PastPaperHero | Mortgages/security devices - Absolute deeds as security

Learning Outcomes

After reading this article, you will be able to identify when an absolute deed operates as a security device rather than a true sale, explain the doctrine of equitable mortgage, distinguish between a mortgage and a sale with a right of repurchase, and apply these principles to MBE-style questions. You will also recognize common exam traps and understand the remedies available to parties in these transactions.

MBE Syllabus

For MBE, you are required to understand the legal consequences when a property owner conveys land by absolute deed but intends the transaction as security for a debt. This article focuses your revision on:

Recognizing when an absolute deed is treated as a mortgage (equitable mortgage).
Distinguishing between a true sale and a disguised security device.
Understanding the rights and remedies of parties in absolute deed/equitable mortgage situations.
Identifying MBE pitfalls and common fact patterns involving absolute deeds as security.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

If a property owner conveys land by absolute deed to a lender, but both parties intend the deed to serve as security for a loan, what is the likely legal effect?
1. The deed is a true sale.
2. The deed is void.
3. The deed is treated as a mortgage (equitable mortgage).
4. The lender acquires the property free of any obligation.
Which of the following is NOT a factor courts consider in determining whether an absolute deed is actually a security device?
1. The relationship of the parties.
2. The adequacy of consideration.
3. Whether the deed was recorded.
4. The existence of a continuing debt.
If a court finds that an absolute deed is an equitable mortgage, what right does the original owner retain?
1. No rights.
2. Only the right to repurchase at the lender’s discretion.
3. The right to redeem the property by paying the debt.
4. The right to rescind the transaction at any time.

Introduction

Absolute deeds as security arise when a property owner transfers title by deed to another, but the parties intend the transaction to secure a debt rather than to effect a true sale. Courts may treat such a deed as a mortgage, even if the document appears to be an outright conveyance. This doctrine prevents lenders from circumventing foreclosure protections and the borrower’s right to redeem. Understanding when an absolute deed is recharacterized as a mortgage is essential for the MBE.

Key Term: Absolute Deed A deed that on its face conveys full title to the grantee, without any express mention of a security interest or right of redemption.

Key Term: Equitable Mortgage A transaction where, despite the form of an absolute deed, the parties’ intent and circumstances show the deed was meant to secure a debt, so equity treats it as a mortgage.

Absolute Deeds as Security: The Equitable Mortgage Doctrine

Identifying an Equitable Mortgage

When a property owner gives an absolute deed to a lender, but the real purpose is to secure a loan, courts may find an equitable mortgage. The key is the parties’ intent, not the form of the document. If the deed is intended as security, the law treats it as a mortgage, and the borrower retains the right to redeem the property.

Key Term: Right of Redemption The borrower’s right to recover property by paying the secured debt, even after an absolute deed is given as security.

Factors Courts Consider

Courts look at the totality of circumstances to determine whether a deed is a true sale or an equitable mortgage. Relevant factors include:

The existence of a debt or obligation.
The relationship of the parties (e.g., lender-borrower).
The adequacy of consideration (was the price much less than market value?).
Whether the grantor remained in possession.
The parties’ conduct after the deed was delivered.
Any written or oral agreements about repurchase or redemption.

No single factor is decisive; courts weigh all evidence to determine intent.

Sale with Right of Repurchase vs. Equitable Mortgage

A sale with a right of repurchase is a true sale if the parties genuinely intend a transfer of ownership, with the seller retaining only a contractual right to buy back the property. In contrast, if the transaction is meant to secure a debt, it is an equitable mortgage, and the borrower’s right to redeem cannot be waived in advance.

Key Term: Sale with Right of Repurchase A transaction where the seller conveys property but retains a contractual right to buy it back, as opposed to a security device.

Worked Example 1.1

A homeowner, facing financial trouble, transfers her house by absolute deed to a lender for $100,000. The property is worth$ 250,000. The homeowner stays in the house and continues to pay the lender monthly “rent” equal to the interest on the $100,000. There is no written agreement about a loan or right to redeem. The lender claims full ownership.

Answer: A court is likely to find this is an equitable mortgage, not a true sale. The grossly inadequate consideration, the ongoing debt relationship, and the homeowner’s continued possession all indicate the deed was intended as security. The homeowner retains the right to redeem by paying the $100,000 debt.

Remedies and Rights

If a court finds an equitable mortgage, the lender cannot simply keep the property. The borrower has the right to redeem by paying the debt. The lender must foreclose to extinguish this right. Any attempt to “clog” the equity of redemption (e.g., by contractually waiving the right to redeem) is void.

Key Term: Clog on the Equity of Redemption Any provision or device that attempts to prevent the borrower from redeeming the property after default.

Worked Example 1.2

A property owner deeds land to a creditor as “absolute owner.” The deed is recorded. The owner remains in possession and continues to pay the creditor monthly amounts labeled as “interest.” The creditor later tries to sell the property to a third party.

Answer: If the original transaction was intended as security, the creditor cannot transfer good title free of the owner’s right to redeem. The owner may bring an action to redeem the property by paying the debt, and the creditor must foreclose to cut off this right.

Exam Warning

On the MBE, do not assume that the form of the document controls. Courts look at intent and circumstances. If the facts suggest a loan secured by property, even if the deed is absolute, treat it as a mortgage.

Revision Tip

If you see a fact pattern where a borrower deeds property to a lender and remains in possession, always consider whether an equitable mortgage exists, especially if the price is far below market value or there is ongoing payment.

Key Point Checklist

This article has covered the following key knowledge points:

An absolute deed may be recharacterized as a mortgage if intended as security for a debt.
Courts look at intent, not just the form of the deed.
Relevant factors: debt, possession, consideration, ongoing payments, and agreements.
If an equitable mortgage is found, the borrower retains the right to redeem.
The lender must foreclose to cut off the right of redemption.
Attempts to “clog” the equity of redemption are void.
Distinguish between a true sale with right of repurchase and a disguised mortgage.

Key Terms and Concepts

Absolute Deed
Equitable Mortgage
Right of Redemption
Sale with Right of Repurchase
Clog on the Equity of Redemption

Mortgages/security devices - Absolute deeds as security