Enforcement of equitable charges over land by sale
An equitable charge is created when property is expressly or constructively made liable to the discharge of a debt or some other obligation. The ‘chargee’/ creditor — the person who has the benefit of the charge — is entitled to realise his security by judicial process, including an order for sale of the land. An equitable mortgage is an example of an equitable charge. An equitable mortgage does not confer legal estate or title in the subject property to the mortgagee (the creditor), but demonstrates a binding intention to create a security in favour of the mortgagee. Equitable charges are distinct from legal charges in that there is no process by which a legal interest is created, such as the registration of mortgages under the Registration of Titles Act.
Equitable charges may be created by contract. Examples of situations where equitable charges over land are created are:
- Where a formal legal mortgage was attempted, but proves ineffective for some reason, such as some defect in execution or formality;
- The by-laws of a membersonly proprietary club create a lien against members’ property in favour of the club for outstanding maintenance charges and dues;
- An agreement between a hardware company and a developer which governs the supply of construction materials on credit contains a clause that the development land is charged with the amount of any materials supplied but not paid for;
- A written authority for a creditor to sell property and retain a debt out of the proceeds of sale.
In each of the examples above, there is an intention for the property to be charged and disposed of to settle the debt in
the event of default. Sometimes, a caveat is registered on the title to the property to give notice to the world of the existence of the equitable right claimed.
If there is default on the agreement, the creditor or chargee may apply to the court to enforce his equitable charge. The remedies available to a creditor will depend on the wording of the contract but will often include the appointment of a receiver, sale of the property to recover the debt or even possession or foreclosure of the property. This article deals with the remedy of sale. Since the holder of the equitable charge does not have a legal mortgage, he cannot just proceed to appraise and auction the property, as a financial institution with a legal mortgage and a power of sale would.
To enforce in the event of default, the holder of the equitable charge would have to file a claim in the Supreme Court and invoke the court’s equitable jurisdiction found in Section 48 of the Judicature (Supreme Court) Act to grant equitable relief, which is founded on a contract.
Part 66 of the Civil Procedure Rules of the Supreme Court of Jamaica may also be utilised as they contain specialised rules which deal with claims for the enforcement of equitable charges including equitable mortgages. That section of the court’s rules deals with, among other things, claims for sale, possession and foreclosure on property subject to an equitable charge, or for payment of the debt.
The process to enforce the equitable charge is relatively simple. For a claim for sale of the property subject to an equitable charge, a fixed date claim form and affidavit are filed by the creditor and served on the debtor and every other person who has a charge over the land. The claim documents should include documents relevant for the court’s consideration such as the contract which creates the charge, evidence of the debt, interest accrued, periodic payments required, repayments that have been made, the amount remaining due, and the interest rate.
If the court is satisfied that an equitable charge has been created by the contract, the remedy of sale was intended and is available, and in all the circumstances it is fair and just to grant the remedy sought, the court may grant an order sanctioning the enforcement of the equitable charge — for sale of the property. Most often, the court can deal with the matter summarily, and within 6-12 months if the claim is filed in the Commercial Division of the Court, which is a specialised division of the court which deals with commercial cases.
The court can also, in the exercise of its jurisdiction to do justice and achieve fairness, make consequential orders to manage the enforcement process such as the requirement that the sale must be by public auction or that a valuation should be conducted before the order for sale is executed. If a debtor refuses to sign the relevant document to effect the transfer of the property, the court can also grant orders empowering the Registrar of Titles to sign transfer documents.
The contract which creates the equitable charge will usually say that the proceeds of sale are to be applied to settlement of the debt and all costs, charges and expenses (including legal fees) incurred for the protection and enforcement of the security.