Freehold real estate law and practice - Finance and acting f...

Learning Outcomes

This article covers finance and acting for a lender in freehold real estate law and practice, including:

• How freehold property purchases are financed and structured through legal mortgages and charges, and the typical transaction flow
• The distinction between legal and equitable mortgages and the formalities for creation, perfection, registration, and company charge filing
• The lender’s powers and duties on default, covering possession, appointment of a receiver, and the power of sale with obligations to act in good faith and obtain true market value
• Protections available to borrowers, including equity of redemption, court relief against possession under the AJA 1970/1973, and statutory control of unfair terms
• Remedies for lenders and practical enforcement issues, with attention to pre-action protocol compliance, risk, and alternative resolutions
• Priority between competing charges, the impact of further advances, agreed notices, and how registration affects priority outcomes

SQE2 Syllabus

For SQE2, you are required to understand the finance considerations and lender's role in freehold real estate transactions, with a focus on the following syllabus points:

• The creation and effect of legal and equitable mortgages over freehold land, including registration requirements
• The main powers and duties of lenders, including the right to possession, appointment of a receiver, and the power of sale
• The legal protections available to borrowers (mortgagors)
• The remedies available for lenders if defaults arise, and applicable limitation periods
• Priority of charges, further advances, and how registration affects priority
• The UK Finance Mortgage Lenders’ Handbook, dual representation and certificates of title
• How to advise a client (borrower or lender) at each stage of a financed transaction, including pre-action protocol compliance

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 difference between a legal mortgage and an equitable mortgage in real estate law?
2. Name two situations in which a lender can exercise the power of sale.
3. What legal safeguards does a mortgagor have against immediate repossession by the lender?
4. 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. For registered land, a legal charge is a registrable disposition and must be completed by registration (Land Registration Act 2002 s 27(2)(f)) to take effect at law.

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. For unregistered land, a deposit of title deeds historically gave rise to an equitable mortgage; modern practice requires compliance with writing requirements (Law of Property (Miscellaneous Provisions) Act 1989 s 2).

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 registered land, it must be completed by registration (LRA 2002 s 27(2)(f)); until registration, it will take effect only as an equitable mortgage;
• If the borrower is a company, the charge must also be registered at Companies House within the statutory period (Companies Act 2006 s 859A ff; form MR01);
• For unregistered land, a first legal mortgage is evidenced by the lender holding the deeds; a second or subsequent legal mortgage (a puisne mortgage) must be protected by a Land Charges registration (Class C(i)) to bind a purchaser.

The deed usually takes the form of a lender’s standard legal charge incorporating terms, including interest, repayment, events of default, and enforcement mechanics. A deed signed but not properly witnessed will not be a valid deed; if there is a compliant written contract, an equitable mortgage may arise.

Priority of mortgages depends on first registration (for registered land) and on the order of creation/notice (for equitable mortgages and unregistered land). For registered charges, s 48 LRA 2002 confirms that priority is determined by the order of registration, subject to any agreed postponements or notices affecting further advances.

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). The lender should promptly seek registration; meanwhile, equitable enforcement (e.g., charging order, order for sale) may be available depending on the terms.

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. In practice, lenders must also comply with the relevant pre-action protocol, consider forbearance, and ensure decisions reflect regulatory obligations and consumer protections where applicable.

Acting for Lender and Borrower; the Certificate of Title

Many residential lenders authorise the buyer’s conveyancer to act for both lender and borrower. Dual representation is permissible where there is no conflict of interest, and the lender relies on a certificate of title.

Key Term: certificate of title (COT)
A formal report by the conveyancer to the lender confirming that the title is good and marketable, the mortgage will be registered (usually as a first legal charge), and that it is safe to lend. It triggers drawdown of funds. Standard forms exist (UK Finance Mortgage Lenders’ Handbook; City of London Law Society form for commercial lending).

The UK Finance Mortgage Lenders’ Handbook sets out core requirements: verifying title, searches, ensuring the lender is named as applicant in pre-completion searches, and alerting the lender to adverse matters (e.g., missing consents, unadopted roads creating risk, restrictive covenants affecting value or use). The COT must be qualified where disclosures are necessary; failing to disclose material matters may expose the conveyancer to liability.

Where acting for both parties, beware conflicts—e.g., borrower instructs you not to disclose a known planning breach or impending insolvency. If a material conflict arises, cease acting for both.

Other standard lender requirements include:

• Execution of occupier consent/waiver forms by adult occupants to prevent overriding interests obstructing sale;
• Evidence of buildings insurance, noting the lender’s interest;
• Satisfactory valuation;
• Pre-completion searches: OS1 priority search in the lender’s name (registered land) and K16 bankruptcy search against individual borrowers.

Right to Possession

A legal mortgagee has a right to possession which arises once the mortgage is executed, but in practice possession is sought following default, and most lenders proceed via a court order.

For residential property, courts can postpone possession if the borrower can realistically bring payments up to date within a reasonable time (Administration of Justice Act 1970 s 36, as read with AJA 1973 s 8). Courts consider the borrower’s overall financial plan and the remaining mortgage term (Cheltenham & Gloucester BS v Norgan), and may suspend orders on terms—for example, payment of instalments plus a sum toward arrears.

Self-help repossession (peaceable re-entry) is possible where no force is used and the property is vacant (Ropaigealach v Barclays Bank), but carries significant risk; unlawful use or threat of violence to secure entry is a criminal offence (Criminal Law Act 1977 s 6). The mortgage pre-action protocol encourages early engagement, consideration of alternatives, and proportionate action.

Whilst in possession, a mortgagee must account to the mortgagor for rental income that could reasonably be obtained (White v City of London Brewery), reinforcing that possession is not a licence to ignore the borrower’s economic interests.

Appointment of a Receiver

A lender may appoint a receiver (LPA 1925 s 109) once the statutory power has arisen and become exercisable (see Power of Sale below). Receivers are often used for income-producing property.

• Receivers are agents of the borrower (s 109(2)), reducing the lender’s liability exposure;
• Their core duties include acting in good faith and with reasonable competence, and (if selling under an express power) taking reasonable care to obtain the property’s true market value at the date of sale (consistent with mortgagee duties);
• Receivers are not obliged to improve the property’s value (e.g., by letting vacant parts or obtaining planning permission), and may sell “as is” if reasonable (Silven Properties v RBS).

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, which is often on execution for repayment mortgages), and
• become exercisable (generally, after some default—e.g., two months’ unpaid interest, or three months after a statutory demand for repayment is served—s 103 LPA 1925).

A sale can be conducted with or without prior possession. The lender must act in good faith and take reasonable care to obtain the true market value at the time of sale (Cuckmere Brick Co v Mutual Finance Ltd).

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:

1. Costs due to any prior mortgages (i.e., redeeming charges with priority),
2. Sale expenses,
3. Repayment of the lender’s own mortgage (including interest and costs),
4. Any remaining balance to the borrower or, where relevant, to subsequent mortgagees (s 105 LPA 1925).

The effect of sale is that the buyer takes free of the selling lender’s charge and any subsequent charges, but subject to interests which had priority over the selling lender’s mortgage (s 104 LPA 1925).

Lender Duties on Sale

Lenders must:

• Act in good faith (e.g., properly market the property, avoid conflicts of interest, and not sell to themselves or connected parties without rigorous safeguards—see Tse Kwong Lam v Wong Chit Sen);
• Take reasonable care to obtain the property’s true market value at sale; failures include not advertising material value points such as extant planning permissions (Cuckmere Brick), and selling off-market at an undervalue without competitive exposure (Bishop v Blake).

They are not required to wait for market improvement (Cuckmere), apply for planning permission, or incur costs to improve value unless reasonable in the circumstances.

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, and failure to do so may depress the price.

Further Remedies and Debt Actions

In addition to sale, lenders may:

• Bring a debt action for the unpaid loan amount; limitation periods are 12 years for capital and 6 years for interest (Limitation Act 1980);
• Seek foreclosure (rare and draconian), extinguishing the borrower’s equity of redemption and vesting the property in the lender. Courts retain discretion and may reopen foreclosure in exceptional cases, or order judicial sale (LPA 1925 s 91(2)) to preserve the equity of redemption.

Key Term: foreclosure
A rarely used remedy in which the court orders that the mortgaged property vests in the lender absolutely, extinguishing the borrower’s equity of redemption. Typically considered only where sale would be inappropriate and the debt is secured by a property worth at least the amount of the debt.

Worked Example 1.3

The borrower is in arrears. The lender considers taking possession without a court order as the property is currently vacant. What risks should the lender be advised about?

Answer:
Peaceable re-entry is lawful if no force is used and the property is genuinely vacant (Ropaigealach), but carries reputational and litigation risks (e.g., allegations of unlawful eviction or damage). It bypasses AJA 1970 s 36 protections, so courts scrutinise post-event conduct. Proceeding by court order is generally safer in residential cases.

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" (e.g., collateral advantages extending beyond redemption, or consolidation provisions used oppressively). The law limits consolidation unless expressly agreed (LPA 1925 s 93), and collateral advantages must be fair (Kreglinger v New Patagonia Meat Co).

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 (AJA 1970 s 36; AJA 1973 s 8). Courts assess affordability and plans case-by-case, applying Norgan to set reasonable periods.

Pre-action protocol requirements encourage early contact, consideration of alternatives, and transparency. Non-compliance may affect costs or adjournments.

Interest Rates and Unfair Terms

Courts scrutinise penal interest rates and unfair contract terms. Consumer protection frameworks (Consumer Credit Act 2006 “unfair relationship” test; Consumer Rights Act 2015 unfair terms) can moderate or strike down terms.

Case law illustrates the approach:

• Cityland & Property Holdings v Dabrah: excessive interest reduced;
• Falco Finance v Gough: dual interest rates post-default held unfair;
• Multiservice Bookbinding v Marden; Paragon Finance v Nash: commercial bargains and discretion within reasonable bounds may be upheld;
• Davies v Directloans: higher rates may be justified for higher risk.

Undue Influence & Independent Advice

If there is evidence of undue influence by one party on another to enter into a mortgage or guarantee, or where a term is unconscionable, the court may set aside the mortgage or strike down the offending provision. Lenders are “put on enquiry” where a non-commercial relationship guarantees debts or the transaction is not to the guarantor’s benefit (e.g., a spouse guaranteeing a business loan). The Etridge guidelines require lenders to ensure the guarantor receives independent legal advice, with direct communication between lender and advising solicitor confirming core information; failure may render the security unenforceable as against the guarantor.

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 a relationship of trust exercising influence.

Key Term: unconscionable term
A contractual provision so one-sided or unjust that equity will intervene to prevent its enforcement.

Worked Example 1.4

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 independent advice) if there is a risk of undue influence. Failure to do so can render the mortgage unenforceable against the wife. If Etridge procedures were not followed and the transaction is not to her benefit, the court may set it aside.

Priority, Further Advances, and Practical Points

Mortgages rank by priority, which determines the order of repayment from sale proceeds.

• Registered land: priority among legal charges is governed by the order of registration (LRA 2002 s 48);
• Equitable charges: priority generally follows the order of creation; notice and postponement agreements can alter priority;
• Further advances: a first lender’s priority for further advances may depend on whether they had notice of subsequent charges. For registered land, agreed notices and the register entries can affect whether a lender enjoys priority for further advances; in practice, lenders often restrict further advances or register appropriate notices to protect priority.

Second and subsequent charges (including puisne mortgages over unregistered land) must be properly protected (Land Charges Act 1972 Class C(i) for unregistered land) to bind purchasers. Failure to register will render the charge void against a purchaser for value of a legal estate.

Worked Example 1.5

A first legal charge is registered. Later, the borrower grants a second legal charge. The first lender makes a further advance after receiving notice of the second charge. What is the likely priority outcome?

Answer:
The first lender’s original advance retains first priority. The further advance may rank behind the second charge if made with notice and without protective arrangements (e.g., agreed priority or appropriate register entries). Lenders typically manage this by restricting further advances or securing priority by agreement/notice.

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.

Lenders must also consider reputational and regulatory impacts. Failure to comply with conduct requirements (e.g., pre-action protocol, fair treatment of customers) may result in judicial censure or costs sanctions.

Worked Example 1.6

A borrower in arrears presents a credible budget showing they can clear arrears over the remaining term if payments are reprofiled. How should the court approach the lender’s possession claim?

Answer:
Applying AJA 1970 s 36 and Norgan, the court is likely to adjourn or suspend possession if the plan is realistic and does not prejudice the lender unduly. Terms may include paying the ongoing instalment plus a sum towards arrears. If market conditions or property value trends risk prejudice to the lender (e.g., rapidly falling prices), courts weigh that against the borrower’s plan (see Bristol & West BS v Ellis; National & Provincial v Lloyd).

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. Ensure compliance with the mortgage pre-action protocol and consider the borrower’s specific circumstances before issuing proceedings.

Summary: Key Stages—Acting for a Lender

1. Ensure the mortgage deed is validly executed and registered.
2. Advise the lender on priority of security (especially if other charges/mortgages exist) and protection of further advances.
3. Confirm compliance with the UK Finance Mortgage Lenders’ Handbook; issue a qualified certificate of title where appropriate.
4. Carry out pre-completion searches (OS1 in lender’s name; K16 bankruptcy; company searches for corporate borrowers) and obtain occupier consents/waivers.
5. Monitor for borrower default; advise on rights and remedies (possession, receiver, sale, debt).
6. Prior to possession/sale, check compliance with all relevant statutory, regulatory, and contractual duties (including pre-action protocol).
7. 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, appointment of a receiver, and power of sale)
• The core duties required of a lender, especially when selling repossessed property, and while in possession
• The statutory and equitable protections available to borrowers, including relief mechanisms and regulation against unfair or improper mortgage terms
• Priority of charges, impact of further advances, and registration requirements to protect priority
• The UK Finance Handbook and certificate of title: how lenders rely on them and how conveyancers should qualify them
• 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
• certificate of title (COT)
• foreclosure