Priority of mortgages

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It is not uncommon for a particularinterest in land to be subject to more than one Mortgage. Problems rarely arise in ordinary domestic mortgages -- the kind you might use to buy your house -- because the domestic mortgage industry is closely regulated, and the kinds of things being mortgaged are well understood. Problems tend to arise where the lender is not institutional, and does not have well-established administrative procedures; or where the interest being mortaged is one that an institutional lend would tend to keep clear of.

The rules of priority of mortgages are derived from the ordinary rules of PriorityOfInterests, with special provisions that relate only to mortgages. To further complicate matters, the rules are not internally consistent, so it is possible to find situations where applying one set of rules gives one result, while applying an equally valid set gives another. In the most alarming cases, it is even possible to find that priorities are intransitive, that is, A takes priority of B, and B takes priority over C; nevertheless C appears to take priority over A. In practice these anomalies, although logically possible, seem never to have arisen as the subject of a court hearing.

This article is divided into four parts, covering the four major interests that are likely to be mortgaged. The parts are arranged into increasing order of complexity. The four areas for consideration are:

  1. Mortgages of an equitable interest other than a trust interest.
  2. Mortgages of a beneficial interest under a trust.
  3. Mortgages of a legal estate in registered land.
  4. Mortgages of a legal estate in unregistered land.

We must also consider the special rules relating to 'tacking' of advances.

Mortgages of an equitable interest other than a trust interest

Interests in this group include equitable leases. The mortgagee may not know that he is taking a charge over an equitable interest until the matter comes to court -- the mortgage may turn out to be a mortgage of an equitable lease if, for example, the deed that was inteded to create a legal lease was defective in some way. It may even be that, say, a four-year lease was created with only a contract, not a deed. In any event, by definition a legal interest cannot be created out of an equitable interest, so a mortgage of an equitable interest will always be equitable. This makes this kind of mortgage rather easy to deal with, because standard equitable rules apply. In short, where the equities are equal, the first in time prevail. Where the equities are not equal -- if, for example, the earlier mortgage was induced by fraud -- then a court may allow the later mortgage to have priority, in accordance with its equitable jurisdication.

Mortgages of a trust interest

Where several mortgages are of a beneficial interest under a trust, then the rule in dearle v hall (1828) applies. This situation may arise where a beneficiary of a trust straightfowardly mortgages his interest (Victorian novels are full of this sort of thing), or when atenant for life under an SLASettlement grants a mortgage of the trust property. In any case, the rule in Dearle v Hall is that the mortgage that takes priority is the one notified to the trustees earliest. This is confirmed by s.137 of the Lpa (1925), which also goes on to describe what 'notice' is. In brief, mortgagee is advised to serve a written notice on all the trustees to be sure of safeguarding his priority.

Mortgages of a registered legal estate

The rules concerning priority of mortgages have not been changed substantially by the Lra (2002), so only the later provisions will be identified.

A legal estate can be subject to both legal and equitable mortgages. Any mortgage is treated as equitable until it is registered as a legal charge. Once registered, the mortgage takes priority over any unregistered minor interest (s.29), which would include any prior unregistered mortgage. However, it will be subject to any overriding interest, any registered minor interest, and any prior legal charge. Between themselves, legal mortgages registered as charges take priority according to the date of registration (s.48(1)).

The situation is different with equitable mortgages because these cannot, of course, be registered as legal charges. An equitable mortgage is created whenever a mortgage deed is executed in respect of registered land, but the mortgage has not been registered as a legal charge. Such a mortgage will be subject to any earlier legal or equitable mortgages of the same estate, even equitable mortgages that are not registered. Once granted, an equitable mortgage should be entered as a Notice on the registered title. It will then take priority over any later mortgages, whether legal or equitable.

Mortgages of an unregistered legal estate

The fourth category of situations we have to consider is mortgages of an unregistered legal estate. This is complicated by the fact that we need to consider not only whether the mortgages are legal or equitable, but whether they have been protected by deposit oftitle deeds.

In general, lenders have wanted to take the title deeds to protect their security. The strongest position to be in as a mortgagee is to have a legal mortgage, protected by deposit of deeds. Such a mortgage is a legal interest and is good against the world. However, there are cases in which the lender has lost his priority, because he has acted carelessly or fraudulently. In perry herrick v attwood (1857), for example, the mortgagee returned the title deeds to the mortgagor, so that he could raise a further mortgage. In fact, he raised two more mortgages and then defaulted on all of them. The court held that the first mortgagee should lose his priority.

However, all the cases which have held that a mortgagor with the title deeds in his possession should lose his priority appear to have been decided before 1925, and the Lpa (1925) talks of mortgages created by deposit of title deeds, not retention of title deeds. It it therefore entirely unclear what would happen in modern law if a lender took the title deeds, advanced the money, and then gave the deeds back to the borrower. Of course, a reputable and prudent borrower would not do such a thing, but if all borrowers were reputable and prudent there would be no case-law on this subject; a fact which clearly does not obtain.

In summary, a legal mortgage protected by title deeds is good, in the absence of fraud and negligence, against all later interests. It may be subject to earlier interests that have been registered as land charges; more of this later.

If the legal mortgage is not protected by deposit of title deeds, then it will lose priority to any later legal or equitable mortgage unless it is registered as a class C(i) charge. This is the so-calledpuisne mortgage. 'Puisne' means 'lesser' or 'weaker' but, in fact, there may be advantages to creating a mortgage of this sort, over taking the title deeds. The problem is that there are cases on record where the mortgagee has taken what he believed to be sound title deeds, which later turned out to be incomplete or pertaining to the wrong property. This poses a difficult problem for the courts, because if a borrower divides his stack of title deeds in half, and makes up some documents to cover the gaps, then gets two mortgages on the strength of the faked deeds, it is not entirely clear which mortgage should have priority. Issues of negligence and notice have to be considered. However, with a puisne mortgage the registration of a land charge is definitive. So long as it is registered, the puisne mortgage will take priority over any later legal or equitable mortgage. What if it is unregistered? Well, s.4(5) of the land charges act (1972) says that such an interest is void against a later purchaser of any interest. This would appear to include a person taking a later equitable mortgage, as well as a later legal mortgage. The only interests that would not take priority are those not taken for Consideration.

All this would appear to be clear enough but, unfortunately, there is some apparent inconsistency in the statutory provisions. We have seen that the LCA says that an unregistered puisne mortgage is void against a later interest, legal or equitable. However, s.97 of the Lpa (1925) says that land charges take priority according to their take of registration. So, if borrower B takes a mortgage loan from lender L1, and then the next day another loan from lender L2, and B retains the title deeds, what is the position when L1 and L2 register their land charges? Assume that both register their charges two days after execution of the respective mortgage deeds. This means that when L2 gets his interest, according to the LCA, L1's interest (as yet unregistered) is void against him. This puts L2 at a higher priority than L1. But then L1 registers his mortgage as a land charge; according to the LPA this puts him at a higher priority, because he has registered his charge first.

There is no obvious solution to this problem, except to note that it has never been the subject of a court hearing, and now cannot be. This is because the grant of a legal mortgage would trigger compulsory registration of the legal estate. So L1 and L2 could not both have pusine mortgages unless they really did advance loans within a few days of each other.

So we've dealt with legal mortgages of unregistered land; in short, a mortgage by deposit of title deeds, or by registration of a class C(i) charge, will usually take priority over any later mortgage.

As for equitable mortgages, we again have to consider two situations -- one where the mortgage is protected by deposit of title deeds, and one where it is not. If the mortage is not so protected, then its priority will be assured if it is registered as a class C(iii) land charge. Like the puisne legal mortgage, if the mortgage is unprotected it will lose priority to any later interest in the same legal estate.

Where there is a deposit of title deeds then we have an odd situation. Where a legal mortgage was so protected, the mortgagee could rely on the principle that legal interests are good against the world, but this is not true of an equitable mortgage. There is a widely-held misconception that deposit of title deeds somehow creates a legal mortgage, but it does not. If the mortgage is not created by a valid deed, it remains at best equitable even if the deeds are deposited. So, it would appear that the priorities in such a case are governed by the straightforward application on equitable principles. If there is a legal mortgage protected by deposit of deeds, then it will be void against a later purchaser of a legal estate without notice. This includes a later legal mortgage. Of course, if the later lender asks the borrower to produce his deeds, and the borrower cannot do so, then the borrower ought to be considered to be on notice. If the later mortgage is itself equitable, then it appears that the order of creation of the mortgages determines the priority, so long as the equities are equal.

In practice, the courts have not always applies the straightforward principles of notice when considering the case where a legal mortgage is granted and an previous equitable mortgage is already in existence. Instead they have tended to ask who is at fault in the transaction, and then adjust the priorities accordingly. It is therefore difficult to say with any certainty what the 'rules' are that govern priority in these cases.

Tacking of advances

Finally we have to consider the special rules related to 'tacking', that is, advancing additional money on the basis of an existing mortgage. Consider a situation where L1 lends money to B against a mortgage of his house. The mortgage is for, say, £50,000, and the house appears to be worth about £100,000. Suppose that B asks another lending, L2, for an additional £20,000 against the same security. L2 might consider this a good investment, as there is ample security remaining in the property. Now, B wants to borrow abother £30,000, and no-one will make the loan, there not being sufficient security after the two previous mortgagees have taken their cuts. B might be able to persuade L1 to 'tack' a further advance because, as L1's mortgage is the earlier, most likely it has a higher priority already. So L1 might be taking a lesser risk by tacking than another lender might by making a new loan.

Because tacking is a way to defeat the system of priorities, it is limited by statute. In unregistered land, tacking is only allowed where:

  1. all the other mortgagess whose priority would be subverted agree to the advance. In practice, this in never going to happen; or
  2. the mortage was made expressly with the provision to tack advances, and the mortgagee seeking to tack had no notice of any other mortgages that would be disturbed. For these purposes, registration of the other mortgages as land charges does not consititute notice, provided that the tacking mortgagee did search the charges register and no additional charges were revealed; or
  3. the mortgagee is obliged to tack by his contract with the mortgagor.

Where the land is registered, tacking is allowed (persuant to the LRA2002, although the principles were not that much different under the 1925 Act) if:

  1. the mortage was made expressly with the provision to tack advances, and the mortgagee seeking to tack was not notified of any other mortgages that would be disturbed. It is the later mortgagees themeslves who have the obligation to inform the earlier mortgagee that tacking would disturb their interests; or
  2. the mortgagee is obliged to tack by his contract with the mortgagor, and this is evident from the register.

And that's it. Simple, isn't it?

Land and Property Law