approach of the courts towards interpreting the rights of the mortgagee vis a vis the rights of the mortgagor are based on balancing the conflicting interests that arise in cases where the mortgagor is unable to pay back the loan but the courts would still seek to understand and distinguish the cases where one party may need more protection than the other.

In Cheltenham and Gloucester Building Society v Grattidge while holding that the mortgagee has the right to the judgment of the sum of the money that is due, Lord Justice Hoffman also noted that the mortgagee cannot be in a worse position than if he had lent unsecured. The rights of the mortgagee come into effect if there is a default on an instalment mortgage which results in the whole advance becoming immediately repayable and while the mortgagee gets entitled to a judgment it does not necessarily mean that he is entitled forthwith to execute upon the judgment. The underlying principle of the Grattidge decision is that there are several remedies available to the mortgagee on the default of the mortgage and that the mortgagee is not bound to pursue any one particular remedy when it is open to them to be able to pursue several remedies at the same time. It can be said this has the potential to weaken the sense of security that the mortgagor has in their home because there are remedies that are available to the mortgagee be default and any of these remedies may be chosen by the mortgagee.

Mortgage is expressed to be by way of legal charge under section 87 of LPA 1925 and it must be created by deed by which a loan is secured against the security of property. A mortgage does not lead to conveyance of estate in the property to the mortgagee and the mortgagee only gets a charge over the land giving him rights which attach to the property. The only method of creating a mortgage in registered land by virtue of section 23 of LRA 2002. Section 23 states that there is a presumption that a registered charge takes effect as a charge by way of legal mortgage, unless there is clear provision to the contrary. There are some differences between a legal and equitable mortgage. LPA1925 applies to create a legal mortgage by a document creating a charge by deed expressed to be by way of legal mortgage.

An equitable mortgage comes into effect in cases where the formalities to create a legal mortgage have not been completed or where the asset being mortgaged is only an equitable interest. LPA 1925 section 52 provides that the charges by way of legal mortgage must be created by deed and section 27(2)(f) provides that legal mortgage must be registered as a charge at the Land Registry. Therefore, if there is no deed or a defective deed, equitable mortgage arises as a contract for the grant of a mortgage if it is specifically enforceable and complies with Law of Property (Miscellaneous Provisions) Act 1989 section 2.

What can be surmised from this discussion is that the law tends to draw a balance between mortgagor and mortgagee by ensuring that the rights of the borrowers are protected. It may also be noted that law protects mortgagee rights to encourage lending to secure property transactions perceived as vital to a healthy economy. This is not to say that mortgagor rights are not protected by the law. There are specific rights that are available to the mortgagor like the equity of redemption without clogs or fetters and collateral advantages for the mortgagee, setting aside of the mortgage obtained through undue influence or oppression, and protection against unlawful credit bargains through statute. In Kreglinger v New Patagonia Meat & Cold Storage Co Ltd, the court held that the right of redemption cannot be restricted even under the terms of the contract as there can be no ‘clogs and fetters on redemption’. Explaining the grounds when such terms can be struck down, Lord Parker emphasised on the avoidance of unfair and unconscionable terms, avoidance of terms that are in the nature of a penalty clogging the equity of redemption and terms that are repugnant to the contractual and equitable right to redeem. In Jones v. Morgan, the court refused to allow option given to mortgagee to purchase a half share in the mortgaged property in a variation of the loan agreement 3 years into the mortgage on the ground that the option was part of a refinancing operation and therefore, a clog on the mortgagor’s equity of redemption.

Clauses allowing the postponing of the right to redeem for an inordinately long period have been held to be void on the ground that if the right to pay off the debt and recover the land is postponed for unreasonably long periods, then the right of redemption becomes illusory. Reference may be made to Fairclough v. Swan Brewery Co Ltd, where the court held a provision preventing redemption until 6 weeks before end of a 17.5 year lease of hotel to be void. However, it is not in every case that the courts will take such approach as demonstrated by Knightsbridge Estates Trust Ltd v. Byrne, where a 40 year postponement clause was held to be valid. The distinguishing factor between the two cases is the commercial nature of the agreement of postponement of redemption in the latter case which waters down the argument of there being an oppressive bargain that puts the mortgagor at a disadvantage.

As mentioned earlier, the mortgagee has access to concurrent rights in case of default by the mortgagor. The power of sale under Section 101 and 103 of the LPA 1925 is one of these remedies that can be accessed. The power of sale arises under Section 101(1) (i) when the mortgage money becomes due to the mortgagee. Under Section 103, power of sale can arise where there is default in payment of capital for three months after notice for payment, arrears of interest under the mortgage for two months after becoming due, or breach of a provision in the mortgage deed. In Cuckmere, it has been held that the mortgagee is not a trustee of the mortgagor and is not required to aggressively market the property or to delay until the market improves so that the mortgagor can get a better price. In Bishop v Blake, the court reiterated that mortgagee has no duty to aggressively market the property for realising the power of sale under Section 103. In Silven v RBS, the mortgagee was held to not be under any duty to delay the realisation of power of sale until market improves and a better price can be realised. These judgments can be seen to be in line with the position of the court in Cheltenham and Gloucester Building Society v Grattidge that leads to the mortgagee having certain rights in case of default without having to consider the interest of the mortgagor. This should however not be taken to mean that mortgagee can act unfairly towards the mortgagor. What this can mean is that while the mortgagee is allowed to take any remedy that is available to him in case of default and concurrently, it does not mean that mortgagor can be acted against in a manner that is unfair. Therefore, courts seek to draw a balance between the rights of the mortgagor and the mortgagee.

Courts have also protected mortgagors in cases where the mortgagee is seen to have acquired an extra benefit from the mortgagor or collateral advantages. Thus, in Noakes v. Rice, a covenant to purchase beer from the lender even after the mortgage had been redeemed was refused to be enforced on the ground that the mortgagee cannot make any stipulation which will prevent a mortgagor, who has paid principal, interest and costs, from getting back his mortgaged property unencumbered. Furthermore, mortgagor will be protected against oppressive or unconscionable terms such as high interest rates that render the equity of redemption valueless. This is demonstrated by Cityland and Properties v. Dabrah, wherein the 'premium' agreed to between the parties was set aside on the ground that it conferred an unconscionable advantage on the mortgagee. On the other hand, where the parties to the mortgage deed had the benefit of independent legal advice with relation of a mortgage of commercial premises, the court took a different approach as there was no great inequality of bargaining power between the parties. It can be inferred that courts tend to protect mortgagors that are thought to be in a weaker bargaining position in non commercial mortgage cases and tend to take an approach favouring freedom of contract in cases involving commercial property mortgage. This approach towards differentiating between residential and commercial mortgages are not limited to the judiciary but can also be seen in statutory provisions. It is most apparent in the right to possession of the mortgagee prior to power of sale being restricted in cases where the mortgaged property is a residence under Section 36 of the Administration of Justice Act 1970. Such protection is not extended to a mortgagor of a commercial property. This differentiation between residential and commercial mortgage can be explained or justified from the perspective of the balancing of the interests of the mortgagor and the mortgagee where the latter’s right to power of sale as an assurance of security is sought to be balanced with the mortgagor’s right to redemption which may be protected more if the property happens to be a home and not a commercial premises.

The right of sale can be exercised at times even without first getting a court order. Moreover, rights come into effect in case of ‘any sums due’ which include the whole of the mortgage. In determining whether the right of repossession be allowed to the mortgagee, courts may have consideration to whether the mortgagor is likely to be able to repay the arrears and the mortgage repayments within a reasonable period. Although courts have sought to draw a balance between the mortgagor and the mortgagee rights, it is not always possible to protect the mortgagor because of the rights and remedies given to the mortgagee as is demonstrated in Alliance & Leicester v Slayford where the bank was allowed to proceed with the remedy of sale despite there being an equitable interest in the property of the borrower’s wife.

To conclude, the principle remains that a borrower has a number of available remedies which can be pursued concurrently or successively until payment is recovered in full or the mortgagee acts in a way which amounts to an election; however, courts do seek to balance the rights of the mortgagor with the mortgagee in order to interpret the ways in which the mortgagee may seek to enforce his rights in a given case.

Legislation

Administration of Justice Act 1970

Law of Property Act 1925

Land Registration Act 2002

Law of Property (Miscellaneous Provisions) Act 1989

Authorities

Alliance and Leicester v Slayford [2000] ALL ER (D) 1376.

Bishop v Blake [2006] EWHC 831 (Ch).

Cheltenham and Gloucester Building Society v Grattidge (1993) 25 HLR 454.

Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343.

Cityland & Property (Holding) Ltd v Dabrah [1968] Ch 166 HC.

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949

Fairclough v. Swan Brewery Co Ltd (1912) AC 565.

Halifax Building Society v Clark [1973] Ch 307.

Horsham Properties Group Ltd v Clark [2008] EWHC 2327.

Jones v Morgan [2001] EWCA Civ 995.

Knightsbridge Estates Trust Ltd v. Byrne (1939) Ch 441.

Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1913] UKHL 1.

Multiservice Bookbinding v. Marden [1979] Ch 84.

Palk v Mortgage Funding Services plc, [1993] 2 WLR 415.

Noakes v. Rice (1902) AC 24.

Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113.

Silven Properties v Royal Bank of Scotland plc [2004] 1 WLR 997.

Secondary sources

Books

Bray J, Unlocking Land Law (Oxon: Routledge 2016).

Gravells N, Land Law: Text and Materials (London: Sweet and Maxwell 2012) 891.

Take a deeper dive into Property Rights and Easements with our additional resources. Take a deeper dive into Property Rights and Easements with our additional resources.