LexisNexis Practical Guidance®

A mortgage is a transaction by which a legal interest or an equitable interest in real or personal property is given as security for the repayment of a debt or performance of another obligation.

Some attributes are fundamental to the existence of a mortgage. This guidance note outlines the characteristics of a mortgage of land, and explains the categories of real property mortgages as well as the importance of distinguishing, for example, a legal mortgage from an equitable mortgage.

Legal practitioners should be aware that each Australian jurisdiction has a prescribed form which must be used if a mortgage is to be registered, and the particular requirements in relation to how a mortgage lodged for registration must be signed are also prescribed in each state and territory, as outlined in this guidance note.

This guidance note also provides an overview of the memorandum of common provisions, also known as the mortgage memorandum.

See Mortgage of land — the essentials.

There are a number of reasons why it is important for legal practitioners to determine whether a mortgage is, or should be drafted as, a legal mortgage or an equitable mortgage, as explained in this guidance note.

With regarding to a legal mortgage, this guidance note includes information that would assist legal practitioners in preparing a mortgage in registrable form each jurisdiction. Also included is commentary regarding the nation mortgage form.

With regards to an equitable mortgage, this guidance note explains, among other things, what is an equitable mortgage, when legal practitioners may encounter it, and possible ways of granting an equitable mortgage.

See Determining the type of mortgage: registered vs equitable.

A mortgagee can register a document containing clauses, which a mortgagee, as a matter of general practice, would require to include in all of its mortgages. This document is called a memorandum of common provisions, or it is more simply referred to as the mortgage memorandum. This enables the bulk, if not all, of the conditions of the mortgage, to be incorporated by reference rather than repeat them in every mortgage.

This guidance note outlines matters relating to a mortgage memorandum that legal practitioners need to be familiar with, and looks at two selected key provisions in a mortgage memorandum by explaining their importance, providing sample wording as reference, and providing practice tips for drafting or reviewing them. The selected two key provisions are the acceleration clause, and the early repayment clause.

See Selected key provisions in a mortgage memorandum — part one.

This guidance note looks at a further four selected key provisions in a mortgage memorandum — the charging clause, the provisions relating to the appointment of a receiver by the mortgagee, the provisions relating to a grant by the mortgagor to the mortgagee of a power of attorney, and the provisions relating to the creation of an equitable mortgage. Sample wording and practice tips are included to assist legal practitioners in their understanding of the concepts and the application in practice.

See Selected key provisions in a mortgage memorandum — part two.

A legal practitioner may be instructed by a mortgagee client to draft a mortgage memorandum, or by a mortgagor (or borrower, or guarantor) client to review a mortgage memorandum. It is useful to be familiar with the key provisions of this document, so of which are set out in this guidance note.

See Selected key provisions in a mortgage memorandum — part three.

The focus of this guidance note is negotiating covenants that may be of concern.

A covenant is an agreement creating an obligation contained in a deed or land title. Generally, promises in a mortgage are referred to as covenants. There are a number of covenants that may be found in the mortgage (or in a collateral document, such as the loan agreement) that may be of particular concern to a mortgagor, and which the mortgagor might seek to have removed before entering into a mortgage transaction.

This guidance note identifies the common examples of such covenants, and assists legal practitioners to negotiate them via the provision of commentary and practice tips.

See Negotiating mortgage terms.

The Nation Credit Code (the Code) and the National Consumer Credit Protection Act 2009 (Cth) which established the Code, heavily regulates the making of loans, and therefore the drafting of the relevant mortgages, governed by the Code.

This guidance notice provides an overview of the Code, and focuses on the Code’s impact on the drafting of mortgages. A number of significate implications are listed for legal practitioners’ reference, including those specific to mortgages. Some of the key requirements with respect to the documentation for Code compliance are provided in summary form which legal practitioners will find relevant and useful.

See Drafting Code-regulated mortgages.

A common approach to drafting mortgages that secure loans is the “all monies” mortgage approach, which involves the mortgage not specifying a particular debt to be secured, but rather, stating that “all monies owing by the mortgagor to the mortgagee” are secured by the mortgage. Typically, these mortgages have the great majority of their terms contained in a lengthy registered memorandum. Usually, matters such as the amount, term and interest rate for the loan that is being secured by the mortgage will not appear in an “all monies” mortgage, but are left to be dealt with in a separate loan agreement.

Legal practitioners are very likely to encounter “all monies” mortgages in practice. This guidance note considers some practical aspects of using the “all monies” mortgage approach by exploring the pros and cons of “all monies” mortgages, to assist legal practitioners in drafting, reviewing or advising on such mortgages.

See The “all monies” approach to drafting mortgages that secure loans.

Farms are typically located in rural areas, and most farmers would have, or have had, a mortgage. The most common scenario is that a loan, secured by a mortgage, is needed for funds to purchase the farm, to provide finance for carrying on farming activities, or to purchase livestock or farming equipment.

The ordinary laws of creditor and debtor, and of mortgagee and mortgagor apply to the provision of finance by a bank or other lender to a person engaged in agricultural production. However, some Australian jurisdictions have legislation that sets out certain procedures to be followed where issues arise in relation to a farmer’s inability to meet his or her obligations under a mortgage. For example, in New South Wales, this is the Farm Debt Mediation Act 1994 (NSW), and in Victoria, the relevant legislation is the Farm Debt Mediation Act 2011 (Vic). This guidance note outlines the relevant legislation so legal practitioners can be aware of them when advising on matters relating to rural mortgages.

See Rural mortgages and farm debt mediation.

Generally, where a borrower (mortgagor) does not own land but leases land instead, the borrower’s right of occupation of the land (the leased premises) can be an asset of the borrower that can be used as security for a loan from a lender. A mortgage of lease, including a sub-lease, uses the lease as a security.

This guidance note starts with explaining the concept of leasehold interests in land, and considers the use of a mortgage of lease as a form of real property security. This includes outlining the typical terms in a mortgage of lease that would aid a legal practitioner when drafting or negotiating a mortgage of lease.

A checklist accompanies this guidance note, which can be used by legal practitioners when reviewing leases for the purposes of taking a mortgage over a lease.

See Mortgage of lease.

It is fair to say that a caveat is not strictly classified as a real property security like a mortgage. However, a caveat can act as security, and caveats are an effective means of protecting legitimate proprietary interests. This is because they place a “freeze” on anyone dealing with the title to land until the subject of the caveat has been resolved. Accordingly, a working knowledge of the operation and effect of a caveat is an essential component of a legal practitioner’s skill set, especially when the legal practitioner’s work involves advising on the taking of security, such as in financing transactions.

This guidance note starts with explaining what caveats are used, and what are caveatable interests (that is, interests that will support a caveat).

In order for legal practitioners to utilise caveats as a means of protecting legitimate proprietary interests, legal practitioners need to appreciate the effect of lodging a caveat, which is explained in this guidance note. This guidance note also includes a number of practical tips to assist a legal practitioner when completing a matter or a transaction that involves a caveat.

Two checklists accompany this guidance note, which can be used by legal practitioners to help determine whether an interest would or would not support a caveat.

See Caveat.

While the Personal Property Securities Act 2009 (Cth) (PPS Act) does not regulate real property security interests, it is not correct to think that personal property securities (PPS) plays no role in the taking of real property security. The guidance note provides an overview of the role of personal property in the context of real estate financings. To enable legal practitioners to appreciate this, this guidance note starts with a brief overview of the PPS legal framework, then explains real property and real property security in the context of the PPS regime.

This guidance note also includes examples of how the PPS Act may interact with real property or real property security.

See Personal property in the context real estate financings.

When taking security, a lender will be concerned to ensure that the security is effective against unsecured creditors, liquidators or trustees in bankruptcy or other secured creditors with a security interest in the same asset. This usually is achieved by taking possession, taking control (in the case of marketable securities and some other forms of personal property), or, and more commonly, registering the security (where registration is available) on the personal property securities register (PPSR).

The priority rules for competing personal property security interests are contained in Pt 2.6 of the Personal Property Securities Act 2009 (Cth) (PPS Act).

If the security is a mortgage over land, priority will be in the order of registration. If a security is not registrable, the general priority rule is that the first in time prevails.

Although most transactions take place without any problem, it sometimes happens that there are multiple people or entities with competing or inconsistent interests in one object.

Interests in land registered under Torrens system legislation are accorded by that legislation priority according to the time of registration, with interests registered first in time enjoying priority over those registered later in time. Generally, this order can, however, be changed through the registration of an instrument executed by the relevant interest-holders expressly altering the order of priority — after registration of this instrument the new order of priority will be expressly noted in the folio relating to the property. Also, interest-holders can make private agreements between them in relation to priorities.

This guidance note explains the key concepts and the relevant rules, and provides practice tips to aid legal practitioners when determining priorities in real property mortgages where at least one of the mortgages is registered.

See Determining priorities in real property mortgages — when at least one of the mortgages is registered.

There are different rules when determining priorities in real property mortgages as between unregistered mortgages. This guidance note explains that priorities between equitable mortgages are determined according to two rules:

• •the first is that priority goes to whichever interest enjoys the greatest equity; and
• •the second is that if the equities are equal, the interest created first in time has priority (from the Latin phrase that some legal practitioners would have come across, “qui prior est in tempore, potior est in jure”).

These two rules are then further explored with illustrative examples and case law, accompanied by practice tips.

See Determining priorities in real property mortgages — as between unregistered mortgages.

Generally, a first mortgage, once it becomes aware that a second mortgage has also been granted, is limited in its ability to make further advances to the mortgagor and claim the repayment of those advances in priority to the monies due under the second mortgage. The ability to claim first priority for such further advances is known as “tacking”.

This guidance note explores further advances and tacking so legal practitioners can understand their relevance in determining mortgage priorities.

See Understanding further advances and tacking in mortgage priorities.

Although a mortgagee holding multiple securities is permitted to realise its securities in such order as it sees fit, if the choice of order negatively impacts a subsequent mortgagee holding fewer securities then equity will intervene to assist that subsequent under the doctrine of marshalling.

This guidance note explains the doctrine of marshalling and its relevance in determining mortgage priorities. It also provides guidance to legal practitioners who may encounter a more complicated marshalling situation where there are two or more subsequent mortgagees.

See Understanding marshalling in mortgage priorities.

Before a mortgagee can attempt to enforce a mortgage, there must be a default by the mortgagor. The terms of the mortgage will determine what constitutes a default. Failure to pay interest on time or the principal of a loan by the due date are very commonly committed defaults, but many mortgages include a long list of other instances in which a default will be deemed to have occurred.

This guidance note starts with commentary regarding the concept of default, and moves onto considering the mortgagee’s goals in the event of default and when taking enforcement action. This is followed by an overview of the typical mortgage enforcement process, focusing on non-National Credit Code (Code) regulated mortgages. This is the case for most guidance notes in this subtopic — a separate guidance note considers matters relating to the enforcement of Code-regulated mortgages.

See Typical mortgage enforcement process.

Although court proceedings are typically initiated in order for the mortgagee to gain possession, that does not need to occur in every case. The mortgagor may agree to voluntarily hand over possession of the security property, the mortgagee may take possession by way of “self-help”, or there may be a tenant already in occupation of the premises which the mortgagee does not wish to disturb, but to convert to being a tenant of the mortgagee.

Self-help involves a mortgagee physically entering on the premises to take possession. This is a dangerous process if the premises are occupied as if the occupiers resist, the mortgagee may end up inadvertently committing crimes such as forcible entry or assault, and the courts view dimly attempts to take possession through any form of force. If, however, the security property is vacant land, taking possession by self-help is relatively risk-free and is likely to be the best course. Self-help is open to a registered mortgagee but not an unregistered mortgagee.

A mortgagee can take possession of land occupied by a tenant by giving the tenant a written notice explaining that the mortgagee is taking possession, and that the tenant should now pay rent to the mortgagee, which the tenant is then obliged to do.

This guidance note overviews each of these matters, and is designed to be a good starting point for legal practitioners who need to consider matters relating to a mortgagee obtaining possession without court proceedings.

See Mortgage obtaining possession without court proceedings.

There are state-based or territory-based requirements relating to enforcing a registered mortgage. This guidance note overviews the key requirements of the states and the territories, and is designed to be a good starting point for legal practitioners who need to consider matters relating to enforcing a registered mortgage. It would be prudent for legal practitioners to consult the relevant state or territory legislation to ensure specific state-based or territory-based requirements are met.

Generally, there is no need in proceedings to enforce a registered mortgage to seek orders for sale of the property, as the mortgagee has a statutory power of sale it can exercise without the need for any orders of a court. Even a second or subsequent mortgagee has the statutory power to sell land, although if a higher-ranked mortgagee is seeking to sell the land, the lower-ranked mortgagee may be compelled to hand possession of the land to the higher-ranked mortgagee for that prior mortgagee to sell.

See Enforcing a registered mortgage.

An equitable mortgagee has no statutory power of sale, and thus enforcement proceedings in relation to an equitable mortgage require relief to be sought with respect not only to possession of the security property but also its sale. As an action in ejectment is a common law action which can only be commenced by a person entitled to possession of the land at law (as opposed to a person with an equitable right to possession), the claim for possession by an equitable mortgagee must be pleaded differently than a claim by a registered mortgagee.

This guidance note provides an overview of the standard approach to enforcing an equitable mortgage, including to commence proceedings in the Supreme Court (typically in the Equity Division) by way of a statement of claim, and by judicial sale. This guidance note looks at some practical matters such as the requirement to join prior interest-holders as parties, and what to include in evidence in support of an application for judicial sale and specific performance.

See Enforcing an unregistered mortgage.

There are state-based or territory-based requirements relating to mortgagee sales. This guidance note provides an overview of the process and the key requirements, and is designed to be a good starting point for legal practitioners who need to consider matters relating to a mortgagee sale. It would be prudent for legal practitioners to consult the relevant state or territory legislation to ensure specific state-based or territory-based requirements are met. Some of these legislations are referred to in this guidance note.

Legal practitioners will find the commentary on topics such as preconditions for sale, a mortgagee’s duty in selling the land, and proceeds of sale particularly practical.

See Mortgage sale.

The National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) includes the Code as Sch 1 to the Act. The Australian Securities and Investments Commission is the national regulator responsible for administering the NCCP Act.

The Code and the NCCP Act which established the Code heavily regulates the making of loans, and therefore the drafting of the relevant mortgages, governed by the Code.

Legal practitioners should be aware that some of the most significant implications in relation to mortgages include matters relating to the notice provisions imposed in relation to the enforcement of loans, mortgages and guarantees — these are explored in this guidance note.

See Enforcement of Code-regulated mortgages.