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Other Proprietary Interests Mortgages Notes

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This is an extract of our Other Proprietary Interests Mortgages document, which we sell as part of our Property and Equity 2 Notes collection written by the top tier of University Of New South Wales students.

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Class 12.2 - Mortgages - Introduction, Priorities, Power of Sale

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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)

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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

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

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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:

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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

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

What does it apply to?
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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 corporationo

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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:

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

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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 o

For hardship if debtors can't meet payments because of illness/unemployment/otherreasonablecause 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 nature of mortgages The general law mortgage

* 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

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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 reenter and determine the estate of the mortgagee was there

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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 o

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

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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

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Megarry and Wade trace the influence of equity: o

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 casesThis 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 owedThis equity of redemption was a valuable interest in the mortgagor - its value being the difference between the debt and the value of the property

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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.

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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*

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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 o

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)

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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

Priorities, mortgages and taking General Law

* 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.

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

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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 acquisitionIt 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.

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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.

Torrens land

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

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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)

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

Mercantile Credits v Australia and New Zealand Banking Group (1988) 48 SASR 407 Facts: The case concerned the position of a first mortgagee for advances made after registration, and with the first's notice of, the second mortgagee. The first mortgagee lent $500k under a secured loan which by agreement secured further advances (at general law this is called 'tacking') which ended up amounting to $5.68m. At the time of registration of the second mortgage, the mortgagee's indebtedness was still $500k; it was after that it rose. At general law the applicability of tacking depends on the absence of notice - oif there is notice then priority is limited to the amount owing under the mortgage at the date of receipt of notice (Hopkinson v Rolt) Question: The applicability of the rule in Hopkinson v Rolt to land brought under the Real Property Act King CJ: A number of arguments were advanced by the plaintiff and rebutted by his honour: Q. Hopkinson v Rolt is founded on old system doctrine of estates that the mortgagor, having conveyed the equity of redemption to the second mortgagee could not create a further charge in favour of the first in priority A. No, leading authorities demonstrate that the rule is founded on the perceptions of courts as to fairness and justice applicable to priority disputes of successive mortgagees

Hence the rule of equity will apply unless it is inconsistent with the scheme of the RPA Q.

Sections 56, 77, 69 and 13 are inconsistent with the rule in Hopkinson v Rolt

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No:

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Section 56 just says priority as to date is now superseded by priority as to registration Section 77 merely talks about the notation of existing interests on COTs o The rule in Hopkinson v Rolt does not affect priority - it limits the amount for which a prior instrument has priority over a second when to the amount owed on notice of the second o Section 56 would determine priority but not the amount for which it is effective Section 69 gives indefeasibility to holders of land - but the rule in Hopkinson v Rolt does not affect title - it just fixes the amount for which the security has priority over subsequent securities at the date of notice Section 135 provides for the application of purchase money - but it does so according to the priorities established by law

The only decision on point (Matzner's Case) consists of a careful examination of authority and a conclusion that the rule applies under the RPA - this has been followed in many other cases.

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The scheme and provisions of the RPA are quite compatible with the equitable rule in Hopkinson v Rolt and that the rule applies to mortgages of land under the RPA

Hence the plaintiff is not entitled to the surplus of the net proceeds in excess of the amount of the mortgage at the date of notice.

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There is also a question of constructive notice: o

Central Mortgage Registry of AU v Donemore (NSWSC)- actual notice is required before the mortgagee is prohibiting from tackin ono

Cf Sibbles v Highfern (HCA) - obiter to the effect that the prior mortgagee could not tack if he had notice actual or constructive of the subsequent mortgage

Donemore's Case - lodgement of a caveat after registration did not constitute constructive notice of the later unregistered mortgageWestpac Corp v Adelaide Bank - it is necessary to show actual notice but not necessary that the first mortgagee has knowledge/actual awareness - it must show that actual notice of its having made an advance on second mortgage was given to the person or persons who represent the mind of the first mortgagee

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Hence it was enough to give actual notice to a mortgagee's agent but not a clerical worker in the agent's office

Further advances refers only to further sums of money; not an extension of time to repay the original sum (Burns v Trade Credit) o

The right to tack is still lost if mortgagees are compelled by the mortgage to make further advances, just as where they have the right to do soBut knowledge of a later mortgage relieves the mortgagee of any existing duty to make further advances (West v Williams, Westpac v Adelaide Bank)

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As mentioned in Mercantile Credits each states have priority determined by date (s 56 (3) RPA) but there are provisions for variation (s 56A)

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Legislation also stipulates the manner in which purchase money is to be applied where mortgagees exercise their power of sale (s 58 (3)) but since the rule in Hopkinson v Rolt derives from the principles of equity, it remains unaffected

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A slightly novel situation was presented in Matzner v Clyde Securities o

Facts: The registered first mortgagee consented to a second and third mortgagee who was aware of the first. After the date of the third, the first made further advances and upon default of the mortgagor, expended money in completing the building pursuant to a clause enabling him to do so.

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Held: Priority was to be altered since there was no grounds for denying the mortgagee first priority for the lessor of the total principal sum or the amount required to complete the buildingo

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Note: This is consistent with the basis of the principle being notions of equity and fair dealing

The right to tack is a right available only to a legal/registered mortgagee o

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This was due to the fact that it would produce an unfair result otherwise - all the mortgagees would be left with an unsaleable security and would be worse off.

Hence an equitable mortgagee of shares holding under an agreement to charge them has no right to tack (Chase Corp v North Sydney Brick & Tile Co)

In three states the right to tack has been abolished subject to exceptions o

In VIC it is when an arrangement is made with subsequent mortgagee or if they have no notice of the subsequent mortgagees or if they had notice where the mortgage imposes obligations to make further advances

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In QLD mortgagees are deemed not to have notice just be the reason that they were registered (Torrens)

The rules based on notions of fairness and good conscience prevent a first mortgagee from recourse to indefeasibility to plead the supremacy of an 'all moneys' covenant o

But these principles are equally applicable to mortgagors. The rule in Otter v Lord Vaux prohibits a mortgagor from setting up an encumbrance that he/she has acquired against the rights of the mortgageeo

Normally a purchaser from a mortgagee exercising the power of sale takes free of later ranking mortgages - but not if it is the mortgagor

Sussman v AGC provides the rationale:Mortgagors who have put their second mortgagees in a position of priority over themselves cannot disturb those priorities, even by transaction with a person who, in a competition with a second mortgagee, would have priority over them.

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Hence the first mortgagee can sell to anybody EXCEPT the mortgagor who cannot buy priority; their equity will never be as good as an interest they put their themselves

Remedies of the mortgagee The power of sale

* This is the most common remedy and its effect, if validly exercised, conveys eh fee simple to the purchaser, free of the mortgagor's right of redemption o

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If the sale does not realise enough funds to meet the mortgagor's indebtedness the mortgagor can sue for the balance on the personal covenant in the mortgage

S 109(1)(a)/ s 57/58 of the RPA in general provide that the power of sale is dependent on: o

Default in payment of the principal or other moneys secured; or

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Breach of other covenants in the mortgage; and

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Failure to remedy the breach in a specified period after notice is given*

The requirement of notice has the same policy as that in breach of covenant - giving an opportunity to remedy the breach in light of the dire impact of sale

It should be noted that a contract to sell Torrens title land is not invalidated notwithstanding that it may have been entered into before the mortgage or a transfer of the mortgage had been registered (Carretta Stud Nominees)

Statutory duty: notice to the mortgagor Websdale v S & JD Investments Pty Ltd (1991) 24 NSWLR 573 Facts: Mortgagees can exercise their power of sale under s 58 of the RPA if there has been default and notice is served under s 57. In this case there was a default but the notice incorrectly stated that the full amount of the principal was due and payable. The mortgagee submitted that the notice was invalid.

Clarke JA pointed out that the notices asserted that both principal and interest were outstanding - but the mortgagor was not liable to pay the principal. The question was hence: Whether notice which contains both a correct assertion that the mortgagor has defaulted in the payment of interest and an erroneous statement that the principal is outstanding complies with s 57.

His honour pointed to the fact that the mortgagee cited a case (Mir), for which the dependant authority was not on point (Campbell). In particular the latter case applied only to cases of a misstatement of an amount of principal rather than a where claim is made for a principal not due. His honour regarded this as fundamental.

? This is because the section requires the mortgagee to bring to the mortgagors attention the particul default - not to specify the amount withstanding. This is consistent with Campbell's case. His honour was further willing to accept that:

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"In the absence of a requirement that the notice identify with particularity the precise amount outstanding, it will be good so long as it identifies correctly the defaults which the mortgagor is given the opportunity of remedying"

His honour declined to follow Mir and hence declared the notices defective

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If a notice of demand is made by a bank requiring arrears be paid off in a month, then a month later a s 57 notice is served requiring a greater amount - the later notice is not invalidated for prematurity because of the earlier demand (Notaras v Sly and Weigall) o

Clare Morris v Hunter BNZ Finance - s 57 notice valid even where it erroneously stated the amount due, whether it was more or less than the amount due

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AGC (Advances) v Tweed Canal Estates - notice is not invalid if the amount demanded is not stated

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