70317 Chap.11 Mortgages and the Power of Sale
Mortgages and the Power of Sale
What a mortgage is
A mortgage secures a loan: the borrower who owns the property is the mortgagor and the lender is the mortgagee.
It is a contract and also a property interest, so on Torrens land it must be registered to be legal, and a property can carry first, second and later mortgages.
The power of sale
After default, a mortgagee serves a notice under s 57(2)(b) of the Real Property Act and, once the period expires, may sell.
It may choose its time, but must act in good faith and, under s 111A of the Conveyancing Act, take reasonable care to sell for market value. Cuckmere Brick and ANZ v Bangadilly are the key readings.
Tacking and forged mortgages
A further advance made after notice of a second mortgage generally cannot be tacked ahead of it unless the first mortgagee was obliged to make it.
Section 56C requires lenders to verify the mortgagor's identity.
What this chapter covers
- 01
Mortgagor, mortgagee and the nature of a mortgage
- 02
The s 57(2)(b) default notice
- 03
Good faith and reasonable care in a sale
- 04
Section 111A and market value
- 05
Distributing the proceeds of sale
- 06
Tacking further advances
- 07
Section 56C and forged mortgages
Worked example · free
Ranking a further advance made after notice of a second mortgage
- 1Bank A's original $500,000 ranks first as the first registered mortgage.
- 1The $80,000 was voluntary and made after notice of B's mortgage, so it cannot be tacked ahead of B (Hopkinson v Rolt).
- 1From $640,000: Bank A takes $500,000, leaving $140,000; B takes its $120,000, leaving $20,000.
- 1Bank A's further advance ranks after B and takes the remaining $20,000, leaving $60,000 of it unsecured.
Key terms
- Mortgagee
- The lender in whose favour a mortgage is granted to secure a loan.
- Power Of Sale
- The mortgagee's right, after default and the required notice, to sell the mortgaged land to recover the debt.
- Tacking
- Attaching a later advance to an earlier mortgage so that it shares the earlier mortgage's priority.
Mortgages and the Power of Sale FAQ
What duties does a mortgagee have when selling?
It must act in good faith and, under s 111A of the Conveyancing Act, take reasonable care to sell for market value or the best price reasonably obtainable. It may choose when to sell. Cuckmere Brick deals with care in advertising and describing the property, and sales to connected buyers attract close scrutiny.
What is tacking in mortgage law?
Tacking is the attempt by a first mortgagee to have a later loan rank with its first mortgage, ahead of a second mortgage. Under Hopkinson v Rolt a voluntary further advance made after notice of the second mortgage cannot be tacked; an advance the first mortgagee was bound to make is treated differently.
Why was section 56C added to the Real Property Act?
Indefeasibility had protected lenders who took mortgages from imposters posing as owners. Section 56C requires a mortgagee to take reasonable steps to confirm who the mortgagor is, so a lender that does not can lose the protection registration would otherwise give. Perpetual Trustees v English and Issa v Owens are the set readings.
How are the proceeds of a mortgagee's sale divided?
First the expenses of selling are paid, then the secured debts in their ranking order, with the first mortgagee ahead of the second; whatever is left belongs to the mortgagor. Since the mortgagor takes last, a careless sale usually costs the mortgagor most, which is why mortgagors are the usual claimants for breach of the duty of care.
Exam move
For power of sale problems, work in a fixed order: notice, care, good faith, then distribution of the proceeds with figures. For tacking, draw a time line of advances and the date of notice before ranking. Read Cuckmere Brick, Bangadilly and Donemore, the asterisked cases, and practise one forged mortgage problem that applies s 56C.
It also helps to look through the sample bank mortgage memorandum in the module materials to see how real enforcement clauses are drafted, without trying to learn its detail.
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