Equitable Mortgages: What Are They, When They May Arise, and Their Effects

By Mirjana (Mira) Markovic

I recently wrote an article on the different types of mortgages that are available within the real estate market sphere. These types of mortgages are all secured and require registration. An equitable mortgage is on the opposite side of the spectrum to a registered mortgage and indeed an interesting concept. Let us take a closer look.

A registered mortgage is a type of mortgage in which the lender registers a secured interest against the property title. Such an interest is registered via the Land Registry Office under whose jurisdiction the property is situated and requires the assistance of a lawyer. Once registration is completed, it gives the lender priority to recover the loan amount over unsecured creditors in the event that the purchaser defaults in payment of the loan.

The word “equitable” is derived from the word “equity”, which simply means in the interest of justice. An equitable mortgage arises out of a transaction that has the intent but not a form of a formal mortgage that the Courts nevertheless will treat as a mortgage. Under this regime, the lender does not acquire a legal interest in the mortgaged property because the borrower’s initial interest in the property is equitable or the borrower has legal interest but a mortgage was created informally by a deposit of the title transfers/deeds (i.e., if the borrower owns a piece of land or property, they can pledge it as security by giving the lender the title-deed to the property. This means that if the borrower cannot repay the loan, the lender can take ownership of the property).

An equitable mortgage is unregistered and does not form a secured interest against a property. It merely represents a promise by the borrower to reserve the relevant equity in the property for the lender when the property is sold. This arrangement should be evidenced via a written agreement between the borrower and the lender outlining certain contractual obligations binding both parties. This type of mortgage is enforceable through the principles of equity and does not require registration before it can be enforced. Enforcement proceedings are brought via a motion in the Superior Court of Justice. The intention of the parties is a crucial component that the Courts will look at to determine if an equitable mortgage has been created and whether it is enforceable.

An equitable mortgage may arise out of the following scenarios:

1. If a borrower has only an equitable interest in a property, she/he can only grant an equitable interest (i.e., a mortgage granted by a beneficiary under a trust can only be equitable because a beneficiary only holds the beneficial interest in a property and not the legal interest);
2. if a transfer/deed is not registered in the Land Registry Office under which the property is situated. Such a document evidences a registration of a legal interest in the name of individuals or corporations; and
3. if a mortgage is not registered against title evidencing a secured interest in the property in favour of a lender, therefore, it takes effect only in equity.

Listed below are crucial points of difference between registered and equitable mortgages:

Basis	Registered Mortgage	Equitable Mortgage
Registration	Registered in the Land Registry Office the property is situated.	No registration is required. Parties are only bound by an agreement.
Creation of interest	Creates a secured interest against a property in favour of a lender.	Does not create a secured interest against a property in favour of a lender.
Process	A legal process is required to properly register a mortgage.	No legal process is required.
Security	Since it creates a secured interest in favour of a lender, the lender has priority to get paid over unsecured lenders if the borrower defaults.	Creates an unsecured interest therefore, a secured lender has priority to get paid over unsecured lenders if the borrower defaults.
Risk	Such mortgages are risk free as such is evidenced on the property PIN once pulled and available to the public. The borrower cannot sell the property by concealing it from the lender.	The only evidence of such a mortgage is via an agreement between the borrower and lender therefore, such is unknown to the public. The borrower can sell the property in the event of default and not notify the lender causing the lender significant loss.

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at mira@sorbaralaw.com.