Ideally, a mortgage is defined as any interest for a loan that has been borrowed and secured by a real property. It is instructive to note that a mortgage is not a debt in the strict legal sense, but is a lender’s security for a loan or debt that is advanced to another individual. Conversely, it may also be regarded as a transfer of an interest in land from the legal ownership of the owner of the land to the person that is lending the money on the condition that the interest on the land will be transferred back to the owner once the loan has been repayed. This essay seeks to discuss two types of mortgages namely; legal and equitable mortgages. It will reveal the methods through which legal and equitable mortgages are created.
Creation of Equitable Mortgage
An equitable mortgage may be created through the following ways;
- Equitable Mortgage by Deposit of title deeds
- Informal Mortgage by Deposit of deed
- Contract to create equitable mortgage
- Private Mortgage
Equitable Mortgage by Deposit of Title Deeds
Traditionally, an equitable mortgage exists or is created where the lender of the money secures a loan if the borrower transfers all documents of title of his the property to the lender. By dint of section 53 (1) (c) of the Land Property Act 1925, the process of transfer of the documents must be expressed in writing if the interest is equitable. In addition section 52(1) provides that if the equitable mortgage is of a land that is not registered it is made by deed. In this sense it is imperative to note that the mortgage is created once the lender takes official possession of the title documents of the property and the mortgagee signs the Memorandum of Deposit of Title Deed. The Memorandum of Deposit of Title Deed is a document embodying an affirmation from the borrower that he has voluntarily deposited the title documents of the property to the borrower so as to secure a loan.
Informal Mortgage by Deposit of deed
In practice the substance common law and the jurisdictions applying it did not recognize the operation of equitable mortgages. In fact common law regarded deposit of tittle deeds as an imperfect mortgage. However, the chancery courts were willing to protect transactions where an estate owner manifested an intention to charge his property so to secure a loan. It can therefore be argued that equitable mortgages may be created through informal agreements between a lender and a borrower but the borrower used his property to secure the loan. The concept of creation of equitable mortgage by deposit of title deeds was brought to force by Lord Thurlow in Russel v Russel where an owner of a property undertook to deposit his land certificate and title deed with a lender so that the lender could advance a loan to him. It was held that the land certificate and title deed deposited by the borrower acted as security of the property. The court took to the view that when such documents of title are deposited to a lender and loan is advanced to the borrower there is a presumption that the title documents represent a security for the loan hence an equitable mortgage is created.
Notably, equitable mortgages are created through a more flexible and informal approach than the rigid common law approach. Apart from the presumption in Russel the flexibility of creating equitable mortgage is evidenced by section 40(2) of the Land Property Act 1925 which provides that, mere deposit of the title documents to the borrower amounts to a contract to create an equitable mortgage and part performance of each parties contractual obligation. Once the borrower received the deeds from the borrower and the loan is advanced to the borrower, either the lender or the borrower can use the doctrine of equitable mortgage to enforce his rights under the agreement.
Contract to Create Equitable Mortgage
By applying the doctrine of equity, ‘Equity regards as done that which ought to be done,’ and section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 an equitable mortgage may also be created when a lender and a borrower enter to a contract to create a legal mortgage. The creation of an equitable mortgage through a contract to create a legal mortgage is conditional on the contract law rule brought to force by the court in Tebb v Hodge that the contract must be one which the courts can enforce by giving an order of specific of performance. It is worth noting that a defective legal mortgage may be enforced through the application of equitable doctrine if the courts can give an order of specific performance. Suffice to say, the court will grant an order of specific performance of the equitable mortgage if the money that is subject of the loan has actually been transfer to the borrower.
It bears noting that the law regulating the creation of equitable mortgage was changed by the Law of Property (Miscellaneous Provisions) Act 1989. Section 2 of the Act provides that an equitable mortgage will be enforceable only if there is evidence showing that there was an agreement made in writing.
An equitable mortgage may also be created through private mortgages which are different from the conventional standard form that is applied in commercial lending charges. More particularly, a private mortgage may be created in circumstances where the borrower and the lender have a social relationship. This is common in where the mortgagor and mortgagee are from the same family. However, this type of equitable mortgage is likely to give rise to issues such as misrepresentation and undue influence. It is worth noting that most of these issues are solved by the application of the law applied to equitable mortgages. It gives added relevance to note that private mortgages are also governed by the section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
Creation of a Legal Mortgage
A legal mortgage is type of mortgage where an individual transfers all or some of his legal interest i.e. title of a property to a lender or mortgagee to secure a loan. However, the mortgagor shall be able to redeem back the legal interest in the property if he repay, in full, the loan advanced by the mortgagor. A legal mortgage may be created through;
- Long term Lease/ Mortgage by Demise
- Mortgage by Legal Charge
A Long Term Lease/ Mortgage by Demise
A legal mortgage may be created through a long term lease that is granted to the lender. Pursuant to section 85 of the Land Property Act 1925 an individual (the mortgagor) is allowed to grant another individual (the mortgagee) a long lease of a real property subject to a loan being advanced to the mortgagor. The mortgage contract must contain a provisions embodies the terms of termination of the lease. The Further, section 85 provides that the long term lease will be deemed to be terminated once the loan has been repayed. Typically, the duration of a mortgagee’s lease is usually a period of 3000 years but the most parties in practice agree on an earlier date. During the entire period of the mortgage the mortgagee retains an absolute estate in the land. Suffice to say, this type of mortgage does not transfer the estate in the land to he mortgagee. The mortgagee is only granted and enjoys propriety interest in the land. This implies that the mortgagor has a right of possession of land or property. However, in many cases the mortgagor remains in occupation of the property.
A legal mortgage created through a long term lease does not bar the mortgagor from creating other legal mortgages. The mortgagor has the freewill to create another legal mortgage with the same property so as to raise more funds. As a matter of law, section 87 of the Land Registration Act provides that the creation of a sub-lease gives rise to a legal mortgage. In the same breadth, the mortgagor can grant another long term leases to other mortgages on the same property for duration longer than the first lease. The difference in the duration creates an impression that the legal interest in the property in the first lease is distinct from the legal interest in the second lease. It should be borne in mind that creation legal mortgage through a long term lease or mortgage by demise is no longer applicable to interests in land that are registered. This shift in legal approach is reflected in section 23 of the Land Registration Act 2002. However, a mortgage by demise still applicable to interests in land that are unregistered.
Mortgage by Legal Charge
According to section 85 of the Land Property Act 1925 a legal mortgage maybe created through a mortgage by legal charge. This is a charge by legal deed that has to be in the form legal mortgage. Pursuant to section 87 the mortgage in this case is created once the mortgagor has executed a charge by deed which his an affirmation that there is charge over the land in question created by way of legal mortgage and is conditional on the repayment of the money advanced with interest. It is instructive to note that in a mortgage by legal charge the mortgagor will still be the legal owner of the property through out the mortgage period unless he defaults in repaying the loan or breaches any other mortgage term. On the other hand, the mortgagee under this type of charge has certain rights over the mortgaged property or security. These rights include the right to take possession of the security and the right to the power of sale. However, these rights may only be exercised after the mortgagor defaults in repaying the loan.
Purpose of Reforms
The Land Property Act 1925 clearly brought to force some notable changes in how legal mortgages may be created. The primary purpose of the 1925 reforms was to ensure that the owner of the property/ mortgagor retained a significant part and control of the interest of the property even though the property is a subject of a mortgage. In addition, the reforms were also brought about the need to give a mortgagee suitable and sufficient remedies in the event the mortgagor default in repaying the loan.
The provisions of section 53 (1) (c) and 52 (1) of the Land Property Act 1925 were echoed by the Court of Appeal in United Bank of Kuwait plc v Sahib which noted that the rationale behind the sections is to prevent the creation of equitable mortgages only by using the deposit of deeds without any evidence of agreement in writing. It can therefore be argued that the reforms in the operation of the doctrine of equitable mortgages were necessary to strengthen the rights of the mortgager and mortgagee. Incase of a dispute such as default in repayment of the loan, undue influence, misrepresentation or where the mortgagee want to exercise the right of power of sale under section 10(1) of the Land Property Act 1925, the contract or any express agreement in writing as may be used a evidence to establish the intention of the parties and their real obligations.
The reforms in the legal position of legal and equitable doctrines in the United Kingdom were also been sparked by the need to bring certainty to the financial and economic aspect of mortgages.
It can be conceded that the most common type mortgage that is used by financial institution across the United Kingdom is the mortgage by legal charge which is one of the methods of creating a legal mortgage. On the flip side, the market for legal mortgages in the United Kingdom has increased in the past decades due to the reforms in the law. Lending institutions seem to be satisfied with some of the remedies that have been granted by law. This stems from the fact that there is a guarantee that if the mortgagee defaults in repaying the loan the lender can recover the amount advanced by exercising his rights over the security. However, many lending institutions such as banks when creating a mortgage by legal charge have undertaken to conduct searches of the title surrendered by the borrowers to investigate if there is any existing mortgage over the popery.
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Land Registration Act 1925
Land Registration Act 2002
Law of Property (Miscellaneous Provisions) Act 1989
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Russel v Russel (1783) 1 Bro CC 269
Santley v Wilde  2 CH 474
Tebb v Hodge(1869) LR 5 CP 73
United Bank of Kuwait plc v Sahib  Ch 107