What Is an Equitable Mortgage and How Does It Work?
Uncover the intricacies of equitable mortgages and their vital role in property security, distinct from traditional legal forms.
A mortgage typically involves a formal, recorded agreement to secure a loan with real estate. However, a lender’s interest in a borrower’s property can also arise through less conventional means, recognized by legal principles focusing on fairness and intent. This alternative form of security is known as an equitable mortgage, operating outside usual statutory requirements.
Defining Equitable Mortgages
An equitable mortgage represents an interest in property recognized by courts of equity, rather than through strict common law or statutory formalities. It grants a lender a right over the borrower’s property, even without a formal mortgage document being fully executed or recorded. This charge on property is enforceable in equity, based on the parties’ intent to create a security interest. Courts apply principles of fairness to ensure substance prevails over form.
This mortgage does not transfer the legal title of the property to the lender. Instead, it creates an equitable interest, meaning the lender has a claim against the property that can be enforced through a court order. This interest can arise even if no formal mortgage documents were prepared or recorded.
How Equitable Mortgages Arise
Equitable mortgages can arise in several common scenarios, often stemming from the parties’ intent to use property as security, even if legal formalities are not fully met. One way is through the deposit of title deeds, where a borrower hands over original property documents to a lender as security for a loan. This action is presumed to indicate an intention to create a charge on the property, allowing a court to recognize an equitable mortgage.
Another common situation is an agreement to create a legal mortgage in the future, where parties intend to execute a formal mortgage but it has not yet been perfected. If loan funds have been advanced based on this agreement, an equitable mortgage may be recognized. This also applies to defective legal mortgages, where an attempt to create a legal mortgage failed to meet statutory requirements, such as improper execution or lack of registration.
An equitable mortgage also arises when a borrower only possesses an equitable interest in property, rather than the full legal title. Any mortgage created over such an interest will inherently be equitable, as the borrower cannot grant an interest greater than what they hold. For example, a beneficiary’s interest in a trust property can only be subject to an equitable mortgage.
Key Differences from Legal Mortgages
The distinctions between an equitable mortgage and a legal mortgage are significant, revolving around their creation, the nature of the interest created, and their protection. Legal mortgages require specific statutory formalities, typically involving a written deed and public registration to be valid at law. In contrast, equitable mortgages arise from less formal agreements or circumstances, often without formal registration.
A legal mortgage generally transfers the legal estate in the property to the lender or creates a legal charge, providing a strong, publicly recorded claim. An equitable mortgage, however, creates only an equitable interest or charge over the property, leaving the legal title with the borrower. This distinction impacts the priority of claims; legal mortgages typically enjoy stronger protection due to their registered status.
Regarding remedies upon default, both types of mortgages provide security, but their enforcement mechanisms can differ. Legal mortgages often come with statutory powers of sale, allowing lenders to sell the property without extensive court proceedings in some jurisdictions. Equitable mortgages, due to their informal nature, generally require court intervention to enforce the security interest.
Enforcement of Equitable Mortgages
Upon a borrower’s default, a lender holding an equitable mortgage must typically seek intervention from a court of equity to enforce their rights. Common equitable remedies include an order for sale, where the court directs the sale of the property to recover the outstanding debt.
In some cases, the court may appoint a receiver to manage the property and collect any income generated, which can then be used to repay the debt. A court might also order foreclosure, which would transfer ownership of the property to the lender. If the equitable mortgage arose from an agreement to create a legal mortgage, the court may compel the borrower to specifically perform their agreement by executing the formal legal mortgage.