Monash University LAW5006 Property Topic 10 - Mortgages PDF

LAW5006: Property Topic 10 – Mortgages Dr Antony Colafella: [email protected]  10.1 Nature of a registered mortgage We can conceptualise a mortgage interest as being created by two separate (but interrelated) agreements. This is helpful when reading the National Credit Code. Fir...

LAW5006: Property Topic 10 – Mortgages Dr Antony Colafella: [email protected]  10.1 Nature of a registered mortgage We can conceptualise a mortgage interest as being created by two separate (but interrelated) agreements. This is helpful when reading the National Credit Code. Firstly, there is the contractual loan agreement (or credit contract) that specifies the debt to be repaid, how it is to be paid, by who, to who, and any charges or fees (e.g. interests). These are personal rights and obligations; and Secondly, there is the security (‘mortgage’) agreement that allows the mortgagee to enforce the debt against the property of the mortgagor in the case of default (by taking possession and selling it). This is a proprietary right. 10.1 Nature of a registered mortgage General Law Land: For general law land, a legal mortgage (in the form of a deed: s 52) transferred legal ownership of the mortgaged property to the mortgagee. The mortgagor retained the equitable right of redemption. This was an equitable property right that allowed the mortgagor to redeem the property once the mortgage debt was repaid. The equitable right of redemption and other constraints ensured the mortgagee’s ownership was by way of security and they were not the actual absolute and beneficial owners of the land. 10.1 Nature of a registered mortgage Torrens System Land: Equitable or legal mortgages of Torrens System Land operate as ‘charges’ against the mortgagee’s property. It is not a ‘true’ mortgage as the mortgagee is not transferred ownership. The two most important rights of a mortgagee are the right to possess the land (which exists prior to default), and the power to sell the land if the mortgagor is in default (without the need for a court order). Legal mortgages are registered mortgages. Equitable mortgages must comply with s126 or sufficient acts of part performance (e.g. providing the certificate of title). However, mortgages protected by the NCC must be in writing and signed by the mortgagor. 10.1 Nature of a registered mortgage Torrens System Land The registered proprietor of any land may mortgage the land (TLA s74(1)). The mortgage may be registered if it is signed by the mortgagee (who also certifies that the mortgage was granted by a mortgagor on the same terms) s74(1A)). The mortgage must retain a copy of the mortgage (s74(2)), or the mortgage is void and the mortgagor is relieved from liability (s74(4)) 10.1 Nature of a registered mortgage Implied covenants by TLA s 75: The mortgagor will pay the mortgage debt (principle + interest) as specified; The mortgagor will repair and keep in repair all buildings constructed on (or other improvements made to) the mortgaged land; and The mortgagee may at all reasonable times enter into the mortgage land to inspect the state of repair. National Credit Code 10.2 Protection of the Mortgagor The National Credit Code (NCC) provides many protections for natural persons who enter into loan agreements (and mortgages) for predominantly domestic (as distinct from commercial) use. If the NCC applies, then certain formalities must be complied with when the contract and mortgage are executed (which effectively modifies s126 and excludes the doctrine of part performance); and there are also further restraints of the mortgagee’s power of sale. We only consider a very small slice of the NCC. 10.2 Protection of the Mortgagor Terminology In relation to the credit contract, the terms credit provider and debtor are used. In relation to a mortgage, the term mortgagee and mortgagor are used. For our purposes, this distinction is not significant if the parties remain the same across the respective roles (e.g. the debtor is also the mortgagor). 10.2 Protection of the Mortgagor Scope of NCC: Per (s 5 NCC), the NCC applies to the provision of credit (and related credit contract) if at the time the credit contract is or will be entered into: 1. The debtor is (or will be) natural persons; and 2. The credit is provided (or intended to be provided) either wholly or predominantly for: personal, domestic, or household purposes; or to purchase, renovate or improve residential property for investment purposes; and 3. There may be charges for providing the credit (e.g. interest); and 4. The credit provider provides the credit in the course of a business of providing credit.  10.2 Protection of the Mortgagor Section 7 of the NCC further clarifies that it applies to a mortgage: To the extent to which the mortgage secures obligations under a credit contract or a related guarantee; and If the mortgagor is a natural person or a strata corporation. To reword this section slightly, it provides that the NCC will only protect a mortgage to the extent it secures the provision of credit that falls within the scope of the NCC (per s5). National Credit Code: Formalities 10.2 Protection of the Mortgagor Section 14(1) provides that a credit contract must be in the form of: (a) A written contract document signed by the debtor and credit provider; or (b) a written contract document signed by the creditor provider that constitutes an offer that is then accepted by the debtor in accordance with its terms (e.g. accessing the credit, or any other conduct that would constitute acceptance at law). Section 14 will be satisfied if the duly signed written mortgage document contains all the necessary terms of the credit contract either itself, or if read alongside other documents that it refers to  10.2 Protection of the Mortgagor However, section 42 provides additional requirements before a mortgage is enforceable against the mortgagor (to the extent it secures obligations under a credit contract). Scenario 1: If the mortgage agreement is separate to the credit contract, then the mortgage must be in the form of: a written mortgage document that is signed by the mortgagor and provides all the terms of the mortgage itself; or a written mortgage document that is signed by the mortgagor and provides all the terms of the mortgage when read with other documents that it refers to. Scenario 2: If the mortgage agreement is contained in a credit contract, the credit contract was signed by the mortgagor. 10.2 Protection of the Mortgagor You cannot contract out of the NCC: s191 (1) The provision of a contract or other instrument by which a person seeks to avoid or modify the effect of the NCC is void; and (2) A provision of a contract or other instrument by which a person seeks to have the debtor, mortgagor or guarantor indemnify the credit provider for any loss or liability arising under this Code is void. (3)/(4) A credit provider that is a party to any such contract or other instrument commits a strict liability criminal offence. Rights and duties of the mortgagee Rights to possession 10.3 Rights and duties of the mortgagee Mortgagee’s Right to Possession of Land Section 81 TLA provides that the first mortgagee has a right to possession (even prior to m’or default) but qualifies this right by stating that the mortgagor has a right to quiet enjoyment until a default. If there is a default, and the right to quiet enjoyment is lost, then the mortgagee can exercise their rights without a court order. This emulates the general law position; but does not confer legal ownership of the property to the first mortgagee. 10.3 Rights and duties of the mortgagee Mortgagee’s Right to Possession of Land Section 78 TLA provides that if the m’or defaults then the mortgagee: may enter into possession of the mortgaged land by receiving any rents and profits derived from the land [to recoup the mortgage debt]; and may bring an action of ejectment to recover the land [which is likely necessary with an uncooperative mortgagor despite s81]. Power of Sale 10.3 Rights and duties of the mortgagee Power of sale: Notice Requirements. Sections 76 and 77 of the TLA collectively provide that: if default is made in payment of the principal sum, interest (or any express or implied covenant) and the default continues for one month (or such period as expressly stated in the mortgage); then The mortgagee may serve on the mortgagor notice in writing to pay the money owing or to perform the covenants (s76); and If the mortgagor does not comply with the notice within one month (or such period as expressly stated in the mortgage), then the mortgagee may sell the property (s77). 10.3 Rights and duties of the mortgagee Both the period before a written default notice can be given (s76), and the period to comply following the notice before the power of sale can be exercised (s77), can be changed by the mortgage instrument. But the requirements for a written notice cannot be removed. Thus, a mortgage which provides that a default notice can be given the day of the default, and that the power of sale can be exercised the day after service of the notice if the default is if is not immediately corrected, will likely comply with ss76/77 TLA.  10.3 Rights and duties of the mortgagee If the mortgage is protected by the NCC then (per s88(2) NCC) the mortgagor cannot exercise their powers (or commence proceedings) against a mortgagor unless: The mortgagor is in default; The credit provider has given the mortgagor a default notice that provides at least 30 days from the date of the notice to remedy the default; and The default has not been remedied within that period. S 88(1) provides the equivalent for the credit contract (Note: 88(4)). This is stronger than the compliance period provided by s77 TLA as s88(2) cannot be reduced by the contract. S 76 TLA still operates (and so applies in addition to s88(2)). S 88(2) also applies to acceleration clauses in the mortgage (s 93 NCC). 10.3 Rights and duties of the mortgagee Contents of Notice (TLA) To satisfy the TLA, a valid written notice must ensure that the mortgagor is aware of the nature of the default and that the mortgagor will exercise their power of sale if the defect is not remedied. If this is conveyed by the notice, then a technical error will not prevent the notice from being effective. In Whild v GE, Croft J held that a notice which overstated the amount owed was valid, as it still correctly identified the event of default relied on by the mortgagor (i.e. non- payment). 10.3 Rights and duties of the mortgagee Contents of Notice (NCC) If the mortgage is protected by the NCC then section 88(3) provides that a prominent heading must be included at the top stating that it is a default notice and specify: The default; The action necessary to remedy the default; A period for remedying the default; The date which enforcement proceedings may begin and the mortgage property may be repossessed; The repossession and sale of the mortgage property may not extinguish the debtor’s liability; and Other pertinent information, etc etc. 10.3 Rights and duties of the mortgagee Consequences of non-compliance: If the notice periods provided for by the TLA are not followed, then there is likely very little consequence if the property is sold at a fair market value. Breaching subsection 88(2) is a criminal offence. The mortgagor has some rights under Part 5 Division 6 against the credit provider that are practically helpful if the property has not been sold to an innocent third party. 10.3 Rights and duties of the mortgagee Low Resolution Timeline 10.3 Rights and duties of the mortgagee Power of sale: Mode of Sale S 77 TLA confers a very broad power of sale on the mortgagee. The mortgagee may sell the whole of the land or any part thereof, either together or in lots; and subject to any terms and conditions the mortgagee thinks fit. The land can be sold by auction, or by private agreement, or a combination of both. The purchase price could be made in instalments. 10.3 Rights and duties of the mortgagee Power of sale: The Mortgagee’s Duty However, section 77 imposes two separate and cumulative obligations on the mortgagee when exercising their power of sale. They must: Act in good faith; and Have regard to the interests of the mortgagor or other persons. 10.3 Rights and duties of the mortgagee Good faith The mortgagee must act in good faith. This requires the mortgagee to act honestly, fairly and with a lack of fraud or collusion. This is to be understood in light of the fact the mortgagee is entitled to give first consideration to their own interest (i.e. to recover the debt). But they cannot sell the property for a purpose other than to recover the debt. 10.3 Rights and duties of the mortgagee Other interests The mortgagee must have regard to the interests of the mortgagor or other persons. This is a objective test, to be determined by reference to the conduct of the mortgagee and the outcome of the sale. The latter is far more important. Other persons include other security holders who have an interest in the property. Again, the mortgagee is entitled to give first consideration to their own interest. 10.3 Rights and duties of the mortgagee Other interests The mortgagee will have satisfied this duty if they have taken reasonable steps to obtain the best price available at the time (as distinct from just the proper price). If the mortgagee has actually obtained the best price (based on the evidence) then this test will be satisfied. The mortgagee is not required to advertise the property, but in order to ensure they have taken reasonable steps it is likely that they will need to in order to bring the sale to the attention of potentially interested persons. The timing and extent of the advertising that is reasonable will depend on the nature of the property. Similarly, the mortgagee should ascertain the value of the property. They cannot accept a price merely because it will cover its own debt. 10.3 Rights and duties of the mortgagee Other interests The mortgagee can sell the property at a time of their choice and is not required to wait until more favourable market conditions. Nor are they required to repair the property prior to the sale. If the property has distinct lots that are can be sold seperately, then a mortgagee can sell the lots in the order that they consider is best (Nolan). If there is no doubt that the sale of the lots in the order preferred by the mortgagor would cover their debts (and the debts of any other security interest holder), then a failure to do so may be a breach. There is no right of home occupation (based on human rights) that influence the court’s interpretation of s77 and the nature of the m’ee’s duty.