The Exercise of the Mortgagee's Power of Sale in Jamaica (Including Equitable Mortgages, Foreclosure, Taking Possession) 1.
“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.” – John Maynard Keynes.
2.
Mortgages can be a driver of economic growth from an individual domestic perspective (residential mortgage – homeownership and increase in personal wealth) and from a corporate or commercial perspective (business capitalization).
When debtors (for that is what all mortgagors are) default in
their obligations, it creates a clog in this economic engine.
It can ruin a
financial institution and cause havoc that reaches well beyond. It is in this context the law relating to mortgages and in particular, the exercise of the power of sale, has developed.
3.
The relevant statutory provisions, in relation to registered property is SS 105, 106 and 107 of the Registration of Titles Act. “S.105
A mortgage and charge under this Act shall, when registered as hereinbefore provided, have effect as a security, but shall not operate as a transfer of the land thereby mortgaged or charged; and in case default be made in payment of the principal sum, interest or annuity secured, or any part thereof respectively, or in the performance or observance of any covenant expressed in any mortgage or charge, or hereby declared to be implied in any mortgage, and such default be continued for one month, or for such other period of time as may therein for that purpose be expressly fixed, the mortgagee or annuitant, or his transferees, may give to the
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mortgagor or grantor or his transferees notice in writing to pay the money owing on such mortgage or charge, or to perform and observe the aforesaid covenants (as the case may be) by giving such notice to him or them, or by leaving the same on some conspicuous place on the mortgaged or charged land, or by sending the same through the post office by a registered letter directed to the then proprietor of the land at his address appearing in the Register Book. S. 106
If such default in payment, or in performance or observance of covenants, shall continue for one month after the service of such notice, or for such other period as may in such mortgage or charge be for that purpose fixed, the mortgagee or annuitant, or his transferees, may sell the land mortgaged or charged, or any part thereof, either altogether or in lots, by public auction or by private contract, and either at one or at several times and subject to such terms and conditions as may be deemed fit, and may buy in or vary or rescind any contract for sale, and resell in manner aforesaid, without being liable to the mortgagor or grantor for any loss occasioned thereby, and may make and sign such transfers and do such acts and things as shall be necessary for effectuating any such sale, and no purchaser shall be bound to see or inquire whether such default as aforesaid shall have been made or have happened, or have continued, or whether such notice as aforesaid shall have been served, or otherwise into the propriety or regularity of any such sale; and the Registrar upon production of a transfer made in professed exercise of the power of sale conferred by this Act or by the mortgage or charge shall not be concerned or required to make any of the inquiries aforesaid; and any persons damnified by an unauthorized or improper or irregular exercise of the power shall have his remedy only in damages against the person exercising the power.
S. 107
The purchase money arising from the sale of the mortgaged or charged land shall be applied as follows: If the sale be by the mortgagee or his transferee-
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First, in payment of the expenses of and incidental to such sale and consequent on such default; secondly, in payment of the moneys which may be due or owing on the mortgage, thirdly in payment of subsequent mortgages and of any money which may be due or owing in respect of any subsequent charge in the order of their respective priorities; and the surplus (if any) shall be paid to the mortgagor: Provided always that if the sale be made by a mortgagee or his transferees, and there is a subsequent charge, the purchase moneys, after there shall have been made thereout all proper prior payments, shall be deposited by him or them in the manner and names, and for the purposes, corresponding with those after mentioned. If the sale be by the annuitant or his transfereesFirst, in payment of the expenses of and incidental to such sale and consequent on such default; then in payment of the moneys which may be due or owing to the annuitant or his transferees; and the residue shall be deposited by him or them at interest in the Workers Savings and Loan Bank, in the joint names of the annuitant or his transferees and of the Registrar, to satisfy the accruing payments of the charge, and, subject thereto, for the benefit of the persons who may be or become entitled to the residue of the deposited money.�
4.
In respect of the unregistered property, it is the provisions of the Conveyancing Act, sections 22 , 23 and 24 that apply:
S. 22 (1)
A mortgagee, where the mortgage is made by deed, shall, by virtue of this Act, have the following powers to the like extent as if they had been in terms conferred by the mortgagee deed, but not further namely-
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(a)
a power, when the mortgage money has become due, to sell, or to concur with any other person in selling, the mortgaged property, or any part thereof, either subject to prior charges or not, and either together or in lots, by public auction or by private contract, subject to such conditions respecting title, or evidence of title or other matter, as he (the mortgagee) thinks fit, with power to vary any contract for sale, and to buy in at an auction, or to rescind any contract for sale and to resell, without being answerable to any loss occasioned thereby; and
(b)
a power, at any time after the date of the mortgage deed, to insure and keep insured against loss or damage by fire any building, or any effects or property of an insurable nature, whether affixed to the freehold or not, being or forming part of the mortgaged property; and the premiums paid for any such insurance shall be a charge on the mortgaged property, in addition to the mortgage money, and with the same priority, and with interest at the same rate as the mortgage money; and
(c)
a power to the mortgagee from time to time to sue for and recover from the mortgagor any premiums under the aforesaid power, together with interest, as for money paid at the request of the mortgagor, and may recover the same although such money may have been added to the principal loan; and
(d)
a power, when the mortgage money has become due, to appoint a Receiver of the income of the mortgaged property, or of any part thereof; and
(e)
a power, while the mortgagee is in possession, to cut and sell timber and other trees ripe for cutting, and not planted or left standing for shelter or ornament, or to contract for any such cutting and sale, to be completed within any time not exceeding twelve months from the making of the contract.
(2)
The provisions of this Act relating to the foregoing powers, comprised either in this section or in any subsequent section regulating the exercise
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of those powers, may be varied or extended by the mortgage deed, and as so varied or extended shall, as far as may be, operate in the like manner and with all the like incidents, effects and consequences, as if such variation or extensions were contained in this Act. (3)
This section applies only if and as far as a contrary intention is not expressed in the mortgage deed, and shall have effect subject to the terms of the mortgage deed, and to provisions therein contained.
S. 23. (1)
A mortgagee shall not exercise the power of sale conferred by this Act unless and until(a)
notice requiring payment of the mortgage money has been served on the mortgagor or one of several mortgagors, and default has been made in payment of the mortgage money, or of part thereof, for three months after such service; or
(b)
some interest under the mortgage is in arrear and unpaid for two months after becoming due; or
(c)
there has been a breach of some provision contained in the mortgage deed or in this Act, and on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon.�
S.24 (1)
A mortgagee exercising the power of sale conferred by this Act, shall have power, by deed, to convey the property sold for such estate and interest therein as is the subject of the mortgage freed from all estates, interests and rights to which the mortgage has priority, but subject to all estates, interests and rights, which have priority to the mortgage.
(2)
Where a conveyance is made in professed exercise of the power of sale conferred by this Act the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized or
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improper or irregular exercise of the power shall have his remedy in damages against the person exercising the power. (3)
The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into court under this Act of a sum to meet any prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale or otherwise, and secondly, in discharge of the mortgage money, interest and costs, and other money if any due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorized to give receipts for the proceeds of the sale thereof.
(4)
The power of sale conferred by this Act may be exercised by any person for the time being entitled to receive and give a discharge for the mortgage money.
(5)
The power of sale conferred by this Act shall not affect the right of foreclosure.
(6)
The mortgagee, his executors, administrators or assigns, shall not be answerable for any involuntary loss happening in or about the exercise or execution of the power of sale conferred by this Act, or of any trust connected therewith.
(7)
At any time after the power of sale conferred by this Act has become exercisable, the person entitled to exercise the same may demand and recover from any person, other than a person having in the mortgaged property an estate, interest or right, in priority to the mortgage, all the deeds and documents relating to the property, or to the title thereto, which a purchaser under the power of sale would be entitled to demand and recover from him.�
5.
For the purpose of this presentation, we will confine our consideration to the Registration of Titles Act. 6 | Page
6.
At the outset, I should make special mention of the informative article by our colleague, Queen’s Counsel R.N.A. Henriques, entitled “Priorities of Mortgages” 1 and to a paper by Ms. Alison Dunkley entitled “Exercise of the Mortgagee’s Power of Sale in Jamaica” 2
presented in 1997 when the
Jamaican Bar Association was promoting continuing legal education well before it became mandatory a few years ago. I do not propose to repeat the content of those papers but bring them to your attention if you wish to pursue further reading.
7.
There have been interesting developments in the last 20 years, especially from the financial collapse in the mid 1990’s that are worthy of consideration. They relate to questions such as: a.
The circumstances in which an injunction may be granted.
b.
The challenge presented by a tenant or purchaser from the mortgagor in possession without the consent of the mortgagee, and
c.
The competing priorities of mortgages and/or other charges or interests in the mortgage premises.
RIGHTS/OBLIGATIONS OF A MORTGAGEE: 8.
In Patvad Holdings Ltd v. Jamaican Redevelopment Foundation, Inc. 3, Mrs. Justice McDonald-Bishop (Ag.) (as she then was) said that as it relates to the legal rights of a mortgagee seeking to exercise its power of sale, “this issue touches on an area of the law that has its own clearly defined principles.
October 1977 West Indian Law Journal, p. 17 Presentation to the Jamaican Bar Association, June 15, 1997 3 Claim No. 2006/HCV 01377, delivered on 12th February 2007. 1 2
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Special rules have evolved governing the question of restraining mortgagee’s power of sale”. 4 Her Ladyship observed that, “it is from the mortgage instrument that the mortgagee derives his rights, duties and obligations and so it is this instrument that one must first look to ascertain the rights of the [mortgagee] over the mortgaged property in question.” 5 Once the specified default has occurred, it is effective to trigger the power of sale pursuant to the terms of the mortgage and the relevant law.
9.
There is a statement by Kekewich J in Colson v. Williams 6 that sought to describe the rights of a mortgagee. He said: “Where a mortgagee under ordinary circumstances thinks it necessary and as long as he is not prohibited by the terms of his contract, he is the sole judge of what is necessary to realize his security, he can do so without hesitation. If there is a notice to be given he must give it; if some conditions are to be observed they must be observed; but as regards the time when he shall realize his security he is the sole arbiter and no one can interfere with him. He may even do it from bad motive… The court has nothing to do with the motives of a mortgagee. If he, from whatever motive, deems it right to realize his security, although he may be guilty of spite,
although
he
may
even
look
forward
with
complaisance or satisfaction to the ruin of his debtor, still if he chooses to exercise his power, he can do so; but Ibid paragraph 16 At paragraph 17. 6 L.J. 1889 Vol. 58 539 at page 540. 4 5
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whether he acts from good or bad motive, whether he acts merely as a man of business deserving to realize his security, or whether he acts from some other or any of the reasons which may influence the human mind, he is equally bound to remember that there is an equity of redemption behind him, and that being so, he cannot do that which would otherwise be possible, and in many circumstances easy. A mortgagee to whom is owed a sum of money on security of land cannot offer the land to a purchaser merely for that which could cover his principal, interests and costs independently of the value of the property.
If there is a
margin which can be reasonably obtained he must remember that there is the mortgagor or possibly a second mortgage claiming through him or possibly other persons having charges who are entitled to be considered. But as long as he exercises the power fairly in that view, so long as he does that which he fairly can do to realize a fair price, he is, in my judgment entirely free.”
THE GRANT OF INJUNCTIVE RELIEF AGAINST A MORTGAGEE 10.
No other circumstance demonstrates the sui generis nature of mortgages than when the Court considers whether to restrain a mortgagee from exercising its power of sale.
11.
What is often described as the “Marbella principle” derives its name from the case SSI (Cayman) Limited v. International Marbella Club SA 7. The
7
SCCA No. 57/1986 delivered on the 6th February, 1987
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case establishes that, as a general principle, a mortgagee will not be restrained in exercising its powers of sale, not even when there is a dispute as to the amount, or an allegation of fraud or conspiracy by the mortgagee unless the mortgagor, as a condition of the restraint, pays into court the amount sworn to by the mortgagee as due and owing. The strict application of this principle has caused an uneasiness with judges, from time to time, but the principle has been applied for over 150 years now with very few exception. But exceptions there are.
12.
In a consolidated appeal which I will style by the name of the first matter in the appeal - Mosquito Cove v. Mutual Security Bank Ltd and others 8 , Morrison, J.A. (as he then was), in what is a comprehensive judgment, reviewed the development of the Marbella principle and its exceptions.
13.
He described as the high-water mark, the much criticized case of Flowers Foliage and Plants of Jamaica Ltd v. Jamaica Citizens Bank 9 .
This
decision of the Court of Appeal has been the proverbial straw grasped by every drowning debtor although the case concerned an application for a stay of execution of a judgment pending appeal and not one for injunctive relief. In determining whether a stay of execution of a judgment should have been on terms of payment of the judgment sum into escrow, Rattray P. declared, “Courts of equity do not shackle themselves with unbreakable fetters if the justice of the particular case demands a more flexible approach� 10.
[2010] JMCA Civ 32. (1997) 34 JLR 447. 10 At page 452. 8 9
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14.
In Mosquito Cove, Morrison J.A. with masterful diplomacy demonstrated why the significance of Flowers & Foliage should be largely diminished in any future consideration whether a mortgagee should be restrained. His Lordship noted that the case was unsatisfactory in at least three respects:
a. The observation by Rattray P was, strictly speaking, obiter; b. As regards the nature of securities in Marbella and Flowers & Foliage, there was no factual distinction between the cases as Rattray P thought, both having equally to do with guarantees and supporting mortgages; and c. The obvious conflation of established principles on which a court will grant an injunction restraining a mortgagee from exercising powers of sale with the quite different principles that govern applications for stay of execution pending appeal where the court is primarily concerned with the risk of injustice to one or other party by the grant or refusal of the stay. 11
15.
The Commercial Court recently revisited Mosquito Cove decision and the question of enforceability of the mortgage in Alexander House Limited v Reliance Group of Companies. 12 The defaulting mortgagor claimed that six foreign currency loans from the mortgagee were illegal and void as they contravened section 22(A) (2) of the Bank of Jamaica Act that provided that person shall not carry on business of borrowing or lending foreign currency unless he is an authorized dealer which the mortgagee was not. The mortgagor admitted receiving the loans and giving security. Batts J opined that while the loan may well be held at trial to be unenforceable for reason of
11 12
Supra, at paragraph 53. [2016] JMCC Comm 22.
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public policy, the exercise of the power of sale did not depend on a judicial act or intervention. 13 The mortgagor admitted receiving the loan and having its full benefit. The matters to be tried were not free from difficulty but the Defendant mortgagee’s prospect of ultimate success was fair. He arrived at that conclusion relying particularly on case law from the United Kingdom that decided that the business of “dealing in securities” without a licence did not necessarily mean the transaction itself was illegal. 14 He granted the injunctive relief sought on terms of payment by the mortgagor into a joint interest bearing account the amount claimed by the mortgagee. The Court of Appeal recently upheld this ruling but its written reasons are outstanding.
16.
Remembering, however, that injunctive relief is discretionary, the power of sale may still be restrained by a Court without any preconditions. For ease, we can summarize these as: i)
Unusual or exceptional circumstances, as in Gill v. Newton 15 where the Court was moved by the peculiar terms used in the mortgage deed. Also in Macleod v. Jones 16, wherein a client /solicitor relationship became a mortgagor/mortgagee, one through a series of transactions advised by the solicitor and on his advising, this was in his client’s best interest. The court said it gave rise to a dangerous conflict of duties. Note however, that while the ordinary principle did not apply, the client/mortgagor was still ordered to pay into Court the amount that had been advanced to her by her solicitor as a condition for the injunction.
ii)
When the mortgagee’s claim is on the face of it excessive: Hickson v. Darlow 17. It is not about whether the sum is merely disputed, which is insufficient to avoid the condition being imposed.
At paragraph 26. At para 32. The court cited Hughes v Asset Managers Plc [1995] 3 All ER 609. 15 (1866) 14 WR 490. 16 (1883) 24 Ch D 289. 17 (1883) 23 Ch D 690. 13 14
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iii)
Where the validity of the mortgage deed is in issue. Rupert Brady v. Jamaican Redevelopment Foundation Inc 18 . The Court of Appeal was persuaded by material before it that the Claimant/Appellant had an arguable case that his signature had been forged. The court determined in those circumstances it would be inequitable to demand payment of the sum owing as a condition for restraining the mortgagee.
Morrison J.A. recognized that the categories of exceptions are not exhausted by the foregoing 19.
17.
Sykes J. in a paper entitled, “From Marbella to Olint: What in Heaven’s Name is Happening?” 20 pointed to the fact that Australian jurisprudence recognizes that the inflexible application of the general rule can lead to injustice. He reviewed how Australian courts have created explicit exceptions to the general rule and then molded their orders to meet the justice of the case. This may lead to some money being paid into court but not the whole sum, the aim being to give protection to the mortgagee without impoverishing the mortgagor. In fact in JMMB Merchant Bank Ltd v. Winston Finzi 21 Sykes J granted the injunction but fashioned the order to take into account that mediation was imminent. The injunction was granted for three weeks to allow mediation to be completed before requiring the mortgagor to pay the amount claimed by the mortgagee as a condition for the continuation of the injunction, in the event the matter was not resolved at mediation.
18.
One final note on this aspect. Section 106 of the Registration of Titles Act is often prayed in and to resist an application for injunctive relief: It has to do
SCCA 29/2007 delivered 12th June, 2008. At paragraph 64. 20 Presented at an Advocates Association seminar 6th June 2009. 21 [2014] JMCCCD 10 18 19
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with the words, “any person damnified by an unauthorized or improper or irregular excuse of the power shall have his remedy only in damages against the person exercising the power.” The Court of Appeal has made it clear that this part of Section 106 “is not relevant as to whether or not an injunction should be granted to restrain the mortgagee from exercising the power of sale.
It is relevant after the power of sale has been exercised.”
(emphasis added) 22.
EQUITABLE MORTGAGES
19.
Section 63 of the Registration of Titles Act deals with the effectiveness of registration or non-registration of instrument affecting lands brought under the Act. “No instrument until registered …shall be effectual to pass any estate or interest in such land, or to render such land liable to any mortgage or charge; but upon registration the estate or interest comprised in the instrument shall pass or, as the case may be, the land shall become liable in the manner and subject to the covenants and conditions set forth in the instrument;…and should two or more instruments signed by the same proprietor, and purporting to affect the same estate or interest, be at the same time presented to the Registrar for registration, the Registrar shall register and endorse that instrument which shall be presented by the person with the certificate of title.”
20.
The foregoing provision underscores the importance of having registered a written instrument of mortgage. With a written Instrument of Mortgage, challenges can be made in respect of the exercise of the powers of sale.
22
Global Trust Ltd v. Jamaican Redevelopment Foundation, Inc SCCA 41/2004 delivered 27th July, 2007
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When there is no written instrument, the matter can become even more complicated.
21.
This was illustrated in Jamaican Redevelopment Foundation Inc v. Winston Finzi 23. There the Defendant obtained a loan from Mutual Security Bank & Trust Company Ltd secured by an equitable mortgage created in August 1995 by the deposit of the duplicate certificate of titles. The property was not registered in his name but in the name of a third party that had an Agreement for Sale with a company that the Defendant allegedly owned and controlled. The company had given previous instructions to its Attorneys-atLaw directing that the title be transferred to the Defendant or its nominee. So, for all intents and purposes the Defendant had clear authority to pledge the title as an equitable security.
22.
By a series of assignments after the 1990’s financial collapse, the Jamaican Redevelopment Foundation (JRF) came to acquire the debt and the deposited certificate of title that secured the equitable mortgage. The debt remained unpaid.
23.
In these circumstances, there is no mortgage instrument to resort to in exercise of the power of sale. One has to apply to a court for relief that parallels the kind enjoyed by legal mortgagees.
24.
The action taken by JRF was to file a Fixed Date Claim Form with supporting affidavit seeking declaratory relief and orders including:
23
Claim No. 2004 HCV 2843
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i.
Declaration that it had an equitable mortgage over the property comprised with the deposited Certificate of Title.
ii.
Declaration that as assignee of the debt and mortgage of Mutual Security Merchant Bank & Trust Co. Ltd, it was the equitable mortgagee of the said property comprised in the Certificate of Title for the sum owing.
iii.
An order for payment by the Defendant to the Claimant of the calculated sum due and owing.
iv.
An order for sale of the mortgaged property.
v.
An order for inquiries of the state of the titles, fixture of the reserve prices for the sale of the property and power to the registration to sign any transfers necessary to vest title.
25.
This last order highlights the stark distinction between a legal and an equitable mortgage. In the former, subject to the terms of the mortgage instrument, the mortgagee is the sole arbiter as to when, where and how the power of sale is exercised. His invoking the remedy has nothing to do with any court action or order. On the other hand, the equitable mortgagee must get an order from the court to guide the exercise of the power. Even the selection of the valuator or auctioneer will generally be ordered and supervised by the court unless the equitable mortgagee and the mortgagor consent to a course of action. When an auction date is fixed, the Registrar of the Supreme Court then advises, by sealed envelope to the auctioneer, what is the reserve price fixed by her.
26.
The supporting affidavit to must contain material evidence on which the court can be satisfied that an equitable mortgage was in fact created: this will 16 | Page
include the exchange of correspondence and proof that monies were exchanged for the deposited title and the terms that were agreed.
27.
However, once there is the declaration that an equitable mortgage exists, this may be registered by way of a miscellaneous entry on the Certificate of Title. Before this, the equitable mortgagee should have at least have lodged a caveat to protect its interest in the interim.
28.
In the JRF v Finzi claim the orders declaring the equitable mortgage were made were made in 2005, some 10 years after the loan was made.
PRIORITIES 29.
Section 59 of the Registration of Titles Act provides the following: “Every instrument presented for registration may be in duplicate (except a transfer whereon a new certificate of title is required), and shall be registered in the order of, and as from, the time at which the same is produced for that purpose; and instruments purporting to affect the same estate or interest shall, notwithstanding any actual or constructive notice, be entitled to priority as between themselves according to the time of registration, and not according to the date of the instrument.
Upon the
registration of any instrument the Registrar shall bind up the original in his office in a book to be kept for that purpose and shall deliver the other (hereinafter called the duplicate) to the person entitled.�
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30.
In Jamaican Redevelopment Foundation, Inc v. Capital Solutions Limited 24, one HC borrowed monies on the security of his property. The first loan was secured by a first legal mortgage to Jamaica National Building Society.
The second loan secured by a second legal mortgage to the
National Commercial Bank. HC approached his employers for a further loan to settle his indebtedness to the first and second legal mortgagees.
His
employers paid out the outstanding balance to the first legal mortgagee and were provided with a form of discharge of that first legal mortgage. The Certificate of Title was sent to the employer on the understanding that they would register the discharge of mortgage and forward the title to the second legal mortgagee. By then, the second mortgage was assigned to JRF. The employers tendered the outstanding balance on the said loan but JRF refused to give a discharge of mortgage because HC had other debts secured by what was an ‘all moneys’ mortgage instrument. HC was not servicing the second legal mortgage or the employer’s loan. HC’s employer asserted that they were assignees of the first legal mortgage and entitled to hold the title in priority to JRF as second mortgagee. Who is entitled to priority?
31.
Mangatal J opined that had the first legal mortgagee not executed a discharge, Capital Solutions, having settled it on behalf of HC, would have had an argument that they were entitled to the assignment of the first legal mortgage.
However, the Learned Judge in Chambers held that Capital
Solutions, having registered their mortgage as a third legal mortgage, could not revert to claim that they had purchased the first legal mortgage or become the assignee of that mortgage.
24
Claim No 2008 HCV 02664 delivered 23rd October 2009
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32.
The case demonstrates that when it comes to competing mortgage interests and exercising the power of sale, there is no better position than being first in line.
33.
Although there is no ambiguity in the language of Section 59 of the Registration of Titles Act, the question of priorities and competing interests in registered property can arise in the most unexpected circumstances. Take, for example, the twin cases involving the Real Estate Board (REB) and the effect of provisions of the Real Estate (Dealers and Developers) Act on the priorities of charges and mortgages, thereby affecting the exercise of the power of sale.
34.
The Real Estate (Dealers and Developers) Act (REDDA) regulates and controls the practice of real estate business and is applicable to development schemes. The vast majority of residential developments are the subject of prepayment contracts and developers taking prepayments must be registered under the REDDA 25. The Act requires that before a Developer enters into a prepayment contract he must ensure the land is free of any prior mortgages or charges, save and except for a mortgage or charge created in favour of an authorized financial institution to secure repayment of amounts advanced by it in connection with the construction of any buildings or works on the said land 26. Developers are also required to open a trust account for the lodgment of prepaid funds and if resort is to be had to those funds, they must register a charge on the certificate of title in favour of the Real Estate Board (REB) 27. In such a scenario, the REB’s charge so created “shall rank in priority before all other mortgages or charges on the said land except any charge…in respect of
Section 26(1)(a) Section 26(1)(b) 27 Section 31(3)(b) 25 26
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unpaid taxes …provided that where a mortgage or charge of the said land has been duly created favor of an authorized financial institution to secure repayment of amounts advanced by that financial institution in connection with the construction…the charge created by this section shall rank pari passu in point of security with the mortgage or change in favour of that authorized financial institution” 28 . The charge is deemed to be a mortgage under the Registration of Titles Act. 29
35.
In Jamaican Redevelopment Foundation, Inc. v. The Real Estate Board 30, JRF in 2002 acquired, as first legal mortgagee, three titles securing a loan to a developer. The mortgages were registered on the certificates of title in 1994, 1995 and 1996 and JRF continued to hold the security as first legal mortgagee until 2006 when it issued statutory notice pursuant to Section 106 of the Registration of Titles Act. It was only then, in 2007, without JRF’s knowledge, that the developer lodged a charge in favour of the REB. Like most mortgages, JRF’s mortgage prohibits and charging or dealing with the property by the mortgagor without its written consent. JRF successfully transferred two of the three titles pursuant to its exercising the power of sale. However, in relation to the third title, the Registrar of Titles refused the transfer, holding the view that she was bound by statute to have regard to the REB’s charge and she required the REB’s consent to register the transfer. In the litigation that followed, Mangatal J found that while the Board’s charge was valid, it could not rank in priority or even pari passu with the first legal mortgage. 31
Section 31(5)f Section 31(7). 30 Claim No 2009 HCV 5152 31 Ibid, delivered on 12th May 2011. 28 29
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36.
Her ruling recognized the right of the first legal mortgagee as first in time/first in line and whose mortgage should have cleared before any pre-payment contracts arose. The REB appealed and our Court of Appeal reversed the Supreme Court’s ruling 32. The court held that the words of section 31(5) of REDDA were unambiguous and had the effect of giving priority to the REB’s charge. For the first time, a first legal mortgagee seeking to exercise its powers of sale was finding itself restricted from doing so because of a later statutory charge. The view taken by many persons was that the decision had the effect of introducing commercial uncertainty and opening the possibility that every first mortgagee of development land could find itself relegated to the back of the line. The Court of Appeal suggested solution to this acknowledged concern was to recommend that the Registrar of Titles should insist on the production of the duplicate certificate of title so that the “demand should at least ensure that the intention of the mortgagor, to register such a charge, is, at least, brought to the attention of the holder of the prior mortgage.” 33 JRF appealed to the Privy Council.
37.
The Privy Council held that “the effect of a construction of Section 31 (5) [of REDDA] which demotes the priority of JRF’s mortgage so that it ranks behind that of the REB is that it penalizes JRF without any identifiable justification. That would, in the opinion of the Board, be contrary to the scheme of the Act, which was that any mortgagee who had not advanced money in connection with the construction of any buildings or works on the land would be paid out in full before any prepayment contract was made.”
34
[2012] JMCA Civ 35. Ibid, at para 65. 34 [2014] UKPC 28 at paragraph 21. 32 33
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38.
The result of the decision meant that JRF’s priority was restored and it was free to exercise its power of sale as first legal mortgagee.
39.
The other case, JMMB Merchant Bank Limited v. The Real Estate Board 35 also concerned another failed development and the question of priorities of competing interests. KES Development Company Ltd. registered with the REB and entered into prepayment contracts with purchasers. JMMB (then Capital & Credit Merchant Bank) agreed to loan KES Development Co. Ltd. $146,000,000.00. Of that sum, $120,000,000.00 was to finance four residential developments including a project called Mountain Valley Development; $6,000,000.00 was for the purchase of a separate property and $20,000,000.00 was for lease financing commercial vehicles. KES executed a single mortgage instrument to cover these loan obligations and other credit facilities. The Bank’s mortgage and charge were noted at the Companies Office in March 2006 but was only registered on the certificate of title in February 2007. Meanwhile in September 2006, KES had granted a charge (pursuant to section 31(3)(b) of REDDA) over the Mountain Valley development in favour of the REB, having entered into prepayment contracts. The development failed. KES defaulted on the loan and went into liquidation.
40.
JMMB naturally sought to exercise powers of sale but the REB contended that its statutory charge in protection of purchasers under prepayment contracts ranked in priority to JMMB’s legal mortgage. The Bank countered that the Board’s charge was void. Mangatal J. said that the REB’s charge indeed ranked ahead of JMMB as the sums advanced by the Bank could not be shown to be in connection with the construction of the land and the Act did
35
Claim No 2010 HCV 00381.
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not contemplate multi-purpose loans. 36
The Court of Appeal upheld this
ruling. 37 JMMB appealed to the Privy Council.
41.
The Privy Council ruled that: i.
Part IV of the REDDA is a self-contained statutory scheme for regulating development schemes.
ii.
The aim of the scheme as it relates to prepayment contracts is to keep the prepayments and the charged land, which is the security for repayment on default, separate from the vendor’s patrimony which is available to its other creditors.
iii.
The scheme protects the REB’s charge and, by extension, the would-be purchasers in two ways by: a.
Requiring, by section 26(1)(b) that the land is to be free of any mortgage or charge other than one in favour of an authorized financial institution under section 31(5); and
b.
Granting pari passu ranking only to a mortgage or charge “to secure repayment of amounts advanced in connection with the construction of any buildings or works on the said land.” 38
42.
Regrettably for JMMB, the mortgage it secured from KES was not so secure after all. The sums advanced covered both monies to fund construction work (a matter that, by itself, would have allowed it to rank pari passu with the Real Estate Board charge) and other unconnected advances. It is a cautionary tale
Ibid, paragraph 75. [2013] JMCA Civ 29. 38 [2015] UKPC 16 at paragraph 17. 36 37
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to all financial institutions that in relation to developments, separate securitization for each credit facility is best recommended.
43.
The Privy Council added that “an authorized financial institution which wishes to benefit from the pari passu ranking has to obtain from the developer a charge which specifies its purpose as the funding of construction within the development, either expressly or by reference to a loan document which provides funding exclusively for this purpose. The institution cannot rely on a general charge which covers lending for other purposes.� 39
44.
This latter part of the ruling has closed the door on any possibility of leading evidence to disaggregate and apportion a multi credit facility that is attributable to a failed development under REDDA, a position that Morrison J.A. himself took in the Court of Appeal.40
TENANT OR PURCHASER IN POSSESSION OF MORTGAGED PREMISES: 45.
The question was asked in Jamaica Youth Development Foundation v. Portfolio International Jamaica Limited: 41
Does a tenant who leases
property from a mortgagor who let the property in breach of an express covenant not to let the property without the written consent of the mortgagee become a tenant of the purchaser from the mortgagee who exercised his power of sale?
Ibid paragraph 26. At paragraph 72. 41 Claim No. 2004 HCV 2305, decided 10th December 2004. 39 40
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46.
The relevant provision of the Registration of Titles Act is Section 108.
It
provides that the estate and interest of a mortgagor passes to the purchaser free from and discharged from all liability on account of the mortgage and free from all other mortgages or charges registered subsequently, except a lease which was consented to in writing by the mortgagee.
So, in effect, the
purchaser is not bound by any lease by the previous owner made without his mortgagee’s consent. Further, section 94 of the Registration of Titles Act provides that no lease of mortgaged premises shall be valid or binding against the mortgagee unless he has consented to it in writing.
47.
Sykes J. concluded that the tenant of a mortgagor who is in possession without the written consent of the mortgagee was not a tenant of the mortgagee and therefore could not be a tenant of the purchaser of the mortgagee.
He relied on the learning in Dudley and District Benefit
Building Society v. Emerson42; that a tenant under a lease that does not bind the mortgagee and who has not been accepted as a tenant by the mortgagee is not a tenant for the purposes of the Rent Restriction Act.
48.
But what of a purported purchaser from the mortgagor in possession without consent of the mortgagee? It is arguable that the principle in Jamaica Youth Case is equally applicable where there is an alleged purchaser who has taken possession without the consent of the mortgagee. Lloyd Sheckleford v Mount Atlas Estate Limited 43 establishes that a purchaser under an Agreement for Sale acquires a beneficial interest in property. However, I submit that such an interest must yield to the interest of the registered legal mortgagee which the purchaser certainly has notice.
42 43
An interesting twist
[1949] 2 ALL ER 252 SCCA No 148/2000 delivered 20th December 2001.
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arose in Franz Fletcher and others v. Jamaican Redevelopment Foundation Inc. 44 where the Morgans, husband and wife, entered into an agreement to purchase property in 2006 from the First Claimant, Executor of the Mortgagor’s Estate. They were let into possession by the First Claimant, ignorant of the fact that he did so without the consent or even knowledge of the Defendant Mortgagee. They effected repairs to the premises and turned it into their family home. They were willing to complete the sale but JRF protested that they were strangers, that the purchase price was insufficient, having regard to the market value of the property. In 2010, JRF sought to exercise the power of sale against the defaulting mortgagor. In response, the purchasers claimed to have acquired the “permission or assignment” of the First Claimant’s equity of redemption and contended that the mortgages were statute barred. The application for an injunction was refused in the Supreme Court. On an application for injunction pending appeal, Phillips J.A., sitting in chambers in the Court of Appeal, granted the relief sought. Unfortunately, we have no determinative decision from that court as the matter was settled.
TAKING OF POSSESSION BY PURCHASER: 49.
The mortgagee, almost invariably, sells the mortgaged premises as is subject to such tenancies as encumbrances. If the mortgagee has not consented to any tenancies, the purchaser’s Attorney should include as a term of the Agreement for sale words to that effect. If the mortgagee has so consented, then, as we have seen, the purchaser will take transfer of the property, subject to the tenancy.
44
[2010] JMCA App 31.
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50.
The more usual issue that arises on the exercise of powers of sale is taking possession from the mortgagor himself. The purchaser, under the power of sale, has two (2) choices. He may seek to take possession bringing a Fixed Date Claim Form for recovery of possession in the Supreme Court or by a Plaint for recovery of possession in the Resident Magistrate’s Court. Section 89 of the Judicature (Resident Magistrates) Act provides: “S. 89
When any person shall be in possession of any lands or tenements without any title thereto from the Crown, or from any reputed owner, or any right of possession, prescriptive or otherwise, the person legally or equitably entitled to the said lands or tenements may lodge a plaint in the Court for the recovery of the same and thereupon a summons shall issue to such first mentioned person; and if the defendant shall not, at the time named in the summons, show good cause to the contrary, then on proof of his still neglecting or refusing to deliver up possession of the premises, and on proof of the title of the plaintiff, and of the service of the summons, if the defendant shall not appear thereto, the Magistrate may order that possession of the premises mentioned in the plaint be given by the defendant to the plaintiff, either forthwith or on or before such day as the Magistrate shall think fit to name; and if such land be not given up, the Clerk of the Courts, whether such order can be proved to have been served or not, shall at the instance of the plaintiff issue a warrant authorizing and requiring the Bailiff of the Court to give possession of such premises to the plaintiff.
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51.
In Danny McNamee v Shields Enterprises Ltd 45 Morrison J.A. noted that proof of annual value does not arise under section 89 and further that proceeding under that section “was appropriate in cases in which the defendant’s occupation of the property is not attributable to any kind of right or title”. 46
52.
However, where possible, the preferable, and certainly more expeditious course to adopt, is the age old ‘self-help’ remedy as was adopted by the purchasers in the aforementioned Jamaica Youth case. Once title has been transferred, the new registered proprietor or his agent serves the mortgagor with a Notice advising that title has been transferred to her, enclosing a copy of same and requiring the mortgagor to vacate within some stated period of time. Given that the mortgagor was in default and would have been aware of the exercise of the power by his mortgagee, and given that the new owner is paying mortgage, I would expect the notice would be for a very short period giving no more than seven (7) days to vacate the property.
53.
At the expiry of that time, the purchaser may resort to taking possession peaceably, if he can, by changing the locks and making arrangements for the removal of the defaulting mortgagor’s possessions, preferably under the supervision of a Justice of the Peace and/or the Police.
Remember, the
defaulting mortgagor is no longer the owner. He has no right to occupy. He is not a tenant of any party and the Rent Restriction Act does not apply.
45 46
[2010] JMCA Civ 37 At paragraphs 35 and 36.
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FORECLOSURE 54.
The procedure for foreclosure is set out in sections 119 and 120 of the Registration of Titles Act. The mortgagor must have been in default for at least six (6) months in respect of both interest and principal. The mortgagee will then serve on the mortgagor notice of default and intention to proceed to foreclosure. The mortgagee can then make an application to the Registrar of Titles for an order of foreclosure.
55.
The application must state the following: (a) That the default has been made and continued for 6 months, (b) land was offered for sale at public auction by a licensed auctioneer, (c) The amount of the highest bidding was insufficient to secure the mortgage money plus costs and expenses, (d) A notice of the intention to make the application was served on the mortgagor and every other person appearing to have an interest in the mortgaged property. 47
56.
The application must be accompanied by a certificate of the auctioneer who had put up the land for sale, and such other proof of the matters stated by the applicant as the Registrar of Titles may require, and the statements made in such application must be verified by statutory declaration of the mortgagee.
57.
Subsequent to the application being made to her, the Registrar of Titles will direct the Applicant to cause her notice offering the mortgaged property for
47
Section 119 Registration of Titles Act.
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sale to be published once in each of three successive weeks in at least one newspaper published in Kingston. At least a month must pass from the date of the first notice after which the Registrar “shall issue to such applicant an order for foreclosure, unless in the interval a sufficient amount has been obtained by the sale of such land to satisfy the principal and interest moneys secured, and all expenses occasioned by such sale and proceedings.� 48
58.
It means that even if an offer is made to purchase the property, the Registrar has no discretion to allow such a sale to proceed unless the mortgagee is made completely whole. No such offer having been received, a final statutory declaration of the mortgagee or its authorized representative with the Tear Sheets as exhibits is submitted to National Land Agency.
59.
When an order for foreclosure is signed by the Registrar and entered in the Register Book, it has the effect of vesting in the mortgagee, the land mentioned in the order, free from all right and equity of redemption on the part of the mortgagor or of any person claiming through or under the Mortgagor subsequently to the mortgage. The provision is that such mortgagee shall, upon such entry being made, be deemed a transferee of the mortgaged land, and become the proprietor thereof, and be entitled to receive a certificate of title to the same, in his own name, and the Registrar shall cancel the previous certificate of title and duplicate thereof and register a new certificate.
60.
On the Order for Foreclosure being entered in the Register Book, there is a vesting of the fee simple in the land in the mortgagee (free and clear from any encumbrances) in full satisfaction of the debt and the Mortgagee is
48
Section 120.
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deemed to be a transferee and a new Certificate of Title is issued in the Mortgagee’s name and the previous Certificate of Title is cancelled.
61.
Of course, the consequence of vesting title in the mortgagee is that if there are multiple mortgagees, only the first mortgagee can access the statutory remedy of foreclosure. It means successive mortgagees remedy may be restricted to suit for the debt. It is possible that a mortgagee who forecloses could get a windfall if the property’s value exceeds the mortgage debt while leaving the second mortgagee in the cold to pursue other remedies. It also shuts the mortgagor out of participating in any surplus equity in the property.
62.
This latter point was made by the mortgagor in Ken Sales & Marketing Limited v. Reliance Group of Companies. 49
The outstanding balance
claimed was $303,000,000.00 and if foreclosure was to proceed the mortgagor argued it would lose over $500,000,000.00 in equity. The Court of Appeal was not moved by this consideration, satisfied as it was that the mortgagee had gone to an unsuccessful auction, given all the requisite notices and monies were still owing. “It could not be said that the foreclosure notice would raise any special or exceptional circumstances permitting the court to give consideration to an injunction.”
63.
50
One final point on foreclosure: in relation to banks and other financial institutions falling under either the Financial Institutions Act and/or the Banking Act there is an additional restriction. Section 13 (3) of the Banking Act provides that “A bank shall not beneficially hold in fee simple for any period exceeding three years from the date of acquisition, land acquired in
49 50
[2013] JMCA App 25. Per Harris J.A. at paragraph 29.
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the course of the satisfaction of debts due to the bank, but shall forthwith after the expiry of that period sell or otherwise dispose of the land absolutely so that the bank no longer has, directly or indirectly, any interest or control in respect thereof except by way of security.” A similar provision appears in the Financial Institutions Act. 51
CONCLUSION 64.
“I'm living so far beyond my income that we may almost be said to be living apart.” There is a ring of truth in this quote. The mortgagee’s power of sale will separate a property owner from his home unless he manages his affairs to avoid default. The only way is for him to make his contractual payments as they fall due or settle his indebtedness in full on demand, thereby exercising his equity of redemption. This is, after all, what he first promised to do when he agreed to give his title up as security for someone else’s money.
M. Maurice Manning Presented at Jamaican Bar Association Conference at Half Moon Hotel November 17, 2017
51
Section 13(3)
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