Mortgages - Protection of mortgagors and third parties with ...

Learning Outcomes

This article outlines protections for mortgagors and third parties with interests in land subject to a mortgage, including:

• The equity of redemption, clogs or fetters, and scrutiny of collateral advantages and excessive interest
• Courts’ statutory powers to postpone possession under AJA 1970 s 36 (as read with AJA 1973 s 8) and related case law on the “reasonable period”
• Mortgagee possession without a court order and the practical risks of self‑help
• Overriding interests arising through actual occupation versus beneficial interests that are overreached, and the actual occupation exceptions
• Overreaching (LPA 1925 ss 2 and 27) in co‑ownership and trust scenarios, and the effect of paying capital money to two trustees or a trust corporation
• Priority between mortgages in registered and unregistered land, and the effect of notices, restrictions, registration, and tacking/further advances
• Mortgagee duties and standard of care on sale (including advertising and conflicts) and the impact on the distribution of proceeds (LPA 1925 ss 104–105)
• Interaction between mortgages and third‑party rights—tenants, spouses/civil partners, and beneficiaries under trusts—in both registered and unregistered land
• Undue influence and lender “put on inquiry” principles (Etridge) and enforceability of security

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, with a focus on the following syllabus points:

• 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.

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.

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.

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.

The Equity of Redemption

A central protection for mortgagors is the equity of redemption. This is the court‑recognised right to redeem even after the contractual redemption date has passed. Equity polices mortgage terms: any provision that renders redemption illusory or excessively difficult will be void as a “clog” or “fetter” on the equity of redemption. Options to purchase the mortgaged property in the lender’s favour are generally void if included in, or linked to, the mortgage security.

Courts also scrutinise collateral advantages (benefits for the lender beyond repayment and interest). A collateral advantage may be struck down if it is unconscionable, inconsistent with the right to redeem, or in substance penal. Interest and pricing terms can be assessed for unfairness, especially in consumer contexts. Illustrative authorities include:

• excessive or penal rates can be reduced (e.g. Cityland & Property Holdings v Dabrah; Falco Finance v Gough under unfair terms regimes)
• commercial bargains negotiated at arm’s length are more likely to stand (e.g. Multiservice Bookbinding v Marden; Paragon Finance v Nash)
• where the lender’s rate setting discretion exists, it must not be exercised capriciously or in bad faith

The bottom line is consistent: “once a mortgage, always a mortgage.” The borrower must retain a genuine, practical right to redeem on clearing the secured debt.

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. A mortgagee may have a contractual right to possession from the moment the mortgage is completed (Four Maids v Dudley Marshall), and in some circumstances can take possession without a court order (Ropaigealach v Barclays Bank). In practice, particularly for residential property, lenders seek a court order to manage risk: forced re‑entry can expose them to criminal and civil liability if violence is used (Criminal Law Act 1977, s 6) or the method is otherwise improper.

The key statutory safeguard is the court’s discretionary power under AJA 1970 s 36 (as read with AJA 1973 s 8) to adjourn or suspend possession if the borrower can repay the arrears “within a reasonable period.” Appellate guidance treats the remaining mortgage term as the usual touchstone for reasonableness (Cheltenham & Gloucester BS v Norgan). The court will weigh the borrower’s repayment plan, affordability evidence, and lender prejudice (e.g. falling market, mounting interest), as seen in National & Provincial v Lloyd and Bristol & West BS v Ellis.

Key Term: power of sale (LPA 1925, s 101)
A power implied into a mortgage made by deed that allows the mortgagee to sell the property once it has become exercisable under s 103 (e.g. two months’ interest in arrears), subject to duties owed to the mortgagor and others.

Key Term: foreclosure
A remedy by court order vesting the mortgaged estate in the mortgagee and extinguishing the equity of redemption. Rare in practice due to its draconian effect and the court’s discretion to refuse or reopen.

In addition to possession, the mortgagee’s remedies include exercising the power of sale (LPA 1925 ss 101–103), appointing a receiver (s 109), bringing a debt action for the unpaid balance (subject to limitation periods), and seeking foreclosure. A sale is more common than foreclosure in residential cases; the latter is often refused or converted into a sale order (LPA 1925 s 91(2)) where that better preserves the borrower’s equity.

Key Term: receiver (LPA 1925, s 109)
A person appointed by the mortgagee (usually by deed) to collect income and manage the property (often let property). The receiver is deemed the borrower’s agent, and typically may be empowered by the mortgage terms to sell, though statute supplies only limited default powers.

Courts expect lenders to observe good practice. Residential lenders should follow the pre‑action protocol for mortgage possession claims (not a rule of law but a factor in case management and costs). Where a borrower challenges enforceability due to undue influence exerted by a third party (typically a spouse/partner guarantor), the mortgage may be set aside unless the lender took Etridge‑compliant steps: it is “put on inquiry” by the non‑commercial nature of the guarantee and must ensure the surety receives independent legal advice, or otherwise risk the charge being unenforceable (Barclays Bank v O’Brien; RBS v Etridge (No 2)). The position differs where the advance was for an apparent joint benefit (CIBC Mortgages v Pitt).

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 if the mortgagor can pay the arrears within a reasonable period, which may be the full remaining term (Norgan).

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.

Whether there is actual occupation is fact‑sensitive. Continuous, permanent looking presence is not required; short absences (hospital, travel) do not necessarily negate occupation if there is a continuing presence and an intention to return (e.g. Chhokar v Chhokar; Link Lending v Bustard). Conversely, mere storage of belongings with no substantive presence can be insufficient (Stockholm Finance v Garden Holdings).

Timing and the nature of the right matter:

• for purchase‑money mortgages, the borrower’s occupation is treated as simultaneous with the mortgage; the lender’s charge takes priority unless the occupier’s right both predates and is coupled with occupation at the relevant time (Abbey National v Cann)
• beneficial interests under a trust can override only if not overreached (see below); otherwise they transfer to the money

Schedule 3, para 2 contains important exceptions: an occupier who fails to disclose the right when reasonably asked, or whose occupation is not obvious on a reasonably careful inspection and of which the purchaser has no actual knowledge, will not override.

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.

Worked Example 1.4

B buys with a mortgage. On completion day, B’s mother (who contributed to the price) is moving furniture in. She claims her beneficial interest overrides the lender because she was “in occupation” first.

Answer:
The claim is unlikely to succeed. In a purchase‑money mortgage, there is no temporal gap between purchase and charge; actual occupation cannot arise in the split second before the mortgage bites (Abbey National v Cann). Unless overreaching fails and the mother can show established occupation and a proprietary right, the charge will take priority.

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 is fundamental to conveyancing in co‑ownership. Where land is held on a trust of land, a buyer or mortgagee who pays capital money to two trustees (or a trust corporation) takes free of beneficiaries’ equitable interests (LPA 1925, ss 2 and 27). The beneficiaries’ rights are converted into rights against the trustees and the proceeds. A Form A restriction on the proprietorship register warns a buyer that the legal estate is held on trust, signalling that capital money must be paid to two trustees to ensure overreaching, but the restriction itself does not create priority.

Overreaching can apply on a mortgage as well as a sale; capital money includes a mortgage advance. It can occur even where no fresh funds pass on completion (e.g. refinancing that secures existing liabilities has been treated as within the overreaching machinery). If capital money is paid to a sole trustee, overreaching fails; the buyer or mortgagee is then vulnerable to any overriding interest based on actual occupation (e.g. Williams & Glyn’s Bank v Boland).

Worked Example 1.5

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.

Worked Example 1.6

Title shows a Form A restriction. The seller is a sole proprietor in actual occupation; the buyer pays the price to that sole proprietor. A cohabitant beneficiary claims a beneficial interest and seeks to remain.

Answer:
Overreaching has not occurred because capital money was not paid to two trustees. If the cohabitant has a proprietary interest and is in actual occupation that is obvious on inspection (and not disclosed upon reasonable inquiry), the interest may override and bind the purchaser or lender.

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.

A registered disposition of a registered estate for value (such as the grant of a registered charge) takes effect subject only to entries on the register and overriding interests (LRA 2002 s 29). Priority between charges is generally by order of registration; a later registered charge ranks behind an earlier one (LRA 2002 s 48). A later equitable mortgage (e.g. created by agreement compliant with LP(MP)A 1989 s 2, but not registered as a charge) will usually need protection by notice to avoid postponement to a subsequent registered charge.

Equitable mortgages over registered titles can arise where a legal charge is intended but the deed or registration is defective; they should be protected by an agreed or unilateral notice. Mere deposit of title deeds is no longer sufficient on its own to create an equitable mortgage of a legal estate (United Bank of Kuwait v Sahib), owing to the LP(MP)A 1989 s 2 formalities.

In unregistered land:

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.

A first legal mortgagee normally holds the title deeds; a puisne mortgage (a later legal mortgage without custody of the deeds) must be registered as a Class C(i) land charge. An equitable mortgage of an unregistered legal estate should be protected as a Class C(iii) land charge; equitable mortgages of an equitable interest require notice to trustees.

Companies’ charges must be registered at Companies House within the statutory time limit (e.g. Companies Act 2006, s 859A regime), failing which they are void against a liquidator/administrator or creditors.

Key Term: tacking
The process by which a first mortgagee secures priority for a further advance by “tacking” it to the original charge; subject to the terms of the charge, notice of subsequent charges, and statutory controls.

Further advances and tacking: whether a first charge holder’s later advance ranks ahead of an intervening second charge depends on the charge terms and whether the first lender had actual notice of the second charge when making the further advance. Contractual priority agreements and facility terms often manage this risk.

Worked Example 1.7

Lender 1 has a registered first charge securing “all monies now or hereafter owing.” Later, the borrower grants Lender 2 a second registered charge. After Lender 2’s charge is registered, Lender 1 makes a further advance. Lender 2 objects to Lender 1 taking priority for that further advance.

Answer:
If Lender 1 had actual notice of Lender 2’s charge when making the further advance, priority for that advance may be postponed absent a contractual priority agreement. If the first charge terms fix a maximum secured amount or require consent for further advances, those terms will govern. Always check the wording of the first charge and any inter‑creditor deed.

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 at the date of sale. The duty is to take reasonable precautions, not to achieve the very best price possible. Key points from the case law:

• failure to publicise material matters (e.g. extant planning permission) that would affect price can be negligent (Cuckmere Brick v Mutual Finance)
• selling to an associated purchaser without safeguards can evidence bad faith or breach (Tse Kwong Lam v Wong Chit Sen)
• a mortgagee is not obliged to spend money or delay sale to improve the property or its value (Silven Properties v RBS)
• modest undervaluations do not necessarily establish breach; valuation is a range (Meah v GE Money)

Upon sale, the mortgagee holds proceeds on statutory trusts in the order set by LPA 1925 s 105: prior encumbrances, sale costs, the selling mortgagee’s debt, subsequent mortgages, with any surplus to the mortgagor (or those entitled through the equity of redemption).

Worked Example 1.8

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 (Cuckmere Brick).

Worked Example 1.9

A tenant occupies under a two‑year legal lease granted after the mortgage without the lender’s consent. The lender now seeks possession and sale.

Answer:
The lease was granted after the mortgage and without consent contrary to the mortgage terms. The lender is not bound and can obtain possession free of the tenancy. By contrast, a pre‑existing legal lease (or a short legal lease that overrides) would usually bind the mortgagee.

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: home rights (Family Law Act 1996)
Statutory rights of occupation for spouses/civil partners in the matrimonial/civil partnership home. In registered land they are protected as a notice; they are not overriding. In unregistered land, they are protected by registration as a Class F land charge.

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.

Typical third‑party scenarios:

• Tenants: A legal lease created before the mortgage will usually bind the mortgagee; in registered land, short legal leases (seven years or less) override registered dispositions. Leases granted after the mortgage contrary to a prohibition will not bind the mortgagee.
• Beneficiaries under a trust/co‑owners: Where capital money is paid to two trustees (or a trust corporation), beneficiaries’ interests are overreached; otherwise, a beneficiary with a proprietary interest coupled with actual occupation may override (Boland). If two trustees receive the mortgage advance, overreaching defeats the beneficiary’s claim even if they are in occupation (Flegg).
• Spouses/civil partners: In registered land, home rights are protected by notice (not overriding). In unregistered land, home rights require a Class F land charge; without registration, they are void against a purchaser for value.

Worked Example 1.10

A wife signed a guarantee and second charge over the home to secure her husband’s business borrowing. She now alleges undue influence by her husband; the lender took no steps to ensure she received independent advice.

Answer:
The lender was “put on inquiry” because this was a non‑commercial surety transaction. Absent reasonable steps to ensure the wife received independent legal advice (Etridge), the security is liable to be set aside as against the wife’s interest.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The equity of redemption protects the mortgagor’s right to redeem and voids attempts to prevent redemption; collateral advantages and excessive interest are scrutinised.
• Statutory provisions (e.g., AJA 1970 s 36 and AJA 1973 s 8) allow courts to postpone possession if arrears can be paid within a reasonable period; possession without an order carries risk.
• Overriding interests, especially actual occupation, may bind purchasers and mortgagees in registered land, subject to disclosure and obviousness exceptions.
• Overreaching allows purchasers and mortgagees to take land free of certain equitable interests if capital money is paid to two trustees or a trust corporation; a Form A restriction is a signpost, not protection in itself.
• Registration of mortgages and third‑party interests is essential for priority and protection in registered land (s 29, s 48 LRA 2002); in unregistered land, relevant land charges must be registered.
• Mortgagees exercising the power of sale must act in good faith and take reasonable care to obtain the true market value; they are not required to improve the property.
• Receivers can be appointed to manage income‑producing property; they act as the borrower’s agent and owe duties of good faith and reasonable competence.
• Third parties can protect their interests by notice, restriction, or land charges (as applicable); they may lose protection if overreaching occurs or formalities are not met.
• Undue influence and the lender’s “put on inquiry” duty (Etridge) affect enforceability of security granted by sureties such as spouses or partners.

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)
• home rights (Family Law Act 1996)
• power of sale (LPA 1925, s 101)
• receiver (LPA 1925, s 109)
• foreclosure
• tacking
• bona fide purchaser
• doctrine of notice