PROPERTY LAW

MORTGAGES
PROBLEM QUESTION

Question-1
In 2004 Angus and Coleen combined their life savings of £80,000 in order to
purchase No 1 High Street with the assistance of a mortgage advance of £250,000
provided by the Scotsdale Bank. Title to the house was registered in the name of
Coleen subject to a registered charge in favour of the Bank. Angus had agreed to
the mortgage and had met with the Bank to discuss this with his own solicitor.
The agreement meant that the interest rate was variable at the discretion of the
Bank, and, in 2007, the Bank quadrupled its interest rate for all customers with
red hair, including Coleen. Angus and Coleen (who had both been contributing to
the mortgage) could not make these payments and went on holiday. While they
were away, the Scotsdale Bank sent a letter addressed to No 1 High Street to
Coleen, informing her that the Bank proposed to take possession of the house
and offer it for sale at auction in three days’ time. A month later Angus returned
to discover that the Bank had sold the house for £305,000 to a bidder who turned
out to be the brother-in-law of the manager of the local branch of the Bank.
Coleen, by this time, had run off with a waiter she met on holiday, and wished to
sell and keep the proceeds of the sale once the bank had been paid all for herself
in order to buy a new property on the Costa Brava.
Advise Angus and Coleen.

Ans: Angus (A) wants to create a claim on the property that supersedes the Bank's
interest. By contesting the interest rate increase and pursuing damages for the loss
incurred, Coleen (C) will strive to maximize the sale revenues.

Angus’s Interest in the Property

As a first matter, A is presumed to have no interest in the property under the approach
outlined in Stack v. Dowden (2007) and Jones v. Kernott (2012) as a result of Coleen
(C) being registered as the sole registered owner. This is true unless an express or
implied common intention to the contrary can be shown. A would be entitled to an
equitable interest in this property as a consequence of his contribution to the purchase
price and mortgage, even if this is a sole names case and the extent to which Kernott
etc. covers this case is unknown because of this. The quantity of A's equitable share
must be determined once it has been shown that he does have an interest, as stated by
Baroness Hale in Stack. If there is no demonstrable express intention as to the quantity
of the share, then such an intention may be suggested or imputed (Kernott). We can't be
certain of the quantity in this case because we don't know how much each party
contributed to the down payment or the mortgage, but given that this relationship is
mutually communal (see Gardner, "Family Property Today," (2008) 124 LQR 422,
Gardner and Davidson, "The Future of Stack v. Dowden," (2011) 127 LQR 13, and
Gardner and Davidson, "The Supreme Court on Family Homes," (2012) 128 LQR
178),20 a share of around 50%

Priority Over Angus’s Share

B will need to show that the interests of its charge come before those of A because C
owns a trust for both herself and A. Even while A's interest would probably prevail under
Sched 3, para 2 LRA 2002), it appears that he has implicitly renounced it - Paddington
BS v. Mendelsohn (1985). The only possible exception to this is if A's approval of the
mortgage was gained as a result of C applying pressure to him in a way that clearly
disadvantageed him, in which case the laws against undue influence would apply (RBS
v. Etridge No. 2 (2001)). Since there is no proof of anything, B takes precedence over A
(permission) and C. (mortgagee).

The Interest Rate Rise

C herself may want to challenge this increase on the grounds that it is unconscionable,
is in violation of an implied term, is a restraint on the equity of redemption, and/or is
governed by consumer protection legislation in order to increase her sale proceeds. The
Bank quadrupled its interest rates for all customers with red hair, including C.

(a) Unconscionability
There are questions about whether judicial action in this matter is to be welcomed. The
general premise is that the parties are free to decide whatever mortgage conditions they
choose. The criteria is strict: Alec Lobb (1984) and Jones v. Morgan. Yet, it's possible
that this phrase could be abolished since it "shocks the conscience of the court"
(Multiservice Bookbinding v. Marden (1977); Jones v. Morgan (2001)). It is quite
improbable that the facts of this case would allow the court to interfere, given that the
circumstances of Jones v. Morgan did not result in a sufficient level of unconscionability
to permit the court to do so.
(b) Implied Term
The contentious Nash v. Paragon Finance ruling provides evidence for the second
possibility (2001). "The discretion to change interest rates shall not be exercised
dishonestly, for an illegitimate motive, capriciously or arbitrarily," it was decided in this
case (para 32). Dyson LJ offers the following illustration: "An example of a capricious
rationale would be where the lender decided to raise the interest rate because its
manager did not like the borrower's hair color" (para 31). Even if a breach were to be
shown, it is not yet apparent how the court would address it and what impact it would
have on C's current situation. There is no proof of loss in this case, but C might be
entitled to an award of damages to make up for whatever losses she might have
endured as a result of the implied term's breach.

(c) Clog on the Equity of Redemption

The equity of redemption concept has been criticized for its apparent shortcomings by
the judiciary, as seen by Samuel v. Jarrah Timber (1904) and Lord Mersey's decision in
New Patagonia Meat Company v. Kregliner (1913). Jones v. Morgan is one of the few
instances in recent times where a clogs-based defense has been successful. Yet, the
obstacle in that situation was the mortgagee's capacity to secure title to the mortgaged
property, which is a choice that is not available to B in this situation. The situation is
considerably dissimilar from Jones'. It seems improbable that a judge would choose this
path in this case. So, it would seem that C's best course of action is to make the case
that the interest rate increase is so arbitrary that it violates an implied provision of the
mortgage agreement and that as a result, C is entitled to damages.

The Process of B Going into Possession and Sale

Regardless of default, the mortgagee is allowed to seize ownership "as soon as the ink
is dry" on a mortgage agreement Four-Maids v. Dudley Marshall (1957), Ropaigealach
v. Barclays Bank (1998). The Bank's possession was legal, and as Ropaigealach
emphasizes, if the Bank does not request a court order for possession, the Mortgagor is
not protected by Section 36 of the AJA of 1970, as Amended. According to Twenty
Century Banking v. Wilkinson (1976), s. 101 LPA 1925, the power of sale becomes
effective after the contractual date for redemption has passed or, as in this case, when
an installment mortgage is in arrears. It becomes exercisable in accordance with
Section 103 when one of the following conditions occurs: I a notice requiring payment of
the entire sum has been given, and three months have passed since the notice and no
such payment has been forthcoming; (ii) some interest owed under the mortgage is two
months past due; or (iii) there has been a breach of another provision of the mortgage
agreement. In this instance, it appears likely that the mortgage's interest is in arrears by
more than two months. It appears then that C has no recourse with regard to the
manner in which B seized possession. Additionally, it appears likely that the power of
sale has materialized and become operative.

The Sale
When a mortgagee sells the mortgaged property, he is under a duty of care in relation
to that sale to obtain to the best price reasonably available at the time (Standard
Chartered Bank v Walker (1982); Cuckmere Brick v Mutual Finance (1970)). This duty
does not however require that the mortgagee goes beyond selling in an appropriate
manner, Silven Properties (2003), Bishop v Blake (2006). In fact, as Bishop v Blake and
Michael v Miller (2004) highlight, the crucial issue is not the price actually achieved but
the steps taken to achieving that price. The problem in this instance is that a family
member of a worker at the nearby branch of B bought the residence. Although a bank
has a strict obligation not to buy the property themselves (Williams v. Wellingborough
Council (1975)), if there was no improper behavior in the transaction, an associate of a
bank employee may buy the property (Halifax v. Corbett, 2002). If P knew that the sale
was improper and was aware of it, the sale can be annulled. It doesn't seem to have
been the case in this instance.

It would appear that damages are C's only available option for redress. The damages
can only account for what C has really lost, regardless of whether this is due to a breach
of the implied agreement or (less probable) a breach of B's duty of care during the
transaction. As a result, she will only be entitled to the difference between what she
actually received as surplus after the sale and the true value of the property less the
amount owed at the lower interest rate. The selling revenues would then be split up
based on the equitable share proportion. Given that the Bank's interest took precedence
over A's, it is highly doubtful that A could have the transaction set aside, although he
would be entitled to some of the earnings.