Mortgages

CHAPTER 14

14.1   Security interests

A security interest will be proprietary in nature where it confers upon the mortgagee in rem rights which are enforceable against a specific and identifiable piece of property. The mortgagee actually holds a proprietary interest in the property which is capable of being alienated; however, this right cannot be realised until it is clear that the mortgagor is in default of the primary obligation; the interest is only a ‘security’. The rights of a security holder are not as absolute as those held by ordinary common law and equitable estates and interests. This disparity has been well summarised by Sykes:1

The security interest is therefore an aggregation or bundle of proprietary rights, though not necessarily of ownership rights; that is, rights which habitually form part of the ownership bundle. It differs from other interests of a proprietary character in that the person entitled always holds subject to the potentiality of the debtor either getting back her or his property, or, as the case may be, coming to hold it free from the burden constituted by the interest of a creditor… Even in those rare cases where the concept was that full dominion passed to the creditor, as in the case of the Roman mortgage, the debtor still had at least a contractual right to redeem.

14.1.1   Classification of security interests

Securities have traditionally been classified into three primary categories based upon the old Roman division of transactions. These categories are fiducia, pignus and hypotheca.2 Fiducia refers to security transactions where the actual proprietary interest is transferred over to the lender for the duration of the loan. Pignus refers to security transactions where possession of the property, but not actual ownership in that property, is transferred over to the lender. Hypotheca refers to security transactions where the lender is not given ownership or possession but, rather, enforceable rights against the property which may be pursued where the debt is not repaid.

This classification may be conveniently summarised today as the mortgage stricto sensu, the possessory security and the charge. These three types of security interests reflect the different forms of mortgages existing with respect to old title land, Torrens title land and personal property.

14.1.1.1   Mortgage stricto sensu

This type of security represents the classic form of mortgage. Under such a mortgage, the mortgagee receives full legal ownership in the secured property for the duration of the debt. Legal title to the secured property is transferred into the name of the mortgagee whilst the mortgagor retains a purely equitable interest in the property entitling him to redeem the secured property once the debt has been fully satisfied. The interest retained by the mortgagor is commonly referred to as an ‘equity of redemption’.

In order for a mortgage stricto sensu to arise, the legal title to the secured property must be properly vested in the mortgagee; where the legal conveyance is ineffective, but it is clear that the parties intended to create a mortgage, the transaction may be enforceable in equity (see Chapter 5 generally).

Once legal title to the secured property is properly vested in the mortgagee, he or she will hold that title as security for the full and proper satisfaction of the debt. The mortgage stricto sensu is the usual form of mortgage associated with general law land. Under the Torrens system, however, a registered mortgagee will acquire a statutory charge in the secured property, legal title remaining with the mortgagor.

The ownership rights conferred upon a mortgagee under a mortgage stricto sensu are similar to, but not as absolute as, full ownership. A mortgagee can only exercise ownership rights in the event of a default in the loan contract and, once the loan has been properly discharged, the mortgagor will have both a contractual and an equitable right to redeem the secured property by transferring legal title to the mortgagor. Furthermore, where a default in the loan contract entitles the mortgagee to exercise rights against the secured property, the mortgagee cannot simply assume full control over the property: in exercising security rights, the mortgagee is obliged to consider not only his or her own interests in discharging the debt, but also the interests of the mortgagor in the remainder or surplus of the property. This is discussed in more detail at para 14.3.5.2.

14.1.1.2   Possessory security

One of the classic forms of particular lien is the vendor’s lien for the unpaid purchase price of the property. Where a purchaser has entered into a contract for sale and paid a deposit, the vendor will hold the legal title to the property as constructive trustee until settlement occurs and legal title is properly transferred. Until the balance of the purchase price is paid, the vendor will also retain an equitable lien in the property, which will entitle the vendor to retain the property until the full purchase moneys are transferred (Bloxam v Sanders (1825) 4 B & C 941; 107 ER 1309).3 The unpaid vendor’s lien has, however, been abolished in Queensland by virtue of s 176 of the Land Titles Act 1994, which specifically states that a vendor of registered land will not hold any equitable lien on the land by reason on non-payment of a part or any of the purchase moneys. This abolition has not unduly affected the position of vendors in Queensland because, as a matter of conveyancing practice, most unpaid purchase moneys would be secured by a bill of mortgage.

14.1.1.3   Charge

14.1.2   General law mortgage

A legal mortgage over general law land will generally take the form of a mortgage stricto sensu. This means that the mortgagee receives a conveyance of the legal title to the secured land for the duration of the debt. One of the terms of the mortgage agreement, which is also enforceable in equity, is the promise by the mortgagee to reconvey the land to the mortgagor once the mortgagor has fully discharged the debt. See further discussion on the right to redeem at para 14.3.1.

The equitable right of redemption held by the mortgagor, and the right of the mortgagee to apply for an order of foreclosure, have, traditionally, been associated with general law mortgages because of their particular relevance to mortgages involving a conveyance of legal title.

Historically, one of the great difficulties associated with general law mortgages was that, where the contractual provisions were inoperative, the security purpose of the contract could be overwhelmed. Hence, where, for example, a mortgagor failed to discharge the mortgage debt on the date specified in the contract, the mortgagor had no contractual right to redeem the property despite the fact that the debt had been repaid. Consequently, there was a need for greater recognition of the rights of the mortgagor to redeem secured property which had been transferred to the mortgagee. This was where the Court of Chancery stepped in. The equity jurisdiction focuses upon the security character of the conveyance; where the mortgagee is fully and properly reimbursed of all the principal and interest moneys owing under the loan, equity takes the view that, in fairness, and in light of the fact that the conveyance is only intended to operate as a security, the mortgagee should have no further claim to the property. Hence, equity upholds the right of the mortgagor to redeem the secured land upon proof that the debt is fully discharged. Redemption in equity constitutes a proprietary right in favour of the mortgagor entitling her to have the property reconveyed into her own name, even though the debt is discharged at a later date to that specified in the contract (Salt v Marquess of Northampton [1892] AC 1). See further discussion on the equity of redemption at para 14.3.1.

A further difficulty historically associated with general law mortgages lay in the fact that it was difficult for mortgagees to foreclose over land in substitution for the repayment of the debt. Due to the extensive nature of the right to redeem—and its enforceability under the Courts of Chancery—it was hard for a mortgagee actually to ‘foreclose’ over the secured land and retain the land in full substitution for moneys owing under the mortgage. Eventually, however, the Courts of Chancery upheld the right of the mortgagees to apply for foreclosure over secured land once the contractual right to redeem had expired, and, where granted, it effectively extinguished the equitable right of redemption (Carter v Wake (1877) 4 Ch D 605). (See further discussion on the right of foreclosure at para 14.3.6.)

As the general law mortgage takes the form of a transfer of legal title to the mortgagee, specific formality requirements for the execution of a proper conveyance must be complied with. The formality requirements for the conveyance of a piece of general law land have been discussed in Chapter 9. In Victoria, a mortgage is actually defined as a conveyance pursuant to s 18(1) of the Property Law Act 1958 and will therefore attract the relevant statutory formalities for the creation of legal interests in land. Basically, all that is required is that the conveyance be executed by way of a deed as set out under s 52(1) of the Property Law Act 1958.⁴

Due to the serious nature of the transaction, the actual mortgage contract will also, generally, take the form of a deed, as set out in the statutory schedules. Nevertheless, a mortgage is not required to be executed by deed; a mortgage contract need only comply with the formality requirements for creating a valid and enforceable contract. The primary requirement for a mortgage contract is that the agreement reveals an intention to create a mortgage. This means that the agreement should indicate that the mortgagor is conveying his or her land to the mortgagee subject to the contractual right of the mortgagor to redeem the secured land once the loan has been discharged in full compliance with the terms of the agreement. Proving a mortgage is not always easy, particularly where the transaction appears to represent a straightforward conveyance. Nevertheless, a court will focus upon the substance rather than the strict form of the agreement and consider the full circumstances and context of the agreement. Often, this type of determination will depend upon the underlying commercial purpose of the agreement. This is well illustrated in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194. On the facts of the case, the plaintiffs were granted an option to purchase land by the defendants who had borrowed money from a related company in order to effect the purchase of that land. The loan agreement was structured in a form which was similar to a mortgage arrangement. Repayments of principal and interest under the agreement were calculated over a 10 year period, with provision for the full repayment of the loan in circumstances where the plaintiff exercised the option to purchase and paid the defendants the purchase price. At issue was whether or not the loan agreement actually constituted a mortgage. The court held that, despite the fact that the form of the agreement resembled a mortgage, the commercial purpose of the arrangement meant that, in substance, the parties had not intended to create a mortgage. Young J held that, on the facts, the mortgagee was not a traditional bank or lending institution and the mortgagor defendants intended to exchange their title for a leasehold interest and distribute rental payments amongst particular company loans for business and taxation purposes. Given this underlying commercial objective, it was inappropriate to classify the arrangement as a traditional mortgage giving rise to the usual rights and obligations.

In Victoria, many practitioners setting up mortgages over old title land utilise the statutory mortgage form set out in the Scheds 7 and 8 to the Property Law Act 1958.5 One of the important statutory requirements for an old title mortgage is that the conveyance be specifically subject to a contractual provision for redemption. Other contractual provisions generally contained in the mortgage agreement include the terms of repayment, the date for repayment and the respective rights of the mortgagee and mortgagor concerning the property during the term of the mortgage.

14.1.3   Torrens title mortgage

Most land in Australia either comes under, or has been specifically brought within, the application of the Torrens system. Hence, most mortgages entered into today are Torrens title mortgages. The Torrens mortgage is significantly different in form from the general law mortgage. The most substantial difference lies in that fact that there is no conveyance of the legal title to the mortgagee. Where registered, the Torrens mortgage confers a statutory charge upon the mortgagee, whilst the mortgagor retains legal title to the property as registered proprietor. Where unregistered, the Torrens mortgagee cannot acquire the benefit of registration. However, where equity is prepared to recognise and enforce the agreement, the mortgagee will acquire an equitable charge in the property. The right to mortgage Torrens land and the effect of such a mortgage is specifically set out in s 74(1)(a) and (b) of the Transfer of Land Act 1958 (Vic), which reads as follows:6

One of the primary benefits of the Torrens title mortgage lies in the fact that the mortgagor retains legal title and therefore may still exercise ownership rights against the property, provided those rights are in accordance with the terms of the mortgage agreement. Hence, it is not necessary to confer specific rights of possession upon the mortgagor as is the case with general law mortgages. (See further discussion on this at para 14.3.2.) Furthermore, the mortgagor may enter into a transaction which deals with or relates to the legal title of the land provided it is in accordance with the terms of the mortgage agreement, which generally requires the consent of the mortgagee. Hence, a Torrens title mortgagor may create a lease, enter into a subsequent mortgage transaction, or even sell the property.

Registration of a Torrens title mortgage will ensure that the interest of the mortgagee is binding upon all future persons dealing with the land. Registration provides effective notice to the rest of the world that the particular title is encumbered by a statutory charge and, until discharged, this charge will remain attached to the land. Upon registration, any mortgage agreement will take effect as a deed even if not executed as such. Section 40(2) of the Transfer of Land Act 1958 (Vic) sets out that, upon registration, every instrument shall have the same effect as if it were properly executed as a deed.⁷ This means that when a mortgage instrument is registered, all the rights and privileges usually applicable to deeds executed under the common law will also apply to the registered mortgage. Where a Torrens title mortgage agreement remains unregistered, the mortgage may be enforceable in the equitable jurisdiction. (See further discussion on equitable mortgages at para 14.1.4.)

A mortgagee holding an unregistered mortgage will not, however, acquire the benefits of registration, namely, an indefeasible title: all unregistered mortgages are capable of being defeated according to the usual priority principles discussed in Chapter 9. The only method of protecting unregistered mortgages under the Torrens system is to lodge a caveat on the title which will effectively operate to provide a mortgagee with notification of all future dealings lodged for registration over the land. (See Chapter 11 on the Torrens system.)

As Torrens title mortgages do not result in a conveyance of the legal estate to the mortgagee, rights traditionally associated with mortgages under general law—such as the equitable right of redemption and the right to seek foreclosure—are not as appropriate. Statutory provisions do, however, specifically confer such rights upon Torrens title mortgagees. Section 81 of the Transfer of Land Act 1958 (Vic) sets out that, apart from other rights specifically conferred by the Act, a first mortgagee has ‘the same rights and remedies at law and in equity as he would have had if the legal estate in the mortgaged land had been vested in him as mortgagee’. Furthermore, s 79 of that Act specifically confers a right on the part of the mortgagee to make an application in an approved form to the Registrar for an order for foreclosure.⁸

The suitability of the equitable right of redemption to Torrens mortgages remains unclear. Whilst there is no ‘legal title’ to redeem, the mortgagor will still want to have the statutory charge discharged and courts have held that this right is akin to the equity of redemption existing under general law mortgages. Hence, the right of Torrens title mortgagors to hold the property free from all encumbrances may, for the purposes of the Torrens legislation, be described as a right of redemption (Re CL Forrest Trust [1953] VLR 246). As noted by Lord Wright in Abigail v Lapin [1934] AC 491, p 501:

In particular, the court examined the nature and effect of s 81 of the Transfer of Land Act 1958 (Vic). Gaudron, Gummow and Callinan JJ made the following comments at p 396:

The court went on to consider the impact of s 77(4) of the Transfer of Land Act 1958 which, on the facts, resulted in the estate or interest of Lamina as registered proprietor vesting in SEAA ‘as proprietor by transfer’ and with SEAA being ‘freed and discharged from all liability on account of such mortgage’. Hence, contrary to the submissions by SEAA, it is not privy with nor does it claim under the bank. In this way, s 77(4) is consistent with the scheme of title by registration and the nature of the statutory mortgage provided for in s 74(2), as well as with the conferral by s 81(1) of rights and remedies ‘as if’ the reversion were vested in the mortgagee and until the happening of certain events. The result is that the rights of SEAA against Figgins do not include the arrears claimed in the Notice.

14.1.4   Equitable mortgages

If it would be inequitable in the circumstances to uphold the finding of a mortgage—then the court may refuse to recognise it. In Maguire v Makaronis (1997) 144 ALR 729, the High Court held that an equitable mortgage did not exist in circumstances where, despite a clear intention to provide loan moneys on the security of property, the transaction amounted to a breach of fiduciary duty. The mortgage was, therefore, set aside on the condition that the loan moneys were repaid by the borrower. The High Court referred to ‘the considerations of general public policy which found the long standing principle that those in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties labour under a heavy duty to show the righteousness of the transactions’.9

An equitable mortgage of a legal estate will arise where it can be established that the parties intended to create a legal mortgage but, because the formalities for the creation of a deed have not been complied with, the mortgage is only enforceable in the equity jurisdiction. In this situation, equity relies upon two primary maxims: ‘equity deems that to be done which ought to be done’ and, ‘equity looks to intent rather than form’. As noted by the court in Walsh v Lonsdale (1882) 21 Ch D 9, an agreement to create an interest which would have been enforceable under common law may be enforceable in equity where it can be established that a court would issue a decree of specific performance.

It must be established that the agreement to create the mortgage complies with all of the usual contractual requirements under common law. Hence, the mortgagee must have actually lent the mortgagor loan moneys so that the requirement of valuable consideration is satisfied. Furthermore, it must be proven that the mortgage transfer, whilst not in the form of a deed, is, nevertheless, evidenced in writing (in order to satisfy the requirements of s 126 of the Instruments Act 1958 (Vic)) or supported by sufficient acts of part performance to render the agreement enforceable in equity. Where the alleged mortgage is purely based upon part performance, and no express mortgage contract exists, the parties must rely upon statutory provisions for the implication of specific rights. In this context, it should be noted that, if the land is general law land, s 101(1) of the Property Law Act 1958 (Vic), which operates to confer a power of sale upon mortgagees, will not apply, as the section is only applicable to mortgages which have been created by way of a deed.

The High Court has clearly indicated that, whilst some transactions may have similar features to a mortgage, this does not necessarily mean that the transaction is a mortgage. In Stern v McArthur (1988) 165 CLR 489, Deane and Dawson JJ, in the majority, drew an analogy between an instalment contract and a purchase with the aid of a mortgage, noting that the forfeiture provision in the instalment contract could be likened to a security interest held by a mortgagee. Nevertheless, the distinction between the two transactions remained: the loan contract was a purely personal right, whereas the mortgage transaction conferred a security interest upon the mortgagee and a right of redemption upon the mortgagor.10

It will only be where the terms of the agreement or the surrounding circumstances clearly indicate that the borrower intended to confer upon the lender a security interest in identifiable property that a court of equity will be prepared to enforce a transaction as a mortgage. Hence, in Eyre v McDowell (1861) 11 ER 871, it was held that a loan contract which entitled the lender to obtain any default or deficiency in repayments by means of ‘entry, foreclosure, sale or mortgage’ of the borrower’s lands was, in substance, a mortgage transaction.

An equitable mortgage may also arise where mortgaged estate is equitable in nature. Equitable mortgages over the interest of a beneficiary under a trust or a second mortgage over the equity of redemption held by a mortgagor are quite common. Where a mortgagor under a general law legal mortgage decides to mortgage his or her equity of redemption, the mortgage will take effect as a mortgage by way of conveyance. However, as the interest being conveyed is purely equitable in nature, there is no need to execute a deed of conveyance: a written conveyance will be sufficient.

Mortgage agreements over equitable interests are legislatively required to be in writing because of the need to ensure that all equitable transactions are properly evidenced. The formality provisions for transactions dealing with equitable interests are set out in s 53(1)(a)–(c) of the Property Law Act 1958 (Vic).11 The creation of an equitable mortgage is likely to constitute a creation and a disposition under sub-s (a) or (c) and, therefore, in order to be enforceable, the mortgage must actually be created in writing.

Finally, one of the most common ways in which equitable mortgages over land may arise is where the borrower has deposited the title deeds to land that he owns with the lender. In this situation, an equitable mortgage is usually implied (Mathews v Goodday (1861) 31 LJ Ch 282). The court presumes that the conduct of the mortgagor in handing over title documents amounts to an intention to confer upon the mortgagee a security interest in the property. In the context of Torrens title land, this is particularly true, because, where a mortgagee holds the certificate of title, no future dealings can be registered over the land without the knowledge of the mortgagee, because registration cannot occur without the production of the certificate of title (J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546). Holding the title documents will usually be adequate protection for an unregistered Torrens title mortgagee; nevertheless, some mortgagees may require the additional security of a caveat lodged over the title, especially as this may have an impact on priority disputes between unregistered interests (J &H Just (Holdings) Pty Ltd v Bank of New South Wales).¹²

As the mortgage arises impliedly from the conduct of the mortgagor in depositing the title document, there is no need for a written memorandum of mortgage to be executed (Re Wallis & Simmonds (Builders) Ltd [1974] 1 WLR 391). Nevertheless, written instruments are often included in the deposit, and where this occurs, a court will generally construe the document to determine whether the parties truly intended to create a mortgage. Whilst, in most cases, an equitable mortgage is presumed from a deposit of title deeds, there are some circumstances where the deposit of title documents with a lender will not create a mortgage or a charge over the land but, rather, a possessory lien. This will be a matter of construction and will depend upon the individual facts of each case, but commonly occurs where the deposit is accompanied by a document, the terms of which clearly indicate that a mortgage was not intended (Re Wallis & Simmonds (Builders) Ltd [1974] 1 WLR 391).

14.2   Sources of mortgage rights