Mortgages

Question 1

What is a mortgage?

Answer 1

A bundle of proprietary rights granted to a lender by an owner of a property in security for a loan.

Question 2

What is a legal mortgage?

Answer 2

A proprietary interest in land. Must be created as a deed (LPMPA 1989 s1) + registered to be legally enforceable.

Question 3

What is an equitable mortgage?

Answer 3

Can be created by mortgagor who only holds an equitable interest in the land rather than being the legal owner in writing + signed by grantor (s.53 LPA 1925).

Can be created by default where legal mortgage is defective provided complies with reqs for land contract (s.2 LPMPA 1989), in writing and signed by both parties, containing all agreed terms.

Question 4

Discharge of Mortgage

Answer 4

Once mortgage repaid in full, mortgage entries at LandRegister must be cancelled. Only fully discharged once removed from Register (DS1 for whole land, form DS3 if only part of land).

Question 5

What is the equity of the redemption?

Answer 5

Full bundle of the borrower’s rights in the property subject to the obligations imposed by the mortgage. Equity recognises borrower as true owner of property and protects these rights.

Can sell the property despite mortgage and use proceeds to discharge mortgage.

(1) Equitable right to redeem the loan;
(2) protection from clauses postponing or preventing redemption;
(3) protection from clauses giving collateral advantages to lender;
(4) protection from unconscionable terms in the mortgage deed.

Question 6

Equitable Right to Redeem

Answer 6

Borrower has a right to repay the loan on reasonable notice to lender and have mortgage discharged from property even where not within strict time limits specified by agreement.

Borrower may lose right if right foreclosed by app to court by lender. Even then, borrower can reopen foreclosure by willing to repay financial losses to lender.

Question 7

Right to Protection from Postponement or Prevention of Redemption

Answer 7

Clauses preventing redemption prohibited.

Right to redeem must not be rendered valueless or a clog/fetter on right to redeem.
e.g pushing back redemption to 6 weeks before end of lease.
BUT allowed where lender offers clear advantage in exchange for postponement, e.g low interest rate UNLESS it is a residential property.

Options to purchase granted at same time as mortgage usually invalid. If option to purchase is a subsequent, independent deal, may be allowed (even if granted on same day).

Question 8

Right to Protection from Collateral Advantage

Answer 8

Lender’s right under mortgage is to repayment of capital + interest. If lender tries to get other advantages, usually not permitted.

Struck out if collateral advantage is unconscionable, a penalty or repugnant to equitable right to redeem.
e.g solus ties - usually upheld if it ends within the mortgage term.

Question 9

Right to Freedom from Unconscionable Terms

Answer 9

Court may strike out oppressive and unconscionable terms, more than unfair or unreasonable.

e.g interest rate = 38% too high BUT can charge high interest rate if borrower has poor credit history and risky. Lender can consider its own commercial position as long as not done for improper purpose.
e.g penalty imposed for default far exceeding lender’s loss
e.g NOT simply bad bargain.

Question 10

Need for priority of Mortgages over Registered Land

Answer 10

Where mortgagees lend on the same property and the borrower defaults and the property is sold, the proceeds of sale are less than the outstanding debt, who gets paid first is determined by the rules of priority.

Question 11

Rules of Priority

Answer 11

Priority between legal mortgage depends on order of registration (LRA 2002, s 48).

Priority between equitable mortgages = rank in order of creation (LRA 2002, s 28). Equitable mortgage can rank above subsequent legal mortgages if notice entered in register under s.32 but DOES NOT affect priority between equitable mortgages. Equitable mortgage not protected by notice will lose priority to subsequent legal mortgage or registrable disposition of estate for value.

Question 12

Priority and Postponement

Answer 12

Priority rules can be modified to allow mortgage to take priority over existing interest (deed of priority or intercreditor deed) requiring express waiver or postponement to be included in agreement so any rights of person living in mortgaged property are postponed to rights of the lender.

Question 13

What are the rights of a lender for an equitable mortgage?

Answer 13

1. Action for debt
2. Appoint receiver
3. Foreclosure
4. Possession (only with court order)

Question 14

What are the rights of a lender holding a legal mortgage?

Answer 14

1. Action for debt
2. Appoint receiver
3. Foreclosure
4. Power to possess
5. Power to sell

Question 15

What is an action for debt?

Answer 15

Might be taken where sale proceeds not sufficient to cover mortgage default. 12 years for recovery of capital, 6 years for interest.

Question 16

What is the power to appoint a receiver?

Answer 16

Receiver acts as a manager of the mortgaged property if lender does not wish to take possession / sell. Is an agent of the borrower (so lender not liable for negligence). Receiver has duty to borrower to act with due diligence.

Question 17

What is the right of foreclosure?

Answer 17

Rarely used, allows lender to take mortgaged property in satisfaction of debt. Freehold vests and borrower loses rights.

• Lengthy and complex for lender, court may order sale in lieu of foreclosure, especially if property worth more than debt.
• Even after final decree of foreclosure, borrower can reopen case by showing they have means to pay.
• Extinguishes all other mortgages and borrower’s contractual debt (so cannot be pursued for suplus).

Question 18

Rights of Lender (s.101 LPA 1925)

Answer 18

Possession
- available to legal mortgagee without court order, equitable mortgagee must obtain court order. Arises as soon as mortgage granted.

Can repossess via self-help if property not occupied but if not, should seek court order.

• Last resort and may be necessary before sale to sell with vacant possession.
• Mortgagor can apply to have possession order postponed if whole/part residential (AJA 2007).
• For residential cases, mortgagee should explore alternatives e.g extending term or new payment plan.

Sale
- final remedy and brings mortgage to close.
- Power arises as soon as one portion of capital is due or at legal redemption date, e.g notice requiring payment served + borrower defaults or arrears of at least 2 months / some other breach.
- Borrower loses all rights to property and priority rules apply no matter which lender exercises power of sale. Surplus proceeds held on trust for borrower.