The Courts and the Parliament in seeking to protect the interests of the mortgagor. Select either historical or contemporary measure/s taken by either the Courts or Parliament (or both) to protect mortgagors, and assess their effectiveness.’
In recent years the real estate credit market has been significantly impacted by the Global Financial Crisis. This has led lawyers, policymakers, and academics to re-examine the legal rules governing real estate finance. Among the laws that have been subjected to particularly strong criticism are those that protect mortgagors from the adverse effects of mortgage default and foreclosure such as statutory rights of redemption.
My assignment focuses on the Queensland position in explaining some of the historical approaches taken by the Courts and Parliament to protect mortgagors and the problems of fairness which arose in some cases in addition to an examination of some of the contemporary measures over recent years.
The historical approach
At common law the obligation of the mortgagor to repay the mortgagee was strictly enforced. The main problem was that this placed the mortgagee in a significant position of power, meaning a default in the repayment agreement could deprive the mortgagor of any right to have a reconveyance of the estate. If the land was worth more than the value of the loan then this was to the advantage of the mortgagee and the detriment of the mortgagor. Eventually the Chancellor intervened in outrageous cases and allowed the redemption of mortgages even if the time for repayment had past provided the mortgagor paid the mortgagee for any losses arising from the late payment. By the end of the 17th century the right had developed to be known as an equitable right of redemption. This requires an element of unconscionable conduct which looks at the stronger party in attempting to enforce, or obtain the benefit of, dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The question is then, if you are late but have the right to pay off the mortgage, how late can you be? How do you terminate the equity? The doctrine that the courts came up with is a process for foreclosing the equity of redemption where it orders that the property be sold at public auction at the date beyond which the mortgagor cannot exercise the equity of redemption.
Clogs on the equity of redemption
There is a so-called rule against ‘clogging’ where mortgagees would sometimes demand that mortgagors waive the equity of redemption. This was problematic and found to be against public policy and would not be upheld. The assumption is that the mortgagor and mortgagee have unequal bargaining power and that the law will be entirely circumvented if these waivers are permitted to take place.
In examining ‘clogging’, the ‘time honoured brocade of equity’, ‘once a mortgage, always a mortgage’ has been the long held view. This means that once a transaction is categorised as a mortgage, any provision that is inconsistent with the mortgagor’s right to have a reconveyance of the property upon payment of the mortgage sum is invalid. Any attempt to prevent a reconveyance is said to be a ‘clog on the equity of redemption’.
The basic principle is that a ‘mortgage cannot be made irredeemable’. Equity will not allow any provisions or devices that allow this to occur. The long established rule is that a mortgagee cannot as part of the mortgage transaction take an option to purchase the mortgaged property as this would give the mortgagee ‘the power to extinguish the equity of redemption’.
A mortgagee cannot enter a contract to purchase interest in mortgaged property or stipulate for an option to purchase, any part of or interest in the mortgaged property. The foundation of the rule is that a contract to purchase, or an option to purchase, any part of or interest in the mortgaged property, is repugnant to or inconsistent with the transaction of mortgage of which it forms part, and so must be rejected because it cannot stand with a contractual proviso for redemption or with an equitable right to redeem. The question is whether an arrangement made after a mortgage had been granted, is “in substance and in fact subsequent to and independent of the original bargain”.
Before the repeal of the usury laws in 1854, the mortgagee could not lawfully stipulate for any collateral advantage beyond repayment of his principal with interest. The position following the repeal of the usury laws, was that there was now no rule in equity which precluded a lender from stipulating for any collateral advantage, provided that the stipulation was not unfair or unconscionable, in the nature of a penalty clogging the equity of redemption or inconsistent with or repugnant to the right to redeem.
In contemporary jurisprudence, the doctrine of clogging has been interpreted in a less formalistic, more substantive manner. This has been consonant with Equity’s wider modern remedial jurisdiction, based on unconscionability. Thus equity will not intervene merely by reason of the mortgagee obtaining a collateral advantage. But it will intervene if there is unconscionable conduct, more readily found in a case of necessitous borrower.
The modern approach to the equity of redemption
Under the Property Law Act the covenants of section 78 imply the obligation of the mortgagor to repay and to preserve property. Section 83 goes on to state the mortgagee’s powers of sale. The Property Law Act contains provisions as to notice that must be complied with by the mortgagee before a sale can be affected. Failure to comply with the provisions can render the notice invalid and put any sale at risk.
On 12 December 2008, the Queensland Parliament urgently passed the Property Law (Mortgagor Protection) Amendment Bill 2008 (Qld) which amended the Queensland Property Law Act 1974. The purpose of the Act was to further protect the interests of mortgagors whose properties are sold by mortgagees when exercising their power of sale. In particular, the Act is concerned with the duty imposed upon mortgagees to ensure that the property is sold at market value. The amendments were included to protect mortgagors from ‘mortgagee fire sales’ where mortgagees intentionally sell the repossessed property below the market value to reclaim enough money to cover their own costs, but show no regard to the interests of the mortgagor. The Queensland Government, by strengthening the laws which relate to a mortgagee’s power of sale, attempted to maximise the mortgagor’s ability to pay the debt and to limit the residual debt of the mortgagor.
The Property Law (Mortgagor Protection) Amendment Act 2008 (Qld) remains consistent with the duty of care already imposed under section 420A of the Corporations Act 2001 (Cth) when dealing with corporations. There have been a number of cases involving the interpretation of section 420A. In the most recent case dealing with this section, Forston Pty Ltd v Commonwealth Bank of Australia , where the Full Court of the Supreme Court of South Australia set out important principles to assist in determining just what that duty is and what is meant by “market value”.
The statutory duty now expressly extends to sales undertaken by a receiver or a mortgagee acting as attorney for the mortgagor. Previously, section 85 of the Property Law Act only applied to ‘mortgagees’ although the definition of mortgagee extended to ‘any person from time to time deriving title to the mortgage under the original mortgagee’. The expressed intent of these amendments is to ensure, not only that full amount owing to the lender is recovered, but also that the mortgagor has the maximum possible funds available to them to make a fresh start after any type of mortgagee or receiver sale.
The new section 85(3) of the Property Law Act also provides that mortgagors have a statutory right to claim damages against receivers in breach of the duty.
Requirements for a ‘prescribed mortgage’
The Act also introduces the concept of a ‘prescribed mortgage’ which are mortgages over land of ‘a consumer credit nature’. In the case of a ‘prescribed mortgage’, the new section 85(1A) will require that the mortgagee or receiver do each of the following:
- ‘ adequately advertise the sale
- ‘ obtain reliable evidence as to the mortgaged property’s value
- ‘ maintain the property, including by undertaking reasonable repairs
- ‘ sell by auction, unless it is appropriate to sell in another way, and
- ‘ do anything else prescribed by regulations (and there is no indication what may be prescribed ‘ this was a point of concern to some members of Parliament).
Mortgagees need to be wary as a mortgage granted over a residential investment property or vacant land at the commencement of the mortgage may later become a prescribed mortgage if the residential land is primarily used as the mortgagor’s home at a later date.
In the Queensland Supreme Court decision of Sablebrook Pty Ltd v Credit Union Australia Ltd the court considered issues pertaining to s85 of the Property Law Act 1974 (Qld) which requires a mortgagee to take reasonable care to ensure a property is sold at market value.
Applegarth J of the Queensland Supreme Court noted that in the circumstances of the case where the mortgagee was relying upon on old valuation in a rising market with no other means of ascertaining market value, the failure by CUA to obtain an updated valuation amounted to a breach of its statutory duty.
Implications in practice
The changes in the Act have only a limited impact on the practices of prudent mortgagees and receivers in addition to what they were already doing. If anything, the Act simply reinforced the need for practitioners to adequately document the steps taken in determining and obtaining market value. What is adequate advertising will depend upon, for example, the property and its location. In relation to repairs, the legislation does not provide any guidance as to what constitutes undertaking reasonable repairs. This will depend upon the condition of the property, the nature of the works, cost and likely impact on market value.
In some situations a sale by auction might not be the best method of achieving market value. For example a sale by tender or sale by private treaty may be appropriate.
The onus will be on the mortgagee or receiver to establish ‘reasonable excuse’ if they fail to comply with any requirement listed in section 85(1A). Problematically, the term ‘reasonable excuse’ is not defined in the legislation.
Arguably the most significant aspect under section 85(1A) is that the mortgagee, attorney of the mortgagor, or receiver will have the onus of proving they had a reasonable excuse if they fail to comply with any requirement under section 85(1A).
An interesting point to note in this area of law is the Queensland Parliament’s willingness to act swiftly and decisively in addressing the interests of mortgagors in the current financial climate’the Act was given only two hours for debate, was not vetted with external parties such as the Queensland Law Society and yet was hastily passed despite the reservations of some members of Parliament.
Further, Parliament has indicated that the Act is unlikely to be the end of reforms, with some members advocating the introduction of a cheaper, simplified sale review process to be overseen by the Department of Fair Trading.