Some Mortgagees’ Rights

Second Mortgagee’s Right of Redemption

A mortgagor’s right to redeem is fundamental. A mortgage can be redeemed at any time up until sale. The cost of repayment and redemption fall on the mortgagor.

In some instances, it may be necessary for the mortgagor to give six months’ notice of his intention to redeem. This does not apply where the mortgage monies have been demanded or the mortgage has been enforced. The Irish Consumer Credit Act prohibits redemption fees on mortgages other than compensation under a fixed interest mortgage.

A mortgagor may require the mortgagee to assign the mortgage debt and convey the mortgage to a nominee. However, if the mortgagor redeems a mortgage, he is not allowed to maintain the mortgage so as to claim an interest in priority to a subsequent mortgagee.

This right also applies to a lower ranking mortgagee, who may thereby acquire a higher ranking mortgage. A purchaser of land from the mortgagor may also acquire the mortgage separately from one  of the mortgagees and keep it alive so as to keep priority over later mortgagees.

 

A person who is entitled to redeem a mortgage may apply for a court order for sale instead of redemption. This will not generally be granted if there is not sufficient monies to discharge the loan. Exceptionally, a court may allow a sale where there is not enough proceeds, as for example where a borrower is ill and needs to move house.

Questions may arises where a borrower wishes to sell to reduce his debt but the lender does not believe the sale is opportune. Generally, the lender’s interests will prevail.

Cross Security

It may be that the default under the loan agreement triggers default under other loan agreements with the same borrower. Other loan agreements may thereby become enforceable. It may be that another property is held as cross security under another loan already. It might be desirable to amend another mortgage, if necessary, to ensure any equity under another mortgage is available as security under the varied loan agreement.

The lender may have security over two or more assets. They may or may not be cross secured already. If not, then it may be appropriate to ensure or confirm that they are cross secured so that both assets are available.

It is possible to have a confirmatory loan agreement and/ or mortgage executed which affirms the position in case, for any reason, there is a doubt as to the existing availability of cross security.. For example, there may be all sums due provisions in the mortgage deed. The all sums due clause in the mortgage deed may be restricted by the terms of the loan agreement. One original loan agreement may state that, for example, that facility A is secured by security A, while another state that facility B is secured by facility B.

It might me argued in the above case, on the basis of the wording of the loan agreement, that notwithstanding the “all sums due” clause in the mortgage deed, that is implied that security A is the only security for facility A and security B is the only security for facility B. A confirmatory loan agreement amendment may remove the risk that a court will interpret the loan agreements against the lenders interests. Where there is no existing sufficient all sums due security, a confirmatory or new mortgage deed may be appropriate.

Cross Default

Generally a default on one loan agreement will trigger default on other loan agreements with the lender or with other lenders because of cross default clauses. On the one hand, the cross default will allow the opportunity to negotiate on all loan agreements. On the other hand, it may have adverse consequences across the borrower’s portfolio of assets. A cross default may arise because of a personal or business partner has defaulted on another facility. This of itself can have cascading effect across the borrower’s portfolio.

Sometimes, borrowers are party to loans agreements with spouses, relatives and business partners on one loan agreement while being a sole borrower or having different partners on another loan. Generally each borrower is jointly and severally liable on the whole of each facility. This means that each borrower can be personally sued for the whole of the loan monies which can be recovered from any one of them. It is then a matter for that borrower to pursue his partners for a contribution of his appropriate share. Some partnership loan facilities, particularly investments organised by financial intermediaries are not joint and several and may be “limited” recourse.

It may be that the security on another facility with the lender is already available because there has been a cross default and that facility is “all sums due”. If there are other partners on that facility, then the borrower’s share of the equity only, is available. If there is cross default and cross security with a facility on a family home, then there may be limitations on the right to secure further advances to which a non-owning spouse has not given specific prior written consent.

Consolidation

The right of consolidation is the right of a mortgagee to require a borrower who has two mortgages to redeem both or neither. This is an exception to be mortgagee’s rights to redeem.

A borrower may have two loans one which is well secured with a low loan to value ratio and another which is “under water”. The purpose of consolidation is to prevent injustice to mortgagees by preventing redemption leaving inadequate security. This is a different issue to that of whether the mortgage itself is an “all sums due” security. This may be the case irrespective of consolidation.

The Law of Property Act excludes the right of consolidation unless the mortgage  deed otherwise provides. It provides that a mortgagor seeking to redeem a mortgage is entitled to do so without paying money due under a separate mortgage of other property. This position only applies in so far as the mortgage deeds do not change this position.

There are conditions and restrictions on the right to consolidate. Where there is a later mortgage, of which the mortgagee has notice, the right to consolidate does not hold good against the lower ranking mortgagee. Otherwise the mortgagee could undermine the rights of the second mortgagee by taking a third mortgage.

There are certain other conditions. The same mortgagor must originally have created both mortgages. The right is an equitable right and the courts therefore have regard to principles of fairness in applying it. There are circumstances where it will not apply where it could prejudice a third party, such as another mortgagee.

The right  of consolidation applies to all type of property including real property and movable property. Each deed should be considered separately. It may be enough that there is a right to consolidate in one deed. The right of consolidation also applies to a later lower ranking mortgagee who redeems an earlier mortgage.

The rules on consolidation can be complex. There are scenarios under which a lender by purchasing another lender’s mortgage can gain a right to consolidate that it would not otherwise have.

Marshalling

Marshalling is a principle which may sometimes be to a mortgagee’s advantage. It can arise where a mortgagor mortgages one property (A) to one lender, and the same property (A) and another property (B) to another mortgagee. Under the principle, the mortgagee who has two securities may be compelled to satisfy itself from property B where property A is insufficient to satisfy both mortgagees’ debts.

For example, a mortgagor may mortgage property A and property B to the first mortgagee to secure a £100,000 debt. He may subsequently mortgage property A to another mortgagee to secure a secure £70,000 debt. If the normal rules applied, the first mortgagee could take £50,000 from each property leaving the second mortgagee’s security inadequate. If the securities are marshaled, the first mortgagee is obliged to take as much as possible of his security from property B leaving property A mortgaged  for the balance only.

It is not enough that one mortgagee has two securities, while the other has just one. Certain conditions apply. The right arises against the mortgagor of both properties. It is not a right that applies between the creditors.  It does not interfere with the right of the first ranking mortgagee to realise his security in the way he chooses.

The first ranking mortgagee may realise his security in such a way as to render one of the securities inadequate for a subsequent mortgagee. The principle operates so that  subsequent mortgagee will be subrogated to the prior mortgagees rights over the first property (A). The first ranking mortgagee would have to hold part of the proceeds of sale of the properties for the second ranking mortgagee. The  principle is an equitable principle so that it is only available in accordance with principles of fairness. It may be necessary to apply to court to secure the right.

Marshalling will not apply where it would prejudice a third-party.  If the property (A; above) is subsequently mortgaged to a third mortgagee, marshalling will not be allowed so as to prejudice the rights of the third mortgagee.

Subrogation

Subrogation may be available, subject to court discretion and principles of fairness. Subrogation is a general principle which applies where one person discharges a debt due to another secured person.  In this case,  the person discharging the debt may be subrogated to the rights of the person whose debt has been discharged. If that person had security, subrogation may act so that the person discharging the debt, steps into that other’s shoes in relation to the security.

The principle may operate where a guarantor or lower ranking mortgagee redeems an earlier mortgagee. The right to the mortgagee’s security is an equitable right where the mortgagee’s debt has been redeemed. There may also be statutory right, which reflects the same principle, to keep the debt and the earlier mortgage “alive” and take an assignment of them.

The principle of subrogation has wider application and may be available in situations where monies have been mistakenly or fraudulently used to redeem another security.  In these cases the rights of the party whose money was used to redeem another mortgage is subrogated to the rights of the security holder.

A Court Order may  be necessary to give effect to subrogation. It is a discretionary order so that the court will only grant it,  if it is fair and reasonable in the circumstances. .

Quistclose Trusts

A so called “Quistclose” trust (named after a legal case) may arise where a loan agreement states that monies are to be used for a particular purpose. A loan offer will typically specify the purpose for which loan monies are to be used.  It does not follow that a Quistclose trust will be available.  The use has to be quite specific.

Where a Quistclose trust is held to apply, the lender may retain a property interest in the loan monies, after they have been transferred.  This cuts across the normal principle by which monies lent belong to the mortgagor and are his property.  There may be separate security but the mortgage monies themselves are not normally secured.

A Quistclose trust may be important in insolvency. If the lender retains a property interest in the monies, then this gives entitlement to the monies in insolvency in priority to  other creditors.

The cases in which Quistclose trusts has been made declared by the courts, have been where the monies are not used for the intended purpose or the borrower goes into insolvency before using them.

When monies are used for a particular purpose and are exchanged into another asset,  it may be possible to “trace” these funds.  That is to say, it may be possible to establish  a security over the proceeds of the funds concerned.