Learning Outcomes
After studying this article, you will be able to explain the legal principles governing the enforceability of mortgage terms, including the equity of redemption, the doctrine of clogs and fetters, and the impact of statutory and regulatory controls. You will be able to identify when a mortgage term may be struck down by the courts, distinguish between legal and equitable mortgages, and apply these rules to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the enforceability of mortgage terms from both a doctrinal and practical standpoint. In your revision, focus on:
- the equity of redemption and the borrower's right to redeem
- the doctrine of clogs and fetters and its application to mortgage terms
- the distinction between legal and equitable mortgages
- the effect of statutory and regulatory controls on mortgage enforceability (including the FCA's MCOB rules and the Mortgage Credit Directive Order 2015)
- how courts balance contractual freedom with borrower protection
- how to apply these principles to practical problem questions
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the equity of redemption, and why is it fundamental to mortgage law?
- Which of the following would likely be struck down as a "clog or fetter" on the equity of redemption?
a) A clause postponing redemption for 40 years in a commercial mortgage
b) A clause requiring the borrower to buy all supplies from the lender for 10 years after redemption
c) A clause granting the lender an option to purchase the mortgaged property as part of the mortgage
d) A clause requiring the borrower to pay interest at a market rate - What is the effect of the Mortgage Credit Directive Order 2015 on the enforceability of mortgage terms?
- True or false: An equitable mortgage can arise where the formal requirements for a legal mortgage are not satisfied.
Introduction
The enforceability of mortgage terms concerns whether the provisions in a mortgage agreement can be upheld by the courts. This area of law balances the lender's right to security with the borrower's right to redeem their property. For SQE1, you must know the limits placed on mortgage terms by equity, statute, and regulation, and how these limits protect borrowers from oppressive or unfair terms.
The Equity of Redemption
The equity of redemption is the borrower's right to redeem the mortgaged property by repaying the debt and any interest due. This right exists even after the contractual date for redemption has passed, provided the borrower pays all sums owed.
Key Term: equity of redemption
The right of a mortgagor (borrower) to redeem their property by repaying the mortgage debt, even after the contractual redemption date.
The equity of redemption is protected by the courts. Any attempt by a lender to prevent or unduly restrict this right will be closely scrutinised.
The Doctrine of Clogs and Fetters
The doctrine of clogs and fetters prevents mortgage terms that unfairly restrict the borrower's right to redeem. The courts will strike down any provision that makes the mortgage irredeemable or imposes an unreasonable barrier to redemption.
Key Term: clog or fetter
A term in a mortgage that unfairly restricts or prevents the borrower's right to redeem the property.
Common examples of clogs or fetters include:
- A term making the mortgage irredeemable or postponing redemption for an excessive period (unless justified by commercial context)
- A provision giving the lender an option to purchase the mortgaged property as part of the mortgage transaction
- A collateral advantage (such as a tie-in to buy goods from the lender) that continues after redemption, unless it is wholly independent of the mortgage
Worked Example 1.1
A lender includes a clause in a residential mortgage requiring the borrower to buy all home insurance from the lender for 15 years, even after the mortgage is repaid. Is this clause enforceable?
Answer: No. This is a collateral advantage that continues after redemption and is likely to be struck down as a clog on the equity of redemption.
Collateral Advantages
A collateral advantage is a benefit to the lender that goes beyond repayment of the loan and interest. Collateral advantages are only enforceable if they are not unconscionable, do not prevent redemption, and do not continue after redemption unless they are truly independent of the mortgage.
Key Term: collateral advantage
A benefit to the lender in a mortgage transaction that is separate from repayment of the loan and interest.
If a collateral advantage is oppressive or tied to the mortgage in a way that restricts redemption, it will be void.
Worked Example 1.2
A mortgage includes a clause giving the lender the right of first refusal to buy the borrower's crops for five years after the mortgage is repaid. Is this enforceable?
Answer: No. Unless the right of first refusal is wholly independent of the mortgage, it is likely to be struck down as a clog or fetter.
Legal and Equitable Mortgages
A legal mortgage is created by deed and, for registered land, must be registered as a charge. If the formalities are not satisfied, but there is a valid contract to create a mortgage, an equitable mortgage may arise.
Key Term: legal mortgage
A mortgage created by deed (and registered if required), giving the lender a legal interest in the property.Key Term: equitable mortgage
A mortgage arising where the formalities for a legal mortgage are not satisfied, but there is a valid contract or other equitable basis for the lender's security.
Equitable mortgages are enforceable in equity but may be less secure than legal mortgages, especially against third parties.
Statutory and Regulatory Controls
Modern mortgage terms are also regulated by statute and the Financial Conduct Authority (FCA). The Mortgage Credit Directive Order 2015 and the FCA's Mortgage Conduct of Business (MCOB) rules impose requirements on lenders, including:
- Clear disclosure of terms and risks
- Assessment of the borrower's ability to repay
- Fair treatment of borrowers in financial difficulty
- Restrictions on unfair or high-risk terms
Key Term: Mortgage Credit Directive Order 2015
UK legislation implementing EU rules to ensure fair, transparent, and responsible mortgage lending.Key Term: MCOB rules
The FCA's Mortgage Conduct of Business rules, setting standards for mortgage lending and customer protection.
Terms that breach these requirements may be unenforceable.
Worked Example 1.3
A lender fails to provide clear information about an early repayment charge in a regulated mortgage. The borrower is charged a large fee when redeeming early. Is the fee enforceable?
Answer: No. Under the MCOB rules and the Mortgage Credit Directive Order 2015, the lender must provide clear disclosure of all charges. Failure to do so may render the fee unenforceable.
Unconscionable and Oppressive Terms
The courts may refuse to enforce a mortgage term if it is unconscionable or amounts to an unfair bargain. This includes:
- Excessive interest rates not justified by risk or market conditions
- Terms imposed by undue influence or misrepresentation
- Terms that are contrary to consumer protection legislation
Exam Warning
The courts will not strike down a mortgage term simply because it is a "bad bargain" for the borrower. There must be evidence of oppression, unconscionability, or breach of statutory/regulatory requirements.
Tacking and Further Advances
Tacking allows a lender to add further advances to an existing mortgage, potentially gaining priority over later interests if the original mortgage provides for this and the lender has no notice of subsequent interests.
Key Term: tacking
The process by which a lender adds further advances to an existing mortgage, potentially gaining priority over later interests.
The Land Registration Act 2002 introduced additional requirements for tacking in registered land, including registration and notice provisions.
Key Point Checklist
This article has covered the following key knowledge points:
- The equity of redemption guarantees the borrower's right to redeem the property by repaying the mortgage debt.
- The doctrine of clogs and fetters prevents mortgage terms that unfairly restrict redemption.
- Collateral advantages are only enforceable if they are not oppressive and do not continue after redemption unless truly independent.
- Legal mortgages require a deed (and registration if required); equitable mortgages arise where formalities are not satisfied but a valid contract exists.
- Statutory and regulatory controls (including the Mortgage Credit Directive Order 2015 and MCOB rules) protect borrowers and may render unfair terms unenforceable.
- The courts may strike down unconscionable or oppressive mortgage terms, but not merely "bad bargains."
- Tacking and further advances are subject to strict requirements, especially for registered land.
Key Terms and Concepts
- equity of redemption
- clog or fetter
- collateral advantage
- legal mortgage
- equitable mortgage
- Mortgage Credit Directive Order 2015
- MCOB rules
- tacking
