Property Law: Mortgages Flashcards

Mortgages and the Numerus Clausus

• Mortgages are recognized as specific interests in land, which is a significant term of art in property law. They represent interests held in a particular estate of land rather than the land itself in its entirety.
• Under the common law, mortgages are classified as property interests. Within the Torrens system, they are registrable interests.
• If a mortgage remains unregistered, it may still be recognized within equity. In these cases, it gains protection through two primary mechanisms:
  • Exceptions to indefeasibility as equitable interests, as provided by the Real Property Act ($RPA$), sections $71(d)$ and $249$.
  • The ability to lodge a caveat under section $191$ of the $RPA$.
• In the hierarchy of the Numerus Clausus, mortgages fall under incorporeal hereditaments. Unlike corporeal interests, which involve physical possession of the land, incorporeal interests like mortgages and easements do not involve physical possession.
• Note: A license is strictly differentiated from a mortgage; it is not considered property.

Mortgages and Security Interests

• In ambiguous or unclear cases, courts apply a "substance test" to determine if a relationship constitutes a mortgage. This is done to ensure the mortgagor receives the specific legal protections associated with that label.
• The substance test asks: Is a limited interest in the land being granted to the mortgagee (the lender) for the specific and sole purpose of securing a debt?
• There are four primary forms of security recognized at common law:
  1. Pledge
  2. Lien
  3. Mortgage
  4. Charge
• Historically, at common law, a mortgage involved the actual transfer of title (and possession) as security. This historical context is vital for understanding how modern mortgages operate.
• A charge is distinct from a mortgage; it is a "right of recourse" to property or "hypothecation." It involves no transfer or delivery of title or possession.
• A mortgage can exist in two states:
  • Registered (Legal): Facilitated through formalities under the Law of Property Act ($LPA$) and the $RPA$/Torrens system.
  • Unregistered (Equitable): Recognized through equitable interests.

The Common Law Mortgage

• Terminology:
  • Mortgagor ($M'or$): The borrower.
  • Mortgagee ($M'ee$): The lender.
• General Mechanics: Before the Torrens system, a mortgage was a conveyance of the legal estate to the mortgagee.
• The Proviso for Re-conveyance: The mortgage agreement included a promise for re-conveyance (redemption). This occurred once the mortgagor paid all "mortgage monies," which consists of the principal amount plus interest.
• Possession Rights: Historically, the mortgagee had an inherent right to possession "as soon as the ink is dry on the mortgage" because the legal estate had been conveyed to them.

The "Equity of Redemption"

• Definition: When the legal estate is conveyed to the mortgagee at common law, the interest remaining with the mortgagor is known as the "Equity of Redemption" ($EOR$).
• Nature of the Interest: The $EOR$ is considered an equitable interest in land. It represents the mortgagor's financial interest in the land.
• Practical Application: If a mortgagor seeks a second mortgage to raise further funds, they are essentially mortgaging their $EOR$, which still holds value.
• The term "equity in a house" refers to the current market value of the house minus the total debt secured by existing mortgages.
• The concept of the $EOR$ remains a critical protection for the mortgagor, even under the modern Torrens system.

Equity’s Protection of Mortgagor

• Equity views a mortgage essentially as a security for the repayment of money, rather than a permanent transfer of property.
• The maxim "once a mortgage always a mortgage" summarizes equity's stance. This led to a strict rule: No "clogs or fetters" could be placed upon the equitable right to redeem property.
• Equitable Relief from Forfeiture: Similar to how equity provides relief from penalties in lease contracts (forfeiture), it permits redemption if the mortgagor pays all monies due.
• Foreclosure: To balance the rights of the mortgagee, equity provided the remedy of foreclosure. This allows the mortgagee to extinguish the mortgagor's right to redeem: Campbell v Holyland $1878$.
• Balancing Act: The court exercises discretion in striking a balance between the mortgagor’s opportunity to repay the debt and the mortgagee’s need to eventually enforce the security.

Protecting the Right to Redeem

• Historical Context: A tension exists between the principle of freedom of contract and the need to protect the mortgagor. Equity historically took a strict view, striking down "collateral advantages."
• Collateral Advantages: These are covenants or benefits extracted by the mortgagee as part of the bargain that go beyond the simple repayment of mortgage monies.
• Fairclough v Swan Brewery Co Ltd. $1912$: A mortgage clause stated it could not be redeemed until the last $6$ weeks of a long term. In this "tied brewery" case, the court held such covenants were repugnant to the right to redeem or "clogs" on the $EOR$ and were struck down.
• Knightsbridge Estates v Byrne $1939$: A mortgagor of freehold land tried to redeem earlier than the agreed $40$-year contractual date. The court upheld the $40$-year term, distinguishing a contractual right to redeem from an equitable right, ruling it was a fair commercial bargain at the time.
• Kreglinger v New Patagonia Meat Company $1914$: Lord Parker reviewed usury laws (repealed in $1854$) and concluded that a collateral advantage is only struck down if it is:
  1. A clog or fetter on the equitable right to redeem (e.g., Samuel v Jarrah $1904$, which involved an option to purchase the property).
  2. Repugnant to the right to redeem.
  3. Oppressive and unconscionable.
• In the absence of these factors, a contractual collateral advantage is generally enforceable.

The Australian Approach to Clogs

• Toohey v Gunther $1928$: A tied brewery case where the "tie" (obligation to buy beer from the brewery) only lasted as long as the mortgage. The High Court of Australia ($HCA$) held there was no clog and approved the Kreglinger dicta.
• Lift Capital v Merrill Lynch $2009$ and Wily v Endeavour Health Care $2003$: These cases suggest that in modern law, the only relevant consideration for striking down a clog should be unconscionability. An interest is not automatically struck down simply because it is a clog or fetter.
• South Australian Position ($LPA$ $1936$, section $55B(2)$): Any covenant collateral to the mortgage ceases to have effect once the mortgage monies are repaid. This provides less flexibility than the NSW approach (Lift Capital) but aligns with the dicta in Toohey.

Equitable Mortgages

• There are three main types of equitable mortgages:
  1. Contract for a legal mortgage: If evidenced in writing, equity treats it as a completed mortgage based on the principle from Walsh v Lonsdale (equity deems as done that which ought to be done).
  2. Mortgage of an equitable interest: Examples include mortgaging a beneficial interest under a trust or a mortgagor creating a subsequent (second) mortgage.
  3. Deposit of title deeds: Based on Russel v Russel $1783$ and the doctrine of part performance. However, for Torrens land, section $149$ of the $RPA$ was removed in $2016$, meaning mortgages by deposit of title deeds are no longer possible because certificates of title are not physical objects to be deposited.
• Remedies ($LPA$ $1936$, section $43$): If an order for sale is made, the court may vest the land in the equitable mortgagee to conduct the sale. This cannot prejudice a prior mortgage without the consent of that prior mortgagee.

Covenants in Mortgages

• A mortgage is a contract, often in the form of a deed. Covenants can be either express or implied.
• Common Express Covenants:
  • Restrictions preventing the mortgagor from leasing or disposing of the property without the mortgagee’s consent.
  • Breaches of these covenants are often termed "events of default."
  • Covenants requiring the mortgagor to maintain insurance and keep the property in good repair.
• Implied Covenants:
  • Section $130$ of the $RPA$: Implies a covenant for repair; allows the mortgagee to enter and inspect the property.
  • Section $47$ of the $LPA$ $1936$: Implies and defines the power of sale upon default (parties can modify or exclude this).

Torrens System Mortgages: Creation and Effect

• Creation:
  • The registered proprietor executes a mortgage in a statutory form referring to the certificate of title (sections $128$-$129$ $RPA$).
  • Amendments in July $2016$ allow mortgagees to register a mortgage without the mortgagor's execution, provided there is appropriate certification.
  • The mortgagee must verify the authority of the mortgagor (section $128A$). Failure to do so is an offense and renders the mortgage defeasible (section $69(i)$).
• Effect:
  • Section $132$ of the $RPA$: A Torrens mortgage operates as a security interest only. It does not transfer the land.
  • Re Forrest Trust $1953$: Defines a Torrens mortgage as a statutory charge or hypothec, which maintains common law features including the equitable right to redeem.
  • Section $56$ of the $LPA$ $1936$: Part $4$ provisions regarding mortgages apply to Torrens land, subject to $RPA$ registration rules.

Mortgagee’s Remedies: Power of Sale

• Generally: The most effective remedy for defaults.
• Right to Possession: At common law, this was automatic. Under the Torrens system (where the mortgage is a charge), the right is statutory. Section $137$ of the $RPA$ provides a right to possession following default.
• Power of Sale Mechanics ($RPA$):
  • Section $132$: Implied power of sale exists after $1$ month of default.
  • Section $133$: Requires $1$ month notice before exercising the power.
  • Section $134$: The purchaser from the mortgagee obtains a discharge via a receipt from the mortgagee.
  • Section $135$: Order of distribution for sale proceeds:
    1. Pay expenses of the sale.
    2. Pay monies due to the mortgagee.
    3. Pay subsequent mortgagees.
    4. Any surplus is returned to the mortgagor.
• General Law: Sections $47$-$52$ of the $LPA$ $1936$ contain parallel provisions for non-Torrens land.

Mortgagee’s Duty on Exercising Power of Sale

• Parties affected by the sale include the mortgagor, any guarantor, and subsequent mortgagees.
• Standards of Care (Legal Tension):
  • UK standard: Negligence standard of care (Cuckmere Brick Co Ltd v Mutual Finance Ltd $1971$).
  • Australian standard: Generally a limited equitable duty to act in good faith, not a negligence standard.
  • Pendlebury v Colonial Mutual Life $1912$: The duty is about good faith ("not reckless") only. The mortgagee can prioritize their own interests as long as there is no wilful or reckless disregard for the mortgagor.
• Improper Sale:
  • Forsyth v Blundell $1973$: The court restrained a sale for reckless disregard. A mortgagor’s equitable right to rectify an improper sale takes priority over the purchaser's rights before settlement.
  • Indefeasibility: After registration, the purchaser is protected by indefeasibility under section $134$ of the $RPA$. The purchaser is not concerned with whether default actually occurred or if notice was properly given.
  • Emerald Securities v Tee Zed Enterprises $1981$: Case that distinguished itself from Forsyth.

Foreclosure and Other Remedies

• Foreclosure:
  • Right to extinguish the right of redemption. It requires a court order at common law.
  • Process: The court makes a conditional order ("nisi") giving the mortgagor $6$ months to repay. If not paid, the order is made "absolute."
  • Campbell v Holyland $1878$: Examines foreclosure limits.
  • Modern usage: Rare. Under section $44(2)$ of the $LPA$ $1936$, the court can order sale or foreclosure at the request of either party.
  • Torrens Foreclosure: Requires application to the Registrar-General (not the court). It is very restrictive, requiring $6$ months of arrears and a failed public auction attempt with proper notices (sections $140$-$142$).
• Right to Sue on Personal Covenants: Used if the sale of the property does not cover the debt. Note: Section $55B(3)$ of the $LPA$ $1936$ prevents suing on personal covenants once foreclosure has occurred.
• Power to Appoint a Receiver:
  • A receiver acts as a manager to collect income from the property to pay the debt.
  • Governed by section $47(1)(c)$ and section $53(1)$ of the $LPA$ $1936$. The apppointment must be in writing.
  • Section $53(2)$: the receiver is deemed the agent of the mortgagor.
• Corporations Act $2001$ (Cth), Section $420A$: Imposes a duty on "controllers" (mortgagees/receivers) to take reasonable care to obtain the best price reasonably obtainable or the market value during a sale.

Consumer Legislation

• National Credit Code (NCC) under the National Consumer Credit Protection Act $2009$ (Cth):
  • Allows review of "unjust" agreements (e.g., lack of independent advice, harsh interests, power imbalance, vulnerability).
  • Applies to "consumer debt": Credit for natural persons predominantly for domestic purposes or residential property investment.
  • Obligations: Disclosure of rates, mandatory $30$-day default notice before enforcement (section $88$).
  • Debtor has the right to pay out the mortgage at any time, subject to fixed charges.
  • Acceleration clauses are restricted to specific default and notice conditions.
• Australian Consumer Law (ACL):
  • Section $18$: Prohibits misleading or deceptive conduct in property transactions.
  • Section $20$: Prohibits unconscionability based on factors similar to Commercial Bank v Amadio $1983$.