Contrary to an often held belief, when you borrow money from the bank and give it a mortgage over your property, the bank doesn’t own your property. The mortgage acts only as security for repayment of your loan. The bank is not entitled to reap any benefit from the property itself once you have paid back the mortgage debt. Historically this was not always the case. Before the law developed to protect mortgagors, the mortgage acted as a transfer of the land to the mortgagee. If the mortgagor did not repay the loan, the mortgagee was entitled to keep the property and therefore profit where the value of the property exceeded the amount owing under the mortgage.
The mortgagee’s power of sale
Over the centuries the law has evolved to protect borrowers when a mortgagee seeks to enforce its mortgage. (The person who holds the mortgage is called the mortgagee. More often than not the mortgagee is a bank.)
The mortgagee’s power of sale may only be exercised if the procedure set out in the Property Law Act 2007 is followed. Furthermore, the mortgagee’s power of sale must only be exercised in good faith for the purpose of obtaining repayment of the debt. The mortgagee must use reasonable care to obtain the best price reasonably obtainable.
If the mortgagee sells the property it must apply any money received from the sale (after payment of sale costs and other amounts owing on the property) in reduction of the mortgage debt. The mortgagee must then pay any surplus to the mortgagor. At any time until the property is sold by the mortgagee the mortgagor may “redeem the mortgage” i.e. the mortgagor may repay the mortgage and prevent the sale taking place.
Mortgagee breaches duty to mortgagor
These legal principles were stated and applied in the recent Court of Appeal case of Coumat Limited v Whitford Properties Limited. This case involved a complicated series of interrelated transactions. Ultimately the mortgagee exercised his power of sale and gave the purchaser of the mortgaged property a credit against the purchase price for a $1.25 m deposit that the mortgagee had retained under a prior failed sale. This meant the mortgagor did not get a reduction in the mortgage debt for the amount of that deposit. The court held the mortgagee should have credited the forfeited deposit to reduce the mortgage debt and, by not doing so, had breached his duty to the mortgagor.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.
