A mortgage creates a security interest in land in favour of the mortgagee (lending institution e.g. Commonwealth Bank of Australia, Westpac Banking Corporation and National Australia Bank). The mortgagee does not become the owner of the land under a mortgage, but it does obtain the right to rely on the property to satisfy the amount advanced to the mortgagor (borrower). For example, if the mortgagor does not provide the repayment of the advance in accordance with the terms of the mortgage, then the right afforded to the mortgagee is the power of sale.
Power of Sale
The power of sale right is based in section 77 of the Transfer of Land Act 1958 (Vic) (Act). This power arises upon default by the mortgagor in observance of the requirements of the mortgage. A pre-condition to the exercise of the power of sale is the service by the mortgagee of a notice requiring the mortgagor to cure the default. Pursuant to section 76 of the Act, if the default has continued for 30 days (or such lesser time as may be provided in the mortgage), the mortgagee may serve on the mortgagor and such other persons as appear by the register to be affected, notice in writing to pay the money owing. The notice requirements clearly include other registered mortgagees and could be construed to apply to unregistered interest holders who have lodged a caveat on title to the property. If the default is not remedied within 1 month of service of the notice (or such lesser time as provided in the mortgage), the mortgagee may sell the land. Where the mortgage obtains the right to sell the property, the mortgagee has a duty to act in good faith, having regard to the interest of the mortgagor, the property can be sold by public auction or private contract and may be sold for a lump sum or under a terms contract (instalments of the price over time).
Distribution of Sale Proceeds
The proceeds of the mortgagee’s sale are to be distributed in the following manner:
- payment of expenses incurred in the sale;
- payment of money due pursuant to the mortgage;
- payment of money due pursuant to subsequent mortgages and charges; and
- the balance if any, to the mortgagor or to the Supreme Court.
In the event of a shortfall such that the proceeds of the sale do not equal the amount due under the mortgage, the mortgagor remains personally liable to the mortgagee for the shortfall.
A mortgagee’s sale is affected by a special form of Transfer. The effect of registration of that document is to transfer the interest of the mortgagor as registered proprietor to the purchaser.
Foreclosure is the alternative to a mortgagee’s sale. Foreclosure is where the mortgagee seeks to become the registered proprietor of the property. The process is extremely long and complicated and as such is very rarely used. Section 79 of the Act provides the statutory basis for foreclosure.