Part 2 Security Interests in Land Section I Introduction to Mortgages

History of Mortgages of Land The form of a mortgage The form of a mortgage Traditionally a transfer of the fee simple either Traditionally a transfer of the fee simple either With a covenant for reconveyance on payment of the debt, or With a covenant for reconveyance on payment of the debt, or Defeasible on condition subsequent (payment of the debt) Defeasible on condition subsequent (payment of the debt) This functioned effectively as a means for providing security for a loan This functioned effectively as a means for providing security for a loan Problem Problem If the condition was not strictly met, the debtor lost his rights to the property If the condition was not strictly met, the debtor lost his rights to the property AND the debtor was still liable for the debt AND the debtor was still liable for the debt

History of Mortgages of Land In the worst case, if a mortgagor was a day late in the final payment, she would not be entitled to recover her land, even though the debt had been paid off in its entirety In the worst case, if a mortgagor was a day late in the final payment, she would not be entitled to recover her land, even though the debt had been paid off in its entirety The Courts of Equity were generally willing to provide relief in such cases The Courts of Equity were generally willing to provide relief in such cases

History of Mortgages of Land The “equity of redemption” was the judicially imposed right to regain title to the land on payment of the debt, even after the contractual time for payment had passed The “equity of redemption” was the judicially imposed right to regain title to the land on payment of the debt, even after the contractual time for payment had passed It was this right which made a mortgage more than a simply contract It was this right which made a mortgage more than a simply contract The equity of redemption was eventually recognized as a right which could itself be sold or mortgaged The equity of redemption was eventually recognized as a right which could itself be sold or mortgaged

History of Mortgages of Land Mortgage law is consumer protection law Mortgage law is consumer protection law The right of redemption cannot be waived The right of redemption cannot be waived “No clogs on the equity of redemption” “No clogs on the equity of redemption” The prohibition on clogs or fetters on the equity of redemption follows directly from the nature of mortgage law as consumer protection law The prohibition on clogs or fetters on the equity of redemption follows directly from the nature of mortgage law as consumer protection law The debtor cannot contract out of rules designed for her protection The debtor cannot contract out of rules designed for her protection

History of Mortgages of Land “Once a mortgage, always a mortgage” “Once a mortgage, always a mortgage” Substance over Form the application of mortgage law is determined by the substance of the transaction, not its form Substance over Form the application of mortgage law is determined by the substance of the transaction, not its form Mortgage law requires such a rule or its consumer protection aspects can be evaded by changing the form of the contract Mortgage law requires such a rule or its consumer protection aspects can be evaded by changing the form of the contract

History of Land Mortgages These rules, while necessary to make mortgage law effective, cause problems in some legitimate transactions These rules, while necessary to make mortgage law effective, cause problems in some legitimate transactions E.g. a true sale with an option to repurchase E.g. a true sale with an option to repurchase A mortgage with a lenders option to purchase A mortgage with a lenders option to purchase Such transactions may be effective in allocating risk of land value fluctuations Such transactions may be effective in allocating risk of land value fluctuations

Equitable Mortgages Equitable mortgages occur when no transfer of the legal title is involved Equitable mortgages occur when no transfer of the legal title is involved E.g. a second mortgage E.g. a second mortgage A legal mortgage with a formal defect A legal mortgage with a formal defect There is no substantive difference between a legal mortgage and an equitable mortgage There is no substantive difference between a legal mortgage and an equitable mortgage

Disguised Mortgages A mortgage that looks like a sale A mortgage that looks like a sale A conveyance of the fee simple with an oral agreement to reconvey on payment of the debt A conveyance of the fee simple with an oral agreement to reconvey on payment of the debt A sale that looks like a mortgage A sale that looks like a mortgage A true sale with an option to repurchase A true sale with an option to repurchase

Modern Form of a Mortgage In some jurisdictions the form of a mortgage remains traditional (e.g. N.B.) In some jurisdictions the form of a mortgage remains traditional (e.g. N.B.) In other jurisdictions, a mortgage is legislative lyconsidered a charge In other jurisdictions, a mortgage is legislative lyconsidered a charge E.g. Ontario Land Registration Reform Act RSO 1990 c.L.4, s.6(3) E.g. Ontario Land Registration Reform Act RSO 1990 c.L.4, s.6(3) This has no effect on the rights and remedies This has no effect on the rights and remedies