A mortgage is a security interest in land given by a borrower (mortgagor) to a lender (mortgagee) to secure the repayment of a loan. The mortgagor retains ownership of the property but grants the mortgagee certain rights over it. If the mortgagor defaults on the loan repayments, the mortgagee can exercise remedies such as possession, sale, or appointment of a receiver to recover the debt. Mortgages are the most common form of secured lending in English law.
There are two main types of mortgage in English law: a legal mortgage (also called a mortgage by legal charge) and an equitable mortgage. The distinction is important because a legal mortgage creates a legal interest in the land, binding all parties regardless of notice, whereas an equitable mortgage creates only an equitable interest, which is vulnerable to a bona fide purchaser of a legal estate for value without notice.
Section 85 of the Law of Property Act 1925 provides that a legal mortgage of a legal estate in land can be created only by a charge by deed expressed to be by way of legal mortgage. This is the primary statutory method for creating a legal mortgage. The charge must be created by deed, and the instrument must expressly state that it is by way of legal mortgage.
To create a legal mortgage under s.85 LPA 1925, the following requirements must be satisfied: (1) the mortgagor must be the legal owner of the property, (2) the mortgage must be created by deed, (3) the deed must expressly state that it is a charge by way of legal mortgage, and (4) if the land is registered, the charge must be completed by registration to be a legal charge. If the land is unregistered, the deed alone is sufficient.
For registered land, a legal mortgage (legal charge) must be registered at the Land Registry to take effect as a legal interest. Until registration, it takes effect as an equitable interest only (LRA 2002 s.27). The registration protects the mortgagee's priority against later interests. Failure to register means the mortgagee loses priority and their charge may be void against a later registered charge or disposition.
For the SQE, remember: s.85 LPA 1925 = charge by deed expressed to be by way of legal mortgage. The key phrase is "expressed to be by way of legal mortgage" — if the deed does not contain these words, the charge may only be equitable. The deed requirement follows from LP(MP)A 1989 s.52, which requires all dispositions of an interest in land to be by deed.
An equitable mortgage arises where the formalities for a legal mortgage are not fully satisfied, but there is a clear intention to create a security interest in the land. Equitable mortgages are enforceable in equity but do not create a legal interest. They are binding on the mortgagor and anyone with notice, but not on a bona fide purchaser of a legal estate for value without notice.
The oldest method of creating an equitable mortgage is by deposit of title deeds. Where the owner of unregistered land deposits their title deeds with a lender as security for a loan, an equitable mortgage is created by implication of law. This is based on the principle that the deposit of deeds raises a presumption that they were deposited as security. The lender does not need to take any further steps — the deposit itself creates the equitable mortgage.
An equitable mortgage can also be created by a written agreement to grant a mortgage, even where the agreement is not by deed. The contract itself is specifically enforceable in equity, meaning the court can order the mortgagor to execute a deed creating the legal mortgage. Until the deed is executed, the mortgagee has an equitable interest under the agreement.
Other methods include: a written agreement to create a legal mortgage coupled with delivery of the title deeds, a promissory note secured on land, a charge back (where a purchaser agrees that the vendor can charge the property for unpaid purchase money), and situations where the parties intend to create a mortgage but the formalities are defective. In each case, equity looks to the intention of the parties and will enforce the security if the intention is clear.
Deposit of title deeds does not create an equitable mortgage for registered land because there are no title deeds to deposit. Since registered land is governed by the LRA 2002, the only way to create a legal charge is by registration. However, an equitable mortgage can still arise by agreement on registered land.
| Feature | Legal Mortgage | Equitable Mortgage |
|---|---|---|
| Creation method | Charge by deed expressed to be by way of legal mortgage (s.85 LPA 1925) | Deposit of title deeds, charge by agreement, or defective formalities |
| Formalities | Must be by deed; must be registered for registered land | No particular formality required beyond evidence of intention |
| Nature of interest | Legal interest in land | Equitable interest in land |
| Binding effect | Binds everyone, regardless of notice | Binds the mortgagor and those with notice |
| Priority | First to register (registered land) or first in time (unregistered) | Depends on notice and priority rules |
| Remedies | Full legal and equitable remedies | Equitable remedies only |
The equity of redemption is the mortgagor's right to redeem the property by repaying the loan (plus interest and costs) at any time before the mortgagee exercises their power of sale or the property is otherwise disposed of. It is a fundamental right in mortgage law and cannot be contracted out of. Any term in the mortgage that prevents or unduly restricts this right is void as a clog on the equity of redemption.
In Santley v Wilde, Lindley LJ stated the classic rule: "Once a mortgage, always a mortgage." The court will not permit a transaction which is in substance a mortgage to be turned into a different transaction so as to prevent the equity of redemption. Any provision that prevents the mortgagor from redeeming on repayment of the principal sum, interest, and costs is void, however it may be disguised. This principle remains good law today.
A clog or fetter is any term in the mortgage agreement that unduly restricts the mortgagor's right to redeem. Examples include: a clause preventing the mortgagor from redeeming for a fixed period, a clause requiring the mortgagor to sell the property to the mortgagee at an undervalue on redemption, a collateral advantage that is inconsistent with or repugnant to the right of redemption, and any term that effectively prevents redemption.
In Noakes & Co v Rice, the House of Lords held that a collateral contract that was not directly part of the mortgage but was closely connected to it could still be struck down as a clog. The borrower had agreed to buy all his sugar from the lender at fixed prices for a period of 21 years as part of the mortgage arrangement. The House of Lords held this was repugnant to the equity of redemption and void. The collateral advantage was seen as an unreasonable restraint on the right to redeem.
The modern courts take a more nuanced approach. Not every collateral advantage is a clog. The court will look at whether the collateral term is: (1) entered into at the same time as the mortgage, (2) unconscionable or unreasonable, and (3) inconsistent with the right of redemption. A reasonable commercial term that is separately negotiated and does not prevent redemption is likely to be upheld. The focus is on whether the term is an unreasonable interference with the right to redeem.
The clog and fetter rule is not absolute. It does not render every term that makes redemption more difficult void. For example, early repayment charges (where the lender charges a fee if the borrower repays early) are generally enforceable if they are a genuine pre-estimate of the lender's loss and are commercially reasonable. The rule targets terms that prevent or unduly interfere with redemption, not terms that simply impose a cost.
When analysing whether a term is a clog on the equity of redemption, ask: (1) Is it a mortgage transaction? (2) Does the term prevent or unreasonably restrict the right to redeem? (3) Is the term commercially justifiable? If the answer to (1) and (2) is yes, and the answer to (3) is no, the term is likely void. Remember Santley v Wilde: "Once a mortgage, always a mortgage."
Where a mortgage is a regulated consumer credit agreement (i.e., the borrower is an individual and the loan is under a certain threshold), the Consumer Credit Act 1974 applies. This provides significant protections for borrowers, including requirements for proper disclosure of terms, a right to withdraw from the agreement within 14 days, and restrictions on enforcement action without a court order.
Under these regulations (now largely replaced by the Consumer Rights Act 2015), terms in consumer mortgage contracts that are unfair are not binding on the consumer. A term is unfair if it creates a significant imbalance in the parties' rights and obligations to the detriment of the consumer. Examples include terms that allow the lender to vary the interest rate unilaterally without notice, or terms that impose disproportionate penalties for late payment.
The Financial Conduct Authority (FCA) regulates most residential mortgages through its Mortgage Conduct of Business (MCOB) rules. These rules require lenders to assess affordability before granting a mortgage, provide clear information about the terms, and treat borrowers fairly, particularly when they fall into arrears. The FCA rules provide practical protections that go beyond the general principles of equity.
The general rule is that priority is determined by the order in which the mortgages are created. The first mortgage created has priority over subsequent mortgages. This is known as the "first in time" rule. If the property is sold to satisfy the first mortgage and there is a shortfall, the second mortgagee can only recover from any remaining proceeds after the first mortgagee has been paid in full.
For registered land, priority is determined by the order of registration at the Land Registry. The first charge to be registered has priority over later charges (LRA 2002 s.29). This is subject to certain exceptions, such as interests that have overriding status or interests that are protected by a notice. A mortgagee who registers their charge first will generally have priority, regardless of when the charge was actually created.
For unregistered land, priority between legal mortgages is determined by the order of creation (first in time has priority). However, a subsequent legal mortgagee who registers their charge under the Land Charges Act 1972 (class C(i) for a legal charge) will have priority over an earlier unregistered equitable mortgage. A legal mortgagee who fails to register their charge may lose priority to a later bona fide purchaser for value without notice.
Overreaching can affect priority between mortgages. Where trustees sell land that is subject to a mortgage, and the proceeds of sale are paid to at least two trustees, any equitable interests (including equitable mortgages) in the land are overreached and transferred to the proceeds of sale. The purchaser takes the land free of the equitable mortgage, and the mortgagee's security attaches to the purchase money instead.
| Situation | Priority Rule |
|---|---|
| Two legal mortgages on registered land | First to register at Land Registry (LRA 2002 s.29) |
| Two legal mortgages on unregistered land | First in time (earliest creation date) |
| Legal mortgage vs equitable mortgage | Legal mortgage has priority (but see overreaching) |
| Two equitable mortgages | First in time; notice may affect priority |
| Unregistered interest vs registered charge | Registered charge has priority over unregistered interests (LRA 2002 s.29) |
| Overreaching applies | Equitable interest overreached; attaches to proceeds of sale |
When a mortgagor defaults on the mortgage repayments, the mortgagee has three main remedies: (1) the power of sale, (2) the power of possession, and (3) the power to appoint a receiver. Each power arises in different circumstances and carries different duties. These powers are statutory (LPA 1925 ss.101, 103, 109) but are subject to equitable principles that require the mortgagee to act fairly and in good faith.
| Power | Statutory Basis | When it Arises | Key Duty |
|---|---|---|---|
| Power of sale | LPA 1925 s.101 | When mortgage debt is due (after default on repayment terms) | Duty to obtain best price reasonably obtainable (Cuckmere Brick Co) |
| Power of possession | Common law + LPA 1925 s.101 | When mortgage debt becomes due | Duty to exercise reasonably; may require court order for residential (Administration of Justice Act 1970) |
| Power to appoint receiver | LPA 1925 s.109 | When mortgage debt is due | Receiver acts as agent of mortgagor; duty to act in good faith |
Section 101 of the Law of Property Act 1925 provides that the mortgagee has a power of sale when the mortgage debt has become due. The power is implied in every mortgage by way of legal charge unless expressly excluded. The mortgagee does not need a court order to exercise the power of sale, though they must comply with their duty to obtain the best price reasonably obtainable.
The power of sale arises when the mortgage debt becomes due. For a mortgage with repayment instalments, the debt is "due" when the mortgagor is in default on the repayment terms and the mortgagee has served formal notice requiring repayment. For a mortgage with a single repayment date, the power arises when that date passes without repayment. The mortgagee must also comply with any contractual conditions precedent to exercising the power.
Cuckmere Brick Co is the leading case on the mortgagee's duty when exercising the power of sale. The Court of Appeal held that the mortgagee owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable at the time of sale. In this case, the mortgagee had sold the property at an undervalue by accepting the first offer without properly marketing the property. The mortgagee was held liable to the mortgagor for the difference between the sale price and the true market value.
Following Cuckmere Brick Co, the mortgagee must take reasonable steps to obtain the best price reasonably obtainable at the time of sale. This does not mean the mortgagee must get the highest possible price. The duty is to act reasonably and in good faith. Steps that may be required include: obtaining proper valuations, marketing the property adequately, not selling too quickly, and not accepting an unreasonably low offer. However, the mortgagee is not required to wait indefinitely for a better offer.
This is a very important case for the SQE. The key principle is: the mortgagee owes a duty to the mortgagor to obtain the best price reasonably obtainable. If the mortgagee sells at an undervalue and has not taken reasonable steps to get a proper price, the mortgagor can claim damages for the difference. Remember: the duty is to act reasonably, not to achieve the maximum possible price.
Although the mortgagee owes a duty to obtain a proper price, the mortgagee is not a trustee of the power of sale for the mortgagor. This means the mortgagee can sell to a connected party (e.g., a company owned by the mortgagee) provided the price is reasonable. The mortgagee can also exercise the power of sale without a court order, and the sale is effective to transfer the legal title to the purchaser even if the mortgagee has breached their duty.
The mortgagee's power of possession arises when the mortgage debt becomes due. This is the same trigger as for the power of sale. Once the mortgagor is in default, the mortgagee is entitled to take possession of the property. Historically, this was an automatic right that could be exercised without court involvement, but statutory protections now significantly restrict this power for residential mortgages.
For residential mortgages, the Administration of Justice Act 1970 s.36 provides important protections. The court has a discretion to suspend or postpone the making of a possession order, or the execution of such an order, on such terms as the court thinks fit. The court must consider all the circumstances, including: the needs and resources of the mortgagor, whether the default is due to a temporary hardship, and the conduct of the mortgagor.
The court will typically refuse or suspend a possession order where: the mortgagor can demonstrate that they can clear the arrears over a reasonable period, the default was caused by a temporary change in circumstances (such as job loss or illness) that has now been resolved, the mortgagor has made genuine efforts to pay, or there are dependent children who would be made homeless. However, the court will not keep suspending indefinitely if there is no realistic prospect of the mortgage being paid.
In Palk, the Court of Appeal considered whether a mortgagee who had taken possession and let the property to tenants was under a duty to manage the property properly. The court held that the mortgagee was not liable to the mortgagor for failing to manage the property efficiently or for failing to obtain the best rent. However, the mortgagee was accountable as a receiver for rents received, and was liable for any waste of the property.
For non-residential mortgages, the mortgagee can take possession without a court order by simply entering the property and changing the locks. This is a self-help remedy. However, the mortgagee must not use force, and if the mortgagor or any occupier resists, the mortgagee must obtain a court order before proceeding.
Section 109 of the Law of Property Act 1925 provides that where a mortgage includes a charge by way of legal mortgage, the mortgagee has the power to appoint a receiver of the income of the property when the mortgage debt has become due. The receiver collects rents and profits from the property and applies them to the mortgage debt. The receiver acts as the agent of the mortgagor, not the mortgagee, which is an important distinction for liability purposes.
The receiver appointed under s.109 LPA 1925 is the agent of the mortgagor, not the mortgagee. This means that the receiver's acts and defaults bind the mortgagor, not the mortgagee. If the receiver commits a tort or enters into a contract in the course of performing their duties, the mortgagor is liable (not the mortgagee). This can create significant problems for the mortgagor, who may be liable for the receiver's actions even though they had no control over the appointment.
The receiver owes a duty to act in good faith and to take reasonable care in managing the property. The receiver must collect rents and profits, pay outgoings (such as insurance, repairs, and taxes), and account to the mortgagee for the net income. The receiver is not required to manage the property in the best interests of the mortgagor, but must not act recklessly or dishonestly.
The most fundamental protection for a mortgagor is the equity of redemption. This is the right to redeem the property at any time before the mortgagee has completed a sale or exercised their power in a way that makes redemption impossible. The mortgagor can redeem by paying off the entire outstanding debt, including interest and any reasonable costs. The right to redeem is inalienable — the mortgagor cannot contract out of it.
Mortgage law does not allow forfeiture in the same way as leasehold law. A mortgagee cannot simply forfeit the property and take ownership without going through the proper process (sale or possession followed by sale). The mortgagor always has the right to redeem up to the point where the property has been sold to a third party. This is a stronger protection than the protection available to tenants under leasehold forfeiture provisions.
Key statutory protections include: Administration of Justice Act 1970 s.36 (court discretion to suspend possession orders for residential mortgages), Consumer Credit Act 1974 (protections for regulated mortgage agreements), FCA MCOB rules (affordability assessment, arrears handling, and fair treatment), and the Human Rights Act 1998 Article 8 (right to respect for private and family life, which can affect possession proceedings for residential properties).
Overreaching is a mechanism that protects purchasers of land from being bound by equitable interests that they may not know about. Where land is held on trust and is sold or charged by the trustees, any equitable interests in the land are overreached (transferred) to the proceeds of sale, provided the capital money is paid to at least two trustees or a trust corporation. The purchaser takes the land free of the equitable interests, and those interests now attach to the purchase money.
Part IV of the Family Law Act 1996 protects spouses and civil partners from being evicted from the matrimonial home without a court order. Under s.33, a spouse who does not have a legal interest in the property but has matrimonial home rights (rights of occupation) cannot be evicted by the mortgagee without a court order. This applies even if the spouse is not named on the mortgage. The court can suspend or postpone the possession order on such terms as it thinks just.
Tenants of a mortgagor are protected by the doctrine of overreaching and by statute. When a mortgagee takes possession and wants to sell the property, any tenants in occupation may have their tenancies overreached if the sale is by trustees and the proceeds are paid to two trustees. If the tenancy is not overreached, the purchaser may take subject to the tenancy. Additionally, tenants may have overriding interests under LRA 2002 Sch.3 if they are in actual occupation.
If a squatter takes adverse possession of mortgaged property, this can affect the mortgagee's security. Under the LRA 2002, a squatter who has been in adverse possession for 10 years can apply to be registered as the proprietor. The registered proprietor (who may be the mortgagee if they have taken possession) will be notified and can oppose the application. If the mortgagee does not oppose, the squatter may be registered and the mortgagee's charge may be extinguished.
Mortgagor defaults on repayments: Borrower fails to make required mortgage payments
Mortgagee serves default notice: Formal notice requiring repayment of the outstanding debt
Is this a residential mortgage?: Determines whether court involvement is required for possession
Yes: Court applies s.36 AJA 1970: Court considers suspension/postponement based on circumstances
No: Mortgagee can take self-help possession: Mortgagee enters property and takes possession without court order
Mortgagee exercises remedies: Power of sale (s.101 LPA 1925), power of possession, or appoints receiver (s.109)
Sale of property: Mortgagee must obtain best price reasonably obtainable (Cuckmere Brick Co)
Proceeds applied to debt: First mortgagee paid first; surplus returned to mortgagor; shortfall remains mortgagor's liability