Property Interests
Property InterestsMortgagee – BANK | Mortgagor – Mortgage OwnerAll forms of property can be used as security by individuals and businesses.Finance is often granted subject to security over property.Involves the transferability of rights to 3rd parties.CATEGORIES OF PROPERTYReal PropertyInvolves land, or things embedded or affixed.‘Land’ also includes:surface of landsoil below, and airspace abovethings that grow on the landbuildings and fixtures (fixtures test)Fixtures test:Is the item affixed with intention of becoming a permanent feature of the land? Coroneo’s Case [ABL 3-080]Is the item fixed by its own weight? Can it be removed without damage?Chattel (Chattels are articles of personal property) securities (Vic), pledge, pawn. Personal Propertyall tangible, moveable things and chattels which are not real property, eg. CarsIntangible Property‘choses in action’ – eg. Shares, copyrights, patents, book debts, trade names.OWNERSHIP OF LANDEstatesFee simple or Freehold interestFee simple (example of title in FLM p. 165)These are unlimited estates in land. They continue for an uncertain duration until the current owner dies without an heir, when the land reverts to the Crown. Owner has right to sell or to lease land.Life EstateA freehold interest limited to the duration of the life of the holder or during the life of another person. Eg, husband can transfer land under his will to his wife for her life, but wife cannot then sell the land, and must take reasonable care of it.Future Estate interests in remainder and reversionRemainder: In the life estate example above, husband’s land may revert to his children in equal shares when his wife dies and her life estate ends.Reversion: The owner of land in fee simple may grant a lesser estate to someone, such as a life estate. During the life estate, the owner’s remaining interest is a reversion. At end of life estate, the owner’s interest reverts back to the owner.JOINT OWNERSHIP OF LANDJoint tenants have separate legal rights between themselves, but are in the position of a single owner as against third parties.A. Joint Tenancy Presumption of 4 unities:Unity of Title: The co-ownership must have been created by the same document, as all the tenants together constitute a single tenant.Unity of possession: Each co-owner has an equal right to possession.Unity of interest: Each co-owner must have the same kind of interest.Unity of time: The interests of the join tenant must be vested at same time.Destruction of one or more of these four unities will end a joint tenancy. The Joint tenancy has a right of survivorship; when one tenant dies, his interest is divided amongst remaining tenants, until one remains.B. Tenancy in Common Tenants in common have an undivided share and a separate interest in the land, although the land remains physically undivided. Their shares may be unequal or equal.In practice, tenants in common only share the unity of possession, but have no right of survivorship. Instead, when a tenant dies, it passes to that tenant’s legal personal representation.LEGAL v EQUITABLE INTERESTS IN LANDImportant in enforcing securityLegal interest in land prevailsCommon law only recognised strict, formal rights of ownership (eg. General law title & mortgage).Only the person named in the deed or title was recognised as the legal owner.Legal interest: registered mortgage, pledge, pawn, etc.Equitable InterestsCourts of equity looked beyond formal ownership and recognised other interests,Trusts/beneficiary under willInterest under an option/contract to purchase‘informal’ mortgagesPRIORITIESBecause the legal owner of property can sell the property, the legal owner is in a strong position to defeat any equitable interests over the property. The rights of the equitable owner are destroyed in event of a sale by the legal owner.Subject to registration rules“Nemo dat quod non habet” (one cannot give what one does not have)Example: If A (legal owner) conveys an estate in fee simple to B, a later conveyance by A to C is void under general law.“Qui prior est tempore potior est jure: (The person who is first in time has the stronger legal claim)Where the interests & merits are equal (eg. 2 legal interests, or 2 equitable interests), the first to occur in time prevails.Prior legal interest prevails over a later equitable interest.Later legal interest prevails over prior equitable interest where the person taking the property is bona fide purchaser for value without notice.Example: If in the first example, the conveyance to C is bona fide and for valuable consideration on C’s behalf, and is registered (under registration of deeds or under Torrens title legislation) before the conveyance to B is registered, C’s interest is effective and gains priority.OWNERSHIP BY TITLE – PAGE 416 of TYREEThe ownership of land is under either Torrens title or old system/general law title.The Torrens system is the name given to the system of land ownership under which land ownership passes not by executing the deeds but by the registration of dealings on a public register maintained by the Registrar-General.Torrens title legislation aims to overcome the difficulties of conveyancing and land ownership under the old system:Torrens title is based on land, not people.The land itself is the unit used to record title and changes of ownershipTorrens title is based on four general principles:The “mirror” principle: The register and the certificate of title accurately and completely reflect all legal interests relevant to the title of the parcel of land.Not a system of registration of title but a system of title by registration.The “curtain” principle: A purchaser only needs to search the title on the Register and does not need to go behind the curtain by inquiring into interests which are not disclosed on the Register.Registration of land is an act authorised and carried out by the State and not by the parties themselves.The indemnity or “insurance” principle: A person deprived of an interest or incurring loss through the operation of the Torrens system my claim compensation from the State.The “indefeasibility” (undefeatability) principle: a registered title is indefeasible, and a person acquiring an interest on the faith of the Register obtains title free trusts, equities and unregistered interests and is protected by the application of the principle.Note: that the indefeasibility principle does NOT apply with fraudulent titles.CAVEATS UNDER TORRENS LANDA caveat is a written warning, or an entry made in a register, to prevent action without notice being given to the person who lodged it (the caveator). The caveat works like an injunction. A caveat may be lodged by a person holding a legal or equitable interest in the land, by the Registrar-General, Registrar of Titles and by creditors (in some jurisdictions)A caveat blocks registration of later dealings until the caveat is withdrawn or the matter is dealt with by the courts. The purpose is to prevent any dealings which would defeat the interests of the caveator. Property as SecurityA security can be defined as an interest in property. The lender can exercise rights against the property in order to obtain performance of an obligation.Security may be both legal and equitable in nature, which raises the possibility of competing interests in the same item of physical property.ADVANTAGES OF TAKING SECURITYTaking security provides speedy recovery of losses- there is no need to sue.In liquidation, avoids the “parri passu” rule for unsecured creditors.TYPES OF SECURITY INTERESTSAt common lawMortgage: Pledge: Lien: EquityChargeEquitable MortgageSECURITY OVER REAL PROPERTY – MORTGAGESLegal aspects of mortgages over real propertyOld system/Deeds system – a purchaser of land could obtain valid title only by having the land conveyed by the true owner of the land.In order to determine that the seller was the true owner, it was necessary to establish that the previous seller was the true owner and so on right back to original Crown Grant.This was expensive, and meant that the current owner was open to attack by some defect in the chain.Old style mortgagesA mortgage of land took the form of a conveyance of the land coupled with a contractual promise that the lender, the new owner of the land, would convey it back to the borrower when the borrower complied with the terms of the repayment of the loan.This looked like a sale of property Right of Redemption and Second MortgagesMain problem with old form of mortgage was the strict interpretation that common law placed on the contractual promise to reconveyIf the borrower defaulted by 1 day, then the lender no longer held borrowers promiseRight/Equity of Redemption – By ordering specific performance of the contract to reconvey, and by a willingness to make such an order even when the borrower had been in default, the equity courts created a new property interest which remained with the mortgagor of the property.Second Mortgage – When a property right was mortgage as security for other lenders, this was termed a ‘second mortgage’i.e. A owns a house, and has a mortgage to lender B. A can use the “equity” in their house to get a loan from C. This “equity” loan is considered a “second mortgage”Torrens SystemWhat is it ?Each parcel of land that is issued under the Torrens system is issued with a certificate of Title.The original certificate is always retained by the titles office in the district where the land is located.A copy of the certificate is used either to the registered owner or to the first registered mortgagee.An inspection of this register will reveal details about the previous dealings with the land as well as any existing outstanding interest in the land which require registration.What determines priority of title?Mortgages over land have priority in the registered determined by the time of registration.When multiple interests in one security:One registered, one unregistered - the registered interest will gain priority even if it is registered with notice of the existence of the unregistered interest.If both are registered, then the first one registered receives priority.If both are unregistered, then the unregistered with greatest interest receives priority.Case - IMPORTANTHopkinson v RoltA lender took a floating charge to secure advances already made to the debtor but also expressed to cover all future advances. The charge agreement also contained a clause by which the borrower agreed not to grant any further encumbrances on the propertyThe borrower did grant futher charges over the same propertyDid the lender have the right to ‘tack on’ advances made to the borrower which were advanced after the creation of the second mortgage?DecisionCourt held that there was no right to tack future advances which were made after the first mortgagee had notice of the creation of the subsequent security interest.BUT the advances made before having such notice could be tackled.i.e. A lends $1000 to B for security. C lends $500 to B for security. A then lends another $500 to B. Is A entitled to all $1500 straight up in event of default by borrower? A is entitled to $1500 assuming that the 2nd $500 advanced by A to B was made without notice to C. It is noted that there is no obligation for A to continually search the register for subsequent charges and this is why b) can occur.How can a bank maintain priority over a charge?A mortgagee does not want to lost priority of the first charge if it has lent a second charge.The mortgagor would pay off the first loan and then pay off the second loan. This means that the first loan will have substantially more paid off, and is eroding this loans priority.Therefore, it is in the banks interest to tack advances onto the first loan.What are advantages of the system?Torrens system has a compensation system built into it for 2 reasons:Occasionally someone who would have remained the owner of land under the deeds system will lose ownership to an innocent registered owner.The system provides for a type of insurance payment to the deprived owner in such a circumstance.It is possible that ownership of land could be lost through some error in the titles office.The system provides for compensation in this event.The system is now simpler and the law related to mortgages has now been rationalised.What is an ‘equitable mortgage’ and ‘legal mortgage’?Legal mortgage – A mortgage document that is created over Torrens system land is a valid equitable mortgage from the time of its creation even though the mortgagee does not have the legal rights provided by the statute until such time as the mortgage is placed in the register.Equitable Mortgage – An equitable mortgage could be created by the mortgagor depositing the title deeds with the mortgagee as in Re Molton Finance Ltd.i.e. An agreement in writing to transfer an estate as a security for the repayment of a sum of money borrowed, or even a deposit of title deeds, and a verbal agreement, will have the same effect of creating an equitable mortgage.What are registered and unregistered mortgages?A registered mortgage is more in the nature of a charge than a mortgage with the interest being legal in nature.Any mortgage is a registrable instrument and should be registered.Certain rights are given to the mortgagee if the mortgage is registered.Ie. Power of sale, priority of title etcPowers of redemption are given to the mortgagorAn unregistered mortgage is not legally invalid – rather it will effect not only the immediate parties but also any third parties since it can be an equitable mortgage.Unregistered mortgages DO NOT RECEIVE RIGHTSThey are liable to be defeated by any prior equitable interestSubject to defeat by fraudulent dealings by the owner provided it is possible for the owner to provide some plausible explanation for the absence of the duplicate certificate of title.Mortgagee has no general power of saleHOWEVER, if it becomes necessary for the lender to resort to the security for repayment of the loan, the mortgage may be registered at any time in order to take advantages of the power of sales given to the registered mortgage – J&H Just Holdings Pty Ltd v Bank of New South WalesWhat are the right of Mortgagor and Mortgagee? (refer FLM 175)Mortgagor – i.e. normal person: repay the principal and interest over the propertyRepayment of interest/principal, clause 3Can apply for sale to prevent interest accruing (Palk v Mortgage Services Funding)Keep the property in good repair and insuredDuty to insure, clause 6-7Duty to pay rates and taxes, clause 4Must keep property in good repair, clause 5Mortgagee – i.e. bank: Allow mortgagee to remain in possession of the propertyDischarge the mortgage according to terms and conditions when mortgage is paidWhat are the rights of the Mortgagee in event of Default by Mortgagor?Mortgage must act - Subject to ss. 66, 70, 80 & Consumer Credit CodeHarsh and Unconscionable Contracts s66,70Credit Provider excerising rights against debtor s80Main rights arise upon default by the mortgagor.There are 3 main remedies in the event of the borrower defaulting on the loan:Enter into the possession of the mortgaged property upon default by the debtor. ( cl 21.4 FLM 175)Take possession by assuming management and control of the property, and taking any income or rents from it.This is not a popular option with mortgagees under normal conditions because the mortgagee is required to account to the mortgagor and assumes a responsible toward the mortgagor to manage the property reasonably.Right to appoint receiver to run the property, cl. 29 (generally if it is a business)Power of Sale – Registered mortgage has direct power of sale given by the Real Property Act, AS LONG AS the mortgagee has served the mortgagor with a notice giving the details of the alleged default and allowing the mortgagor a period of at least one month from the receipt of notice to remedy the default.Unregistered mortgage has no direct power of sale under the Real Property Act unless there is an EXPRESS CONTRACTUAL TERMRight to sell land and fixtures & satisfy mortgage debt from proceeds of sale, cl. 20-21Memorandum of mortgage will contain an express power of sale.Sue for compensation – Right to sue mortgagor for debt compensation cl. 11Does the Mortgagee have to obtain the best price?Mortgagee’s duty to obtain a fair market price is not clear.It is has been said that the mortgagee is not like a trustee for the mortgagorThe Privacy Council has said that it is the duty of the mortgage to behave ‘as a reasonable man would behave in the realisation of his own property’ – McHugh v Union Bank of Canada, Alexandre v New Zealand Breweries LtdIt is definitively clear that the mortgagee may not act fraudulently or sacrifice the property at a VERY low price.Must act - Subject to ss. 66, 70, 80 & Consumer Credit CodeHarsh and Unconscionable Contracts s66,70Credit Provider excerising rights against debtor s80Are there any defences available to the Mortgagor?Defences by the mortgagor:misleading or deceptive conduct under s. 52 TPA. For example, may be evidence that the mortgagee’s conduct was misleading and it had given negligent advice in respect of financing.Unconscionability under TPA and at common law.Procedures in the Consumer Credit Code, which regulates mortgages over property securing the obligations of a debtor or a guarantor.Torrens Land Cavet - A caveat blocks registration of later dealings until the caveat is withdrawn or the matter is dealt with by the courts. The purpose is to prevent any dealings which would defeat the interests of the caveator. A is mortgagee, and B is mortgagor under Torrens System. B defaults on loan, and A seeks to satisfy debt. B thinks been treated unfairly. B can lodge a Caveat to stop any action by A until the courts hear the case.Difference between Sale and ForeclosureForeclosureVery rare – only for common law mortgages.Foreclosure removes the mortgagor’s equity of redemption, and ownership passes to the mortgagee.Mortgagee must give notice of default, mortgagor to rectify in 6 months.If property is not redeemed, the mortgagee becomes the absolute owner in equity as well as in law.SaleExercised under statutory powersPower must be exercised in good faith, not necessarily at market valueNixon v CGA – mortgagee inadequately advertised proposed mortgage auction, and property was passed in at $20,000. It was later sold for $55,000. As property was evaluated at no less than $80,000, damages of $25,000 were awarded to the mortgagor for the mortgagees breach of duty. ................
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