Mortgages

1. Mortgages Cameron Stewart (thanks to Shae McCrystal and Jim Helman)

2. Definition • What is a mortgage? • Difference between old system mortgage and Torrens system mortgage • Waldron v Bird [1974] VR 497– 3 features of a mortgage • Promise to repay money • Absolute assignment of property • Promise to retransfer on payment

3. Definition in common law • Mortgagor Mortgagee Conveyance of the Fee Re-conveyance after payment Contractual right to have property returned Legal Ownership

4. Definition • Why do things this way? • Christianity and usury is a sin • Conveyance would meant that the legal owner could enter the property and keep all the profits from the land and not charge for the use of money (which was forbidden) • A Mort Gage • Later agreements would grant possession back to mortgagor - attornment • Payment conditions were strictly enforced

5. Equity’s approach • Mortgagor Mortgagee Conveyance of the Fee Re-conveyance after payment Equitable right to redeem beyond contractual provision Equity of redemption Legal Ownership

6. Torrens system mortgage • The Torrens system mortgage is a charge • Neither possession or ownership but a right to call upon property if a triggering event occurs • United Travel Agencies v Cain (1990) 20 NSWLR 566 at 570 (Young J) – An equitable charge is said to be created when property is expressly or constructively made liable, or is specially appropriate, to the discharge of debt or some other obligation and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale. • The Torrens registered mortgage is a legal charge • No rights of ownership eg possession and title deeds • Title deeds ordinarily provide under contractual clause

7. Torrens title mortgage • Mortgagor Mortgagee Charge granted to mortgagee Discharge after payment Legal Ownership and Equity of redemption Legal Charge

8. When is it a mortgage or something else? • Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98 – In this case, Mr Gurfinkel was a man who had a lot of property and a lot of debt. He owned a number of properties and they all had mortgages on them. This case involved 2 of those properties in particular (but it is relevant that he had others with mortgages) both of which were Torrens land.

9. Property One – Property One had 2 registered mortgages on it and a half built factory. The 2 mortgagees decided to sell the land (G in default). G tried to borrow money from Bentley Ltd to redeem the mortgages. Bentley said no, right up until a day or so before the auction. Bentley agreed to buy the property from G for enough money to clear the mortgages. Bentley agreed in writing – an agreement negotiated by their lawyers to reconvey the land to G within 12 months if G exercised the option to renew and repaid the purchase price + 10%. So, the auction did not happen, Bentley discharged the two mortgages and became the RP. • Property Two – Similar set of facts, Bentley agreed to pay out a mortgage if the property was conveyed to Bentley with an option to repurchase at purchase price + 10%. Purely oral agreement.

10. G affirmed his intention to repurchase the properties, but did not do so in accordance with the contract. The option period passed. The case ended up in the High Court when G sought to exercise the options outside the 12 month period. He sought the assistance of equity – arguing that the true nature of the transactions had been a mortgage of the property to Bentley – and that G had an equity of redemption which could be exercised after the redemption date had passed

11. The High Court held that if equity considered this transaction to be a mortgage, equity would recognise G’s right to redeem after the redemption date. The court said that in order to ascertain if the transaction was a mortgage, you needed to look to the substance of the agreement, in all the circumstances – parol evidence being admissible to construe the agreement. In this case, the court, by majority, found that the transaction was a sale with an option to repurchase, and not a mortgage

12. Why? Owens J: • Agreement settled by lawyers; both parties had legal advice • Parties could have created a first ranking mortgage if Bentley had discharged the existing mortgages and then registered his as first charge – but didn’t • A mortgage was unattractive in the circumstances because G had defaulted on the two existing mortgages AND on mortgages he had on other properties (including the second property) • Clearly the sale and repurchase option was considered safer by Bentley in these circumstances and were the only grounds on which B was prepared to assist G as G was clearly a bad credit risk • True nature was a sale with repurchase and not a mortgageThisalso applied to the second transaction which was entered into on the same understanding as the first.

13. Creating mortgages • Old system – Legal • Sec 23B – deed • If a person purports to mortgage a fee simple to a mortgagee by deed that they do not have, it will be ineffective at law until the person acquires the fee simple, at which time it will be ‘fed’ to the mortgagee under the original deed.

14. Creating a mortgage • Torrens system legal • Registered ss 41, 42, 43 • NSW RPA • Sec 56(1) Whenever any land or estate or interest in land under the provisions of this Act is intended to be charged with, or made security for, the payment of a debt, the proprietor shall execute a mortgage in the approved form. • Sec 57(1) - a mortgage, charge or covenant charge under this Act has effect as a security but does not operate as a transfer of the land mortgaged or charged.

15. Creating mortgages • Equitable Mortgage – An equitable mortgage can arise in equity in a number of different ways. To be recognised the equitable mortgage must be in writing or be supported by sufficient acts of part performance (CA s 23C and 23E)

16. Creating mortgages • Mortgage of equitable interest – A mortgage of the equity of redemption to create a second mortgage. As the equity of redemption is equitable, a mortgage can only be created in equity. If you have mortgaged the equity of redemption, then you have a right to redeem that interest, so you can mortgage that too, to create a third mortgage and so on.

17. Creating mortgages • Agreement to grant a mortgage – If parties create an agreement to grant a mortgage, but don’t actually create a legal mortgage, equity will enforce the agreement to grant a mortgage. This may arise where the parties just contract to grant a mortgage and never convey the title; or where the formalities for a mortgage fail. Equity will recognise an equitable mortgage in these circumstances. However, if the agreement has not been performed – no money has been lent – equity won’t intervene (won’t specifically enforce the contract). Why? Equity intervenes if the parties have carried though their intentions but not created the legally enforceable security. But if the agreement is purely executory – no money is lent – the lender does not need protecting.

18. Creating mortgages • Deposit of title deeds – In equity, the deposit of title deeds with a lender as security for money advanced, is prima facie evidence of an agreement to grant a mortgage. The act of depositing the title deeds with the lender is a sufficent act of part performance of the contract alleged for equity to recognise the mortgage. The deeds must have been deposited with the intention of creating a security (not for some other purpose) and one co-owner cannot create an equitable mortgage of title deeds without the consent of the other co-owners to the use of the deeds in this manner. The fact that one of the co-owners can demand the deeds back, undermines the security and equity won’t enforce it

19. Theodore v Mistford(2005) 221 CLR 612 • Mr Theodore wanted to buy a business from Mistford. He went to the bank to get a loan but they turned him down. So he went Mistford and asked to pay the purchase price in installments over two years. The company agreed to this course of action, as long as he could provide a security and a guarantor. Mr Theodore asked his Mum to put up a property she owned as security for a loan and to go guarantor. She refused to be his guarantor but did agree to put up the house as security.

20. Theodore v Mistford(2005) 221 CLR 612 • What is the difference? As guarantor she would be personally guaranteeing his repayment of the loan, so she could be sued personally. In putting just the house up, she was saying that they could access the house in the event of non payment, but that she personally could not be sued. Mr Theodore went back to the company and bought the business and deposited his Mum’s CT as security for the loan. The company sent back guarantor forms and a form to register the mortgage but his mum refused to fill them in and they went uncompleted.

21. Theodore v Mistford(2005) 221 CLR 612 • Mr Theodore failed to make his payments. Mistford went after the property. • The Court further affirmed that the deposit of the certificate of title under Torrens will create an equitable mortgage unless it is established that the CT was deposited for other reasons. • Here, the deposit of the CT was intended to create an immediate security in favour of Mistford, but that there was no common intention or agreement that Mrs Theodore would execute a guarantee or be personally liable for her sons repayments. • Therefore, they were limited to recovering the sum owing out of the proceeds of the sale and could not pursue Mrs Theodore personally as well.

22. Covenants in a mortgage • The essential covenants relate to the loan - ie the amount of the loan, the rate of interest, the date of repayment. There are infinite variations in practice, depending on the nature and purpose of the mortgage (eg domestic v commercial property, commercial v private lender), the prevailing and predicted market conditions, and the extent of competition among lenders: • the term may be fixed, or indefinite - ie payable on demand - a "line of credit" • may provide an option for early repayment (subject to conditions such as giving of notice and termination payment - rationale is to give the mortgagee an opportunity to find a place to invest the funds); • the interest rate may be fixed or variable or a combination • repayment may be in a single lump sum, or by periodic payments - of principal and interest, or "interest only" where the principal is payable in a lump sum at the end of the term.

23. Clogs on the equity of redemption • Once a mortgage always a mortgage • Attempts to change the nature of the mortgage and make it impossible or difficult to redeem • Options to purchase - a mortgagee cannot take an option to purchase the property • Is the relationship one of mortgage or is an option with a collateral mortgage/ • Wily v Endeavour Health Care Services Pty Ltd [2003] NSWCA 312 - A granted an option to purchase to B in exchange for a loan of $100K secured by a mortgage – CA held that it was an option agreement and didn’t offend the rule

24. Clogs on the equity of redemption • Early Repayment • The general rule at law and in equity was that a mortgage was not capable of being repaid on a date earlier than a date fixed for the repayment of the mortgage. This rule could be avoided by a provision in the mortgage allowing for early repayment, with or without a period of notice, or as suggested by Butt [1848] “where the mortgagee has demanded repayment or otherwise taken steps to enforce the security, as by going into possession.” • Section 93 CA – allows early repayment but requires payment of all interest for remainder – applies to Torrens

25. Clogs on the equity of redemption • Postponing the right to redeem • Some postponement allowed (eg six months notice) but clauses preventing redemption or making it illusory, oppressive or unconscionable : Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441

26. Clogs on the equity of redemption • Collateral advantages • Restrictive trade practices between mortgagor and mortgagee • Is it repugnant to the right to redeem or a parallel contract • A question of substance not form.

27. Clogs on the equity of redemption • In Kreglinger v New Patagonia Meat & Cold Storage Co [1914] AC 25 the New Patagonia Meat & Cold Storage Co Ltd carried on a business of preserving meat. Kreglinger carried on business as wool brokers and agreed to lend to New Patagonia the sum of £10,000.00 for a period of 5 years with a proviso that New Patagonia could repay the loan at any time upon giving one month’s notice. Notice was given and the loan was repaid in full in January 1913, well before the repayment date of 30 September 1915.

28. Clogs on the equity of redemption • In addition to the provisions concerning the payment of interest and the repayment of the principal sum, the mortgage document provided that during a period of 5 years from 24 August 1910 New Patagonia would not sell sheep skins to any person, firm or company “other than the lenders so long as the lenders are willing to purchase the same at a price equal to the best price (c.i.f. London) offered for the same by any such other person, firm or company.”

29. Clogs on the equity of redemption • After repayment of the loan Kreglinger sought to exercise its right to continue to purchase sheepskins and New Patagonia disputed that this right existed and said that it had only applied during the time the loan was unpaid and that it was void as it amounted to a clog on the redemption.

30. Clogs on the equity of redemption • Viscount Haldane: What was the true character of the transaction? Did the appellants make a bargain such that the right to redeem was cut down, or did they simply stipulate for a collateral undertaking, outside and clear of the mortgage, which would give them an exclusive option of purchase of the sheepskins of the respondents? The question is in my opinion not whether the two contracts were made at the same moment and evidenced by the same instrument, but whether they were in substance a single and undivided contract or two distinct contracts.

31. Covenants in a mortgage • Covenant to pay a higher interest on default • A provision that a higher interest rate is payable in the event of a default is considered a penalty and unenforceable. • If a mortgage provides that a rate of interest is payable and provides for a lower rate of interest if the payments are received on time then this is not considered a penalty: Strode v Parker (1694) 32 ER 804

32. Covenants in a mortgage • Covenant to pay the whole of principle and interest on default • If a mortgage provides that upon default, the principal sum becomes due along with interest to the end of the term, then the courts will say that such a provision is a penalty and not enforceable. The result of such a provision is that the mortgagee is placed in a better position than it should be. Only a genuine pre estimate of the mortgagee’s loss on default will be enforceable

33. Covenants in a mortgage • In Wanner v Caruana[1974] 2 NSWLR 301 the court was asked to consider whether a provision in a mortgage was void as a penalty. The provision said: • PROVIDED THAT in the event that any monthly instalment being in default for fourteen (14) days the whole of the balance of the principal sum and any other monies due hereunder with interest thereon at the rate of 10 dollars ($10.00) per centum per annum shall in the case of such default immediately become due and payable for the balance of the term up to and including the 23rd day of August, 1978. • Street CJ found this to be a penalty as it bore no relationship to the loss of the mortgagee. • What about a mortgage that makes the entire debt (capital plus interest) payable immediately at the start of the loan with an indulgence for instalments?: Protector Endowment Loan and Annuity Co v Grice (1880) 5 QBD 592

34. Rights of Mortgagee • Right to sue on the personal covenant • Mortgagors promise to repay the debt • Mortgagee can pursue mortgagors after exercising the power of sale for anything which remains • H/W if foreclosure is used they cannot pursue the mortgagor

35. Rights of Mortgagee • Right to assign the mortgage • Assignment of both the interests in the land and the personal covenant • Section 91 CA – assignment can occur via a memorandum • Applies to both Old System and Torrens endorsed on or attached to the mortgage • Sec 53 RPA – transfer of mortgage vests the right to sue on the mortgage and recover the debt • Sec 42 will wipe out pre-existing claims

36. Rights of Mortgagee • Right to possession • The right to possession follows the legal estate in old System • As the mortgage of land under old system title requires a conveyance of the legal estate the mortgagee is entitle to the possession of the property. This is not what is normally intended so the mortgage normally includes a provision that entitles the mortgagor to occupy the premises as tenant of the mortgagee. This provision is called an attornment clause. It is not particularly satisfactory. Mortgages also often contain a clause entitling the mortgagor to retain possession until a default occurs. The breach of this provision by a mortgagee entitles the mortgagor to an action for breach of contract.

37. Rights of Mortgagee • In Torrens, mortgagee only get possession after breach • Section 60 RPA allows for possession after court application • Notice must be given under s 60 – rents and profts are owned by Mortgagee after notice • Sec 60 requires default which must relates to the payment of principal or interest • Contractual rights are needed or possession for other kinds of breaches

38. Rights of Mortgagee • Responsibilities when in possession • Mortgagees must account for rents and profits received - even those which they would hjave received had they not been in wilful default – some gross lack of diligence • Mortgagees have a duty to preserve the property – ensure no damage from vandals • Duty to do repairs but subject to the amount of income being received • If building being constructed m’gee must act as provident owner and take adequate precaution for workmanlike manner of building

39. Rights of Mortgagee • Right to improve the property • There are two rights a mortgagee has relating to the title of the mortgagor. The first is the right to make the title perfect. If the mortgagee is only a second mortgagee then this right entitles the mortgagee to buy out the first mortgagee so that the second mortgagee becomes the first mortgagee. • The second is the right to improve the property representing the security for the loan.

40. Rights of Mortgagee • Any expenditure must be reasonable compared with the amount borrowed and cannot be such as to hamper the mortgagors right to redeem. While it is possible for a mortgagee to make lasting alterations they must be reasonable and cannot change the nature of the property. Upon redemption of the mortgage the mortgagor is entitled to receive back the substance of what was mortgaged.

41. Rights of Mortgagee • If a mortgagee spends more than is reasonable, then the mortgagee cannot claim reimbursement for the money spent even if this leads to a windfall in favour of the mortgagor. Provided the expenditure is reasonable, then the mortgagor cannot claim any increase in the saleable value without reimbursement for the money spent.

42. Rights of Mortgagee • In Southwell v Roberts (1940) 63 CLR 581 a mortgagee entered into possession of property after a default by the mortgagor. After some years as mortgagee in possession, the mortgagee determined that the properties had become so dilapidated that it was not possible to economically repair them and accordingly decided to demolish and rebuild the houses. This work was carried out and resulted in two semi-detached brick cottages being constructed on Portion “A” and a double fronted detached brick bungalow being constructed partly on Portion “A” and partly on Portion “B”. • Mortgagee spent nealry double the mortgage liability

43. Rights of Mortgagee • Starke J. said : • In my opinion the amount expended was neither reasonable in amount nor reasonable having regard to the nature of the property. The mortgagee expended double the amount of the principal debt and changed the character of the buildings upon the land, and indeed on the vacant portion of the land she erected a building where none had been before. The case is an example of a mortgagee in possession effecting improvements without regard to the mortgagor’s interest and calculated to improve him out of his property. In these circumstances the expenditure cannot be allowed, unfortunate though it be for the mortgagee. But she could have protected herself by obtaining the consent or acquiescence of the mortgagor or possible by fore-closing.

44. Powers of Mortgagees • Power to Lease • Leases in old system not binding after redemption • Sec 106 CA – leases can be granted if: • Less than five years • Bent rent • Right of reentry if rent is in arrears • Must be registered (in DRS or Torrens) • Such a lease binds the mortgagor – contract make change obligations

45. Powers of Mortgagees • Lease by mortgagor? Grant of lease prior to mortgage was binding (subject to BFPVWN or s 42(1)(d) in RPA) • Grant after mortgage was not binding • Sec 106 now applies in same terms to bind mortgagee

46. Powers of Mortgagees • Power to Appoint a Receiver • Where a mortgagor is in default, a mortgagor may appoint a receiver. This is the preferred device where a mortgagee wants to manage property subject to a mortgage rather than going into possession of the property themselves. Each jurisdiction contains its own statutory procedure is that apply in the event that a receiver is appointed to manage the property and the power is only available in the event of default by the mortgagor.

47. Powers of Mortgagees • Power to Foreclose • Foreclosure is the extinguishment of the equity of redemption • In other words, where a mortgagee forecloses on a mortgage, they obtain an order which vests absolute ownership of the mortgaged property in the mortgagee and which extinguishes the mortgagor's equitable right to redeem the mortgage. This remedy is only available for default in repayment of the sum advanced on the due date. It is not available for a default with respect to an instalment payment. So, when the due date for repayment of the full amount in the mortgage contract is reached, a right to exercise foreclosure will arise if the mortgagor defaults.

48. Foreclosure • Foreclosure of land under the old system can only be affected by an order of the court pursuant to section 99A of the Conveyancing Act. • Two steps : • Decree nisi where there is an accounting done of outstanding amount with an order that the mortgagor pay within a period (usually 3-6 months) • Decree absolute to extinguish the equity • To foreclose under a mortgage of land under the Torrens system it is necessary to apply to the Registrar General for an order for foreclosure under ss 61 and 62: • Must be six months in arrears; • Land must have been offered for sale by auction but without the price reaching what is owed to mortgagee; and • Notice has been served on all registered mortgagees and caveators • The Rg can order another attempt at sale or order foreclosure which will extinguish the mortgagor’s right and that of other mortgagees • Only applies to registered mortgages • If the property is partly old system and partly Torrens it is necessary to apply to the court for an order using the provisions in the Conveyancing Act.

49. Foreclosure • The effect of an order for foreclosure is set out in section 100 of the Conveyancing Act: • On an order absolute for foreclosure the mortgagee or chargee shall be deemed to have taken the property mentioned in such order, in full satisfaction of the mortgage debt or amount secured by the charge, and the mortgagee or chargee’s right or equity to bring any action or to take other proceedings for the recovery of the mortgage money or amount secured by the charge from the debtor, surety, or other person, shall be extinguished, and all collateral securities for the debt or amount secured by the charge which have not previously been enforced shall be released, and the right or equity of the mortgagor to redeem the said property shall also be extinguished

50. Powers of Mortgagees • Power of Sale • The power of sale is the standard remedy used by a mortgagee where a mortgagor is in default. The power of sale has advantages for both the mortgagee and the mortgagor which make it a superior action to foreclosure. The advantages for the mortgagee include: • exercise of the right of sale is available for non-payment of an instalment as well as non-payment of the outstanding debt on the final date for repayment. This means it is a more flexible remedy available during the running of the mortgage, and not just at the point that the entire mortgage amount becomes due; • it is a simple and convenient remedy and lacks the cumbersome processes of foreclosure; • any outstanding debts owed by the mortgagor to the mortgagee may still be recovered by an action in debt on the personal covenant to repay contained in the mortgage; and • Any surplus money that is left after repayment of the debts and the expenses of the mortgagee goes to the mortgagor