Presentation on theme: "Cameron Stewart (thanks to Shae McCrystal and Jim Helman)"— Presentation transcript:
1Cameron Stewart (thanks to Shae McCrystal and Jim Helman) MortgagesCameron Stewart (thanks to Shae McCrystal and Jim Helman)
2Definition What is a mortgage? Difference between old system mortgage and Torrens system mortgageWaldron v Bird  VR 497– 3 features of a mortgagePromise to repay moneyAbsolute assignment of propertyPromise to retransfer on payment
3Definition in common law Mortgagor MortgageeConveyance of the FeeRe-conveyance after paymentContractual right to have property returnedLegal Ownership
4Definition 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 GageLater agreements would grant possession back to mortgagor - attornmentPayment conditions were strictly enforced
5Equity’s approach Mortgagor Mortgagee Conveyance of the Fee Re-conveyance after paymentEquitable right to redeem beyond contractual provisionEquity of redemptionLegal Ownership
6Torrens system mortgage The Torrens system mortgage is a chargeNeither possession or ownership but a right to call upon property if a triggering event occursUnited 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 chargeNo rights of ownership eg possession and title deedsTitle deeds ordinarily provide under contractual clause
7Torrens title mortgage Mortgagor MortgageeCharge granted to mortgageeDischarge after paymentLegal OwnershipandEquity of redemptionLegal Charge
8When 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.
9Property 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.
10G 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
11The High Court held that if equity considered this transaction to be a mortgage, equity would recognise G’s 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
12Why? Owens J:Agreement settled by lawyers; both parties had legal adviceParties could have created a first ranking mortgage if Bentley had discharged the existing mortgages and then registered his as first charge – but didn’tA 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 riskTrue 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.
13Creating 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.
14Creating a mortgage Torrens system legal Registered ss 41, 42, 43 NSW RPASec 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.
15Creating mortgagesEquitable 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)
16Creating mortgagesMortgage 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.
17Creating mortgagesAgreement to grant a mortgage – If parties create an agreement to grant a mortgage, but don’t 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 won’t intervene (won’t 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.
18Creating mortgagesDeposit 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 co-owner 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 won’t enforce it
19Theodore 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.
20Theodore 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 Mum’s 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.
21Theodore 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.
22Covenants 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 combinationrepayment 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.
23Clogs on the equity of redemption Once a mortgage always a mortgageAttempts to change the nature of the mortgage and make it impossible or difficult to redeemOptions to purchase - a mortgagee cannot take an option to purchase the propertyIs the relationship one of mortgage or is an option with a collateral mortgage/Wily v Endeavour Health Care Services Pty Ltd  NSWCA 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 didn’t offend the rule
24Clogs on the equity of redemption Early RepaymentThe 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  “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
25Clogs on the equity of redemption Postponing the right to redeemSome postponement allowed (eg six months notice) but clauses preventing redemption or making it illusory, oppressive or unconscionable : Knightsbridge Estates Trust Ltd v Byrne  Ch 441
26Clogs on the equity of redemption Collateral advantagesRestrictive trade practices between mortgagor and mortgageeIs it repugnant to the right to redeem or a parallel contractA question of substance not form.
27Clogs on the equity of redemption In Kreglinger v New Patagonia Meat & Cold Storage Co  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, for a period of 5 years with a proviso that New Patagonia could repay the loan at any time upon giving one month’s notice. Notice was given and the loan was repaid in full in January 1913, well before the repayment date of 30 September 1915.
28Clogs 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.”
29Clogs 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.
30Clogs 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.
31Covenants in a mortgage Covenant to pay a higher interest on defaultA 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
32Covenants in a mortgage Covenant to pay the whole of principle and interest on defaultIf 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 mortgagee’s loss on default will be enforceable
33Covenants in a mortgage In Wanner v Caruana  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 23rd 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
34Rights of Mortgagee Right to sue on the personal covenant Mortgagors promise to repay the debtMortgagee can pursue mortgagors after exercising the power of sale for anything which remainsH/W if foreclosure is used they cannot pursue the mortgagor
35Rights of Mortgagee Right to assign the mortgage Assignment of both the interests in the land and the personal covenantSection 91 CA – assignment can occur via a memorandumApplies to both Old System and Torrens endorsed on or attached to the mortgageSec 53 RPA – transfer of mortgage vests the right to sue on the mortgage and recover the debtSec 42 will wipe out pre-existing claims
36Rights of Mortgagee Right to possession The right to possession follows the legal estate in old SystemAs 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.
37Rights of MortgageeIn Torrens, mortgagee only get possession after breachSection 60 RPA allows for possession after court applicationNotice must be given under s 60 – rents and profts are owned by Mortgagee after noticeSec 60 requires default which must relates to the payment of principal or interestContractual rights are needed or possession for other kinds of breaches
38Rights 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 diligenceMortgagees have a duty to preserve the property – ensure no damage from vandalsDuty to do repairs but subject to the amount of income being receivedIf building being constructed m’gee must act as provident owner and take adequate precaution for workmanlike manner of building
39Rights 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.
40Rights of MortgageeAny 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.
41Rights of MortgageeIf 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.
42Rights of MortgageeIn 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
43Rights 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 mortgagor’s 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.
44Powers of Mortgagees Power to Lease Leases in old system not binding after redemptionSec 106 CA – leases can be granted if:Less than five yearsBent rentRight of reentry if rent is in arrearsMust be registered (in DRS or Torrens)Such a lease binds the mortgagor – contract make change obligations
45Powers of MortgageesLease 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 bindingSec 106 now applies in same terms to bind mortgagee
46Powers 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.
47Powers of Mortgagees Power to Foreclose Foreclosure is the extinguishment of the equity of redemptionIn 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.
48ForeclosureForeclosure 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 equityTo 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; andNotice has been served on all registered mortgagees and caveatorsThe Rg can order another attempt at sale or order foreclosure which will extinguish the mortgagor’s right and that of other mortgageesOnly applies to registered mortgagesIf 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.
49ForeclosureThe 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 chargee’s 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
50Powers 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; andAny surplus money that is left after repayment of the debts and the expenses of the mortgagee goes to the mortgagor
51Power of SaleThe 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 …..
52Power of SaleThe 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).
53Power of SaleThe formalities to exercise the power of sale for Torrens land are set out in section 57 of the Real Property Act 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
54Power of SaleThe 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  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?
55Power of SalePendlebury 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.
56Power of SaleAll 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)
57Power of SaleThe 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 mortgagor’s 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)
58Power of SaleHowever, 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.
59Power of SaleForsyth v Blundell (1973) 129 CLR 477. In Forsyth the mortgagee was selling a property to recoup a debt of $ Before the auction a purchaser expressed a willingness to buy the property for $ The mortgagee did not proceed to auction and sold the property to a third party for $ 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.
60Power of SaleWith 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)
61Power of SaleANZ 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.
62Power of SaleClearly a breachJacobs 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. . .
63FactorsTime 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 don’t 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.
64FactorsObligation 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 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.
65FactorsJustice 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”.
67Power of Sale Cuckmere Brick Co Ltd v Mutual Finance Co Ltd  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?
68Power 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)
69Power of SaleIn 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.
70Priorities and mortgages Old System Land – Order of priority is determined on the basis of the priority rules and the deeds registration rulesTorrens – 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.
71Priorities 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.
72Priorities 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..
73Priorities 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.
74Priorities and mortgages Tabula in naufragio – competition between 2 equitable mortgages, later equitable mortgage can prevail over earlier equitable mortgage by acquiring the legal estate.Won’t 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.
75Priorities and mortgages Tacking for further advancesUnder 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 B’s mortgage and “tack” this further advance to the monies advanced under the original mortgage.If A has no notice of B’s equitable mortgage then A may make further advances and may “tack” these advances to his first advance. Once A becomes aware of B’s mortgage then A is not permitted to “tack” any further advances to the original advance.
76Priorities and mortgages For example:A is the registered proprietor of a fee simple worth $ A has two registered mortgages:a mortgage to B worth $a mortgage to C worth $So the whole value of the property is mortgaged. A can’t get a further mortgage on the land because someone will be the third mortgagee and there won’t be anything left. So, can A go to B and borrow another $ – upping the value of the first mortgage to $ ? This would have the effect of reducing the value of C’s mortgage.
77Priorities and mortgages The key issue is notice. Justice Holland in Matzner v Clyde Securities  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.
78Priorities 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.
79Priorities 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  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.
80Priorities 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  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.”
81Priorities 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 $ 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 $ had been advanced, a second mortgage was created and then a third. Were advances made after the $ secured by the first mortgage?
82Priorities 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.