Introduction
A mortgage is a proprietary interest in land granted by the mortgagor (borrower) to the mortgagee (lender) as security for a loan. This relationship is characterised by an inherent power imbalance, favouring the mortgagee who provides the capital. In recognition of this, the law in England and Wales has developed a range of protections for the mortgagor to prevent exploitation and to mitigate the harshness of the mortgagee’s remedies, particularly the right to possession and sale. These protections can be found in both the common law, specifically the rules of equity, and in modern statutory provisions. This essay will discuss these key areas of protection available to a mortgagor.
Common Law and Equitable Protections
Historically, the most significant protections for the mortgagor have come from the court’s equitable jurisdiction. Equity’s guiding principle is that a mortgage is merely security for a loan, and once the debt is repaid, the mortgagor should be able to recover their property in its original state. This principle is upheld through the equitable right to redeem and the associated doctrine against 'clogs and fetters' on this right.
The equitable right to redeem allows the mortgagor to repay the loan and discharge the mortgage at any time after the legal date for redemption has passed. Equity will not permit this fundamental right to be rendered illusory. Any term in the mortgage deed that attempts to remove or fetter this right is known as a 'clog' and is generally void. For example, a term granting the mortgagee an option to purchase the mortgaged property is a classic clog, as it prevents the mortgagor from getting their property back. In Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904] AC 323, the House of Lords held that an option to purchase, granted to the mortgagee at the same time as the mortgage, was void as it was inconsistent with the nature of a mortgage.
Similarly, equity is suspicious of 'collateral advantages' that give the mortgagee a benefit beyond the repayment of the loan with interest. A common example is a 'solus tie', where the mortgagor is obliged to buy products exclusively from the mortgagee. The traditional rule, seen in Noakes & Co Ltd v Rice [1902] AC 24, is that such an advantage must cease when the mortgage is redeemed. However, this rule has been relaxed in commercial contexts, and a collateral advantage may be upheld if it is a genuinely separate and independent transaction (Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25). Furthermore, equity may intervene where a term of the mortgage is considered unconscionable. In Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166, the court struck down an extremely high interest rate, substituting it with a more reasonable one, on the grounds that it was an oppressive and unconscionable term imposed on the borrower.
Statutory Protections
While equity provides foundational protection, Parliament has enacted significant legislation to protect mortgagors, particularly those borrowing against their home. The most important provision is section 36 of the Administration of Justice Act 1970 (AJA 1970). This gives the court a discretion to adjourn possession proceedings brought by a mortgagee, or to suspend or postpone the execution of a possession order, where the property includes a dwelling-house.
The court can exercise this power if it appears that the mortgagor is likely to be able, within a 'reasonable period', to pay any sums due under the mortgage, or to remedy the default in question. The interpretation of 'reasonable period' is central to the effectiveness of this protection. In the landmark case of Cheltenham & Gloucester BS v Norgan [1996] 1 WLR 343, the Court of Appeal held that the starting point for determining a 'reasonable period' should be the outstanding term of the mortgage itself. This gives the mortgagor a significant opportunity to reschedule their debts and avoid losing their home, provided they can present a viable financial plan to the court.
Further protection is provided by the modern regulatory framework. For most residential mortgages entered into since 2004, lenders must be authorised and regulated under the Financial Services and Markets Act 2000 (FSMA 2000). The Financial Conduct Authority’s (FCA) rulebook, specifically the Mortgage and Home Finance: Conduct of Business sourcebook (MCOB), imposes duties on lenders. MCOB 13 requires a lender to treat a customer in arrears with forbearance and fairness. It states that repossession must be a last resort, and lenders are expected to explore other options, such as extending the term of the mortgage or agreeing to a new payment plan, before initiating possession proceedings.
Conclusion
In conclusion, the mortgagor is protected against the mortgagee by a combination of long-standing equitable principles and modern statutory intervention. Equity ensures the core purpose of the mortgage as security is preserved through the inviolable right to redeem, striking down clogs, fetters, and unconscionable terms. However, for the modern residential mortgagor, the most powerful and practical protections are now found in statute. Section 36 of the AJA 1970, particularly as interpreted in Norgan, provides a crucial lifeline for those in temporary financial difficulty, while the regulatory regime under FSMA 2000 and the MCOB rules attempts to prevent repossession from happening in the first place by imposing standards of fair treatment on lenders. Together, these measures form a significant, though not absolute, shield for the borrower.
References
Cases
- Cheltenham & Gloucester BS v Norgan [1996] 1 WLR 343
- Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166
- Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25
- Noakes & Co Ltd v Rice [1902] AC 24
- Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904] AC 323
Legislation
- Administration of Justice Act 1970
- Financial Services and Markets Act 2000
