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…

Accordingly, for an equitable mortgage to be enforceable it is now necessary to show that the agreement was made in writing. It will not do merely to have a later deed which states that the agreement exists (as was previously common practice) because that deed would merely purport to record an existing contract which would not satisfy s. 2, and accordingly would not amount to a contract at all. This effect of s. 2 (which may well have been unforeseen) was confirmed by the Court of Appeal in United Bank of Kuwait plc v Sahib [1997] Ch 107. This prevents the creation of the most informal old type of mortgage, in which deposit of deeds was used without anything more being done.

The one exception to this rule will be cases in which one of the parties (probably the intended mortgagee can rely on the doctrine of constructive trust, as happened in Kinane v Mackie-Conteh [2005] EWCA Civ 45. However, it would appear that commercial lenders, like banks and building societies, will not normally be able to rely on this doctrine because of the need for belief in the existence of a mortgage relationship, when such organisations will be clear as to the need for a written contract compliant with s. 2.

Equitable charge

An equitable charge arises when a charge appropriates specific property to the repayment of a sum of money in such circumstances that a legal charge does not arise. This type of arrangement is rare and would normally require a written document.

Equitable mortgage or an equitable interest

One obviously cannot grant a legal mortgage of an interest that is recognised only in equity. This rule dates from the days of separate courts with separate jurisdictions. Common law did not recognise the equitable interests developed in the Chancellor’s courts, and accordingly would not enforce any legal dealings with them. Therefore, any mortgage of an equitable interest in land, such as that of a life interest under the old settlement, had to be equitable in character. The method of creating such mortgages was not changed in 1925 and thus they continue to be made by a transfer of the entire interest to the mortgagee, subject to an agreement that it will be returned to the mortgagor on repayment of the loan. The transfer must be made, at the least, by writing, in order to pass the equitable interest to the mortgagee under LPA 1925, s. 53(1)(c). Normally thereafter, the mortgagee should give notice of the transfer to the trustees of the trust under which the interest exists.