REAL PROPERTY II

WORKSHEET III
Mortgages

Objectives
At the end of this topic you should be able to:
(1) Identify the features of mortgages
(2) Distinguish between different rights and obligations of
mortgagors and mortgagees.

__________________________________________________________________
Kodilinye, CCPL, chp.11

Security

Security is created where a person (the creditor) to whom an obligation is owed by

another (the debtor) by statute or contract, in addition to the personal promise of
the debtor to discharge the debt, obtains rights exercisable against some property in
which the debtor has an interest in order to enforce the discharge of the debtor’s
obligations to the creditor: Bristol Airport plc v Powdrill [1990]Ch 744 at 760.

Real security affords a creditor rights over real or personal property to discharge
the debt.

There are three main forms of real security created by contract

1. Mortgage: a mortgage is a form of security created by contract whereby an
interest in the property is transferred to the creditor and the interest is re-
conveyed to the debtor upon satisfaction of the debt. A mortgage may be
legal or equitable.
2. Pledge: this is a form of security created by contract and carried into effect
by a bailment of a chattel to the lender to be kept by the creditor until the
debt is satisfied. The ownership of the chattel remains in the debtor. The
pledge is incomplete without actual delivery of the goods to the creditor. A
mortgage may be preferred by the borrower as opposed to a pledge, as with a
mortgage the borrower can keep possession of the property.
3. Charge: this has been defined as the appropriation of real or personal
property for the discharge of a debt without giving possession.
A lien is a form of real security that is obtained by operation of law. A right is
granted to maintain possession or a charge on the real or personal property of
another person until the debt is satisfied.

MORTGAGE
A mortgage is a conveyance or disposition of an interest in property to secure the
payment of money or the discharge of some other debt. The party who conveys
the property is known as the mortgagor and the lender who obtains the interest is
known as the mortgagee. The mortgagee obtains a real security that prevails
against the general body of creditors.

➢ Royal Bank of Scotland plc v Etridge (No. 2) 2 AC 773 at [34] per Lord
Nicholls of Birkenhead.
➢ Pettitt v Pettitt [1970] AC 777 at 824.
➢ National Provincial Bank Ltd. v Ainsworth [1965] AC 1175.

FORM

Barbados
A mortgage of a legal estate can be effected at law only by a charge by deed: s.96
of Property Act, 1979-11.
(1) A mortgage of a legal estate in land can be effected at law only by a charge by
deed.
(2) A first mortgagee has the same right to the possession of documents as if his
security had been effected by conveyance or assignment to him of the legal estate
of the mortgagor.
(3) A purported conveyance, assignment or demise of a legal estate in land by way
of mortgage, any other purported legal mortgage by deed, and any other
transaction by an instrument which is declared by statute to operate as a mortgage,
made after 1st January 1980 operates as if it were a charge by deed.

Jamaica
A mortgage may be effected by way of statutory mortgage by adopting the form
provided by First Schedule to the Act:
Conveyancing Act, 1973, Cap 73 (Jamaica), s.29
(1) A mortgage of freehold or leasehold land may be made by a deed expressed to
be made by way of statutory mortgage, being in the form given in Part 1 of the
First Schedule, with such variations and additions, if any, as circumstances may
require, and the provisions of this section shall apply thereto.

Statutory Mortgage
PART 1
Deed of Statutory Mortgage
THIS INDENTURE made by way of statutory mortgage the
..................... day of .................... 19...... between A. of
[etc.] of the one part and M. of [etc.] of the other part.
WITNESSETH in consideration of the sum of $
................... . now paid to A. by M. of which sum A. hereby
acknowledges the receipt A. as mortgagor and as beneficial
owner hereby conveys to M. All that [etc.]
To hold to and to the use of M. in fee simple for
securing payment on the ...................... day of ......................
19...... of the principal sum of $ ................ as the mortgage
money with interest thereon at the rate of [four] per centum
per annum.
In witness, etc

General Form
1. A legal mortgage of unregistered land may be created by conveyance of the
mortgagor’s fee simple estate to the mortgagee subject to a proviso that, upon
redemption (repayment of the debt), the property should be re-conveyed to the
mortgagor.
2. Where the mortgagor has only a leasehold estate, a mortgage is created by sub-
demise, subject to a proviso for cesser on redemption. This method of creating
mortgages applies in most Commonwealth Caribbean jurisdictions: ss 27, 32-35,
48 of the Conveyancing and Law of Property Act Ch 56:01 (Trinidad and Tobago).
3. A mortgage of registered land is created by execution of a Memorandum of
Mortgage or Charge in the prescribed form, which must be lodged for registration
in the Land Registry: Real Property Act Ch 56:02 (Trinidad and Tobago)

Equitable mortgages are created:

(a) By deposit of title deeds (or duplicate certificate of title to registered land)
usually with bank to secure an overdraft or loan:

➢ Mapp v Barclays Bank International Ltd (1992) 43 WIR 30, Barbados.

(b) Under the Walsh v Lonsdale principle, where there is an agreement to grant a
legal mortgage; or

(c) Where the mortgagor has only an equitable interest in property, by assignment
of the interest in the mortgagee.

RIGHTS OF THE MORTGAGOR/BORROWER/DEBTOR

1. Legal right to redeem
At common law the land is conveyed to the mortgagee on condition that if the
loan was repaid on the date stipulated in the agreement, the conveyance would
be defeated and the mortgagor would be free to re-enter this land. This date is
the legal/ contractual date of redemption. If repayment was not made on the
date fixed for repayment, the estate of the mortgagee would become absolute
and the mortgagor’s interest in the land would be extinguished. In essence,
non-payment at the appointed time rendered the mortgage irredeemable.

2. Equitable right to redeem

The Court of equity intervened on the principle that the strict compliance with
contract was found to be harsh, as the essential object of a mortgage is to grant
security and as long as the security remains intact there is no justification for
taking the property of the mortgagor because of his failure to make a prompt
payment on the contractual date. As such time was not regarded to be of the
essence and the mortgagor acquires the equitable right to redeem after the
contractual redemption date has passed.
 ➢ Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013]
UKPC 20, para 72.
3. The equity of redemption
The equity of redemption is the sum of the mortgagor’s interests in the mortgaged
property after the mortgage has been created. This arises from his right to redeem
and, in fact, the concept of equity of redemption is often used interchangeably with
the right to redeem, but technically they differ in meaning. The equitable right to
redeem arises after the contractual redemption date has passed whereas the equity
of redemption comes into existence as soon as the mortgage is created. The
equitable right to redeem is a specific right, while the equity of redemption
represents the aggregate of the mortgagor’s rights. It is an equitable interest that
represents the value of the mortgagor’s interest in the property after it has been
conveyed to the mortgagee as a security and is freely transferable.

Clogging the Equity of Redemption

The right to redeem is inviolable. It is noteworthy that any provision which
directly or indirectly prevents the recovery of the property by the mortgagor upon
performance of the obligation is repugnant to the very nature of the transaction and
therefore void, for when performance is completed there is no longer any need or
justification for the retention of the security.

“Once a mortgage always a mortgage”

➢ Biggs v Hoddinott [1898] 2 Ch 307.

➢ Thornborough v Baker (1675) 36 ER 1000

Excluding the right to redeem:

The right to redeem must not be excluded from the mortgage agreement.
➢ Davis v Symons [1934] Ch 442.
➢ Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904] AC 323
➢ Reeve v Lisle [1902] AC 461

Postponement of right to redeem

It should be considered whether the postponement of the contractual right to
redeem is objectionable on the ground of unreasonable interference with the rights
of the mortgagor. It has been held that a clause which prolongs the security after
the mortgagor is willing and able to pay is one that should be held void.
 ➢ Knightsbridge Estates Trust Ltd. v Byrne [1939] Ch 441, 457
➢ Fairclough v Swan Brewery Co Ltd [1912] AC 565:a provision which leaves the
mortgagor with an illusory right to redeem is void.

Collateral advantages

A collateral advantage in the mortgagee’s favour denotes some benefit conferred

on him by the mortgagor in addition to repayment of the loan plus interest: for
instance, where the mortgagor of a public house agrees to sell on the premises only
beer brewed by the mortgagee.
A contract shall not be used as an engine of oppression. The Courts will set aside
“any oppressive bargain, or any advantage exacted from a man under grievous
necessity and want of money”. If the mortgagee stands in a fiduciary relationship
to the mortgagor, the burden is on him to prove the fairness of the transaction.
Two general rules apply:

(1) The collateral advantage must not be unfair or unconscionable:

➢ Cityland and Property (Holdings) v Dabrah [1967] 2 All ER 639

➢ Multiservice Bookbinding Ltd. v Marden [1978] 2 All ER 489
➢ Perot v First Citizen’s Bank Ltd. 2004 High Court, Trinidad and Tobago
No. 5071 of 1996 (unreported) Carilaw TT 2004 HC 33.

(2) The collateral advantage must not unfairly restrict redemption:

➢ Bradley v Carritt [1903] AC 253 at 277

➢ Biggs v Hoddinott [1989] 2 Ch 307
➢ Noakes v Rice [1902] AC 24
➢ Krelinger v New Patagonia Meat and Cold Storage Co Ltd. [1914] AC 25

Note: that the Courts have been moving from a rigid to a more flexible attitude
towards the relationship between the mortgagor and mortgagee. The Courts
attempt to strike a balance, as unless there is evidence of harsh and oppressive
dealings, a bargain freely entered into between the parties should be upheld.

Restraint of trade
A mortgage is subject to the common law doctrine that invalidates a contract which
operates in restraint of trade and places an unreasonable restriction upon the
freedom of a man to pursue his trade or profession. The test is unreasonableness
and not unconscionability.

➢ Esso Petroleum Co Ltd. v Harper’s Garage Ltd [1967] 1 All ER 699

➢ Royal Bank of Scotland v Etridge (No 2) [1981] 4 All ER 705

Undue Influence
A mortgage may be set aside for undue influence on the part of the mortgagee or of
a third party who acts as agent of the mortgagee in exerting influence on the
mortgagor.

An example of vicarious undue influence is where a member of the mortgagor’s

family acts as the agent of the mortgagee.

➢ Barclay’s Bank plc v O’Brien [1993] 3 WLR 786: the Bank is put on notice where (i)
the transaction is on its face not to the financial advantage of the wife; and there is a substantial risk that in
procuring the wife to act as surety, the husband commits a legal or equitable wrong that entitles the wife to
set aside the transaction.
➢ CIBC Mortgages plc v Pitt [1993] 3 WLR 802

Rebutting the presumption of undue influence and independent legal advice

➢ Royal Bank of Scotland plc v Etridge (No 2) [1998] 4 All Er 705

Rights of the mortgagor in possession

1. Right to the rents and profits
2. A right to sue for trespass or any wrong done to the land; and
3. A right to grant valid leases:

➢ Iron Trades Employers’ Insurance Association v Union Land and House

Investors ltd [1937] 1 All ER 481;
➢ Quennell v Maltby [1979] 1 All ER 568.

Note: where the mortgagor grants a lease without the mortgagee’s consent (where
such consent is required), the mortgagee may opt to treat the lessee as a trespasser
or accept him as his own tenant: Stroud Building Society v Delamont [1960] 1
WLR 431 at 434.
Rights of the Mortgagee
The remedies of the mortgagee may be pursued concurrently when the mortgagor
is in default. As such, the mortgagee may sue on the personal covenant to pay and
commence foreclosure proceedings. The rights are also cumulative, this is so as
the mortgagee may exercise the power of sale and sue on the personal covenant to
pay where the proceeds of sale are insufficient to satisfy the outstanding debt.

Note that foreclosure puts an end to the other remedies.

1. Right to sue on the personal covenant

A mortgage deed contains an express covenant where the mortgagor
covenants to repay the principal sum on a specified date. The moment the
date passes, the mortgagee may sue on the personal covenant for recovery o
the principal sum and interest in arrears.
2. Right to enter into possession of the mortgaged property:

➢ Four Maids LTd. v Dudley Marshal (Properties) Ltd. [1957] 2 All ER 35, 36
➢ Quennell v Maltby [1979] 1 All ER 568
➢ Baksh General Wholesalers Ltd v Republic Bank Ltd (1999) High Court
Trinidad and Tobago No. 1555 of 1998 (unreported) [ Carilaw TT 1999 HC
91]
➢ White v City of London Brewery Co (1889) 42 Ch D 237
➢ Osadebay J in Davis v Finco Corp (Bahamas) Ltd (1998) Supreme Court
Bahamas No. 1160 of 1995 (unreported).
“The mortgagee may go into possession before the ink is dry on the
mortgage...unless...he has contracted himself out of that right”. However, it is not
usual for a mortgagee to enter into possession and he does so in an effort to
exercise his right to sell where there is a need to evict the mortgagor before
completion of the sale. Note the obligation of the mortgagee to account for any
waste and rent during his occupation.

3. Right to appoint a receiver:

Sections 39-45 of Ch 56:01

4. Right to sell the mortgaged property:

sections 39-45 of Ch 56:01 Trinidad and Tobago

a. Note when the power of sale arises: as soon as the mortgage money has
become due. This may be varied by the provisions of the mortgage deed
where the power may be extended or excluded.

b. Note when the power of sale is exercisable: 1. the requisite statutory notice
must be served on the mortgagor after default, the right becomes exercisable
three months of the service of such notice; 2. interest must be in arrears for
two months; and 3. there has been some other breach of the mortgage
provisions.
➢ Derrick v Trinidad Asphalt Holdings Ltd (1979) 33 WIR 273
➢ Jobson v Capital and Credit Merchant Bank (2005) COA Jamaica, Civ App
No. 113 of 2002 (unreported) [Carilaw JM 2005 CA 40] s 42 of Ch. 56:01.
➢ Lord Waring v London and Manchester Assurance Co Ltd [1935] Ch 310,
318 per Crossman J.

c. Note effect of sale: this extinguishes the mortgagor’s equity of redemption.

d. Application of proceeds of sale: the money received by the mortgagee after

any prior mortgages have been paid off is held in trust:

(i) To pay all expenses incidental to the sale;

(ii) To pay himself the principal and interest and costs under the mortgage;
(iii) To pay the surplus to any person entitled to the mortgaged property. This
includes subsequent mortgagees.

Restraining exercise of the power of sale

➢ American British Canadian Motors Ltd. v Imperial Life Assurance Co of
Canada (1990-91) 4 Carib Comm LR 258, 261.

5. Right to foreclose the mortgage

s.49 Ch. 56:01

➢ Kidderminster Mutual Benefit Building Society v Haddock [1936] WN 158.

➢ Perry v Barker (1806) 33 ER 269
➢ Barclay’s Bank plc v O’Brien [1993] 3 WLR 786
 ➢ CIBC Mortgages plc v Pitt [1993] 3 WLR 802

Foreclosure is procedure by which the mortgagee acquires the property free from
the equity of redemption. The Court may order a sale in lieu of foreclosure.

Foreclosure may be re-opened and the equity of redemption revived in

circumstances where the mortgagee sues on the personal covenant to pay after an
order absolute has been obtained.

Additionally, the Court has the option to re-open a foreclosure if relief appears in
the circumstances of the case to be due to the mortgagor.

Duty of mortgagee exercising power of sale

Mortgagee’s duty of care

A mortgagee who exercises his power of sale is not in other respects a trustee for
the mortgagor. However, he must take reasonable steps to obtain the true market
value of the mortgaged property at the date on which he decides to sell it.
➢ Davey Durant (1857) 26 LJ Ch 830
➢ Waltham Forest London Borough v Webb (1974) 232 EG 461
➢ Cuckmere Brick Co Ltd. v Mutual Finance Ltd [1971] 2 All ER 633, 643
➢ Dreckett v Rapid Vulcanizing Co. Ltd. (1988) 25 JLR 130.

Duty to obtain best price reasonably obtainable

➢ Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54

Genuine sale
A mortgagee cannot sell to himself either alone or with others, nor to a trustee for
himself, nor to anyone employed by him to conduct the sale. Such a sale is not a
genuine sale.

➢ Williams v Wellingborough Council [1975] 1 WLR 1327

➢ Farrar v Farrars Ltd (1888) 40 Ch D 395 at 409

There is no clear rule that a mortgagee may not sell to a company in which he
owns shares, the onus lies on both the mortgagee and the company to show that the
sale was in good faith and that the mortgagee took reasonable precautions to obtain
the best price obtainable at the time:

➢ Tse Kwong Lam v Wong Chit Sen [1983]1 WLR 1349

Bad faith
➢ Lord Waring v London and Manchester Assurance Co Ltd [1935] Ch 310,
318
➢ Kennedy v De Trafford [1897] AC 180

Mode of Sale
➢ Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54
➢ Cuckmere Brick Co Ltd v Mutual Finance Ltd [1979] Ch 949
➢ Farrar v Farrars Ltd (1888) 40 Ch D 395
➢ Martinson v Clowes (1882) 21 Ch D 857
➢ Nutt v Easton [1899] 1 Ch 873

Rights of equitable mortgagees

Barclays Bank Ltd v Bird [1954] 1 All ER
Ocean Accident and Guarantee Corp Ltd. v Ilford Gas Co. [1905] 2 KB 493
Tutorial Questions
(1) Five years ago, Usher executed a mortgage in favour of BET Bank to secure a
loan of $2,000,000 for the purchase of a two-storey dwelling house in which Usher
currently lives. The loan is repayable by monthly instalments of $10,000 over a
period of 20 years, the whole capital sum being immediately repayable in the event
of a failure to pay any instalment within two weeks of its, becoming due. Last year,
contrary to a clause in the mortgage agreement whereby the "mortgagor shall not
grant leases of the property without the prior consent of the mortgagee", Usher
granted a 5-year lease of the ground floor area of the house to Beyonce. Usher is
now in arrears as to 2 months' instalments.

Advise BET Bank:

(a)whether and, if so, by what method, it may recover possession of the house;
(b)whether it is under a duty to seek a valuation of the property; and
(c)whether it may sell the house to Alicia, an accountant employed by the Bank,
without advertising it for sale to the general public.
(d)as to its legal obligations generally with respect to the exercise of any power of
sale it may have.

(2) A bargain freely entered into between a mortgagor and mortgagee should be
upheld.

Discuss.