Mortgages - Protection of mortgagors and third parties with an interest in the land

Learning Outcomes

After studying this article, you will be able to explain the legal protections available to mortgagors and third parties with interests in mortgaged land. You will understand the equity of redemption, statutory safeguards, the operation of overriding interests, and the mechanisms by which third-party rights may bind or be defeated by a mortgagee or purchaser. You will be able to apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the legal and practical protections for mortgagors and third parties with interests in land subject to a mortgage. In your revision, focus on:

• the equity of redemption and the mortgagor’s right to redeem
• statutory restrictions on mortgagee remedies (especially possession and sale)
• the nature and effect of overriding interests (especially actual occupation)
• the doctrine of overreaching and its impact on third-party rights
• the registration and priority of mortgages and third-party interests
• the duties of mortgagees when exercising remedies
• how third-party interests may be protected or lost in registered and unregistered land

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.

1. What is the equity of redemption, and why is it important for mortgagors?
2. Which of the following is an overriding interest in registered land? a) a registered charge b) a short legal lease c) a beneficial interest under a trust with no actual occupation d) a restriction
3. How can a third party’s beneficial interest under a trust be defeated by a purchaser or mortgagee?
4. True or false? A mortgagee must always obtain a court order before taking possession of a mortgaged property.

Introduction

When land is used as security for a loan, the law provides a range of protections for the mortgagor (borrower) and for third parties who may have an interest in the land. These protections are designed to ensure fairness, prevent abuse by mortgagees (lenders), and balance the rights of all parties involved. For SQE1, you must be able to identify and apply the key doctrines and statutory rules that safeguard mortgagors and third parties, especially in the context of registered land.

The Equity of Redemption

A central protection for mortgagors is the equity of redemption. This is the right of the mortgagor to recover full ownership of the property by repaying the mortgage debt, even after the contractual date for repayment has passed.

Key Term: equity of redemption
The mortgagor’s right to redeem the property by repaying the mortgage debt and to have the mortgage removed from the title, regardless of any contractual attempts to prevent redemption.

The courts will strike down any mortgage term that seeks to prevent or unduly restrict redemption. This includes clauses that postpone redemption for an unreasonable period or grant the mortgagee an option to purchase the property as part of the mortgage.

Worked Example 1.1

A mortgage agreement states that the mortgagor cannot redeem the mortgage for 30 years, even though the loan is for a modest sum and the property is worth much more. Is this clause valid?

Answer: No. The clause is likely to be void as a "clog" on the equity of redemption. The mortgagor must always have a real and practical right to redeem.

Statutory Protection for Mortgagors

Statute provides further protection for mortgagors, especially in relation to possession and sale.

Key Term: possession (mortgage context)
The right of the mortgagee to take control of the mortgaged property, usually as a prelude to sale or to collect income.

A mortgagee may have a contractual right to possession, but in practice, the courts have powers to postpone or suspend possession proceedings in order to allow the mortgagor to pay arrears within a reasonable period.

Key Term: Administration of Justice Act 1970, s 36
A statutory provision allowing the court to adjourn, suspend, or postpone possession proceedings if the mortgagor can pay the sums due within a reasonable time.

Worked Example 1.2

A mortgagor falls into arrears but can show that they will be able to pay off the arrears over the remaining mortgage term. Can the court postpone possession?

Answer: Yes. Under s 36 AJA 1970, the court can suspend or adjourn possession proceedings if the mortgagor can pay the arrears within a reasonable period (which may be the full remaining term).

Exam Warning

In some cases, a mortgagee may take possession without a court order if the property is unoccupied. However, if the property is a dwelling and the mortgagor is in occupation, the mortgagee should seek a court order to avoid criminal liability or civil claims.

Overriding Interests and Actual Occupation

In registered land, certain interests bind a purchaser or mortgagee even if not entered on the register. These are called overriding interests.

Key Term: overriding interest
A right or interest that binds a purchaser of registered land even though it is not recorded on the register, as set out in Schedule 3 of the Land Registration Act 2002.

One of the most important overriding interests is the right of a person in actual occupation.

Key Term: actual occupation
Physical presence on the land that is obvious on inspection, giving rise to an overriding interest if coupled with a proprietary right.

A person with a beneficial interest under a trust who is in actual occupation may have an overriding interest that binds a purchaser or mortgagee—unless their interest is overreached (see below).

Worked Example 1.3

A wife has a beneficial interest under a trust in the family home and is in actual occupation. The husband mortgages the property without her knowledge. The husband defaults. Can the bank obtain possession free of her interest?

Answer: If the mortgage advance was paid to two trustees, her interest is overreached and she cannot claim an overriding interest. If paid to only one trustee, her interest may override and bind the bank if she is in actual occupation.

Overreaching and Third-Party Interests

The doctrine of overreaching allows certain equitable interests (such as beneficial interests under a trust) to be "lifted" from the land and transferred to the proceeds of sale or mortgage advance, provided the purchase money is paid to at least two trustees.

Key Term: overreaching
The process by which a purchaser or mortgagee who pays capital money to two trustees takes the land free of equitable interests, which attach instead to the money.

This protects purchasers and mortgagees from being bound by hidden equitable interests, while ensuring that beneficiaries receive their share of the money.

Worked Example 1.4

A property is held by two trustees on trust for themselves and a third person, who lives in the property. The trustees sell the property and the purchase money is paid to both trustees. Does the third person's interest bind the purchaser?

Answer: No. The interest is overreached and attaches to the sale proceeds, not the land. The purchaser takes free of the interest.

Registration and Priority of Mortgages

In registered land, a legal mortgage must be registered as a charge to have priority. The order of registration determines priority between multiple mortgages.

Key Term: registered charge
A legal mortgage entered on the charges register of a registered title, giving the lender priority according to the date of registration.

If a mortgage is not registered, it may lose priority to later registered charges.

Key Term: land charge
A registrable interest in unregistered land, such as a puisne mortgage or certain equitable interests, which must be registered against the name of the estate owner to be binding on purchasers.

Key Term: puisne mortgage
A legal mortgage of unregistered land that is not protected by deposit of title deeds and must be registered as a land charge to bind purchasers.

Duties of Mortgagees

When exercising the power of sale, a mortgagee must act in good faith and take reasonable care to obtain the true market value of the property.

Worked Example 1.5

A mortgagee sells a property at auction but fails to mention that it has valuable planning permission, resulting in a lower sale price. Is the mortgagee liable?

Answer: Yes. The mortgagee has breached the duty to obtain the best price reasonably obtainable and may be liable to the mortgagor for the shortfall.

Protection of Third Parties

Third parties with interests in mortgaged land may be protected by:

• entry of a notice or restriction on the register (in registered land)
• registration as a land charge (in unregistered land)
• actual occupation giving rise to an overriding interest (in registered land)
• overreaching, which may defeat their interest if the purchase money is paid to two trustees

Key Term: restriction (registered land)
An entry on the proprietorship register limiting the ability to deal with the land unless specified conditions are met, such as obtaining consent from a third party.

Key Term: notice (registered land)
An entry on the charges register of a registered title to protect a third-party interest, ensuring it is binding on purchasers.

Key Term: bona fide purchaser
A person who acquires a legal estate for value in good faith and without notice of an equitable interest, and is not bound by it in unregistered land.

Key Term: doctrine of notice
The principle that in unregistered land, a purchaser for value of a legal estate is bound by equitable interests only if they have actual, constructive, or imputed notice of them.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The equity of redemption protects the mortgagor’s right to redeem the property and voids attempts to prevent redemption.
• Statutory provisions (e.g., AJA 1970 s 36) allow courts to postpone possession to protect mortgagors.
• Overriding interests, especially actual occupation, may bind purchasers and mortgagees in registered land.
• Overreaching allows purchasers and mortgagees to take land free of certain equitable interests if money is paid to two trustees.
• Registration of mortgages and third-party interests is essential for priority and protection.
• Mortgagees must act in good faith and take reasonable care when selling mortgaged property.
• Third parties may protect their interests by notice, restriction, or registration, but may lose protection if overreaching occurs.

Key Terms and Concepts

• equity of redemption
• possession (mortgage context)
• Administration of Justice Act 1970, s 36
• overriding interest
• actual occupation
• overreaching
• registered charge
• land charge
• puisne mortgage
• restriction (registered land)
• notice (registered land)
• bona fide purchaser
• doctrine of notice