PART 6 – THE LAW OF REAL PROPERTY Chapter 28 – The Law of Mortgages Prepared by Douglas H. Peterson, University of Alberta Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited THE LAW OF MORTGAGES Introduction Historical Development The Nature of Mortgages Priorities between Mortgages Rights and Duties of the Parties Special Clauses Discharge of the Mortgage Assignment of Mortgage Sale of Mortgaged Property Default, Foreclosure, and Sale Business Applications of Mortgage Security Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited INTRODUCTION Mortgage – an agreement made between a debtor and a creditor in which the title to property of the debtor is transferred to the creditor as security for payment of the debt Mortgagor – the borrower who grants the mortgage Mortgagee – the lender who receives the mortgage Terms of the mortgage – amount of the loan, interest rate etc. Terms of debt and conditions under which the property interest will be returned to the mortgagor Copyright © 2004 McGraw-Hill Ryerson Limited

INTRODUCTION – Registry System Mortgage involves conveyance of title Mortgagee becomes owner Transfer of title of mortgagor’s property to the mortgagee Mortgagor retains possession of property until debt paid or default Re-conveyance of title to mortgagor when debt paid Equity of redemption Obligations of mortgagor to protect and maintain property Mortgage contains terms for mortgagee to take steps to terminate mortgagor’s rights and interests in property Copyright © 2004 McGraw-Hill Ryerson Limited

INTRODUCTION – Land Titles System Charge – a secured claim (similar to a mortgage) registered against title of property under Land Titles System mortgage involves creation of charge Mortgagor continues to hold title Mortgagee receives security interest in land Charge removed when mortgage satisfied Hypothec An instrument used to secure debt in Quebec that creates a security interest in land somewhat similar to a lien Copyright © 2004 McGraw-Hill Ryerson Limited

HISTORICAL DEVELOPMENT Originally draconian in application Strict application of rules Title passed to mortgagee during debt. Mortgagor had no title, therefore had no right to possession. One missed payment (breach) by mortgagor meant loss of property with no recognition of payments already made, AND debt continued to exist! Gradual reform recognized transaction as primarily one of debt security, not a land transaction Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited NATURE OF MORTGAGES Legal Mortgage (First Mortgage) A first mortgage of real property whereby the owner of land in fee simple transfers the title of the property pledged as security to the creditor on the condition that the title will be re-conveyed when the debt is paid Only first mortgage maybe be a legal mortgage Equitable Mortgage (Second Mortgage) A mortgage subsequent to the first or legal mortgage A mortgage of the mortgagor's equity Greater risk than first mortgage Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited NATURE OF MORTGAGES Equity of Redemption The equitable right of a mortgagor to acquire the title to the mortgaged property by payment of the debt secured by the mortgage Subsequent Mortgages Greater risk Third mortgages are possible Usually limited to mortgagor’s equity in property Charge higher rate of interest Subsequent mortgagee may have to pay first mortgage if mortgagor defaults Mortgagor must maintain each mortgage in good standing Copyright © 2004 McGraw-Hill Ryerson Limited

PRIORITIES BETWEEN MORTGAGES Order of priority determined by time of registration Searches and unregistered interests Mortgagee must search registry system Cannot rely upon the word of a mortgagor Registration of a mortgage is deemed to be notice Registered mortgage takes priority over unregistered even if unregistered granted first Copyright © 2004 McGraw-Hill Ryerson Limited

MORTGAGE PRIORITIES UNDER REGISTRY SYSTEM MORTGAGE LAW MORTGAGE PRIORITIES UNDER REGISTRY SYSTEM ‘A’ HOLDS A PARCEL OF LAND IN FEE SIMPLE ‘B’ ‘B’ HOLDS ‘LEGAL’ OR FIRST MORTGAGE Mortgages Land to Mortgages Land to ‘C’ ‘C’ HOLDS ‘EQUITABLE’ OR SECOND MORTGAGE Copyright © 2004 by McGraw-Hill Ryerson Limited. Mortgages Land to ‘D’ ‘D’ HOLDS EQUITABLE THIRD MORTGAGE Assuming Registration in the Above Order. Copyright © 2004 McGraw-Hill Ryerson Limited 32

RIGHTS AND DUTIES OF THE PARTIES Mortgagor may remain in possession of mortgaged property as long as abides by terms and conditions of mortgage Material default gives rise to mortgagee’s rights Mortgage is contractual in nature Any term can be inserted 4 main terms Covenant of payment Payment of taxes Insurance Waste Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited PAYMENT Common for repayment of principal plus interest Mortgagor wants property Mortgagee wants payment (principal plus interest) Form of payment is varied and negotiable between parties Acceleration clauses Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited PAYMENT OF TAXES Priority Municipal governments enjoy priority over other encumbrances for unpaid taxes on real property Mortgagee desires to retain priority so insists on payment of taxes by mortgagor Often clause requiring mortgagor to make monthly payments to mortgagee of tax amounts Requirement to submit paid tax bill to mortgagee Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited INSURANCE Applies when building or structure is on the land Most common is a residential home Value rests in building, so loss would lessen mortgagee’s security Mortgagee or mortgagor can arrange for insurance Mortgagee is first beneficiary of any insurance policy Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited WASTE Covenant not to commit waste Any act that would reduce the value of the property Any act that reduces security available to mortgagee Demolish building, strips top soil Any act can be done with consent of mortgagee Never given if reduces value of property Not include ordinary deterioration for lack of repair Specific clause must be inserted to cover this Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited SPECIAL CLAUSES Pre-payment – allows mortgagor to pay out mortgage early Usually a penalty fee exists for early payout since mortgagee loses interest Part Discharge If mortgagor intends to sell parts of the mortgaged land Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited DISCHARGE OF MORTGAGE Registry System Releases all claims that the mortgagee has Land Titles System Cessation of charge Acknowledgment of payment and removes the charge from the title to the property Copyright © 2004 McGraw-Hill Ryerson Limited

ASSIGNMENT OF MORTGAGE Mortgagee may assign Must comply with applicable legislation General law of assignments applies Copyright © 2004 McGraw-Hill Ryerson Limited

SALE OF MORTGAGED PROPERTY Mortgagor right to sell or dispose of property at any time Does not relieve mortgagor of covenants in mortgage Assumption Buyer signs agreement to assume mortgage and all covenants Original mortgagor is still liable if subsequent mortgagor defaults unless they obtain a release from mortgagee Copyright © 2004 McGraw-Hill Ryerson Limited

DEFAULT, FORECLOSURE, AND SALE Acceleration Clause – a clause in a debt instrument that requires the payment of the balance of the debt upon the happening of a special event such as default of an installment If in agreement mortgagee can invoke if mortgagor defaults on payment or is in breach of a material covenant Legislation usually allows mortgagor to pay arrears and related expenses Practically: Mortgagees’ want money not mud Copyright © 2004 McGraw-Hill Ryerson Limited

DEFAULT, FORECLOSURE, AND SALE Options available to mortgagee upon default Sale Under Power of Sale Foreclosure Sale Possession Copyright © 2004 McGraw-Hill Ryerson Limited

SALE UNDER POWER OF SALE Mortgage allows power of sale or lease Invoked when default exists for a period of time Requirements Notice: Mortgagee must provide written notice To mortgagor and subsequent mortgagees Delay: Wait for statutory period Purpose: allows mortgagor or others to put mortgage into good standing Copyright © 2004 McGraw-Hill Ryerson Limited

SALE UNDER POWER OF SALE Proceed with sale Proceeds: Order of priority Mortgage debt (first mortgagee) Subsequent encumbrances Execution creditors Remainder to mortgagor Mortgagor may be liable for any deficiency If mortgagor in possession need a court order for possession (writ of possession) Sale must be conducted in good faith and obtain a reasonable price Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited FORECLOSURE Procedure through the courts Final order of foreclosure Extinguishes all rights of mortgagor and subsequent encumbrances Mortgagor and subsequent encumbrancers’ have right to redeem May make a request for a time period to redeem (usually 6 months) Strong right that exists up until the very end Mortgagees want money not mud Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited SALE Apply to court for possession, payment, and sale of property Proceeds distributed Payment of mortgage Subsequent parties Mortgagor Different procedure than power of sale Used often with sale by tender or auction Mortgagor can insist when foreclosure instituted by mortgagee Mortgagor must pay a sum of money Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited POSSESSION Upon default mortgagee has right to possession Lease – mortgagee may displace lessor and collect owed rents Mortgagor entitled to an accounting Usually requires a court order Unless property has been vacated Copyright © 2004 McGraw-Hill Ryerson Limited

BUSINESS APPLICATIONS OF MORTGAGE SECURITY Land development mortgage Partial discharges Building mortgage Advances Collateral mortgage Used to support other weaker debt instruments or promises Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited SUMMARY Mortgage Uses land as security for debt Registry System Title remains with mortgagee who has a mortgage Land Titles System Title transferred to mortgagor and mortgagee has a charge Copyright © 2004 McGraw-Hill Ryerson Limited

Copyright © 2004 McGraw-Hill Ryerson Limited SUMMARY Contractual in nature Contains terms dealing with the debt Covenants Pay, taxes, insurance, waste Rights of Mortgagee Power of Sale Foreclosure Sale Possession Equitable right of Redemption Valuable right to the mortgagor Copyright © 2004 McGraw-Hill Ryerson Limited