Debts can arise in a variety of ways, the most familiar being:
- Through lending money: the amount required to be repaid being a debt; and
- Through providing goods or services: the price for which is a debt.
Many creditors want more assurance that they will be paid or repaid than simply a right to be paid. What if the debtor has no intention of payment, or cannot pay because of other expense commitments?
For this reason, many creditors want their (including proposed) debtors to give security over land they own, so that if there is a default in repayment, steps can be taken to sell the land to recoup what is owed.
Registered Mortgages
The most familiar form of land security is the registered mortgage. When someone borrows money from a bank for a home loan, the bank will take a mortgage over the borrower’s land (such as the land being bought with the money loaned by the bank).
Taking a registered mortgage has a lot of advantages for a creditor, one of which is that if the debtor defaults and some notice requirements are met, the creditor can itself sell the mortgaged land to recover what it is owed. The registered mortgagee does not need the Court’s help to sell the land (although it might seek the Court’s help to obtain possession of it). Another advantage is indefeasibility of the mortgagee’s (creditor’s) interest.
Unregistered Mortgages
The registered mortgage is not the only form of land security available to a (including prospective) creditor. For example, a person can mortgage his land to secure the payment of debts even if the creditor does not, and may not even be entitled to, register the mortgage. In this case, the form of security would be an unregistered (or equitable mortgage).
St. Clair & Associates has extensive experience in dealing with land securities, and can assist you with:
- Advice on the form of land securities you might want to take in a commercial transaction.
- Drafting mortgages and other security clauses or documentation.
- The drafting of caveats.
- Advice on the implications of you giving a proposed security.
- Advice on the sort of steps that a proposed secured creditor should take to minimise the likelihood of defences being raised (such as defences under the Contracts Review Act 1980).
- For those facing claims by secured creditors, advice on possible defences.
- Advice on both registered and unregistered mortgage and other land security enforcement.
- Acting on your behalf in legal proceedings for the enforcement of your security interests in land.
- Transactions associated with the assignment of securities (from an existing security-holder to a new one).
- Subject to the terms of your securities, the appointment of a receiver to the secured land.
FREQUENTLY ASKED QUESTIONS
What is a caveat and what are they used for?
The standard way a secured creditor protects unregistered (equitable) interests in land is by lodging a caveat over the land. Broadly:
- Caveats prevent the registration of dealings in land (such as transfers of the land by sale or the registration of new mortgages): one example of why this would be important is because without a caveat, the land-owner (debtor) could just sell the land without the secured creditor knowing about it, take the sale price on settlement and ‘run’, leaving the secured creditor without security anymore.
- Caveats give notice to other prospective secured creditors that the caveator (secured creditor) already has an interest in the property. This is important, because another (later) secured creditor might say that it should be paid from any sale of the property ahead of the earlier one, because the earlier one allowed the later one (by not publicising the interest by a caveat) to assume it did not have this ‘unpublicised competition’, an assumption that it relied on in deciding to lend to the land-owing, or supply goods or services.
My business offers a lot of commercial credit to customers. How can I increase the chances of being paid?
It is commonplace for regular suppliers of goods on credit to require buyers to provide an equitable charge or mortgage to the supplier to secure payment of the account balance. A classic example would be where, in an application for commercial credit from a building materials supplier, the director of a purchaser company agrees that the purchaser’s liability to the supplier is secured against his or her land.
Unlike the situation with registered mortgages, a secured creditor having an unregistered interest in land (such as a charge) cannot itself sell the land without the Court’s assistance. Where the land is owned by one person, the typical Court application is for judicial sale of the land, where the Court appoints the secured creditor as its agent (on certain terms) for the purposes of undertaking the sale. Where the land is owned by more than one person, the typical Court application (in NSW) is under section 66G of the Conveyancing Act 1919, whereby the Court appoints (usually) two independent professionals (such as a solicitor and real estate agent) to sell the property.