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Terms and Conditions

WHAT IS THE SIGNIFICANCE OF MORTGAGE TERMS AND CONDITIONS?

A mortgage is a contract of loan, secured on property. Like any other contract, its meaning and effect depends largely upon its terms.

The contractual terms upon which the lender contracts with the borrower are usually comprised in a combination of:

• The offer of mortgage (or separate loan agreement if there is one)

• The mortgage conditions

• The mortgage deed (which usually incorporates the terms of the offer of mortgage and/or mortgage conditions)

In practice, most of the key, day-to-day mortgage terms are comprised in the mortgage conditions, and it is important to ensure (1) that reference is made to the correct conditions, and (2) that the conditions do actually enable the lender to do what it wants to do. Remember that High Street Bank and Building Society mortgage conditions are all different. While they generally cover the same areas, they employ different wording, often with different results.

The conditions will typically cover a whole range of things such as the dates and amounts of payment of principal and interest; variations to the rates of interest; obligations to insure and maintain the property etc; restrictions on letting; lender’s powers, including the events upon which the right to possession and the power of sale arises; indemnity on costs; and various other miscellaneous provisions.

WHEN DOES THE RIGHT TO TAKE POSSESSION ARISE?

This is an important point.

Contract and statute apart, a mortgage lender is entitled to possession as soon as the mortgage is executed (Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317 per Harman J at p 321).

Why?

Because a charge by deed expressed to be by way of legal mortgage gives the lender the same protection, powers and remedies (including the right to possession) as if a mortgage term for three thousand years had been created in favour of the lender (s 87(1) Law of Property Act 1925).

However, although the right to possession arises on the execution of the mortgage, the general intention of the parties is normally that the borrower should be allowed to remain in possession until he commits some act of default, hence the contract - the mortgage terms and conditions - will normally provide for this.
 
High Street Bank and Building Society mortgages achieve this in a number of slightly different ways. For example:

  • Some state that the borrower shall hold and enjoy the property until the mortgage monies have become due
  • Some state that the lender will not enforce its right to possession unless certain events have occurred
  • Some simply stipulate when and in what circumstances the mortgage monies are deemed to become due and then provide for the lender to  take possession
    • However, it is important in each case to ascertain when the right to possession has actually arisen.

      Strictly, the circumstances in which the lender becomes entitled to possession have nothing to do with when the statutory power of sale arises (in s 101(1) (i) Law of Property Act 1925) although in practice the two are often combined, so that the right to take possession and the power of sale are exercisable when the mortgage monies have become due.

      Caution!

      Although most mortgage conditions make provision for when and in what circumstances the right to take possession and the power of sale arise, some fail to distinguish between the two. A classic example is where the conditions stipulate when the mortgage monies become due and then provide that all the lender’s powers by statute (of which the right to take possession is not one) shall immediately become exercisable.

      Why is this so important?

      Because if the mortgage conditions do not effectively delay the right to possession, the limitation period will generally run against the lender, so that in the absence of a part-payment or acknowledgment of title for the purposes of ss 29-31 Limitation Act 1980, it may find that it loses its right to possession and that its security is extinguished.

      See the recent case of National Westminster Bank Plc v Ashe [2008] EWCA Civ 55 (see talso under Limitation) in which it was held that the bank’s standard form of third party all-monies legal charge did not restrict the right to possession, even though the mortgage monies only became repayable on demand (following National Westminster Bank Plc v Skelton [1993] 1 WLR 72). The lender lost the right to recover possession and its security was extinguished!

HOW DOES THE COURT INTERPRET THE MORTGAGE CONDITIONS?

A contract of mortgage (including the offer letter, mortgage deed and mortgage conditions and any related documentation), falls to be construed in accordance with the ordinary principles of contractual construction. See Arnold v Britton [2015] UKSC 36 in which the Supreme Court summarised the principles to be applied. The court’s task is to determine what a reasonable (ie. an objective) person, having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The court focusses on the meaning of the relevant words of the clause in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [Policy], (iii) the overall purpose of the clause and the [Policy], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of the party’s intentions. This means that what the parties themselves think is meant by the term ‘institutional lender’ is not directly relevant.

See for example Moat Financial Services Ltd v Wilkinson [2005] EWCA Civ 1253 (construction of offer letter); Kotonou v National Westminster Bank Plc [2006] All ER (D) (Apr) (construction of guarantee) and Blackwater Services Ltd v West Bromwich Commercial Ltd
[2016] EWHC 3083 (Ch) (construction of interest rate charging provisions).

Finally – a salutary lesson!

Remember that the contractual terms are not necessarily bullet-proof if the parties have actually proceeded on a different basis. In National Westminster Bank plc v Patel [2004] All ER (D) 429 (May) the court held that the bank was not entitled to continue to rely on its standard form of bank all-monies charge which had been taken as security for an initial loan of £65,000, and which had since been repaid when the expectation of the parties was that it would then be released (instead of retained as continuing security). The judge ordered delivery up and cancellation of the charge notwithstanding that the borrowers had run up and defaulted on subsequent borrowings which, ordinarily, would have been secured by the charge.

WHAT EFFECT DOES STATUTE HAVE?

Subject to any contractual restriction in the mortgage conditions, the only other thing which may restrict the lender’s right to possession is s 36 Administration of Justice Act 1970  - this is dealt with separately under 'Section 36'. In respect of Consumer Credit Regulated Agreements there are similar statutory provisions in s 29 Consumer Credit Act 1974 (time orders).
 
Note that the terms of s 36(3) enable the court to adjourn, stay, suspend or postpone subject to such conditions with regard to (a) payment or (b) the remedying of any other default, as the court thinks fit.

Thus it is perfectly open to the lender to seek to repossess a property based on (a) default in repayment and/or (b) breach of any other obligation, and the court has the power to address both when it considers whether for e.g. to make a suspended order on terms.