Creation of Legal and Equitable Mortgages in the UK

This essay discusses the creation of legal and equitable mortgages in the UK, including methods such as deposit of title deeds and mortgage by legal charge. It explains the purpose of reforms and the differences between the two types of mortgages. The essay also covers the creation of equitable mortgages through informal agreements and private mortgages. The subject is relevant to land law and property law courses.

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1.0 Introduction
Ideally, a mortgage is defined as any interest for a loan that has been borrowed and secured by a
real property.1 It is instructive to note that a mortgage is not a debt in the strict legal sense, but is
a lender’s security for a loan or debt that is advanced to another individual.2 Conversely, it may
also be regarded as a transfer of an interest in land from the legal ownership of the owner of the
land to the person that is lending the money on the condition that the interest on the land will be
transferred back to the owner once the loan has been repayed.3 This essay seeks to discuss two
types of mortgages namely; legal and equitable mortgages. It will reveal the methods through
which legal and equitable mortgages are created.
2.0 Creation of Equitable Mortgage
An equitable mortgage may be created through the following ways;
a) Equitable Mortgage by Deposit of title deeds
b) Informal Mortgage by Deposit of deed
c) Contract to create equitable mortgage
d) Private Mortgage
2.1 Equitable Mortgage by Deposit of Title Deeds
Traditionally, an equitable mortgage exists or is created where the lender of the money secures a
loan if the borrower transfers all documents of title of his the property to the lender.4 By dint of
section 53 (1) (c) of the Land Property Act 1925, the process of transfer of the documents must
be expressed in writing if the interest is equitable. In addition section 52(1) 5provides that if the
equitable mortgage is of a land that is not registered it is made by deed. In this sense it is
imperative to note that the mortgage is created once the lender takes official possession of the
title documents of the property and the mortgagee signs the Memorandum of Deposit of Title
Deed. The Memorandum of Deposit of Title Deed is a document embodying an affirmation from
1 Megarry, Robert, Charles Harpum, William Wade, Stuart Bridge, and Martin J. Dixon. The law of real property.
Sweet & Maxwell, 2012.
2 Gray, Kevin J., and Susan Francis Gray. Elements of land law. Vol. 4. Oxford: Oxford University Press, 2009.
3 Santley v Wilde [1899] 2 CH 474
4 Rollison, W. D. "English Doctrine of Equitable Mortgages by Deposit of Title Deeds or Other Muniments of Title."
Notre Dame Law. 6 (1930): 341.
5 Land Property Act 1925

the borrower that he has voluntarily deposited the title documents of the property to the borrower
so as to secure a loan.
2.2 Informal Mortgage by Deposit of deed
In practice the substance common law and the jurisdictions applying it did not recognize the
operation of equitable mortgages. In fact common law regarded deposit of tittle deeds as an
imperfect mortgage. However, the chancery courts were willing to protect transactions where an
estate owner manifested an intention to charge his property so to secure a loan. It can therefore
be argued that equitable mortgages may be created through informal agreements between a
lender and a borrower but the borrower used his property to secure the loan. The concept of
creation of equitable mortgage by deposit of title deeds was brought to force by Lord Thurlow in
Russel v Russel6 where an owner of a property undertook to deposit his land certificate and title
deed with a lender so that the lender could advance a loan to him. It was held that the land
certificate and title deed deposited by the borrower acted as security of the property. The court
took to the view that when such documents of title are deposited to a lender and loan is advanced
to the borrower there is a presumption that the title documents represent a security for the loan
hence an equitable mortgage is created.
Notably, equitable mortgages are created through a more flexible and informal approach than the
rigid common law approach. Apart from the presumption in Russel the flexibility of creating
equitable mortgage is evidenced by section 40(2) of the Land Property Act 1925 which provides
that, mere deposit of the title documents to the borrower amounts to a contract to create an
equitable mortgage and part performance of each parties contractual obligation. Once the
borrower received the deeds from the borrower and the loan is advanced to the borrower, either
the lender or the borrower can use the doctrine of equitable mortgage to enforce his rights under
the agreement.
2.3 Contract to Create Equitable Mortgage
6 (1783) 1 Bro CC 269,

By applying the doctrine of equity, ‘Equity regards as done that which ought to be done,’ and
section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 an equitable mortgage
may also be created when a lender and a borrower enter to a contract to create a legal mortgage.
The creation of an equitable mortgage through a contract to create a legal mortgage is
conditional on the contract law rule brought to force by the court in Tebb v Hodge7 that the
contract must be one which the courts can enforce by giving an order of specific of performance.
It is worth noting that a defective legal mortgage may be enforced through the application of
equitable doctrine if the courts can give an order of specific performance. Suffice to say, the
court will grant an order of specific performance of the equitable mortgage if the money that is
subject of the loan has actually been transfer to the borrower.
It bears noting that the law regulating the creation of equitable mortgage was changed by the
Law of Property (Miscellaneous Provisions) Act 1989. Section 2 of the Act provides that an
equitable mortgage will be enforceable only if there is evidence showing that there was an
agreement made in writing.
2.4 Private Mortgage
An equitable mortgage may also be created through private mortgages which are different from
the conventional standard form that is applied in commercial lending charges.8 More particularly,
a private mortgage may be created in circumstances where the borrower and the lender have a
social relationship. This is common in where the mortgagor and mortgagee are from the same
family. However, this type of equitable mortgage is likely to give rise to issues such as
misrepresentation and undue influence. It is worth noting that most of these issues are solved by
the application of the law applied to equitable mortgages. It gives added relevance to note that
private mortgages are also governed by the section 2 of the Law of Property (Miscellaneous
Provisions) Act 1989.
3.0 Creation of a Legal Mortgage
A legal mortgage is type of mortgage where an individual transfers all or some of his legal
interest i.e. title of a property to a lender or mortgagee to secure a loan. However, the mortgagor
7 (1869) LR 5 CP 73
8 Evans, Steve. "A Scrutiny of Powers of Sale Arising Under an Equitable Mortgage; A Case for Reining These in."
(2015).

shall be able to redeem back the legal interest in the property if he repay, in full, the loan
advanced by the mortgagor. A legal mortgage may be created through;
a) Long term Lease/ Mortgage by Demise
b) Mortgage by Legal Charge
3.1 A Long Term Lease/ Mortgage by Demise
A legal mortgage may be created through a long term lease that is granted to the lender. Pursuant
to section 85 of the Land Property Act 1925 an individual (the mortgagor) is allowed to grant
another individual (the mortgagee) a long lease of a real property subject to a loan being
advanced to the mortgagor. The mortgage contract must contain a provisions embodies the terms
of termination of the lease. The Further, section 859 provides that the long term lease will be
deemed to be terminated once the loan has been repayed. Typically, the duration of a
mortgagee’s lease is usually a period of 3000 years but the most parties in practice agree on an
earlier date. During the entire period of the mortgage the mortgagee retains an absolute estate in
the land. Suffice to say, this type of mortgage does not transfer the estate in the land to he
mortgagee. The mortgagee is only granted and enjoys propriety interest in the land. This implies
that the mortgagor has a right of possession of land or property. However, in many cases the
mortgagor remains in occupation of the property.
A legal mortgage created through a long term lease does not bar the mortgagor from creating
other legal mortgages. The mortgagor has the freewill to create another legal mortgage with the
same property so as to raise more funds. As a matter of law, section 87 of the Land Registration
Act provides that the creation of a sub-lease gives rise to a legal mortgage. In the same breadth,
the mortgagor can grant another long term leases to other mortgages on the same property for
duration longer than the first lease. The difference in the duration creates an impression that the
legal interest in the property in the first lease is distinct from the legal interest in the second
lease. It should be borne in mind that creation legal mortgage through a long term lease or
mortgage by demise is no longer applicable to interests in land that are registered. This shift in
legal approach is reflected in section 23 of the Land Registration Act 2002. However, a mortgage
by demise still applicable to interests in land that are unregistered.
9 Land Registration Act 1925

3.2 Mortgage by Legal Charge
According to section 85 of the Land Property Act 1925 a legal mortgage maybe created through
a mortgage by legal charge. This is a charge by legal deed that has to be in the form legal
mortgage. Pursuant to section 87 the mortgage in this case is created once the mortgagor has
executed a charge by deed which his an affirmation that there is charge over the land in question
created by way of legal mortgage and is conditional on the repayment of the money advanced
with interest. It is instructive to note that in a mortgage by legal charge the mortgagor will still be
the legal owner of the property through out the mortgage period unless he defaults in repaying
the loan or breaches any other mortgage term. On the other hand, the mortgagee under this type
of charge has certain rights over the mortgaged property or security. These rights include the
right to take possession of the security and the right to the power of sale. However, these rights
may only be exercised after the mortgagor defaults in repaying the loan.
4.0 Purpose of Reforms
The Land Property Act 1925 clearly brought to force some notable changes in how legal
mortgages may be created. The primary purpose of the 1925 reforms was to ensure that the
owner of the property/ mortgagor retained a significant part and control of the interest of the
property even though the property is a subject of a mortgage. In addition, the reforms were also
brought about the need to give a mortgagee suitable and sufficient remedies in the event the
mortgagor default in repaying the loan.
The provisions of section 53 (1) (c) and 52 (1) of the Land Property Act 1925 were echoed by
the Court of Appeal in United Bank of Kuwait plc v Sahib10 which noted that the rationale behind
the sections is to prevent the creation of equitable mortgages only by using the deposit of deeds
without any evidence of agreement in writing. It can therefore be argued that the reforms in the
operation of the doctrine of equitable mortgages were necessary to strengthen the rights of the
mortgager and mortgagee. Incase of a dispute such as default in repayment of the loan, undue
influence, misrepresentation or where the mortgagee want to exercise the right of power of sale
under section 10(1) of the Land Property Act 1925, the contract or any express agreement in
10 [1997] Ch 107

writing as may be used a evidence to establish the intention of the parties and their real
obligations.
The reforms in the legal position of legal and equitable doctrines in the United Kingdom were
also been sparked by the need to bring certainty to the financial and economic aspect of
mortgages.11
5.0 Conclusion
It can be conceded that the most common type mortgage that is used by financial institution
across the United Kingdom is the mortgage by legal charge which is one of the methods of
creating a legal mortgage. On the flip side, the market for legal mortgages in the United
Kingdom has increased in the past decades due to the reforms in the law. Lending institutions
seem to be satisfied with some of the remedies that have been granted by law. This stems from
the fact that there is a guarantee that if the mortgagee defaults in repaying the loan the lender can
recover the amount advanced by exercising his rights over the security. However, many lending
institutions such as banks when creating a mortgage by legal charge have undertaken to conduct
searches of the title surrendered by the borrowers to investigate if there is any existing mortgage
over the popery.
References
11 McAuslan, Patrick. "Whose mortgage is it anyway? Producers, consumers and the law in the UK mortgage
market." (2009): 1-57.

Evans, Steve. "A Scrutiny of Powers of Sale Arising Under an Equitable Mortgage; A
Case for Reining These in." (2015).
Gray, Kevin J., and Susan Francis Gray. Elements of land law. Vol. 4. Oxford: Oxford
University Press, 2009.
Land Registration Act 1925
Land Registration Act 2002
Law of Property (Miscellaneous Provisions) Act 1989
McAuslan, Patrick. "Whose mortgage is it anyway? Producers, consumers and the law in
the UK mortgage market." (2009): 1-57.
Megarry, Robert, Charles Harpum, William Wade, Stuart Bridge, and Martin J. Dixon.
The law of real property. Sweet & Maxwell, 2012.
Rollison, W. D. "English Doctrine of Equitable Mortgages by Deposit of Title Deeds or
Other Muniments of Title." Notre Dame Law. 6 (1930): 341.
Russel v Russel (1783) 1 Bro CC 269
Santley v Wilde [1899] 2 CH 474
Tebb v Hodge(1869) LR 5 CP 73
United Bank of Kuwait plc v Sahib [1997] Ch 107