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Mortgages
Cameron Stewart (thanks to Shae
McCrystal and Jim Helman)
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
Definition in common law
Conveyance of the Fee
• Mortgagor
Mortgagee
Re-conveyance after
payment
Contractual
right to have
property
returned
Legal
Ownership
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
Equity’s approach
Conveyance of the Fee
• Mortgagor
Mortgagee
Re-conveyance after
payment
Equitable right to redeem
beyond contractual
provision
Equity of redemption
Legal
Ownership
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
Torrens title mortgage
Charge granted to
mortgagee
• Mortgagor
Mortgagee
Discharge after payment
Legal Ownership
and
Equity of redemption
Legal Charge
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.
• 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.
• 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
• 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
• 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 mortgageThis also
applied to the second transaction which was entered into on the
same understanding as the first.
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.
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.
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)
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.
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.
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
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.
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.
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.
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.
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
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
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
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.
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.
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.”
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.
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.
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
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
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
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
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
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.
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
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
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.
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.
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.
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
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.
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
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
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.
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.
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.
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
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
Power of Sale
• The power in the mortgagee to exercise the power of sale
comes from either an express term in the mortgage
document, or from an implied statutory power of sale
where no express power has been given in the mortgage.
•
• Conveyancing Act (1919) NSW – s 109(1)
• 1) A mortgagee and a chargee shall by virtue of this Act
have the following powers to the like extent as if they had
been in terms conferred by the instrument creating the
mortgage or the covenant under which the charge arose
but not further, namely:
•
• A power to sell …..
Power of Sale
• The New South Wales provision implies a power of sale
into both Old System and Torrens mortgages (s 109(5))
- providing a power of sale in instances where the
parties have not included such a term in their written
contract. The section does, however, only operate with
respect to written mortgages “as if they had been in
terms conferred by the instrument”. Therefore oral
arrangements, such as a mortgage by deposit of title
deeds, do not have a power of sale attached. Parties
involved in oral mortgages may get the benefit of the
implied power of sale by registering the mortgage
(creating the instrument in which the power may be
implied).
Power of Sale
• The formalities to exercise the power of sale for Torrens land are set out in
section 57 of the Real Property Act 1900. The parties cannot contract out
of these obligations unless stated in the section. The section requires:
• that there be a default by the mortgagor;
• that notice in a prescribed form has been served on the mortgagor giving
the mortgagor a specified period to rectify the default.
– Defaults in payment of principal, interest or an instalment - minimum
of one month notice and the contract may specify longer;
– other defaults, a contract can dispense with the need for notice, but if
there is nothing in the contract the default statutory period is one
month.
• Where notice has been served and the mortgagor complies with the
notice by rectifying the default, the default is deemed not to have
occurred and the mortgagee cannot exercise the power of sale.
• Similar provisions for Old System land in s 111 CA
Power of Sale
• The starting point with respect to a mortgagees obligations in
exercising the power of sale is a standard statement made by
both courts and commentators that a mortgagee is not a
trustee and is not under a duty to put the interests of others
over his or her own. It is acknowledged that the mortgagee is,
in fact, acting in his or her own interests when selling the
property: Cuckmere Brick Co Ltd v Mutual Finance Co Ltd
[1971] Ch 949 – per Salmon LJ at 965 – “ it is well settled that
a mortgagee is not a trustee of the power of sale for the
mortgagor. Once the power has accrued, the mortgagee is
entitled to exercise it for his own purposes whenever he
chooses to do so.”
• Duty of reasonable care or good faith?
Power of Sale
•
Cuckmere Brick Co Ltd v Mutual Finance Co Ltd [1971] Ch 949.
A mortgagee exercising the power of sale advertised the
property for sale as having planning approval for the building
of houses on the property. In actual fact, the mortgagor had
obtained planning approval to build flats as well as housing.
The mortgagor drew the omission to the attention of the
mortgagee but the sale proceeded anyway. The purchaser of
the property bought the property to develop houses and paid
₤44,000. Evidence presented to the court demonstrated that
if developers interested in building flats had been aware of
the planning approval, the property could have sold for
around ₤65,000 to a developer of flats. Evidence also
demonstrated that the omission in advertising was not
dishonest or intentional. Had the mortgagee breached any
obligations to the mortgagor in selling in this way?
Power of Sale
•
Lord Justice Salmon noted in the case that the mortgagee is not a trustee
and is not obligated to put anyone's interests above their own. Further,
Salmon notes that a mortgagee is entitled to sell the property at a time
that suits them. However, despite this Salmon noted that mortgagee does
owe a duty to take reasonable care in selling the property:
“The mortgagor is vitally affected by the result of the sale but its
preparation and conduct is left entirely in the hands of the mortgagee.
Proximity between them could scarcely be closer. Surely they are
‘neighbours’. Given that the power of sale is for the benefit of the
mortgagee and that he is entitled to choose the moment to sell which
suits him, it would be strange indeed if you are under no legal obligation
to take reasonable care to obtain what I call the true market value at the
date of the sale … I accordingly conclude … that a mortgagee in exercising
his power of sale does owe a duty to take reasonable precautions to
obtain the true market value of the mortgaged property at the date on
which he decides to sell it.” (at 968)
Power of Sale
• In England in recent years there has been a retreat from framing the duty
of the mortgagee in terms of the tortuous standard of negligence.
Emphasis has shifted to the duty of the mortgagee arising in equity and
therefore being a duty of good faith. This is in fact the path that Australia
took early on – we never really adopted the negligence standard,
preferring instead to see the duty as one of good faith in which the
mortgagee had a duty not to recklessly or willfully sacrifice the interests of
other parties in selling the property.
Power of Sale
• Pendlebury v Colonial Life (1912) 12 CLR 676 a mortgagee
exercised the power of sale in such a manner as to recover
only the cost of the outstanding mortgage on the land and
their costs in executing the power of sale. The property was
purchased at auction by a purchaser for 720 pounds (which
just discharged the mortgagors debt). The purchaser then
resold the property one month later for 1800 pounds. The
price at auction was woefully under. The evidence disclosed
that the property was a large rural property which had only
been advertised for sale in two metropolitan newspapers with
no relevant information as to the quality of the land, the fact
that it was under crop, had significant improvements made
and was near a significant water course.
Power of Sale
• All three judges found that the mortgagee had willfully sacrificed the
interests of the mortgagor in making the sale and the manner of
advertising.
• As to the question of the right test in Australia, all three judges
reformulated the test for Australia as a test of good faith. In particular,
Justice Isaacs formulated the test solely on the basis of good faith:
• If the right to sell is a power which …. is given to him not as a trustee for
the mortgagor but for his own benefit, it must carry with it the
consequence that with respect to the way he carries out the sale, not
merely is he not liable as for breach of trust, but also that he owes no duty
of care to the mortgagor, so long as he is bona fide acting within the limits
of his power. His rights under the power are adverse to the mortgagor. He
cannot, therefore, on any principle known to the law be liable for mere
negligence, because that assumes a standard of care owed to another. The
mortgagee is however confined by the expressed and implied limits of his
power and nothing else (per Issacs J at 700)
Power of Sale
• The mortgagee must act bona fide in exercising the power of sale –
honestly and in good faith in exercising that power of sale – the object of
which is to obtain the best price possible on the day of the sale. However,
if he recklessly or willfully disregards the interest of the mortgagor, then
he will be called to account:
• By ‘recklessness’ then, I understand a disregard of the mortgagor’s
interest, ignoring his property in the possible surplus, in short, not caring
whether its fair and proper value was obtained or not, as distinguished
from the mere want of care or prudence in the course of honestly trying to
conserve it. (per Isaacs J at 702)
Power of Sale
• However, the two other judges did not abandon
negligence as thoroughly as Isaacs did. Griffith CJ and
Barton J both stated that the test is of good faith and
that good faith includes a negligence based test – a
duty to take reasonable precautions to obtain the
best price reasonably obtainable on the day of the
sale. This is a slightly more stringent test as instead
of requiring the mortgagee to act honestly, even if
carelessly, the test would require them to act
honestly and to take reasonable care in selling the
property.
Power of Sale
• Forsyth v Blundell (1973) 129 CLR 477. In Forsyth the
mortgagee was selling a property to recoup a debt of
$120 000. Before the auction a purchaser expressed
a willingness to buy the property for $150 000. The
mortgagee did not proceed to auction and sold the
property to a third party for $120 000. In this case
both Justices Walsh and Mason found that the
mortgagee had not acted in good faith and had
recklessly sacrificed the interests of the mortgagor in
the conduct of the sale of the property.
Power of Sale
• With respect to the question of whether or not the
obligation to act in good faith also includes a duty to
take proper precautions on sale, both Walsh and
Mason pointed out that the answer to this question
is unclear but they were not prepared to determine
the question. Justice Menzies who dissented on the
facts but not the law, did however make an obita
statement that the duty to act in good faith includes
a duty to take reasonable precautions to obtain a
proper price: “the duty to take reasonable
precautions to obtain a proper price is but part of the
duty to act in good faith” (at 481)
Power of Sale
•
•
ANZ Banking Group v Bangadilly Pastoral Co. Pty Limited (1978) 52 ALJR 529. In
this case the mortgagee and the purchaser were family companies in which there
were identical directors and shareholders - Mr and Mrs Hall. So one company
comprising Mr and Mrs Hall was the mortgagee, and that company sold to another
company which comprised Mr and Mrs Hall. As directors of the mortgagee
company, Mr and Mrs Hall set the reserve price for the sale; then as directors of
the purchasing company, Mr and Mrs Hall set the maximum price to be bid.
Unsurprisingly, they were the only bidders! They did this to rob a second
mortgagee of its interest (ANZ)
The facts are briefly summarised as follows:
– Talga Pastoral owned a property called Bangadilly. Property subject to 2 mortgages, 1st to
Glenthorne Pty Ltd and 2nd to ANZ Bank.
– Talga contracted to sell to Hall Investments Pty Ltd (controlled by Mr & Mrs Hall).
– Talga couldn't complete and Hall arranged for another of their companies, Halco Products to
take an assignment of the 1st mortgage for $280,000 being the principal plus interest.
– Halco purported to exercise its power of sale and sold the property to Bangadilly, a third
company controlled by Hall.
– the auction was poorly advertised and the price received was $265,000, $15,000 less than
Halco had paid for the mortgage.
– ANZ sought a declaration that the sale be set aside.
Power of Sale
• Clearly a breach
• Jacobs J. referred to some of the circumstances and found himself:
• . . . quite unable to conclude that there was no shortcoming or that
the mortgagee clearly preferred the obtaining of the best price on
realization of its security over any desire that the closely associated
company should purchase at a price favourable to it. I shall set out
some of those facts:
– (1) There was no local advertising of the proposed auction sale,
virtually no Sydney or Melbourne advertising, and the sale was held in
Sydney. The lead time was minimal.
– (2) The appellant, the second mortgagee, was not informed that the
auction sale was to take place.
– (3) The date of the auction was not a desirable time to hold this kind
of auction sale. . .
Factors
•
Time of Sale - neither test in England or Australia constrains the mortgagee's
choice to sell at a particular time. The mortgagee is free to choose the time to
exercise the power of sale, and are free to sell at a time that suits them
without reference to the interests of other parties. This is a source of some
dissatisfaction for mortgagor's particularly where the value of the land may
fluctuate depending on the time of year - for example rural land may be more
attractive that at some times in the year than others. I don’t think that the
new statutory test will change this in any way.
•
However note – CA s 103(2) gives the court the power to order a sale of old
system property on the application of any person and despite the dissent of
any person which would allow a mortgagor to apply to the court to order sale.
There is no equivalent for Torrens land although Butt suggests at page 646
that a court of equity might have an inherent jurisdiction to order a sale on
application by a mortgagor depending on the circumstances.
Factors
• Obligation to accept offers? - Because the choice of when to sell is entirely
a matter for the mortgagee, it follows that there is no obligation to sell at
all or to accept offers.
• Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700 - in
this case acting on their security over a hotel, Westpac went into
possession of the hotel and appointed receivers to manage the hotel. An
offer was made to buy the hotel that would have removed the outstanding
liability of the debtor and a guarantor that had guaranteed the debt as
well but it was not taken up. The action in this case was brought by the
guarantor, who argued that the breach of the duty of good faith on the
part of the bank was in their failure to consider the offer received and sell
the property so as to extinguish the liability of the mortgagor and
therefore the guarantor as well.
Factors
• Justice Cole held that there is no obligation upon a mortgagee to exercise
a power of sale if it does not wish to do so. Therefore if there is no
obligation to sell at all, or at any particular time, failure to sell at any point
of time can not constitute a breach of duty:
• “ if the mortgagee can decide when he wishes to exercise the power of
sale, there can be no liability attaching to him for failure to exercise it at
any particular point of time. Nor can failure to assess any offers prior to a
decision having been taken to exercise the power of sale constitute a
breach of a duty”.
New Section
•
• 111A Duties of mortgagees and chargees in respect of sale price of land
• (1) A mortgagee or chargee, in exercising a power of sale in respect of
mortgaged or charged land, must take reasonable care to ensure that the
land is sold for:
• (a) if the land has an ascertainable market value when it is sold—not less
than its market value, or
• (b) in any other case—the best price that may reasonably be obtained in
the circumstances.
• (2) Subsection (1) applies to an agent appointed by a mortgagee or
chargee to sell the mortgaged or charged land in the same way as it
applies to a mortgagee or chargee exercising a power of sale in respect of
mortgaged or charged land.
• (3) Nothing in section 112 (7) or 115 (2) of this Act, or in section 58 (1) of
the Real Property Act 1900, affects the duty imposed by this section.
New Section
•
•
•
•
•
•
•
4) The title of the purchaser cannot be challenged on the ground that the
mortgagee or chargee has committed a breach of any duty imposed by this section,
but a person who suffers loss or damage as a result of the breach of the duty has a
remedy in damages against the mortgagee or chargee exercising the power of sale
or selling the land.
(5) This section has effect despite any stipulation to the contrary.
(6) Nothing in this section affects the operation of any rule of law relating to the
duty of the mortgagee or chargee to account to the mortgagor or chargor.
(7) This section applies to mortgages and charges whether made before or after
the commencement of this section but only in relation to a sale arising as a
consequence of a default occurring after the commencement of this section.
(8) This section extends to mortgages and charges under the Real Property Act
1900.
New Section
• This section effectively codifies the Cuckmere
Brick view of the mortgagee’s duties in respect to
exercise of the power of sale – imposing by
Statute, a duty to take reasonable care to ensure
that the land is sold for not less than its market
value (if ascertainable); or the best price that
may reasonably be obtained in the
circumstances.
New Section
• This duty applies to both general system and old system land.
It will be interesting to see how it applies in practice. It
suggests that we measure the mortgagees’ actions against an
objective standard of care. However, as I suggested above, it
can be argued that applying a good faith test (subjective –
have you acted in good faith) often produces a similar
outcome to applying a standard of objective reasonableness.
Further the Act codifies the idea that the goal is market value
(if ascertainable) or the best price in the circumstances –
which is an easier measure to test. However bear in mind that
if the property sells below market value, the test may not be
broken if reasonable care to obtain the market value has been
taken.
Remedies for breach of duty in
exercising the power of sale
• Remedies for Defective Exercise of the Power of Sale
• There are two possible defects that can occur when a
mortgagee exercises the power of sale:
• non-compliance with mandatory formalities; or
• breach of duty.
An action against the mortgagee may be brought by either the
mortgagor, other mortgagees or guarantors.
Remedies for breach of duty in
exercising the power of sale
• There are range of remedies that may be sought by these parties if
they can establish a defect.
• The remedy that may be sought, will depend on whether or not the
mortgagor has priority over the purchaser who has bought subject
to the mortgagees exercise of the power of sale.
• Justice Walsh in Forsyth v Blundell (1973) 129 CLR 477 notes that
where a mortgagee wrongfully exercises the power of sale, the
mortgagor has a cause of action against the mortgagee.
• However a mortgagor may only take action which impinges the
right of the purchaser if the mortgagor has priority over that
purchaser. If the sale has proceeded to registration, the purchaser
will be protected by the indefeasibility provisions. If the sale has not
proceeded to registration, the contest will be between competing
unregistered interests.
Remedies for breach of duty in
exercising the power of sale
• If a purchaser has priority (is registered or is protected by s
43A and can proceed to registration) then the mortgagor can
only seek damages. Here the mortgagor would be suing in
equity to seek an account for the loss suffered - the difference
between the price obtained and the price which should have
been obtained. (In Pendlebury the case where the land was
sold for 720 and then 1800 the next month, the mortgagee
got the difference – the 720 had extinguished their debt, so
the bank had to give them 1080 plus costs).
Remedies for breach of duty in
exercising the power of sale
• If a purchaser has not been registered, the mortgagor can
lodge a caveat to prevent the registration of the transfer to
the purchaser. The matter will then be determined on a
priority dispute. If the mortgagor has priority, then the
mortgagor can seek:
– An injunction to restrain settlement with the purchaser if settlement
has not yet occurred.
– Where settlement has occurred but not registration and the
mortgagor wants to retain the right to redeem the mortgage, rather
than acquire financial compensation, the mortgagor might seek an
order setting aside the contract of sale. An order setting aside the
contract of sale would not void the contract of sale but which would
treat the sale as an assignment of the mortgagee's interest – ie, a
purchaser will take subject to the mortgagor's equity of redemption
and the mortgagor would retain the right to redeem the mortgage.
Three variations
The mortgagee improperly exercises the power of sale and the transfer
to the purchaser has been registered.
• the purchaser has indefeasible title to the fee simple because
registration has gone through;
• the mortgagor has the right to have the power of sale exercised
properly - this is an unregistered interest.
• Priority rule - the registered interest of the purchaser is indefeasible
unless the mortgagor can establish an exception to indefeasibility.
• The mortgagor will not be able to have the transfer to the
purchaser set aside unless the mortgagor can show that the
purchaser has been fraudulent or where the mortgagor has an in
personam cause of action against the purchaser.
Three variations
• The mortgagee improperly exercises the power of sale and
the mortgagor seeks relief before registration - after the
contract of sale has been entered into - but before
settlement.
• the purchaser has an interest arising under the contract - to
seek an order for specific performance. Therefore the
purchaser has an unregistered interest before settlement;
• the mortgagor has the right to have the power of sale
exercised properly.
Three variations
• There is a slight complicating factor in this situation. The mortgagor
is still listed as the registered proprietor of the property, but their
right as registered proprietor is now subject to the mortgagees right
to exercise the power of sale.
• In these cases the mortgagor cannot rely on their indefeasible title
because they consented to the mortgage and the exercise of the
power of sale – so this means that at the point of default on the
mortgage, you lose the right to assert your indefeasible title against
persons who deal with the mortgagee.
• Instead, the right of the mortgagor stems from the improper
exercise of the power of sale – it is generated through the
mortgagees conduct and is separate from the registered interest. In
Forsyth v Blundell (1973) 129 CLR 477 Justice Walsh characterized
the interest of the mortgagor as an unregistered right to have the
contract of sale set aside on the basis of improper exercise of the
power of sale.
Three variations
• Priority rule - where the equities are equal the first in time
prevails. Is there any postponing conduct on the part of the
first interest holder? In the majority of cases the answer will
be no – because the mortgagee had a right to exercise the
power of sale and the mortgagor did nothing to contribute to
it being exercised improperly.
• So when this set of facts arose in Forsyth v Blundell –
mortgagor got an injunction after the contract of sale was
made and before settlement – the mortgagors interest was
not postponed to the purchasers interest – the mortgagor
prevailed.
Three variations
• The mortgagee improperly exercises the power of sale and the
mortgagor seeks relief before registration and after settlement.
• Two unregistered interests; mortgagor has unreg prior right to have
contract of sale set aside; purchaser has unregistered transfer.
Under common law, mortgagor would prevail (no postponing
conduct) BUT this fact scenario brings up section 43A of the RPA.
• So ask the standard three questions:
- does the purchaser have a registrable dealing?
- Is the purchaser dealing with the registered proprietor?
- is the purchaser a bona fide purchaser for value without notice of
the other unregistered interest at settlement? (Notice – RPA s 58(2)
states that a purchaser is not fixed with constructive notice of a
failure to comply with the formalities of an exercise of the power of
sale by a mortgagee. So if failed to comply with notice
requirements, not fixed with constructive notice. Circumstances
may still fix with notice of failure to comply with duty of good faith).
Three variations
• If the purchaser is protected by section 43A, the
purchaser wins the priority dispute and is
guaranteed a registration, so the mortgagor cannot
obtain an injunction or an order setting aside the
contract of sale. In that situation the mortgagor is
left only with the remedy of damages from the
mortgagee.
Three variations
• Note –New s 111A(4) The title of the purchaser cannot be
challenged on the ground that the mortgagee or chargee has
committed a breach of any duty imposed by this section, but a
person who suffers loss or damage as a result of the breach of the
duty has a remedy in damages against the mortgagee or chargee
exercising the power of sale or selling the land.
• It is not immediately clear if this section affects the decision in
Forsyth v Blundell. If the word ‘title’ is interpreted to mean ‘legal
title’ then all this section does is reproduce the distinction between
the capacity to set aside a purchasers contract of sale before or
after settlement. However, if we read the word title to include
equitable interests, then it would overrule the effect of Forsyth v
Blundell and we could not challenge the exercise of the power of
sale once a contract for sale had been entered into. We property
lecturers and Peter Butt think that the section is intended to refer
to legal title and thus preserves the common law position.
Priorities and mortgages
• Old System Land – Order of priority is
determined on the basis of the priority rules
and the deeds registration rules
• Torrens – Order of priority is determined on
the basis of registration; first registered takes
priority; second is second and so on.
Competition between unregistered mortgages
– common law priority rules.
•
Priorities and mortgages
• Where the power of sale is exercised, the costs of
the sale are paid first, then the mortgagees in
order of priority and then the mortgagor gets
what is left.
• Sale by first priority holder - provided they give
notice to all other registered mortgagees and any
unregistered mortgagees who have lodged a
caveat, they may proceed to exercise the power
of sale and distribute the proceeds.
Priorities and mortgages
• Sale by second or third mortgagee - A later registered
mortgage may seek to exercise the power of sale in
one of two ways:
• they may sell the property subject to the first mortgage
which is not discharged. Any purchaser of the property
takes the property with the encumbrance.
• They can sell the property with the consent of the first
mortgagee to the sale. In this case they would sell the
property free of the mortgage but the first mortgagee
would have the first call on the proceeds of sale..
Priorities and mortgages
• The order of priorities between mortgages may be
changed in a couple of ways:
– Torrens – s 56A RPA allows mortgagees to register a
memorandum reversing the order of priority;
– Parties may agree between themselves to change the
order – enforceable as between themselves;
– Where one mortgage is paid out, the others move up to
take its place. This applies unless a later mortgage is used
to pay out an earlier mortgage, in which case it will take
the place of the earlier mortgage.
– CA s 94 – old system or Torrens – a mortgage can be
‘assigned’ to a new mortgagee – the new mortgagee steps
into the priority position of the existing mortgagee.
Priorities and mortgages
Tabula in naufragio – competition between 2
equitable mortgages, later equitable mortgage
can prevail over earlier equitable mortgage by
acquiring the legal estate.
Won’t apply if earlier equitable mortgage registered
under deeds reg (because will give later equitable
mortgage holder notice) or to mortgages
registered under the RPA – because these
mortgages are determined by order of
registration – so no room for tabula in naufragio.
Priorities and mortgages
Tacking for further advances
• Under old system title the first mortgagee A acquires a
legal estate in the land. If the mortgagor then grants a
further mortgage to B the question is whether A can
make a further advance after the date of B’s mortgage
and “tack” this further advance to the monies
advanced under the original mortgage.
• If A has no notice of B’s equitable mortgage then A may
make further advances and may “tack” these advances
to his first advance. Once A becomes aware of B’s
mortgage then A is not permitted to “tack” any further
advances to the original advance.
Priorities and mortgages
For example:
• A is the registered proprietor of a fee simple worth
$500 000. A has two registered mortgages:
• a mortgage to B worth $300 000
• a mortgage to C worth $200 000
• So the whole value of the property is mortgaged. A
can’t get a further mortgage on the land because
someone will be the third mortgagee and there won’t
be anything left. So, can A go to B and borrow another
$200 000 – upping the value of the first mortgage to
$500 000? This would have the effect of reducing the
value of C’s mortgage.
Priorities and mortgages
The key issue is notice. Justice Holland in Matzner v
Clyde Securities [1975] 2 NSWLR 293 at 298 –
• A mortgagee to whom the property is mortgaged
for advances already made cannot, after
receiving notice of a second mortgage, have
priority over the second mortgagee for further
advances upon the first mortgage, even if the first
mortgage, to the knowledge of the second
mortgagee is expressed to be a security for
further advances.
Priorities and mortgages
• This is also known as the rule in Hopkinson v
Rolt (1861) 11 ER 829. So, if a mortgagor and a
mortgagee agree that the mortgagee will
make further payments, those further
payments cannot be tacked to the existing
security IF a second mortgage is created and
the first mortgagor has notice of the second
mortgage – this means that those further
advances will sit UNDER the second
mortgagee in the order of priority.
Priorities and mortgages
• Notice – unclear if actual or constructive – Weight of
authority favours actual – and in NSW Central Mortgage
Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR
128 – Single Sup Court Judge said actual notice necessary. In
this case a prior mortgage holder made advances under a
mortgage after the creation of a second mortgage and after
the second mortgage holder lodged a caveat. Justice Kearney
held no actual notice as there had been no occasion for the
first mortgage holder to search title. Therefore, advances did
have priority. Further Justice Kearney said that if he was
wrong, and constructive notice was sufficient – no
constructive notice here as a caveat is not notice to all the
world and no reason for mortgagee to search title before
making further advances under the mortgage.
Priorities and mortgages
The rule also applies to land under the provisions
of the Real Property Act where the priority of
mortgages is governed by their date of
registration. Following Matzner v Clyde Securities
Ltd [1975] 2 NSWLR 293 it is clear that the rule
against tacking applies to mortgages under the
Real Property Act. It was said by Holland J. that
“the rule against tacking was based on
considerations of fairness and justice between
the competing mortgagees.”
Priorities and mortgages
Matzner also establishes an exception to the rule in
Hopkinson v Rolt where the further advances made by
the first mortgagee do not diminish the value of the
second mortgage holders interest because they
increase the value of the land overall. In Matzner, the
mortgagee agreed to lend a total of $273 000 to enable
the construction of units on a piece of land. The
payments were to be made in instalments to cover the
cost of building work as it was completed. After $250
000 had been advanced, a second mortgage was
created and then a third. Were advances made after
the $250 000 secured by the first mortgage?
Priorities and mortgages
• Under the rule in Hopkinson they were not covered because the
first mortgagee knew about the second and third mortgages.
However, Justice Holland found that because this rule is about
being fair to the later mortgagees, if the value of the security is
increased by the further advances, then it cannot be unfair to them
to allow the further advances to take priority:
– I can see no grounds for denying to the mortgagee first priority for
advances made pursuant to … the mortgage .. up to the total amount
of the principal sum .. on the basis of justice and fair dealing between
the parties. Advances made under those clauses after notice of the
subsequent mortgages were not designed or liable to diminish the
value of the security given to the subsequent mortgagees”. (p 303)
• So this sets up a limited exception where the mortgage allows for
and the advances actually provide for the construction of buildings
on the property that increase the overall value of the security.