General Tips on Unregistered Mortgages
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.
|Notice to Registered Mortgagee||Consideration should be given to giving notice to the first mortgagee as to the interest of the second mortgagee. If the first mortgagee is on notice as to such interest then such further advances may well have had priority over the prior mortgages.|
|Delay||A delay in seeking consent from the first mortgagee could result in difficulties later. For example, the registered mortgagees may not agree to registration at a later time.|
|Consent of Mortgagees||The lender should seek to obtain the consent of the registered mortgagee(s) as to registration of the second mortgage.This is because with registration and subject to the comments above the lender could exercise a power of sale.This would also be subject to compliance with Section 57 of the RPA. In addition it would have removed doubts as to the disbursal of the proceeds of sale after payment to the prior mortgagees.|
|Breach of prior mortgages||The first registered mortgage will most likely contain a provision that the granting of further liabilities on the properties was a breach of those mortgages.A beach of the prior mortgages could result in those mortgages being called upon, which is of particular importance if the securities were a development site.|
|Quantum of prior mortgages||Enquiries should be sought prior to the advance to obtain confirmation as to the amount of the prior mortgages. This is for the obvious reason that the value of the security is dependant, inter alia, on the amount owing under the first mortgage, or other prior mortgages.|
|Rate of Interest||The rate of interest being offered is sometimes a matter that should raise concerns as to the nature of the transaction and the strength of the security.
If the rate of interest is a high rate then this should alert a potential lender to the high probability that it was a high risk loan.
|Searches||No moneys should be advanced without doing title searches on all properties that formed part of the securities.
The standard governmental enquires should also be obtained as is usual conveyancing practice when purchasing land, so as to ensure that the property(s) is free of charge or proposed resumption.
|Valuation||It is always advisable to seek to determine the value of the security of the loan by obtaining a valuation.
The valuation should be obtained from an independent reputable valuer.
Evidence of the valuer’s professional indemnity insurance should be provided.
|Loan to Value Ratio||Consideration should be given as to the loan to value ratio. Such a valuation should be considered and compared with the amounts being advanced and whether it is a high percentage and particularly having regard if the security is a development site.|
|Delays in Lodgment||There should be no delay in the lodgment of the caveat. The time of registration is relevant as to the priority of dealings.|
|Stamp Duty||A caveat that is protecting a mortgage advance needs to be stamped as to the same amount as if it was a mortgage.
Evidence should be provided that the security properties are insured and further that the interest of the lender is noted thereon.
|Trustee Company||If the borrower is a Trust then there should be an examination of the Trust Deed to establish whether the loan contemplated is within the powers of the Trust.|
|Financial Details||Financial information should be provided by borrowers and the guarantors as to their assets and liabilities and income and expenditure.|
|Commercial Loan||If the loan is other than for a commercial purpose there are additional special requirements that need to be accepted.|
Lending on developments
There are added matters to consider when advancing moneys to developers. These include:-
- If the mortgagor/developer cannot proceed, substantial additional costs are usually incurred with another builder completing the works, plus inevitable additional holding costs, including interest to mortgagees.
- There may be difficulties and/or delays in obtaining Council consent.
- Details of any development should be provided including details of all conditions attaching to them.
- If the builder is negligent with the construction there may be consequential building defects.
- There may be delays with the construction.
- There is no return of income on the properties whilst they are under construction. Therefore the ability of the mortgagor to fund the project including constructions costs, holding charges, council and water rates and land tax and payment of the mortgage debts should be examined by the proposed lender.
- The possibility of the advance being made by way of progress payments at various stages of construction.
- Investigate the building contract to see if it is a “fixed price contract” or a “do and charge” contract.
- Enquire as to the right to use the plans and other documents so as to ensure that a mortgagee in possession can use them and not prevented by a third party who may claim ownership of them.
- Whether a certain percentage of pre-sales has to occur as a condition by the first mortgagee before they provide funding.
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