Module 4: The Law Relating to Mortgages PDF

Mastering Mortgages The Bahamas Institute of Financial Services MODULE FOUR THE LAW RELATING TO MORTGAGES After completing this module, students should be able to:...

Mastering Mortgages The Bahamas Institute of Financial Services MODULE FOUR THE LAW RELATING TO MORTGAGES After completing this module, students should be able to: 1. Understand the priority of security rights relating to Mortgages 2. Develop an understanding of how judgments affect mortgage rights 3. Gain an awareness of the practicalities of the law relating to a. mortgages particularly the legal remedies available to a b. mortgagee for default of a mortgage loan by a mortgagor 4. Integrate their knowledge of the law relating to mortgages a. with the practical application of key legal concepts to simple b. and complex issues. Mortgage over Land The borrower who grants the mortgage over his land is known as the ‘mortgagor’ and. the lender is known as the ‘mortgagee’. When the loan is repaid and the land becomes free of the mortgage again, the mortgagor is said to ‘redeem’ the land. During the currency of the mortgage, the mortgagor’s residual rights in the land are known as his ‘equity of redemption’ or ‘equity’. Its value is the value of his unencumbered collateral minus the value of the secured loan. Mortgage and a Charge: Note that a mortgage and a charge imply theoretically different interests. A mortgage implies the transfer of the mortgagor’s interest in the property as security, with a proviso for the transfer on satisfaction of the obligation. A charge implies a mere right to look to the charger’s property to satisfy an obligation without such transfer. When the discussion of security is raised, there are two distinct issues: What is the nature of the interest in the land or collateral, that is, the subject matter of the security? For example, the mortgagor may have a freehold or leasehold estate in the land and his interest maybe legal or equitable. Also, the land may be unregistered. The nature of the security interest created must be ascertained, that is legal or equitable mortgage or charge. When a secured loan is obtained in relation to a mortgage, the borrower (the mortgagor) gives the lender (the mortgagee) an interest over the land, a right in priority to other creditors, and the power to obtain repayment of the loan (and any interest due) through numerous legal remedies including but not limited to Power of Sale, if the borrower defaults. Enforcement of the mortgagee’s rights through established and actionable legal remedies is a fundamental premise of the law relating to mortgages. For example, even though the mortgagee must obtain a court order in order to effectuate a Power of Sale, the Power of Sale (and the other legal remedies) does not make the mortgagee the legal owner of the land. The mortgagee is merely exercising its right to dispose of the land by sale so that it may repay itself what it owes under the mortgage loan. However, it should be noted that any surplus obtained in the sale of the mortgaged property belongs to 39  Mastering Mortgages The Bahamas Institute of Financial Services the mortgagor, subject to the rights of other mortgagees to whom the mortgagor may have given subsequent mortgages to the same land. Equity of redemption The mortgage loan is a contract under which the mortgagor offers a legal interest or mortgage over his land in return for an amount which the mortgagee loans to him and under which both parties undertake to carry out certain legal obligations (e.g. repayment of the loan amount with interest). Consequently, the mortgage acts as security for the mortgagor’s due performance of the contract. Once the mortgagor performs his obligations under the terms of contract- mortgage loan- his land is released from the mortgagee’s rights or legal interest in the land and freed from his personal obligation to the mortgagee. If the mortgagor fails to discharge his obligations under the mortgage loan, (particularly failure to repay the loan when it is due to be paid), he is in breach of contract and may no longer retain his contractual right to redeem his security by payment at a later date. However, under the equitable principle of the ‘equity of redemption’, the mortgagor has a right at any time after the contractual date of repayment to pay the loan and redeem his security. He must give notice of repayment or pay the interest on the mortgage loan (as mutually agreed with the mortgagee) over a period of time. Although in a loan financing/banking context, the equity or equity of redemption in relation to the mortgage is the value in the land which is the difference between the amount originally borrowed and the amount presently owed to the mortgagee/lender, in strict legal terms, the equity of redemption is the general rights of the mortgagor to redeem his security and discharge the mortgage or legal interest of the mortgagee over his land by repayment of the mortgage loan, after giving notice of his intention to repay and paying the agreed amount of interest. The equity of redemption also represents the mortgagor’s remaining interest in the mortgaged land while the mortgage exists. For example, if a mortgagor has mortgaged land valued at $150,000 as security for a loan of $100,000, his right to redeem is worth $50,000 net. The mortgagor is allowed to dispose of that right by sale or he may use it as security for another loan which may create a second mortgage over the same mortgaged land. Clogs on the equity This means that there must be no clutter or impediment on the equity of redemption. In equity the property belongs to the borrower and the purpose of the mortgage is to provide security for repayment of the loan. In principle, the borrower ought to be able to get his property back by paying off the loan with his property in the original condition. The borrower should not place undue postponement of redemption. Note that the parties may agree to a long-term repayment and early repayment might put the lender at a serious disadvantage. Protection and Perfection of Security/Mortgage Interest English Common Law, upon which Bahamian mortgage and land law is based generally, and The Conveyancing and Law of Property Act 1909 (as amended) require the recording/filing of the relevant mortgage document and conveyance (where applicable), after the production of evidence of the payment of stamp duty. This legal requirement is necessary to perfect and protect the security interest of the relevant party to whom the property is mortgaged, against third parties generally, without proof of specific notice to any 40  Mastering Mortgages The Bahamas Institute of Financial Services particular claimant or any actual knowledge on its part of the prior interest. In addition to the foregoing legal principle, a security interest, which is unrecorded or filed, in the absence of a statutory provision to the contrary, may be perfected vis-à-vis a particular third party by notice to that party or by knowledge on his part. In general, an accurate and thorough title search of the particular property being mortgaged or used as security for a mortgage will assist any prospective third-party Purchaser or creditor in discovering the existence of an adverse title or security interest, whether created by the prospective seller, debtor, or by one of his predecessors in title. The object of the filing or lodging of the mortgage document and other documents of title in support of the mortgage is to give notice of the security interest to such third parties. Although failure to file or lodge the relevant mortgage document does not, in principle, affect the enforceability of the security as against the debtor himself, the time of filing of the documents/security interest is of utmost importance in terms of the priority of interests of the secured creditor (e.g. mortgagee etc.). It is important to note that in terms of the priority of security interests, particularly as it relates to mortgages in The Bahamas, “the first document to be recorded in time prevails”, notwithstanding the date of execution or creation of the document. Failure to file/lodge a security interest, whether a mortgage or a judgment order from the courts, will result in the fact that secured creditor is postponed to subsequent encumbrancer and loses out altogether to an outright Purchaser, particularly a bona fide Purchaser for value with no knowledge of the prior security and one who is not involved in any fraud or collusion regarding the same. It should be noted that where the mortgaged property is a debt or other money owing as to person to whom the notice should be given (e.g. prospective Purchaser, secured creditor, etc.), a mortgagee who gives written notice to the debtor gains priority over a mortgagee earlier in date who omits to give notice. The omission to give effective notice leaves the property under the mortgagor’s control and deprives the second mortgagee of the chance of ascertaining the existence of the first mortgage by inquiry of the debtor. The filing of the relevant mortgage is important to the notice requirement and to protect the interests of the first mortgagee because the priority of the second mortgagee does not depend on whether it made inquiry; it depends solely on notice. However, a second mortgagee will not gain priority if it gave no value or if he had knowledge of a prior mortgage at the time of his advance. A judgment creditor who obtains a charging or similar order from the court will be treated as a volunteer and cannot gain priority by giving notice. It is also important to note that where notices are contemporaneous, the encumbrances will rank in order of the time of creation. Real Property Tax With regard to the priority and enforceability of real property taxes as a lien on the subject mortgaged property after filing of the mortgage document, it should be reiterated that real property taxes represent a first charge over property, under Section 21 of the Real Property Tax Act, 1969 (“the Act”), which arises automatically by operation of law and does not require filing or lodging by the appropriate governmental agency/department/ministry responsible for the assessment and collection of such real property taxes. 41  Mastering Mortgages The Bahamas Institute of Financial Services Additionally, under Section 7(5) of the Act, real property taxes can be assessed for ten (10) years retroactively. This first charge, which, quite arguably, ranks in priority to the mortgage security interest filed and created by the mortgagee, is better understood in the context of the legal obligation (s) and liability of mortgagees as they relate to the payment of real property tax on the mortgaged property, since those mortgagees will be deemed to be owners of the property where real property taxes remain unpaid, particularly during currency of the mortgage loan, under Section 19 of the Act.. Remedies of a Legal Mortgagee As a lender, a bank will have the usual right to bring a personal action against the debtor on his promise to repay. 1. Action for debt – the bank/mortgagee has a right to sue on the debt independently of the security if it wishes/decides to do so, particularly where the proceeds of sale of the mortgaged property are less than the amount still owed under the mortgage loan after default (inclusive of interest). However, a bank’s rights as a holder of a security interest are more extensive and are important if the debtor becomes insolvent. The remedies depend on the nature of the security, that is, whether it is a legal or equitable charge or whether the security was effected by deed. The following remedies are available to a mortgagee on default of the mortgage loan by the mortgagor: 2. Entering into possession – A court order is required by the mortgagee in order to enter into possession; if the mortgagor is in occupation of the mortgaged property (and in some instances refuses to leave), the eviction order is needed. The costs to enter into possession are borne by the mortgagee. Entering possession` is normally one of the initial steps in selling the mortgaged property by exercising the Power of Sale. There are several restrictions on the bank being able to enter into possession: If the mortgaged property is a dwelling house then the court has a discretion to adjourn the action if the mortgagor is likely to be able, within a reasonable period, to pay the sums due. In the case of Quennell v Maltby (1979) 1 All ER 568; it suggests there may be a general discretion in the court to refuse possession to a mortgagee if possession is not sort for the purposes of enforcing the security but for an ulterior purpose. (see also Albany Homes Loans v Massey 2 All ER 609 and Sadiq v Hussain (1997) EWCA Civ 1003. 3. Appointment of a Receiver – where mortgaged property is leased to tenants, the Receiver appointed by the mortgagee is paid rent directly by the tenants of the property rather than pay such rent to the mortgagor who is the landlord. This is an attractive remedy only if the bank wishes to continue with the mortgage and the land is income-producing. However, before the bank/mortgagee appoints a Receiver, it must make formal demand for repayment from the customer or mortgagee. There are extensive case law setting out the duties of a receiver (Silven Properties Ltd. v Royal Bank of Scotland (2004 1 WLR 997); Downsview Nominees Lt v First City Corp Ltd No. 1 (1993 AC 295); Although the receiver is appointed as an agent of the mortgagor, he must take steps to protect and preserve the mortgaged property. When it comes to selling the property, they owe the same duties to the mortgagor and others interested in the equity of redemption. This means that 42  Mastering Mortgages The Bahamas Institute of Financial Services although they must obtain the best price reasonably obtainable, they are not obliged to take steps to enhance the value of the property or to delay a sale in order to achieve a higher price. The remedies of entry into possession and the appointment of a receiver do not bring the mortgage to an end. 4. Sale of the property/Power of Sale – The Act gives the mortgagee a statutory power of sale. Once it becomes clear that that the mortgagor is likely to remain in default of his obligations, banks normally seek this remedy in conjunction with the obtaining vacant possession. Similarly, Under the terms of the mortgage loan, the mortgagee has a Power of Sale to sell the mortgaged property in the event that the mortgagor defaults, even where the property is still occupied by the mortgagor, subject to obtaining an eviction order for Eviction and following other legal formalities. A mortgagee ‘is not a trustee of the power of sale for the mortgagor’ (Silven Properties v Royal Bank of Scotland), and he has ‘an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed’ (Tse Kwong Lam v Wong Chit Sen (1998)’-cited in Silven Properties. For a mortgagee in possession selling a property , it does not matter that the time may be unpropitious and that by waiting a higher price cold be obtained: he is not bound to postpone in the hope o obtaining a better price. In particular the mortgagee need only have regad to his own interests and need not postpone the sale in the hope of obtaining a higher price or take steps to achieve a higher price. The mortgagee’s only duty is preserving the value of the security and to obtain the best price that can reasonably be attained. As mentioned previously, if a mortgagee exercises its Power of Sale and there are surplus proceeds from the sale (i.e. the net sale proceeds exceed the amount due from the borrower, those surplus proceeds must be paid to the mortgagor. On the realization of security/exercise of a Power of Sale, the bank/mortgagee must act reasonably and obtain a fair price for the mortgaged property to be sold under a Power of Sale (Standard Chartered Bank v. Walker & Walker (1982) 3 All ER 938). A company issued to S, a bank, a debenture giving S a charge over the company’s assets in respect of any sums then or in future owing to S. The debenture empowered S to appoint a receiver with a provision that any receiver so appointed was to be deemed the company’s agent and that the company alone would be responsible for his acts or defaults. In November 1980 S appointed a receiver who engaged auctioneers to hold a sale of the company’s stock. As the auction was held on a cold day in February the proceeds of sale was entirely absorbed by the expenses of realisation and preferential debts other than that of S. S claimed the sums guaranteed by W and W subsequently brought an action against S, alleging the sale was poorly organised and realised at a gross undervalue. It was held that A receiver realising assets under a debenture owed a duty both to the borrower and to a guarantor of the debt to take reasonable care to obtain the best price that circumstances permitted, and that a duty was also owed to exercise reasonable care in choosing the time for the sale. Despite the receiver being deemed the company’s agent, S, as holder of the debenture, might have responsibility for the receiver’s actions if it were shown that it interfered with the conduct of the receivership. As these were triable issues W would be granted unconditional leave to defend. An appraiser/surveyor who negligently values a house for mortgage purposes so that its forced sale value is less than the amount loaned by the mortgagee to the mortgagor will be liable to pay damages for the mortgagee’s entire loss, including any unpaid interest at the default rate in the mortgage loan Baxter v Gapp (FW) and Co. Ltd (1939) 2 All ER 752 ; Swing Castle Ltd. v Alastair Gibson (A firm) (1991) 2 All ER 353; Banque Bruxelles S.A 43  Mastering Mortgages The Bahamas Institute of Financial Services v Eagle Star Insurance Co. Ltd and Others (1995) 2 All ER 769and Mortgage Express v Countrywide Surveyors Lts. (2016) EWHC 1830 (Ch)’ The timing for the realization of the security or exercise of the Power of Sale after default is entirely a matter for the bank/mortgagee. The bank/mortgagee is not liable to the mortgagor or surety for a decline in the value of the mortgaged property unless the bank/mortgagee was responsible for that decline In China and South Sea Bank v. Tan Soon Gin (1990) 1 AC 536 the decision of the court was that a mortgagee’s decision on sale is not constrained by reason of the fact that the exercise or non- exercise of the power will occasion loss or damage to the mortgagor. He can sit back and do nothing. He is not obliged to take steps to realise his security. Where a creditor has concurrent remedies against the debtor, a security and a surety it is matter for him which one he pursues, if indeed he pursues any at all. In Silven Properties Limited, Chart Enterprises Incorporated v Royal Bank of Scotland Plc, In this case the court held that by accepting office as receivers of the Claimants’ properties the Receivers assumed a fiduciary duty of care to the Bank, the Claimants and all (if any) others interested in the equity of redemption. The scope or content of the duty depends on the special nature of the relationship between the Bank, the Claimants and the Receivers arising under the terms of the mortgages and the appointments of the Receivers, and in particular the role of the Receivers in securing repayment of the secured debt and the primacy of their obligations in this regard to the Bank. That was inconsistent with a duty to take the pre-marketing steps for which the Claimants contended in this action. It should be noted that a court has the power to order the sale of mortgaged property even though a mortgagee may refuse consent to the sale because the sale would realize insufficient funds to pay off the money advanced by the bank for the mortgage loan (Palk v. Mortgage Services Funding plc (1992) Ch 330). In Palk, the court ordered the sale sought by the mortgagor, refusing to let the mortgagee retain the property and rent it out. The value of the property was insufficient to cover the loan and the rent would not cover the interest payable, with the result that the mortgagor’s liability would increase if the mortgagee remained in possession unless property values increased steeply. Under the decision in Target Home Loans Ltd. v. Clothier C.A. (1994) 1 All ER 439, a bank/mortgagee may allow a mortgagor the opportunity to try to sell the mortgaged property, as the court held the view that there may be instances where an occupied property is more attractive than a repossessed property. The terms of the sale of the mortgaged property by the mortgagor (already in default) may also be agreed that after the end of a certain period of time (e.g. three months) and no sale was made of the property, the mortgagee could take immediate possession of the property, subject to the legal formalities, and exercise its Power of Sale. Additionally, a bank/mortgagee, in exercising its Power of Sale, has no duty towards a beneficiary of a trust, where the mortgagor is a trustee of the trust or mortgaged property (Parker-Tweedale v. Dunbar Bank plc and Others (1989). 5. Foreclosure – Under a court order which must be obtained by the mortgagee, ownership of the property is transferred from the mortgagor to the mortgagee. 44  Mastering Mortgages The Bahamas Institute of Financial Services MODULE FOUR LAW RELATING TO MORTGAGES SELF ASSESSMENT QUESTIONS 1. Explain the ‘equity of redemption’. 2. How may title to mortgaged property be protected and perfected? 3. What are the legal implications if title to mortgaged property is not protected or perfected? 4. How may prior or existing judgments by a potential mortgagor impact mortgaged property? 5. What interests does a mortgagee have in mortgaged property? 6. Describe legal obligations of the mortgagee/mortgagor regarding the payment of real property tax for mortgaged property. 7. Describe the mortgagee’s power and right to insure mortgaged property. 8. List the remedies available to a legal mortgagee. 9. Explain a mortgagee’s exercise of the Power of Sale 10. Explain the appointment of a Receiver. 45  Mastering Mortgages The Bahamas Institute of Financial Services MODULE FOUR LAW RELATING TO MORTGAGES STUDY RESOURCE GUIDE 1. Conveyancing and Law of Property Act, 1909 2. Real Property Tax Act, 1969 3. Fiscal Reform and Tax Relief Act 1990 4. Real Property Tax (Amendment) Act, 2002 5. Real Property Tax (Amendment) Act, 2008 6. Real Property Tax (Amendment) Act, 2012 7. Abbey National Building Society v. Cann (1990) 8. China and South Sea Bank v. Tan Soon Gin (1990) 9. CIBC Mortgages plc v. Pitt (1993) 10. City of London Building Society v. Flegg (1986) 11. Deutsche Bank AG v. Ibrahim (1992) 12. Lloyds Bank v. Rossett (1990) 13. Midland Bank v. Dobson (1985) 14. Parke-Tweedale v. Dunbar Bank plc and Others (1989) 15. Palk v. Mortgage Services Funding plc (1992) 16. Standard Chartered Bank v. Walker and Walker (1982) 17. Swing Castle Ltd. v. Gibson (1990) 18. Target Home Loans v. Clothier CA (1992) 19. Westminster Bank v. Cond (1940) 20. Williams and Glyn’s Bank v. Boland (1980) 46