Learning Outcomes
After reading this article, you will be able to:
- Explain how a freehold property purchase is financed
- Distinguish between legal and equitable mortgages
- Describe the lender's powers and duties, including the power of sale
- Advise on protections for borrowers
- Identify and apply the correct remedies for lenders and deal with practical issues encountered in real estate finance—key for SQE2 success.
SQE2 Syllabus
For SQE2, you are required to understand the finance considerations and lender's role in freehold real estate transactions. Focus your revision on:
- The creation and effect of legal and equitable mortgages over freehold land
- The main powers and duties of lenders, including the right to possession and the power of sale
- The legal protections available to borrowers (mortgagors)
- The remedies available for lenders if defaults arise
- How to advise a client (borrower or lender) at each stage of a financed transaction
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 difference between a legal mortgage and an equitable mortgage in real estate law?
- Name two situations in which a lender can exercise the power of sale.
- What legal safeguards does a mortgagor have against immediate repossession by the lender?
- True or false: A lender must always go to court before taking possession of a mortgaged property.
Introduction
Securing finance is an essential part of most freehold property transactions. Lenders expect robust security, usually via a legal mortgage, while borrowers seek fair and transparent dealings. This article covers the creation and enforcement of mortgages, the role of the lender, core rights and remedies available to both parties, and the legal safeguards in place for the mortgagor.
The Structure and Creation of Mortgages
When a client (the buyer) finances a purchase, the lender (often a bank or building society) lends money and receives security over the property. This is typically a legal mortgage. Creation of the mortgage and how it is protected are foundational issues for any solicitor acting for buyer or lender.
Key Term: legal mortgage
An interest in land, created by deed, that gives the lender the right to sell, possess, or otherwise enforce against the property if the borrower defaults.Key Term: equitable mortgage
A security interest that arises where the legal formality (usually, execution of a valid deed or registration) is missing, or the mortgagor only owns an equitable interest; enforceable in equity, not as a legal interest.
Requirements for a Legal Mortgage
To create a legal mortgage over freehold land:
- It must be made by deed (see s 52 Law of Property Act 1925 and s 1 Law of Property (Miscellaneous Provisions) Act 1989 for requirements);
- It must be registered on the title for registered land (Land Registration Act 2002);
- If over unregistered land, it is protected by the mortgagee holding the deeds or (for non-first mortgages) by registration as a land charge.
If any of these are missing, the security may instead be recognized as an equitable mortgage.
Worked Example 1.1
A client agrees a short-term loan and signs a mortgage document, but the lender fails to register it at the Land Registry. The borrower defaults. Can the lender enforce the mortgage as a legal interest?
Answer:
No. Registration is essential for a legal mortgage of registered freehold land. However, the lender may enforce an equitable mortgage if there is a valid contract and the borrower has not acted unfairly (i.e., has clean hands).
Advising the Lender: Key Powers and Duties
A solicitor acting for a lender will ensure the mortgage is properly created and registered. After the mortgage is completed, the lender's central rights become enforceable if the borrower defaults.
Right to Possession
A legal mortgagee generally has a right to possession of the property after default, although for residential property, a court order is usually required. The Administration of Justice Act 1970 s 36 empowers the court to postpone possession if the borrower can realistically bring payments up to date.
Power of Sale
Once the mortgage is in default and provided for by the mortgage deed or implied by statute (s 101 LPA 1925), the lender may sell the property. This power must have:
- arisen (typically, the legal date for redemption has passed),
- become exercisable (generally, after some default—e.g., nonpayment of interest for two months, or after three months from a demand for repayment).
The sale's main purpose is to allow the lender to recover the debt, but the lender must take reasonable steps to achieve the property's market value.
Key Term: power of sale
The lender's right to sell the mortgaged property—exercisable after specific default events—to recover the loan balance.
Accounting for Sale Proceeds
After a sale, the lender holds the proceeds on trust to cover:
- Costs due to any prior mortgages,
- Sale expenses,
- Repayment of the lender’s own mortgage,
- Any remaining balance to the borrower or, rarely, subsequent mortgagees.
Lender Duties on Sale
Lenders must:
- Act in good faith (e.g., properly market the property, do not sell to themselves or at an undervalue),
- Take reasonable care to obtain the property's true market value at sale.
If these duties are breached, the mortgagor may claim any shortfall as damages.
Worked Example 1.2
A lender sells a repossessed house without advertising that it has planning permission for apartments, achieving a lower sale price. The borrower sues for the difference. Is the lender liable?
Answer:
Likely yes. The lender's duty to achieve the true market value was breached—material matters affecting value must be fully disclosed during the sale.
Protections for the Borrower
Borrowers are not without safeguards. The law restricts lenders from enforcing unfair terms or taking premature action.
Equity of Redemption and "Clogs and Fetters"
Borrowers have a protected right to repay the loan and regain the property (equity of redemption). Clauses that delay, restrict, or make redemption illusory beyond what is commercially reasonable may be void as "clogs or fetters."
Key Term: equity of redemption
The borrower’s residual right to redeem the property by repaying the full mortgage; cannot be unduly restricted.
Relief Against Possession and Foreclosure
Before taking possession or seeking foreclosure, the lender must comply with clear procedures. For homes, the court can suspend or delay possession if the borrower can realistically repay within a reasonable time.
Undue Influence & Unfair Terms
If there is evidence of undue influence by one party on the other to enter into a mortgage, or where a term is so unfair as to be unconscionable, the court may set aside the mortgage or strike down the offending provision.
Key Term: undue influence
When a party enters into a mortgage (or other transaction) not of their own free will, typically due to improper pressure, misrepresentation, or relationship.Key Term: unconscionable term
A contractual provision so one-sided or unjust that equity will intervene to prevent its enforcement.
Worked Example 1.3
A wife guarantees her husband's business debts by mortgaging their jointly owned house, but the lender does not check she received independent legal advice. The husband defaults. The wife seeks to set aside the mortgage for undue influence. Will she succeed?
Answer:
Possibly. Lenders must take reasonable steps (e.g., ensure legal advice) if there is a risk of undue influence. Failure to do so can render the mortgage unenforceable against the wife.
Remedies Available to the Lender
For default, the lender can:
- Pursue a debt action for the unpaid loan amount;
- Appoint a receiver for income-producing property;
- Exercise the power of sale (as described above);
- As a last resort, seek foreclosure (rare in practice—extinguishes borrower's equity of redemption and vests the property in the lender entirely).
Before any action, it is standard practice (and often mandatory) to explore alternative solutions, such as payment plans or re-negotiation, especially in residential cases. Statutory pre-action protocols may require evidence of such efforts.
Exam Warning
The lender cannot use force when taking possession, nor can they include contractual terms that make redemption illusory or require purchase of other products as a condition of the loan. Always advise clients to scrutinize any such provisions.
Summary: Key Stages—Acting for a Lender
- Ensure the mortgage deed is validly executed and registered.
- Advise the lender on priority of security (especially if other charges/mortgages exist).
- Monitor for borrower default; advise on rights and remedies (possession, sale, debt).
- Prior to possession/sale, check compliance with all relevant statutory and contractual duties.
- After sale, confirm correct distribution of sale proceeds and discharge of the mortgage.
Key Point Checklist
This article has covered the following key knowledge points:
- The legal and practical requirements to create a valid mortgage over freehold property
- The distinction between legal and equitable mortgages and their enforceability
- The main powers and remedies available to lenders (including right to possession and power of sale)
- The core duties required of a lender, especially when selling repossessed property
- The statutory and equitable protections available to borrowers, including relief mechanisms and regulation against unfair or improper mortgage terms
- How to advise both lender and borrower about rights and risks at each stage of a financed freehold real estate transaction
Key Terms and Concepts
- legal mortgage
- equitable mortgage
- power of sale
- equity of redemption
- undue influence
- unconscionable term