Thomas D Marshall
"Necessitous men are not truly speaking, free men, but, to answer a present contingency, will submit to any terms that the crafty may impose on them..." Lord Henley LC in Vernon v Bethell (1762)
This essay concerns the plight of a couple and their children. The father, who granted a mortgage over the family home, has suffered under the financial strain of mortgage payments and lower-than-expected income, and now finds himself falling into arrears. The purpose of this essay will be to explore some options and consequences for the family at this unfortunate crossroads.
What is a Mortgage?
It is first helpful to understand what a mortgage is before looking at the family’s options. As stated in the case of Santley v Wilde? a mortgage is simply "a conveyance of land...as security for the payment of a debt or discharge of some other obligation." This means that a mortgage society may be granted a legal estate in the land 'in rem'.? In return, the family will receive a loan and an equitable "right of redemption."?
Whilst a mortgage may be a great facilitator for the majority of citizens looking to purchase a home the difficulty, for this family in particular, is what can occur when one falls into arrears. The mortgagee may seek to recoup its losses, exercise its legal interest in the land, and possibly take possession of the property to realize on its debt.?
What Options Might the Lender Exercise Prior to Possession?
The Council Of Mortgage Lenders (CML) to which many lenders belong, understands that more drastic options can result in loss for both parties, and so suggests several options for lenders in its published practice code. For the family, this might provide some welcomed alternatives. The CML suggests that a lender might make the following attempts to help a mortgagor with arrears.? A lender might lengthen the loan period, change the mortgage type from monthly installments plus interest to simply interest payments (the principle due at the end of the mortgage period), defer the interest for a period, or allow the mortgagor to re-capitalize the arrears (i.e. adding the arrears to the principle and then continuing monthly installments on the "new" principle).?
In the event however, that the family is unable to exercise the CML's suggested alternatives, it may be the desire of the lender to seek possession. Again however, there may be alternatives or methods of postponing such a fate. Let us turn to examine the issue of possession and deferment.
When the Lender Wishes to Seek Possession
Under the unregistered system, title and deeds to a mortgaged property are vested in the lender, as security for the loan. Upon redemption, the title and deeds are returned to mortgagor.? Under the registered system, the result is very much the same; the lender when repaid ceases to have a legal interest in the property.? In default however, the title deeds or legal charge over the property are used to seek possession of the property.? Interestingly, this right of the lender to take possession arises automatically at Common Law even when the mortgagor is not in default. For example, in Western Bank Ltd v Schindler? the mortgagee (in the absence of default) sought possession in simple reliance on the legal estate conferred on it under the charge as soon 'as the ink was dry' on the mortgage agreement. This situation though is "unusual" and most mortgage contracts, and likely this family's, will include a term that possession will not be sought unless the mortgagor defaults.?
Of course the purpose of seeking possession is to realize the debt outstanding on the mortgage. This will often take the form of seeking possession for the purposes of sale.? However, whilst there is a Common Law right to take possession, there is no Common Law power of sale - a power of sale exists only under statute.? Thus, the Law of Property Act (LPA) 1925 draws a distinction between when a power of sale arises at law and when it becomes exercisable.? Section 101 of LPA 1925 states that a power of sale arises when it is not excluded in the mortgage deed, when the mortgage is made by deed (thus all legal mortgages – and excluding most equitable mortgages), and when the legal redemption date has passed. Therefore s.101 implies into every deed a power of sale in the above conditions.? Section 103 of the LPA 1925 states three instances where a power of sale becomes Exercisable: Where a notice requiring payment of the entire money has been served and this has not been complied with for three months or more (this refers to capital payments), where some interest under the mortgage is two months in arrears and unpaid, and where there is a breach of some other mortgage covenant - for example not keeping the house in repair, or failing to insure the property.?
When one examines the plight of this family in relation to s.101 and s.103 the situation appears rather grim. The facts suggest that their mortgage payments have remained unpaid longer than the minimum two months, and notice has been given of the arrears several times by the lender. And since the family's mortgage agreement does not likely exclude a power of sale, is a legal mortgage, and the likelihood that the legal redemption date has passed, it seems that if desired, the lender could seek possession for the purposes of sale. Unfortunately, a sale will destroy the equity of redemption.? Therefore, for the sake of this family, it is now necessary to turn to an examination of how to defer or avoid an order for possession.
Avoiding Dispossession
Under s.36 of the Administration of Justice Act (AJA) 1970, the court is given a degree of discretion to stay a lender's application for possession. This discretionary power is enhanced further by s.8 of the AJA 1973.? The combined effect of these two provisions, as noted in Cheltenham & Gloucester Building Society v Norgan, is that a court may suspend or delay possession for a "reasonable period" if it is likely that the mortgagor will be able to "bring his payments up-to-date."? Furthermore, the payments due may be treated as only those "as the mortgagor would have been expected...to pay" and not the entire mortgage sum. In Norgan, it was determined, relying in part on the Dicta of Buckley LJ in West Bank Ltd v Schindler? that such a "reasonable period" for paying off arrears should be the "remaining part of the original term of the mortgage.”
Following this reasoning then, a court via s.36 and s.8 might suspend an application for possession if it is likely that the family will be able to pay off the arrears over the remaining term of the mortgage. Should the family be able to demonstrate, as Mrs. Norgan was able to, that the prospect for payment is "likely" then it may be that a stay of execution will be granted. Alternatively, if the mortgagor is unable to show that it is likely that he will be able to bring payments up-to-date and continue under the mortgage, the court may have little alternative but grant execution of an order for possession in favor of the lending institution. In the event that a power of sale is exercised equity will however, require that the lender receive ‘proper market value’ for the estate, and may hold the lender or his agent liable for any shortfall. As well, should the lender sell to himself, or his agent, equity may also set aside the sale.?
On the other hand, there may also be instances where a mortgagor will want to sell the property to realize the debt, since a mortgagor may receive a better sum from sale than a mortgagee or his agent. This may be an option for this family, if their home is worth more than the outstanding debt. Indeed, a mortgagor may apply under s.91 (2) of the LPA 1925 to have the court order sale, and if necessary, suspend an order for possession made by the mortgagee. In Cheltenham and Gloucester plc v Krausz? the Court of Appeal held that, "Where the proceeds of sale were likely to discharge the mortgage debt, s.36 of the AJA 1970 (as amended by the AJA 1973) conferred on the court the power to suspend a warrant for possession of mortgaged property in order to enable the mortgagor to make an application for sale under s.91 of the LPA 1925.”? However the combined use of s.36 and s.8 does not appear to empower the court to do so where the mortgage debt will not be fully discharged. For the family then, the possibility of selling the home under their direction may depend on what the value of the home is in relation to the outstanding debt.
Occupation:
The general rule under s.70 (1)(g) of the LRA 1925? is that persons in "actual occupation" have an overriding interest.? This means that a purchaser or mortgagee will take possession subject to such rights. However, a person seeking to rely on such an overriding interest must, independently of mere occupation, have some identifiable property interest or right in the land and that interest must be enforceable prior to disposition.? In Strand Securities v Caswell? the occupation of the (unregistered) lessor's stepdaughter as a licensee of the absent lessor was insufficient to establish a right in the land. This was because the stepdaughter, unlike her stepfather, could show no right in the property. For the family then, it is necessary to examine whether the children and wife have an interest in the property that might override the rights of the mortgagee, since they are obviously in occupation.
Occupation: Children in the Home
The family has three children living in the home, but it is uncertain how this might affect an order for possession. In First National Bank v Nano Kojo Adjei Achampong? the presence of children in the home was not sufficient to prevent an order for sale. "It seems however, that the mere presence of infant children or disabled persons...at most" would "be sufficient to postpone" a sale.? As Nourse LJ stated in Re Citro? such hardships resulting from the disruption to children is a necessary, even if unpleasant result of failing to maintain mortgage payments. Nourse LJ in Hypo-Mortgage Services Ltd v Robinson and Another? again reinforced this point where he suggested, "it was axiomatic that minor children of the legal owner are not in actual occupation within the meaning of s.70 (1)(g)"? This is because the courts have tended to characterize the occupation of children as merely a “shadow” of the parent’s status as occupiers.? Therefore, in light of the above, although it is unfortunate for the children of the family, their presence in the home may only be sufficient to postpone and not halt an order for possession.
Occupation: Non-Contributing Spouse
While the Matrimonial Homes Act (1983) s.1 (MHA) and the Family Law Act (1996) s.30 grant a statutory right of a spouse to occupy the matrimonial home,? whether such a statutory right will bind a mortgagee depends firstly on whether this spousal interest is an overriding, or merely a minor one.? Unfortunately it appears that under s.31 of the FLA (1986) and schedule 3 of the LRA 2002, a statutory right of spousal occupation is excluded from being an overriding interest.? This means that such a right will only take effect as a minor interest. Minor interests are only protected under s. 32(1) of the LRA 2002 if a notice on the register is created. Such a notice must be registered prior to the disposition. This is because of s.20 of the LRA 1925 (now enacted in s.29 of the LRA 2002), which provides that upon disposition for valuable consideration, a purchaser or mortgagee will take free of any minor interests if not protected on the register, even if the purchaser or mortgagee has actual notice of such interests.? Therefore, in the case of registered land whether the lender was granted a mortgage free of the wife’s interest depends on whether she has protected her minor interest by entering a notice on the property’s register prior to the disposition for valuable consideration.?
Indeed, even if the land were unregistered, the wife would still need to protect her spousal right of occupation as a land charge under the Land Charges Act (LCA) 1925. Under this Act, the wife would be required to register a “Class F” land charge against the full and correct name of the legal estate owner – in this case her husband.? Failure to do so would result in a purchaser or mortgagee taking free of her interests. In Midland Bank trust Co Ltd v Green? a father granted an option to his son to purchase the family farm – the contract being one of the classes of registerable charges against the estate. However, the son failed to register, and after a family dispute the father sold the farm to his wife. It was held that since the son had failed to register his interest prior to the disposition, the mother, as purchaser took free of the estate contract. Therefore, like in registered land, it appears that for the wife to have an occupational interest enforceable against the lender it will be necessary for her to have registered it. Otherwise the lender will take possession without reference to her interests.
Note: From the formulation of the Coursework Question, it appears that reference to beneficial interests under resulting or constructive trusts was specifically excluded. This is alluded to in the words, “ Marie neither contributed to the purchase price, nor to the household expenses.”? Therefore, this essay has merely dealt with some of the practical considerations for a family finding itself in arrears. It seems that, when a detailed inspection of the wife and children’s interests is made, there is little practical difference between whether the land occupied is registered or unregistered. Furthermore, while this essay has dealt with the issue of unregistered land where applicable, it seems that on the facts as stated, it is possible that the property is subject to compulsory registration.? In other words, either the purchase of the home, or the acquiring of a legal mortgage over the property may have triggered registration.? In either case however, it seems that at best, if the family is unable to regain control of their mortgage payments, the only remedy available to them may be to defer possession by the bank for a period prior to the “evil” day when they will be forced to leave their home.
Thomas D Marshall
Bibliography
Cases
Abbey National Building Society v Cann and another [1991] 1 AC 56
Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883
Bristol and West Building Society v Henning [1985] 2 All ER 606
Bull v Bull [1955] 1 WB 234
Carsborne v Scarfe (1738)
Cheltenham and Gloucester Building Society v Norgan [1996] All ER 449
Cheltenham and Gloucester plc v Krausz [1997] 1 All ER 21
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] ER 779
Dilligent Finance Ltd v Alleyne [1972] 23 p & CR 346
Drake v Whipp [1996] 1 FLR 826
First National Bank v Nano Kojo Adjei Achampong [2003] EWCA Civ 487
Four Maids Ltd v Dudley Marshall Properties Ltd [1957] Ch 317
Hypo-Mortgage Services Ltd v Robinson and Another [1997] 2 FCR 422
Kreglinger v New Patagonia Meat & Cold Storage Co. Ltd [1914] AC 25
Midland Bank trust Co Ltd v Green [1981] AC 513
NWB v Skelton [1993] 1 WLR 72
Paddington Building Society v Mendelsohn [1987] Fam Law 121
Re Citro[1991] Ch 142 at 157
Santley v Wilde [1899] 2 Ch 274
Strand Securities v Caswell [1965] Ch 958
Vernon v Bethell (1762) 2 Eden 110 at 113
Western Bank Ltd v Schindler [1976] 2 All ER 393
William & Glyn’s Bank Ltd v Boland and Another [1981] AC 487
Internet Resources
Lexis-Nexis online legal resource material
http://www.landregistry.gov.uk/assets/library/documents/fact_sheet011.pdf
http://www.landregistry.gov.uk
http://www.legalweek.com/documents/UPDATES/LU_1004_7.pdf
Statutes
Administration of Justice Act 1970
Administration of Justice Act 1973
Family Law Act 1996
Land Charges Act 1925
Law of Property Act 1925
Land Registration Act 1925
Land Registration Act 1997
Land Registration Act 2002
Land Registration Rules 2003
Matrimonial Homes Act 1983
Texts
MacKenzie, Judith et al, Textbook on Land Law Oxford University Press. Oxford: 2004
Journal Articles
Morgan, Jill. “Mortgage Arrears and the Family Home” (1995) 112 LQR
