Rights of mortgagor
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- The right to redeem the property
- The right to grant leases
- The right to sue
This total bundle of rights was traditionally known as the 'equity of redemption'. This archaic term dates back to the days when the traditional method of creating a mortgage was to transfer the estate absolutely to the mortgagee, with a contractual arrangement for cessor on redemption, that is, to have it transfered back on completion of the mortgage term.
These days the term 'equity of redemption' is used by some writers as a synonym for 'right to redeem', although technically the equity of redemption is a proprietary interest in land in its own right, of which the right to redeem is only a part.
The mortgagor can also seek to have a mortgage set aside forundue influence.
The rights of the mortgagee balance the corresponding rights that the mortgagor acquired over the property; see powers of mortgagee for more details.
The right to redeem
The right to redeem the mortgage is the mortgagor's most important, and best protected, right. There are a number of slogans associated with this right, which reflect the attitude taken by the courts (traditionally by the courts of equitable jurisdication). For example, you will come across statements such as there must be no clogs or fetters on the equity of redemption, and once a mortgage, always a mortgage. These catch-phrases denote simply that a mortgage is a form of security -- the onus is on the mortgagee to free the property at the end of the term, and the courts will make him do this if he tries to use the mortgage as a device to obtain control of the property.
There are a number of different facets to the right to redeem:
- The right to redeem on reasonable terms
- The right to be free of terms that prevent or postpone redemption
- The right to be free of oppressive or unconscionable terms
- The right to be free of collateral agreements favouring the mortgagee
The right to redeem on reasonable terms
A mortgage is a contract granting an interest in land in return for an advance of money. The contract should set out how and when the mortgage is to be redeemed. Originally the law of contract applied strictly to redemption, which led to some low practices on the parts of mortgagees. In particular, a mortagee might absent himself on payment day, then seek to keep the property as the mortgagor had not fulfilled his part of the contract. The courts of equity, as you might expect, took a dim view of this kind of thing, and generally upheld the right of the mortgagor to redeem on 'reasonable terms' at any point after the contractual date. Note that there was, and is, no general equitable right to redeem a mortgage early. However, the courts have occassionally allowed redemption before the contractual date when the mortgage duration was excessively long (see below).
The right to be free of terms that prevent or postpone redemption
Any term that has the effect of preventing or postponing redemption will, in general, be struck out. It follows from this that a mortage cannot include any term whose effect is to transfer the property to the mortgagor absolutely, if the mortgagee defaults on some part of the contract. The mortgagee does have extensive powers to obtain possession of the property if the mortgagor is in default, and can obtain the property asbolutely via the mechanism of Foreclosure, but the courts will not allow the contract to contain a term that allows the mortgagee to obtain the property without due process.
The rule that no mortgage term can allow the mortgagor to obtain the property absolutely is applied inflexibly (SamuelVJarrahTimber1904). One consequence, perhaps undesirable, is that the mortgage cannot contain a term granting the mortgagee an option to purchase. In a domestic mortgage there is unlikely to be a good reason to include such a term, and it seems reasonable that any such term would be void. However, in commercial mortgage arrangements, there are valid reasons why one company might advance money to another in return for the right to buy the property at some point in the future. However, these terms will be void as well. In general, the courts feel that the lender is usually in a stronger bargaining position that the borrower, and that allowing the lender the ability to exercise an option to purchase the property would encourage lenders to exploit their stronger position unfairly. There have been suggestions that if the option to purchase is granted in a separate agreement, this might be valid (ReeveVLisle1902). However, even if there is a separate agreement, it will have to be genuinely a new agreement, and not a continuation of the mortage negotiations on different terms (JonesVLewis2001).
In addition to terms that prevent redemption completely, the courts have traditionally taken a dim view of terms that would have the effect of postponing redemption for an unreasonably long time. In fairclough and swan brewery (1912), a lease was mortgaged until six weeks before the lease expired. The court upheld the mortgagor's right to redeem earlier than the contractual date, because by the contractual date the lease would essentially be worthless. The mortgage was, in effect if not in words, irredemable. However, in knightsbridge estates v byrne (1939), a 40-year term was held to be reasonable, and the mortgagor's request to redeem early was denied. The mortgage was of a freehold estate, and would be worth as much, or more, on redemption as it was at the start of the mortgage. Moreover, the contract was between two businesses dealing at arm's length. It is unlikely that a domestic mortgage for 40 years could be held to its full term by the mortgagee.
The right to be free of collateral agreements favouring the mortgagee
In the commercial context, it is not unusual for a money to be advanced in return for advantages other than the repayment of interest. The classic example is that of a brewery which loans money to buy a public house, on the understanding that the landlord will sell the brewery's products. These arrangements, so long as they are not oppressive, do not attract the disfavour of the courts so long as they do not last beyond redemption. The logic for this is straightforward: if a borrower enters into an agreement that survives redemption, the effect is that after redemption his interest will be encumbered by the earlier bargain. He may even be prevented from redeeming the mortgage, because he will be unable to satisfy his obligations under the agreement after redemption. Traditionally all such colleteral agreements were struck out by the courts. But in kreglinger v new patagonia meat and cold storage (1914), the House of lords upheld an agreement that would have had the effect of surviving three years after redemption. It was held that the agreement was a reasonable one, and made between businesses at arm's length; this suggests that certain metas of collateral advantage might now be upheld.
There has been some concern that Kreglinger might now allow collateral agreements to be enforced in domestic mortgages, which would allow the institutional lenders to exploit their stronger position. For example, many lenders now offer insurance, property valuation, life assurance, and similar services. It would be bad for the consumer generally if mortgage lenders were allowed to enforce terms compelling the borrower to use its collateral services indefinitely. Such terms, however, might fall foul of legislation, as discussed below.
The right to be free of oppressive or unconscionable terms
Where mortgage agreements are made between businesses, the courts will rarely grant one party relief on the basis that it made a bad bargain, even an exceptionally bad one (MultiserviceBookbindingVMarden1979). However, the courts might be moved to intervene when a term is 'unconscionable'. Unconscionable is not the same as 'unreasonable'; to charge someone an excessive rate of interest on a loan might be unreasonable, but it is not unconscionable unless it is exploitative, or 'morally reprehensible'. In cityland and property v dabrah (1986), the Court of Appeal modified a mortgage term that had the effect of imposing repayments equivalent to a rate of interest of 12%. This was more than unreasonble -- it was something that could not be upheld in good conscience.
In domestic mortgages, the situation is somewhat different. In practice, problems rarely arise because the mortgage industry is so closely regulated. Where they do arise, the consumer will usually be able to rely on the unfair terms in consumer contracts regulations (1994), or the consumer credit act (1974), to have the offending term struck out. In general, and excessive rate of interest is likely to amount to an 'extortionate credit bargain' for the purposes of the 1974 Act.