Australia: Securing the repayment of loans - mortgages and securities

Brief outline of mortgages and history

A mortgage is a statutory charge granted by the borrower in favour of the lender over the borrower's real property. As real property is a valuable, simple and stable asset, it is the most preferred way for a lender to secure its debt until the loan has been repaid in full.

Prior to 1863, the registration system for mortgages was the "Old System" title, which required a borrower to give up legal ownership of their land (real property) to a lender until repayment of the loan. This meant that the borrower had to transfer the land to the lender during the term of the loan and only held an equitable interest in the land (equitable redemption). Once the loan was repaid, the land would be transferred back to the borrower, by way of an executed transfer or court order.¹ The main issue with Old System title was that it was difficult to determine the ownership of the land without the thorough examination of a chain of deeds to establish the true owner of the land, a process known as evidence of the good root of title to the land. This was because one piece of land could have multiple title deeds.

The introduction of the Torrens title system, which is still in place today, simplified ownership precisely, as it ensured all interests in the land are recorded on one title deed. This eliminated the need to evidence a good root of title to the land.² Under the Torrens title system, the legal title to the land is not required to be transferred from the legal proprietor to the lender as the mortgage is a statutory charge over the land.³ This means that the borrower remains the legal proprietor of the land and will be prohibited from, unless consent is obtained from the lender, disposing, leasing, sub-dividing, or changing the use of the land, among other things. Upon repayment of the loan, the lender will discharge the charge (the mortgage) over the land. Alternatively, if the borrower defaults under the loan, the lender may take possession of the property and recover the debt by receiving rent or selling the property.

It is important to note that Old System titles still exist in some areas of New South Wales. Therefore it is important to check the title search of a property prior to entering into any term sheet and / or loan agreement.

Paper Certificate of titles have been abolished in New South Wales, Western Australia, the Australian Capital Territory, Queensland and South Australia. As a result, the Certificate of Title is no longer required to register a mortgage on title. Paper and electronic certificates of title are available in the Northern Territory and Victoria. Tasmania remains as issuing paper titles only.

Prescribed form of Mortgage

The National Mortgage Form prescribed by the Real Property Act 1900 (NSW) (RPA) is to be used for all mortgages. The National Mortgage Form is a deed that does not require consideration and is immediately binding on a party from the moment they sign. The National Mortgage Form and its requirements are slightly different in each state and territory. In New South Wales, both the borrower and the lender must sign the National Mortgage Form and reasonable steps must be taken to verify the identity of the mortgagor.

What is a Security Interest / the PPSA

A borrower's personal property (rather than real property under the RPA) may be secured to a lender by way of a security agreement which creates a security interest(s) under the Personal Property Security Act 2009⁴ (Cth) (PPSA). The definition of 'Security Interest(s)' under section 12 of the PPSA includes:

Notably, a security interest under the PPSA only recognises security interests in personal property and not real property.⁵

Since it's commencement in 2012, the PPSA changed the way security interests in personal property assets were governed. A major development that came with the PPSA was that it introduced the Personal Properties Security Register (PPSR), an official government register that shows security interests in personal property. The PPSR act as a national noticeboard showing all registered security interests in the personal property of grantors which is incredibly valuable as it creates transparency and consistency nationally.

Usually security interests arise when a lender and a grantor enter into a security agreement giving rise to a lender's (secured party) interest in the personal property of a borrower or guarantor (grantor). There are three different types of security interests, which are:

1. all-PAAP – this security interest is granted over all of the grantor's personal property (both present and future);
2. specific Security – this security interest is granted over specific personal property of the grantor; and
3. PMSI – this security interest is granted to a person who facilitates the acquisition of personal property.

If an event of default occurs, the lender may enforce its security interest under the PPSA and sell the asset and recover any amounts owing. Although the PPSA does not recognise security interests in real property, typically security agreements contain a charging clause over any present and future real property to address any administration risk that a lender may be exposed to in the provision of the loan to a borrower.

The PPSA does not prescribe a form or document for the creation or registration of a security interest on the PPS register, unlike the prescribed National Mortgage Form in respect of a Torrens title mortgage. However, a registration on the PPSR must made within 20 business days after the signing of the security agreement, otherwise the lender will lose priority on its security interest for 6 months.

Key Takeaways

1. security agreements (bringing about security interests) and mortgages are alike in that they both secure debt to ensure repayment.
2. both mortgages and security agreements will contain a charging clause, however these clauses generally apply to different types of assets (i.e. real property and personal property).
3. there is no prescribed form or verification of identity requirements for a security agreement, however a Torrens title mortgage requires the National Mortgage Form and a verification of identity must be conducted.

Footnotes

¹ Bryson, John P QC, The History of Property Law (2017).

² Stein, R, The Principles, Aims and Hopes of the Title by Registration (1983) 9(2) Adelaide Law Review 267.

³ Real Property Act 1900 (NSW) No 25 Part 1A s 3.

⁴ Personal Property Security Act 2009 (Cth).

⁵ Personal Property Security Act 2009 (Cth) s 10.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.