Solicitors are commonly asked to advise potential mortgagors about loan and mortgage documents before witnessing the mortgagor’s signature on those documents. Some solicitors perform this task very inadequately, and suits brought by mortgagors against solicitors for inadequate advice are common.

In NSW, r 58 of the former New South Wales Professional Conduct and Practice Rules 1995 (Solicitor’s Rules) from the Law Society of New South Wales set out steps that a solicitor is obliged to follow when acting for a person signing loan or mortgage documents. Although a solicitor should be careful to comply with r 58, his or her duties do not end there.

A solicitor should avoid conflict of interest in advising on mortgage and loan documents (r 58.3 of the former Solicitor’s Rules, and r 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW), r 8.6 of the Professional Conduct and Practice Rules 2005 (Vic) from the Law Institute of Victoria, r 11 of the Australian Solicitors Conduct Rules (2012) (Qld) from the Queensland Law Society, r 28 of the Professional Conduct Rules 2008 (WA) from the Law Society of Western Australia, r 11.1 of the Australian Solicitors’ Conduct Rules (SA) from the Law Society of South Australia, r 8.1 of the Rules of Professional Conduct and Practice (NT) from the Northern Territory Law Society, and r 11 of the Legal Profession (Solicitors) Conduct Rules 2015 (ACT).

In Tasmania, there are general conflict of interest provisions under r 12 of the Rules of Practice 1994 (Tas), but no comparable provisions relating to mortgages in particular.

Practitioners should identify the mortgagor by applying the new requirements set out in r 11.2 of the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 (NSW). Sections 56C and 117 of the Real Property Act 1900 (NSW), which commenced on 1 November 2011, and ss 87A to 87E of the Transfer of Land Act 1958 (Vic), which commenced on 24 September 2014, will make the proper identification of mortgagors all the more important.

Additionally, in the Northern Territory, pursuant to s 160 of the Land Title Act (NT), a person who witnesses an instrument executed by a natural person (such as a mortgage) must:

• take reasonable steps to ensure that the natural person is the person entitled to sign the instrument;

• have the natural person execute the instrument in the presence of the person; and

• not be a party to the instrument.

In Western Australia, r 28.4 of the Professional Conduct Rules 2008 (WA) from the Law Society of Western Australia requires a legal practitioner to identify the proposed signatories of loan documents through the use of one of the documents listed in that sub-rule.

In South Australia, s 267 of the Real Property Act 1886 (SA) requires that the execution of any instrument by or on behalf of a party to that instrument must be witnessed by a person who either knows the person executing the instrument personally or is satisfied as to his or her identity. Section 268 of the Real Property Act 1886 (SA) imposes penalties for improper witnessing.

In South Australia, the Registrar-General’s Verification of Identity Policy came into operation on 1 July 2013 and compliance with that Policy is mandatory in respect of documents executed on or after 28 April 2014. Conveyancers, lawyers and mortgagees must certify on the document that reasonable steps have been taken to verify the identity of the mortgagor. See the Registrar-General’s Verification of Identity (VOI) Requirements which can be found on the Land Services Group website.

The Registrar-General's Verification of Authority Guidelines came into force on 4 July 2016 and require conveyancers, lawyers and mortgagees to verify the authority of a party to enter into a conveyancing transaction: ss 273A and 273B, Real Property Act 1886 (SA).

In Queensland, the mortgagee must take reasonable steps, before the mortgage is lodged for registration, to ensure that the person who executed the mortgage as mortgagor is identical with the person who is the registered proprietor or is about to become the registered proprietor of the land: s 11A(2) of the Land Title Act 1994 (Qld). A mortgagee will have taken reasonable steps if the mortgagee complies with practices included in the Land Title Practice Manual: s 11A(3) of the Land Title Act 1994 (Qld). See the Department of Natural Resources and Mines website (DNRM) for more information on the Land Title Practice Manual. See paragraph [2-2005] of the Manual.

In Tasmania, the Northern Territory and the Australian Capital Territory, there is no equivalent statutory requirement to identify the mortgagor. However, practitioners should consider whether or not the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) applies to the particular transaction.

Although potential mortgagors may be keen to sign the loan and documents and view the solicitor’s task merely as witnessing their signature, a solicitor should not succumb to this manner of thinking. There may be important terms in the documents that the mortgagor was not expecting to be there and which need, at least, to be renegotiated with the mortgagee prior to the transaction being entered into. There may need to be other agreements prepared and executed with third parties to reduce the mortgagor’s risk. It may be that the transaction is simply not in the mortgagor’s interest however the documents are drafted, in which case the solicitor should advise the mortgagor not to proceed. See Advising mortgagors.

Solicitors should also ensure that they carefully review the documents to determine whether they hold the appropriate practicing certificate to provide advice on the loan and documents, as a number of mortgagors require that only a solicitor with an unrestricted practicing certificate review the documents.

Generally speaking, the solicitor acting for the mortgagor will not be required to draft the mortgage or loan documents, as typically lenders have their own standard forms of those documents. There may, however, be scope for negotiating an amendment to terms in those standard documents.

The mortgagor’s solicitor needs to carefully check loan and mortgage documents for covenants that may be of particular concern to the mortgagor, as once identified, the solicitor has the potential to negotiate with the mortgagee for their modification or removal (or, at the very least, such covenants can be brought to the mortgagor’s attention so that the mortgagor can consider whether he or she wishes to proceed with the transaction). Some of these covenants may be seen by the mortgagee as essential to protect the mortgagee’s interests, while others may be considered as mere boilerplate clauses the mortgagee may agree to delete if they threaten the making of the loan. Covenants likely to be of particular concern to mortgagors include:

• charging clauses;

• prohibitions on further mortgages;

• dual interest rate regimes, including higher default rates of interest;

• acceleration of principal clauses;

• penalty regimes; and

• cross-collateralisation provisions.

Practice Tip: Standard advice booklets in plain English are a useful tool to advise clients and manage retainers efficiently, reliably and safely.

See Negotiating mortgage terms.

If the mortgagee refuses to discharge a mortgage according to its terms when payment in full is offered, the mortgagor can bring a redemption suit against the mortgagee. This involves the mortgagor applying to the court for orders forcing the mortgagee to discharge the mortgage upon payment of the monies due. This situation most frequently occurs when there is a dispute between the mortgagee and the mortgagor over the amount due. Typically, mortgages are drafted to give the mortgagor the right to redeem at any time, and so the mortgagor will not need to wait until the term of the mortgage has expired to pay out the loan and receive a discharge of mortgage.

If a dispute arises as to the amount due, typically, if the mortgagor wishes to obtain discharge while maintaining his or her position, it will be necessary for the mortgagor not only to pay the mortgagee the amount demanded but also to pay to the mortgagee or into court the mortgagee’s estimated future costs of engaging in litigation to determine the correct amount.

Occasionally a mortgagee is unknown, cannot be found or is outside the jurisdiction when a mortgagor is seeking to redeem. If this occurs, the mortgagor can apply to the court for a discharge. The court can then grant the discharge on the basis that the mortgagor pays into court the amount owing under the mortgage and the court then holds that amount until the mortgagee is located to claim it.

Note that in Tasmania, under s 90 of the Land Titles Act 1980 (Tas), the Recorder of Titles may facilitate the discharge of a mortgage in some cases.

See Redemption suits.

Mortgagors often apply to courts to stay eviction resulting from the mortgagee enforcing a writ of possession (being the court’s instructions to its enforcement arm, the Sheriff’s Office, to take possession of land and provide it to the mortgagee), and such stays are frequently granted by courts. Stays to allow an application to set aside a default judgment for possession or to prosecute an appeal are commonly granted, although they are by no means automatic. Courts will usually permit stays for several weeks to allow the mortgagor to obtain refinance and pay out the existing mortgage if it appears likely that such refinance will be quickly obtained. Courts may grant a short stay on compassionate or practical grounds if there are special reasons why the occupiers of the security property cannot vacate the premises in the time allowed by the Sheriff enforcing the writ on behalf of the mortgagee.

A mortgagor may apply to a court to seek an injunction prohibiting the mortgagee selling the security property. If the court has already given judgment for possession to the mortgagee, there are typically few grounds for the mortgagor to make such an application, but if there is no existing judgment, the mortgagor may allege, for example, that the mortgage is unenforceable or that there has been no breach.

Obtaining an injunction against a mortgagee sale on the grounds that the sale is not going to be properly conducted by the mortgagee has traditionally been difficult due to the fact that mortgagees have had considerable latitude in the manner of sale, although that latitude has been reduced somewhat in relation to corporate mortgagors by s 420A of the Corporations Act 2001 (Cth) and this has been extended to all mortgagees of New South Wales land by s 111A of the Conveyancing Act 1919 (NSW) as of 1 November 2011. Further, it can be hard to show beforehand that the sale will be improper, and the court may well consider the most convenient course is to simply let the property be sold and that any financial loss to the mortgagor be compensated in due course by a payment by the mortgagee. See Stay or injunction applications.