The Rights of Mortgagors & Mortgagees : A Brief Comparison of the position in UK & Malaysia

Saw your dream house but don’t have a spare RM1,000,000.00 lying around. What can you do? When an individual wants to purchase a property, they would take on a mortgage better known as a loan.

A mortgage is defined as “a conveyance of land…as a security for the payment of a debt or the discharge of some other obligations for which it is given. This is the idea of a mortgage, and the security is redeemable on the payment or discharge of such debt or obligation…” as per Lindley LJ in Santley v Wilde (1899) 2 CH 474.

The mortgagee is the lender who provides a loan to the mortgagor (the borrower) for the purchase of a property. The mortgagee would not own the property through the loan but, retain a lien or a right over the property. In the event the mortgagor defaults in the payment of the loan, the mortgagee then has the right to sell the property to complete the repayment of the loan.

In other words, the mortgagee can exercise its power of sale if the mortgagor fails to meet their loan repayment obligations. Based on the above, it would seem very unfair that a mortgagee can exercise such a right which places the mortgagor at a severe disadvantage. The question then arises as to how the law seeks to balance the rights of a mortgagor and a mortgagee.

It is important to note that a mortgagee has an unqualified and/or absolute right to possession of the mortgaged property which arises as soon as the mortgage is made and not dependent on any default by the mortgagor. This was held in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] 2 All ER 35 where the High Court (Chancery Division) held as follows:-

“The mortgagee was entitled to an order for possession because a legal mortgagee’s right to possession was absolute, apart from any restriction expressed or implied in the document of mortgage, and was exercisable immediately on the execution of the mortgage without any default on the part of the mortgagor; in the present case the restriction in the mortgage had become no longer applicable, and the court had no discretion but to make the order.”

A mortgagee derived its rights to exercise their power of sale under Section 101 of the Law Property Act 1925 (‘LPA 1925’). However, this is subject to the requirements under Section 103 of LPA 1925.

Section 101 of LPA 1925 provides that the mortgagee can exercise its right and/or power to sell the mortgaged property if the following 3 conditions are fulfilled:-

1.  The mortgage is created by deed;
2.  The mortgage money is due; and
3.  The mortgage deed does not have contrary intention which precludes a power of sale.

When exercising this power of sale, the mortgagee must comply with the one of the following requirements as provided under Section 103 of LPA 1925:-

1. The mortgagee must give notice requiring payment to the mortgagor. If the mortgagor has defaulted for a subsequent 3 months after service of the notice, only then would the mortgagee be entitled to exercise his power of sale; or
2. When the mortgagor failed to pay some interest which is is in arrears (payment due) for 2 months after the same becoming due; or
3. There has been some breach of the Act or deed on the part of the mortgagor, other than non-payment.

If one of these requirements are fulfilled, the mortgagee would then have a statutory authority to proceed with the sale of the mortgaged land and/or property.

From the above, it is clear that law does not allow the mortgagee to exercise their power of sale whenever at their own whims and fancy. A mortgagee must comply with the requirements of the LPA as mentioned above and cannot exercise such right until and unless requirements and circumstances as provided under Section 101 and Section 103 of the LPA 1925 are met. The provisions above were clearly designed with the aim to protect the rights of the mortgagor.

We now move to consider what can happen if a mortgagee decides it wants to take possession of your mortgaged home?

Section 36(1) of the Administration of Justice Act 1970 (‘AJA 1970’) confers discretionary powers to the courts to postpone the recovery of possession of a residential premise by a mortgagee where the court considered that the mortgagor is able to make repayments within a reasonable time. By way of Section 36(1), the court may adjourn proceedings or postpone the giving of any judgment, or making an order for delivery of possession may stay or suspend the execution of the order or postpone the date for delivery of possession. This essentially affords protection to mortgagors of residential home where the mortgagee seeks an order for possession from the court.

An example of the application of the provision above can be seen in the case of Target Home Loans Ltd v Clothier [1994] 1 ER 439 where the defendant borrowed money from the plaintiff mortgagee and charged their home by a legal charge to secure repayment of the loan. The defendant failed to make monthly repayment thus, the plaintiff applied for immediate possession of the house. The Court of Appeal adjourned the application for four months to enable planning permission to be obtained and the sale of part of the land to be completed.

In National & Provincial Building Society v Llyod [1996] 1 All ER 630, the defendant took out a loan with the plaintiff building society and the loan agreement provided that the society might allow a partial redemption of the loan if the defendant sought to dispose of any part of the farm. The defendant fell into arrears and the society brought proceedings against them. The Court of Appeal held as follows:-

“..if there were clear evidence that the completion of the sale of a property, perhaps by piecemeal disposal, take place in six or nine months or even a year there was no reason why a court could not come to the conclusion.. that the mortgagor was ‘likely to be able within a reasonable period pay any sums due under the mortgage’ and, in each case, the question of what was a ‘reasonable period’ would be a question for the court.”

The court even allowed the mortgagor to negotiate a private sale if the proposed sale is likely to discharge the entire mortgage debt which was the case in National & Provincial Building Society v Llyod [1996] 1 All ER 630. Section 36 AJA 1970 above state that the courts ‘may’ exercise these powers if mortgagor are likely to pay within a reasonable period.

It must be noted that Section 36 above has been amended by way of the, Section 8 of the Administration of Justice Act 1973 which extends the courts’ powers to include circumstances notwithstanding the existence of an early repayment clause.  The courts would always exercise their discretion to ensure the rights of both the mortgagor and mortgagee are upheld.

Section 8 of the Administration of Justice Act 1973 (which has amended Section 36 AJA 1970) extends the courts’ powers to include circumstances notwithstanding the existence of an early repayment clause. The Court of Appeal in Governor and Company of The Bank of Scotland v Grimes [Plaint No, 84 00730] [1985] Q.B 1179 held that the purpose of Section 36 AJA 1970 and Section 8 AJA 1973 is to give a measure of relief to those people who find themselves in temporary financial difficulties, unable to meet their commitments under their mortgage and in danger of losing their homes.

The Court of Appeal in that case held that Section 8 AJA 1973 was to be construed to give effect to its intention and purpose within the context of Section 36 AJA 1970 where a loan for a fixed period of 25 years came within the ambit of Section 8 where payment of capital was deferred. Since there was a provision in the agreement for earlier repayment in the event of a default, Section 8 is applicable and the court had jurisdiction to exercise its discretion to make an order postponing an order for possession.

On the other hand, if the mortgagor is unable to keep up with the payment of the loan, what can a mortgagee do in return?

Other than power of sale and repossession, the mortgagee has a right to “foreclose” which means they can take over the property and the property will belong to them. More often than not, the mortgagee would then sell the property to recover the money owed to them by the mortgagor. In the event the sale does not cover the total mortgage debt, the mortgagee may then still sue on the mortgagor’s personal covenant for repayment of the outstanding debt. This is normally provided for in the mortgage agreement as seen in Bristol & West plc v Bartlett [2003] 1 WLR 284.

As mentioned in the above, the mortgagees have a legal right to exercise its power to sell the mortgaged property. However, a mortgagee owes a duty in equity to exercise this power in good faith for the sole purpose of obtaining repayment. The mortgagee must also take reasonable precautions to secure a proper price for the sale of the property. This was the case of Downsview Nominees Ltd v First City Corpn Ltd [1993] AC 295 where the Privy Council held as follows, “If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor.”

Pursuant to Section 105 of the Act the proceeds of sale from the mortgaged property should be applied as payment of all costs, charges and expenses, payment to any subsequent mortgagee and residue to the mortgagor, and usually to discharge of mortgage money. This ensures that even when a mortgagee unable to recover any payments due from the mortgagor, the mortgage would still be able to recover payments through the proceeds of sale from the mortgaged property.

In the past, the ownership of a mortgaged property lies upon the mortgagee itself. Prior to 2002, the law relating to mortgages is different in Malaysia when compared to the United Kingdom in light of the Torrens System applied in Malaysian land law.

With the introduction of Land Registration Act 2002 in United Kingdom, a mortgage of registered land can only be created by way of registered charge. This is provided for in Section 23 of the said act. A registered charge takes effect as a charge by way of legal mortgage, unless there is clear provision to the contrary. It also becomes legally effective when it is entered onto the title of the land as required by Section 27 of the Land Registration Act 2002.

In Malaysia, a charge under the National Land Code (“NLC”) has never involved a transfer of title, unlike the past practices of English common law, but only establishes an interest in favour of chargee in the chargor’s land.

In Malaysia, the NLC adopts the principle of “title by registration”, a charge only takes effect as a security under the NLC upon registration, pursuant to Section 243 NLC. The registration of the charge acts as an encumbrance on the title. Once the charge is registered, the charge becomes a legal charge and the chargor can sell the property subject to the legal charge itself, and can only lease or sublease the land with the consent of the chargee (Section 226 of the NLC). 

Despite the benefits of registration under the Torren system, there are still conflicting decision as to the creation of equitable charge and the rights of an equitable chargee in Malaysia.

What is an equitable charge? It is usually created when the chargor with registered title or interest, charges it to a bank or lender (chargee) and subsequently, the chargee fails to register the said title or interest.

The Court in Malayan Banking Bhd v Zahari bin Ahmad [1988] 2 MLJ 135 allows the creation of equitable charges by virtue of a loan agreement and an assignment (not absolute). The bank was an equitable chargee due to the fact that there was no issuance of document of title in respect of the said property. The Court then held that the equitable chargee has the right to sell the property by way of application for sale under Order 83 of the Rules of Court 1980. On the other hand, the Court in Oriental Bank v Chup Seng Restaurant (Butterworth) Sdn. Bhd. [1990] insisted that the charge requires registration in its prescribed form before a chargee can enforce his right of foreclosure under the NLC.

In rare circumstances, an equitable mortgage can also be created by way of loan agreement cum absolute assignment (LACA). This usually applies to high rise and/or strata properties. Despite the fact that the word ‘mortgage’ was not used in the agreement, the loan agreement would still amount to an equitable mortgage because the assignment of the right, title and interest in the land was expressly or obviously for the purpose of securing the loan given to the borrower to purchase the land (Chuah Eng Khong v Malayan Banking Bhd [1999] 2 CLJ 917). Under this type of agreement, the borrower has assigned unto the lender all his rights, title and interest in land by way of security for loan, the lender is entitled to claim the entire loan sum in the event of a default. However, it is important to note that banks are more reluctant to grant a loan based on equitable mortgage due to the increase risk of default for payment.

Under NLC, the chargee has the right to take ownership of the property, namely remedy of possession. In addition, the chargee can also apply for order for sale of the land, lease or undivided share in land on breach of any agreement.

Now, let us consider if the chargor is entitled to have any say in the proceeding before the order for sale is granted to the chargee? Fret not! A charger can stop the granting of an order for sale from being granted by showing cause to contrary pursuant to Section 256(3) of the NLC. There are generally three categories of cases of ‘cause to the contrary’ under Section 256(3), which are:-

1. Where the chargor could demonstrate that the chargee has failed to meet the condition precedent for the making of the application for an order for sale;
2. When the chargor was able to bring his case within any of the exception to the indefeasibility doctrine in Section 340 of the NLC; and
3. When the chargor could demonstrate that the grant of an order for sale would be contrary to some rule of law or equity.

The above clearly show that the Courts and the law are still considerate and willing to uphold that right of an individual to his or her property. If the chargor fails to stop the order for sale from being granted, Section 266 NLC confers the charger a right to tender payment at any time before the conclusion of the sale to redeem the property and the order for sale shall cease to have effect.

In conclusion, the courts and the law in both the United Kingdom and Malaysia have always tried to achieve a balance in relation to the rights of both mortgagor/chargor and mortgagee/chargee. Despite the perceived bigger bargaining position and legal power a lender may have, the law would still provide opportunities, mandatory requirements and procedures to enable the borrower to protect and recover their property.