Dividing the Single Indivisible Transaction: Balancing the Interests of Mortgagees and Innocent Occupants
(2015) 4 Oxford University Undergraduate Law Journal 37-52
Posted: 20 May 2016 Last revised: 31 May 2017
Date Written: September 1, 2015
When a mortgagee provides the funds necessary to purchase a property, the law protects the priority of the mortgagee’s security interest from any other interests in the property created after that property was purchased (unless consented to by the mortgagee). The House of Lords affirmed this principle in Abbey National Building Society v Cann (‘Cann’), and rejected the technical argument based on a scintilla temporis in favour of the policy argument concerning the need to ensure that housing loans are available and affordable. The effect of this principle is to allow the mortgagee to enforce the security interest in the property in the event of the mortgagor’s default, even if there are individuals with an equitable interest in the property and who are in actual occupation.
The loan, the purchase of the property and the creation of the mortgage on the property are collectively considered by the law to be a single indivisible transaction, preventing any equitable interest from arising at any point between these stages. This is the first sense in which the transaction is said to be indivisible. The transaction is also indivisible in another sense, for the burden of the mortgagor’s default on the loan is subject to no apportionment in the event that he fails to meet his payment obligations. The mortgagee is allowed to enforce the security interest and the equitable interests of the occupants of the property are irrelevant at this stage. Yet, there are situations where one may question whether this leads to a fair outcome. Where the default on the mortgage occurs due to the fraud of the mortgagor, and the mortgagee ought to have known or suspected this, it is arguable that the ‘relatively innocent’ holder of the equitable interest should not have to suffer the full burden of the consequences of the default. This was the situation facing the House of Lords in Re North East Property Buyers Litigation (‘Scott’).
Keywords: Mortgages, Sale and Rent Back Transactions
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