Land Law - Mortgages (Part 1)

The key to mortgages is striking a balance between two parties; the mortgagor (often a homeowner) and the mortgagee (often a bank). Beyond this mortgages are also about balance between the strictness of contract law and the flexibility provided by equity. Often the mortgagee is in the stronger bargaining position and will try to enforce a strict adherence to the contract however if this is unconscionable then equity will step in to protect the mortgagor (Knightsbridge Estates Trust Ltd v Byrne [1939]).

The key equity is the right to redeem the mortgage and this is essentially the right of the mortgagor to pay back the mortgage (including costs and interest) to the mortgagee at any time after the date of redemption. Under the 'clogs and fetters' doctrine any attempt to interfere with this right of the mortgagor is liable to be altered or struck down by the court. Such clogs or fetters generally fall under one of three categories:

1) Exclusion/postponement of the right
In theory the mortgagor can redeem the mortgage at any time between the date of redemption right until the mortgagee can foreclose on the property. The case of Samuel v Jarrah Timber [1904] is a good example of how this right can be curtailed. The mortgage agreement included a clause that gave the mortgagee the right to buy the property at any time in the first 12 months of the contract. This meant that the mortgagor could potentially pay back the mortgage and yet still lose the property! Even though this was contractually agreed the House of Lords reluctantly stepped in and regarded this clause as a fetter to the right of redemption. Interestingly though this is in contrast to the case of Lewis v Frank Love Ltd [1961] where the mortgage contract and the option were two distinct documents and therefore allowed by the courts. This, however, should not be taken as a hard and fast rule as the case of G&C Kreglinger v New Patagonia Meat [1914] requires a judge to look at the reality of the situation.
On the other side of the coin the mortgagee does have the right to postpone the earliest date of redemption and while this can be unreasonable it is not allowed to be unconscionable.
2) Unfair collateral advantages
When the mortgagee tries to gain some other advantage outside of the actual mortgage agreement the courts will always view this with suspicion. According to Lord Parker in G&C Kreglinger v New Patagonia Meat [1914] these will be struck down if they are:
Unfair and unconscionable; or
A penalty that clogs equity of redemption; or
Inconsistent with the right to redeem
The most common type of collateral advantage exists in the commercial sphere in the form of solus agreements where the mortgagee requires a certain product to be exclusively stocked in a commercial property. Cf Esso Petroleum v Harper’s Garage [1968]. For more information on these topics it is also important to consider the law around restraint of trade as well as EU competition law under Art 101 TFEU.
3) Oppressive interest rates and charges
The UK is somewhat unusual in that the mortgagee does have discretion in terms of the interest charge on a mortgage as most clearly seen in the case of Paragon Finance v Nash [2002] where a variable rate was allowed and Wednesbury unreasonableness was considered. However this does not mean that interest rates can be oppressive as in the case of Cityland & Property (Holdings) Ltd. v Dabrah [1968].

Another important and often overlooked area for mortgagors is consumer protection law. s. 140A(1) of the Consumer Credit Act 1974 allows the court to intervene where the relationship between the creditor and debtor is unfair to the debtor. Meanwhile s. 62 of the new Consumer Protection Act 2015 sets out in full the requirement for contract terms to be fair.

Protection for the mortgagee is also important where the complainant has been “misled” as to the facts of the transaction or has had their will “overborne or coerced” as per RBS v Etridge (No. 2) [2002]. Misrepresentation can cause financial transactions to be voided (Barclays Bank plc v O’Brien [1994]) while undue influence founds an equity in the complainant to void a transaction. According to Lord Browne-Wilkinson in the O'Brien case there are two types of undue influence: actual (such as threats or violence) or presumed (arising out of a relationship). Within presumed undue influence there are two sub-classes: (A) certain designated relationships; and (B) where the complainant places trust and confidence in the other person. In the first instance the burden is on the complainant to establish the relationship but after that the burden is on the other person to try and disprove undue influence. As in Papouis v Gibson-West [2004] this can often be done by showing that the person got independent, professional advice.

Undue influence is also a concern for the lender who can be put on inquiry if they have actual or constructive notice of undue influence.