In circumstances where a credit provider is unable to register a mortgage over real property, but has an equitable mortgage or charge, are they relegated to life as an unsecured creditor with no ability to realise the property in order to discharge the debt? No they are not. In certain circumstances a court order may be sought for a judicial sale of the real property.
What is an equitable mortgage?
The essence of a mortgage is that a debtor gives a proprietary interest in their property to their credit provider, which interest may be realised by the credit provider in order to discharge the liability of the debtor.
Where a debtor gives a binding undertaking to provide a proprietary interest in property to the credit provider, an equitable mortgage is created. The binding undertaking can be provided by the signing of a credit contract which states the property is provided as security.
If there has only been a binding undertaking to provide the proprietary interest, and no legal transfer has been made, a proprietary interest in equity is created in the property.
Unlike a legal mortgage, there is no specific form required to create an equitable mortgage. It may be created by general words. To enforce a right to sell property under an equitable mortgage, court orders conferring a power of sale are required.
Protection of mortgagee's rights under equitable mortgage
There is no protection afforded to an equitable mortgagee that is equivalent to a registered mortgagee. That said, it is commonly recommended that the next best form of protection for an equitable mortgagee is to lodge a caveat on the property to which the mortgagee claims an interest. A caveat will only entitle the equitable mortgagee to notification of any dealings with the title, it does not confer a right to possession of land or power of sale of land, nor will it prevent any such dealings by a registered mortgagee.
Enforcement of equitable mortgage
Whilst an equitable mortgagee does not have a statutory power of sale pursuant to section 76 of the Transfer of Land Act 1958 (Vic) (or equivalent legislation) in respect of the mortgaged land, it may have a contractual right or the ability to obtain a court declaration to sell the land where the mortgagor is in default of the terms of the equitable mortgage.
Courts have an inherent jurisdiction to make orders that a party be permitted to sell a property and to direct the disposal of the proceeds of sale, often referred to as a "judicial sale" of a property. For a Court to determine whether a judicial sale is appropriate, it will first determine if there is a charge over the land, whether it be by written deed, agreement or some other action.
For a sale to proceed the property will need to be vacant. A court application for judicial sale will need to also seek orders for delivery up of vacant possession of the property to enable the sale to proceed. The Supreme Court of NSW found in King Investment Solutions v Hussain  NSWSC 1076 that whilst a registered second mortgagee can bring proceedings for ejectment, a mere equitable charge over land has no right to possession. However, where the mortgage contains a promise by the mortgagor to give up possession upon default, then an equitable mortgagee is entitled to a declaration that it is entitled to possession once there has been default. Further, in appropriate circumstances, the equitable mortgagee could obtain an order in the nature of specific performance to enforce that promise by requiring the mortgagor to deliver up possession.
Orders may also be sought in Victoria relying on section 91(2) of the Property Law Act 1958 (Vic) for the Court to direct a sale of mortgaged property on such terms as it thinks fit. Similarly, in Queensland, the Court may make appropriate orders allowing the equitable mortgagee to carry out a sale of the property in a like manner as if the mortgage had been created by way of instrument or deed pursuant to section 100 of the Property Law Act 1974 (Qld). However, it is important to note that in the absence of express consent from any affected party, the Court will only make such orders provided they do not prejudice any encumbrance on title having priority over the equitable mortgage.
A registered mortgage puts a credit provider in a better position than an equitable mortgage. A registered mortgage provides the credit provider with an indefeasible interest in the property. However if circumstances have arisen where a registered mortgage has not been obtained, a credit provider can pursue possession and sale of property under an equitable mortgage.
A court declaration that the credit provider has an equitable mortgage and is entitled to a judicial sale can be obtained. To obtain this order a court hearing is required, resulting in the process taking time and incurring costs. However, if the best chance of loan recovery is through a sale of property, it is a worthwhile process.