LEGAL307 Mortgages Summary 2021 PDF

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LEGAL307-21D Mortgages Principle

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Relevant legislation 1

Land Transfer Act 2017 ss 99-106 Land Transfer Act 1952 ss 100-103, 105, 109 and 111-114 Land Transfer Regulations 2002 Property Law Act 2007 ss 75-205 Credit Contracts and Consumer Finance Act 2003

A mortgage does not require the delivery of possession and so any kind of asset whether tangible (such as houses, ships or planes) or intangible (such as copyrights or patents) is capable of being mortgaged. However, for this course, the focus is mortgages over estates/interests in land. For security interests in personal property see Personal Property Securities Act 1999.

Nature of a mortgage 2

A mortgage comprises a contract to repay money or perform specified obligations and a contract of security for securing the repayment or performance of obligations. Once that debt has been paid or the obligation performed, the mortgagee must release the mortgage.

Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513

“A mortgage whether legal or equitable, is security for repayment of a debt. The security may be constituted by a conveyance, assignment or demise or by a charge on any interest in real or personal property. An equitable mortgage is a contract which creates a charge on property but does not pass a legal estate to the creditor. Its operation is that of an executory assurance, which, as between the parties, and so far as equitable rights and remedies are concerned, is equivalent to an actual assurance, and is enforceable under the equitable jurisdiction of the court.” – Lord Templeman at p 521. You can mortgage estates and interests in land, including mortgages of leasehold estates.

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Mortgagor does not transfer the title to the mortgagee

LTA 1952 s 100/LTA 2017 s 99;

Mortgage = a charge on land.

PLA 2007 s 79.

There are other charges that may be created over land, for example: 

where land is subject to a charging order following

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Comment an application to the Court – see High Court Rules Part 17, subpart 5 

Rates are a charge, pursuant to s 59 of the Local Government (Rating) Act 2002

While a mortgage creates a charge Merbank Corp Ltd v Cramp [1980] 1 NZLR 721 on the land, it is the act of registration, not the instrument, that establishes the charge over land

This means that the time of registration determined legal priority, not time of creation.

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Fixtures become an accretion to the land and part of the mortgagee’s security, whereas chattels remain the property of the mortgagor and may be charged by the mortgagor to third parties.

March Construction Ltd v Queenstown Carparking Ltd (2011) 12 NZCPR 75

The distinction between fixtures and chattels has arisen most frequently in recent years in the context of the competing claims of a mortgagee and other creditors of the mortgagor.

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Equitable mortgages are possible, although these will not meet the requirements for registration, and so will not obtain the benefits of indefeasibility of title that registration confers

Textbook New Zealand Land Law at 9.1.06 (p 844)

There are 2 kinds of equitable mortgages: (a) equitable mortgages of assets that are equitably owned; and (b) equitable mortgages over legally owned assets.

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Thus, if the instrument is not registered, it can only operate as a contractual security, not as a charge over the land which can be recognised in equity, hence the remedy available to an equitable mortgagee of applying to the Court for an order for sale.

(a) for the first group, the beneficiary doesn’t have legal title (only an equitable interest) so cannot grant a legal mortgage. (b) for the second group, equitable mortgages over legal interests arise where the formalities to create a legal mortgage have not been complied with.

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Comment In terms of recognising legal vs equitable mortgages, ask: (1) what is the nature of the ownership of the asset that has been mortgaged? - if it is an equitable interest, then it will give rise only to an equitable mortgage. (2) If it is a legal interest, then the next question is whether it complies with the requirements for mortgages under the LTA (see the formalities set out in s 100 LTA 2017)? If the instrument is not registered, it can only operate as a contractual security, not as a charge over the land – that means that an Equitable mortgage is going to be effective only against those who have notice of it. It can nevertheless be recognised in equity, hence the remedy available to an equitable mortgagee of applying to the Court for an order for sale.

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Mortgage may fall within the Credit Contracts and Consumer Finance Act 2003 as a “consumer credit contract”.

“Consumer credit contract” defined in s 11 CCCFA 2003 Credit advanced for business or investment purposes is excluded – s 12 CCCFA Presumption that a credit contract is a consumer credit contract – s 13 CCCFA The parties can sign declaration that transaction is not a consumer credit contract – s 14. However, this must be done before entering the transaction (so, in Burke v Advanced Securities Ltd [2008] NZCA 93, declarations that were signed after the loans had been entered into did not rebut the presumption in s 13).

The focus of the course is not consumer credit contracts. Be aware that a mortgage may be a consumer credit contract, and as such give rise to certain requirements under the CCCFA. The CCCFA is concerned with consumer protection – excessive interest rates, oppressive lending practices, etc. Hence its standard focus on personal lending. The CCCFA places disclosure obligations on lenders. These are set out in Part 2 (“consumer credit contracts”). s 17 – initial disclosure s 18 – continuing disclosure s 32 – disclosure standards s 35 – how disclosure must be made

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Comment Enforcement and remedies are set out in Part 4.

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Specific CCCFA provisions for “buy-back” transactions.

CCCFA ss 8, 71-83, Schedule 3

See particularly s 72 (disclosure obligations) and Schedule 3 (which sets out the particulars that must be disclosed)

Burmeister v O’Brien [2010] 2 NZLR 395

Court held that the plaintiffs had not entered into a buy-back transaction. While the requirements of s 8(1)(a) and (b) of the CCCFA 2003 were met, they did not in fact have any legal “right” to occupy the whole or any part of the land once it had been transferred to the O’Briens (therefore s 8(1)(c) was not met), nor did they have a right to repurchase the land because they believed that they continued to own it save for the presence of the trust (therefore s 8(1)(d) was not met).

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Plaintiffs had been deceived in transferring their property to another person (the O’Brien Trust) by false statements as to the implications of what they were doing,

In short: the transaction was a transfer from the Burmeisters to the O’Brien Trust, without any legal right of occupation or repurchase. The Court held that the Burmeisters’ entitlement to get the property back arose from the fraud practised on them and the constructive trust on which the property was held, not from any buy-back arrangement. Nathan v Cooper [2013] NZHC 1559 

the plaintiff owned two properties, one of which was owned in conjunction with a relative supposedly servicing the BNZ mortgage on the property.

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The mortgage fell into default and the bank issued a default notice.

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After the first defendant, purporting to be a

The Court held that the transaction was a buy-back transaction in terms of s 8. One of the properties was the plaintiff’s family home, she agreed to transfer it to Five Star Homes Ltd (after nomination by Sunset Finance Ltd), and through an understanding with the parties (including the first defendant) she continued to live in the home after the sale of the property was completed. The discussion confirming this preceded the signing of the original agreement for sale

LEGAL307-21D Mortgages Principle

Authority “financial adviser”, approached the plaintiff, the plaintiff arranged to sell the two properties for well under value to companies associated with him. 

Agreements for sale and purchase were signed on 31 January 2012. On this same day, the third defendant (Sunset Finance Ltd) entered into an agreement with the plaintiff for her to buy back one of the properties with a settlement date of 29 March 2012 (a date only a little under two months after the date for settlement of the original sale agreement).

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The purchaser under these agreements was named as Sunset Finance Ltd but, after nomination, Five Star Homes Ltd (the fourth defendant) became the purchaser. The first defendant controlled both of these companies.

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The agreement stated that “should settlement not occur on the settlement date the vendor has the right to immediately cancel this agreement”.

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The plaintiff was permitted to continue to occupy the property.

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On 30 March 2012, the plaintiff was given a notice whereby Five Star Homes Ltd purported to cancel the agreement. Trespass proceedings were then taken against the

Comment and purchase, and this arrangement was only terminated when a trespass notice was issued after the buy-back agreement was cancelled. In addition, the plaintiff had a right to repurchase the other property and her decision to enter into the agreements was reached firstly because she mistakenly thought that she was going to lose her home because of the Property Law Act notice issued by the BNZ (which in fact was only over the second property), and secondly because of the erroneous advice provided to her by the first defendant.

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plaintiff and she was required to vacate her home. The two properties were sold, fetching an amount just sufficient to meet the BNZ mortgage debts and costs. Parties to a mortgage 9A

Mortgagor

9B

Mortgagee

9C

Guarantor

LTA 2017 s 5 (interpretation)

Person with title to the interest in land being mortgaged

PLA 2007 s 4 (Interpretation) LTA 2017 s 5 (interpretation) PLA 2007 s 4 (Interpretation) “Guarantor” is not defined in the LTA 2017 and PLA 2007, but s 4 of the PLA does define “covenantor” in relation to a mortgage to include a guarantor:

Person granted the mortgage as security (usually as a result of having advanced funds to the mortgagor) Person guaranteeing the mortgage; may be liable in the event of mortgagor default

covenantor, in relation to a mortgage,— (a) means a person, other than the mortgagor, who has agreed to pay money or perform obligations secured by the mortgage; and (b) includes a guarantor Requirements for creation of mortgage 10 A

Legal mortgage

LTA 2017, s 100 See forms set out in Schedule 2 to Land Transfer Regulations 2002, which provide for the information required for registration

Legal mortgages must comply with the requirements of s 100 LTA 2017. The form to be used and information to be included for an “all obligations mortgage” can be found in cl 6 (it’s Form 6) to Schedule 2 of the Land Transfer Regulations 2002, and the “fixed sum mortgage” form is in cl 7 (Form 7). The LTA 1952 set out the requirements in s 101(2):

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Comment (a) the land or estate or interest to be mortgaged, which must include a reference to the register in the prescribed manner; and (b) the person who is to take the mortgage; and (c) the nature of the debt secured by the mortgage; and (d) the covenants and conditions (if any); and (e) the stated priority limit under section 92 of the Property Law Act 2007 (if any). See also the sample mortgage instrument in the CMs

10B

Equitable mortgage

PLA 2007 s 25 Kim v Lee [2014] NZHC 1032

In order for an equitable mortgage to be created, the contract must satisfy the writing requirements of s 25 PLA 2007 or there must be a sufficient act of part-performance Kim v Lee [2014] NZHC 1032 – sets out at [24] factors to be taken into account to support claims of equitable mortgage: “(a) The particular property charged in the caveat was identified in the agreement as the property to be charged. “(b) The borrower, in executing the agreement, acknowledged that the property was to be charged and as a result consented to the lodging of the caveat. “(c) The intention of the documents seemed to be that the borrower acknowledged that the property was to be charged either by a caveat in the first place or by a registrable mortgage if a request to execute one was made. “(d) The part of the document containing these provisions

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Comment expressly referred to those provisions as an agreement to mortgage.”

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Memorandum of mortgage

LTA 2017 s 209

A ‘Memorandum of Mortgage’ sets out the terms and conditions applying to the mortgage. S 155A of the 1952 LTA provides that any person may execute a memorandum for the purpose of registration, and the Registrar shall number and register any such memorandum that is executed and delivered for registration and is approved by the Registrar. This has been preserved in the 2017 LTA in s 209.

LTA 1952 s 155A

While a mortgage once contained all the relevant information, now we are in the age of electronic registration. So, although we refer to a “mortgage” as if it were a single tangible thing, we are really referring to the legal concept of a mortgage. In terms of the actual documentation involved, the mortgagor (borrower/guarantor/property owner) no longer signs one self-contained document. Instead a series of documents are signed that indicate the intention to borrow or guarantee and give a charge over land to secure the obligation. Priority of Mortgages 12

Priority of mortgages

s 24 LTA 2017: effect of registration s 35 LTA 2017 (s 37 LTA 1952): Priority according to time of registration s 102 LTA 2017 (s 103 LTA 1952): Variation of priority of mortgages

Legal rights trump equitable rights (because registration affords indefeasibility protections). Priority will be determined by time of registration (not creation date) of mortgage: s 37 LTA 2017. Otherwise, equity operates on priority ranking determined by time of creation (unless the “first in time” principle should be displaced in light of other equitable

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Comment considerations). Priority of mortgages may be varied by agreement, per s 102 LTA 2017. This must be done by registration of variation of mortgage instrument.

Indefeasibility 13

Fraud exception to indefeasibility:

LTA 2017, s 52 LTA 1952, ss 62, 63(1) Dollars & Sense Finance Ltd v Nathan [2008] 2 NZLR 557 •

Dollars & Sense Finance Ltd agreed to lend Rodney Nathan $245,000 to assist him to purchase shares in a business.

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One of D & S’s conditions of loan was that Rodney Nathan’s parents should provide security for his liability to repay that loan by executing a memorandum of mortgage to D & S over the parents’ jointly owned residential property at Kerikeri.

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Nathan procured his father’s signature on the documents, including the mortgage, but, knowing that his mother Rerekohu Nathan (the respondent), was unlikely to agree to give the mortgage, he forged her signature. When the business failed and Rodney did not meet his repayment obligations, D & S sought to exercise its power of sale.

The Court held that Rodney Nathan was acting as agent for D & S Ltd: •

That Rodney was acting in his own interests did not preclude the conclusion that he also acted on behalf of D & S in obtaining signature of the relevant documents.

•

“Rodney was entrusted with the task, on behalf of D & S, of obtaining the signatures. He was D & S’s agent for that purpose. D & S implicitly authorised him to represent it in its dealings with his parents concerning their signature of the documents” (at [27]).

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“a fraudulent act may be done within the scope of an agency, even if done exclusively for the benefit of the agent (and even more so when it is done for the benefit of the principal as well as for the benefit of the agent)” (at [41]).

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“Liability for a fraud committed in the course of an agency does not depend upon the attribution of

LEGAL307-21D Mortgages Principle

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Mrs Nathan argued that Rodney Nathan forged her signature; that he did so in the course of an agency for D & S; and that, accordingly, under the fraud exception to the indefeasibility provisions of the LTA D & S’s title as mortgagee is defeasible and the mortgage should be removed from the register

Comment legal fault or moral blame to the principal” (at [43]). •

The fraud was within the scope of the agency, even though D & S did not explicitly authorise it.

Issue = Whether Rodney Nathan was expressly or impliedly appointed to act as the agent of D & S in its intended transaction with Mrs Nathan? And, if so, was Rodney’s fraud committed in the course of that agency for D & S?

Burmeister v O’Brien [2010] 2 NZLR 395

See above. Case is relevant to indefeasibility because the transaction was ultimately ruled to be not a buyback transaction but a fraudulently obtained transfer.

Frazer v Walker [1967] NZLR 1069 (PC)

This case is authority for the point indefeasibility of title does not bring to an end personal claims at law or in equity.

Covenants 14 A

Express covenants can be agreed by parties

LTA 2017 s 209

14B

Covenants implied at law

LTA 2017 ss 208-209

LTA 1952 s 155A

These are typically set out in Memorandum of Mortgage, which is discussed above.

LTA 1952 ss 154-156

Covenants implied at law are set out in Part 1 of Schedule 2 of the PLA 2007.

PLA s 95 and Sch 2

These include: 1. Payment of principal sum and interest by mortgagor:

LEGAL307-21D Mortgages Principle

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Comment Ellery v Blair (2006) 7 NZCPR 640 – personal obligation to pay principal sum 2. Mortgagor to keep buildings (and other insurable improvements) insured. Policy will be arranged in the joint names of the mortgagor and the mortgagee for their respective rights and interests in an insurance office in New Zealand that is approved by the mortgagee. Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 3 NZLR 1 (PC) 3. Application of insurance money by mortgagee: can be applied to reinstatement of property or reduction of debt at mortgagee’s election. If applied to reduction of debt, the mortgagor has a right to at any time within 2 months after the date on which the insurance money was so applied, pay off all amounts still owing under the mortgage. 4. Mortgagor to pay obligations as they fall due (eg rates) 5. Mortgagor’s re...