Posted on 6 November 2013 by Alan Segal
Lending money can have its pitfalls. The key for the lender is to ensure that moneys advanced are properly secured. If a borrower wishes to secure moneys advanced by way of an unregistered mortgage, the borrower should consider at least the points below.
What considerations should be given when moneys are proposed to be advanced to a third party?
The primary issue to be considered is the strength of the security. By this I mean the ability to recover the amount advanced, plus costs and interest in the event of default by the borrower.
Firstly an unregistered mortgage does not give the lender the power of sale in the event of the borrowers default.
Although the mortgage creates a personal covenant by the borrowers (and possibly the Guarantor also) to the Lender to repay the debt, it does not give the right to exercise a power of sale in the event of default by the borrower.
The exercise of a mortgagee’s power of sale is the most practical and convenient way to recover the mortgage debt which can occur without the necessity of obtaining an Order of the Court.
For land that is Torrens Title:
- A mortgage which is registered only creates a charge on the land – see Section 57(1) Real Property Act, 1900 (the RPA) – if the mortgagee is registered.
- The mortgagee can only exercise a power of sale and transfer the mortgaged land to a purchaser by virtue of the powers conferred upon him by the RPA (see Section 57 and 58 of the RPA) if the mortgage is registered.
Section 3 of the RPA defines ”mortgagee” as the proprietor of a mortgage. However Section
57(2) begins with the words ”a registered mortgagee”. Therefore, it is clear that the power of sale is exercisable only by a registered mortgagee or his executors, administrators and assigns.
Further limitations on power of sale
Even with registered second mortgages there are limitations on the power of sale for the following reasons:-
- The first mortgagee is entitled to exercise the power of sale without obtaining the consent of the subsequent mortgagees even if a second mortgage was registered. However the first mortgagee must account to the subsequent mortgagees after payment of the costs of sale and moneys due under prior mortgages from the surplus funds (if any) (see Section 112 (4) Conveyancing Act and see also Section 58 (3) of the RPA).
- If a second or third mortgagee wishes to exercise a power of sale then:
- Firstly the mortgage would need to be registered;
- Secondly such sale can only occur subject to the consent of the prior mortgagee or free of it.
- If there is more than one registered mortgage in respect of the same land, then priority will be in accordance with the date of registration and not the date of the instrument (see Section 36(9), of the RPA).
Effect of Caveat
The nature and effect of Caveats should be made clear. In particular that caveats:-
- Do not create a charge on the land or confer a power of sale in the event of default by the mortgage.
- Do not prevent further advances by the first mortgagee. Any further advances by the first mortgagee may well have priority to the moneys being advanced by the later mortgages.
- Provide far less security than a registered mortgage.