FREE CHAPTER from ‘A Practical Guide to Mortgage Possession Proceedings’ by Jacqueline Lean

CHAPTER ONE – MORTGAGES & THE RIGHT TO POSSESSION: AN OVERVIEW

    1. In broad terms, the essence of a mortgage transaction is that a charge is taken over property as security for performance of an obligation. In practical terms, that will commonly take the form of a legal charge1 over property securing a loan which facilitated its purchase, or a legal charge over property securing business lending.

    2. Historically, a mortgage took the form of a conveyance of the freehold (or leasehold2) estate to the mortgagee (the lender), subject to a condition subsequent on a fixed date, the property being reconveyed to the mortgagor (the borrower) on satisfaction of the obligation. That position was altered by the Law of Property Act 1925 (LPA 1925),3 with the mortgagee retaining legal title to the freehold or leasehold estate, and the legal mortgage created either by a charge by deed expressed to be by way of legal mortgage or, prior to 13 October 20134 (i) a demise for a term of years absolute subject to cesser on redemption (for a freehold estate)5 or (ii) a sub-demise for a term of years absolute subject to cesser on redemption, the term being at least one day shorter than the leasehold interest vested in the mortgagor (for leasehold land).6

    3. A charge by way of legal mortgage must be made by deed, be expressed to be by way of legal mortgage7 (although thE exact phrase “charge by way of legal mortgage” does not need to be used8) and, for registered land, completed by registration to have effect.9 A mortgagee pursuant to a legal charge created by deed has the same protections, powers and remedies as if he were a mortgagee by demise or sub-demise. That includes the right to take proceedings to obtain possession from the occupiers and the persons in receipt of rents and profits.10

    4. The mortgagee of a mortgage made by deed also has a number of powers conferred by LPA 1925 s.101 to the same extent as if they had been provided for under the terms of the mortgage deed, but subject to the terms of the mortgage deed and insofar as as a contrary intention is not in the same, including:

  1. A power, when the mortgage money has become due, to sell or concur in selling the property;

  2. A power to insure the property, with the premiums paid secured under the charge in addition to the mortgage money;

  3. A power, when the mortgage money has become due, to appoint a receiver of the income of the mortgaged property or any part thereof.

    1. In principle, the mortgagee has an immediate right to commence an action for possession of the property – subject to any agreement to the contrary. That is, however, subject to a number of qualifications and restrictions.

    2. Firstly, the mortgage deed itself. The deed (or agreement it gives effect to) will commonly provide that the mortgagee will not exercise his right to seek possession provided that the mortgagor maintains the payments due under the mortgage and/or complies with any other terms or conditions of the mortgage agreement.11 If seeking possession in such a case the mortgagor will need to demonstrate that the conditions for seeking possession in the event of the default relied on have been met, and that any notices or other procedures provided for under the agreement have been strictly complied with.

    3. Secondly, where a mortgage secures a regulated mortgage contract or a regulated agreement under the Consumer Credit Act 1974 (CCA 1974),12 the right to possession is only enforceable pursuant to an order of the court.13

    4. Thirdly, if a receiver has already been appointed by the court in respect of the property at the request of a third party,14 the mortgagee cannot enter into possession of the property unless his right to do so was expressly reserved in the order appointing the receiver. If that is the case, the mortgagee will either need to apply to court for the receiver to be discharged, or for leave to bring an action for recovery of the land.

    5. Fourthly, if a claim to an overriding interest is made by an occupier of the property.15

    6. Fifthly, if a claim is brought against one joint-mortgagor and the other is in possession and has an arguable defence. For example, in Albany Home Loans Ltd v Massey [1997] 2 All E.R. 609 the mortgagee (Albany Home Loans Ltd) sought possession of a property jointly owned by a husband and wife who were also joint mortgagors. An order for possession was made against the husband, the trial judge having dismissed his defence that the arrears had arisen because he had been wrongfully dismissed from the claimant company. A possession order had not been made as against the wife, as her defence, based on undue influence, were awaiting trial. The Court of Appeal made clear that where the ejection of one of two mortgagors was of no benefit to the mortgagee (the making of the possession order at that time not being necessary to protect the rights of the mortgagee) it was “not in general right to make an order requiring him to leave within the period during which the other mortgagee is in possession and entitled to be in possession”.16 That was particularly the case where the two mortgagees shared the home as husband and wife,17 with reference being made in the judgment to Article 8 of the European Convention of Human Rights18 and the consequences that could in theory follow if the husband remained in occupation of the property in breach of the court order, or left and subsequently returned to the property whilst his wife remained in occupation.

    7. Finally, there is also the court’s discretion to grant a stay in proceedings relating to residential property under section 36 of the Administration of Justice Act 1970. This is discussed further in Chapter 9.

    8. Whilst this book is primarily concerned with claims for possession of property – i.e. for the giving up of possession of the property to the mortgagee – it is also important to bear in mind that a mortgagee can enter into possession of property without taking the keys to the property. The mortgagee may, for example, exercise his right of possession by giving notice to the mortgagor’s tenants to pay rent directly to him.19

    9. A mortgagee who enters into possession of mortgaged property is, however, subject to a number of duties and liabilities, to the mortgagor and to others who may have an interest in the equity of redemption (for example, other chargees). Where the mortgagee does not seek to sell the property, or to divert the rents of profits to discharge monies due to him under the mortgage, it may therefore be preferable to appoint a receiver in respect of the property: either under the terms of the mortgage agreement or by way of application to the court pursuant to LPA s.101. A receiver appointed under s.101 is considered an agent of the mortgagor rather than the mortgagee (even though appointed on application by the mortgagee). However, a receiver appointed under the mortgage deed will be regarded as an agent of the mortgagee unless the mortgage deed provides to the contrary. It is therefore common to find a proviso in the mortgage deed that a receiver will be the agent of the mortgagor.

    10. A receiver appointed under a mortgage agreement may bring a claim for possession of the property from those in occupation if that falls within the powers conferred on them under the mortgage deed. For example, in McDonald v McDonald [2015] Ch 357, the Court of Appeal held that it was open to receivers appointed under a mortgage agreement to serve a notice under s.21 of the Housing Act 1988 terminating an assured shorthold tenancy entered into in breach of the mortgage conditions in their own names (and not in the name of the landlords), the power to serve such notice being reasonably incidental to exercise of the power to sell the property and to take possession of it under the mortgage agreement. Although in McDonald the claim for possession was brought in the name of the landlords, it is common to see claims for possession brought by the named receiver(s) acting as receivers / LPA receivers of the mortgagor.

    11. The position with regards to authorised, and unauthorised tenants of the mortgagor, is considered in more detail in Chapter 6.

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1It is questionable whether an equitable mortgagee has a right to take possession of property, not having any legal estate in the land, at least in the absence of a term in the agreement conferring such a right on the mortgagee, or other provision by which the mortgagee may enjoy such a right.

2 Or the granting of a sub-lease, one day shorter than the lease, with a proviso that the sub-lease would cease on redemption.

3 LPA 1925 ss 85(1) and 86(1).

4 Section 23(1) of the Land Registration Act 2002 (LRA 2002) provides that, in respect of a registered estate, the owner’s powers do not include granting a mortgage by demise or sub-demise.

5 LPA 1925 s. 85(1)

6 LPA 1925 s.86(1)

7 LPA 1925 s.87

8 See Cityland and Property (Holdings) Ltd v Dabrah [1968] Ch 166, and, for registered land, LRA 2002 ss 6 and 7.

9 LRA 2002 ss 6 and 7. All charges created by means of a registrable disposition take effect as charges created by deed by way of legal mortgage after 13 October 2003 pursuant to LRA 2002 s.51.

10 LPA 1925 s.87

11 Such a restriction might be implied into a mortgage agreement (if, for example, if provides for monies to be payable in instalments) – although the court is not likely to take such a course lightly.

12 See Chapter 2

13 CCA 1974 s.126 provides that a land mortgage securing (a) a regulated agreement, (b) a regulated mortgage contract, or (c) a consumer credit agreement which would, but for article 60D of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 , is enforceable on order of the court only.

14 See para 1.13 below.

15 See Schedule 3 to the LRA 2002 and Chapter 6.

16 Per Schiemann L.J at pg 613. In a Coda to his judgment, Schiemenn L.J. also provided some practical guidance on the ‘appropriate course’ to be followed where a district judge was faced with a submission by one mortgagor that an order for possession against him would not advantage the mortgagee because another mortgagor was entitled to remain in possession. “In general such a submission will have force. There are no doubt a number of ways in which effect could be given to it. It seems to me that the judge in those circumstances, in the absence of an undertaking on the lines of the one in the present case, ought to adjourn the proceedings with liberty to restore if the other mortgagor leaves the property or an order for possession is made against that mortgagor.”

17 Per Schiemann L.J. at pg 613

18 Although the case pre-dated the Human Rights Act 1998

19 See, for example, Horlock v Smith (1842) 11 L.J. Ch 157