31.07.12

Jumping the Queue: Priority of mortgages: When is first not first

Sandra Minott-Phillips, Q.C.
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(876) 922-5860 or (876) 833-6171

When land is mortgaged more than once, the general rule is that priority is given to the mortgage registered first on the land title. So if a loan is not repaid in accordance with the contract, triggering the bank's need to sell the property, the first mortgagee must be paid out before the second mortgagee can be paid out, and so on. This is the essence of the rule of priority. Each lending institution knows where it stands depending on its ranking as first, second or third mortgagee.

On July 20, 2012 the Court of Appeal delivered a judgment that recognized the Real Estate Board's ability to jump the queue. All financial institutions are now doing a double-take.

The ability to lend and borrow money is at the heart of the market driven economy. In the ordinary course of things banks will only lend out the money deposited with them by their customers if they can be assured of repayment. After all, when a depositor comes into the bank and wants to make a withdrawal from his account, the bank must have it to give him. To ensure they can do this banks require lenders to give them collateral (i.e. to put up security for repayment of the loan).

The preferred and predominant collateral of banks is a mortgage of land. If the money loaned is not repaid by the borrower, the bank sells the land and recovers the money. Mortgages of registered land are the best kind of mortgage because they give the bank the power to sell the land simply and quickly without need to resort to the lengthy process of suing the borrower. This is called the power of sale.

A mortgage is a type of charge (encumbrance) on the land which, in the case of registered land, becomes a registered mortgage on the date of its registration on the certificate of title for the land. The person who mortgages the land is the mortgagor/chargor and the entity receiving the mortgage is the mortgagee/chargee. Mortgages of registered land are governed by the provisions of the Registration of Titles Act.

Exceptions to the rule of priority are rare, but they do exist. Inherently, an exception is a small aberration that, by virtue of being small, is not significant enough to erode the established order defined by the general rule applicable in the majority of circumstances.

One exception to the rule of priority of charges on registered land occurs in the Real Estate (Dealers & Developers) Act. It applies to pre-payment contracts entered into between purchasers and developers of land subject of a development scheme. Simply put, a pre-payment contract is a contract to buy something that is not yet built (but which both parties understand will be built) using the money paid to the developer as a pre-payment. When a developer receives money from a purchaser under such a contract he is required to register a charge on the land in favour of the Real Estate Board to secure repayment to the purchaser of the money advanced to him by that purchaser- in the event things don't go as they should. That charge created in favour of the Real Estate Board (save in one exceptional circumstance) ranks in priority to all other mortgages or charges regardless of the date of the registration of the charge in favour of the Real Estate Board. Even if its charge is registered on the certificate of title for the land after the registration of prior charges or mortgages, the Real Estate Board becomes the first entity to receive money out of any proceeds of sale of the land. Its charge, therefore, is an exception to the general rule of priority.