Is your loan protected? Priority of competing equitable interests

Have you provided credit or loaned money, but been unable, or have not yet registered a mortgage over your borrower’s property as security?

Have you provided credit or loaned money, but been unable, or have not yet registered a mortgage over your borrower’s property as security?  In most cases, until and unless you have a registered legal interest on the Certificate of Title, you are deemed only to have an equitable mortgage.

In these circumstances, you need to be clear about your legal position as it relates to:

  1.     The enforceability and protection of your equitable mortgage and loan; and
  2.     The priority of your equitable mortgage relative to other equitable interests, i.e. If there are insufficient funds from the proceeds of sale of real property to pay out all creditors, who gets paid first?

Equitable Mortgages

A mortgage is a proprietary interest given by a borrower to their lender, which interest may be realised by the lender in order to discharge the borrower’s liability under a loan.  A registered mortgage provides the lender with an indefeasible interest in the property and puts a lender in a better position than the holder of an equitable mortgage.

If the instrument pertaining to the mortgage on title has not been registered, there is still a proprietary interest in equity created in the property.  However, unlike a legal mortgage, a court order conferring a power of sale is required to enforce a right to sell property under an equitable mortgage.

Priority of Competing Equitable Interests

The general principle to determine priority between competing equitable interests is that, where the merits are equal, the earlier in time prevails over the later: Rice v Rice (1853).  However, this principle is merely a starting point and the court will look at the circumstances of the matter to determine who has a better equity and accordingly, higher priority.

One circumstance in which the later interest holder will be held to have a better equity than the earlier is where the earlier interest holder is guilty of an act or omission which had or might have had the effect of inducing the later interest holder to act to his or her prejudice: Butler v Fairclough (1917).

A common example of such an act or omission is the failure to lodge a caveat, thereby inducing a subsequent lender to assume there are no interests in the land besides those on the register.  In such circumstances, the prior interest may have engaged in postponing conduct, resulting in the later interest holder having a higher priority than the earlier interest holder to be repaid his funds.

Importantly, if a person with an equitable mortgage initially fails to lodge a caveat, but then later lodges a caveat after a subsequent mortgagee has taken an equitable mortgage in reliance upon lack of caveats, the mere fact that the prior mortgagee might lodge their caveat before the subsequent mortgagee lodges a caveat would not assist the earlier mortgagee in the contest of priorities.

Priority of Competing Equitable Interests

A lender with a mere equitable mortgage is in a weaker position than a lender with a registered, legal mortgage. Accordingly, as a lender you should take care and seek appropriate legal advice to ensure your rights and interests are not unnecessarily derogated.

This article does not constitute legal advice and should not be relied upon as such.  This article is intended only to provide general commentary on matters of interest and is not intended to be comprehensive.  You should seek legal advice before acting or relying on any of the content of this article.

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