Equitable Mortgages

Contract to create a mortgage

Under the principle that ‘Equity regards as done that which ought to be done,’ a contract to create a legal mortgage will be regarded as giving rise to an equitable mortgage from the date of the contract. Of course, since the introduction of s. 2 of the Law of Property (Miscellaneous Provisions) Act 1989, the contract itself must be made in writing. Reliance on the equitable rule is also dependent upon the contract being one which the courts would enforce by an order for specific performance (Tebb v Hodge (1869) LR 5 CP 73). A defective legal mortgage (e.g. one which has been signed but not witnessed) will be similarly treated, as long as specific performance is available. This is similar to the rule for defective leases. However, specific performance will not be available in any of these cases unless the mortgage money has actually been advanced, for traditionally equity has declined to force someone to make a loan. In such cases, the mortgagor could fall back on his common law remedy of damages.

Informal mortgage by deposit of deeds

In the past, the willingness of equity to recognise and protect any transaction in which it was clear that an estate owner had intended to charge his property with the repayment of a loan meant that many informal arrangements were regarded as equitable mortgages because equity regarded what had taken place as evidence of a contract to grant a mortgage. The classic example of the protection afforded by equity arose where an estate owner deposited his land certificate or title deeds with the lender in return for the loan. This was recognised as creating an equitable mortgage of the property in Russel v Russel (1783) 1 Bro CC 269, and continued in modern law under the saving provisions of LPA 1925, s.13. For this type of mortgage, until 1989, no written record of any kind was necessary, for the deposit of title deeds was regarded not only as constituting the contract to make the mortgage but also as amounting to part performance for the purposes of LPA 1925, s. 40(2). Moreover the deposit and receipt of the deeds were regarded as part performance by each party respectively, so whichever side wished to rely on the doctrine might do so. Despite this, however, a written record was desirable in order to provide clear evidence of the nature of the transaction. These mortgages were convenient and cheap where a short-term loan was envisaged.

The law relating to these informal mortgages was, however, changed by the Law of Property (Miscellaneous Provisions) Act 1989, s. 2, because that provision relates to:

  • A contract for the sale or other disposition of an interest in land…

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For more information on:

  • Equitable charge
  • Equitable mortgage or an equitable interest