|The Shilling Law Book|
The Relation of Debtor and Creditor:-If one man lends money to another, or they enter into a contract for goods to be supplied, or work done, or for some other object, the result of which is that one becomes bound to pay a sum of money to the other, then the relation of debtor and creditor is constituted between them, and will last until the debt is discharged. The ordinary creditor who cannot get paid has, as creditor merely, no right against or charge over the property of his debtor, and his only remedy is to sue for the debt. If his claim is for a definite fixed amount, and the creditor can show that the debtor has really no defence to the action, then, unless the debtor in his turn can show some good cause why he should be allowed to defend, the plaintiff will be given leave to sign summary judgment against the debtor for the amount of his claim. In such a case the matter does not come into court, and the creditor recovers his debt speedily and with a minimum of trouble and expense. If the amount of the debt is under £50, the action should be brought in the County Court ; if is exceeds £50, in the High Court.
However, even supposing the action is undefended, or practically so, and the creditor obtains summary judgment, he may not get his money after all, for either it may happen that the debtor has no property which can be taken in execution for the debt, or else the latter may make himself, or be made bankrupt, and then the creditor will have to prove in the bankruptcy proceedings for his debt, and possibly only recover a small fraction of it.
But the creditor may be in a better position than this - he may, at the time the debt was incurred, or subsequently, have stipulated for, and obtained, security for his debt. That is to say, he may have entered into an agreement with the debtor, whereby the latter, in consideration of money lent to, or due from him, transferred property belonging to him to the creditor, subject to a proviso that upon payment of the debt with interest the property should be transferred. Or the agreement may have been as follows:-
That property of the debtor's should be charged with, and so made available for, the payment to the creditor of his debt, in case the debtor should fail to pay. In the first case the creditor is said to have a Mortgage, in the second,. a Charge or Lien over the debtor's property. In the great majority of cases a mortgage is given in consideration of money lent at the time, but it may equally well be given for a pre-existing debt. People are not usually willing to lend money without good security, and those who cannot offer such security will have difficulty in borrowing, except from professional money-lenders, who charge a very high rate of interest. It is proposed in this Chapter to discuss the subject of Mortgages and securities for money generally.
Polonius tells us, " Neither a borrower nor a lender be," but it is to be feared that little heed is paid to his counsel. If from the adult population of this country there were deducted, first, those who are in need of money, and wish to borrow, and secondly, those who have money and are willing (for a consideration) to lend upon having security, only a small proportion would be left over. It has even been estimated that over two-thirds of the land in the United kingdom is mortgaged. Mortgages of freehold land or house property are highly esteemed as investments, and are largely held by banks and trustees. It will be necessary at the outset to distinguish between the different classes of securities for money. They may be divided as follows
- Legal Mortgages of property, subject to redemption, giving a right to foreclosure, and made by deed.
- Equitable Mortgages, which are agreements to execute a legal mortgage, accompanied by a deposit of title-deeds.
- Bills of Sale, which are mortgages of movable personal property, and are specially regulated by statute.
B. Securities other than Mortgages.
- Charges over property, not giving a right to foreclosure.
- Liens, or charges arising by operation of law, such as the lien of a solicitor on his client's papers for his costs.
- Pawns or Pledges, which are securities of movable personal property, where the possession passes to the lender.
The fundamental distinction between a mortgage, whether legal or equitable, and all other securities for money, is that a mortgage passes the ownership of the property, subject to the right of redemption, from the borrower to the lender, whereas other securities do not, though they may, as in the case of Pledges, transfer the possession, which a mortgage does not immediately affect. Liens and Charges do not pass the ownership of the property ; they only give the creditor a right over it, which can be enforced by the Court by making an order for sale.
A modern legal mortgage is made by deed, and consists, as a rule, of two principal parts - first, a threefold covenant by the borrower (the mortgagor) with the lender (the mortgagee)
- to repay the principal sum lent on a day fixed ;
- to pay interest on it in the meantime at a named rate; and
- if the principal should not be repaid by the date named, to continue paying interest on it until it is repaid ;
and secondly, a conveyance by the mortgagor to the mortgagee of the property which is to be the security for repayment of the loan or debt, absolute in form, but subject to a proviso for redemption, that is, a proviso that the property shall be reconveyed to the mortgagor upon payment by him or his representatives of the amount owing for principal and interest. The naming the covenant of a certain day for repayment does not now mean, as it did in early times, at any rate before the sixteenth century, that if the mortgagor fails to pay by the very day, he loses all right to recover his property ; it only means this, that the mortgagor cannot be called upon to redeem the mortgage, nor the mortgagee to reconvey the property, before that day. Practically speaking, the mortgagor can redeem at any later time, unless the property has been sold by the mortgagee under his power of sale, or the mortgagee has gone into possession, and been allowed to acquire an absolute title under the Statutes of Limitation by lapse of time (twelve years), or the mortgagee has succeeded in an action of " foreclosure " against him. Even in the latter case the foreclosure may be " reopened," and the mortgagor allowed to redeem the property upon certain terms, provided he does so within a reasonable time. But he is not entitled to redeem before the day named, without paying six months' interest in lieu of notice.
A short statutory form of mortgage is provided by the Conveyancing Act, 1881, and will be found in the Schedule to the Act. It runs as follows :
This Indenture made by way of Statutory Mortgage the day of between A of [&c.] of the one part, and M of [&c.] of the other part, witnesseth that in consideration of the sum of C now paid to A by M, of which sum A hereby acknowledges the receipt, A, as mortgagor and as beneficial owner hereby conveys to M all that [description of Properly mortgaged] ; to hold to and to the use of M in fee simple for securing payment on the __________ day of ____ of the principal sum of £ ________ as the mortgage money, with interest thereon at the rate of _____ per centum per annum. In witness, &c.
[Signatures of Parties.]
The above form is sufficient to create a valid legal mortgage, and implied in it by law are :
- a covenant to pay principal and interest, and in the meantime interest half-yearly ;
- a proviso for redemption upon repayment. It is not, however, very often used.
After a mortgagor has mortgaged property, all the interest which he has left in it, apart from the right of possession so long as he is not in default, is his right to redeem it, better known as the Equity of Redemption. The mortgagee is said toy have the legal estate vested in him. If the mortgagor cannot or will not pay, when called upon so to do, or makes default in his payment of interest, the mortgagee may either sell the property, and repay himself out of the proceeds, or he may bring an action, called a Foreclosure action, by which the mortgagor, if judgment is given against him, is " foreclosed " or deprived of his equity of redemption, and the mortgagee becomes absolute owner of the property.
A mortgage cannot be made irredeemable by any stipulation or agreement contained in it. The fundamental idea of a mortgage is that the mortgagor should be at liberty to redeem at any time on payment of principal, interest, and costs. A distinction should, however, be drawn between a true mortgage and a bonâ fide sale with an option of repurchase. Thus, suppose A sells property to B, and they agree that if within a certain time A pays a fixed sum of money to B, B shall reconvey the property to A. The test whether such an agreement is or is not a mortgage is this. If, there is a debt for which B can sue A, whether the deed contains a covenant to pay or not, it is a mortgage, and nothing in it can prevent A redeeming at any time. If there is no such debt, then it will be a conditional sale, and A must exercise his option within the time fixed, or not at all. The time cannot be extended, except by an agreement between the parties.
Fettering the Equity of Redemption.-It is a rule, or rather maxim, analogous to the above, that the equity of redemption may not be " fettered," i.e., the mortgagee is not to be allowed to gain any collateral advantage from the mortgage - only his principal, interest, and costs. Thus a stipulation that only the mortgagor himself, and not his assignees or representatives, shall be allowed to redeem, is void. And again, a mortgagee may not be paid a commission for receiving rents. But the rule has now become pretty well honeycombed with exceptions, and one of the most important occurs in connection with mortgages of public-houses. As a rule, the only person who is willing to lend money to a publican to carry on his business is a brewer or distiller, and the mortgagee always takes care to get a covenant by the mortgagor inserted in the mortgage to purchase all beer or liquors from the mortgagee, and no one else, during the continuance of the security, and also to provide that the loan is not to be repaid for some time, perhaps several years. Such stipulations have been held to be valid, though possibly something that went a very little further might be declared void.
A stipulation in the mortgage deed to the effect that if interest is not paid punctually, a higher rate is to become payable, would be void, as being against the rule, but in practice this is constantly evaded by reserving interest at a rate (e.g., 5 per cent.) - higher than it is intended to charge, and then, providing that if it is paid punctually, a lower rate - e.g., 4 per cent. - shall be accepted. This arrangement comes to the same thing in the end, and is perfectly valid.
What Property may be Mortgaged.- Generally speaking, all forms of and any interests in property may be the subject of a mortgage, but the strict use of the word is confined to real property (land and houses), including leaseholds, and certain classes of personal property, such as Government securities, policies of assurance, stocks, shares, and other securities for money issued by corporations, local authorities, or trading companies, also book-debts ; in short, personal property of an " incorporeal " nature which can only be validly transferred from one person to another by the use of documents of title. Mortgages of movable personal property which can be transferred out-and-out by mere delivery, are known as Bills of Sale, and, with the object of preventing fraud, are regulated by very special and stringent statutory restrictions, contained in the Bills of Sale Acts. Although, therefore, bills of sale are, properly speaking, mortgages, they are a class apart, and will be discussed separately later on.
Property which is settled on a married woman who is restrained from anticipating or alienating it, cannot, of course, be mortgaged.
Equitable Mortgages. - An equitable mortgage is an agreement to execute a legal mortgage. Suppose A borrows £100 from B, and signs a document whereby he undertakes, in consideration of the loan, to execute a mortgage to B over certain property to which he is entitled, and hands this to B, together with the title-deeds relating to the property agreed to be mortgaged, and showing A's title to it, then B is said to have an equitable mortgage. It is so called because the old Court of Equity or Chancery (now represented by the Chancery Division of the High Court), acting on the maxim that "what ought to be done must be regarded as done," would compel specific performance of such a contract, although the Common Law Courts refused to do so, and would only give the lender the remedy of an action for damages for breach of contract. Since 1875, however, all divisions of the High Court recognise the validity of an equitable mortgage.
An equitable mortgage is a convenient way of raising money in a hurry, without the delay and expense of preparing deeds, and it is most often used to secure an overdraft on a bank. In some cases, too, an equitable mortgage can be made, where a formal mortgage would be impracticable ; for example, where it is desired to mortgage leaseholds, and the lease contains a covenant against assignment or underletting.
An equitable mortgagee has no implied power of sale, because he has not got the legal estate to convey to the purchaser, at any rate until specific performance of the agreement has been enforced and carried out. He may, however, go to the Court to enforce his security, and obtain the appointment of a receiver to collect the income.
Rights and Remedies of the Mortgagee.
In a normal case where there is no default, the mortgagor pays interest upon the loan at quarterly or half-yearly intervals, until either he is requested by the mortgagee to redeem, or he gives notice of his intention to redeem. Thereupon, upon payment of principal, interest, and costs, the mortgagee will reconvey the property to the mortgagor, assuming that the latter has not in the meantime mortgaged the equity of redemption, i.e., given a second mortgage over the property.
Suppose, however, that the mortgagor falls into arrear with his payments of interest, or refuses, or is unable to repay what he owes, when called upon by the mortgagee to redeem, the latter may proceed to enforce his security, that is, to repay himself out of it, and we have next to consider how this may be done. Assuming that the mortgage is an ordinary legal mortgage, made by deed, the following remedies are open to the mortgagee:
- He may sue the mortgagor upon the covenant for payment contained in the mortgage.
- He may bring an action against the mortgagor for foreclosure.
- He may exercise his power of sale.
- He may appoint a receiver of the mortgaged property.
- He may go into possession of the property himself.
Taking these remedies, and considering them in their order.
(a) Action upon the Covenant. - This remedy differs from all the others in being a personal remedy, and not an enforcing of the security at all. It is not advisable to resort to it, unless there is no doubt that the mortgagor is able to pay, and that his refusal arises rather from obstinacy than impecuniosity. But the refusal of a debtor to pay generally arises from inability to do so, and in such a case it would be no good to sue, merely to get an unsatisfied judgment. In any case it is better not to sue the mortgagor on his covenant, whether or not he has money, unless or until the property has seriously depreciated in value, so as to be no longer a sufficient security for the debt.
An equitable mortgage only gives rise to a simple contract debt, for which the creditor has but six years in which to sue, while a covenant to pay in a mortgage deed creates a " specialty " debt, which is not barred until twelve years from the last acknowledgment or payment of interest.
- Foreclosure.-If the mortgagor is in default, after the mortgage money has fallen due, the mortgagee may sue him for foreclosure. If the action succeeds, the mortgagor will be allowed a certain time, usually six months, in which to redeem, failing which he and all other persons interested in the equity of redemption are foreclosed and deprived of it, so that the mortgagee becomes absolute owner of the property to the extent of the mortgagor's interest in it, subject, however, to the possibility of the foreclosure being " re-opened" under certain special circumstances. It is better as a rule to exercise the power of sale than to bring an action for foreclosure, because the Court may order the property to be sold, unless it is not likely to realise its full value. The Court will generally order a sale in an action either for foreclosure or redemption:
- where the mortgagor is bankrupt and the property much encumbered;
- where the interest is heavily in arrear ;
- where the property is unproductive.
A sale will not be ordered where the property seems likely to improve in value ; and this is the case where a foreclosure action may be the best remedy. A property which is an insufficient security for the debt may often be improved into a good security with careful management, in the hands of the mortgagee, who, however, cannot recover more than his principal, interest, and costs. If any balance is leftover after a sale, he holds it as a trustee for the mortgagor.
Any mortgagee has a right to redeem every mortgagee whose charge is prior to his own, and to foreclose the mortgagor and every mortgagee whose charge is later than his own. In a redemption action (which is the converse of a foreclosure action) the plaintiff will be given a certain time in which to exercise his right of redemption, and if he does not do so within the time given, the action will be dismissed, and such dismissal will operate as a foreclosure.
An equitable mortgagee has the same right to foreclosure as a legal mortgagee has.
(c) Power of Sale.-Previous to the year 1882 it was the invariable practice to insert an express power of sale in the mortgage deed, but this is now omitted, as under the Conveyancing Act, 1881, there is implied in every mortgage made since 1881 a power for the mortgagee to sell the property and convey it to a purchaser. The statutory provisions relating to the power of sale may be summarised as follows :-
The power can only be exercised after the mortgage money has become due, and one of the three following alternatives has happened :
- Notice has been served on the mortgagor requiring payment, and default has been made in payment for three months after such notice.
- Some interest under the mortgage is in arrear, and remains unpaid for two months after becoming due.
- Some covenant or provision expressed or implied in the mortgage. other than the covenant for payment of principal and interest, has been broken by the mortgagor.
A sale under a power of sale will only be set aside by the Court in one of the two following cases :
- If the property has been sold at a gross undervalue.
- If the mortgagee has in reality sold to himself, his agent, or nominee, or to a firm in which he is a partner.
The proceeds of any sale made under his power by the mortgagee must be applied, first in payment of costs and expenses, and then in discharging the mortgage money and any interest due and unpaid thereon. The balance must be paid to the mortgagor or other person entitled to the equity of redemption, a second mortgagee having a prior claim to any one else. The mortgagor can only take what is left after all mortgagees have in turn been satisfied. The mortgagee selling is to the extent of such balance a trustee for the persons entitled to it.
The exercise of the power of sale is a mortgagee's best and most usual remedy, where the security is sufficient, and it is less expensive than foreclosure. The mortgagee will not be liable for any involuntary loss incurred in exercising the power of sale.
The Conveyancing Act does not apply to mortgages made before 1882, which as a rule contain an express power of sale. In its absence, there is a restricted power of sale under Lord Cranworth's Act (1860).
An equitable mortgagee by deposit of deeds cannot exercise the power of sale, at any rate until he has enforced his agreement for a legal mortgage, because, not having the legal estate, he cannot convey the property to a purchaser.
The statutory power of sale does not affect the mortgagee's right of foreclosure in any way.
(d) Appointment of a Receiver.-This is a very useful remedy of the mortgagee, the object of which is to enable him to secure the rents of the property, without undertaking the onerous liabilities of going into possession. There are many cases in which the property, though a sufficient security for the debt, would not fetch anything like its real value on a forced sale, while it may be bringing in a good income in the shape of rent, and under these circumstances it will be best to appoint a receiver. If, however, the property is not producing anything, this remedy will be useless.
Leaving aside the former practice as to receivers, in the case of any mortgage dated since 1882, and made by deed, the mortgagee may, if circumstances have arisen giving him a right to exercise his power of sale (see ante), appoint a receiver of the income of the mortgaged property. The appointment is made in writing, under the hand of the mortgagee. The receiver, when appointed, acts as the agent of the mortgagor, who is solely responsible for his acts. He has power to demand and recover all the income of the property by action, or otherwise, and to give receipts for it. He is entitled to be paid a remuneration - usually 5 per cent. of his gross receipts:
Money which comes into the receiver's hands as such, must be applied as follows:
- In paying rents, rates, and taxes.
- In paying the interest on all principal sums secured on the property prior to the mortgage under which the receiver is appointed, according to the priority of each sum.
- In payment of the receiver's commission, insurance premiums, and cost of repairs directed by the mortgagee.
- In payment of interest on the mortgage.
Any surplus will belong to the mortgagor.
It will be seen that an equitable mortgagee has no power, apart from special agreement, to appoint a receiver himself, for the above power only applies to mortgages made by deed. But the Court has a general jurisdiction to appoint a receiver in an action, whenever it is just and convenient, so that an equitable mortgagee can commence an action asking for sale or foreclosure, or and other remedy, and move therein for the appointment of a receiver at once. If the: mortgage includes a business carried on on the premises, the appointment of a receiver and manager, and not merely a receiver, should be asked for, and will in a proper case be made. A receiver appointed by the Court must give security and will be entitled to remuneration. He is an " officer of the Court," and therefore he cannot be turned out except by further order of the Court, whereas a receiver appointed by the parties can be turned out by a prior legal mortgagee appointing another receiver on his own behalf, or himself going into possession. But the Court will not appoint a receiver if a prior legal mortgagee has done so, or is in possession.
(e) Mortgagee in Possession.-This is a remedy now seldom resorted to, partly because nearly all its advantages can equally well be obtained by the appointment of a receiver, but chiefly for the reason that a mortgagee by taking possession of the property lets himself in for various heavy responsibilities. For instance, he will be liable to account not only for the income which he has actually received, but also for what, but for his wilful default, he would have received. He cannot charge for collecting the rents, but must do so at his own expense. If he personally resides upon the property, he must pay an occupation rent for it. Again, though it is easy to go into possession, it is not so easy to get out again, for the mortgagee cannot get rid of his responsibilities so incurred by the appointment of a receiver. Altogether, it is a remedy which may very well turn out to be worse than the disease, and it is one the resort to which the law does not encourage.
On the other hand, there are exceptional cases where it may be the only way of realising anything out of the property. For example, a mortgagee has power, when in possession, and only then, to cut and sell timber or contract for doing so. He may also open mines, and lease the property without the mortgagor's consent. He may charge for necessary repairs while in possession, but he is not allowed to "improve the mortgagor out of his property " ; in other words, to make improvements, the cost of which would, if added to the mortgage-debt, make it impossible, or unreasonably difficult, for the mortgagor to redeem. A mortgagee would only go into possession as an extreme step, as where the security is grossly insufficient, or the mortgagee has absconded, and there is a chance of becoming absolute owner of the property under the Statutes of Limitation.
Other Remedies and Powers of the Mortgagee. The mortgagee has also power, under the Conveyancing Act, 1881, to insure the mortgaged property. The premiums paid by him for such insurance will be a charge on the property, to be added to the mortgage-debt, with interest at the same rate as in the mortgage.
Leasing Powers of Mortgagor and Mortgagee. A mortgagor in possession can, since 1882, grant a valid lease or leases without the consent of the mortgagee, and a mortgagee in possession can grant leases as against the mortgagor and all other incumbrancers. The foregoing, however, must be taken as subject to the following qualifications. The term must not exceed, in the case of an occupation or agricultural lease, twenty-one years, and in the case of a building lease, ninety-nine years. The mortgagor and mortgagee may agree in the mortgage deed either to exclude or extend the powers of leasing given by the Conveyancing Act, except as to length of term. If the mortgagor has granted a lease of the property before mortgaging it, the tenant must continue to pay the rent to him, unless and until he receives express notice from the mortgagee that in future the rent must be paid to the latter.
Mortgages of Leasehold Property.-Mortgages of freeholds are always in the same form - that of an absolute conveyance of the property, subject to a proviso for reconveyance upon payment of the mortgage money with interest. There are two entirely different ways, however, of making a mortgage of property held on a lease for a term of years - in other words, leaseholds. These are:-
- By assignment.
- By demise (i.e., underlease).
In the former case the mortgagor assigns all his interest in the property, that is, the whole of the unexpired term ; in the latter he underlets the property to the mortgagee for a portion of the unexpired term (as a rule, all but the last few days of it), subject, of course, in either case to the usual proviso for redemption upon repayment. Each plan has its peculiar advantages and disadvantages. If a mortgagee has the lease assigned to him, he becomes liable to pay the rent and per form the covenants upon the mortgagor failing to do so. On the other hand, if the mortgage is by demise, the mortgagor may commit breaches of covenant, and cause a forfeiture without the mortgagee being any the wiser. On the whole, the best plan is to have the mortgage made by demise or underlease, but with a proviso giving control of the whole term, including the nominal reversion of two or three days at the end of it, to the mortgagee.
If there is a covenant in the lease against underletting, a mortgage of it must be by assignment, and similarly, if there is a covenant against assignment, the mortgage must be by demise. If there are restrictions both against underletting and assignment, an equitable mortgage may be resorted to.
Transfers of Mortgages.- A mortgage is assignable by the mortgagee to any other person for value, with or without the concurrence of the mortgagor, and the person to whom it is so assigned succeed; to all the rights, powers, and remedies of the mortgagee - becomes in fact the mortgagee in his place. Suppose a mortgagee wants to call in his money, but the time has not yet come for payment, or the mortgagor is unable to pay at once, then the mortgagee can assign the right to receive the mortgage money and interest and the benefit of the security to a third person, in consideration of being; paid by that person, instead of by the mortgagor. If the security is good, there should be no difficulty in finding an assignee, but it is usually the mortgagor's business. as well as his interest, to find one. Under the Conveyancing Act, 1881, any mortgagor entitled to redeem can compel the mortgagee to assign the mortgage-debt and transfer the security to a third person named by the mortgagor, upon the same terms on which he (the mortgagee) would be bound to reconvey, that is, upon payment of principal, interest, and costs. If, however, the mortgagee has been or is in possession, he cannot be compelled to transfer the mortgage, and in such a case it would hardly be advisable for him to do so. The mortgagor is a usual, though not a necessary party to a transfer, but if he is a party to it he should enter into a fresh covenant for payment, with the transferee. An intending transferee should take care to get an admission from the mortgagor that the debt is due, should the latter not be a party. Notice of a transfer should, at the very least, be given to the mortgagor, otherwise he may pay off the original mortgagee and not the transferee.
There are one or two other instances of transfers of mortgages which occur in practice.
(a) A transfer by way of mortgage - in fact, a mortgage of the mortgage. This is called a sub-mortgage, and may be resorted to by a mortgagee who is temporarily in immediate want of money, but does not want to call in his mortgage. It is often done by an equitable mortgage, the mortgage-deed and other title-deeds being deposited with the lender (usually a bank), together with a memorandum in writing.
(b) A transfer of a mortgage held by trustees, upon a change of trustees, by the surviving or retiring trustees to the new ones.
(c) A transfer by operation of law. Upon the death of a mortgagee, the mortgage, together with all the rights and powers of the mortgagee, devolves on his legal personal representative. There is only one exception to this rule, and that is a mortgage of copyhold land, the legal estate in which devolves on the mortgagee's customary heir, though the mortgage-debt vests in his representative. And if the mortgagee becomes bankrupt, the mortgage, along with the rest of his property, vests in his trustee in bankruptcy.
The Conveyancing Act, 1881, provides a form of statutory transfer applicable to mortgages made in the statutory form (q.v.),
FORM OF STATUTORY TRANSFER (WHERE THE MORTGAGOR IS NOT A PARTY).
This Indenture made by way of Statutory Transfer of Mortgage the ______ day of __________ between M of [&c.], of the one part, and T of [&c.] of the other part, supplemental to an Indenture made by way of Statutory Mortgage, dated _________ , and made between [&c.], witnesseth that in consideration of the sum of £ ______, now paid to M by T, being the aggregate amount of £ _______ mortgage money, and £_______ interest, due in respect of the said mortgage, of which sum M hereby acknowledges the receipt, M as mortgagee hereby conveys and transfers to T the benefit of the said mortgage. In witness, &c.
Notice, when Necessary to Perfect the Title of a Mortgagee or Transferee.- There is one most important detail to be attended to in every case where a mortgage of an equitable interest is made or transferred, and that is, immediately to give notice of the transaction to the person in whom the legal estate is vested.
Suppose, for example, that property is vested in A and B in trust for C for life, and after his death in trust for D. Here C and D have only equitable interests in the property, C as tenant for life, and D as reversioner or " remainderman," the legal estate being vested in A and B, the trustees. There is nothing, however, to prevent C and D mortgaging their interests, and persons in their position, especially D's, very often do so, but, as they cannot transfer the legal estate, any intending mortgagee of such an interest must be most particular to do two things, viz. :
- Inquire of the trustees whether they have had notice of any mortgage or charge affecting the property.
- Give immediate notice of the mortgage to the trustees, as soon as ever it has been effected.
If he omits to do the first, he may discover, when it is too late, that he has really been lending money on a second or third, instead of a first mortgage of the life or reversionary interest. A mere statement by the mortgagor that he has not created any incumbrances should not be accepted, without further inquiry of the trustees. If the second requirement is from any cause omitted or delayed, the mortgagee may find his security postponed to that of another person who has subsequently advanced money on the same property, and has given notice to the trustees before the prior mortgagee. For the rule is that notice is necessary as between successive mortgagees who have not got the legal estate, and priority is determined by date of notice. The law has always regarded the " bonâ-fide purchaser for value without notice " with especial favour.
It should be remembered that a second and any subsequent mortgage of land or other property, though the latter be not vested in trustees, is a mortgage of an equitable interest, viz., the equity of redemption, for the first mortgagee has the legal estate.
A mortgage of a life interest is almost invariably supplemented by a mortgage of a policy of assurance on the life of the mortgagor - a policy often taken out for the purposes of the advance. The object of this is to secure the mortgagee against loss, in case the mortgagor should die before the money has been repaid. The mortgagor covenants to pay the premiums and to keep the policy on foot. If he makes default in this, the mortgagee may pay them, and add the amount of the payments to the debt secured. Notice of the mortgage must be given immediately to the insurance office, for priority depends upon the date of notice.
Title-Deeds.-In the case of mortgages of land, or any interests in land, a mortgagee must be careful always to have the title-deeds handed over to him, and to keep them safely in his own custody, or that of his solicitor. If he cannot get them, he should have a reasonable explanation of the reason why. Once handed over, the mortgagor should never be allowed to get possession of them upon any pretext, unless they, or those of them showing title in the mortgagor, have been indorsed with notice of the mortgage ; for otherwise the mortgagee may put it in the power of the mortgagor to commit a fraud, by representing that the property is not mortgaged. If by the negligence of the mortgagee the mortgagor is enabled to commit a fraud, the former's rights will be postponed to those of a subsequent bonâ-fide purchaser or mortgagee. Of course a second mortgagee cannot have the deeds, because they are already in the first mortgagee's possession, but he must give the latter notice of his charge at once.
Transfer of the Equity of Redemption. A mortgagor may assign his interest in the equity of redemption, subject to the first and any other mortgages which he may have created, to a purchaser absolutely, if he can find one. After he has done that he has no further interest in the property, though he still remains liable to pay the amount due on the mortgage, and is also liable on any other covenants which he may have entered into. If, however, the mortgagee sues him on his covenant to pay, he gains a new right of redemption.
Reconveyance - Upon payment of all principal, interest, and costs owing in respect of the mortgage, the mortgagor, or any other person entitled to redeem, has a right to require the mortgagee to execute a deed reconveying the property to him, freed from the mortgage. The title-deeds will at the same time be handed back to the person redeeming.
Payment cannot be made (unless by mutual consent) before the date fixed in the mortgage deed for reconveyance, and of course the above does not apply where a mortgagee has gone into possession and acquired a title under the Statutes of Limitation.
In the case of a mortgage to a Building Society, a receipt under the seal of the Society, countersigned by the secretary or manager, in accordance with statute, and indorsed on the mortgage deed, is a sufficient reconveyance, no formal deed being necessary. The receipt vests the legal estate in the person who has the best right to call for a conveyance of the property, that is the person who, regards his interest in the property, rank next after the Society whose mortgage has just been paid off.
Mortgages and the Statutes of Limitation.- Under the latest Limitation Act (the Real Property Limitation Act, 1874), no proceedings may be taken to recover money secured on land or rent, but within twelve years after a right to receive the same has accrued, or within twelve years after some part-payment or acknowledgment of the debt has been made by the person entitled to receive the same, or his agent. This means that the mortgagee has only twelve years after the last payment or acknowledgment in which to sue. Similarly he has six years in which to recover arrears of rent or interest. A mortgagee has the same period of twelve years from the last payment or acknowledgment in which to pursue his remedy against the land by foreclosure. So that at the end of that period both his real and personal remedies are barred. The same period is allowed to a mortgagor in which to redeem, when the mortgagee is in possession. A mortgagee after having been in possession for twelve years, without making any acknowledgment of the mortgagor's right to redeem, becomes absolute owner of the property. Formerly (before 1874), the period was twenty years in every case where it is now twelve. In the case of an equitable mortgage, the debt being a simple contract debt, the right to sue for the money will be barred in six years, though a foreclosure action may be brought at any time within twelve years.
Bills of Sale.
We have seen that although Bills of Sale are true mortgages, inasmuch as they pass the property, but not the possession of it, to the lender, subject to redemption, yet they must be considered apart, as the law relating to them is entirely contained in certain special Acts of Parliament, and the cases which have been decided on them since they were passed. The object of these Acts is to prevent frauds upon creditors, and in a minor degree to protect impecunious persons from the extortions of money-lenders, who are the only class willing, as a rule, to advance money on a bill of sale. It is obvious that fraud would be easy, if stringent provisions as to registration, &c., were not made obligatory in the case of a mortgage of goods and movable property. An owner of land can only deal with his property by means of his title-deeds, and if he mortgages it he has to hand them over to the mortgagee, and thus puts it out of his own power to deal with the land either by sale or further mortgage, so as to defraud the first mortgagee. And the same would apply to a mortgage of a life policy, or stocks and shares, or any other intangible form of property which can only be transferred by means of documents of title. But with movable goods, such as furniture or cattle, the case is entirely different, for the property in them passes on a sale or gift by delivery only, and title-deeds are unnecessary. Consequently, but for the restrictions of the Bills of Sale Acts, a dishonest person in need of money might mortgage his furniture half a dozen times over to different mortgagees - that is, assuming any one would be found willing to lend under such circumstances - and then defeat them all by selling it out and out. Under the existing law, however, every bill of sale must be registered with in seven days of its execution, and there fore an intending lender or purchaser has an opportunity of seeing, by inspection of the register, whether the property has already been made the subject of a bill of sale or not.
The Acts regulating bills of sale are the Bills of Sale Acts, 1878 and 1882. They draw a distinction between " absolute " bills, which are assignments, out and out, of personal movable property to a purchaser, and " conditional " bills, which are given as security for money, and are subject to much stricter rules than absolute bills, chiefly contained in the Act of 1882. It is with the latter only that we have here to deal.
A conditional bill of sale is a document given as security for money upon personal goods belonging at the time to the person who gives the bill. The definition of " bill of sale " includes, besides bills of sale properly so called, assignments, transfers, declarations of trust, inventories, receipts for purchase-money, and powers and licenses to take possession of personal property as security for a debt, but it does not include
- Assignments for the benefit of creditors,
- Marriage settlements.
- Transfers and mortgages of ships, bills of lading, and various other commercial documents and warrants.
- Bonâ fide hire-purchase agreements.
To illustrate the difference between a hire-purchase agreement and a bill of sale; if A bonâ fide sells chattels (i.e., movable goods) to B, and B enters into an agreement with A for the hire of the said chattels by A, this is not a bill of sale, although in terms it may give B a right to enter and seize the property in default of payment. But where it appears that the sale is fictitious, and that the form of a sale has been adopted in order to conceal what is really a loan transaction, then the document is a bill of sale, and will be void unless it complies with the Acts.
Property Subject to the Acts.- The Act of 1882 applies to every bill of sale under which the grantee (i.e. the mortgagee) has power at any time to seize or take possession of any personal chattels comprised in and subject to such bill of sale. " Personal chattels " includes all goods, furniture, animals and other property capable of transfer by delivery, also all fixtures and growing crops, when assigned or charged separately from the building to which they are affixed or the land on which they are growing, also trade machinery. But the definition does not include
- Fixtures and crops assigned together with the land.
- Stocks, shares, debentures, and other securities in Government funds, corporations, or companies.
- "Choses in action," i.e., rights of action to recover property (e.g., debts, policies of assurance.)
- Stock or produce of a farm which by law or custom ought not to be removed.
- Ships (which are not transferable by delivery).
All these, except perhaps (d) may be the subject of an ordinary mortgage.
Requirements of the Acts.-The requirements of the Act of 1882, with which a conditional bill of sale must comply, in order to be valid, may be summed up under the following heads
- Inventory of property mortgaged.
- Registration, and statement of consideration.
- Minimum advance, £30.
- Form prescribed by the Act.
Dealing with these in order
- The property charged by the bill of side must all be fully specified in an inventory annexed by way of schedule to the document. The absence of an inventory, or the fact that the person giving the bill of sale was not the true owner of the goods, makes the bill void as against a subsequent bill of sale holder, though not as against the grantor (i.e., mortgagor). These rules, however, do not apply to bills of sale given over growing crops, fixtures, and trade machinery, in which cases, although the document must be in the proper form, an inventory and ownership by grantor are not necessary.
- The bill of sale must truly set forth the consideration or money value, whether it is a loan or a pre-existing debt for which it is granted, and it must be registered in the central office of the Supreme Court, or if the transaction takes place outside the London district, in a local registry, within seven days of its execution. A true copy of the bill and schedule or inventory must be filed, with the name and address of the attesting witness, and an affidavit that the bill was properly executed. Non-compliance with these requirements renders the bill absolutely void in respect of the goods comprised in it. That is, the grantor remains liable on the covenant for payment, but the grantee cannot acquire any title to the goods, even if he takes possession of them, and therefore loses his security. A bill of sale must be re-registered every five years.
- A bill of sale which is given in consideration of any sum under £30 is absolutely void, for all purposes whatsoever.
- Every bill of sale must be attested by one or more credible witnesses, not parties to it, and the address and description of each witness must also be stated, otherwise the bill is absolutely void.
- Every bill of sale which is not made in accordance with the statutory form, contained in the Schedule to the Act of 1882, will be absolutely void, for all purposes. The statutory form is as follows : -
Form of Bill of Sale.
This Indenture, made the ______ day of __________ between A B of _____ of the one part, and C D of the other part, witnesseth
that in consideration of the sum of £ _______ now paid to A B by C D, the receipt of which the said A B hereby acknowledge,,
[or whatever else the consideration may be], he the said A B doth hereby assign unto C D, his executors, administrators, and assigns, all and singular the several chattels and things specifically described in the schedule hereto annexed, by way of security for the payment of the sum of £ ______ and interest thereon at the rate of ______ per cent. per annum [or whatever
else may be the rate]. And the said A B doth further agree and declare that he will duly pay to the said C D the principal sum aforesaid, together with the interest then due, by equal payments of £ ________ on the _______ day of __________[or whatever else may be the stipulated tines or time of payment]. And the said A B doth also agree with the said C D that he will [here insert terms as to insurance, payment of rent, or otherwise, which the parties may agree to for the maintenance or defeasance of the security].
Provided always, that the chattels hereby assigned shall not be liable to seizure or to be taken possession of by the said C D for any cause other than those specified in section seven of the Bills of Sale Act (1878) Amendment Act, 1882. In witness, &c.
Signed and sealed by the said A B in the presence of me E F. [Add witness's name, address and description.]
SCHEDULE ABOVE REFERRED TO.
The " causes " specified in section of the Bills of Sale Act 1882, and for which the lender may seize the goods, are briefly as follows :
- If the grantor fails to pay the amount secured by the bill of sale at the stipulated time for payment.
- If the grantor becomes bankrupt, or allows the goods to be distrained upon for rent, rates, or taxes.
- If the grantor fraudulently removes the goods from the premises.
- If the grantor without a reasonable excuse fails to produce to the grantee his last receipts for rent, rates, and taxes, upon the latter's written demand.
- If execution is levied on the good of the grantor.
Any stipulation that the grantee may seize the goods for any cause other than the above will make the bill absolutely void.
If the goods are seized for a proper cause, they must still remain on the premises, and cannot be removed or sold until five clear days have expired from the date of seizure. This is to enable the grantor to apply to the Court to be allowed a last chance of redeeming the property by offering to pay the amount d due.
Mortgage Securities Issued by Companies.
A company, like an ordinary person, may require to borrow money ; indeed, very few companies could carry on their business without doing so. But a company, or " corporation," to use the strict legal term, unlike an ordinary person, has no power to do anything, such as borrow money, unless such power is expressly or impliedly conferred upon it by the statute or charter under which it is created. Practically all companies are given power to borrow money on mortgage, but as a rule only to the extent of a certain fixed sum in the case of trading companies, and subject to special restrictions. Consequently, persons lending money to a company should be careful to see that it is not exceeding its borrowing powers (which will be found set out in the special Act or Memorandum of Association of the company) or mortgaging what it may not lawfully mortgage - for example, uncalled capital. For our present purposes companies may be divided into two main classes, according to the manner in which they are brought into existence :
- Companies under the Companies Acts.
- Companies under special Acts of Parliament.
1. Companies under the Companies Acts, 1862-1890, i.e., ordinary trading companies incorporated by Memorandum of Association, with limited liability, have power to borrow money for the purposes of their business, and they do this by the issue of debentures.
A debenture is in form an instrument issued under the common seal of the company, containing a covenant to pay to the holder a certain named sum with interest at a fixed date, secured by a charge on all or part of the company's property, and a statement that it is issued under the conditions indorsed on it, and that it is one of a series. Debentures are nearly always issued in series. Thus, if a company was borrowing £100,000 it would do so by issuing 10,000 debentures for £10 each or 1,000 for £100 each, even if they were all issued to the same person. Every debenture of a series ranks equally with the others as a first charge on the company's business and assets.
The difference between a debenture in its usual form and an ordinary legal mortgage gage is found in the nature of the charge which each creates. A mortgage creates a fixed charge on specific property belonging to the debtor, and if the latter sold the property the mortgage would still attach to it unless and until it was paid off. But debentures are charged on all the company's property and its business for the time being, generally, and not on any specific property, and they create what is known as a "floating charge." which does not specifically attach to any particular property until it becomes enforceable, which it will do upon the appointment of a receiver on the ground that the interest is in arrear or that the security is in jeopardy, or upon the winding-up of the company.
The object of creating a "floating charge" is to give as much security as possible to lenders without hampering the company in the conduct of its business. If debenture-holders were in the position of ordinary legal mortgagees customers would be afraid to deal with the company, and its operations would soon be at a standstill. The existence of a floating security will not prevent the company from dealing with (selling or mortgaging) any special part of its property, except that it may not, as a rule, mortgage its real estate in priority to the debentures. Debentures are often further secured by a trust deed appointing trustees on behalf of the debenture-holders.
The Court may appoint a receiver at the instance of debenture-holders when the interest is in arrear, even though the principal be not due. Such a receiver can only receive the income, and pay the outgoings ; he has no power of management, except where the business or goodwill as well as the property of the company is mortgaged, when a receiver and manager will be appointed instead of a receiver alone.
2. Companies under Special Acts of Parliament.- These are companies formed to promote public undertakings, such as railways, canals, harbours, and docks, the supply of gas, water or electric light. Their constitution and borrowing powers are regulated by a series of Acts known as the Companies Clauses Consolidation Acts, the chief of which were passed in 1845 and 1863. Such companies may borrow money by means of debentures, but they more frequently do so by issuing what is called " debenture stock."
Debenture Stock partakes still less of the nature of a mortgage than does a debenture. It is usually irredeemable, and it creates no debt, i.e., confers no right to the repayment of the principal. Debenture stock-holders have simply a right to a perpetual annuity payable out of the profits of the concern, and to have all arrears of interest (if any), as well as the interest due, paid in priority
to the payment of interest on any other class of stock. Debenture stock is merely a kind of Preference stock bearing a fixed rate of interest, and ranking before all other stocks, Preference or Ordinary. It does not create a mortgage of the company's property, under which tiny part of it can be seized and sold, for a railway or other public undertaking has duties to perform towards the public at large, and its work must be carried on whether the debenture-holders are being paid their full interest or not. The security can only be enforced by the appointment of a receiver to see that the net profits of the company are being properly applied. Municipal corporations and county councils also have power to borrow money on the security of debentures or debenture stock.
Any company which has power to raise money on mortgage under any Act of Parliament can issue debenture stock, provided it has taken power to do so, under its Memorandum of Association.
Miscellaneous Securities Analogous to Mortgages.
Charges and Liens.-A charge, over property is simply a right on the part of the person who holds the charge to make that property available for the payment of money. It usually arises by the act of some person, or by contract between two or more, whereas a lien arises by operation of law. A charge differs from a mortgage in that it does not pass the property or give any right to foreclosure. Charges are of various kinds, and may exist over property of any nature, but the use of the word is chiefly confined to rights over land and real property. They are often created by will - e.g., a charge for the payment of debts and legacies, a charge for raising portions for children, &c. A charge is enforced by going to the Court and getting an order for the sale of the property. The proceeds of sale will be applied in payment of the amount due. A rent charge is an annual sum of money charged upon land belonging to the grantor, and is generally created under a will or settlement.
Liens are of two entirely different kinds, according to their origin, viz. :
- Equitable liens and
- common law liens.
An Equitable Lien-so called because it was first recognised by the old Court of Equity or Chancery - is simply a charge which arises not by the act of any party, but by operation of law. Instances of equitable liens are : the lien of a vendor of land for unpaid purchase money ; the lien of a partner on surplus assets in a dissolution of partnership for money to which he is entitled ; the lien of a beneficiary under a trust on the trust property.
A Common Law Lien is of a different nature, being based on possession, and is the right of a creditor in possession of goods belonging to his debtor to detain them until the debt is paid. Every creditor has not got such a lien, but as a rule only those persons who are under an obligation to receive and accommodate their debtor's goods or who have expended labour or money on them. For example, an inn keeper has a lien over a traveller's luggage for the amount of the bill incurred, together with a power of sale given by statute. A tradesman or artificer who has used labour and skill in working on property delivered to him for that purpose has a lien on it for his charges. Other instances of common late liens are railway companies, ship-owners and other carriers' lien for the charge or freight on the goods carried, unpaid vendor's lien under the Sale of Goods Act, 1893, and last, but not least, the lien of a solicitor over his client's papers for his costs. A lien is enforced in the same way as a charge.
Pawns or Pledges.-A pawn, or pledge (which means the same thing), is a deposit of personal property with another person as security for a loan advanced by that person or a debt due to him. The security differs from a mortgage in that the property does not pass to the lender, but the possession of it does. The lender is said to have a "special property" in the goods pledged. Goods may be pledged by the deposit of documents of title to them, e.g., a bill of lading, or by the deposit of the key of a room where they are locked up. The pledgee - i.e., the person with whom the goods are pledged - cannot get a better title to the property than the pledgor, so that if the goods are stolen or the pledgor was not the true owner, he maybe liable to return them to the owner. The pledgee may sell the goods pledged after the time fixed for payment has elapsed ; if no time is fixed he must give notice to the pledgor, requiring the money to be paid, and stating his intention to sell after a certain date. Any surplus belongs to the pledgor. The pledgee is bound to take reasonable care of the property pledged. The pledgor may redeem it any time upon tender of the amount due for principal and interest.
Pawnbrokers are regulated by the Pawnbrokers Act, 1872, which applies to all persons who make a business of taking goods in pawn, where the amount advanced is under £10. The Act regulates the contract between the pledgor and pawnbroker in all respects where the loan is under forty shillings, fixing the rate of interest at one halfpenny a month on every two shillings advanced, i.e., 25 per cent. per annum. A " special contract " may be made when the amount of the advance exceeds forty shillings but is under £10. Where the amount exceeds £10 the Act has no application. The business of pawnbroking is surrounded by a number of regulations and restrictions, the breach of any one of which is an offence against the Act, punishable in most cases by a fine of £10. If a pawnbroker refuses to deliver up any property pledged, to the person entitled to it, on payment of the amount due, or to deliver up property unlawfully pawned, to the true owner, he may be ordered so to do in each case by a Court of summary jurisdiction. Any property pledged for less than ten shillings becomes the absolute property of the pawnbroker after twelve months and seven days, and any other property pledged may be sold by auction, under special restrictions, after that interval. The holder of the pawn-ticket is presumed to be the person entitled to redeem the pledge.
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