PROP T2 A1 Advising on and creating securities notes SA 20220422

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PROP T2 A1 Advising on and creating securities notes SA 2022_04_22.doc Page 1 of 10 © The College of Law Limited Advising on and creating securities Mortgages of land A mortgage over real property is commonly requested by lenders to secure loan money. The relationship between the lender (mortgagee) and the borrower (mortgagor) is regulated contractually by the mortgage document. The essence of a mortgage over property is to give the lender rights over the property in the case of default by the borrower. Under the terms of the mortgage, the mortgagor agrees to pay the interest on time, to repay the principal sum on the due date and to comply with other terms. If the mortgagor defaults, the mortgagee is entitled to enforce the mortgage, usually by claiming possession of the security property and subsequently selling it. This unit focuses on mortgages of legal title to real property registered under the Real Property Act 1886 (SA) (Real Property Act). Different procedures apply to the mortgage of other forms of legal title, such as old system land and some types of Crown land. Terminology The parties to a mortgage transaction may be described by different names, at different stages of the transaction. At the beginning of the loan advance process: • the owner or purchaser of the property to be mortgaged is referred to as "the borrower" • the lending institution, which may be a bank, building society or private individual, advancing the money is known as "the lender", and • the property to be mortgaged is called the "security property". When the mortgage document(s) have been prepared by the mortgagee's solicitor, the borrower becomes known as the "mortgagor" and the lender the "mortgagee". The terms of the mortgage are sometimes known as "covenants" . Relevant legislation It is important to be familiar with the legislation that applies to mortgages of real property. In South Australia, this includes: • Law of Property Act 1936 (SA), particularly Pt 4 • Real Property Act, particularly Pt 12 • Stamp Duties Act 1923 (SA) Pt 3 Div 10, and • National Credit Code (NCC), contained in National Consumer Credit Protection Act 2009 (Cth) Sch 1. The NCC is referred to in Practice Paper P503 Acting in Mortgage Transactions and Practice Paper CC505 Finance and Securities . The NCC applies to credit contracts that are provided wholly or predominantly for personal, domestic or household purposes. Under s 13 of the NCC, if the debtor
PROP T2 A1 Advising on and creating securities notes SA 2022_04_22.doc Page 2 of 10 © The College of Law Limited declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, the NCC will not apply. Equitable mortgages Although this unit deals primarily with mortgages to be registered under the Real Property Act, it is important to be aware of the circumstances in which an equitable mortgage of Real Property Act land may arise. Equitable mortgages may arise where: • a mortgage is signed by all parties but not yet registered • document(s) are created that may give a party rights to obtain specific performance, or • there is already a registered mortgage of the property and, for whatever reason, the second mortgagee does not wish to register its mortgage. Caveats If you are acting for a mortgagee of an equitable mortgage, it is advisable to lodge a caveat at Land Services SA (Land Services). A caveat is a notice to the Registrar General of the existence of the mortgagee's equitable mortgage. A permissive caveat prevents the registrar from registering any dealings with the property that are inconsistent with those of the party who lodged the caveat (called the caveator). An absolute caveat prevents the Registrar General from registering any dealing with respect to the land. Priority of mortgages If a mortgagor grants more than one mortgage over the same property, it is important to consider the priority of the mortgages. Under the Torrens system, the rules of priority cover competition between: • registered mortgages - the date and time of registration at Land Services will dictate the order of priority • unregistered mortgages - common law principles apply, and the mortgagee of an unregistered mortgage first in time has a stronger claim, and • registered and unregistered (or equitable) mortgages - under the Real Property Act, a registered mortgage will take priority over an unregistered mortgage. Mortgagee's rights on default Upon default by the mortgagor, the mortgagee will have certain rights under the mortgage. These are usually: • a right to take possession of the security property • a right to sell the property to recover the loan money • a right to sue the mortgagor for the borrowed money, or any outstanding balance, following sale of the property by the mortgagee, and
PROP T2 A1 Advising on and creating securities notes SA 2022_04_22.doc Page 3 of 10 © The College of Law Limited • a right to foreclose so that the mortgagee may apply to the court for the title to the security property to be vested absolutely in the mortgagee, which results in all the mortgagor's rights in the property being extinguished in law and equity. The Real Property Act requires the mortgagee to give written notice to the mortgagor of the alleged default before exercising the right to sell the property. This notice must allow a certain period of time for the mortgagor to rectify the default. Acting for the mortgagor Taking instructions You may receive instructions to act for a mortgagor in one of two ways: • your client, who is purchasing a property, requires finance and has received loan approval from a lender, or • your client, who already owns property, requires further or alternative finance. They may contact a lender directly or seek your assistance in finding a suitable lender. A conference should be organised and a new file should be opened. It is important to ensure that you have received instructions from your client (and if you have more than one, for example, joint mortgagors, or in the case of a corporate client, a person with the requisite authority). By accepting instructions from the proposed mortgagor you are undertaking to protect their rights and interests in the property to be mortgaged through the mortgage and collateral documents. A checklist of your instructions and the necessary procedures may be used for easy reference. The checklist may be completed as the matter progresses. A form of checklist is provided at the end of these notes. The instructions from the borrower should include: • the name of the lender, and • a copy of the loan approval sent by the lender to the borrower. The loan approval usually contains the following information: • name of borrower(s) • address of the security property • names of any guarantors • amount of the loan advance • term of loan advance • interest rate to be charged, and • special conditions relating to the approval of the loan; for example, itemising any debt to be repaid or requesting a copy of the contract for sale. The loan approval requires the borrower to sign the original loan approval letter as a record of acceptance of the conditions of the approval.
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