Practice Paper P306 Acting in Mortgage Transactions 2023 PDF

PRACTICE PAPER P306 Acting in Mortgage Transactions By Phillip Nolan Barrister and Solicitor of the Supreme Court of Victoria Revised by Megan Thorburn BSc, DipLaw (LPAB), GDLP, AccS(Prop) Principal, CCP Law Adjunct Lecturer, The College of Law Victoria August 2023 © 2023 The College of Law Limited This publication is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Disclaimer The practice papers have been prepared as practice guides primarily for students at The College of Law and also for legal practitioners. They are not intended to be a comprehensive statement of the law or practice and should not be relied upon as such. If advice on the law or practice is required or required to be given, professional advice should be sought and practitioners should undertake their own legal research. P306 Acting in Mortgage Transactions CONTENTS 1 INTRODUCTION......................................................................................................... 6 2 RELEVANT LEGISLA TION........................................................................................... 6 2.1 Transf er of Land Act 1958 (Vic)..................................................................................... 6 2.2 Instruments Act 1958 (Vic)............................................................................................ 6 2.3 Powers of Attorney Act 2014 (Vic)................................................................................. 6 2.4 National Credit Code.................................................................................................... 7 2.5 Competition and Consumer Act 2010 (Cth).................................................................... 7 2.6 Unf air contract terms.................................................................................................... 7 2.7 Privacy Act 1988 (Cth).................................................................................................. 7 3 FORM OF REGIS TERED MORTGAGE......................................................................... 7 4 TYPES OF SECURITIES.............................................................................................. 8 4.1 Outline........................................................................................................................ 8 4.2 Mortgages................................................................................................................... 8 4.3 Registration of mortgages............................................................................................. 9 4.4 Third-party mortgages.................................................................................................. 9 4.5 Guarantees................................................................................................................. 9 4.6 Security interest over a company’s assets...................................................................... 9 5 LOAN APPLICA TION................................................................................................. 10 5.1 Establishing the security............................................................................................. 10 5.2 Registered mortgage.................................................................................................. 10 5.3 Ending the security.................................................................................................... 11 6 ACTING FOR THE MORTGAGOR.............................................................................. 12 6.1 Overview................................................................................................................... 12 6.2 Advising the client...................................................................................................... 13 6.3 Reduction or early repayment of principal..................................................................... 14 6.4 Replies to mortgagee’s requirements........................................................................... 14 6.5 Lawyer’s costs........................................................................................................... 15 7 ACTING FOR THE MORTGAGEE.............................................................................. 15 7.1 Overview................................................................................................................... 15 7.2 Preparing the mortgage.............................................................................................. 15 7.3 Other documents....................................................................................................... 15 7.4 Insuring the mortgaged property.................................................................................. 16 7.5 Lenders mortgage insurance....................................................................................... 17 8 MORTGAGE DOCUMENTS....................................................................................... 17 8.1 General considerations............................................................................................... 17 8.2 Interest..................................................................................................................... 18 © The College of Law Limited 3 THE COLLEGE OF LAW PROPERTY 8.3 Additional covenants...................................................................................................18 9 SETTLEMENT...........................................................................................................19 9.1 Electronic settlement...................................................................................................19 9.2 Af ter settlement..........................................................................................................19 10 VARIATIONS OF MORTGAGE....................................................................................19 10.1 Variations of terms of mortgage...................................................................................19 10.2 Variations of priority of mortgages................................................................................19 11 TRA NSFERS OF MORTGAGE....................................................................................19 12 DISCHARGES OF MORTGAGE..................................................................................20 12.1 Mortgagee’s lawyer.....................................................................................................20 12.2 Mortgagor’s lawyer.....................................................................................................20 13 POWER OF SALE ON DEFAULT................................................................................20 13.1 Requirements.............................................................................................................20 13.2 Sale procedures.........................................................................................................21 13.3 Sale of owner-builder works.........................................................................................22 14 ALTERNA TIVES TO MORTGAGEE’S SALE.................................................................22 14.1 Foreclosure................................................................................................................22 14.2 Assignment/transf er of mortgage af ter def ault...............................................................23 14.3 Right to possession....................................................................................................23 14.4 Appointment of receiver..............................................................................................23 14.5 Credit legislation.........................................................................................................23 15 PROFESSIONAL MATTE RS.......................................................................................23 15.1 Regulation of lawyers’ mortgage practices....................................................................23 15.2 Acting for more than one party.....................................................................................24 15.3 Prof essional f ees........................................................................................................24 APPENDICES.........................................................................................................................25 APPENDIX 1 – DRAFT LETTER FROM MORTGAGOR’S LAWYER TO MORTGAGEE’S LAWYER.......................................................................................................25 APPENDIX 2 – EXAMPLE FILE NOTE FOR MORTGAGOR’S LAWYER......................................27 4 © The College of Law Limited P306 Acting in Mortgage Transactions ABBREVIATIONS eCT electronic Certif icate of Title LIV Law Institute of Victoria LVR loan to value ratio MCP Memorandum of Common Provisions NCC National Credit Code (National Consumer Credit 2009 (Cth) Sch 1) PEXA Property Exchange Australia Ltd PLA Property Law Act 1958 (Vic) TLA Transfer of Land Act 1958 (Vic) VOI verif ication of identity Protection Act REFERENCES LexisNexis, Australian Encyclopaedia of Forms and Precedents (looseleaf and online) ACKNOWLEDGM ENT S This practice paper was written by Phillip Nolan and is regularly reviewed and updated (as necessary) by College of Law academic staf f and other legal practitioners. Previous reviewers include Elspeth McNeil BA (Hons), LLB (Melb), GradCertHigherEd (Mon) in 2007, Stuart Monotti BA, LLB (Mon) in 2008, College of Law academic staf f in 2009, Geof f Nicholson in 2011, Kamilla Shaw LLB (Latrobe) in 2012, Kristine Pham LLB (UTAS) in 2013–2015, Lee Lesley Horton BA, DipLaw (LPAB), GDLP in 2016, Murray McCutcheon AM, LLB (Melb) in 2017, Megan Thorburn BSc, DipLaw (LPAB), GDLP, AccS(Prop) in 2018–2019 and 2021–2022, and Simon Libbis BJuris, LLB, AccS(Prop) in 2020. Current revision by Megan Thorburn, August 2023. © The College of Law Limited 5 THE COLLEGE OF LAW PROPERTY 1 INTRODUCTION This practice paper discusses the responsibilities and obligations of a lawyer who acts f or a mortgagor or a mortgagee in a transaction involving a mortgage of an estate or interest in land. This paper f ocuses on the Torrens system statutory mortgage of real estate registered under Transfer of Land Act 1958 (Vic) (TLA) s 74. A statutory mortgage of land takes ef f ect as a security, and no estate passes f rom the mortgagor to the mortgagee. The mortgage “charges” the land with the payment of the principal, interest and other money payable to the mortgagee under the provisions of the mortgage. A discussion of common law mortgages is beyond the scope of this paper. A lender usually requires a borrower to provide something of value as security f or providing a loan. Pledging the asset by giving the lender the power to take control and sell it, is ref erred to as granting a mortgage. The person who grants or gives a mortgage is the “mortgagor”. The person who accepts or receives the mortgage is the “mortgagee.” This paper ref ers to the borrower (who may also be a purchaser) as a mortgagor and the lender as a mortgagee. A lawyer acting f or a purchaser of property must obtain instructions from the client as to the source of the f unds to complete the transaction. If the purchaser is borrowing f unds, this will usually take the f orm of a loan secured by a mortgage where the purchaser is the mortgagor. The purchaser’s lawyer should conf irm that any loan has been approved and that the mortgagee’s requirements can be met bef ore the contract of sale becomes unconditional. A ”subject to f inance” condition ought to be inserted in the contract of sale. Purchasers may seek advice and assistance when making loan applications. As a lawyer you should have a working knowledge of the various sources of finance available to home purchasers and investors in real estate but remain mindf ul that as a legal practitioner you are unable to provide f inancial advice. You should also be aware of the procedures, processing times and deadlines involved in applications being processed by mortgagees. 2 RELEVANT LEGISLATION 2.1 Transfer of Land Act 1958 (Vic) The TLA applies to mortgages (ss 74–87) of , and registration of dealings (ss 40–44) with, Torrens system land. It is the primary legislation relevant to mortgages of real property in Victoria. The TLA includes provisions relating to variation and discharge of mortgages (ss 75A–75B and 84, respectively), the power of sale of the mortgagee in the event of default by the mortgagor (ss 76–77), and the power of f oreclosure (s 79). Where there has been a def ault by the mortgagor, the Property Law Act 1958 (Vic) (PLA) may also apply to Torrens system land. 2.2 Instruments Act 1958 (Vic) The Instruments Act 1958 (Vic) stipulates that all dealings with land, which includes mortgages, must be evidenced by a note or memorandum in writing signed by the person to be charged (or by a person lawf ully authorised in writing by that person to sign the document) in order to be enf orceable: s 126. These requirements may be met in accordance with the Electronic Transactions (Victoria) Act 2000 (Vic). 2.3 Powers of Attorney Act 2014 (Vic) The Powers of Attorney Act 2014 (Vic) regulates powers of attorney. An attorney under a power given by the mortgagor or by the mortgagee may sign the mortgage on behalf of the relevant party. Where a power of attorney has been granted you should also consider Trustee Act 1958 (Vic) s 30 in regard to an attorney appointed f or a trustee. 6 © The College of Law Limited P306 Acting in Mortgage Transactions 2.4 National Credit Code The National Credit Code (NCC) is contained in National Consumer Credit Protection Act 2009 (Cth) Sch 1. The NCC applies to mortgages and guarantees related to a credit contract entered into on or af ter 1 July 2010, and where credit is wholly or predominantly f or personal or domestic use (including f or residential investment properties). Under NCC Pt 3, special provisions apply to mortgages and guarantees that secure credit contracts. The NCC does not apply to certain loans, including low-cost, short-term credit (less than 62 days), insurance premiums paid by instalments, bill f acilities and staf f loans. For f urther inf ormation regarding the NCC, ref er to Practice Paper CC305 Finance and Securities. See also the Australian Securities and Investments Commission (ASIC) website. 2.5 Competition and Consumer Act 2010 (Cth) Schedule 2 of the Competition and Consumer Act 2010 (Cth) comprises the Australian Consumer Law. The Australian Consumer Law and Fair Trading Act 2012 (Vic) provides that the Australian Consumer Law will apply as a law of Victoria. The provisions of the Australian Consumer Law are largely replicated by amendments to the Australian Securities and Investments Commission Act 2001 (Cth) so as to cover f inancial products and services. 2.6 Unfair contract terms Sections 23–28 of the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) s 12BG(1) prohibit unf air contract terms in consumer contracts. A consumer contract is a contract entered into by an individual to acquire goods, services, an interest in land, f inancial products or f inancial services wholly or predominantly f or personal, domestic or household use or consumption. The legislation applies to unf air terms in standard f orm consumer contracts. A consumer contract term will be unf air if the term: would cause signif icant imbalance in the parties’ rights and obligations arising under the contract; is not reasonably necessary in order to protect the legitimate interests of the party who will be advantaged by the term; and would cause detriment (whether f inancial or otherwise) to a party if the term were to be applied and relied on. Af ter 9 November 2023, a person is prohibited f rom making a contract with an unf air contract term. A pecuniary penalty can be imposed if a person contravenes this prohibition. 2.7 Privacy Act 1988 (Cth) The aim of the Privacy Act 1988 (Cth) is to protect and give individuals more access to, and control over, their personal inf ormation, held by all businesses except most “small businesses” with a turnover of $3m or less. Most mortgagees have responsibilities under the Privacy Act 1988 (Cth). The Act adopted 13 Australian Privacy Principles covering collection, use and disclosure, storage, protection and transfer of personal information. Generally, the mortgagee will ask the mortgagor to sign a privacy consent f orm so inf ormation obtained by the mortgagee can be disclosed to third parties in certain circumstances. 3 FORM OF REGISTERED MORTGAGE The required f orm of registered mortgage is a national f orm developed by the Australian Registrars National Electronic Conveyancing Council. The mortgage f orm only contains the minimum inf ormation © The College of Law Limited 7 THE COLLEGE OF LAW PROPERTY to enable registration. It is usual that the mortgagee will require that its usual mortgage terms, the standard terms and covenants that are incorporated by ref erence, be also registered under TLA s 91A. The terms and covenants are known as a “Memorandum of Common Provisions” (MCP). Most f inanciers use their own MCP. In addition, most financiers have other security documentation, such as a non-registered loan agreement or a loan security agreement setting out the terms of the loan. For a copy of the national mortgage f orm, see the Australian Registrars’ National Electronic Conveyancing Council website. The Law Institute of Victoria (LIV) publishes its own MCP (MCP AA3553). It is designed for use by legal practitioners f or their clients and is available in hard copy f rom the LIV Bookshop or electronic copies are available online. The national mortgage f orm makes specific provision f or loan information and options in MCP AA3553. The data f or these options and identif ication of which options apply, including commencement date, amount of the advance and payment dates, must be inserted into the “Additional terms and conditions” data box of the national mortgage f orm to be valid and enf orceable. 4 TYPES OF SECURITIES 4.1 Outline A security is a written undertaking to repay a loan. Mortgages are just one f orm of security and are given to a mortgagee by a landowner. In exchange f or the mortgage, the mortgagee gives the landowner (the mortgagor) money (the mortgage loan). This is sometimes called the “principal sum” in the mortgage or the “advance”, especially if there are progressive payments of the loan. There are other f orms of security that may be given to a lender (f or example, chattel securities) but these are outside the scope of this practice paper. 4.2 Mortgages A mortgage is usually a security taken over real estate, that is, over land. However, a mortgage may be taken over anything of value, including goods, debts, water rights, leases and sub-leases. The mortgagor must own, or have an estate or interest in, the property being mortgaged and is usually given the right to remain in possession of the property. The mortgagor gives the mortgagee evidence of the mortgagor’s ownership of the property, the certif icate of title. The mortgagee retains control of the certif icate of title until the loan is repaid. Under the mortgage, the mortgagor and the mortgagee have rights and obligations. The mortgagor’s obligations usually include: repaying the loan and interest; keeping the property insured (noting the mortgagee’s interest on the certif icate of currency); paying rates and taxes (if any); and keeping the property in good repair. The mortgagee undertakes to allow the mortgagor to remain in possession, that is, to occupy the property until default under, or repayment of, the loan. The mortgagee is obliged to provide a discharge of mortgage on f inal payment of the loan. A mortgagee’s principal rights arise upon def ault by a mortgagor. These include the right to: 8 take possession of the property or receive the rent f rom it; sue f or the amount owing to the lender; or sell the mortgaged land in the mortgagee’s name. © The College of Law Limited P306 Acting in Mortgage Transactions 4.3 Registration of mortgages A mortgage over land under the TLA can be, and usually is, registered on the title to the property: s 74. There is no change of ownership when a mortgage of Torrens system land is registered. If the mortgage is not registered, then a caveat can be lodged online via Property Exchange Australia Ltd (PEXA) and recorded on the title to protect the mortgagee’s interest in the property. The Registrar of Titles requires all transactions to be lodged electronically. On repayment of the mortgage loan, the mortgagee processes a discharge of mortgage electronically through PEXA, transf erring control to the mortgagor’s representative or incoming mortgagee (in the case of a ref inance). Procedures f or electronic settlement and registration are described in Practice Paper P302 Sale and Purchase of Land. 4.4 Third-party mortgages Sometimes an entity will agree to provide security f or a loan when it is not receiving the benef it of the loan. This is known as a third-party mortgage. For example, a parent, spouse or partner may agree to be the mortgagor and give a mortgage over their own land to the mortgagee in support of the loan to the borrower. All three are parties to the mortgage. It is essential that each party to the transaction obtain their own independent legal advice. Third-party mortgages that secure a credit contract are unenf orceable under NCC s 48(3). 4.5 Guarantees A lender may require a guarantee f rom a third party that the loan will be repaid if the borrower or mortgagor is unable to pay. For example, if the borrower is a company, the lender will usually require a guarantee f rom two directors of the company so that they will be personally liable f or the loan in the event that the company does not repay it. Again, each party to the transaction should obtain independent legal advice. A certif icate stating that the guarantor has obtained independent legal advice and a certif icate stating that the guarantor has obtained independent f inancial advice are f requently required by mortgagees. The person giving the guarantee is known as the guarantor. The lender is named as the benef iciary in the guarantee, as the lender is entitled to the benef it of the guarantee. The guarantor undertakes to step into the shoes of the borrower in the event of default by the borrower and pay to the lender any money owed to the lender by the borrower. This usually includes any money owing now or at any time in the f uture. A guarantor will also give the lender an indemnity. This establishes a direct contractual relationship between the lender and guarantor. If f or any reason the borrower’s obligation to pay the lender is invalid or unenf orceable, the guarantor is still liable to repay the loan. A guarantee will usually continue even if the terms of the loan given to the borrower change, and even if the loan is repaid and the money is lent again. However, it is common f or the lender to require the guarantor to acknowledge, in writing, any variation in the loan conditions, before the conditions change. Note the requirements of NCC ss 59 and 61 regarding extending or increasing a guarantor’s liability under a guarantee that secures a credit contract. 4.6 Security interest over a company’s assets When a company borrows money, the lender may require the company to give the lender not only a mortgage over its real property but also a security interest (or charge) over all its assets, both real and © The College of Law Limited 9 THE COLLEGE OF LAW PROPERTY personal property. If the company def aults in its repayment of the loan, a registered security interest enables the lender to sell the assets of the company to recover the loan amount. An all present and af ter-acquired property (AllPAAP) security interest over the personal property of a company can be registered on the Personal Property Securities Register under the Personal Property Securities Act 2009 (Cth). See Practice Paper CC305 Finance and Securities. 5 LOAN APPLICATION 5.1 Establishing the security Where there is a mortgage granted to secure the purchase of real property, usually the intending purchaser of a property would have contacted a bank, or another lending institution, and requested to borrow money f rom the lender. The mortgagee will require the purchaser to complete an application f orm and ask f or certain inf ormation such as the purchaser’s last annual tax return or pay slips or bank statements, details of assets and liabilities, a copy of the contract of sale, any relevant trust deed, and a title search of the security property as well as personal identif ication documents. Once the purchaser has satisf ied the mortgagee’s requirements, the mortgagee will prepare a letter of of fer, which sets out the conditions of the loan that the mortgagee offers to the borrower. This will include inf ormation about the provisional amount of the loan, interest rate and term. When the purchaser accepts the of fer, the mortgagee will instruct a valuer to value the security property. The valuation is important because the value of the property usually determines the loan amount. The loan amount is generally based on the loan to value ratio (LVR). Usually the mortgagee wants to ensure that the value of the loan does not exceed 75% of the value of the security. The LVR f or f armland may be as little as 50%. If the loan is more than 80% of the purchase price of the property, the mortgagee will require the mortgagor to take out mortgage guarantee insurance (also known as lenders mortgage insurance). Once a satisf actory valuation has been received and the loan amount confirmed, reduced or increased, if necessary to ref lect the agreed LVR, the lender will instruct its lawyers to prepare the necessary security documents. The mortgagee will require the mortgagor to take out replacement insurance over the property and will require a copy of the certif icate of currency noting their interest as mortgagee to certif y loan documentation. The security documents are then signed and the loan drawn down when the lender hands the money to the borrower (or as the borrower instructs) in return f or the security documents. The responsible lending obligations contained in National Consumer Credit Protection Act 2009 (Cth) Pt 3 apply to licensed credit providers entering into credit contracts. 5.2 Registered mortgage Once settlement has been completed and the mortgage is registered, the security is ongoing. During this stage the mortgagor must make payments of interest and principal to the lender in accordance with the loan agreement and/or mortgage. The mortgagor must also comply with the terms of the mortgage. This would usually include: maintaining adequate insurance cover noting the interest of the mortgagee; paying rates and taxes; 10 keeping the property in good repair; © The College of Law Limited P306 Acting in Mortgage Transactions 5.3 obtaining approval f or alterations to the property; and complying with any other obligations under the mortgage. Ending the security There are three ways that a security can end: the mortgagor repays the loan; the mortgagor does not repay the loan and there is a def ault; or the mortgagor has the loan declared invalid and seeks to have the loan set aside on the basis of contract law or in equity. Repayment of the loan If the mortgagor repays the money owing to the mortgagee, the security will end and the mortgagor is entitled to have a discharge of mortgage registered so that the mortgage no longer appears on the title. The mortgagee must pass control of the electronic title to the mortgagor’s representative or incoming mortgagee (if the property is being ref inanced). Non-repayment of the loan If the borrower cannot, or will not, repay the loan, the mortgagee is entitled to take possession and sell the goods or land over which the security has been taken. The power of sale conf erred by TLA s 77 depends upon the service and expiry of a notice of default under s 76. There are of ten provisions in loan agreements to the ef fect that the mortgagee will not enforce its rights in the event of default unless there is a particular kind of default that continues f or a certain period, or unless a notice to remedy a def ault is given but not complied with by the mortgagor. A mortgagee has a right to possession upon default in the payment of principal or interest or any part thereof under TLA s 78 as well as any f urther rights to possession conferred by the mortgage instrument. The lender will receive the amount owing to repay the loan f rom the proceeds of the sale, and the balance, if any, will be given to the borrower. Having the loan declared invalid and set aside Rules of contract law, under which a contract may be declared invalid and set aside, apply to security documents. Where a security contract is declared invalid, the borrower will not have to repay the loan. A contract may be declared invalid f or a variety of reasons including: a party is legally incompetent to enter a contract, f or example, because one party is an inf ant or is of unsound mind or was drunk; a party is bankrupt; a party to the contract is not a legal entity (f or example, a business name is not a legal entity); or the contract is illegal. If a contract is unconscionable, the court may also declare the contract to be invalid in equity. In equity, relief is also available where there has been unconscionable dealing or undue inf luence. The equitable principle of unconscionable dealing applies whenever there is “exploitation by one party of another’s position of disadvantage in such a manner that the f ormer could not in good conscience retain the benef it of the bargain”: Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 489 (Amadio). Undue inf luence can af f ect the “validity” of the consent given by the weaker party to a transaction. In some relationships, for example, between lawyer and client, trustee and beneficiary, undue inf luence is presumed to exist unless the contrary is proven. In other situations, the party alleging the undue inf luence must prove its existence. © The College of Law Limited 11 THE COLLEGE OF LAW PROPERTY In Amadio, the High Court set aside a third-party mortgage given to a bank by elderly parents to provide security f or loans to their son’s business. The bank knew of the serious f inancial dif f iculties being experienced by the son’s business, whereas the parents did not. The bank was aware (or should have been reasonably aware f rom the circumstances) that the parents did not understand the significance of giving the mortgage over their property. The parents had little command of written English, and the evidence showed that they would not have executed the mortgage had they received independent advice. Af ter Amadio, it is now common f or lenders to require borrowers, mortgagors and guarantors to obtain independent legal advice bef ore signing mortgage documents and also to require that the lawyer sign a certif icate conf irming that independent legal advice has been given. Mortgagees also commonly require guarantors to provide certif icates of independent f inancial advice. In Westpac Banking Corporation v Mitros VSC 465, the mortgagee sought possession of a house and land f rom the mortgagor owner, Helen Mitros, f ollowing non-payment of principal and interest by the borrower, which was her husband’s company. At the trial, Mrs Mitros relied on three defences to the bank’s claim. The two def ences relevant to the setting aside of the contract were: the undue inf luence f rom her husband inducing her to enter the contract; and her lack of understanding of the transaction. Judgment was given in f avour of Mrs Mitros and the mortgage was set aside on the f ollowing basis: the mortgage was signed in circumstances in which her will was overborne by her husband, who exercised undue inf luence by not explaining to her the nature of the obligation he was requiring her to undertake and not explaining to her the nature and extent of the debt she was providing security f or; even though the bank was not aware of the undue inf luence, it should have ensured that Mrs Mitros understood the nature and ef f ect of the documents by explaining them to her or by being satisfied that she had obtained competent and independent legal advice; and in the circumstances it would be unconscionable f or the bank to enf orce its security over the property and obtain possession of the house. If the loan is a credit contract, then a debtor, mortgagor or guarantor may apply to the court to reopen an “unjust” transaction: NCC s 76(1). In deciding whether a transaction was unjust, the court must have regard to the public interest and to all circumstances of the case: s 76(2). There are numerous f actors that require consideration under s 76(2)(a)–(p), including: whether the borrower received independent legal advice; and any unf air conduct by the lender. If the court decides to re-open the transaction, it may do any of the things set out in NCC s 77, including altering or setting aside the loan contract or any security given. 6 ACTING FOR THE MORTGAGOR 6.1 Overview Once the loan has been approved, the mortgagee (or their lawyer) will usually request that the mortgagor’s lawyer provide some or all of the documents listed below so that the mortgagee or their lawyer can prepare mortgage documentation: a copy of the contract of sale and vendor statement (also ref erred to as a “section 32 statement”), properly executed; a copy of the register search statement (title search) f or the security property; nomination f orm and associated statutory declaration (if any); 12 © The College of Law Limited P306 Acting in Mortgage Transactions minutes of directors’ meeting – authorising the transaction and resolving to sign the mortgage and associated documents (where the mortgagor is a company); an ASIC company search if the mortgagor and/or the vendor is a company; any relevant trust deed(s) (if the mortgagor is the trustee of a trust) and any variations to that trust deed; a certif ied copy of any power of attorney to be relied upon by the mortgagor; a copy of the Duties Online settlement statement; current rate, planning and other statutory certif icates or inf ormation statements f or the security property; an insurance policy or certificate of currency of insurance f rom the insurer of the security property, which insurance notes the interest of the mortgagee; certif ied copy of all leases (if any) f or the security property; and owners corporation certificate under Owners Corporation Act 2006 (Vic) s 151(4) if the security property is a lot on a plan of subdivision that is af f ected by an owners corporation. The documents provided are used by the mortgagee or the mortgagee’s lawyer to certif y documentation f or settlement. The mortgagor’s lawyer will require each mortgagor to undergo verif ication of identity (VOI). The mortgagor’s lawyer must arrange f or a client authorisation form to be completed by the client at the time VOI is undertaken, in order to conduct the transaction. A draf t letter f rom a mortgagor’s lawyer to a mortgagee’s lawyer, which can be adapted as appropriate f or each transaction, is included at Appendix 1. 6.2 Advising the client The mortgagor’s lawyer has the obligation of checking the loan documentation submitted by the mortgagee’s lawyer and replying to mortgagee’s requirements. The mortgagor’s lawyer must also advise their client on the rights and obligations to be created by the mortgage. The mortgagor’s lawyer should confirm with their client that loan documents reflect the loan agreement and do not contain any provision that is outside that agreement or that may be unf air, unconscionable or prejudicial to the client’s interests. The loan agreement signed by a borrower specif ies the sum to be lent, the interest to be paid, the general nature of the security to be given, the duration of the loan, the mode of payment of principal and interest, and any other essential conditions (such as carrying out specif ic repairs to the security property). A mortgagor’s lawyer must ensure that their client understands the ef f ect of the key provisions in the mortgage, the obligations imposed upon the client by the covenants in the mortgage form, the MCP, the loan agreement and any other ancillary agreements, as well as the potential consequences of default, including the exercise of the mortgagee’s power of sale. An interpreter should be used if necessary. In particular, the mortgagor’s lawyer should consider and give advice on the matters set out below: Interest rate – in bank mortgages, the interest rate is not usually specif ied in the mortgage document. If the interest rate is not f ixed, you should advise your client that interest will vary according to changes in the rates of the bank. Under the NCC, the annual percentage rate or rates must be disclosed, and if the rate is determined by ref erring to a “ref erence rate”, details must be set out in the contract: s 17(4). Interest in arrears – most mortgages require interest to be paid in arrears. If the mortgage requires payment of interest in advance, you should ensure that the client has agreed to this. © The College of Law Limited 13 THE COLLEGE OF LAW PROPERTY Interest commencement – you must check the date at which interest commences to run. Some mortgages may provide that interest will be computed f rom the date of the loan approval, rather than the settlement date on which the money is advanced to your client. Default interest rate – you must also warn your client about the def ault interest rate that will invariably apply f or late payment. Default events – including non-payment of interest or principal, and typically also including breach of representation, insolvency, breach of covenant and material adverse change. Right of early repayment. Credit legislation – if the NCC applies to the loan, the mortgagor should be advised that, if it has dif f iculty in meeting its commitments, it may be able to obtain relief under that legislation. It is important f or the mortgagor’s lawyer to take detailed f ile notes clearly setting out the explanation provided to the client. See Appendix 2 f or an example of such a f ile note. It is also good practice to draw up a precedent document that sets out advice that you would give a borrower, mortgagor or guarantor, such as the loan amount, term, interest payable, their obligations and the lender’s rights. You should use this document as a precedent, adapting it as appropriate f or each transaction, and place it on the f ile with a clear statement that the document f ormed the basis of the advice to the client. If the mortgagor’s lawyer is required to provide a lawyer’s certif icate to the mortgagee confirming legal advice has been provided, then this must be draf ted in accordance with the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 (Vic). The certif icate must be in the f orm prescribed by the LIV Australian Legal Practitioner’s Certif icate (Sch 1), which can be f ound on the LIV website. The Legal Practitioners’ Liability Committee risk guide Managing Mortgage Risk and articles on the risk of providing solicitor’s certificates are excellent resources that are available on the Committee’s website. 6.3 Reduction or early repayment of principal Having regard to the terms of the loan agreement, a mortgagor’s lawyer should seek the inclusion of a provision in the mortgage that gives the mortgagor the f ollowing rights: to reduce the principal on any due date f or payment of interest by a convenient multiple (f or example, $1,000) so that f rom then on the mortgagor would be obliged to pay interest only on the reduced balance; and to discharge the mortgage in f ull at any time, paying interest only to the date of discharge. If the transaction is one to which the NCC applies, the mortgagor is entitled to pay out the contract at any time, paying interest, f ees and charges to the date of termination: s 82. Any early termination charges provided for in the mortgage must also be paid provided that they are not unconscionable, that is, the charges must not be greater than a reasonable estimate of the mortgagee’s loss from the early termination: s 78. 6.4 Replies to mortgagee’s requirements The mortgagor’s lawyer should obtain the mortgagor’s instructions in relation to the mortgagee’s requirements and should make replies in accordance with those instructions. A mortgagor’s lawyer must remember that there may be liability on the part of the mortgagor and their lawyer f or inaccurate replies. Standard mortgagee practice requires the mortgagor’s lawyer to return replies to mortgagee’s requirements, insurance policy, executed mortgage documents and authorities, and to enter payment directions to pay to the mortgagee in PEXA before settlement so that these documents and figures may be checked. The source f inancial line items will be conf irmed in PEXA once the mortgagee’s lawyer is satisf ied that it can certify to the mortgagee that the mortgagor has or will have good title to the property. 14 © The College of Law Limited P306 Acting in Mortgage Transactions Where the mortgagee is a bank, it will usually prepare its own mortgage in PEXA. Under the NCC, documentation is sent to the borrower, not the lawyer. Banks do not have the mortgage documents executed by the mortgagor at the bank. They require that the mortgagor take the documents to an independent lawyer f or advice. 6.5 Lawyer’s costs The mortgagor is liable to pay their own lawyer’s costs. The mortgagor’s obligations also usually include an obligation to pay the mortgagee’s lawyer’s costs and disbursements. The mortgagee’s lawyer usually submits a bill of their estimated costs and disbursements with the mortgage documents and requirements. Generally, the mortgagee’s lawyer requires that they be authorised to deduct the amount involved f rom the loan money at settlement. 7 ACTING FOR THE MORTGAGEE 7.1 Overview When agreement has been reached between the parties (or their agents) to lend money upon the security of a mortgage, the mortgagor’s lawyer should provide particulars of the title to the security property to the mortgagee or its lawyer. Title particulars are needed to complete the mortgage document, and the particulars should include the title ref erence and any existing encumbrances. Mortgagees usually also require a copy of the Register Search Statement (title search). The mortgagee’s lawyer must investigate the title and make searches, enquiries and requirements similar to a lawyer acting f or the purchaser of that property: ref er to Practice Paper P302 Sale and Purchase of Land. In practice, a mortgagee’s lawyer usually requires the mortgagor’s lawyer to f urnish the results of these property searches and inquiries to avoid duplicating costs. A f inal title search should be made as close as possible to the time of settlement. The mortgagee will also be advised of any activity on title throughout the PEXA transaction by Title Activity Checks. Where a mortgage is a second or subsequent mortgage, the mortgagee needs to be satisfied that prior mortgages permit the subsequent mortgage and that all necessary consents of prior mortgagees are obtained by the mortgagor. It is usual that a f ormal priority of mortgages or similar agreement is entered into by the respective mortgagees so that the earlier mortgagees agree to make f urther advances over an agreed amount. A mortgagee or the mortgagee’s lawyer is required to properly verif y the authority and identity of a mortgagor by taking “reasonable steps” bef ore execution or variation of a mortgage. The LIV has produced a VOI checklist available on their website. A registered mortgage is void and loses the benef it of indefeasibility if a f raud has been committed and reasonable steps were not taken to verif y identity. 7.2 Preparing the mortgage The mortgagee’s lawyer, or the mortgagee, will prepare and submit the mortgage to the mortgagor’s lawyer f or perusal and execution by the mortgagor. When the mortgage is within the ambit of the NCC, the mortgage must comply with ss 42–53. 7.3 Other documents The mortgagee’s lawyer must prepare not only the mortgage, but also the f ollowing supporting documents, according to the nature of the transaction: memorandum of costs and disbursements; requisitions or requirements; © The College of Law Limited 15 THE COLLEGE OF LAW PROPERTY mortgagor’s authority to complete blanks in the mortgage documents – allowing the mortgagee’s lawyer to insert the agreed dates f or the repayment of principal and interest af ter settlement of the mortgage transaction; mortgagor’s direction as to payment – addressed to the mortgagee and its lawyer, authorising payment of the advance according to the direction of the mortgagor’s lawyer; certif icate of independent legal advice; priority agreement with prior or subsequent mortgagees; undertaking to comply with conditions – such as a condition that certain work on the mortgaged property be completed within a limited period af ter settlement. Alternatively, this condition could f orm part of the mortgage. The mortgagee may retain a portion of the advance pending completion of that work; and undertaking by the mortgagor’s lawyer to comply with any requirements relating to the registration of the mortgage – a mortgagee’s lawyer may ask a mortgagor’s lawyer to sign such an undertaking, although it is the mortgagee’s lawyer’s duty to ensure that the mortgage is in registrable f orm before settling the transaction. As a lawyer you must ensure you are able to satisfy any undertaking given by you. Undertakings should be avoided wherever possible and only used in exceptional circumstances. These documents are submitted to the mortgagor’s lawyer f or approval and execution by the mortgagor. Upon their return, the mortgagee’s lawyer will need to check f or proper execution of the mortgages and the other documents. 7.4 Insuring the mortgaged property A mortgagee’s lawyer should require that the interest of the mortgagee in the property is covered by adequate insurance against the loss or damage of any improvements on the mortgaged property. The minimum level of cover required is usually equal to the principal of the mortgage loan. The mortgagor must provide a certif icate of currency to the mortgagee noting the mortgagee’s interest. If there is an existing policy, the mortgagor, as policy holder, can assign their rights to themself as owner and the lender as mortgagee. Once the assignment has been executed, it is sent, with the policy, to be noted in the company’s records. The policy is then endorsed accordingly and returned to the mortgagee. There are two reasons f or requiring insurance in the mortgagee’s name: if the property is damaged or destroyed, the mortgagee may claim directly on the policy ahead of the mortgagor and can recover the amount of the loan; and if a premium is not paid, the mortgagee is notif ied by the insurance company and can pay it to maintain cover. Some mortgagees require the insurer to agree that the policy will not be cancelled without prior notif ication to the mortgagee. Failure of the mortgagor to pay insurance premiums is invariably a breach of the mortgage conditions. The mortgagor must be allowed to choose their own insurer, and the mortgagee can do no more than require the insurance company to be a reputable and established insurer. Where the mortgaged property is a lot on a plan of subdivision and there is common property, a mortgagee will also require evidence that the owners corporation has taken out a policy or policies of insurance in accordance with Owners Corporation Act 2006 (Vic) Pt 3 Div 6, which covers: reinstatement and replacement insurance f or all buildings on the common property: s 59; and public liability insurance f or the common property f or not less than $20m: s 60(3). If the owners corporation has taken out insurance, a requirement by a mortgagee of a lot af f ected by the owners corporation for the lot owner to take out an insurance policy over the lot and the lot owner’s interest in the common property will be void unless: 16 © The College of Law Limited P306 Acting in Mortgage Transactions the mortgagee’s interest is noted on the owner’s corporation policy; and the sum insured in respect of the lot and interest in the common property under the owners corporation policy is less than the sum owing under the mortgage and the extra insurance is for the amount of the dif f erence: s 58. These provisions of the Owners Corporation Act 2006 (Vic) will not apply if there is no common property and the owners corporation has resolved unanimously that each lot owner must arrange f or their own insurance: s 63. 7.5 Lenders mortgage insurance The NCC applies to a mortgage where the mortgage secures obligations under a credit contract or a related guarantee, and the mortgagor is a natural person or a strata corporation (in Victoria, an owners corporation). A ”credit contract” means a contract under which credit is or may be provided: s 4. When the NCC applies, the mortgagee will be restricted to requiring only such insurance by the mortgagor as NCC Pt 8 allows. Such insurance is limited to compulsory insurance, mortgage indemnity insurance, insurance over mortgaged property, or insurance of a nature and extent approved f or the purposes of this section by the regulations. Mortgagees will sometimes seek additional security in the f orm of lenders mortgage insurance that requires the insurer to make payments of principal and/or interest to the mortgagee in the event that the mortgagor defaults in payments due under the mortgage. Mortgagees may also require a mortgagor to ef f ect some lif e insurance in conjunction with the mortgage. It is usually the mortgagor’s obligation to pay premiums f or lenders mortgage insurance. The premium may be in the f orm of a one-of f payment or as an annual payment f or the term of the mortgage. Many mortgagees require lenders mortgage insurance as a condition of lending when the loan exceeds a specified percentage of the mortgagee’s valuation (the LVR) of the security property (for example, 70%). 8 MORTGAGE DOCUMENTS 8.1 General considerations The Australian Registrars’ National Electronic Conveyancing Council national mortgage form approved under the TLA requires the f ollowing inf ormation to be included: lodger details; estate or interest mortgaged; land particulars; particulars of the mortgagor and the mortgagee; and additional terms and conditions. Copies of approved mortgage f orms and guides to assist in completing the f orms are available on the council’s website. The covenants contained in an MCP approved and retained by the Registrar of Titles will usually be incorporated in the mortgage by ref erence. The MCP published by the LIV (MCP AA3553) is of ten incorporated into mortgages prepared by lawyers f or non-f inancial institution mortgagees. Most institutional mortgagees have obtained approval from the Registrar of Titles for their own standard MCP which is then incorporated in their mortgages by ref erence to the appropriate approval number. © The College of Law Limited 17 THE COLLEGE OF LAW PROPERTY 8.2 Interest Mortgages traditionally provide for payment of higher and lower rates of interest. The mortgagee agrees to accept interest at a lower rate f or every period if the mortgagor makes the interest payment on or within 7–14 days (usually) af ter the due date. This is done because a provision that imposes a higher rate of interest in the event of def ault in payment on the due date is regarded as a penalty and is unenf orceable. However, there is no objection to encouraging punctual payment by reserving interest at a specified rate with a proviso f or accepting a lower rate f or payment made within a specif ied period af ter the due date: Wallingford v Directors of Mutual Society (1880) 5 App Cas 685. Mortgages may provide calculation of interest at a “f lat rate” of interest, calculated on the f ull principal sum at the expressed rate f or the whole term of the loan. Such mortgages usually provide f or the principal together with interest so calculated to be paid to the mortgagee by equal instalments (weekly, monthly or quarterly). Each succeeding monthly payment involves a steady reduction of the principal sum, so that the true interest yield, if calculated on the reducing balance of principal, is greater than the f lat rate. Alternatively, a mortgagee may require the principal to be repaid by equal periodical instalments, together with interest calculated at an expressed rate on the balance of the principal owing at the start of each such period. Mortgagees such as banks of ten charge a variable rate of interest rather than a f lat rate, so that the interest rate can be changed during the term of the mortgage if there is a change in Reserve Bank interest rates. It is important f or the lawyers acting f or the mortgagee and the mortgagor to ensure that the repayment provisions in the loan documentation accord with the instructions f rom their respective clients. 8.3 Additional covenants Other mortgagor’s covenants ordinarily included in mortgages are as f ollows: to pay rates, taxes, duties and assessments assessed against or in respect of the mortgaged property punctually; to observe obligations imposed by local government, statute, regulation or by-law, where a breach of these may result in the imposition of a charge or have a prejudicial ef f ect on the property; to keep the mortgaged property in good repair and not to pull down, alter or remove any part of it without the mortgagee’s consent; to insure against loss or damage by f ire and other risks, all buildings on the mortgaged property noting the mortgagee’s interest f or the f ull insurable value; to deliver the certif icate of currency to the mortgagee; to pay the costs of preparation and registration of the mortgage and the costs of any default by the mortgagor, which will also f orm part of the principal and bear interest accordingly; to allow the mortgagee to enter upon the mortgaged property to view the state of repair of the buildings at all reasonable times; without the prior consent in writing of the mortgagee, not to transfer, sell or agree to transfer or sell the mortgaged property; and not to execute any f urther mortgage or charge over the mortgaged property without the mortgagee’s prior written consent. In the event of any f ailure by the mortgagor to comply with these covenants, the mortgagee can make good the default by payment of the appropriate amount or undertaking the necessary work. The money outlaid or the cost of work will f orm part of the principal covered by the security and will incur interest accordingly. 18 © The College of Law Limited P306 Acting in Mortgage Transactions 9 SETTLEMENT 9.1 Electronic settlement Settlement of mortgage transactions are processed electronically in Victoria. Once the mortgage is lodged upon settlement in PEXA it is registered at Land Use Victoria where each dealing is prescribed a number that becomes its registered number. The registered number and the name of the mortgagee, are recorded on the relevant f olio of the register for the land, showing that the property described in the title is mortgaged. The new title issued will be an electronic certif icate of title (eCT) and control of the eCT will pass to the mortgagee’s lawyer or the f inancial institution. Further inf ormation on electronic settlements in PEXA is described in Practice Paper P302 Sale and Purchase of Land. 9.2 After settlement The principal duty of the mortgagor’s lawyer af ter settlement is to report to the client and account to the client f or all money received on settlement of the transaction. Of ten this money will have been applied towards the purchase price of the mortgaged property or to discharge a previous mortgage over the same property. If any surplus f unds remain in the lawyer’s trust account, those f unds will be held on trust f or the client. The lawyer’s tax invoice is usually paid at settlement in PEXA. As the mortgagor’s lawyer, you should also ensure that your client is aware of their obligations under the mortgage, the events that constitute def ault, and the consequences of def ault. 10 VARIATIONS OF MORTGAGE 10.1 Variations of terms of mortgage Section 75A of the TLA allows a mortgagee, with the mortgagor’s consent, to vary the terms of a mortgage where those terms f orm part of the mortgage f orm or the MCP, by, f or example: increasing or reducing the rate of interest payable; increasing or reducing the principal sum secured; or shortening or extending the term of the mortgage. A statutory variation of mortgage cannot be used to alter the term of the mortgage, the area of land mortgaged or the parties to the mortgage. A variation of mortgage can be processed in PEXA as a Residual Document. 10.2 Variations of priority of mortgages The relative priority of registered mortgages and charges may, if each of them af fects the whole of the land and no other land, be varied by an approved f orm: TLA s 75B. A variation of priority of mortgage can be processed in PEXA as a Residual Document. 11 TRANSFERS OF MORTGAGE A mortgagee may register a transf er of its interest in a registered mortgage to another party in PEXA by completing the relevant transf er document. The mortgagor’s consent is not required, but notice of the transf er of a mortgage debt must be given to the mortgagor by the transf eree in order to pass the legal right to claim the debt: PLA s 134. © The College of Law Limited 19 THE COLLEGE OF LAW PROPERTY 12 DISCHARGES OF MORTGAGE 12.1 Mortgagee’s lawyer The mortgagee’s lawyer is usually f irst instructed on a discharge by the mortgagee. Alternatively, the mortgagee’s lawyer may receive a request f rom the mortgagor’s lawyer to prepare a discharge of mortgage in anticipation of a settlement and to advise a payout f igure at a specif ied date, with a daily amount of interest. Where such a request is received f rom the mortgagor’s lawyer, the mortgagee’s lawyer seeks instructions from their client to act and then communicates the requisite information to the mortgagor’s lawyer. A mortgage registered against the title is a charge, but the legal title has remained with the mortgagor. The purpose of a discharge of mortgage is to remove the charge and this is ef f ected by electronically registering the discharge. The discharge of mortgage is signed by the mortgagee electronically in PEXA. When the discharge is registered, the mortgaged estate or interest ceases to be charged with any money secured by the mortgage to the extent specif ied in the discharge. Control of the eCT will be passed to the mortgagor’s lawyer. The mortgagee’s lawyer’s remaining duty is to report to the mortgagee and account f or the principal and interest money received on settlement. 12.2 Mortgagor’s lawyer When a lawyer receives instructions to act f or the mortgagor on a discharge of a mortgage, the lawyer should arrange f or the mortgagor to sign a discharge authority directed to the mortgagee to satisfy the mortgagee’s requirements and to minimise any potential delays in the preparation of documents or settlement. A client authorisation f orm must also be signed by the mortgagor at this time. The mortgagor’s lawyer should then write to the mortgagee (or to the mortgagee’s lawyer, if known) to: advise of the client’s intention to discharge the mortgage; attach the discharge authority (if not completed online) and request an indicative payout f igure f or the date of settlement. The letter may also enquire about the mortgagee’s lawyer’s costs of discharge which will be payable by the mortgagor on settlement. When all the inf ormation is received, the mortgagor’s lawyer should confirm the payout figures with the mortgagor. The mortgagor’s lawyer will conf irm a date and time f or electronic settlement with the mortgagee’s lawyer. Following settlement of the discharge, the mortgagor’s lawyer should report to the client and provide the client with their tax invoice, a statement of account and a trust account statement if f unds were received in trust. 13 POWER OF SALE ON DEFAULT 13.1 Requirements Mortgages empower the mortgagee to sell the mortgaged property on def ault by the mortgagor by service of a notice. Service of the notice also entitles the mortgagee to possession or the rent and profits f rom the mortgaged land: TLA s 78(1). In the absence of such provision, a power of sale is implied into a TLA mortgage but only if the mortgage is registered: s 77. Bef ore the mortgagee can exercise the power of sale and take possession or the rents and prof its, there must have been def ault and notice. 20 © The College of Law Limited P306 Acting in Mortgage Transactions The notice should: specif y that it is a notice pursuant to TLA s 76; require the mortgagor to remedy the particular def ault and if the breach relates to payment, it must specif y details of the outstanding principal and/or interest; and notif y the mortgagor that unless the requirements of the notice are met within 1 month (or other period specified in the mortgage) of service of the notice, the mortgagee proposes to exercise its power of sale. A copy of the notice should be served on: each mortgagor; any other mortgagee; and any caveator. If the notice is complied with, the def ault the notice relates to is deemed not to have occurred. Where compliance with a notice is waived by a mortgagee, it must serve a f resh notice in order to take f urther enf orcement steps. Waiver can occur by words or conduct. Failure to give notice as required may have the f ollowing consequences: a person who is entitled to receive such notice may be entitled to damages f rom the mortgagee; a sale made without proper notice may be set aside; the mortgagor (or another af f ected party) may be able to obtain an injunction restraining the sale; or the Registrar of Titles may ref use to register a transf er by the mortgagee purporting to exercise its power of sale. A mortgagee is generally not permitted to exercise the power of sale conferred by statute or under the mortgage until: def ault has been made in the payment of the principal money or interest; notice requiring payment of the amount, the f ailure of which to pay constitutes the def ault, has been served; def ault has either: – continued f or 30 days (or 1 month) f rom the service of the notice; or – been made in the observance or f ulf ilment of some provision contained in the mortgage or implied in the Act on the part of the mortgagor to be observed and perf ormed; notice requiring the def ault to be remedied has been served; and such def ault has continued f or 30 days f rom the service of the notice. 13.2 Sale procedures In exercising its power of sale, a mortgagee must act in good faith and have regard to the interests of the mortgagor: TLA s 77(1). These two requirements are cumulative: Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd VR 309. In exercising its power of sale, a mortgagee must take reasonable steps to obtain the best price: Goldcel Nominees Pty Ltd v Network Finance Ltd 2 VR 257. A mortgagee need not sell by auction and can sell by private sale: s 77. However, an auction may demonstrate that the mortgagee achieved the best price reasonably obtainable in the prevailing market. The mortgagee must also ensure that the property has been advertised f or sale properly: Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; 18 ALR 124. The f orm of electronic transfer that must be used for a sale by a mortgagee exercising its power of sale is a Transf er by Mortgagee. © The College of Law Limited 21 THE COLLEGE OF LAW PROPERTY Registration of a transf er by a mortgagee has the ef f ect of (s 77(4)): transf erring the mortgagor’s title to the purchaser; discharging the mortgage under which the property has been sold; extinguishing subsequently registered mortgages and charges; and subsequently recorded caveats relating to a loan to the mortgagor shall lapse: s 91(2B). However, certain encumbrances to which the mortgagee has consented or by which it is bound are not extinguished. Also, any caveat claiming an interest other than as mortgagee or charge will not lapse on registration of an electronic Transf er by Mortgagee. The (a) (b) (c) (d) proceeds of sale must be applied in the f ollowing order (s 77(3)): payment of the costs and expenses of the mortgagee’s sale; payment to the mortgagee of the principal and interest owing under its mortgage; payment to subsequent mortgagees and chargees in order of their priority; and payment of the residue (if any) to the mortgagor. The exercise of the power of sale does not preclude the mortgagee f rom taking action against the mortgagor on its personal covenant under the mortgage, to recover any shortf all between the net sale proceeds and the mortgage debt, unless there is a condition to the contrary: Commonwealth Bank of Australia v Buffett (1993) 114 ALR 245. 13.3 Sale of owner-builder works The lawyer acting f or a mortgagee who enters into possession of a property where owner-builders works have commenced should be aware of Building Act 1993 (Vic) s 137B(5AA), which extends the operation of s 137B (owner-builder requirements on sale of a property) to include a mortgagee in possession. For more inf ormation on owner-builder works, see Practice Paper P302 Sale and Purchase of Land. 14 ALTERNATIVES TO MORTGAGEE’S SALE 14.1 Foreclosure Foreclosure is the process by which the mortgagee repossesses the property and becomes the owner of the mortgaged property. Foreclosure extinguishes the mortgagor’s interest in the property, including its equity of redemption and entitlement to any surplus on sale. Foreclosure is now rarely undertaken by a mortgagee. The TLA outlines the procedure to be f ollowed in the f oreclosure of registered mortgages: s 79. If the mortgagor def aults in payment of principal or interest f or 6 months, the mortgagee may apply to the Registrar of Titles f or an order f or f oreclosure in the appropriate approved f orm. The f oreclosure application must be accompanied by a declaration stating that: 22 the required def ault has been made and continued f or 6 months; notice to pay under TLA s 76 has been served; the land has been of f ered f or sale by auction within the preceding 2 years; the highest bid f ell short of the amount outstanding under the mortgage plus the expenses of the sale; and notice of the mortgagee’s intention to make application f or f oreclosure has been served on the mortgagor and subsequent registered mortgagees and caveators. © The College of Law Limited P306 Acting in Mortgage Transactions 14.2 Assignment/transfer of mortgage after default Assignment by the mortgagee of the benef it of its mortgage to another person may be usef ul where: the mortgagee wishes to get the debt “off its books” and is prepared to accept a discount on the full mortgage debt; or a subsequent mortgagee is prepared to take over the f irst mortgage by paying out the f irst mortgage to improve its position in relation to the secured property. 14.3 Right to possession If the mortgagor defaults in payment of principal or interest under the mortgage, the mortgagee of land under the TLA may take “constructive” possession of the property by receiving the rents: s 78(1)(a). Alternatively, it may take court proceedings f or (actual) possession before enf orcing its power of sale: s 78(1)(b). A mortgagee who takes possession is strictly accountable. This step is usually a precursor to a mortgagee’s sale, so that the property may be sold with vacant possession. Possession may also be taken in order to protect the property f rom vandals or to ef f ect repairs where necessary, or if the mortgagor has abandoned the property. 14.4 Appointment of receiver Usually, the terms of the mortgage give a power to the mortgagee to appoint a receiver in the event of def ault by the mortgagor. Alternatively, the same power is implied by statute: PLA s 109. The role of a receiver is to manage the property and collect rent on the mortgagee’s behalf. However, a receiver also owes a f iduciary duty to the mortgagor in the perf ormance of its role. 14.5 Credit legislation Bef ore exercising any remedies available to a mortgagee on def ault, a mortgagee must check whether the loan transaction is covered by the NCC, and if so, must take care to comply. The NCC applies where: the mortgagor is a natural person or strata corporation; the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes; or to purchase, renovate or improve residential property for investment purposes, or to ref inance credit provided wholly or predominantly f or those purposes; and the mortgagee provides the credit in the course of a business of providing credit or incidentally to another business. Where the NCC applies, the mortgagee must serve on the mortgagor a written 30-day notice bef ore exercising a power of sale: NCC s 88. A mortgagor may apply to the mortgagee for certain variations of the loan contract where, due to illness, unemployment, or other reasonable cause, the mortgagor is unable to discharge its obligations under the contract: s 72. The NCC does not apply to business loans, charge cards, insurance premiums paid by instalments, investment loans f or shares, employee loans or pawnbrokers. 15 PROFESSIONAL MATTERS 15.1 Regulation of lawyers’ mortgage practices Law practices in Victoria are no longer permitted to operate or promote managed investment schemes (MIS). © The College of Law Limited 23 THE COLLEGE OF LAW PROPERTY There are restrictions on the legal services that may be provided in relation to a MIS if any associate of the law practice has a substantial interest in the scheme or the responsible entity for the scheme. These provisions also affect legal services that may be provided in connection with mortgage practices. Refer to Legal Profession Uniform Law Application Act 2014 (Vic) Sch 1 s 258. 15.2 Acting for more than one party Sometimes, clients may request that you act f or more than one party in the same matter. This should be avoided and is prohibited in certain transactions. Rule 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW and Vic) emphasises that solicitors should not accept instructions to act f or more than one party, except in certain circumstances. The rule encompasses duties to two or more clients not necessarily involved in the same matter, but where there is a conflict or potential conf lict of the duties to act in each client’s best interests. There are requirements f or inf ormed consent f rom both clients. Where an actual conf lict arises between the duties owed to two or more clients, the solicitor (law practice) may continue acting f or one of the clients provided that conf identiality is maintained and the clients have given inf ormed consent. There is an obligation on solicitors to comply with their duties in continuing to act “subject always to each solicitor discharging their duty to act in the best interest of their client” and may be subject to the court’s discretion in being able to continue to act in the matter: r 11.3. 15.3 Professional fees On receiving instructions to act in a transaction involving a mortgage of an estate or interest in land, you need to comply with the costs disclosure and costs agreement requirements under Legal Profession Uniform Law Application Act 2014 (Vic) s 174. 24 © The College of Law Limited P306 Acting in Mortgage Transactions APPENDICES APPENDIX 1 – DRAFT LETTER FROM MORTGAGOR’S LAWYER TO MORTGAGEE’S LAWYER [Modifications in italics with square brackets or strikethrough indicate suggested changes for an electronic transaction or possible electronic transaction.] Date: To: Details of mortgagee or mortgagee’s lawyer From: Details of mortgagor’s lawyer [including email address] Subject: New loan to # (insert mortgagor’s name) Security property: (insert property address) ____________________________________________ We act for the mortgagor/borrower/guarantor. The transaction workspace number is #. We enclose: 1. Full contract and section 32 statement properly signed (where the security property is to be purchased). 2. 3. 4. 5. Register search statement(s) for the security property. Nomination form and statutory declaration (if any). Any relevant Trust Deed(s) for the mortgagor/borrower/guarantor. Any variations to the Trust Deed(s). Alternatively, We confirm there have been no variations to the Trust Deed(s). Certified copy of any power of attorney to be relied upon by the mortgagor/borrower/guarantor. Where the security property is being purchased, current rate, planning and other statutory certificates for the security property. An insurance policy or certificate of currency of insurance from the insurer (not from the broker) for the security property, which policy or certificate notes the interest of your client as mortgagee and which policy is to be for the following types of insurance: Building replacement for the usual risks. Public liability. 6. 7. 8. 9. Certified copy of all leases (if any) for the security property. 10. Owners corporation corporate certificate (s 151(4)) if the security property is a lot on a plan of subdivision and is affected by an owner corporation. 11. GST withholding notice. 12. FRCGW Clearance Certificate. © The College of Law Limited 25 THE COLLEGE OF LAW PROPERTY Settlement details: Settlement is scheduled to take place on #. Please inform us of the net proceeds available for settlement. We are instructed that: The current unit holders for any relevant Unit Trust(s) are as follows: The mortgagor/borrower/guarantor is/is not acting as a trustee, responsible entity, custodian, agent, and/or manager in regard to the loan/mortgage/ownership of the security property. GST is/is not payable on the purchase of the security property. A full/partial release of any charge over the vendor/mortgagor/borrower/guarantor will be provided at settlement in regard to the security property. Yours faithfully 26 © The College of Law Limited P306 Acting in Mortgage Transactions APPENDIX 2 – EXAMPLE FILE NOTE FOR MORTGAGOR’S LAWYER FILE NOTE DATE: FILE NUMBER: NAME OF LAWYER: NAME OF CLIENT IN ATTENDANCE: PROPERTY: LENDER: MORTGAGOR: BORROWER: GUARANTOR: LOAN AMOUNT: $ INTEREST RATE: HIGHER LOWER FIXED BOTH WHEN PAYABLE: INTEREST IS: VARIABLE NAME AND ADDRESS OF INTERPRETER: Summary of explanation to client – mortgage and/or guarantee and indemnity: The lender has agreed to lend money to the mortgagor/borrower. The property is being given to the lender by the mortgagor/guarantor to secure repayment of the loan to the borrower from the lender. The mortgagee will receive eCT control of the eCT on lodgment and registration of the mortgage. The borrower, mortgagor and guarantor must repay the loan amount and all interest and lender’s costs for giving and enforcing the loan. The mortgagor must: Insure the property. Pay all rates and taxes and outgoings in respect of the property. Keep the property in good repair and not prejudice the mortgagee’s interest. The mortgagee must consent before renovating or altering property. The mortgagor will be in default where: The loan is not repaid. A party to the mortgage goes into bankruptcy. A party to the mortgage who is a company goes into liquidation. A party to the mortgage enters into an arrangement with creditors. There is an unsatisfied judgment against a party to the mortgage. Where this is a default the lender may seek possession of the property and is entitled to receive any rent. The lender will determine how much money is owing to the lender under the mortgage. The lender will write to a party at the address given in the mortgage or as advised from time to time. On repayment the lender will attend to electronic lodgment of a discharge of mortgage. © The College of Law Limited 27 THE COLLEGE OF LAW PROPERTY Excluded explanations I informed the client in clear terms that I was not expressing any opinion nor advising on: the viability of the transaction which the borrower was undertaking; and the borrower’s ability to make the required payments; and the client’s ability to make payment. I further informed the client that if in any doubt on those aspects the client should obtain independent financial advice before signing the documents. Following my explanations, the client stated to me: that he/she/they understood the general nature and effect of the documents and the obligations and risks involved in signing those documents. It appeared to me that they did have such understanding; that he/she/they was/were signing these documents freely, voluntarily and without pressure from the Borrower or any other person. Identification The following evidence of identification was produced to me by the client (eg, driver licence): Translation/interpretation An independent interpreter was/was not required. Client’s certificate I certify that I have been handed a copy of this document. I have read this certificate. I am the client named. The above information is true. Signed: Dated: 28 / /20xx © The College of Law Limited

Practice Paper P306 Acting in Mortgage Transactions 2023 PDF

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