#7585 - Other Proprietary Interests Mortgages - Property and Equity 2

The TB writers talk about how central mortgagers are to everyday life – they also distinguished between the significance of secured and unsecured mortgages in terms of the position of the debtor (who, after all securities are exhausted only has a claim for a personal action)

They also talk about the range of security transactions like charges, HPAs etc. and also the fact that mortgagers aren’t the only way land can be financed (e.g. payment by instalments on a contract of sale) giving the vendor the right to rescind if the purchaser defaults

Then there are also the ‘bills of sale Acts’ which govern mortgages of chattels

But the focus of policy makers has been consumer credit transactions, the laws of which have been subject to a number of examinations – all states having enacted a Consumer Credit Code which:

• Had the objectives of uniform application across Australia, promoting the policy of “truth in lending” with a view to providing redress mechanisms to borrowers in the event credit providers don’t comply with the legislation

• Provisions of contracts that seek to avoid/modify the code are void by s 169(1) of the CCC

What does it apply to?

• S 8(1) – Mortgages over land if the mortgage secures obligation under a credit contract or guarantee and the mortgagor is a natural person or strata corporation

  • S 6(1)A credit contract is one where at the time the credit was entered into the debtor was a natural person in the jurisdiction or a strata corporation formed in the jurisdiction and:

    • Credit is provided or intended to be provided wholly or predominantly for a personal/domestic/household purpose

    • A charge is made for providing the credit and the credit is provided in the course of business of providing credit

• The code has a number of consumer protection provisions such as requiring the contract to be written (s 12) and the debtor to be given a copy (s 18)

Special provision is made in the code for changes to contracts on the grounds of hardship/unjust transactions

• For hardship if debtors can’t meet payments because of illness/unemployment/other-reasonable-cause but reasonably expects to meet them if the contract was altered then they can apply to the credit provider (s 66) and then to a court (s 68) to have it altered.

  • The court will consider a variety of factors outlined in s 70(2) like consequences of compliance with all the provisions, relative bargaining power of the parties etc.

The earliest mortgage was an attempt to provide security for a loan and to avoid to prohibition on usury – the creditor was given possession of the debtor’s land and was entitled to rents and profits. Since the mortgagee had possession the security was regarded as a pledge (‘gage’) either a living pledge (vivum vidium) that discharged the entire debt or a dead pledge (mortuum vadium) that discharged the interest only

Eventually the common form of mortgage was for the mortgagee to take the legal title (by feoffment0 subject to a condition subsequent that if the loan was repaid by the agreed date the power to re-enter and determine the estate of the mortgagee was there

Then it became custom to use reconveyance instead of a condition subsequent – this gave the mortgagor right to relief in contract that depended on the intervention of equity to compel the reconveyance of the mortgage

• This form remained until the Law of Property Act (UK) that permitted only mortgage by demise and by legal charge – both of which exist for old system land in Australia

At common law mortgages were characterised by strict enforcement if money was not paid on the due date the rights of the mortgagor were extinguished and the mortgagee was absolutely entitled – but equity took a different approach

Megarry and Wade trace the influence of equity:

• Mortgages and securities – the idea that mortgagors lose their property because of a late payment was repugnant to equity; it started by relieving in cases of accident, mistake and special hardship but eventually relief was granted in all cases

  • This meant that mortgagees didn’t stand to gain property worth more than the debt – equity compelled the mortgagee to treat the property as just a security for the money owed

  • This equity of redemption was a valuable interest in the mortgagor – its value being the difference between the debt and the value of the property

• Foreclosure – this was the limit to the equitable right to redeem; the decree of foreclosure in equity. This was an order of the court made on the mortgagee’s application declaring that the equitable right to redeem was at end. This would give the mortgagee an unencumbered fee simple – but if the property was more valuable than the debt the court would order sale of the property and the mortgagee would get only what was due.

• The equity of redemption – the right to redeem is distinguished from this; this is wider. The right to redeem doesn’t rise until the contractual date for redemption has passed – this rises as soon as the mortgage is made. Also the equitable right to redeem is a particular right but the equity of redemption is an equitable interest in the land consisting of all the mortgagor’s rights in the property

  • Hence at law one will have parted with the land but in equity they will be the owner subject to the mortgage; the mortgagee is at law the owner but in equity a mere encumbrancer

Since a general law mortgage conveys the estate to the mortgagee it must be done by deed

• But if an enforceable agreement is entered into without the formalities, a W v L equitable mortgage can arise )but equity won’t grant SP unless the loan is advanced)

• If a lander advances and the borrower deposits title deeds with the lender, the parties’ actions are part performance that can be SP subject to equity’s discretion (Russel v Russel)

The equity of redemption that the mortgagor retains can be mortgaged as security for a further loan, which operates only in equity (Whipp’s Case) as do subsequent mortgagers

At general law priority depends on whether the mortgages are legal or equitable, whether a later equitable mortgage has notice of a prior legal mortgage(??) or in the case of equitable mortgages which was created first and whether there was postponing conduct.

There is also the doctrine of tabula in naufragio (plank in a shipwreck)

• This refers to the capacity of a subsequent equitable mortgage holder to salvage their interest by grasping hold of the legal estate.

  • This applies where the holder has no notice of the prior equitable interest at the time of acquisition

  • It does not apply if the later equitable holder obtains the interest by a breach of trust

• Bailey v Barnes [1894]

  • Facts: Lilley (L) acquires an equity of redemption in land but at the time there was an outstanding equitable mortgagee who had improperly exercised his power of sale. L had no notice but found out shortly after acquiring his. The mere lack of notice did not protect him in competition but L then paid out the legal mortgagee and took the fee simple.

  • Held: Equitable owners who are equal may struggle for the legal estate and he who obtains it, having both law and equity on his side, is in a better situation than he who has equity only.

    • This is an established rule of law since 1728 and is well settled and only alterable by parliament

• A classic situation where this would arise is a third mortgagee obtaining priority of a second by acquiring the first’s estate without notice of the second.

For Torrens land priority of registered mortgages is determined according to date of registration

For equitable mortgages, priority in time is relevant and so is whether the unregistered mortgagee takes position of the COT or lodges a caveat (or uses some other means of protecting their interest – Just’s Case)

A special doctrine applicable to both Torrens and old system is ‘tacking’