The Law Commission (LAW COM. No. 204) TRANSFER OF LAND-LAND MORTGAGES Laid before Parliament by the Lord High Chancellor pursuant to section 3(2) of the Law Commissions Act 1965 Ordered by The House of Commons to be printed 13 November 1991 I LONDON: HMSO E 15.90 HC 5 The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Commissioners are: The Honourable Mr Justice Peter Gibson, Chairman Mr Trevor M. Aldridge Mr Jack Beatson Mr Richard Buxton, Q.C. Professor Brenda Hoggett, Q.C. The Secretary of the Law Commission is Mr Michael Collon and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WClN 2BQ. 11 TRANSFER OF LAND-LAND MORTGAGES CONTENTS Paragraph Page PART I: INTRODUCTION 1.1 1 Introduction 1.1 1 Background to the Report 1.4 1 Contents of the Report 1.6 2 PART 11: STRUCTURAL REFORM 2.1 3 The Need for Reform 2.1 3 Defects in the Present Law 2.6 4 Multiplicity of types of mortgage 2.6 4 Legal mortgage 2.7 5 Equitable mortgage of a legal estate 2.8 5 Equitable mortgage of an equitable interest 2.10 6 Equitable charge 2.12 7 Reduction in number of types of security 2.13 7 Removal of the distinction between mortgages 2.14 7 and charges Inappropriateness of form 2.17 8 Mortgage by demise 2.18 8 Mortgage by Assignment 2.19 9 The Working Paper Proposals 2.20 9 Reasons for rejecting Proposals I11 and IV 2.2 1 9 Reasons for rejecting Proposal I1 2.23 10 PART 111: FORMAL AND INFORMAL LAND MORTGAGES 3.1 12 Nature of the New Mortgage 3.1 12 Variable and overriding provisions 3.3 12 General limitation on exercise of rights etc. 3.4 13 Method of Creation 3.5 13 Formal Land Mortgage 3.5 13 Recognition of Informal Mortgages 3.9 14 Nature of Informal Mortgage 3.1 1 15 Method of Creating Informal Land Mortgage 3.14 16 Registration and Priority 3.18 16 Protection and Priority in Registered Land 3.20 17 Formal land mortgage of a legal estate 3.20 17 Informal land mortgage of a legal estate 3.21 17 ... 111 Paragraph Page Priority of informal land mortgages of a legal estate 3.22 19 Formal and informal mortages of an equitable interest 3.23 19 Protection and Priority in Unregistered Land 3.30 22 Formal and informal mortgages of a legal estate 3.31 22 Formal and informal mortgages of equitable interests 3.33 23 Other amendments to the Land Charges Act 1972 3.34 23 Summary of the New Mortgage Structure 3.35 24 PART IV PROTECTED MORTGAGES 4.1 25 The need for a protected class of mortgage 4.1 25 Agricultural land 4.7 26 Mixed business and residential premises 4.8 26 Consumer Credit Act 1974 4.9 27 PART V: FORM OF FORMAL LAND MORTGAGE 5.1 28 Standardisation 5.1 28 Standard forms 5.2 28 Standard terms 5.5 29 Prescribed information 5.9 31 Effect of failure to comply with requirements 5.12 32 PART VI: RIGHTS AND DUTIES OF THE PARTIES DURING THE SECURITY 6.1 34 Introduction 6.1 34 Standard Provisions 6.4 34 Documents of title 6.4 34 Insurance 6.9 35 Repair and condition of the property 6.13 37 Possession 6.16 38 Powers of leasing 6.17 38 Other matters relating to the relationship of the parties during the security 6.22 40 Transfer of the mortgage 6.22 40 Transfer of the mortgagor’s interest 6.31 43 Regulation of interest rates 6.32 43 Increase of rate of interest on default 6.33 43 Regulation of variable interest rates 6.35 44 Redemption 6.42 46 Consolidation 6.44 47 Discharge 6.45 48 iv Pa ragraph Page PART VII: ENFORCEMENT OF THE SECURITY 7.1 49 Introduction 7.1 49 The Remedies 7.4 49 Power of Sale 7.5 49 When the power becomes exercisable 7.6 49 Enforceable events 7.8 50 Additional requirements for protected mortgages 7.11 51 Enforcement notice procedure 7.12 51 Extrajudicial enforcement 7.14 52 Exercise of power of sale after mortgagor contracts to sell 7.16 53 Protection of purchaser on sale by mortgagee 7.20 54 Sale by mortgagee to itself 7.22 54 Mortgagee’s duty on sale 7.23 55 Proceeds of sale 7.25 55 Foreclosure 7.26 56 Possession 7.28 56 Possession for the purpose of sale 7.29 56 Cesser of interest 7.33 57 Possession to preserve the value of the mortgaged property 7.36 59 Liability of mortgagee in possession 7.37 59 Appointment of a Receiver 7.39 60 When the power is exercisable 7.42 61 Powers of receiver 7.43 61 Receiver’s duty to account 7.44 62 Qualifications of a receiver 7.46 62 Powers of leasing 7.47 63 Jurisdiction of the Court on Enforcement 7.48 63 Protection of Tenants of the Mortgagor 7.54 65 PART VIII: JURISDICTION TO SET ASIDE OR VARY TERMS OF THE MORTGAGE 8.1 67 Introduction 8.1 67 New Statutory Jurisdiction 8.4 67 PART IX MISCELLANEOUS MATTERS 9.1 69 Tacking of Further Advances 9.1 69 Land Mortgages and the Consumer Credit Act 1974 9.6 70 V Paragraph Page Transitional Provisions 9.7 70 Statutory Charges 9.1 1 71 Effect on the Crown 9.12 71 PART X SUMMARY OF RECOMMENDATIONS 10.1 72 APPENDIX A Draft Land Mortgages Bill with Explanatory Notes 81 APPENDIX B: List of individuals and organisations who submitted comments on Working Paper No. 99 151 APPENDIX C: List of participants in the Seminar on Land Mortgages held at the Law Commission on 3 1st August 1987 152 APPENDIX D: Statement of Practice issued by the Department of the Environment and H.M. Treasury Working Group on the Secondary Mortgage Market (1 989) 153 APPENDIX E: Section 7 of the Local Government Act 1986 155 APPENDIX F: The Local Authorities (Disposal of Mortgages) Regu- lations 1986, S.I. 1986, No. 1028. 156 APPENDIX G Note on the effect of the new scheme on mortgages created by standard form debenture deeds. 158 vi THE LAW COMMISSION Item 4 of the Fourth Programme: Transfer of Land LAND MORTGAGES To the Right Honourable the Lord Mackay of Clashfern, Lord High Chancellor of Great Britain PART I INTRODUCTION Introduction 1.1 In this Report we consider the law relating to consensually created securities over interests in land.’ This is part of our programme of examining conveyancing with a view to its modernisation and simplification. 1.2 We recommend in this Report that all existing methods of consensually mortgaging or charging interests in land should be abolished by legislation and replaced by a new form of mortgage to be used for mortgaging any interest in land, whether legal or equitable. We make further recommendations about the rights and duties of the parties to the new mortgage, and about its regulation and enforcement. A draft Bill to implement our recommendations appears as Appendix A to this Report. 1.3 These reforms are radical in that a new simplified mortgage structure will be erected in place of the complex structure that now exists. But in making these broad recommendations affecting an important area of commercial activity, and many people’s housing, we have been careful to ensure that the essentials of the familiar mortgage system should be continued, and indeed strengthened. For a new class of “protected mortgage^",^ we recommend new safeguards for mortgagors. But in general our reforms do not envisage changes to the basic provisions of the law. Rather, those familiar rules would be presented in a way which was simpler, clearer, more logical and consistent and easily accessible than at present. Background to the Report 1.4 In 1986 we published a Working Paper3 in which we examined the defects in the present law of mortgages of interests in land. The provisional view expressed in the Working Paper was that the law was in need of simplification and modernisation and that in order to achieve this it was necessary to reconsider first, the structure of the mortgage relationship and secondly, the rights, duties, protection and remedies of the parties to the relationship, both during the security and on its enforcement. The Working Paper put forward for consideration five sets of proposals for reform. The first four, Proposals I to IV, presented four different options for structural reform. The fifth, Proposal V, contained a series of proposals relating to such matters as rights and duties of the parties and enforcement of the security, to be combined with any one of Proposals I to IV. 1.5 In response to the Working Paper we received many valuable comments on the need for reform in general, and on the particular proposals for reform we had made. A list of those who commented is set out as Appendix B. Response to the Working Paper revealed overwhelming support for our provisional view that mortgage law ought to be simplified and rationalised. It also revealed several issues which we thought merited further discussion between some of those who had commented on the Working Paper. As a further step in the consultation process we therefore held a seminar at the Commission on 3 1 July 1987 at which participants explained and discussed the views they had expressed to the By “consensually created securities” we mean all mortgages, charges and other security interests voluntarily created or granted by the mortgagor/chargor (including those deemed to have been created or granted voluntarily, in the special circumstances explained in para.