The loan agreement and the mortgage deed together set out the legal rights and obligations of the lender and borrower. It is possible in principle, to have all matters comprised in the mortgage deed. However, convenience and practical considerations make a separate loan agreement and mortgage deed preferable.
The loan agreement contains the key commercial terms of the loan. The mortgage deed deals with the security. Sometimes there is a duplication of subject matter in the two documents. There may be inconsistencies between the loan agreement and mortgage deed.
Ideally, the loan agreement and mortgage deed would be drafted in parallel, so there is no duplication and risk of incompatibility. In higher value transactions, a bespoke loan agreement and mortgage deed may be used. In this case, the mortgage deed is likely to be shorter with considerably less duplication of the covenants and representations in the loan agreement.
In the vast majority of cases, an “omnibus” mortgage is used in conjunction with a loan agreement. The mortgage/charge is intended to be in sufficiently broad terms, so as to be compatible with a wide range of underlying loan agreements. In many cases, there will be several loan agreements during the lifetime of the mortgage.
Further advances may be made, and borrowings which fall due may be refinanced or restructured at a later date. These considerations make an omnibus mortgage deed desirable. Quite apart from issues surrounding the cost and inconvenience of putting in place new mortgages, the bank will wish to preserve its priority against later charges, judgment mortgages, etc.
There are risks that the incompatibility of the loan agreement and mortgage/charge deed will have unexpected effects. The loan agreement and in particular its special terms represent the specially negotiated terms of the lending. If there is a conflict between the loan special conditions and the mortgage/deed of charge conditions, priority is likely to be given to the former. The inconsistencies are likely to be interpreted against the lender’s interests. The courts have criticised lenders whose loan offers are significantly inconsistent with their mortgage deeds.
Prescribed Forms I
The Land Registration Rules S.I. 559 of 2011now prescribe forms of charge for Form 114Form 115charges executed on or after 1st March 2012.These prescribed single page forms, cross reference and incorporate detailed the mortgage conditions, which are to be contained in a separate document www.prai.ie.
Form 51 is intended to cover personal fixed charges for present and future sums due. Most banks, credit unions, and building societies have agreed to use the mortgage conditions published by the Irish Banking Federation / Banking & Payments Federation Ireland in residential cases. The mortgage conditions now contain the bulk of the content of the charge.
They are incorporated by reference in Form 51; e.g.
This Mortgage incorporates the Banking & Payments Federation Ireland General Housing Loan Mortgage Conditions (version 1.1 2011) (the “Conditions”) as if they were set out in this Mortgage in full, and the Mortgagor acknowledges that the Mortgagor has been given a copy of the Conditions and has read them and agrees to be bound by them.
Prescribed Forms II
In respect of Debentures and Commercial Mortgages executed on or after 1st March 2012, where a specific charge on registered land is intended to form part of the security, Form 52 must be used as the prescribed. It is a simple one-page document. It is supplemental to or may incorporate the principal deed of Commercial Mortgage/Debenture.
The mortgagor may execute both documents, but only the one page Form 115 is lodged with the Authority. The Debenture/Commercial mortgage conditions are retained by the lending institution.
Terms of Mortgage
A lender’s mortgage deed terms and conditions will typically vary in accordance with the status of the borrower (company or individual), the security (real property and / or other assets) and the transaction type. The mortgage deed will usually be in a standard, non-negotiable form. The clauses provided will deal with multiple scenarios, so that only those relevant in a particular case, take effect. A mortgage deed may be negotiated in higher value or unusual transactions.
Many important terms and conditions which apply to mortgage deeds are set out and implied by the Conveyancing Act. It is possible to change some of these terms and conditions so as to make the position more favourable to the lender. Since the 2009 Act reforms, this is possible only in relation to “non-housing” loan mortgages.
Unfair Contract Terms Regulations
The Unfair Contract Terms Regulations apply to mortgages with consumers in the same way that they apply to loan agreements. A consumer is a borrower who is not acting in the course of a business. Under the Unfair Contract Terms Regulations, a clause in a loan agreement can be deemed void or can be modified to the extent that it is unfairly prejudicial to the consumer.
A clause in a mortgage deed may be capable of a wide meaning which gives sweeping powers to the lender. The Unfair Contract Terms Regulations may require it to be interpreted in a narrower way that is fairer to the consumer borrower.
Apart from the Unfair Contract Terms Regulations, most mortgage deeds will be interpreted in favour of the borrower under common law principles of interpretation. These principles apply when a legal document is produced by one party, the lender, in a standard form.
Any ambiguity is to be interpreted against the interests of the party who has prepared the document. This principle will apply to most borrowers whether they are consumers or not.
A mortgage requires an underlying debt. If there is no debt, the mortgage can be redeemed by the borrower. The mortgage must, therefore, incorporate or refer to a covenant to pay the loan monies or undertake an obligation that can be expressed as a liquid sum.
In some (less usual) cases, the detailed provisions in relation to the repayment of principal and interest are specifically set out. The mortgage may refer to the loan agreement which sets out the commercial repayment terms. More commonly, the monies secured by the loan and agreed to the paid, are all monies due on all accounts between the borrower and lender (an “all sums” due mortgage). This usually covers all loans and accounts, present or future actual or contingent, owed solely or jointly, whether as debtor, as principal or as guarantor.
An “all sums due” clause may give the lender security over the mortgaged property for a wide range of present and future liabilities and not just the immediate debt in relation to which it was created. However, the wide terms of a mortgage deed may be restricted by the loan agreement which may expressly or impliedly limit the mortgage in some way.
The security in many cases consists of specified real property only. In the case of a mortgage of business assets, even one granted by an individual, the mortgage deed may include charges over certain non-movable business assets such as goodwill, contracts, accounts, and debts.
In the case of a company, the mortgage deed may include a “floating charge” over all plant, machinery, equipment and other movable assets present and future which the company may have or acquire.
Most mortgages, charges and debentures follow a broadly similar structure. Their objective is to create a proprietary security in favour of the lender which can be asserted against all comers. This proprietary right, if properly created and perfected, should allow the lender to sell and realise the secured asset in satisfaction or part satisfaction of its debt, in priority to other creditors. The essence of security is that it should be robust enough to withstand insolvency and challenges from unsecured creditors.
A legal charge of registered land must follow the charging language prescribed by the Land Registry Rules. The chargor must assent to the registration of the charge on the relevant title. Since the 2009 Act, the Land Registry Rules have prescribed the form of charge deed.
A debenture, (by which it is intended to refer to a corporate security over all, or substantially all the assets of a company or a particular business or undertaking of the company), will have many of the same characteristics and clauses as a mortgage or charge. Debentures (in this context) might be described as mortgages or charges with certain enhanced elements. These additional features are looked at separately below.
The parties to a mortgage deed should be the owners of the property or at least, persons with powers to charge and dispose of the assets concerned. A mortgagee/chargee cannot take any better title than that which the mortgagor/chargor has. The mortgagor will wish to ensure through investigation or certification of title, that the appropriate parties have joined in the mortgage or charge.
It may emerge from investigation of title to real property assets that a third party has some subsidiary interest in the property. In this case, a deed of confirmation may be appended to confirm the mortgage of the interest concerned.
It may be that another lender or party has a security interest (e.g. a group company). In this case, it may be agreed that the other security holder will subordinate its rights to that of the new charge holder.
Some mortgages provide that the security is given, both for the benefit of the principal lender and also its associated group lenders. Provision may be made for the transfer of the benefit of the security to new associates and third parties. Similar issues to those in the context of loan agreements arise. The new charge should register the transfer in the appropriate Registry.
Charging/Grant of Security
In the case of an individual, the charge is likely to be limited to real property and ancillary property rights. The Bill of Sales Act makes the creation of security over movable goods by an individual prohibitively difficult. In the case of a company, a wider range of assets, embracing all or almost all of the assets of the business, may be charged by way of fixed or fixed and floating charge.
The real property is usually described in the schedule to the mortgage. The mortgage or charging clause should provide that the property is mortgaged or charged with the payment of the obligations set out in the mortgage, subject to its terms and conditions and subject to the proviso for redemption.
Ancillary property rights attaching to the land and buildings may be separately charged. This may include rights of compensation from a public authority, covenants, and agreements relating to the construction of property, provision of services, completion of roads, etc. The benefit of any such charge would be perfected only on giving notice to the relevant counterparty /obligor.
It is usually provided that the security is a continuing security for all sums on all accounts. This is designed to reverse the rule in Clayton’s case which provides that the first repayments reduce the first indebtedness. Where there is a revolving facility or a variable overdraft, earlier repayments may otherwise be deemed to redeem and release the security, so that subsequent advances may be unsecured. Therefore, mortgages and charges are expressed to be security for the full balance outstanding from time to time.
A fundamental principle of mortgage law developed by the Courts of Equity, is the right of the mortgagor to redeem. In the case of a mortgage, the secured property is re-transferred. In the case of a charge, it is released and discharged. It is impermissible to place restrictions on the right to redeem. These are so-called “clogs” on the equity of redemption.
Covenant to pay
The covenant to pay is fundamental. Unless there is an obligation to pay a sum in money or monies worth, the mortgagor/chargor is entitled to redeem. In the case of a mortgage/charge by a third party who is not the borrower, there should be a limited recourse guarantee of the debt, so that there is a financial obligation on which to base the charge.
The mortgage deed may include details of a specific debt or loan agreement. More commonly, the mortgage will express itself to be security for all sums due on all accounts between the borrower and the lender whatsoever, whether as principal or surety or whether jointly or with others or as a sole borrower.
The “all sums” clause will usually incorporate a wider range of potential liability such as acceptance finance, leasing finance, interest, commissions, costs expenses and bank charges. The loan agreement may by its terms, limit the extent and breadth of an “all sums” due clause.
The mortgage monies should be expressed to be payable on demand. Provided that the underlying loan agreement does not contain incompatible clauses, then this should mean that the Statute of Limitations period, runs only from the date of demand. If the monies fell due on the date of a technical breach, then the Statute of Limitations might run unknown to the lender and during a period of forbearance.
Covenant to Pay
There will generally be a covenant that interest is payable. A certificate by an officer of the bank may be deemed conclusive evidence in the absence of manifest error, as to the amount of interest which arises. The interest may be specified to run at the underlying rate for the relevant class of account.
The covenant to pay may provide that monies are payable on demand, or that they are payable when due under the underlying loan agreement. Where there is a loan agreement, which provides that monies are due on default, then the combined effect may mean that the loan monies are payable on demand on default. If the loan agreement is itself payable on demand or becomes payable on demand by reason of default, then the security may become enforceable. Its covenant to pay, may itself require a demand. A single demand will usually be effective to trigger the on-demand provisions in the charge deed and in the loan agreement, where they refer to the same debt
Lenders do not usually demand loan monies until a final decision to enforce has been made. The demand of all monies due under the loan agreement usually represents a parting of the ways with the borrower. It is usually followed by enforcement of security by way of the appointment of a receiver and/or sale.
The mortgage deed should set out how a demand may be validly made. Usually, it is deemed validly made if delivered or sent by prepaid post to the borrower’s registered office or last known address. Due to the risk of technical invalidities with demands, it may be specified that a demand is deemed valid, notwithstanding inaccuracies or minor errors.
Mortgage covenants are designed to protect the value and integrity of the secured assets. The covenants and conditions should not contradict those in the loan agreement/facility letter. The following restrictions usually apply to dealings by the mortgagor with the property;
- prohibition on charges or mortgages to another party;
- prohibition on sales or transfers of the property or any part of it;
- requiring payment of compensation in relation to the property;
- prohibition on leases, lettings or sharing possession of the property other than as permitted.
There are usually positive and negative obligations on the borrower, for the purpose of protecting the secured assets. The particular covenants will depend on the type of security involved. The following are typical terms contained or implied in most mortgages: –
- to pay rents, ground rents and service charges;
- to observe covenants in relation to the title;
- to comply with statutory legal obligations;
- not to let the property without consent;
- an obligation to keep the property in repair. If the mortgagor defaults, the mortgagee may generally enter and undertake the repairs without becoming liable as mortgagee in possession;
- to comply with the terms and conditions in any lease; this is of vital importance as non-compliance with a lease could mean the borrower’s interest in the property is forfeited and of no value;
- not to make any alterations or changes without the lender’s consent;
- not to develop without consent;
- not to apply for planning permission without lender’s consent;
- to produce information to the lender as required;
- to enforce the terms and conditions of leases;
- to give the lender notice of a threat to forfeit a lease or any proposed public authority action (e.g. compulsory acquisition).
Insurance covenants protect the security. In many mortgages, there is a simple obligation on the borrower to insure. However, the interest in the insurance money is not effectively captured, unless the lender is named as a sole loss payee or is jointly insured.
Endorsement of the lender’s interest (which is common) is not sufficient. Ideally, the insurer should agree not to avoid the policy or cancel it without first notifying the lender. In many cases, joint insurance and the non-cancellation clause is not achievable, and a noting of interest only is achieved.
The mortgagee usually has power under the mortgage deed to insure and keep insured property against damage by fire and similar insurable risks, if the mortgagor does not do so. Premiums paid by the lender for insurance are a charge on the property.
Mortgages usually require monies received from the proceeds of an insurance claim to be laid out in the repair or restatement of the property or to be paid to the mortgagee. If the policy is in the name of the mortgagor pursuant to a covenant to insure, the mortgagor is entitled to the proceeds. However, the mortgagee may have an interest by way of charge in the proceeds. In order to give full effect to this, notice must be given to the insurance company of the mortgagee’s interest.
In the case of a structure such as a commercial unit or apartment block, the management company will typically be responsible for the repair, maintenance and reinstatement of the structure. The policy will typically be in its name. The interests of apartment owners and their mortgagee are commonly automatically noted.
Trading and Licensing Covenants
In the case of commercial or development facilities, there may be further covenants appropriate to the circumstances. These are more common and more extensive in the case of a mortgage debenture. See the separate section on the additional features of a debenture.
The following trading and licensing covenants may be included in a mortgage by an individual.
- proper conduct of the business;
- keeping proper books of account and making them available;
- devoting time to the conduct of business;
- maintaining licences.
There may be further covenants and obligations relevant to the type of security.
As a mortgage over real property is a proprietary interest, the document creating it should be executed as a deed. Execution as a deed removes questions in relation to consideration. Execution as a deed requires formal execution and witnessing after the 2009 Act.
Execution as a deed is necessary to create a security over real property. It removes questions about consideration (e.g. past consideration issues) and creates a 12 year Limitations period.
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