Mortgages - Enforceability of mortgage terms

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Overview

Recognizing the enforceability of mortgage terms is a key area for SQE1 FLK2 exam candidates. This topic requires balancing lender protections with borrower rights, informed by both historical case law and recent legislative developments. A solid understanding of these concepts is essential for those engaging with property law and financial transactions.

Equity of Redemption and the Doctrine of Clogs and Fetters

The equity of redemption is a fundamental principle in mortgage law, safeguarding a borrower's right to reclaim their property after full debt repayment. This principle arose to prevent excessive gains by lenders under strict common law.

The doctrine of clogs and fetters complements this by prohibiting any mortgage term that obstructs redemption rights. Important aspects include:

  1. Mortgages must allow redemption upon debt repayment.
  2. Hindrances to redemption can be invalidated.
  3. Courts examine terms extending lender rights beyond repayment.

Landmark Case Law

Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25

This case clarified the doctrine of clogs and fetters. The House of Lords decided that collateral benefits to a lender are acceptable if they don't unfairly restrict redemption or become oppressive.

Jones v Morgan [2001] EWCA Civ 995

This case offers clarity on modern applications of these principles. The Court of Appeal found that a term requiring payment of 30% of any property value increase at redemption was not a clog.

Legislative Framework and Regulatory Oversight

The Mortgage Credit Directive Order 2015

This Order brought major changes to UK mortgage practices, impacting term enforceability. Key elements include:

  1. Improved lender disclosure requirements.
  2. A mandatory borrower creditworthiness assessment.
  3. A reflection period for borrowers.

Financial Conduct Authority (FCA) Mortgage Conduct of Business Rules (MCOB)

The FCA's rules further shape mortgage enforceability, focusing on fair treatment and borrower protection. Key aspects include:

  1. Fair treatment of customers in arrears.
  2. Limitations on certain mortgage products.
  3. Clear and fair communication standards.

Advanced Mortgage Concepts

Legal vs. Equitable Mortgages

Distinguishing these is important:

  • Legal Mortgages: Transfer legal title through a deed, offering stronger enforcement.
  • Equitable Mortgages: Recognized in equity, created by agreement or conduct, usually requiring court involvement for enforcement.

Tacking and Further Advances

Tacking allows additional borrowing under an existing mortgage. Key points:

  1. Allowed for advances if specified in the original mortgage.
  2. Voluntary advances may be added if no subsequent encumbrance is noticed.
  3. The Land Registration Act 2002 altered rules for registered land.

Practical Considerations

For Lenders:

  1. Precisely draft terms to balance commercial aims with legal and regulatory demands.
  2. Regularly update mortgage products for compliance.
  3. Use effective systems to assess borrower creditworthiness and ensure transparency.

For Borrowers:

  1. Recognize their rights, particularly regarding redemption and protection against unfair terms.
  2. Seek independent advice before entering complex agreements.
  3. Stay informed about regulatory protections and dispute resolutions.

Conclusion

The enforceability of mortgage terms hinges on balancing contractual rights with equitable principles. SQE1 FLK2 candidates should comprehend:

  1. The equity of redemption and its safeguarding through clogs and fetters.
  2. Key case law developments impacting modern agreements.
  3. Legislative and regulatory effects on enforceability.
  4. Complex concepts like legal vs. equitable mortgages and further advances.
  5. Practical considerations for lenders and borrowers in structuring and negotiating mortgages.

A comprehensive knowledge of these elements enables effective engagement with mortgage law in exams and future practice.