Mortgages

Cameron Stewart (thanks to

Shae McCrystal and Jim
Helman)

Definition
What is a mortgage?
Difference between old system
mortgage and Torrens system
mortgage
Waldron v Bird [1974] VR 497 3
features of a mortgage
Promise to repay money
Absolute assignment of property
Promise to retransfer on payment

Definition in common law

Conveyance of the
Fee

Mortgagor
Contractual
right to have
property
returned

Re-conveyance
after payment

Mortgagee
Legal
Ownership

Definition
Why do things this way?
Christianity and usury is a sin
Conveyance would meant that the legal
owner could enter the property and keep
all the profits from the land and not charge
for the use of money (which was forbidden)
A Mort Gage
Later agreements would grant possession
back to mortgagor - attornment
Payment conditions were strictly enforced

Equitys approach
Conveyance of the
Fee

Mortgagor
Equitable right to
redeem beyond
contractual
provision
Equity of
redemption

Re-conveyance
after payment

Mortgagee
Legal
Ownership

Torrens system mortgage

The Torrens system mortgage is a charge
Neither possession or ownership but a right to call
upon property if a triggering event occurs
United Travel Agencies v Cain (1990) 20 NSWLR
566 at 570 (Young J) An equitable charge is said to be

created when property is expressly or constructively made liable, or

is specially appropriate, to the discharge of debt or some other
obligation and confers on the chargee a right of realisation by
judicial process, that is to say, by the appointment of a receiver or
an order for sale.

The Torrens registered mortgage is a legal charge

No rights of ownership eg possession and title
deeds
Title deeds ordinarily provide under contractual
clause

Torrens title mortgage

Charge granted to
mortgagee

Mortgagor
Legal Ownership
and
Equity of
redemption

Discharge after
payment

Mortgagee
Legal
Charge

When is it a mortgage or
something else?
Gurfinkel v Bentley Pty Ltd (1966) 116
CLR 98 In this case, Mr Gurfinkel was a
man who had a lot of property and a lot
of debt. He owned a number of
properties and they all had mortgages
on them. This case involved 2 of those
properties in particular (but it is relevant
that he had others with mortgages) both
of which were Torrens land.

 Property One Property One had 2 registered mortgages on

it and a half built factory. The 2 mortgagees decided to sell
the land (G in default). G tried to borrow money from
Bentley Ltd to redeem the mortgages. Bentley said no, right
up until a day or so before the auction. Bentley agreed to
buy the property from G for enough money to clear the
mortgages. Bentley agreed in writing an agreement
negotiated by their lawyers to reconvey the land to G within
12 months if G exercised the option to renew and repaid the
purchase price + 10%. So, the auction did not happen,
Bentley discharged the two mortgages and became the RP.
Property Two Similar set of facts, Bentley agreed to pay
out a mortgage if the property was conveyed to Bentley
with an option to repurchase at purchase price + 10%.
Purely oral agreement.

 G affirmed his intention to repurchase

the properties, but did not do so in
accordance with the contract. The option
period passed. The case ended up in the
High Court when G sought to exercise the
options outside the 12 month period. He
sought the assistance of equity arguing
that the true nature of the transactions
had been a mortgage of the property to
Bentley and that G had an equity of
redemption which could be exercised
after the redemption date had passed

 The High Court held that if equity

considered this transaction to be a
mortgage, equity would recognise Gs right
to redeem after the redemption date. The
court said that in order to ascertain if the
transaction was a mortgage, you needed to
look to the substance of the agreement, in
all the circumstances parol evidence
being admissible to construe the
agreement. In this case, the court, by
majority, found that the transaction was a
sale with an option to repurchase, and not a
mortgage

 Why? Owens J:
Agreement settled by lawyers; both parties had legal advice
Parties could have created a first ranking mortgage if
Bentley had discharged the existing mortgages and then
registered his as first charge but didnt
A mortgage was unattractive in the circumstances because
G had defaulted on the two existing mortgages AND on
mortgages he had on other properties (including the second
property)
Clearly the sale and repurchase option was considered safer
by Bentley in these circumstances and were the only
grounds on which B was prepared to assist G as G was
clearly a bad credit risk
True nature was a sale with repurchase and not a
mortgageThis also applied to the second transaction which
was entered into on the same understanding as the first.

Creating mortgages
Old system Legal
Sec 23B deed
If a person purports to mortgage a fee
simple to a mortgagee by deed that
they do not have, it will be ineffective
at law until the person acquires the fee
simple, at which time it will be fed to
the mortgagee under the original
deed.

Creating a mortgage

Torrens system legal

Registered ss 41, 42, 43
NSW RPA
Sec 56(1) Whenever any land or estate or
interest in land under the provisions of this Act
is intended to be charged with, or made
security for, the payment of a debt, the
proprietor shall execute a mortgage in the
approved form.
Sec 57(1) - a mortgage, charge or covenant
charge under this Act has effect as a security
but does not operate as a transfer of the land
mortgaged or charged.

Creating mortgages
Equitable Mortgage An equitable
mortgage can arise in equity in a
number of different ways. To be
recognised the equitable mortgage
must be in writing or be supported by
sufficient acts of part performance
(CA s 23C and 23E)

Creating mortgages
Mortgage of equitable interest A
mortgage of the equity of redemption to
create a second mortgage. As the equity
of redemption is equitable, a mortgage
can only be created in equity. If you have
mortgaged the equity of redemption,
then you have a right to redeem that
interest, so you can mortgage that too,
to create a third mortgage and so on.

Creating mortgages
Agreement to grant a mortgage If parties create an
agreement to grant a mortgage, but dont actually
create a legal mortgage, equity will enforce the
agreement to grant a mortgage. This may arise
where the parties just contract to grant a mortgage
and never convey the title; or where the formalities
for a mortgage fail. Equity will recognise an equitable
mortgage in these circumstances. However, if the
agreement has not been performed no money has
been lent equity wont intervene (wont specifically
enforce the contract). Why? Equity intervenes if the
parties have carried though their intentions but not
created the legally enforceable security. But if the
agreement is purely executory no money is lent
the lender does not need protecting.

Creating mortgages
Deposit of title deeds In equity, the deposit of
title deeds with a lender as security for money
advanced, is prima facie evidence of an agreement
to grant a mortgage. The act of depositing the title
deeds with the lender is a sufficent act of part
performance of the contract alleged for equity to
recognise the mortgage. The deeds must have
been deposited with the intention of creating a
security (not for some other purpose) and one coowner cannot create an equitable mortgage of title
deeds without the consent of the other co-owners
to the use of the deeds in this manner. The fact
that one of the co-owners can demand the deeds
back, undermines the security and equity wont
enforce it

Theodore v Mistford (2005)

221 CLR 612
Mr Theodore wanted to buy a business
from Mistford. He went to the bank to get a
loan but they turned him down. So he went
Mistford and asked to pay the purchase
price in installments over two years. The
company agreed to this course of action,
as long as he could provide a security and
a guarantor. Mr Theodore asked his Mum
to put up a property she owned as security
for a loan and to go guarantor. She refused
to be his guarantor but did agree to put up
the house as security.

Theodore v Mistford (2005)

221 CLR 612
What is the difference? As guarantor she
would be personally guaranteeing his
repayment of the loan, so she could be sued
personally. In putting just the house up, she
was saying that they could access the house
in the event of non payment, but that she
personally could not be sued. Mr Theodore
went back to the company and bought the
business and deposited his Mums CT as
security for the loan. The company sent
back guarantor forms and a form to register
the mortgage but his mum refused to fill
them in and they went uncompleted.

Theodore v Mistford (2005)

221 CLR 612
Mr Theodore failed to make his payments. Mistford went
after the property.
The Court further affirmed that the deposit of the certificate
of title under Torrens will create an equitable mortgage
unless it is established that the CT was deposited for other
reasons.
Here, the deposit of the CT was intended to create an
immediate security in favour of Mistford, but that there was
no common intention or agreement that Mrs Theodore would
execute a guarantee or be personally liable for her sons
repayments.
Therefore, they were limited to recovering the sum owing
out of the proceeds of the sale and could not pursue Mrs
Theodore personally as well.

Covenants in a mortgage
The essential covenants relate to the loan - ie the amount
of the loan, the rate of interest, the date of repayment.
There are infinite variations in practice, depending on the
nature and purpose of the mortgage (eg domestic v
commercial property, commercial v private lender), the
prevailing and predicted market conditions, and the extent
of competition among lenders:
the term may be fixed, or indefinite - ie payable on demand a "line of credit"
may provide an option for early repayment (subject to
conditions such as giving of notice and termination payment
- rationale is to give the mortgagee an opportunity to find a
place to invest the funds);
the interest rate may be fixed or variable or a combination
repayment may be in a single lump sum, or by periodic
payments - of principal and interest, or "interest only" where
the principal is payable in a lump sum at the end of the term.

Clogs on the equity of

redemption
Once a mortgage always a mortgage
Attempts to change the nature of the mortgage
and make it impossible or difficult to redeem
Options to purchase - a mortgagee cannot take
an option to purchase the property
Is the relationship one of mortgage or is an
option with a collateral mortgage/
Wily v Endeavour Health Care Services Pty Ltd
[2003] NSWCA 312 - A granted an option to
purchase to B in exchange for a loan of $100K
secured by a mortgage CA held that it was an
option agreement and didnt offend the rule

Clogs on the equity of

redemption
Early Repayment
The general rule at law and in equity was that a
mortgage was not capable of being repaid on a
date earlier than a date fixed for the repayment
of the mortgage. This rule could be avoided by a
provision in the mortgage allowing for early
repayment, with or without a period of notice, or
as suggested by Butt [1848] where the
mortgagee has demanded repayment or
otherwise taken steps to enforce the security, as
by going into possession.
Section 93 CA allows early repayment but
requires payment of all interest for remainder
applies to Torrens

Clogs on the equity of

redemption
Postponing the right to redeem
Some postponement allowed (eg six
months notice) but clauses
preventing redemption or making it
illusory, oppressive or
unconscionable : Knightsbridge
Estates Trust Ltd v Byrne [1939] Ch
441

Clogs on the equity of

redemption
Collateral advantages
Restrictive trade practices between
mortgagor and mortgagee
Is it repugnant to the right to redeem
or a parallel contract
A question of substance not form.

Clogs on the equity of

redemption
In Kreglinger v New Patagonia Meat & Cold
Storage Co [1914] AC 25 the New Patagonia
Meat & Cold Storage Co Ltd carried on a
business of preserving meat. Kreglinger
carried on business as wool brokers and
agreed to lend to New Patagonia the sum of
10,000.00 for a period of 5 years with a
proviso that New Patagonia could repay the
loan at any time upon giving one months
notice. Notice was given and the loan was
repaid in full in January 1913, well before
the repayment date of 30 September 1915.

Clogs on the equity of

redemption
In addition to the provisions concerning the
payment of interest and the repayment of
the principal sum, the mortgage document
provided that during a period of 5 years
from 24 August 1910 New Patagonia would
not sell sheep skins to any person, firm or
company other than the lenders so long as
the lenders are willing to purchase the same
at a price equal to the best price (c.i.f.
London) offered for the same by any such
other person, firm or company.

Clogs on the equity of

redemption
After repayment of the loan
Kreglinger sought to exercise its right
to continue to purchase sheepskins
and New Patagonia disputed that this
right existed and said that it had only
applied during the time the loan was
unpaid and that it was void as it
amounted to a clog on the
redemption.

Clogs on the equity of

redemption
Viscount Haldane: What was the true
character of the transaction? Did the
appellants make a bargain such that the right
to redeem was cut down, or did they simply
stipulate for a collateral undertaking, outside
and clear of the mortgage, which would give
them an exclusive option of purchase of the
sheepskins of the respondents? The question
is in my opinion not whether the two
contracts were made at the same moment
and evidenced by the same instrument, but
whether they were in substance a single and
undivided contract or two distinct contracts.

Covenants in a mortgage
Covenant to pay a higher interest on
default
A provision that a higher interest rate is
payable in the event of a default is
considered a penalty and unenforceable.
If a mortgage provides that a rate of
interest is payable and provides for a lower
rate of interest if the payments are
received on time then this is not considered
a penalty: Strode v Parker (1694) 32 ER
804

Covenants in a mortgage
Covenant to pay the whole of principle and
interest on default
If a mortgage provides that upon default, the
principal sum becomes due along with
interest to the end of the term, then the
courts will say that such a provision is a
penalty and not enforceable. The result of
such a provision is that the mortgagee is
placed in a better position than it should be.
Only a genuine pre estimate of the
mortgagees loss on default will be
enforceable

Covenants in a mortgage
In Wanner v Caruana [1974] 2 NSWLR 301 the court was asked to
consider whether a provision in a mortgage was void as a penalty.
The provision said:
PROVIDED THAT in the event that any monthly instalment being in
default for fourteen (14) days the whole of the balance of the
principal sum and any other monies due hereunder with interest
thereon at the rate of 10 dollars ($10.00) per centum per annum
shall in the case of such default immediately become due and
payable for the balance of the term up to and including the 23 rd day
of August, 1978.
Street CJ found this to be a penalty as it bore no relationship to the
loss of the mortgagee.
What about a mortgage that makes the entire debt (capital plus
interest) payable immediately at the start of the loan with an
indulgence for instalments?: Protector Endowment Loan and Annuity
Co v Grice (1880) 5 QBD 592

Rights of Mortgagee
Right to sue on the personal covenant
Mortgagors promise to repay the debt
Mortgagee can pursue mortgagors
after exercising the power of sale for
anything which remains
H/W if foreclosure is used they cannot
pursue the mortgagor

Rights of Mortgagee
Right to assign the mortgage
Assignment of both the interests in the
land and the personal covenant
Section 91 CA assignment can occur via
a memorandum
Applies to both Old System and Torrens
endorsed on or attached to the mortgage
Sec 53 RPA transfer of mortgage vests
the right to sue on the mortgage and
recover the debt
Sec 42 will wipe out pre-existing claims

Rights of Mortgagee
Right to possession
The right to possession follows the legal estate in old
System
As the mortgage of land under old system title
requires a conveyance of the legal estate the
mortgagee is entitle to the possession of the
property. This is not what is normally intended so the
mortgage normally includes a provision that entitles
the mortgagor to occupy the premises as tenant of
the mortgagee. This provision is called an attornment
clause. It is not particularly satisfactory. Mortgages
also often contain a clause entitling the mortgagor to
retain possession until a default occurs. The breach
of this provision by a mortgagee entitles the
mortgagor to an action for breach of contract.

Rights of Mortgagee
In Torrens, mortgagee only get possession
after breach
Section 60 RPA allows for possession after
court application
Notice must be given under s 60 rents
and profts are owned by Mortgagee after
notice
Sec 60 requires default which must relates
to the payment of principal or interest
Contractual rights are needed or
possession for other kinds of breaches

Rights of Mortgagee
Responsibilities when in possession
Mortgagees must account for rents and profits
received - even those which they would hjave
received had they not been in wilful default
some gross lack of diligence
Mortgagees have a duty to preserve the
property ensure no damage from vandals
Duty to do repairs but subject to the amount
of income being received
If building being constructed mgee must act
as provident owner and take adequate
precaution for workmanlike manner of building

Rights of Mortgagee
Right to improve the property
There are two rights a mortgagee has
relating to the title of the mortgagor. The
first is the right to make the title perfect. If
the mortgagee is only a second mortgagee
then this right entitles the mortgagee to buy
out the first mortgagee so that the second
mortgagee becomes the first mortgagee.
The second is the right to improve the
property representing the security for the
loan.

Rights of Mortgagee
Any expenditure must be reasonable
compared with the amount borrowed and
cannot be such as to hamper the
mortgagors right to redeem. While it is
possible for a mortgagee to make lasting
alterations they must be reasonable and
cannot change the nature of the property.
Upon redemption of the mortgage the
mortgagor is entitled to receive back the
substance of what was mortgaged.

Rights of Mortgagee
If a mortgagee spends more than is
reasonable, then the mortgagee cannot
claim reimbursement for the money
spent even if this leads to a windfall in
favour of the mortgagor. Provided the
expenditure is reasonable, then the
mortgagor cannot claim any increase in
the saleable value without
reimbursement for the money spent.

Rights of Mortgagee
In Southwell v Roberts (1940) 63 CLR 581 a
mortgagee entered into possession of property
after a default by the mortgagor. After some years
as mortgagee in possession, the mortgagee
determined that the properties had become so
dilapidated that it was not possible to economically
repair them and accordingly decided to demolish
and rebuild the houses. This work was carried out
and resulted in two semi-detached brick cottages
being constructed on Portion A and a double
fronted detached brick bungalow being constructed
partly on Portion A and partly on Portion B.
Mortgagee spent nealry double the mortgage
liability

Rights of Mortgagee
Starke J. said :
In my opinion the amount expended was neither
reasonable in amount nor reasonable having regard to
the nature of the property. The mortgagee expended
double the amount of the principal debt and changed
the character of the buildings upon the land, and
indeed on the vacant portion of the land she erected a
building where none had been before. The case is an
example of a mortgagee in possession effecting
improvements without regard to the mortgagors
interest and calculated to improve him out of his
property. In these circumstances the expenditure
cannot be allowed, unfortunate though it be for the
mortgagee. But she could have protected herself by
obtaining the consent or acquiescence of the
mortgagor or possible by fore-closing.

Powers of Mortgagees
Power to Lease
Leases in old system not binding after
redemption
Sec 106 CA leases can be granted if:

Less than five years

Bent rent
Right of reentry if rent is in arrears
Must be registered (in DRS or Torrens)

Such a lease binds the mortgagor

contract make change obligations

Powers of Mortgagees
Lease by mortgagor? Grant of lease
prior to mortgage was binding
(subject to BFPVWN or s 42(1)(d) in
RPA)
Grant after mortgage was not
binding
Sec 106 now applies in same terms
to bind mortgagee

Powers of Mortgagees
Power to Appoint a Receiver
Where a mortgagor is in default, a
mortgagor may appoint a receiver. This is
the preferred device where a mortgagee
wants to manage property subject to a
mortgage rather than going into
possession of the property themselves.
Each jurisdiction contains its own statutory
procedure is that apply in the event that a
receiver is appointed to manage the
property and the power is only available in
the event of default by the mortgagor.

Powers of Mortgagees
Power to Foreclose
Foreclosure is the extinguishment of the equity of
redemption
In other words, where a mortgagee forecloses on a
mortgage, they obtain an order which vests
absolute ownership of the mortgaged property in
the mortgagee and which extinguishes the
mortgagor's equitable right to redeem the
mortgage. This remedy is only available for default
in repayment of the sum advanced on the due date.
It is not available for a default with respect to an
instalment payment. So, when the due date for
repayment of the full amount in the mortgage
contract is reached, a right to exercise foreclosure
will arise if the mortgagor defaults.

Foreclosure

Foreclosure of land under the old system can only be affected by an order of the
court pursuant to section 99A of the Conveyancing Act.
Two steps :
Decree nisi where there is an accounting done of outstanding amount with
an order that the mortgagor pay within a period (usually 3-6 months)
Decree absolute to extinguish the equity
To foreclose under a mortgage of land under the Torrens system it is necessary
to apply to the Registrar General for an order for foreclosure under ss 61 and 62:
Must be six months in arrears;
Land must have been offered for sale by auction but without the price
reaching what is owed to mortgagee; and
Notice has been served on all registered mortgagees and caveators
The Rg can order another attempt at sale or order foreclosure which will
extinguish the mortgagors right and that of other mortgagees
Only applies to registered mortgages
If the property is partly old system and partly Torrens it is necessary to apply to
the court for an order using the provisions in the Conveyancing Act.

Foreclosure
The effect of an order for foreclosure is set out in
section 100 of the Conveyancing Act:
On an order absolute for foreclosure the mortgagee or
chargee shall be deemed to have taken the property
mentioned in such order, in full satisfaction of the
mortgage debt or amount secured by the
charge, and the mortgagee or chargees right or
equity to bring any action or to take other
proceedings for the recovery of the mortgage money
or amount secured by the charge from the debtor,
surety, or other person, shall be extinguished, and
all collateral securities for the debt or amount secured
by the charge which have not previously been
enforced shall be released, and the right or equity of
the mortgagor to redeem the said property shall also
be extinguished

Powers of Mortgagees

Power of Sale
The power of sale is the standard remedy used by a mortgagee
where a mortgagor is in default. The power of sale has advantages
for both the mortgagee and the mortgagor which make it a
superior action to foreclosure. The advantages for the mortgagee
include:
exercise of the right of sale is available for non-payment of an
instalment as well as non-payment of the outstanding debt on the
final date for repayment. This means it is a more flexible remedy
available during the running of the mortgage, and not just at the
point that the entire mortgage amount becomes due;
it is a simple and convenient remedy and lacks the cumbersome
processes of foreclosure;
any outstanding debts owed by the mortgagor to the mortgagee
may still be recovered by an action in debt on the personal
covenant to repay contained in the mortgage; and
Any surplus money that is left after repayment of the debts and
the expenses of the mortgagee goes to the mortgagor

Power of Sale
The power in the mortgagee to exercise the power
of sale comes from either an express term in the
mortgage document, or from an implied statutory
power of sale where no express power has been
given in the mortgage.

Conveyancing Act (1919) NSW s 109(1)
1) A mortgagee and a chargee shall by virtue of this
Act have the following powers to the like extent as if
they had been in terms conferred by the instrument
creating the mortgage or the covenant under which
the charge arose but not further, namely:

A power to sell ..

Power of Sale
The New South Wales provision implies a power
of sale into both Old System and Torrens
mortgages (s 109(5)) - providing a power of sale
in instances where the parties have not included
such a term in their written contract. The section
does, however, only operate with respect to
written mortgages as if they had been in terms
conferred by the instrument. Therefore oral
arrangements, such as a mortgage by deposit of
title deeds, do not have a power of sale attached.
Parties involved in oral mortgages may get the
benefit of the implied power of sale by
registering the mortgage (creating the
instrument in which the power may be implied).

Power of Sale
The formalities to exercise the power of sale for Torrens land are set out
in section 57 of the Real Property Act 1900. The parties cannot contract
out of these obligations unless stated in the section. The section
requires:
that there be a default by the mortgagor;
that notice in a prescribed form has been served on the mortgagor
giving the mortgagor a specified period to rectify the default.
Defaults in payment of principal, interest or an instalment - minimum
of one month notice and the contract may specify longer;
other defaults, a contract can dispense with the need for notice, but
if there is nothing in the contract the default statutory period is one
month.
Where notice has been served and the mortgagor complies with the
notice by rectifying the default, the default is deemed not to have
occurred and the mortgagee cannot exercise the power of sale.
Similar provisions for Old System land in s 111 CA

Power of Sale
The starting point with respect to a mortgagees
obligations in exercising the power of sale is a standard
statement made by both courts and commentators that a
mortgagee is not a trustee and is not under a duty to put
the interests of others over his or her own. It is
acknowledged that the mortgagee is, in fact, acting in his
or her own interests when selling the property: Cuckmere
Brick Co Ltd v Mutual Finance Co Ltd [1971] Ch 949 per
Salmon LJ at 965 it is well settled that a mortgagee is
not a trustee of the power of sale for the mortgagor. Once
the power has accrued, the mortgagee is entitled to
exercise it for his own purposes whenever he chooses to
do so.
Duty of reasonable care or good faith?

Power of Sale

Cuckmere Brick Co Ltd v Mutual Finance Co Ltd [1971] Ch 949.

A mortgagee exercising the power of sale advertised the
property for sale as having planning approval for the building of
houses on the property. In actual fact, the mortgagor had
obtained planning approval to build flats as well as housing.
The mortgagor drew the omission to the attention of the
mortgagee but the sale proceeded anyway. The purchaser of
the property bought the property to develop houses and paid
44,000. Evidence presented to the court demonstrated that if
developers interested in building flats had been aware of the
planning approval, the property could have sold for around
65,000 to a developer of flats. Evidence also demonstrated
that the omission in advertising was not dishonest or
intentional. Had the mortgagee breached any obligations to the
mortgagor in selling in this way?

Power of Sale

Lord Justice Salmon noted in the case that the mortgagee is not a
trustee and is not obligated to put anyone's interests above their own.
Further, Salmon notes that a mortgagee is entitled to sell the property at
a time that suits them. However, despite this Salmon noted that
mortgagee does owe a duty to take reasonable care in selling the
property:
The mortgagor is vitally affected by the result of the sale but its
preparation and conduct is left entirely in the hands of the mortgagee.
Proximity between them could scarcely be closer. Surely they are
neighbours. Given that the power of sale is for the benefit of the
mortgagee and that he is entitled to choose the moment to sell which
suits him, it would be strange indeed if you are under no legal obligation
to take reasonable care to obtain what I call the true market value at the
date of the sale I accordingly conclude that a mortgagee in
exercising his power of sale does owe a duty to take reasonable
precautions to obtain the true market value of the mortgaged
property at the date on which he decides to sell it. (at 968)

Power of Sale
In England in recent years there has been a retreat from
framing the duty of the mortgagee in terms of the tortuous
standard of negligence. Emphasis has shifted to the duty of
the mortgagee arising in equity and therefore being a duty
of good faith. This is in fact the path that Australia took
early on we never really adopted the negligence standard,
preferring instead to see the duty as one of good faith in
which the mortgagee had a duty not to recklessly or
willfully sacrifice the interests of other parties in selling the
property.

Power of Sale
Pendlebury v Colonial Life (1912) 12 CLR 676 a
mortgagee exercised the power of sale in such a manner
as to recover only the cost of the outstanding mortgage
on the land and their costs in executing the power of sale.
The property was purchased at auction by a purchaser for
720 pounds (which just discharged the mortgagors debt).
The purchaser then resold the property one month later
for 1800 pounds. The price at auction was woefully under.
The evidence disclosed that the property was a large rural
property which had only been advertised for sale in two
metropolitan newspapers with no relevant information as
to the quality of the land, the fact that it was under crop,
had significant improvements made and was near a
significant water course.

Power of Sale
All three judges found that the mortgagee had willfully sacrificed the
interests of the mortgagor in making the sale and the manner of
advertising.
As to the question of the right test in Australia, all three judges
reformulated the test for Australia as a test of good faith. In particular,
Justice Isaacs formulated the test solely on the basis of good faith:
If the right to sell is a power which . is given to him not as a trustee
for the mortgagor but for his own benefit, it must carry with it the
consequence that with respect to the way he carries out the sale, not
merely is he not liable as for breach of trust, but also that he owes no
duty of care to the mortgagor, so long as he is bona fide acting within
the limits of his power. His rights under the power are adverse to the
mortgagor. He cannot, therefore, on any principle known to the law be
liable for mere negligence, because that assumes a standard of care
owed to another. The mortgagee is however confined by the expressed
and implied limits of his power and nothing else (per Issacs J at 700)

Power of Sale
The mortgagee must act bona fide in exercising the power
of sale honestly and in good faith in exercising that power
of sale the object of which is to obtain the best price
possible on the day of the sale. However, if he recklessly or
willfully disregards the interest of the mortgagor, then he
will be called to account:
By recklessness then, I understand a disregard of the
mortgagors interest, ignoring his property in the possible
surplus, in short, not caring whether its fair and proper
value was obtained or not, as distinguished from the mere
want of care or prudence in the course of honestly trying to
conserve it. (per Isaacs J at 702)

Power of Sale
However, the two other judges did not abandon
negligence as thoroughly as Isaacs did. Griffith CJ
and Barton J both stated that the test is of good
faith and that good faith includes a negligence
based test a duty to take reasonable
precautions to obtain the best price reasonably
obtainable on the day of the sale. This is a slightly
more stringent test as instead of requiring the
mortgagee to act honestly, even if carelessly, the
test would require them to act honestly and to
take reasonable care in selling the property.

Power of Sale
Forsyth v Blundell (1973) 129 CLR 477. In Forsyth
the mortgagee was selling a property to recoup a
debt of $120 000. Before the auction a purchaser
expressed a willingness to buy the property for
$150 000. The mortgagee did not proceed to
auction and sold the property to a third party for
$120 000. In this case both Justices Walsh and
Mason found that the mortgagee had not acted in
good faith and had recklessly sacrificed the
interests of the mortgagor in the conduct of the
sale of the property.

Power of Sale
With respect to the question of whether or not the
obligation to act in good faith also includes a duty
to take proper precautions on sale, both Walsh and
Mason pointed out that the answer to this question
is unclear but they were not prepared to determine
the question. Justice Menzies who dissented on the
facts but not the law, did however make an obita
statement that the duty to act in good faith
includes a duty to take reasonable precautions to
obtain a proper price: the duty to take reasonable
precautions to obtain a proper price is but part of
the duty to act in good faith (at 481)

Power of Sale

ANZ Banking Group v Bangadilly Pastoral Co. Pty Limited (1978) 52 ALJR
529. In this case the mortgagee and the purchaser were family
companies in which there were identical directors and shareholders - Mr
and Mrs Hall. So one company comprising Mr and Mrs Hall was the
mortgagee, and that company sold to another company which comprised
Mr and Mrs Hall. As directors of the mortgagee company, Mr and Mrs Hall
set the reserve price for the sale; then as directors of the purchasing
company, Mr and Mrs Hall set the maximum price to be bid.
Unsurprisingly, they were the only bidders! They did this to rob a second
mortgagee of its interest (ANZ)
The facts are briefly summarised as follows:
Talga Pastoral owned a property called Bangadilly. Property subject to 2 mortgages,
1st to Glenthorne Pty Ltd and 2nd to ANZ Bank.
Talga contracted to sell to Hall Investments Pty Ltd (controlled by Mr & Mrs Hall).
Talga couldn't complete and Hall arranged for another of their companies, Halco
Products to take an assignment of the 1st mortgage for $280,000 being the
principal plus interest.
Halco purported to exercise its power of sale and sold the property to Bangadilly, a
third company controlled by Hall.
the auction was poorly advertised and the price received was $265,000, $15,000
less than Halco had paid for the mortgage.
ANZ sought a declaration that the sale be set aside.

Power of Sale
Clearly a breach

Jacobs J. referred to some of the circumstances and

found himself:
. . . quite unable to conclude that there was no
shortcoming or that the mortgagee clearly preferred the
obtaining of the best price on realization of its security
over any desire that the closely associated company
should purchase at a price favourable to it. I shall set
out some of those facts:
(1) There was no local advertising of the proposed auction
sale, virtually no Sydney or Melbourne advertising, and
the sale was held in Sydney. The lead time was minimal.
(2) The appellant, the second mortgagee, was not
informed that the auction sale was to take place.
(3) The date of the auction was not a desirable time to
hold this kind of auction sale. . .

Factors

Time of Sale - neither test in England or Australia constrains the

mortgagee's choice to sell at a particular time. The mortgagee is
free to choose the time to exercise the power of sale, and are free
to sell at a time that suits them without reference to the interests
of other parties. This is a source of some dissatisfaction for
mortgagor's particularly where the value of the land may fluctuate
depending on the time of year - for example rural land may be
more attractive that at some times in the year than others. I dont
think that the new statutory test will change this in any way.
However note CA s 103(2) gives the court the power to order a
sale of old system property on the application of any person and
despite the dissent of any person which would allow a mortgagor
to apply to the court to order sale. There is no equivalent for
Torrens land although Butt suggests at page 646 that a court of
equity might have an inherent jurisdiction to order a sale on
application by a mortgagor depending on the circumstances.

Factors
Obligation to accept offers? - Because the choice of when to
sell is entirely a matter for the mortgagee, it follows that there
is no obligation to sell at all or to accept offers.
Westpac Banking Corporation Ltd v Kingsland (1991) 26
NSWLR 700 - in this case acting on their security over a hotel,
Westpac went into possession of the hotel and appointed
receivers to manage the hotel. An offer was made to buy the
hotel that would have removed the outstanding liability of the
debtor and a guarantor that had guaranteed the debt as well
but it was not taken up. The action in this case was brought by
the guarantor, who argued that the breach of the duty of good
faith on the part of the bank was in their failure to consider the
offer received and sell the property so as to extinguish the
liability of the mortgagor and therefore the guarantor as well.

Factors
Justice Cole held that there is no obligation upon a
mortgagee to exercise a power of sale if it does not wish to
do so. Therefore if there is no obligation to sell at all, or at
any particular time, failure to sell at any point of time can
not constitute a breach of duty:
if the mortgagee can decide when he wishes to exercise
the power of sale, there can be no liability attaching to him
for failure to exercise it at any particular point of time. Nor
can failure to assess any offers prior to a decision having
been taken to exercise the power of sale constitute a
breach of a duty.

New Section

111ADuties of mortgagees and chargees in respect of
sale price of land
(1) A mortgagee or chargee, in exercising a power of sale in
respect of mortgaged or charged land, must take reasonable
care to ensure that the land is sold for:
(a)if the land has an ascertainable market value when it is sold
not less than its market value, or
(b)in any other casethe best price that may reasonably be
obtained in the circumstances.
(2) Subsection (1) applies to an agent appointed by a
mortgagee or chargee to sell the mortgaged or charged land in
the same way as it applies to a mortgagee or chargee exercising
a power of sale in respect of mortgaged or charged land.
(3) Nothing in section 112 (7) or 115 (2) of this Act, or in section
58 (1) of the Real Property Act 1900, affects the duty imposed by
this section.

New Section

4) The title of the purchaser cannot be challenged on the ground

that the mortgagee or chargee has committed a breach of any
duty imposed by this section, but a person who suffers loss or
damage as a result of the breach of the duty has a remedy in
damages against the mortgagee or chargee exercising the power
of sale or selling the land.
(5) This section has effect despite any stipulation to the contrary.
(6) Nothing in this section affects the operation of any rule of law
relating to the duty of the mortgagee or chargee to account to the
mortgagor or chargor.
(7) This section applies to mortgages and charges whether made
before or after the commencement of this section but only in
relation to a sale arising as a consequence of a default occurring
after the commencement of this section.
(8) This section extends to mortgages and charges under the
Real Property Act 1900.

New Section
This section effectively codifies the
Cuckmere Brick view of the mortgagees
duties in respect to exercise of the power
of sale imposing by Statute, a duty to
take reasonable care to ensure that the
land is sold for not less than its market
value (if ascertainable); or the best price
that may reasonably be obtained in
the circumstances.

New Section
This duty applies to both general system and old system
land. It will be interesting to see how it applies in practice. It
suggests that we measure the mortgagees actions against
an objective standard of care. However, as I suggested
above, it can be argued that applying a good faith test
(subjective have you acted in good faith) often produces a
similar outcome to applying a standard of objective
reasonableness. Further the Act codifies the idea that the
goal is market value (if ascertainable) or the best price in
the circumstances which is an easier measure to test.
However bear in mind that if the property sells below
market value, the test may not be broken if reasonable care
to obtain the market value has been taken.

Remedies for breach of duty in

exercising the power of sale
Remedies for Defective Exercise of the Power of
Sale
There are two possible defects that can occur when a
mortgagee exercises the power of sale:
non-compliance with mandatory formalities; or
breach of duty.

An action against the mortgagee may be brought by

either the mortgagor, other mortgagees or guarantors.

Remedies for breach of duty in

exercising the power of sale
There are range of remedies that may be sought by these
parties if they can establish a defect.
The remedy that may be sought, will depend on whether or
not the mortgagor has priority over the purchaser who has
bought subject to the mortgagees exercise of the power of
sale.
Justice Walsh in Forsyth v Blundell (1973) 129 CLR 477
notes that where a mortgagee wrongfully exercises the
power of sale, the mortgagor has a cause of action against
the mortgagee.
However a mortgagor may only take action which impinges
the right of the purchaser if the mortgagor has priority over
that purchaser. If the sale has proceeded to registration, the
purchaser will be protected by the indefeasibility provisions.
If the sale has not proceeded to registration, the contest will
be between competing unregistered interests.

Remedies for breach of duty in

exercising the power of sale
If a purchaser has priority (is registered or is
protected by s 43A and can proceed to registration)
then the mortgagor can only seek damages. Here
the mortgagor would be suing in equity to seek an
account for the loss suffered - the difference
between the price obtained and the price which
should have been obtained. (In Pendlebury the
case where the land was sold for 720 and then
1800 the next month, the mortgagee got the
difference the 720 had extinguished their debt,
so the bank had to give them 1080 plus costs).

Remedies for breach of duty in

exercising the power of sale
If a purchaser has not been registered, the mortgagor
can lodge a caveat to prevent the registration of the
transfer to the purchaser. The matter will then be
determined on a priority dispute. If the mortgagor has
priority, then the mortgagor can seek:
An injunction to restrain settlement with the purchaser if
settlement has not yet occurred.
Where settlement has occurred but not registration and the
mortgagor wants to retain the right to redeem the mortgage,
rather than acquire financial compensation, the mortgagor
might seek an order setting aside the contract of sale.
An order setting aside the contract of sale would not void the
contract of sale but which would treat the sale as an
assignment of the mortgagee's interest ie, a purchaser will
take subject to the mortgagor's equity of redemption and the
mortgagor would retain the right to redeem the mortgage.

Three variations
The mortgagee improperly exercises the power of sale and
the transfer to the purchaser has been registered.
the purchaser has indefeasible title to the fee simple
because registration has gone through;
the mortgagor has the right to have the power of sale
exercised properly - this is an unregistered interest.

Priority rule - the registered interest of the purchaser is

indefeasible unless the mortgagor can establish an
exception to indefeasibility.

The mortgagor will not be able to have the transfer to

the purchaser set aside unless the mortgagor can show
that the purchaser has been fraudulent or where the
mortgagor has an in personam cause of action against
the purchaser.

Three variations
The mortgagee improperly exercises the power of
sale and the mortgagor seeks relief before
registration - after the contract of sale has been
entered into - but before settlement.
the purchaser has an interest arising under the
contract - to seek an order for specific
performance. Therefore the purchaser has an
unregistered interest before settlement;
the mortgagor has the right to have the power of
sale exercised properly.

Three variations
There is a slight complicating factor in this situation. The
mortgagor is still listed as the registered proprietor of the
property, but their right as registered proprietor is now
subject to the mortgagees right to exercise the power of
sale.
In these cases the mortgagor cannot rely on their
indefeasible title because they consented to the mortgage
and the exercise of the power of sale so this means that
at the point of default on the mortgage, you lose the right
to assert your indefeasible title against persons who deal
with the mortgagee.
Instead, the right of the mortgagor stems from the
improper exercise of the power of sale it is generated
through the mortgagees conduct and is separate from the
registered interest. In Forsyth v Blundell (1973) 129 CLR
477 Justice Walsh characterized the interest of the
mortgagor as an unregistered right to have the contract of
sale set aside on the basis of improper exercise of the
power of sale.

Three variations
Priority rule - where the equities are equal the first
in time prevails. Is there any postponing conduct
on the part of the first interest holder? In the
majority of cases the answer will be no because
the mortgagee had a right to exercise the power of
sale and the mortgagor did nothing to contribute to
it being exercised improperly.
So when this set of facts arose in Forsyth v Blundell
mortgagor got an injunction after the contract of
sale was made and before settlement the
mortgagors interest was not postponed to the
purchasers interest the mortgagor prevailed.

Three variations
The mortgagee improperly exercises the power of sale and
the mortgagor seeks relief before registration and after
settlement.
Two unregistered interests; mortgagor has unreg prior right
to have contract of sale set aside; purchaser has
unregistered transfer. Under common law, mortgagor would
prevail (no postponing conduct) BUT this fact scenario brings
up section 43A of the RPA.
So ask the standard three questions:
- does the purchaser have a registrable dealing?
- Is the purchaser dealing with the registered proprietor?
- is the purchaser a bona fide purchaser for value without
notice of the other unregistered interest at settlement?
(Notice RPA s 58(2) states that a purchaser is not fixed with
constructive notice of a failure to comply with the formalities
of an exercise of the power of sale by a mortgagee. So if
failed to comply with notice requirements, not fixed with
constructive notice. Circumstances may still fix with notice of
failure to comply with duty of good faith).

Three variations
If the purchaser is protected by section
43A, the purchaser wins the priority
dispute and is guaranteed a registration,
so the mortgagor cannot obtain an
injunction or an order setting aside the
contract of sale. In that situation the
mortgagor is left only with the remedy of
damages from the mortgagee.

Three variations
Note New s 111A(4) The title of the purchaser cannot be
challenged on the ground that the mortgagee or chargee
has committed a breach of any duty imposed by this
section, but a person who suffers loss or damage as a
result of the breach of the duty has a remedy in damages
against the mortgagee or chargee exercising the power of
sale or selling the land.
It is not immediately clear if this section affects the
decision in Forsyth v Blundell. If the word title is
interpreted to mean legal title then all this section does is
reproduce the distinction between the capacity to set aside
a purchasers contract of sale before or after settlement.
However, if we read the word title to include equitable
interests, then it would overrule the effect of Forsyth v
Blundell and we could not challenge the exercise of the
power of sale once a contract for sale had been entered
into. We property lecturers and Peter Butt think that the
section is intended to refer to legal title and thus preserves
the common law position.

Priorities and mortgages

Old System Land Order of priority is
determined on the basis of the priority
rules and the deeds registration rules
Torrens Order of priority is determined
on the basis of registration; first
registered takes priority; second is
second and so on. Competition
between unregistered mortgages
common law priority rules.

Priorities and mortgages

Where the power of sale is exercised, the
costs of the sale are paid first, then the
mortgagees in order of priority and then
the mortgagor gets what is left.
Sale by first priority holder - provided they
give notice to all other registered
mortgagees and any unregistered
mortgagees who have lodged a caveat,
they may proceed to exercise the power of
sale and distribute the proceeds.

Priorities and mortgages

Sale by second or third mortgagee - A later
registered mortgage may seek to exercise the
power of sale in one of two ways:
they may sell the property subject to the first
mortgage which is not discharged. Any
purchaser of the property takes the property
with the encumbrance.
They can sell the property with the consent of
the first mortgagee to the sale. In this case
they would sell the property free of the
mortgage but the first mortgagee would have
the first call on the proceeds of sale..

Priorities and mortgages

The order of priorities between mortgages may
be changed in a couple of ways:
Torrens s 56A RPA allows mortgagees to register a
memorandum reversing the order of priority;
Parties may agree between themselves to change
the order enforceable as between themselves;
Where one mortgage is paid out, the others move up
to take its place. This applies unless a later
mortgage is used to pay out an earlier mortgage, in
which case it will take the place of the earlier
mortgage.
CA s 94 old system or Torrens a mortgage can be
assigned to a new mortgagee the new mortgagee
steps into the priority position of the existing
mortgagee.

Priorities and mortgages

Tabula in naufragio competition between
2 equitable mortgages, later equitable
mortgage can prevail over earlier equitable
mortgage by acquiring the legal estate.
Wont apply if earlier equitable mortgage
registered under deeds reg (because will
give later equitable mortgage holder
notice) or to mortgages registered under
the RPA because these mortgages are
determined by order of registration so no
room for tabula in naufragio.

Priorities and mortgages

Tacking for further advances
Under old system title the first mortgagee A
acquires a legal estate in the land. If the
mortgagor then grants a further mortgage to B
the question is whether A can make a further
advance after the date of Bs mortgage and
tack this further advance to the monies
advanced under the original mortgage.
If A has no notice of Bs equitable mortgage then
A may make further advances and may tack
these advances to his first advance. Once A
becomes aware of Bs mortgage then A is not
permitted to tack any further advances to the
original advance.

Priorities and mortgages

For example:
A is the registered proprietor of a fee simple
worth $500 000. A has two registered mortgages:
a mortgage to B worth $300 000
a mortgage to C worth $200 000
So the whole value of the property is mortgaged.
A cant get a further mortgage on the land
because someone will be the third mortgagee
and there wont be anything left. So, can A go to
B and borrow another $200 000 upping the
value of the first mortgage to $500 000? This
would have the effect of reducing the value of
Cs mortgage.

Priorities and mortgages

The key issue is notice. Justice Holland in
Matzner v Clyde Securities [1975] 2 NSWLR
293 at 298
A mortgagee to whom the property is
mortgaged for advances already made
cannot, after receiving notice of a second
mortgage, have priority over the second
mortgagee for further advances upon the first
mortgage, even if the first mortgage, to the
knowledge of the second mortgagee is
expressed to be a security for further
advances.

Priorities and mortgages

This is also known as the rule in
Hopkinson v Rolt (1861) 11 ER 829. So, if
a mortgagor and a mortgagee agree that
the mortgagee will make further
payments, those further payments cannot
be tacked to the existing security IF a
second mortgage is created and the first
mortgagor has notice of the second
mortgage this means that those further
advances will sit UNDER the second
mortgagee in the order of priority.

Priorities and mortgages

Notice unclear if actual or constructive Weight of
authority favours actual and in NSW Central
Mortgage Registry of Australia Ltd v Donemore Pty Ltd
[1984] 2 NSWLR 128 Single Sup Court Judge said
actual notice necessary. In this case a prior mortgage
holder made advances under a mortgage after the
creation of a second mortgage and after the second
mortgage holder lodged a caveat. Justice Kearney
held no actual notice as there had been no occasion
for the first mortgage holder to search title. Therefore,
advances did have priority. Further Justice Kearney
said that if he was wrong, and constructive notice was
sufficient no constructive notice here as a caveat is
not notice to all the world and no reason for
mortgagee to search title before making further
advances under the mortgage.

Priorities and mortgages

The rule also applies to land under the
provisions of the Real Property Act where
the priority of mortgages is governed by
their date of registration. Following
Matzner v Clyde Securities Ltd [1975] 2
NSWLR 293 it is clear that the rule against
tacking applies to mortgages under the
Real Property Act. It was said by Holland J.
that the rule against tacking was based
on considerations of fairness and justice
between the competing mortgagees.

Priorities and mortgages

Matzner also establishes an exception to the
rule in Hopkinson v Rolt where the further
advances made by the first mortgagee do not
diminish the value of the second mortgage
holders interest because they increase the
value of the land overall. In Matzner, the
mortgagee agreed to lend a total of $273 000
to enable the construction of units on a piece of
land. The payments were to be made in
instalments to cover the cost of building work
as it was completed. After $250 000 had been
advanced, a second mortgage was created and
then a third. Were advances made after the
$250 000 secured by the first mortgage?

Priorities and mortgages

Under the rule in Hopkinson they were not covered because the
first mortgagee knew about the second and third mortgages.
However, Justice Holland found that because this rule is about
being fair to the later mortgagees, if the value of the security is
increased by the further advances, then it cannot be unfair to
them to allow the further advances to take priority:
I can see no grounds for denying to the mortgagee first priority for
advances made pursuant to the mortgage .. up to the total
amount of the principal sum .. on the basis of justice and fair
dealing between the parties. Advances made under those clauses
after notice of the subsequent mortgages were not designed or
liable to diminish the value of the security given to the subsequent
mortgagees. (p 303)

So this sets up a limited exception where the mortgage allows

for and the advances actually provide for the construction of
buildings on the property that increase the overall value of the
security.