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

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

• Mortgagor Mortgagee

Conveyance of the Fee

Legal Ownership

Contractual right to have

property returned

Re-conveyance after payment

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

Legal Ownership

Equitable right to redeem beyond contractual

provision

Equity of redemption

Re-conveyance after payment

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

Legal ChargeLegal Ownershipand

Equity of redemption

Discharge after payment

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.


• 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.


• 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


• 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.


• 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.”


• 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.

http://www.legislation.nsw.gov.au/xref/inforce/?xref=Type=act%20AND%20Year=1900%20AND%20no=25&nohits=y

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.

•

http://www.legislation.nsw.gov.au/xref/inforce/?xref=Type=act%20AND%20Year=1900%20AND%20no=25&nohits=y

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.


• 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.


• 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).


• 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 variationsThe 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.

•


• 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.


• 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.


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 mortgagesTacking 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 mortgagesFor 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.


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.


• 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.


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 mortgagesMatzner 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.

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

Documents

Transcript of Mortgages Cameron Stewart (thanks to Shae McCrystal and Jim Helman)