In the current global financial meltdown many people have lost their properties to banks and other lending institutions under their contracts of mortgage. In any given mortgage transaction, both parties- the mortgagee and the mortgagor- have rights and obligations under the mortgage transaction. The mortgagor is entitled to his equity of redemption and his equitable right to. The two rights sound alike and seem similar to each other but they are quite different to each other. The mortgagee is entitled to a number of rights and remedies but the two most common rights available to him as a mortgagee are his statutory right of sale and his right of foreclosure and his right to possession of the mortgaged property. Again, both rights of sale and foreclosure are quite different from each other. This article examines the rights available to the parties and argues strongly that despite all said and done that the mortgagor is seemingly not in helpless situation where and if he chooses to exhaust all his rights and remedies. The law being an instrument of social engineering actually affords protection to the mortgagor but the mortgagor must canvass his rights and remedies with full force before the court to save his property at the hands of heartless creditors.
From time immemorial, society and organised religion have sought to protect citizens against usurious and avaricious creditors who may wish to take advantage of the necessitous and impecunious conditions of the borrower and use their superior bargaining power to coerce him to agree to any onerous condition. Islamic religion and Judeo-Christian faiths prohibit onerous form of borrowing known as riba fadh or usury respectively and provided that no man might lawfully charge loan for money. See Exodus 22; 25 and Luke 6; 35. With the progress and development of human society, statute and equity have stepped in to ameliorate the harshness and rigour of modern mortgages in an attempt to protect the mortgagor considering the inherent inequality of the bargaining power of the mortgagor and the mortgagee.
Before proceeding, a working definition of mortgage is necessary to enhance our understanding of this important aspect of our present day commercial life. In its simplest form, a mortgage is a transaction under which property is used as a security for a loan. Mortgages are extremely common in the everyday purchase of a family house or a commercial property since few people have enough money to be able to afford to purchase a house outright. The traditional essence of a mortgage lies in the transfer of a property interest to the mortgagee [the lender]. Before the Law of Property Act 1925, this would normally be the legal fee simple. The mortgagor [borrower] would retain the equity of redemption which is the right to recover the property on repayment of the loan. Under the old law prior to the LPA 1925, the fee simple is transferred to the mortgagee and then re-transferred or re-conveyed to the mortgagor on repayment of the loan.
But note that after 1925 the borrower’s legal estate [fee simple] is not transferred to the lender or mortgagee. Instead, the lender should be given a long lease by virtue of section 85 of the Law of Property Act 1925. Alternatively, the property can be mortgaged by a charge by deed expressed to be by way of a legal mortgage pursuant to section 87 of the Law of Property Act 1925. This can be used for both freeholds and leaseholds, and gives the mortgagee the same protection, right and remedies as if the mortgage had been made lease or sub-lease. In reality the charge by way of legal mortgage is the usual way of mortgaging property today.
With registered land the mortgage must be registered on the charges register of the title affected if the mortgagee is to enjoy its full powers. With unregistered land, the mortgage should [ but not must] be recorded at the deeds register at the appropriate records office [eg at the Registrar General Dept in the Bahamas] if the mortgagee is to enjoy priority protection of his interest as a mortgagee. The operation of 1925 is critical to all modern mortgages section 85 and section 86 of the Law of Property Act because it fundamentally underscores the fact that the mortgage transaction was/is intended to operate as security for a loan. This view is fortified by the ancient law, which had always been, that the Chancery or the Court of Equity would treat as a mortgage that which was intended to be a conveyance by way of security between A and B. Thus, the maxim, once a mortgage, always a mortgage and nothing but a mortgage, is not only a rigid construct in real property law, but has been a principle for centuries. See Harman LJ in Grangeside Properties Ltd v Collingwoods Securities Ltd [1964] 1 WLR 139.
There are many rights, obligation and remedies of both parties under a contract of mortgage. The mortgagee’s rights include the following:
I. The right to possess the title deeds
II. The right to possess the land
III. The right to insure the mortgaged property against loss or damage [see section 101 Law of Property Act 1925]
IV. The right to lease the property
V. The right to tack further advances [section 94 LPA 1925] and
VI. The right to consolidate the mortgage where the same borrower has two or more mortgages from the same lender on separate properties etc.
Note however, that in practice a lender rarely bothers to lease the property as he will prefer to sell and a borrower’s right are always excluded [the last thing a lender wants is a sitting tenant on his hands if he wants to sell]. As for the mortgagor and as previously mentioned, he has two rights and they are:
The right to right to redeem the mortgage and this right to redeem is often expressed in two facets ie:
I. The equity of redemption which is the right to redeem the property on a date which the mortgage money is to be repaid. This is the legal date for redemption.
II. The second right of the mortgagor is his equitable right to redeem his property even after the legal date for redemption has passed.
It is the critical role that equity plays and supported by statute that affords the mortgagor or borrower the enhanced protection in a mortgage transaction in our modern times where credit crunch and financial meltdown may become a supervening circumstances capable of affecting the parties rights and remedies under the mortgage transaction. The mortgage instrument normally specifies a date on which the mortgage money is to be repaid and this is called the date for redemption. At common law this condition had to be strictly observed and if the money is repaid on the agreed date the lender becomes entitled to retain the property which the borrower had conveyed to him. Equity took a different view. In the eyes of equity a mortgage is essentially a loan of cash secured by a property transaction. It therefore allows a mortgagor to redeem his mortgage any time after the legal date for redemption.
Note further that the mortgagee has remedies to enforce his rights and protect his interest in the mortgage transaction. The mortgagee’s remedies include the right of sale- that is the right under section 101 LPA 1925 under which every legal mortgagee has a power of sale which arises when the mortgage money due is due - ie on the legal date for redemption.
Note further that the right under section 101 LPA 1925 is exercisable subject to section 103 LPA 1925. The other remedies available to a mortgagee are the remedies of foreclosure which allows the lender to take the property in satisfaction of the mortgage debt but this particular remedy is hardly exercised these days and the mortgagee also has the remedy of appointment of a receiver but only in exceptional circumstances will the mortgagee exercise this remedy today eg where a corporate body or business organisation is involved.
Thus as previously mentioned if the loan is not repaid in accordance with the contract of loan, the lender’s security may be realised through a forced sale of the land, the loan money being recouped from the proceeds. Hence, like so many phenomena of land law, the mortgage represents a conjunction of the contractual and proprietary. The mortgage arises from contract of loan and creates for the lender [or mortgagee] some form of proprietary entitlement in the land of the borrower [the mortgagor]. This proprietary entitlement in the land of the borrower for all practical purposes today is translated into money just as a English County Court judge tersely observe to the writer while the writer was before the learned country court judge in London trying to save a friend’s property from legal repossession [warrant of execution as it is called here] by a lending [mortgage] company to the effect that "it’s all about money"!
Having said this, the mortgagor’s right to redeem is not without legal protection. The equitable right to redeem is jealously guarded by Equity. Hence, the mortgagee will not be allowed to impose a "clog or fetter" on the Equity of redemption. This means that Equity will strike down a legal date for redemption which is so far in the future as to render the right to redeem illusory. In every case the object is to prevent the borrower from keeping the property for himself so long as the borrower may still be in a position to repay the amount secured. It follows therefore, that in substance Equity still regards the mortgagor as being the owner of the property and prevents the lender from obtaining more than the return of his capital plus interest plus costs. These rights are known as the "Equity of redemption".
In substance they boil down to the market value of the property less than the amount outstanding on the mortgage. In some instances- if the property has negative equity [ie where the mortgage debt exceeds the current market value] ,the mortgagee may choose to take possession and rent it out in the hope that property price will improve, and sell it at a later date.
Again, hardly will a mortgagee take this route especially in the context of conventional residential mortgage! The mortgage transaction and the liability which it generates can underpin almost every feature of the way in which we live our lives. The mortgage provides a method of instalment purchase of the homes of millions- thus combining the economic function of a tenancy with the ideological function of property.
Thus, apart from the possibility of the intervention of Equity in the transaction to save the mortgagor’s property, statute also plays a pivotal role in affording the mortgagor some degree of protection. Section 36 of the Administration of Justice Act 1970 which was amended by section 8 of the same Administration of Justice Act 1973 for instance, sufficiently lays down the criteria which, if, a mortgagor, is able to meet or satisfy may be able to retain his property against legal repossession or the execution of the warrant of possession on or over his property by the mortgagee/lender. The relevant criteria include;
Will the mortgagor be able to pay the arrears over a reasonable period of time?
And will the mortgagor be able to maintain the current monthly instalment during that time?
If the above questions can be answered in the affirmative and supported by evidence of income eg in the form of letter from the employer or/and evidence of other realistic and likely source of income which will justify the inference that the chances of redeeming the mortgage by the mortgagor are not nil or hopeless, a mortgagor in default should be able to stop the repossession of his property or the execution of a warrant of possession against his property by a mortgagee/creditor. Note that section 91 of the Law of Property Act 1925 gives the court discretion to order a sale on an application of anyone entitled to redeem the mortgage ie a party to whom the mortgagor may have assigned the mortgage.
The court will make the order if it is just and equitable, striking a balance between the parties. See for instance the case of Pulk v Mortgage Services Founding plc where the court ordered as sale as the likely rent was not enough to meet current interest, and there was no realistic prospect of house price recovering sufficiently to pay off ever increasing arrears. Note finally that even after the date of foreclosure- it is possible for the borrower to reopen it if he acts promptly and can now at long last repay the debt. It is in this regard that foreclosure can be re-opened and equity of redemption revived in four n conditions at least. It need not be said that in the case of residential property that mortgagee must make application to the court for an order allowing the mortgagee to exercise its right of possession. Moreover with a dwelling house, section 36 of the Administration of Justice Act 1970 as amended by section 8 of the AJA 1973 gives the mortgagor a degree of protection.
Clement Chigbo [Esq], LLB[Hons], LLM[Lond], L.E.C, B.L, MCIArb, is a practising solicitor and a lecturer in law in the UK. He also practises as a registered associate with the Law Firm C F Butler 7 Associates, Nassau, the Bahamas. Mr Chigbo is also currently a doctoral candidate at and a tutor in law at the University of Aberdeen in the UK. He may be contacted at lawscholar2006@yahoo.com, clemsweiss@hotmail.com
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