Mortgages - Priority of mortgages

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Overview

Understanding the priority of mortgages is vital for SQE1 FLK2 candidates, as it is a key component of property law and financial dealings. This area involves the interaction between different interests in land, legal statutes, and equitable principles. A firm grasp of mortgage priority is necessary for understanding property rights, assessing lending risks, and advising clients on secure property dealings. This guide delves into the legal framework surrounding mortgage priority, providing candidates with the essential knowledge for success in the SQE1 FLK2 exam and their legal careers.

Legal Framework for Mortgage Priority

Registered Land

The Land Registration Act 2002 (LRA 2002) sets the main legal basis for interest priority in registered land:

  1. Section 28 LRA 2002: Determines priority by the date of interest creation, with certain exceptions.
  2. Section 29 LRA 2002: Allows a registered interest for value to override earlier unprotected interests, unless they qualify as overriding interests.

This framework balances the importance of timely registration against the protection of certain unregistered rights.

Unregistered Land

In unregistered land, "first in time, first in right" typically dictates interest priority. Key principles include:

  1. Legal interests generally take precedence over equitable ones.
  2. Among competing equitable interests, the first in time usually prevails (qui prior est tempore potior est jure).
  3. A bona fide purchaser for value without notice of a prior equitable interest is not bound by that interest.

Without a formal registration system, unregistered land poses challenges for priority determination, requiring thorough checks to identify all potential interests.

Overriding Interests

Overriding interests, outlined in Schedule 3 of the LRA 2002, can affect purchasers even if unregistered. Important overriding interests include:

  1. Short leases (term not exceeding 7 years)
  2. Rights of individuals in actual occupation
  3. Legal easements and profits à prendre
  4. Local land charges

Actual occupation is particularly noteworthy, as shown in Williams & Glyn's Bank Ltd v Boland [1981] AC 487, where a wife's equitable interest, based on her contribution to the purchase price and actual occupation, took priority over a bank's registered charge.

Subrogation and its Impact on Mortgage Priority

Subrogation is an equitable principle allowing a new lender to assume the priority position of an original lender, potentially altering standard priorities between secured interests. Key principles involve:

  1. Intention: The lender must have sought security for their advance.
  2. Mistake: Subrogation must rectify a mistake, such as believing the advance would be secured by a first charge.
  3. Unjust enrichment: Subrogation prevents other parties from benefitting unfairly from the discharge of an earlier mortgage.

In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, the House of Lords clarified that subrogation is based on unjust enrichment rather than party intentions, broadening its potential application in mortgage disputes.

Advanced Topics in Mortgage Priority

Tacking and Further Advances

Tacking allows adding further advances to an existing mortgage, affecting the priority of later charges. The rules differ between registered and unregistered land:

  1. For registered land, section 49 of the LRA 2002 allows tacking if: a) The charge includes an obligation for further advances, or b) The advance is made under an agreement noted on the register, or c) The lender hasn't been notified of a subsequent charge.

  2. For unregistered land, the rules depend on whether the subsequent charge is legal or equitable.

Postponement Agreements

Parties can change the order of their interests through postponement agreements, allowing a senior lender to agree to a lower priority. These agreements must be well-drafted and, for registered land, noted on the register to be valid against third parties.

Practical Application and Case Studies

Case Study 1: Competing Mortgages in Registered Land

Facts: Alice owns a registered property worth £500,000. She grants a first mortgage to Bank A for £300,000, which is registered quickly. Six months later, she grants a second mortgage to Bank B for £100,000, which is also registered. Alice then borrows an additional £50,000 from Bank A as a further advance.

Analysis: Under section 28 LRA 2002, Bank A's initial mortgage takes precedence over Bank B's due to earlier registration. The priority of Bank A's further advance depends on whether it meets the exceptions in section 49 LRA 2002. If Bank A had no notice of Bank B's charge and the original mortgage didn't prevent further advances, the £50,000 would likely tack onto the original mortgage and keep priority over Bank B's charge.

Case Study 2: Unregistered Interests and Actual Occupation

Facts: David owns a registered property and grants a mortgage to Bank C. His partner, Emma, contributes to the mortgage payments and lives in the property but is not named on the title. Bank C seeks to enforce its security, unaware of Emma's contribution.

Analysis: Emma's equitable interest, combined with her actual occupation, likely constitutes an overriding interest under Schedule 3 LRA 2002. Following the principle in Boland, Emma's interest may take precedence over Bank C's mortgage, despite not being registered. This case underscores the necessity for lenders to conduct thorough checks, including physical inspections, before lending.

Case Study 3: Subrogation in Practice

Facts: Frank owns a property with a first mortgage of £200,000 to Bank D. He secures a loan of £250,000 from Finance Co., intending to use £200,000 to repay Bank D and obtain a first charge for Finance Co. Due to an error, Finance Co.'s charge is registered as a second charge.

Analysis: Finance Co. may seek subrogation to assume the rights of Bank D for the £200,000 used to clear the first mortgage. Following Banque Financière, the court is likely to allow subrogation to prevent unjust enrichment, effectively giving Finance Co. priority for £200,000 over any intervening charges.

Conclusion

Mastering mortgage priority is essential for success in the SQE1 FLK2 exam and future legal practice. Key points include:

  1. Differences in priority rules for registered and unregistered land
  2. The impact of overriding interests, especially actual occupation
  3. Subrogation's role in changing standard priority rankings
  4. Tacking and further advances' complexities
  5. The necessity of thorough checks and proper documentation to ensure priority

By fully understanding these concepts and their applications, aspiring solicitors will be well-prepared to tackle mortgage priority complexities, advise clients effectively, and structure secure property transactions in their future careers.