A mortgage, in its simplest form, is a means by which a mortgagor provides his real property as security in favour of a mortgagee, in return for an advance of money. Unlike general law mortgages, the registered proprietor will retain the legal interest in the real property and the mortgage, when registered, will have the effect as a security and create an interest in land but does not transfer the land. [Section 74(2)] Consequently, the relationship between the mortgagor and the mortgagee is governed by legislation, namely Division 9 of the Transfer of Land Act 1958 [TLA], being Sections 74 and following and the terms of the mortgage.
All mortgages provide for the repayment of the advance either by instalments or by interest payments and a lump sum at the conclusion of the term. If the mortgagor defaults in the payment of any monies secured by the mortgage, the mortgage permits the mortgagee to enter into possession of the property and provides the mortgagee with a power of sale.
These powers of possession and sale are based in statute, the Transfer of Land Act. Though the Act sets out the duration of notices required to be served, the terms of the mortgage may provide for a shorter period of notice. Accordingly, it is essential to always read the terms of the mortgage to ensure that the proper time spans for notices have been given.
REQUIREMENTS UNDER THE TRANSFER OF LAND ACT 1958
The primary sections in Division 9 of Part IV of the TLA can be summarised as follows:
Confirms that a mortgage has the effect of a security and provides an interest in land but does not operate as a transfer of the land.
Sets out the basic covenants to be implied in every mortgage
Sets out the procedure in the event of a default. If the default has continued for 30 days (or such lesser time as may be provided in the mortgage) the mortgagee may serve, on the mortgagor and such other persons as appear by the register to be affected, notice in writing to pay the money owing.
Where the mortgage provides for payment on demand, a demand in writing in accordance with the terms of the mortgage is equivalent to serving the notice. [Section 76(2)]
If the notice is not satisfied within 1 month of service (or such lesser time as provided in the mortgage), the mortgagee may sell the land. This section provides that the sale is to be in good faith, and have regard to the interests of the mortgagor; may be sold by public auction or private contract; and may be sold for a lump sum or by instalments. This section also provides that the registrar may accept a transfer by a mortgagee in exercise of the power of sale as sufficient evidence that the power has been exercised. The section also provides for the application of the purchase money and provision for the registration of the transfer. The specifics will be examined under separate headings.
This section gives the mortgagee power to take possession of the real property and to either receive in the rents and profits or bring an action to recover the land.
This section provides for foreclosure. Foreclosure is often confused with the power of sale. Foreclosure is a separate procedure by which the mortgagee seeks to become the registered proprietor. The process is extremely long and complicated and very rarely used.
The following are considerations and requirements for each party involved in a mortgagee sale:
ACTING FOR A MORTGAGEE VENDOR
The lawyer for the mortgagee has the primary responsibility of ensuring that each of the steps required to sell a property have been carried out in accordance with the appropriate legislation.
Sections 76 & 77 are the primary sources of the power of sale; however, they should be read in conjunction with the mortgage as the terms of the mortgage generally reduce the time of default to either 7 or 14 days in lieu of the statutory 30 days.
A notice to pay, which is a precondition to any sale [Section 76] must be served. It is served not only on the mortgagors but also on “such other persons as appear by the register book to be affected” that would include other mortgagees, caveators, registered lessees etc. The notice to pay is self-operative. On expiration of the notice period, the mortgagee can proceed to the sale of the property. If the mortgagee delays acting on the notice it may be deemed a waiver and could deprive the mortgagee of the right to sell. The notice must strictly comply with the requirements of the Act, however, no form of notice is specified though it must be in writing and the mortgagee or an agent should sign it.
If the mortgaged property is tenanted, possession may be obtained by arranging for the agent, or the tenant to pay the rent to the mortgagee. Generally, the property will be sold with vacant possession. If the mortgagor occupies it, it will be necessary to obtain possession before the sale. Section 78 gives the mortgagee the power to issue proceedings for ejectment. However, Section 77(1) permits a mortgagee to sell the land by public auction or by private contract, the requirements to act “in good faith” and to have “regard to the interests of the mortgagor,” make it prudent for a mortgagee to sell by auction, at least initially. The authorities have held that the statutory requirement to act “in good faith and having regard to the interests of the mortgagor” places an obligation on the mortgagee to engage competent and suitably experienced estate agents; not to delay the sale and to sell the property in a timely manner, as well as carry out a suitable advertising campaign. Section 77(4) that provides that if the power was “improperly or irregularly exercised” the mortgagor may claim damages.
CONTRACT OF SALE
1 The mortgagee is shown as the vendor, not the registered proprietor.
2 Chattels should not be included in the sale, as the mortgage does not include chattels; consequently, the mortgagee has no right to sell any chattels. A separate clause should be in the contract, clearly stating that the contract does not include the sale of any chattels.
1 The mortgagee should be described as the vendor. There should be no reference to the registered proprietor.
2 For the proof of the right to sell, a copy of the mortgage and the notice to pay should be annexed.
If an auction is unsuccessful, the mortgagee can consider a private sale. However, the mortgagee may notify all subsequent encumbrances on title of the mortgagee’s intention to sell by private treaty and to provide details of the proposed sale. This would permit any subsequent mortgagee to exercise its rights under Section 87 of the TLA to pay out in full the preceding mortgage and take a transfer of the prior mortgagee’s interest. However, this is very unlikely unless the prior mortgagee’s debt was reasonably minimal.
Section 77(4) provides for the registration of the transfer. This section passes the interest of the registered proprietor to the purchaser. The interest of the purchaser is vested free of any liability from the mortgage and free of liability of any other mortgage, charge or encumbrance registered or notified in the register book subsequent to our mortgage. The Land Registry Office will endorse “DOES NOT NOW AFFECT” on the mortgage and subsequent mortgages and caveats. Accordingly, settlement is effected without the need for discharge of mortgages (unless they bind the first mortgagee) and without the need for withdrawal of caveats, Section 91(2A) of the TLA provides that the transfer under the power of sale shall not be prevented by a caveat lodged subsequent to the mortgage and claiming an interest pursuant to an unregistered mortgage or charge securing the payment of money. Section 91(2B) provides that any such caveat lapses upon registration of the transfer.
PROCEEDS OF SALE
After settlement, distribution of the sale proceeds is set out in Section 77(3) of the TLA. Proceeds are applied in the following order:
1 In payment of all costs, charges and expenses incurred in the sale
2 In payment of the money due on the mortgage
3 Payment of money owing under subsequent mortgages and charges in the order of their priorities
4 The balance, if any, to the mortgagor or into the Supreme Court (Section 69 Trustee Act 1958)
If the proceeds of sale are insufficient to cover the amount due under the mortgage and expenses, the mortgagor remains personally liable to the mortgagee for any shortfall.
Purchasers must satisfy themselves that the mortgagee can pass title. This will involve checking the mortgage documents and the notice to pay to make sure that the mortgagee has complied with his duties and obligations under the mortgage and the Act, and that the notice to pay has been properly drawn and served.
If any of the steps have not been carried out properly or in accordance with the legislation, the mortgagee may not have the right to sell.
The purchaser’s requisitions should require that the vendor provide a statutory declaration confirming that “all notices, acts and things required to be done by the Transfer of Land Act 1958 as a prerequisite to the mortgagee exercising its powers of sale have been done”. It is not necessary to requisition on chattels, as generally the mortgagee has no title to the chattels and should not have been included in the contract. Requisitions should be raised regarding the existence of any lease that the mortgagee has consented to or to a mortgage, which is binding on the mortgagee.
The purchaser is entitled to rely upon Section 77(4) and is not required to delve into the manner of sale, treatment of other interested parties or the distribution of proceeds. These are the responsibility of the mortgagee.
SUBSEQUENT MORTGAGEES AND CAVEATORS
Second or later mortgagees must satisfy themselves that the sale has been made in good faith and then all they can do is stand in line and wait for distribution. They have very little bargaining power, as a discharge is not required.
A subsequent mortgagee does have the right under Section 87 of taking a transfer of the first mortgagee’s rights by payment of all monies outstanding. However, this is unlikely to be of any use as, generally, the first mortgage is for considerably more than the amounts secured by subsequent mortgages.
Caveators, which fall under Section 91 (2A), are also not required to provide a withdrawal of caveat and are in a similar situation to the subsequent mortgagees unless the caveat claims that the unregistered mortgage, charge, or other document is binding upon the mortgagee.
However in most cases, the vendor mortgagee will not have been aware of such interest protected by the caveat and will not have consented to the caveat. In such cases, the caveat would not bind the vendor mortgagee.
Caveats not claiming to secure payment of money and lodged subsequent to the mortgage, such as a caveat by a purchaser from the registered proprietor or purported trust caveat does not automatically lapse. In such a situation, the vendor cannot make title and unless the caveat is removed or withdrawn, the purchaser would not be required to settle.
The vendor could apply for the removal of the caveat under Section 89A or apply to the court pursuant to Section 90(3) seeking an order that the caveator remove the caveat.
One other alternative is for the documents to be lodged at the Land Registry Office, as the Registrar will accept the transfer. However, the Registrar must give notice to the caveator under Section 90(1). The purchaser is at risk for a period of 30 days. If the caveator does not issue proceedings, the registration procedure may proceed. Settlement monies could be retained in trust pending the registration.
TENANT IN POSSESSION AT DATE OF REGISTRATION OF MORTGAGE
Pursuant to Section 42(2) (e) of the TLA, the registered proprietor holds his interest in real estate subject to the rights of a tenant. As a mortgagee cannot be in a better position than the registered proprietor can, he would be subject to the rights of the tenant who was in possession at the date that the mortgage commenced.
As the mortgage document usually provides that a mortgagee is entitled to the receipt of rents and profits once default occurs under the mortgage, and Section 78 of the TLA empowers the mortgagee to claim rents and profits upon default, the tenant must comply with any request for the payment of rent to the mortgagee.
However, there is authority that a mortgagee in possession is not obliged to refund the security deposit to the tenant at the expiration of the term.
TENANCY AFTER THE DATE OF THE MORTGAGE
If the tenant has not obtained the consent of the mortgagee, (or registered the lease under Section 66), the tenant cannot resist a claim for possession by the mortgagee.
REAL ESTATE AGENTS
As the sale is by a mortgagee and not the registered proprietor as in most instances, many prospective purchasers may be unsure of what they will receive and this doubt may affect their decision to purchase.
Estate agent must re-assure a prospective purchaser:
1 That there is no defect, and
2 That upon registration of the transfer of land, the purchaser will obtain title to the property in the normal manner, and
3 That the prospective purchaser, to relieve his concern, could refer a copy of the vendor statement to his lawyer before auction
The agent must understand that it is the mortgagee’s responsibility to obtain the best possible price for the property and that the property is to be properly advertised.
NEED MORE INFORMATION
Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344