Mortgages of Part: Understanding the risks
Every so often I am faced with advising a lender on a mortgage over just part of the borrower’s land. Not all mortgages of part are problematic, but they should be avoided if possible.
When a lender mortgages property they need to ensure the mortgaged property benefits from all necessary rights (i.e. easements) of access and services to ensure that in the event of an enforcement scenario it can fully and easily realise its security over the property. It is my job as a lender’s lawyer to check this and certify to the lender that sufficient rights exist.
If access or services to the mortgaged property are required over adjoining land owned by the borrower, which is not being mortgaged by the lender, the lender will hit a problem – an easement cannot exist where the land benefitting from the easement (referred to legally as the dominant tenement) and the land over which the easement is enjoyed (referred to as the and the servient tenement) is in the same ownership. This is known as the ‘unity of seisin’.
Consequently, if the lender attempted to sell the property under its power of sale, it would not be able to do this with the benefit of the necessary easements, thus devaluing the lender’s security.
This may sound quite complicated so I shall provide an example:
A borrower owns a terrace of four houses with a shared access (also owned by the borrower). The houses are registered under one title number and the access is registered under another title number. The borrower requires a loan from ABC Bank Plc and the bank requires a mortgage over one of the four houses.
The issue here is that if the borrower defaults on the loan, and the bank then enforces its power of sale or took possession of the house, the house does not benefit from a right of way over the access. A right of way cannot be expressly granted at the point the mortgage is completed because the house and the access are in the same ownership. As there is no change in ownership, no easement is necessary, nor can one be created because of the unity of seisin.
If the borrower defaults on the loan and the bank sells the house under its power of sale, the house would not benefit from a right of way over the access. Furthermore, it would be extremely difficult for the bank to get a disgruntled borrower in default to agree to grant easements to a purchaser of the house.
However, the case of Taurusbuild Ltd and others v McQue and another (2019) may provide lenders with some comfort.
Background and facts of the case
This case involved a nursing home called Dinsdale Hall which was registered at the Land Registry under three separate title numbers; one for Dinsdale Hall, another for part of the property occupied by the owners (called The Hall), and a third for part of the property known as 2 The Hall. The latter was occupied by the owner’s mother.
Although the property was registered under three separate titles, each title was registered in the name of the same owner.
Planning permission was obtained to convert the whole property into residential apartments and finance was raised for the development with different lenders. Mortgage Agency Services Number Six Limited (MAS) secured its loan on 2 The Hall and the National Westminster Bank Plc secured a mortgage over Dinsdale Hall.
The borrower fell into financial difficulties and, in January 2011, 2 The Hall was repossessed by MAS under its power of sale. MAS sold 2 The Hall to Mr and Mrs McQue.
Around the same time NatWest appointed Law of Property Act receivers and Dinsdale Hall was sold at Auction to Taurusbuild Ltd.
2 The Hall had two possible accesses: it benefitted from an express right of way over a rear roadway; and access was also possible over a roadway in front of Dinsdale Hall which also gave access to parking spaces. The access over Dinsdale Hall was more convenient and so was used by the occupiers and visitors of 2 The Hall. There was however no express easement.
In the absence of an express easement, Mr and Mrs McQue applied to the Land Registry to register a right of way, with or without vehicles, over the access in front of Dinsdale Hall, together with a right to use two parking spaces. This application was opposed and the matter was referred to the First Tier Tribunal.
The First Tier Tribunal found that Mr and Mrs McQue were entitled to be granted the rights and Taurusbuild appealed to The Upper Tribunal
The Upper Tribunal dismissed the appeal. It was held that Mr and Mrs McQue were entitled to an implied right of way over the front access and to park in two parking spaces because such rights were reasonably necessary for the enjoyment of 2 The Hall.
The judge ruled that the rights were implied into the mortgage in favour of MAS under the rule in Wheeldon v Burrows. In addition, at the date of the mortgage, the fact that the front access and 2 The Hall were in common ownership was not fatal to the implied creation of the easements.
At the point MAS took possession of 2 The Hall and the receivers were appointed by NatWest over Dinsdale Hall, there ceased to be unity of possession and so the implied easement in the mortgage was transferred to Mr and Mrs McQue by MAS selling under its power of sale.
Rule in Wheeldon v Burrows
In a nutshell this rule applies on a disposition (for example sale, gift, lease, mortgage) of part of land in favour of a buyer to imply all quasi-easements over land retained by the seller.
In brief terms, a quasi-easement is a type of use made by a landowner over another part of their land, which, if that other part was owned by another person, would be an easement.
For example, person A owns and occupies two fields (1 and 2) and the only access to field 2 is over a track on field 1. The use of the track on field 1 by A to access field 2 is a quasi-easement. A then sells field 2 to person B. Under the rule in Wheeldon v Burrows, B would have an implied right of way over the track on field 1.
It has always been the view that it is not possible for a borrower/mortgagor to grant an immediate easement to a lender on the creation of a mortgage of part. This is because of the unity of seisin and because it is a required characteristic of an easement that it benefits land and not a person. If the land is in common ownership then the land does not require an easement as you do not require an easement to cross your own land.
Commentators on the case have therefore remarked it odd that the Upper Tribunal came to the conclusion that an easement could be implied into the mortgage when it is not legally possible to expressly grant an easement in the mortgage. Some go on to say that the judge seemed keen to do justice on the facts and did not explain why the unity of seisin was not fatal to the existence of an implied easement. It therefore remains to be seen whether others will seek to rely on this case.
Lenders should consequently remain cautious when being asked to take only part of the borrower’s land as security and take legal advice before proceeding. I remain of the view that mortgages of part should be avoided.