Prelude
Terms such as mortgage, mortgagee, mortgagor, and guarantee or guarantor are
frequently used in this area of law.
The terms are generally understood by those who work within the finance sector
(such as banks, finance brokers etc.) But they are not so readily understood by the
individuals and companies who use financial services.
Although there is an element of jargon to their use, the terms are intended to
describe specific forms of financial transactions, each having a slightly different
effect. For example, a mortgage is different from a charge as to the extent of its
security over a property. Both are quite different from the effect of a guarantee.
The following descriptions can hopefully clarify the general meaning of a number of
the terms used in this series of blogs:
a) Loan Agreement
A contract made between a lender and a borrower, where
the borrower personally promises to repay the debt and any payable interest
on agreed dates.
The types of lenders can range from banks and credit societies through to
finance companies and private lenders.
Some examples of a loan agreement include a bank loan, a rollover bill, or
your credit card account.
b) Guarantee
A contract between a lender and a third party, where the third
party promises to pay the lender the amounts of any default in the repayment
of the borrower's debt and payable interest.
The third party who makes that promise to the lender is known as the
guarantor.
A common source of third party guarantees is the 'bank of mum and dad'.
If a bank or other lender is concerned about whether you can afford to repay
the loan, it will usually expect you to provide a mortgage and a guarantee.
Parents, relatives and even friends are often the persons who end up
guaranteeing the repayment obligations of a borrower.
c) Mortgage
A mortgage is a particular type of agreement (known as a security)
which entitles the lender to take and sell the borrower's property if there is a
default (non-payment) in the due payment of the loan or payable interest.
If so, the borrower's property is sold in order to reduce or wholly discharge the
debt owed to the lender.
Ironically, the property being sold by the lender is usually the same property
that the borrower had loaned the money to buy in the first place.
If a borrower fails to pay either the interest or the whole of the loan owed to a
lender under a mortgage, the lender is entitled to seek remedies available
under the terms of its mortgage.
The lender who lodges a mortgage over the borrower’s property to secure the
repayment of the loan is known as the mortgagee. The owner of the
mortgaged property is known as the mortgagor. That person (or a couple) is
usually the borrower of the loan monies.
However, in the case of a mortgage guarantee, the lender’s mortgage can be
lodged against the guarantor’s property. In that case, the guarantor is also a
mortgagor.
In order to clarify the terminology used in this area of law, we will generally
refer to the relationship of the lender (whether bank or other financier) and the
borrower (of the loaned money). That relationship can be overlaid by different
financial documents, such as mortgages and guarantees.
Mortgagee Remedies
Better known mortgagee remedies include:
a) a mortgagee sale;
b) repossession of the mortgaged property;
c) the foreclosure of the mortgaged property (so that it becomes the lender's property); and
d) the appointment of a receiver to manage the property (particularly if a business is being operated from the property).
Generally, the different remedies can be enforced by the mortgagee lender’s
commencement of a “mortgage action”. Mortgage actions are regulated by the
Courts (particularly the Supreme Court).
Therefore, in order for the lender to obtain a remedy of this type, it must firstly
commence a mortgage action in the appropriate Court.
The rules and powers of the Court in the conduct of a mortgage action are aimed at
providing a balance between the respective rights and duties of the mortgagee and
mortgage who are in dispute.
How the Court usually resolves mortgage disputes
In order to obtain the remedy it seeks, we have noted that a mortgagee lender
must bring a Court action against the mortgagor (whether a borrower or a guarantor).
If a borrower or a guarantor is served with a Supreme Court Writ, they will have only
a limited time to file (ordinarily 10 days) and serve a Memorandum of Appearance
with the Registry of the Court.
If these steps are not taken correctly, the lender can obtain a default judgement
against the borrower. From that point, a lender can enforce an order for vacant
possession of the mortgaged property. The conduct of a mortgagee sale follows,
usually by auction.
If the mortgagor (being the Defendant to the legal action) successfully files and
serves a Memorandum of Appearance to the Court action, then the action
continues.
The next step usually taken by the mortgagee lender is to apply for a Summary
judgement.
In order to be successful, a summary judgement application must produce evidence
to the Court to demonstrate there is no real defence to the mortgagee's claim by the
borrower.
Whether there is a legal defence to the mortgagee's claim can only be determined by
reference to:
a) The facts and circumstances in which the mortgage agreement was entered
into; and
b) The actual terms of agreement made between the parties.
If an arguable defence by the defendant mortgagor is detected, then the Court will
dismiss the summary judgement application. The matter will then proceed to a trial,
and to a final judgment.
This precis’ sets out some of the major whistle-stops in the rail journey towards a
Court determination. The process is technical, expensive and inherently uncertain.
Alternatives to the trial process
By contrast to the Court system, there are some alternative methods of dispute
resolution that are available. The two which are of particular relevance to mortgage
and guarantee disputes are:
a) The ombudsman service presently known as the Australian Financial
Complaints Authority (“AFCA”); and
b) The mediation process.
The latter can be opted for either within the Court process or privately between the
parties.
A significant (and growing) portion of loan agreements with banks and similar
financiers are regulated by AFCA.
AFCA has wide powers to compel banks (and other financiers) to co-operate in a
resolution process between the bank/financier and the customer.
However, this process is only usually available before Court proceedings have
begun. Therefore, it is important to consider whether this service might be of
assistance in your financial dispute BEFORE the lender takes legal action against
you.
More information about the AFCA services are detailed in a separate blog in this
series.
Once a mortgage action is underway in the Courts, a private mediation between the
mortgagee and mortgagor is relatively uncommon.
However, the Court offers (and encourages) mediation conferences within the Court
system itself.
The conferences are conducted by Court Registrars, who are officers of the Court.
The mediation Registrars generally have qualifications or experience in techniques
of alternative dispute resolution.
The conferences are also less formal than the other hearings which take place
before Judges or Masters of the Court.
The mediation conference process is also the subject of another blog in this series.
Epilogue
After reading blogs in this series, you should now be more familiar with the
terminology used for mortgages and guarantees.
You should also be slightly more familiar with the stages of a mortgage action
procedure before the Courts.
To the extent that you are less familiar with the substantive law and procedure
(including the grounds of defence), legal advice and assistance should be sought.
Contact Us
If the issues discussed in this blog are relevant to you and/or you require legal assistance, you can contact Tony or Andrew at Irwin Legal on admin@aristei.com.au or by contacting 08 92218337.
About the Author
Anthony J Aristei ('Tony') was admitted to legal practice in Western Australia in 1985, and admitted as an independent barrister in 1996. With some 40 years of legal experience, he has represented clients in over a thousand cases, including numerous high-profile matters reported in a number of law reports such as the Western Australian Law Reports, State Reports and various Federal Reports.
Tony is also an accomplished legal writer, having authored the Nutshell students' text on real property law and annotated commentaries on retail shops legislation in Western Australia, along with various Law Society of Western Australia and LexisNexis seminar papers on property, equity, and trusts law. Additionally, he previously served several terms as the President of the Western Australian branch of the Anglo-Australasian Lawyers Society, which fosters professional relations between legal communities in Australia, New Zealand, and the UK.