Jamaica
News - Real Estate - Finance
Source: Financial Gleaner, Dennis Morrison, March 14, 2007)
Mortgages and freedom of
contract
Mortgages of land play a crucial role in the commercial life of the country.
They enable access by citizens, whether
individual or corporate, to obtain long-term financing for the purpose of
acquiring homes, office buildings and land generally, while at the same time
providing financial institutions with a properly secured investment option,
guaranteeing over time a return on their money.
The power of sale of the mortgaged property given
to the lender by the Registration of Titles Act is its main recourse in the
event of default in payment under the mortgage by the borrower, and is therefore
a critically important power from the lender's point of view.
However, of equal importance to the borrower,
are the restrictions in the act on the exercise of the lender's powers of sale,
in particular the general requirement that the borrower in default of payment -
or any other obligation under the mortgage - must be given a notice of default
by the lender calling upon him to make good the default within such time as may
be specified in the notice, failing which the mortgaged property will be sold to
recover the debt.
Mortgage instrument
It is sometimes the case that the mortgage
instrument itself, which is signed at the time the loan is being granted,
prescribes a different procedure in cases of default from that provided for by
the act, as was the case in Jobson v Capital & Credit Bank Limited.
In that case, the mortgage instrument stated that
the lender's powers of sale under the act were exercisable without any notice or
demand to the borrower whenever the borrower was in default of payment
obligations under the mortgage for a period of 30 or more days.
The borrower having defaulted, a notice of the
lender's intention to exercise the powers of sale was apparently dispatched, but
the evidence in the case was that the borrower never received it.
No notice of sale
The borrower's default continued and the
mortgaged property, a small fruit farm, was in due course sold by the lender to
recover the debt, as a result of which the borrower sued the lender on the basis
that no notice of sale had been given in accordance with the Act and that the
lender had not therefore been entitled to exercise the powers of sale.
The case accordingly posed in acute form the
question whether the lender's exercise of the power of sale, which had not been
carried out in accordance with the act, though carried out in accordance with
the terms of the mortgage instrument itself, was valid.
Put another way: Was the lender obliged to
give the borrower notice under the act, even though this was not required by the
terms of the mortgage itself?
In the Jobson case, an important decision handed
down February 14, the Privy Council has now ruled that it is the terms of the
mortgage that should prevail.
It was pointed out that the act itself
permitted the parties to a mortgage to modify or negate by express terms any
covenant or power implied by the act, and that in the instant case the parties
had by the express terms of the mortgage clearly modified the statutory powers
of sale by providing that no notice of default was required to be given by the
lender to the borrower in default for the stated period.
Necessary incident
This was a necessary incident, it was decided,
of the parties' freedom of contract, which by its terms the act in fact
preserved rather than restricted on this point.
This decision is obviously of tremendous
practical significance to lenders and borrowers alike.
For lenders, it confirms the efficacy of a
drafting practice that has in fact been prevalent for many years, while for
borrowers, it underscores the need to pay careful attention to the terms of the
mortgage instrument itself
This will ordinarily include taking legal advice
where necessary. However, most borrowers — for example, persons entering the
home purchase market for the first time — are not in a position to bargain
successfully with prospective lenders on a point such as this.
A more fundamental question is, therefore,
whether the philosophy of freedom of contract which the act, drafted in 1888,
has now been confirmed to reflect, should give way to a policy of consumer
protection, more in line with modern social values, in this the 21st Century,
and if the should be amended to make it compulsory for lenders to serve a notice
of default on borrowers under a mortgage, giving them at least 21 days notice as
a precondition to the exercise of the power of sale.
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