Mortgages

Question 1

What are collateral advantages and what is the position in law regarding them?

Answer 1

Collateral advantages are stipulations which do not form part of the security, but which give the mortgagee additional advantages. Before the repeal of usury laws, collateral advantages were frowned upon by equity and the two doctrines ‘once a mortgage, always a mortgage’ and the ‘anti-clog doctrine’ served to make such terms unenforceable. But since the repeal of usury laws, courts have started to be more favourable towards such terms in the name of freedom of contract, save for exceptional cases where there is unconscionable, oppressive or unfair behaviour (Kreglinger/Fiscal Consultants) and/or it is a penalty clause (Hong Leong v Tan Gin Huay))

Examples:
An option for the mortgagee to purchase the whole or any part of the mortgaged stock at an agreed price within 12 months of the loan (Samuel v Jarrah Timber)

A clause that stated the mortgage was not to be wholly paid off until six weeks before the expiration of the 20-year lease (Fairclough)

A term provided that the loan could not be repaid before 40 years from the granting of the mortgage (Knightsbridge)

An option of pre-emption that stated that for a period of five years, the company could not sell sheepskins to any person other than the lenders so long as the latter were willing to buy at the best price offered by any other person (Kreglinger)

Provisions that postponed the exercise of the right to redeem for 10 years; and made the capital and interest payable linked to the Swiss franc currency (Multiservice Bookbinding)

A term that provided that the mortgagor could not redeem the property until the expiry of one year and with 3 months’ notice (Fiscal Consultants)

An option to purchase 30% of the shares bought by the mortgagor under the loan (Citicorp Investment)

Question 2

Analysis: Can (mortgagor) redeem the mortgage?

Answer 2

(FIRST, was there a mortgage?)

a. Here, the mortgagor only had an equitable interest in property to start with. Since a conveyance in writing and signed (s 7(2) CLA) was made to the mortgagee, an equitable mortgage will likely have been created.

b. Here, there is a registered mortgage since an instrument of mortgage in the approved form (s 68(1) LTA) was made.

c. Here, even though the mortgage was not registered with an instrument in the approved form, there is an equitable mortgage since there was a specifically enforceable contract on the principle of Walsh v Lonsdale.

d. Here, even though the mortgage was not registered with an instrument in the approved form, an equitable mortgage may be created if there is a valid and specifically enforceable contract by the principles of Walsh v Lonsdale.

Here the contract does not meet s 6(d) of the CLA since it was not in writing or signed by the other party. However, the doctrine of part performance would apply because (the party enforcing the agreement) has acted on it by… Thus, regardless of whether one applies the stricter standard in Maddison v Alderson or the relaxed standard in Steadman, the test of part performance would be met…

Next, the contract must be specifically enforceable. A contract to mortgage will normally be specifically enforceable, for damages is less valuable than the property in the event of the mortgagor’s insolvency (Swiss v Lloyds Bank)

Therefore, an equitable mortgage will be likely be created since there is a specifically enforceable contract on the principles of Walsh v Lonsdale.

e. Here, even though the instrument was not registered, there is an equitable mortgage because the title deed/duplicate certificate was deposited with (mortgagee) with an accompanying intention to create a mortgage. The intention that accompanies the deposit here is the fact that…

(SECOND, are the terms of the mortgage enforceable?)

Here the (specific terms on the facts) is a clog on the equity of redemption because it prevents the mortgagor from redeeming the mortgage upon payment of his debt and interest. The test is whether the term will prevent or impede redemption in any way (Fairclough, Jarrah TImber).

On the facts…
(In Fairclough, a postponement clause which prevented the mortgage from being paid off until 6 weeks before the expiration of a 20-year lease was held to be a clog on the equity of redemption.)
(In Jarrah Timber, an option to purchase the whole or any part of the mortgaged stock at an agreed price within 12 months of the loan was held to unenforceable it prevented the mortgagor from redeeming his security.)

Even if found as a clog on the equity of redemption, the term may be enforceable if it is a collateral bargain separate from the mortgage agreement (Viscount Haldane’s approach in Kreglinger, endorsed in Citicorp Investment). In determining if there was such a collateral contract, the court must examine the true character of the transaction and look into the intentions of both parties.

On the facts…
(In Citicorp Investment, the court held that an option to purchase 30% of the mortgaged shares was a collateral bargain entered by both parties as a condition to enter into the mortgage agreement. Without the option, the bank was not prepared to lend money in the first place. Similarly / in contrast, the facts here show that… )
(In Kreglinger, the court found that a 5-year pre-emptive option for the first right of refusal to buy sheepskins was in fact a collateral bargain that was entered into as a condition for the mortgage agreement. Without the option, the lenders were not prepared to lend money in the first place. Similarly / in contrast, the facts here show that…)

(Since the term here is not a collateral bargain, it will be unenforceable as a clog on the equity of redemption. However, in my view, Singapore courts will unlikely accept that the doctrine is still applicable today. Though the SGCA in Citicorp did not abolish the doctrine because it held that the option to purchase the mortgaged shares was a collateral bargain, Citicorp has emphasized the importance of upholding freedom of contract especially where commercial parties are involved. Thus, it is more likely to only hold the term unenforceable if the term is unconscionable, a penalty, or a restraint of trade, and these are the issues to which I will now turn.

(However, even if the term is a collateral bargain, it will be unenforceable if it is unconscionable / a penalty / a restraint of trade.)

a. The term may be unenforceable if it is found to be unconscionable or oppressive (Kreglinger). There are currently two tests in the case law to determine if a term is unenforceable.

First, in Multiservice Bookbinding, the court held that a term was only unconscionable if the mortgagee had imposed the term in a “morally reprehensible manner”. Multiservice was endorsed by the SGHC in Fiscal Consultants.

Applying the Multiservice test on the facts…
In Multiservice, the court held that a clause that pegged the interest rates to the Swiss franc index which resulted in a 33.33% interest on the mortgage was not morally reprehensible because both parties were businessmen who were legally advised and knew full well the bargains they had entered into. Similarly, / In contrast, the facts here show that…

Second, in BOM v BOK, the SGCA rejected the Multiservice test for being too subjective and held that the test instead required the plaintiff to establish that he suffered an infirmity that the other party had exploited, with the burden then falling on the defendant to prove that the transaction was still fair, just and reasonable.

An infirmity must be of sufficient gravity to have acutely affected the plaintiff’s ability to conserve his own interests. Infirmities may be physical, mental or emotional in nature.

The infirmity must have been, or ought to have been, evident to the other party.

An overt act of exploitation is not necessary, but it will most likely be present.

A transaction at an undervalue or the lack of independent advice to the plaintiff would be very relevant factors that would lean against a finding that the transaction was fair, just and reasonable.

b. The term may be struck down for being a penalty clause. Singapore courts have held that penalty clauses in mortgages are unenforceable (Hong Leong v Tan Gin Huay). The test is whether the sum stipulated for is extravagant and out of all proportion in comparison with the greatest loss that could be conceivably proved to have resulted from the breach at the time of contracting.

On the facts…
In Hong Leong v Tan Gin Huay, the court held that the increased interest rates of 18% upon the mortgagor’s default was a penalty because it was an extravagant increase from the initial interest rates of 5.5% and 6.75%. The fact that it was an industry practice to charge large interest rates at 18% or more per annum did not make it any less a penalty.Similarly / In contrast, the facts here show that…

c. The term may be struck down for being a restraint on trade. The test is whether the term is reasonable between the parties and also in the public interest (Esso Petroleum). To be reasonable in the interests of the parties, the restraint must afford the party in whose interests it is imposed no more than adequate protection for interests which he is entitled to protect. A restraint is unreasonable if it is designed to protect a trader against what is in the public interest, that is, free and open competition.

On the facts…
In ESSO Petroleum, a term that prevented the mortgagor from redeeming the mortgage before the expiry of 21 years, when coupled with a solus agreement for the exclusive sale of Esso products, was held unenforceable because it had the object and effect of protecting Esso products against competition. Similarly / In contrast, the facts here show that…

It is important to note that in ESSO Petroleum, the court found the term that postponed the redemption for 21 years unenforceable because it was ‘coupled’ with the solus agreement. If the term was analysed independently of the solus agreement, it is arguable that the term would have been enforceable because the courts have held that such postponement clauses, while unreasonable, were not oppressive or unconscionable (Knightsbridge)

Question 3

Analysis: Did the (mortgagee) breach any duties in exercising the power of sale?

Answer 3

(FIRST, was there a mortgage?)

a. Here, the mortgagor only had an equitable interest in property to start with. Since a conveyance in writing and signed (s 7(2) CLA) was made to the mortgagee, an equitable mortgage will likely have been created.

b. Here, there is a registered mortgage since an instrument of mortgage in the approved form (s 68(1) LTA) was made.

c. Here, even though the mortgage was not registered with an instrument in the approved form, there is an equitable mortgage since there was a specifically enforceable contract on the principle of Walsh v Lonsdale.

d. Here, even though the mortgage was not registered with an instrument in the approved form, an equitable mortgage may be created if there is a valid and specifically enforceable contract by the principles of Walsh v Lonsdale.

Here the contract does not meet s 6(d) of the CLA since it was not in writing or signed by the other party. However, the doctrine of part performance would apply because (the party enforcing the agreement) has acted on it by… Thus, regardless of whether one applies the stricter standard in Maddison v Alderson or the relaxed standard in Steadman, the test of part performance would be met…

Next, the contract must be specifically enforceable. A contract to mortgage will normally be specifically enforceable, for damages is less valuable than the property in the event of the mortgagor’s insolvency (Swiss v Lloyds Bank)

Therefore, an equitable mortgage will be likely be created since there is a specifically enforceable contract on the principles of Walsh v Lonsdale.

e. Here, even though the instrument was not registered, there is an equitable mortgage because the title deed/duplicate certificate was deposited with (mortgagee) with an accompanying intention to create a mortgage. The intention that accompanies the deposit here is the fact that…

(SECOND, did the mortgage have the right to exercise the power of sale?)

A mortgagee is entitled under s 24(1) and s 25 CLPA (s 69(1) LTA applies these to registered mortgages) to exercise a power of sale if firstly, the mortgage money is due and secondly:

a. The mortgagor is in default 3 months after being served notice requiring payment of the mortgage money; or

b. Interest is in arrears and unpaid for one month after being due; or

c. there is a breach of any covenant besides the covenant to pay the mortgage money or interest

The mortgagee is not required to obtain the consent or approval of anyone else in exercising his power of sale (s 73(2) LTA (registered mortgages), applied in UOB v Chia Kin Tuck).

(THIRD, did the mortgage breach any duties in exercising his power of sale?)

(Objective Duty to Take Reasonable Steps to Obtain Proper Price)

In exercising his power of sale, a mortgagee has a duty to take reasonable steps to obtain the proper price of the property (Cuckmere, endorsed in Lee Nyet Khiong). The duty is objective, and the focus is on whether reasonable steps had been taken (Cuckmere, endorsed in Lee Nyet Khiong).

On the facts…
Bare and minimum description of property
Short period, not enough time for buyers to make detailed inquires and organise their finances
Failed to mention relevant facts of the property
Failed to instruct agents to stimulate enthusiasm for the property
Failed to consult agents about the best method of sale

One issue that has confronted the courts is whether there is a need to wait for a better price in a rising property market. Even though there is no duty to sell at a specific time (China & South Sea, endorsed in Teo Siew Har), the court in Kian Choon held that a “reasonable and prudent step” in a rising property market would have been to await the outcome of the sale of the opposing property before exercising the sale of property. In my view, the position should be that there is no need to await a right time to sell, but once the mortgagee has made a decision to sell, he needs to exercise that power with reasonable diligence. In Kian Choon, the mortgagee had already decided to sell, and thus the court was merely saying that waiting in a rising property market was a reasonable step the mortgagee should have taken after it already decided to sell.

When there is a conflict of interest between the mortgagee’s interest in repurchasing the property at the lowest price and his duty to sell the property at the best price available, the cases are slightly divided on the standard of test to apply:

In Tse Kwong Lam, the Privy Council held that once there is such a conflict, the burden lay on the mortgagee to prove that he had used his “best endeavours” or “all reasonable steps” to obtain the best price reasonably obtainable. This can be contrasted with the approach in Kian Choon Investments, where the SGHC appeared to suggest that the onus on the mortgagee was not as heavy when they held that the mortgagee needs to have taken “reasonable steps”. Despite the language of the court, it is my view that the Singapore courts will generally take a more stringent approach when there is a conflict of interest. This is because the court in Kian Choon held that a reasonable step would have been to await the outcome of the sale of an opposing property in a rising property market, which seems like a heavier duty when one considers that a mortgagee is normally under no duty to decide when it would exercise its power of sale (China & South Sea, endorsed in Teo Siew Har).

On the facts…

(Subjective Duty to Exercise Power of Sale in Good Faith)

A mortgagee also has a duty to take act in good faith in exercising his power of sale (Cuckmere, endorsed in Lee Nyet Khiong). The duty is subjective, and it demands that the mortgagee should not act wilfully, recklessly, dishonestly or with improper motives. Mere negligence is not enough (Beckett).

On the facts…
In Kian Choon, the court held that the lenders had breached their bona fide duty because they had not even bothered to put up an advertisement and simply approached one of their existing customers to offer the property. In that situation, what they did went beyond a mere failure to take reasonable steps, their conduct showed a “calculated indifference” to the interests of the borrowers/mortgagor and was thus evidence that the lenders did not act bona fide. Similarly / In contrast, the facts here show that…

(FOURTH, what remedies is the mortgagor entitled to?)

Assuming there was a breach of the objective reasonable steps duty, the usual remedy is damages for the difference between the proper price and the undervalue. The amount can be used to reduce the remaining debt owed by the mortgagor (Beckkett)

Assuming there was a breach of the subjective bona fide duty, the appropriate remedy would depend on whether the sale had been completed. If the sale is complete, the court may set aside the sale to allow mortgagor to redeem security, provided the purchaser is not a bona fide purchaser or had notice of mortgagee’s lack of good faith (Beckkett). If the sale is still ongoing, the court may order an injunction to stop the sale. The mortgagor need not prove any bad faith or notice on the purchaser’s part because until the conveyance (equitable) or registration of transfer (registered) the mortgagor retains an interest in the property that cannot be defeated by the purchaser’s rights (Kian Choon Investments)

(FIFTH, Effect of Sale for Registered Mortgages)

Assuming that the mortgagee had not breached his duties and the sale can proceed, the effect of s 26(1) CLPA (for equitable mortgages) or s 73(2) LTA (for registered mortgages) is to transfer the land to the purchaser free of all encumbrances including the equity of redemption. The equity of redemption and any existing encumbrances are extinguished and converted into an interest in the proceeds of the sale instead which the mortgagee holds on trust and must pay out according to the priority in s 26(3) CLPA (equitable mortgages) or s 74(1) LTA (registered mortgages). The mortgagor must accordingly pay any residual proceeds to any persons with a caveat with an interest in land (s 74 LTA, Chip Thye)

Question 4

Analysis: Did the (mortgagee) breach any duties in leasing out the property?

Answer 4

(FIRST, was there a mortgage?)

a. Here, the mortgagor only had an equitable interest in property to start with. Since a conveyance in writing and signed (s 7(2) CLA) was made to the mortgagee, an equitable mortgage will likely have been created.

b. Here, there is a registered mortgage since an instrument of mortgage in the approved form (s 68(1) LTA) was made.

c. Here, even though the mortgage was not registered with an instrument in the approved form, there is an equitable mortgage since there was a specifically enforceable contract on the principle of Walsh v Lonsdale.

d. Here, even though the mortgage was not registered with an instrument in the approved form, an equitable mortgage may be created if there is a valid and specifically enforceable contract by the principles of Walsh v Lonsdale.

Here the contract does not meet s 6(d) of the CLA since it was not in writing or signed by the other party. However, the doctrine of part performance would apply because (the party enforcing the agreement) has acted on it by… Thus, regardless of whether one applies the stricter standard in Maddison v Alderson or the relaxed standard in Steadman, the test of part performance would be met…

Next, the contract must be specifically enforceable. A contract to mortgage will normally be specifically enforceable, for damages is less valuable than the property in the event of the mortgagor’s insolvency (Swiss v Lloyds Bank)

Therefore, an equitable mortgage will be likely be created since there is a specifically enforceable contract on the principles of Walsh v Lonsdale.

e. Here, even though the instrument was not registered, there is an equitable mortgage because the title deed/duplicate certificate was deposited with (mortgagee) with an accompanying intention to create a mortgage. The intention that accompanies the deposit here is the fact that…

(SECOND, did the mortgagee have a right to enter into possession?)

a. The equitable mortgagee does not have any right in general law to enter into possession because she does not own the legal estate. But she may still try to apply to the court for an order of possession.

b. Under s 75(1) LTA, a registered mortgagee has a right to enter into possession with 1 month’s notice upon the mortgagor’s default in paying interest, principal, or other money secured by the mortgage. This is met on the facts.

(THIRD, did the mortgagee have a right to lease the property?)

While in possession, the mortgagee has a statutory right (s 23 CLPA) to grant (a) an agricultural or occupation lease not exceeding 21 years or (b) a building lease not exceeding 99 years. However, the power to lease under s 23 is ultimately subject to the terms of the contract. The rent received by mortgagee should go towards discharge the interest due, with any surplus to be returned to the mortgagor.

s 69 LTA applies s 23 CLPA to registered mortgages.

(FOURTH, did the mortgagee breach any duties in leasing out the property?)

Per s 23(5) CLPA, the mortgagee has a statutory duty to reserve “the best rent that can reasonably be obtained” in the circumstances of the case.

s 69 LTA applies s 23 CLPA to registered mortgages.

Question 5

Analysis: Did the (mortgagee) breach any duties in taking possession of the property?

Answer 5

(FIRST, was there a mortgage?)

a. Here, the mortgagor only had an equitable interest in property to start with. Since a conveyance in writing and signed (s 7(2) CLA) was made to the mortgagee, an equitable mortgage will likely have been created.

b. Here, there is a registered mortgage since an instrument of mortgage in the approved form (s 68(1) LTA) was made.

c. Here, even though the mortgage was not registered with an instrument in the approved form, there is an equitable mortgage since there was a specifically enforceable contract on the principle of Walsh v Lonsdale.

d. Here, even though the mortgage was not registered with an instrument in the approved form, an equitable mortgage may be created if there is a valid and specifically enforceable contract by the principles of Walsh v Lonsdale.

Here the contract does not meet s 6(d) of the CLA since it was not in writing or signed by the other party. However, the doctrine of part performance would apply because (the party enforcing the agreement) has acted on it by… Thus, regardless of whether one applies the stricter standard in Maddison v Alderson or the relaxed standard in Steadman, the test of part performance would be met…

Next, the contract must be specifically enforceable. A contract to mortgage will normally be specifically enforceable, for damages is less valuable than the property in the event of the mortgagor’s insolvency (Swiss v Lloyds Bank)

Therefore, an equitable mortgage will be likely be created since there is a specifically enforceable contract on the principles of Walsh v Lonsdale.

e. Here, even though the instrument was not registered, there is an equitable mortgage because the title deed/duplicate certificate was deposited with (mortgagee) with an accompanying intention to create a mortgage. The intention that accompanies the deposit here is the fact that…

(SECOND, did the mortgagee enter into possession?)

a. On the facts, the mortgagee was clearly in possession of the property in his capacity as a mortgagee because…

b. On the facts, the mortgagee was not in possession of the property in his capacity as a mortgagee. Rather, he had only occupied the property as a licensee / tenant / agent for the mortgagor….

(THIRD, did the mortgagee have a right to enter into possession?)

a. The equitable mortgagee does not have any right in general law to enter into possession because she does not own the legal estate. But she may still try to apply to the court for an order of possession.)

b. Under s 75(1) LTA, a registered mortgagee has a right to enter into possession with 1 month’s notice upon the mortgagor’s default in paying interest, principal, or other money secured by the mortgage. This is met on the facts.)

(Here, since mortgagee had entered into possession without any right to do so, mortgagor may want to apply to court and obtain an injunction)

(FOURTH, did the mortgagee breach any duties while in possession?)

Regardless of whether the mortgagee had the right to enter into possession, if he does enter into possession, the mortgagee has a Duty to Exercise Due Diligence in Realising Amount Due to him. This means he must place the property in beneficial use, such as by renting out the premises and not leave it vacant. Any profits or rents received while in possession should go towards discharging the mortgagor’s interest or debt owed to him (Lee Nyet Khiong)

a. Here, since (mortgagee) failed to rent out the property while in possession, he will be liable to account for rents which ought to have been received during the time he is in possession (Lee Nyet Khiong), and this should go towards deducting the interest or debt owed.

b. Here, since (mortgagee) had occupied the property for himself, he will be liable to pay his occupation rent to the mortgagee (Lee Nyet Khiong), and this should go towards discharging the interest or debt owed.

c. Here, since (mortgagee) had occupied the property for his family members, he will be liable to pay their occupation rent to the mortgagee (Lee Nyet Khiong), and this should go towards deducting the interest or debt owed.

Question 6

Rights of the Equitable Mortgagor (borrower)

Answer 6

1. Pursuant to the equity of redemption, the equitable mortgagor may exercise his contractual right to redeem the mortgage at the stipulated time on paying all outstanding amounts and subject to other terms of the mortgage.
2. The equitable mortgagor may also exercise his equitable right to redeem the mortgage after the expiry of the contractual date, before the mortgagee exercises his right to foreclose or sell the property. Unless the mortgage deed states differently, s 22 of the CLPA requires the mortgagor to give 3 months’ notice of the intention to redeem or pay 3 months’ interest in lieu of notice.
3. The equitable mortgagor may also assign his interest. The assignee would now be the mortgagor and the equity of redemption also passes on to her. However, the original mortgagor remains liable for any breaches under the mortgage since there is privity of contract. Thus, it is common for an indemnity clause to be included in the deed of assignment.
4. Under s 23 CLPA, a mortgagor has a right to issue an agricultural or occupation lease for a term not exceeding 3 years. However, this is subject to the terms of the mortgage (s 23(11) CLPA).

Question 7

Rights of the Equitable Mortgagee (i.e the lender)

Answer 7

(Rights independent of mortgagor’s default)

General Law Right to Assign Interest: The equitable mortgagee may assign his interest. The assignee would now be the mortgagee and take the interest subject to the equity of redemption and other equities of which he has notice. However, he will not be able to sue on personal action for any debts unless this has been separately assigned to him.

No Right to Enter Into Possession: The equitable mortgagee does not have any right in general law to enter into possession because she does not own the legal estate. But she may still try to apply to the court for an order of possession.

Contractual Right to Enter Into Possession (if there is a contractual term allowing it)

(Rights conditional on mortgagor’s default)

Statutory Right to Enter into Possession: Nil (but can try and apply to court)

Statutory Right to Grant Lease When In Possession:
Provided the equitable mortgage was created by a deed in writing, while in possession, the mortgagee has a statutory right (s 23 CLPA) to grant (a) an agricultural or occupation lease not exceeding 21 years or (b) a building lease not exceeding 99 years. However, the power to lease under s 23 is ultimately subject to the terms of the contract.

Contractual Right to Recover Debt: The contractual right to recover debt for breach of covenant to repay the loan with interest. However, the cause of action does not arise until the contractually stipulated date of redemption.

General Law Right to Foreclose Property:
Regardless of whether it the mortgage was in a deed in writing, the mortgagee has a right to foreclose as this right is inherent in the nature of a mortgage. However, the mortgagee must apply to court for foreclosure (Order 83 Rules of Court).

Statutory Right to Exercise Power of Sale:
Provided the equitable mortgage was created by a deed in writing, per s 24(1)(a) and s 25 CLPA, the mortgagee has a statutory right and to exercise a power of sale when: (1) the mortgage money is due and (2) a. The mortgagor continued to be in default 3 months after being served notice requiring payment of the mortgage money; OR b. Interest is in arrears and unpaid for one month after being due; OR c. Breach of covenant besides the covenant to pay the mortgage money or interest.

If there is no deed in writing, the mortgagee will only have a power to sale if the (oral?) contract provides for it. (Double-check with Ying). It can also apply to the court for a court order of sale via s 30(2) CLPA.

Statutory Right to Appoint Receiver: Provided the equitable mortgage was created by a deed in writing, per s 24(1)(c) and s 29(1) CLPA, the mortgagee has the statutory right to appoint a receiver (1) when the mortgage money becomes due AND (2) he has the Statutory Right to Exercise Power of Sale (see above).

If there is no deed in writing, the mortgagee will only have a power to appoint a receiver if the (oral?) contract provides for it. (Double-check with Ying)

Question 8

Equitable Mortgagee Duties

Answer 8

(When in possession of the property)

1. During the time he is in possession, the mortgagee has a Duty to Exercise Due Diligence in Realising Amount Due to him. This means he must rent out the premises and not leave it vacant, and he must account for any rents received and deduct it from the loan due (Lee Nyet Khiong)

If he does not rent it out to others, he must still account for rents which ought to have been received (Lee Nyet Khiong)

If he occupies the property for himself or his family members, he must pay occupation rent to the mortgagee (Lee Nyet Khiong).

(When granting lease)

1. Provided the equitable mortgage was created by a deed in writing and the mortgagee has a Statutory Right to Grant Lease While In Possession per s 23 CLA, then per s 23(5) CLPA, the mortgagee also has a statutory duty to reserve “the best rent that can reasonably be obtained” in the circumstances of the case.

(When exercising power of sale)

Provided the equitable mortgage was created by a deed in writing and the mortgagee has a Statutory Right to Exercise Power of Sale per s 24(1)(a) and s 25 CLPA, then it will be subject to the following duties in general law:

1. Subjective Duty to Exercise Power of Sale in Good Faith (Lee Nyet Khiong, Cuckmere)
2. Objective Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value. (Lee Nyet Khiong, Cuckmere)
3. Statutory duty to pay proceeds of sale (held on trust by mortgagee) to the persons and in the priority prescribed under s 26(3) CLPA

(No duties)

No Duty to Exercise Powers of Sale at a Specific Time (China & South Sea, Teo Siew Har)

Question 9

Rights of the Registered Mortgagor (borrower)

Answer 9

1. Per s 77 LTA, the registered mortgagor has a right to discharge the land from the mortgage (i.e free the land from the security) upon fulfilling the obligations under the mortgage agreement. s 77(3) states that the mortgagor is deemed to have an equity of redemption for the purpose of enforcing this right.

Thus s 77 entitles the mortgagor to redeem the mortgage:

1) Upon fulfilling the obligations under the mortgage agreement, and unless the mortgage deed states differently, to give 3 months’ notice of the intention to redeem, or pay 3 months’ interest in lieu of notice (s 22 of the CLPA)

2) Upon the stipulated time in the mortgage upon paying all outstanding amounts and subject to other terms of the mortgage.

2. Per s 63 LTA, the registered mortgagor has a right to assign his interest via an instrument of transfer in the approved form. The assignee would now be the mortgagor. However, the original mortgagor remains liable for any breaches under the mortgage since there is privity of contract. But per s 64 LTA, there is also implied a covenant for the assignee mortgagor to perform all obligations under the mortgage and indemnify and keep harmless the mortgagor. However, this may still be negatived by an express statement in the transfer.
3. Under s 23 CLPA, a mortgagor has a right to issue an agricultural or occupation lease for a term not exceeding 3 years. However, this is subject to the terms of the mortgage (s 23(11) CLPA). s 69 LTA applies this section to registered mortgages.

Question 10

Rights of a Registered Mortgagee (i.e the lender)

Answer 10

(Rights independent of mortgagor’s default)

Statutory Right to Assign Interest: Per s 63 LTA, the registered mortgagee has a right to assign his interest via an instrument of transfer in the approved form. The assignee would now be the mortgagee, and is also entitled to all rights, powers and remedies of the mortgagee expressed or implied in the mortgage, including the right to recover any debt, money or damages.

No Right to Enter Into Possession: In the absence of any default, the registered mortgagee does not have a general law right to enter into possession because he does not own the legal estate.

(Rights conditional on mortgagor’s default)

Statutory Right to Enter into Possession: Per s 75(1) LTA, the registered mortgagee has a statutory right to enter into possession with 1 month notice. The right arises upon the mortgagor’s default in paying interest, principal, or other money secured by the mortgage.

Statutory Right to Grant Lease When In Possession: While in possession, the mortgagee has a statutory right (s 23 CLPA) to grant (a) an agricultural or occupation lease not exceeding 21 years or (b) a building lease not exceeding 99 years. However, the power to lease under s 23 is ultimately subject to the terms of the contract. s 69 LTA applies s 23 CLPA to registered mortgages.

Contractual Right to Recover Debt: The contractual right to recover debt for breach of covenant to repay the loan with interest. However, the cause of action does not arise before the contractually stipulated date of redemption.

Statutory Right to Foreclose Property: Under s 76(1)(b) and (4) LTA, a registered mortgagee has the right to apply to the court for foreclosure upon the mortgagor’s default.

Statutory Right to Exercise Power of Sale: Per s 24(1)(a) and s 25 CLPA, the statutory right and/or contractual right to exercise a power of sale when:

(1) the mortgage money is due and

(2) a. The mortgagor continued to be in default 3 months after being served notice requiring payment of the mortgage money; OR b. Interest is in arrears and unpaid for one month after being due; OR c. Breach of covenant besides the covenant to pay the mortgage money or interest. s 69 LTA applies s 24 and s 25 CLPA to registered mortgages.

Additionally, per s 73(2) LTA, this statutory right to exercise the power of sale can be enforced by the mortgagee without obtaining the consent of anyone who has interests in the property (UOB v Chia Kin Tuck)

Statutory Right to Appoint Receiver: Per s 24(1)(c) and s 29(1) CLPA, a mortgagee has the statutory right to appoint a receiver (1) when the mortgage money becomes due AND (2) he has the Statutory Right to Exercise Power of Sale (see above). s 69 LTA applies the s 29 CLPA to registered mortgages.

Question 11

Registered Mortgagee Duties

Answer 11

(When in possession of the property)

1. During the time he is in possession, the mortgagee has a Duty to Exercise Due Diligence in Realising Amount Due to him. This means he must rent out the premises and not leave it vacant, and he must account for any rents received and deduct it from the loan due (Lee Nyet Khiong)

If he does not rent it out to others, he must still account for rents which ought to have been received (Lee Nyet Khiong)

If he occupies the property for himself or his family members, he must pay occupation rent to the mortgagee (Lee Nyet Khiong).

(When granting lease)

1. Per s 23(5) CLPA, the mortgagee has a statutory duty to reserve “the best rent that can reasonably be obtained” in the circumstances of the case. s 69 LTA applies s 23 CLPA to registered mortgages.

(When exercising power of sale)

1. Subjective Duty to Exercise Power of Sale in Good Faith (Lee Nyet Khiong, Cuckmere)
2. Objective Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value. (Lee Nyet Khiong, Cuckmere)
3. Statutory duty to pay proceeds of sale (held on trust by mortgagee) to the persons and in the priority prescribed under s 74(1) LTA (s 74 LTA, Chip Thye)

(No duties)

No Duty to Exercise Powers of Sale at a Specific Time (China & South Sea, Teo Siew Har)

Question 12

Receivership analysis

Answer 12

(Registered mortgagees)

Statutory Right to Appoint Receiver: Per s 24(1)(c) and s 29(1) CLPA, a mortgagee has the statutory right to appoint a receiver (1) when the mortgage money becomes due AND (2) he has the Statutory Right to Exercise Power of Sale. s 69 LTA applies s 24 and s 29 CLPA to registered mortgages.

Effect 1: The receiver shall be deemed to be the AGENT of the MORTGAGOR, and the mortgagor shall be solely responsible for the receiver’s acts unless the mortgage deed otherwise provides.

Effect 2: The receiver may demand and recover all the income of the property over which he is appointed receiver, by (1) action, (2) distress, or (3) otherwise. He may do so in the name of either the mortgagor or of the mortgagee.

Effect 3: Like the mortgagee, the receiver owes to the mortgagor a (Subjective) Duty to Exercise Power of Sale in Good Faith and for proper purposes, and (Objective) Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value

Effect 4: While the mortgagee has No Duty to Exercise Powers of Sale at a Specific Time, a receiver must be active in the protection and preservation of the mortgaged property over which he is appointed to

Remedy: The mortgagor may claim that the receiver had breached the (Subjective) Duty to Exercise Power of Sale in Good Faith and the Objective) Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value and claim for their respective remedies.

Question 13

Foreclosure analysis

Answer 13

(Equitable mortgages)

General Law Right to Foreclose Property: Regardless of whether it the mortgage was in a deed in writing, the mortgagee has a right to foreclose as this right is inherent in the nature of a mortgage. However, the mortgagee must apply to court for foreclosure (Order 83 Rules of Court).

Effect of Foreclosure: If successful, the foreclosure will:
(a) Vest the legal estate and interest of the mortgagor in the land with the mortgagee,
(b) Free land of the mortgagor’s equity of redemption and any other mortgagor’s rights, and
(c) Free land of any other encumbrances, except leases or other interests that may be binding on the mortgagee

Remedy 1: The equitable mortgagor retains her Equity of Redemption, Thus, she can:
(a). Exercise her contractual right to redeem the mortgage at the stipulated time on paying all outstanding amounts and subject to other terms of the mortgage,
OR (b). Exercise her equitable right to redeem the mortgage after the expiry of the contractual date but before the mortgagee exercises his right to foreclose or sell the property (after giving 3 months notice or paying 3 months interest in lieu of notice, per s 22 CLPA - unless mortgage deed states otherwise)
OR (c). Sue to hold any covenant unenforceable for being a clog on the equity of redemption (and hence, no ‘default’ to give rise to the right to apply for foreclosure).

Remedy 2: The equitable mortgagor can apply for judicial sale in lieu of foreclosure under s 30(2) CLPA (Palk v Mortgage Services). Since equity does not favour foreclosure, courts are more likely to order a judicial sale instead.

(Registered mortgagees)

Statutory Right to Foreclose Property: Under s 76(1)(b) and (4) LTA, a registered mortgagee has the right to apply to the court for foreclosure upon the mortgagor’s default.

Effect of Foreclosure: If successful, the foreclosure will:
(a) Vest the legal estate and interest of the mortgagor in the land with the mortgagee,
(b) Free land of the mortgagor’s equity of redemption and any other mortgagor’s rights, and
(c) Free land of any other encumbrances, except leases or other interests that may be binding on the mortgagee

Remedy 1: Per s 76(1)(b) LTA, the registered mortgagor is deemed to have an Equity of Redemption, Thus, she can:
(a). Exercise her contractual right to redeem the mortgage at the stipulated time on paying all outstanding amounts and subject to other terms of the mortgage,
OR (b). Exercise her equitable right to redeem the mortgage after the expiry of the contractual date but before the mortgagee exercises his right to foreclose or sell the property (after giving 3 months notice or paying 3 months interest in lieu of notice, per s 22 CLPA - unless mortgage deed states otherwise)
OR (c). Sue to hold any covenant unenforceable for being a clog on the equity of redemption (and hence, no ‘default’ to give rise to the right to apply for foreclosure).

Remedy 2: The registered mortgagor can apply for judicial sale in lieu of foreclosure under s 30(2) CLPA (Palk v Mortgage Services). Since equity does not favour foreclosure, courts are more likely to order a judicial sale instead. s 69(1) LTA applies s 30 CLPA to registered mortgages.

Question 14

If the sale of mortgaged property yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor.

If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket.

True or false?

Answer 14

True (Cuckmere v Mutual Finance)

Question 15

What are the 2 main types of mortgages relevant for the exam?

Answer 15

Registered Mortgage under the LTA. No transfer of legal title and only grants a security over the land (i.e the right to sell the property to satisfy the debt)
- Legal interest remains with mortgagor throughout.
- Equitable interest also remains with mortgagor throughout (equity of redemption)

Equitable Mortgage, involving the transfer of the equitable title only.
- Mortgagee has equitable interest in property
- Mortgagor has equity of redemption

Question 16

What are the two related equitable doctrines related to the Equity of Redemption?

Answer 16

1. Once a mortgage, always a mortgage (Samuel v Jarrah Timber)
2. No clogs on the Equity of Redemption (Fairclough v Swan Brewery)

Question 17

What are ‘clogs on the Equity of Redemption’? Give some examples.

Answer 17

Clauses that provide for advantages in favour of the mortgagee.

Example 1:
An option to purchase the mortgaged property (Samuel v Jarrah Timber)

Example 2:
Postponements of the mortgagor’s right to redeem (Fairclough)

Example 3:
An additional sum that must be paid on redemption or default

Question 18

When is a term in the mortgage agreement regarded as a clog in the Equity of Redemption?

Answer 18

Whether the term will be regarded as a ‘clog’ on the Equity of Redemption seems to depend on the bargaining positions of both parties.

Where parties are businessmen, the presumption seems to be that they are on equal terms and that the parties are prepared to share risks and gains. In this mood, equity will not interfere even where the terms are hard and even unreasonable (Knightsbridge Estate (UK), CIticorp (SG))

If the term exists in substance as a collateral contract outside of the main mortgage agreement, then it may not derogate the equity of redemption (Kreglinger)

However, when the parties are of different bargaining positions, the courts will lean towards a finding that the terms were oppressive and unconscionable (Fairclough v Swan Bakery (UK), Hong Leong v Tan Gin Huay (SG))

Question 19

When does the mortgagor have a right to redeem?

Answer 19

1. Contractual right to redeem at the stipulated time and terms of the mortgage

2, Equitable right to redeem after the expiry of the contractual date, until the mortgagee exercises right to foreclose or sell the property.

Per s 22 of the CLPA, the mortgagor must give 3 months’ notice to redeem or 3 months’ interest in lieu of notice s 69 LTA applies s 22 CLPA to registered mortgages.

Question 20

Samuel v Jarrah Timber

Answer 20

Proposition 1: The doctrine “once a mortgage always a mortgage” means that no option between a mortgagor and mortgagee is valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid and inconsistent with the transaction being a mortgage.

(However, this principle has been watered down after Knightsbridge/Kreglinger/Multiservice Bookbinding which allows such options to be valid if they were considered a collateral contract falling outside of the main mortgage agreement)

(On the facts)
Mortgagor company obtained a loan secured on its debenture stock. The loan agreement included an option for the mortgagee to purchase the whole or any part of the mortgaged stock at an agreed price within 12 months of the loan. The mortgagor was prepared to pay off the loan within the 12 months; but the mortgagee gave notice to exercise his option to purchase.

HL held that the option to purchase the mortgaged stock was invalid as it was inconsistent with the transaction being a mortgage. The mortgagor (company) was entitled to redeem the loan on payment of the principal loan amount with interest.

Question 21

Fairclough v Swan Brewery

Answer 21

Proposition 1:
(The anti-clogs doctrine) Equity will not permit any device or contrivance being part of the mortgage transaction or contemporaneous with it to prevent or impede redemption

(On the facts)
Hotel owner had a leasehold interest (with 20 years remaining) in a hotel. The lease was mortgaged to a brewery company. A clause in the mortgage deed provided that the mortgage was not to be wholly paid off until six weeks before the expiration of the lease. This meant that the mortgagor would have had to pay 209 successive monthly instalments until then. The issue was whether such a clause was valid at law.

The Privy Council held that pursuant to the anti-clogs doctrine, the provision was invalid and unenforceable because it practically made the mortgage irredeemable.

Question 22

Knightsbridge Estates

Answer 22

Proposition 1:
Mere unreasonableness does not make a term unconscionable or oppressive (per the first limb of Lord Parker’s test in Kreglinger)

Proposition 2:
In deciding whether or not the postponement of a right of redemption is oppressive or unconscionable, the length of time of postponement may be relevant.

(On the facts)
Mortgagor company owned a large number of freehold estates in London. These were mortgaged to a friendly society to secure a loan of GBP 310,000. A mortgage term provided that the loan could not be repaid before 40 years from the granting of the mortgage. It was to be repaid by 80 half-year instalments of principal and interest.

After a few years, when the interest rates in the market fell, the mortgagor wanted to redeem the mortgage in advance and borrow the money more cheaply elsewhere.

Mortgagor argued that the provision was void for postponing redemption for an unreasonably long time.

Court held that the term was not void. The postponement of the right to redeem may be unreasonable but they were not oppressive or unconscionable.

Question 23

Kreglinger v New Patagonia

Answer 23

Proposition 1:
Equity will only preclude a mortgagee from stipulating any term in the mortgage if the term is (1) unfair and unconscionable, (2) in substance a penalty clogging the equity of redemption, or (3) in substance a condition that is inconsistent with or repugnant to the contractual and equitable right to redeem (Lord Parker, p. 60)

Proposition 2:
The Equity of Redemption does not apply if the term that seemingly fetters the right to redeem was, in substance, a separate collateral contract entered into as a condition to the main mortgage agreement, provided also that the other party had not acted unfairly or oppressively (Viscount Haldane, p. 37)

In determining if there was such a collateral contract, the court must examine the true nature of the transaction. The question is not whether the two contracts were made at the same time and within the same document/instrument, but whether they were in substance a single, undivided, contract or two distinct contracts (p. 39)

(On the facts)
The lenders were a firm of woolbrokers and the borrowers were in the business of preserving meat.

The lenders extended a loan to the borrowers secured by a floating charge on the mortgagors’ business of preserving meat.

The loan agreement provided that for a period of five years the company should not sell sheepskins to any person other than the lenders so long as the latter were willing to buy at the best price offered by any other person. This was an option of pre-emption.

Mortgagor paid off the loan before five years (they took 3 years) and wished to be free of the option of pre-emption. They argued that it was void in equity as it amounted to a clog on the redemption.

The Privy Council held that the agreement for a 5-year option to purchase the sheepskins was not in substance a fetter on the borrower’s right of redemption, but a collateral contract separate from the mortgage agreement. The court believed that it was the intentions of both parties to enter into this collateral contract as a condition for granting the loan, and it was not inequitable to give effect to this bargain entered into as part of ordinary commercial transactions. However, the court noted that had the charge not been a floating charge, it might have been more difficult to give effect to this intention (p. 41)

Lord Parker also noted that the option was not a penalty.

Question 24

Multiservice Bookbinding

Answer 24

Proposition 1:
A term is only unfair and unconscionable (pursuant to Lord Parker’s test in Kreglinger) if one of the parties had imposed the terms in a morally reprehensible manner that affects his conscience (p 110F)

An example is where one party takes advantage of a young, inexperienced or ignorant person to introduce a term which no sensible well-advised person would have accepted.

Proposition (obiter):
The categories of unconscionable bargains are not limited The court can and should intervene where a bargain has been procured by unfair means (p 110F).

(On the facts)
Mortgage agreement contained provisions that postponed the exercise of the right to redeem for 10 years and linked the capital and interest payable to the Swiss franc currency (specifically, the payment in pound sterling was to vary according to the exchange rate with the Swiss franc).

The effect of those provisions was that the mortgagee would receive about 33.33% interest on the mortgage at the end of the period of ten years.

Mortgagor sought to be relieved from the terms of the agreement, particularly, the link to the Swiss franc.

Browne-Wilkinson J held that the clause was valid and enforceable because it had not yet met the threshold of being unfair and unconscionable. The parties were of similar bargaining positions, were represented by solicitors, and there was no sharp practice of any kind. The plaintiffs had accepted the bargain with their eyes open and were thus bound by it.

Question 25

Fiscal Consultants

Answer 25

Proposition:
Endorsed both Krelinger and Multiservice Bookbinding in Singapore.

(On the facts)
A company obtained a loan from a finance company secured over 2 Beach Road properties that the company wanted to purchase as office space. The mortgage included a term that provided that the mortgator could not redeem the property until the expiry of one year and with 3 months’ notice. After 4 months, the company wanted to pay off the loan entirely and redeem their mortgage. The defendants insisted that if the company wanted to pay off the loan before 1 year, they had to pay the full interest that would have been due had the redemption taken place after a year. The plaintiffs agreed ‘in protest’ and later brought proceedings arguing that both the term and the subsequent variation were clogs on the equity of redemption.

SGHC held that the term preventing the mortgagor from redeeming the property until 1 year and the subsequent variation of the contract requiring full interest to be paid for earlier redemption were neither harsh and unconscionable nor a clog on the equity of redemption.

Question 26

Citicorp Investment

Answer 26

Proposition 1:
Endorsed Viscount Haldane ‘collateral contract’ test and Lord Parker’s test in Kreglinger in Singapore.

Emphasized that Singapore courts should be slow to interfere with the freedom of contract where experienced, commercial parties are involved and allow them to pursue their legitimate interests through flexible and innovative financing schemes.

(On the facts)
The respondent Wee obtained a loan from the appellant bank that was secured on shares in a Hong Kong company. Wee already held some shares, but wanted to buy more. The loan agreement purported to grant the bank an option to purchase 30% of the shares bought by Wee under the loan. Later, both parties varied the agreement by providing that the option to purchase shall be terminated if Wee pays the bank a certain sum (USD 800,000). Wee did not pay the stated sum, and Citicorp refused to return some of the mortgaged shares to Wee. Wee argued that the option to purchase was void for being a clog on the equity of redemption.

SGCA held that option to purchase was not a clog on equity of redemption. Applying the collateral contract analysis by Viscount Haldane in Kreglinger, the court found that the option to purchase shares was a separable and distinct bargain that was formed as a condition to the bank entering into the mortgage agreement ([40]). There was also no unfairness, oppression or unconscionability in this case, as both parties were experienced businessmen advised by competent solicitors ([41]).

Question 27

Esso Petroleum

Answer 27

Proposition 1:
The doctrine of restraint of trade applied to mortgages, and a term which makes renders the mortgage irredeemable may be unenforceable if the effect of the term (when ‘coupled’ with other terms, like solus agreements) amounts to an unreasonable restraint of trade.

(On the facts)
The respondent company mortgaged their garage to Esso Petroleum. According to the terms of the mortgage, the mortgagor was not allowed to redeem it for 21 years. A solus agreement (ie. an exclusive sale contract) also required the company to sell only Esso products during the same period. The issue was whether these terms were enforceable.

HL held that the term in the mortgage rendering it irredeemable for 21 years was unenforceable as it was linked to the unreasonable restraint of trade (the solus agreement). The coupling of the two makes both bad if the period is so long as to be unreasonable in restraint of trade.

Question 28

Jones v Morgan

Question 29

BOM v BOK

Answer 29

Proposition 1:
The narrow doctrine of unconscionability applies in Singapore. To invoke the doctrine, the plaintiff has to show that he was suffering from an infirmity that the other party exploited in procuring the transaction. Upon the satisfaction of this requirement, the burden is on the defendant to demonstrate that the transaction was fair, just and reasonable. In this regard, while the successful invocation of the doctrine does not require a transaction at an undervalue or the lack of independent advice to the plaintiff, these are factors that the court will invariably consider in assessing whether the transaction was improvident.

Question 30

Palk v Mortgage Services

Answer 30

Proposition 1:
Where the mortgagor prefers to have the property sold and the mortgagee paid off to the extent of the proceeds of the sale to reduce the mortgagor’s interest liability, the mortgagor may apply for the court’s discretion to order a sale under s 30(2) CLPA. s 69 LTA applies s 30 CLPA to registered mortgages.

Proposition 2:
A mortgagee owes a mortgagor a duty to take reasonable care to maximise his return from the property and sell only at a proper market value. He cannot sell hastily at a knock-down price sufficient to pay off his debt.

(On the facts)
The borrowers (Palks) were unable to meet their payments under a mortgage secured over their house. They wanted to sell the house for $280K, but the lenders refused as this was insufficient to cover the total outstanding amount ($350K). Instead, the lenders wanted to lease out the property and sell when the property market was better. The borrowers applied to have the mortgaged property sold in spite of the lender’s objection.

(Note: Lenders here had taken steps to enforce his rights by applying for possession of property)

English CA exercised its discretion under (the English equivalent of 30(2) CLPA) to order the sale of the property. It considered the following four factors in doing so:

1. The rental recovered under the lease would fall significantly short of the interest Mrs Palk would save if the
   house was sold.
2. The only prospect of recovering the shortfall lay in the hope that there will be a substantial improvement in the property market. This was not a case where the sale was being postponed for a reason specific to this property: for example, pending the outcome of an application for planning permission for development.
3. The loss borne by the borrowers pursuant to this plan (given that their financial liability will increase indefinitely) far outweighed the prospect of any gain the lenders may make in the future
4. Directing a sale would not prevent the lenders from buying back the property; A mortgagee was normally not allowed to buy property from itself, but the mortgagee could do so if the sale was directed by the court.

Question 31

Teo Siew Har v OCBC

Answer 31

Proposition 1:
Endorsed China & South Sea Bank, holding that a mortgagor is entitled to decide if and when he should sell the property.

(On the facts)
Pursuant to the borrower’s (and her husband’s) default in mortgage repayments, the bank instituted proceedings to possess the house with a view to exercising its power of sale.

The borrower Teo argued that the bank had breached its equitable duties owed to the mortgagor by failing to exercise its power of sale at an earlier stage when Teo had requested for its exercise.

SGCA held that the mortgagee was not bound by any duty to sell the property at a specific time. It could exercise that power at any time.

Question 32

China & South Sea Bank

Answer 32

Proposition 1:
A mortgagor is entitled to decide if and when he should sell the property and is under no duty to sell at a specific time.

(On the facts)
Shares in a company were mortgaged to secure a loan. Mortgage contained the usual power of sale. Though the power of sale arose pursuant to mortgagor’s default in repayment, the mortgagee did not exercise the power of sale. Subsequently, the shares fell in price and became worthless. Mortgagee sued the surety for the debt owed.

Surety argued that the bank should have exercised its power of sale earlier, when the shares still fetched a decent price, and the mortgagee’s failure to do so should extinguish or at least reduce his liability.

Privy Council held that the mortgagee owed no duty to the mortgagor as to whether he would exercise the power of sale and, if so, when to sell.

Question 33

Hong Leong v Tan Gin Huay

Answer 33

Proposition 1:
Penalty clauses in mortgages are unenforceable in Singapore

The test is whether the sum stipulated for is extravagant and out of all proportion in comparison with the greatest loss that could be conceivably proved to have resulted from the breach at the time of contracting

Proposition 2:
A court only has a very limited jurisdiction to adjourn the summons for possession or grant a stay of execution of the order for possession for a short period of
time if there is a reasonable prospect that the mortgagor would be able to satisfy the debt owed in full. If there is no reasonable prospect of the mortgagor satisfying the debt in full, then the court cannot adjourn the summons for possession.

(On the facts)
The borrowers were two illiterate old ladies who bought a 20-year leasehold interest in a hawker stall from HDB. Their purchase was financed by a 15-year mortgage loan of $115,000 from the lenders, a finance company. The interest rate was 5.5% for the first 2 years and 6.75% thereafter. The agreement provided that an interest rate of 18% per annum was payable for any late or non-payments. The borrowers defaulted in their payments, and the lenders sought to enforce its security. One of the issues that arose was whether the term providing for the increased interest rate was enforceable.

SGCA held that the clause was a penalty, and thus unenforceable.

Quare: The 33% in the other case was linked to the tie-in with the exchange rate so perhaps it was more foreseeable that there would be a great loss to justify such a high interest rate

Question 34

Pereira Dennis v UOB

Answer 34

Proposition 1:
Where a creditor has several remedies at its disposal, such as whether to realise the security provided by the mortgagor-borrower or that provided by a guarantor, it is free to determine how and in what sequence it will pursue those remedies. To prescribe a sequence otherwise would be to rewrite the express terms of the parties’ contract and diminish the attractiveness of guarantees as a form of security.

Question 35

Parker-Tweedale v Dunbar Bank

Answer 35

Proposition (obiter);
The duty owed by the mortgagee to the mortgagor is not grounded in tort but grounded in equity (18H- 19A).

Proposition 2:
A mortgagee does not owe a duty to a beneficiary of a trust created by the mortgagor

(On the facts)

Question 36

Tse Kwong Lam

Answer 36

Proposition 1:
There is no hard and fast rule that a mortgagee may not sell to a company in which he is interested. but the mortgagee and the company must show that the sale was made in good faith and that the mortgagee had taken reasonable precautions to obtain the best price reasonably obtainable at that time.

(On the facts)
Mortgagors arranged for sale of property by public auction. The advertisements were placed in 3 newspapers with the date of auction and a minimum description of the property. At the auction, there was only one bid, which was placed by a company in which the mortgagee, his wife, and son were directors. The property was sold to that company. The mortgagor sought to set aside that sale on the ground that the sale to the company was improper and at an undervalue.

PC held that mortgagor had breached duty to take reasonable steps to obtain the best price reasonably obtainable. The advertisement’s description of the property was minimal, and the date of the auction only gave readers 15 days to make detailed inquires and organise his finances, and there was “no evidence that anyone took the elementary precautions which a purchaser of a building for a sum in excess of $1m would expect to take before venturing to bid at an auction”.

Question 37

Cuckmere Brick v Mutual Finance

Answer 37

Proposition 1:
In exercising his power of sale, a mortgagee owes the mortgagor two duties: a (Subjective) Duty to Exercise Power of Sale in Good Faith and an (Objective) Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value.

Proposition 2:
A mortgagee is not a trustee of his power of sale vis-à-vis the mortgagor. Thus, he is not required to wait for the best market conditions to sell or to delay a sale in the hope of obtaining a better price. He is entitled to prefer his own interest to that of the mortgagor, provided that he does not disregard the interests of the mortgagor.

(On the facts)
Mortgage secured over property which had planning permission for building 100 flats and 35 houses.

The advertisements placed by the mortgagee failed to mention the planning permission for 100 flats. Even though this omission was later drawn to their attention, they refused to delay the sale.

English CA held that the mortgagee had breached his duty to exercise reasonable care to the mortgagor because “it is or ought to be obvious” that the site would have been more attractive if potential buyers knew that it could accommodate 100 flats.

Question 38

Lee Nyet Khiong

Answer 38

Proposition 1:
Endorsed Cuckmere Brick in Singapore, and held that mortgagees owe an (Objective) Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value in equity.

Proposition 2:
During the time he is in possession, a mortgagee has a duty to exercise due diligence in realising the amount which is due to him. This means he must rent out the premises and not leave it vacant, and he must account for any rents received and deduct it from the loan due.

If he does not rent it out to others, he must still account for rents which ought to have been received.

If he occupies the property for himself or his family members, he must pay occupation rent to the mortgagee.

(On the facts)
The sister (Janet) purchased a property and renovated it with the assistance of a $6m loan from her brother (Khiong) which was secured over the property. Janet was later adjudicated a bankrupt. She wanted the property to be sold so as to clear her debts. A valuer appointed valued the property at $7m. Khiong proceeded to exercise his power of sale to by public tender. He advertised the property in the Straits Times. Only one tender was received by the close of the tender at particular price ($6.85m.) Subsequently, Janet found another potential buyer willing to pay a higher price ($7.1m). Janet wanted the property to be sold to the second buyer, but the Khiong proceeded to sell it to the first buyer at the lower price instead.

Janet sued accusing Khiong of breaching the Subjective Duty to Exercise Power of Sale in Good Faith and duty to exercise reasonable care to obtain the best price for the property. She also claimed an account of rent for the period in which Khiong had been in possession of the property.

SGCA held that Khiong had breached his duty because he failed to exercise reasonable efforts to obtain the best price for the property:

1) Khiong’s advertisement gave bare minimum of the description of the property. It did not provide any information as to the state and condition of the house, particularly its extensive renovations. These could have attracted a wider group of potential purchasers interested in a luxurious lifestyle.

2) Khiong’s advertisement also only appeared once and gave a short period of 2 weeks for tenders to be submitted. The short period had reduced the market for the property, as potential buyers would not have been able to make detailed inquires and organise their finances before making a bid for such an expensive property.

3) Even though Khiong did not like the full terms of the $7.1m offer (it required a 1-month option) Khiong could have negotiated with the buyer, perhaps to ask for a shorter option period or a higher price than $7.1m in exchange for the option. Khiong made no attempt to negotiate and simply discarded the offer.

4) Khiong could have divulged the $7.1m offer to the first buyers and use it to negotiate for a better price.

5) The market value of the property was at $7m and given that the property market was healthy and there was no urgency in rushing the sale, Khiong could have put the property up for sale again instead of accepting the lower offer of $6.85m.

Thus, court concluded that Khiong was only concerned with realising sufficient funds from the sale to pay off the debt owed to him and was not at all interested in securing a higher price for the property.

SGCA also held that Khiong was liable to pay to Janet occupation rent at market rent for placing his mother and siblings in occupation of the property.

Question 39

Kian Choon Investments

Answer 39

Proposition 1:
There is no distinction between a Tse Kwong Lam case, where mortgagee sells property controlled and substantially owned by him, and this current case, where the mortgagee sells to an independent third party but on terms that entitle him to make an immediate repurchase of a substantial part of the property at virtually the same price at which he sells the property. In both cases the mortgagee must show that the sale was made in good faith and that he has taken reasonable precautions to obtain the best price reasonably obtainable in the circumstances.

Proposition 2:
While a mortgagee was entitled to have regard primarily to its own interests, it was not entitled, if those interests were not at risk, to act in a manner which sacrificed the interests of the mortgagor ([20])

Proposition 3:
Clauses in a separate agreement between the mortgagee and mortgagor that constitute the mortgagee as “an absolute owner of the property”, deprive the mortgagor “of any interest in the property”, or unconditionally “waives all [mortgagor’s] rights or remedies” prima facie will not exonerate a mortgagee from a breach of the Subjective Duty to Exercise Power of Sale in Good Faith or the Objective Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value. ([34]- [36])

Proposition 4:
If a mortgagee does not exercise the power of sale in
good faith and the purchaser has knowledge of the facts which show the lack of good faith, the purchaser cannot obtain a right superior to the right of the mortgagor.

If the purchaser has no notice of any impropriety at the date of contract and continues to have no notice at the time when it is completed, the purchaser will obtain a title which cannot be challenged by the mortgagor (basically a bona fide purchaser without notice? Check with Ying).

However, where there is a breach of the Subjective Duty to Exercise Power of Sale in Good Faith, and if the purchase has not yet been completed, even if the purchaser has no notice, a mortgagor will be prima facie entitled to an injunction against both purchaser and mortgagee to restrain the completion of the sale. This is because until the transfer is completed, the mortgagor retains a legal interest in the land ([22] and [42]).

Proposition 5:
Damages would not be an adequate remedy to a party who is being or will be deprived of his enjoyment of land ([40]). (If the property was clearly more than an investment, then this will support a finding that damages are not an adequate remedy)

(On the facts)
The lenders (bank) sold a mortgaged freehold property valued at $131m to one of their customers (Amcol) on the condition that the buyer would grant the lenders a lease of four floors of the property and an option to repurchase 6 floors of the property. The borrowers complained that the lenders had breached their duties of good faith and to take reasonable steps to obtain the best price because the bank did not bother to put up an advertisement and merely approached one of their customers with an offer to sell the property to them.

SGCA held that lenders were in breach of both duties.

1. The lenders failed to take steps to test the market, advertise their intention to sell the property, invite tenders or bids for the property and instruct estate agents to interest the investing public or stimulate enthusiasm or interest of potential buyers for the property.
2. A reasonable and prudent precaution, especially in a rising property market, in would have been to await the outcome of the sale of an opposing property (which was inferior to the property as it was only a leasehold) before initiating any steps to sell the property.
3. What the lenders did went beyond a mere failure to take reasonable steps, their conduct showed a “calculated indifference” to the interests of the borrowers/mortgagor and was thus evidence that the lenders did not act bona fide.

SGCA also held that the borrowers/mortgagors were entitled to an injunction against both the lenders/bank and the purchaser to stop the sale:

1. It was arguable that Amcol had sufficient notice of the impropriety because Amcol knew that the lenders were selling the property as mortgagee, there was no advertisement of the property for sale, and must have been aware that the terms of the sale were obviously beneficial to the lenders ([38])
2. Even if Amcol had no notice, the borrowers were entitled to an injunction because the lenders had breached their Subjective Duty to Exercise Power of Sale in Good Faith and the sale had not yet been completed ([38])

SGCA held that damages were not an adequate remedy, and the borrowers were entitled to an injunction restraining the sale of property:

1. There was evidence that the borrowers were seeking fresh finance to redeem the property, though they were unsuccessful up to the time of sale. Rather than being an investment, the property is more than an investment to the plaintiffs.

Question 40

How Seen Ghee

Answer 40

Proposition 1:
Endorsed Cuckmere, holding that a mortgagee is not a trustee of his power of sale vis-à-vis the mortgagor. Thus, he is not required to wait for the best market conditions to sell or to delay a sale in the hope of obtaining a better price. He is entitled to prefer his own interest to that of the mortgagor, provided that he does not disregard the interests of the mortgagor.

However, if his own interests are NOT AT RISK, the mortgagee is not entitled to act in a manner which sacrifices that mortgagor’s interests.

Proposition 2:
The court held that in most cases, there is no reason why the parties should not co-operate with each other to
try to realise as much as possible from the sale of the property. An auction is not always the best way of securing a good price and it is often possible for the mortgagor himself to try and secure a good price by a private treaty sale. There is seldom any harm in allowing the mortgagor a reasonable opportunity to do so. While the mortgagor is engaged in such efforts, the mortgagee should refrain from doing anything which is liable adversely to affect the mortgagor’s efforts.

Proposition 3:
As remedy, the Singapore court deducted the shortfall (between the $725k sold price and $670k offer) from the borrower’s remaining liability with the lenders.

(On the facts)
The lenders (bank) sold a mortgaged property pursuant to an outstanding loan amount of $1.45m. The borrowers had managed to get a private offer of $725K, but the lenders were slow to response and refused to sell because they wanted to discuss how the shortfall would be paid. After the borrower failed to come up with a repayment schedule for the shortfall, the lenders put the property up for sale via auction and sold the property for $670K to the purchaser who had originally offered the $725k.

The borrower sued the lender for breach of duty to take reasonable steps to sell the property at the best price.

SGCA held that the bank had breached its duty to take reasonable steps to obtain the best price for the property:

1. The bank took too long to reply to the private offer of $725k when the lenders first raised it up to them
2. In view of the fact that the property had been valued at $650k, it was difficult to see how delaying the higher private offer of $725k just to discuss the repayment schedule with the borrower would help things.
3. Instead of seeing whether the private offer of $725k was still available, the bank went ahead with a routine procedure of putting up the property for sale via auction. The evidence showed that the prospective buyer had remained interest in purchasing the property throughout.

Accordingly, the court deducted the shortfall (between the $725k sold price and $670k offer) from the borrower’s remaining liability with the lenders.

Question 41

Beckkett v Deutsche Bank

Answer 41

Proposition 1:
Emphasized again that a mortgagee in exercising his power of sale has a (Subjective) Duty to Exercise Power of Sale in Good Faith and also a (Objective) Duty to Take Reasonable Steps to Obtain a Proper Price / True Market Value. at the date on which he decides to sell the property.

Proposition 2:
The subjective requirement of good faith demands that the mortgagee should not act wilfully and recklessly in a way that sacrifices the mortgagor’s interests. This usually relates to the avoidance of conflicts of interests, but a breach of this duty can be found whenever there is dishonesty, improper motive, or some other element of bad faith. The court emphasized that the concept of good faith must not be diluted by treating it as capable of being breached by conduct than these. Mere negligence should not be enough ([94]- [95])

The objective requirement of reasonable care
asks how a reasonable man would behave in the realization of his own property, so that the mortgagor may receive credit for the fair value of the property sold. This tends to lead to mere monetary liability ([29]).

Proposition 3:
While most cases involving a breach of the Subjective Duty to Exercise Power of Sale in Good Faith relate to conflict of interest situations where a mortgagee tries to sell to himself or to his representative, trustee, or agent, there is no reason in principle why it should be limited to a conflict of interest situation.

Prospective 3:
Where the mortgagor sues both the mortgagee and the purchaser for the setting aside of a sale, the court intervenes only if fraud or bad faith is proved. The appropriate remedy in this case is to set aside the sale.

Where the mortgagor only sues the mortgagee and sues only for an accounting between them in respect of sale at undervalue, the court assesses the mortgagee’s conduct by reference to the higher objective standard of reasonable care. The appropriate remedy is damages. ([29]).

Proposition 4:
A breach of duty to take reasonable steps to obtain the true market value will usually lead to a claim for damages only, for the reason that the complaint is not that the mortgagee is not entitled to sell, but that he has sold at undervalue.
A completed sale should not be set aside merely because it has taken place at an undervalue, as undervalue is not, by itself, evidence of bad faith or impropriety ([28])

Where there is a breach of the Subjective Duty to Exercise Power of Sale in Good Faith and the purchaser is not a bona fide purchaser or that he has notice of bad faith of the mortgagee, then the court may set aside the sale to allow the mortgagor to redeem the security. The burden of proof throughout it on the mortgagor ([28]).

Question 42

Chip Thye v Development Bank

Answer 42

Proposition 1:
Any person who has duly lodged a caveat claiming an interest in the mortgaged property is entitled to the residual proceeds under s 74 of LTA. The interest need not be a registered interest in the property ([38]).

Proposition (obiter):
Where there is more than one caveator, any difficulty in determining which caveators was entitled can be resolved by the mortgagee applying to court under Order 17 rule 1 of the Rules of the Supreme Court for interpleader reliefs

If there are no competing claims but the mortgagee wishes to ensure he pays the residual proceeds to the right person, he can apply to the court for directions and pay the surplus into court under s 65 of Trustees Act.

(On the facts)
The mortgagor (Quah) entered into a contract for sale of the property to the purchaser (Chip Thye) conditional on the planning approval. Chip Thye accordingly lodged a caveat claiming interest over the property. However, before planning approval was given and the sale could be completed, the mortgagee (bank) exercised its power of sale for the default on mortgage payments. Eventually, the bank’s sold the property to another purchaser (not Chip Thye) for $1.2m and the residual proceeds of $415k (after satisfying the mortgage loan and costs) was paid to Quah. Chip Thye brought proceedings claiming that they were entitled to the proceeds of sale under s 74 LTA.

The issue was whether Chip Thye as a caveator came within the term ‘the person who appears from the land register to be entitled to the mortgaged property’ under s 74 of the LTA.

SGCA held that Chip Thye came within that section. At the time of the mortgagee sale of the property and also at the time of completion, there was entered in the land register Chip Thye’ caveat in which they claimed an interest in the property as purchasers; they were persons who appeared from the land register to be entitled to the property. Thus, the bank was in breach of their duty under s 74 for failing to pay the surplus to Chip Thye. The court ordered the surplus of $415k received by Quah to be returned to Chip Thye.

Question 43

UOB v Chia Kin Tuck

Answer 43

Proposition 1:
Per s 73(2)(d) LTA, a mortgagee is entitled as of right to exercise its power of sale without procuring the consent or approval of those who may have interests in the property (such as a WSS). Any rights that a judgement creditor may have pursuant to its WSS over the property would be converted into an interest in the surplus sale proceeds.

(On the facts)
The judgement creditor obtained a WSS against the mortgaged property pursuant to the mortgagor’s bankruptcy. It challenged the mortgagee’s right to exercise the sale of the mortgaged property. The issue was whether the mortgagee had a right to conduct the sale of the mortgaged property in spite of the registration of the WSS.

Question 44

Rimmon Watch

Answer 44

Proposition 1:

(On the facts)
Mortgagor obtained mortgagee’s consent for a 3-year lease, but unknown to the mortgagee, the lease contained an option to renew for another 3 years. Mortgagee claimed he was not bound by option to renew and sought to exercise right of possession under s 75 LTA.

SGCA held that express consent was given only for 3-year lease, and mortgagee exercising right to possession under s 75 is not in the same position as the mortgagee at general law who enters in possession. Since the mortgagee does not have the reversion, he is unaffected by the covenants under the lease.

Question 45

Singapore FInance v Matterhorn

Answer 45

Proposition 1:

(On the facts)
Registered mortgagor let various units of building out to the 12 defendant tenants without having obtained the prior written consent of the plaintiff mortgagees. Such consent was required under the terms of the mortgage.

Pursuant to mortgagor’s default, the mortgagees sued for vacant possession of the property and sought to evict tenants.

One issue was whether the registered mortgagor could create a valid tenancy despite a prohibition to create one without the mortgagees’ consent.

SGHC held that 23 CLPA (which applied to registered mortgages by virtue of s 69 LTA) permitted the mortgagor to create an occupation lease for a term not exceeding 3 years, subject to the terms of the mortgage.

Question 46

s 74 LTA

Answer 46

The money received by a mortgagee who has exercised
her power of sale must be held by the mortgagee
on trust to be applied in the following order:

1) Pay all costs and expenses incidental to sale or attempted sale

2) Pay the outstanding mortgage money, interests and costs

3) Pay any subsequent mortgages in their order of priority

4) Any residue to be paid to “the person who appears from the land-register to be entitled to the mortgaged property” (Chip Thye)