§ 160. Securities.
A security is an encumbrance, the purpose of which is to ensure or facilitate the fulfilment or enjoyment of some other right (usually though not necessarily a debt) vested in the same person.[[436]] Such securities are of two kinds, which may be distinguished as mortgages and liens, if we use the latter term in its widest permissible sense.[[437]] In considering the nature of this distinction we must first notice a plausible but erroneous explanation. A mortgage, it is sometimes said, is a security created by the transfer of the debtor’s property to the creditor, while a lien is merely an encumbrance of some sort created in favour of the creditor over property which remains vested in the debtor; a mortgagee is the owner of the property, while a pledgee or other lienee is merely an encumbrancer of it. This, however, is not a strictly accurate account of the matter, though it is true in the great majority of cases. A mortgage may be created by way of encumbrance, no less than by way of transfer;[[438]] and a mortgagee does not necessarily become the owner of the property mortgaged. A lease, for example, is commonly mortgaged, not by the assignment of it, but by the grant of a sub-lease to the creditor, so that the mortgagee becomes not the owner of the lease but an encumbrancer of it. Similarly freehold land may be mortgaged by the grant to the mortgagee of a long term of years.
Inasmuch, therefore, as a mortgage is not necessarily the transfer of the property to the creditor, what is its essential characteristic? The question is one of considerable difficulty, but the true solution is apparently this. A lien is a right which is in its own nature a security for a debt and nothing more; for example, a right to retain possession of a chattel until payment, a right to distrain for rent, or a right to receive payment out of a certain fund. A mortgage, on the contrary, is a right which is in its own nature an independent or principal right, and not a mere security for another right, but which is artificially cut down and limited, so that it may serve in the particular case as a security and nothing more; for example the fee simple of land, a lease of land for a term of years, or the ownership of a chattel. The right of the lienee is vested in him absolutely, and not merely by way of security; for it is itself nothing more than a security. The right of a mortgagee, on the contrary, is vested in him conditionally and by way of security only, for it is in itself something more than a mere security. A lien cannot survive the debt secured; it ceases and determines ipso jure on the extinction of the debt. It is merely the shadow, so to speak, cast by the debt upon the property of the debtor. But the right vested in a mortgagee has an independent existence. It will, or may, remain outstanding in the mortgagee even after the extinction of the debt. When thus left outstanding, it must be re-transferred or surrendered to the mortgagor, and the right of the mortgagor to this re-assignment or surrender is called his right or equity of redemption. The existence of such an equity of redemption is therefore the test of a mortgage. In liens there is no such right, for there is nothing to redeem. The creditor owns no right which he can be bound to give back or surrender to his debtor. For his right of security has come to its natural and necessary termination with the termination of the right secured.[[439]]
Mortgages are created either by the transfer of the debtor’s right to the creditor, or by the encumbrance of it in his favour. The first of these methods is by far the more usual and important. Moreover it is peculiar to mortgages, for liens can be created only by way of encumbrance. Whenever a debtor transfers his right to the creditor by way of security, the result is necessarily a mortgage; for there can be no connexion between the duration of the debt so secured and the natural duration of the right so transferred. The right transferred may survive the debt, and the debtor therefore retains the right of redemption which is the infallible test of a mortgage. When on the other hand a debtor encumbers his right in favour of the creditor, the security so created is either a mortgage or a lien according to circumstances. It is a mortgage, if the encumbrance so created is independent of the debt secured in respect of its natural duration; for example a term of years or a permanent servitude. It is a lien, if the encumbrance is in respect of its natural duration dependent on, and coincident with the debt secured; for example a pledge, a vendor’s lien, a landlord’s right of distress, or an equitable charge on a fund.
Speaking generally, any alienable and valuable right whatever may be the subject-matter of a mortgage. Whatever can be transferred can be transferred by way of mortgage; whatever can be encumbered can be encumbered by way of mortgage. Whether I own land, or chattels, or debts, or shares, or patents, or copyrights, or leases, or servitudes, or equitable interests in trust funds, or the benefit of a contract, I may so deal with them as to constitute a valid mortgage security. Even a mortgage itself may be transferred by the mortgagee to some creditor of his own by way of mortgage, such a mortgage of a mortgage being known as a sub-mortgage.
In a mortgage by way of transfer the debtor, though he assigns the property to his creditor, remains none the less the beneficial or equitable owner of it himself. A mortgagor, by virtue of his equity of redemption, has more than a mere personal right against the mortgagee to the reconveyance of the property; he is already the beneficial owner of it. This double ownership of mortgaged property is merely a special form of trust. The mortgagee holds in trust for the mortgagor, and has himself no beneficial interest, save so far as is required for the purposes of an effective security. On the payment or extinction of the debt the mortgagee becomes a mere trustee and nothing more; the ownership remains vested in him, but is now bare of any vestige of beneficial interest. A mortgage, therefore, has a double aspect and nature. Viewed in respect of the nudum dominium vested in the mortgagee, it is a transfer of the property; viewed in respect of the beneficial ownership which remains vested in the mortgagor, it is merely an encumbrance of it.
The prominence of mortgage as the most important form of security is a peculiarity of English law. In Roman law, and in the modern Continental systems based upon it, the place assumed by mortgages in our system is taken by the lien (hypotheca) in its various forms. The Roman mortgage (fiducia) fell wholly out of use before the time of Justinian, having been displaced by the superior simplicity and convenience of the hypotheca; and in this respect modern Continental law has followed the Roman. There can be no doubt that a similar substitution of the lien for the mortgage would immensely simplify and improve the law of England. The complexity and difficulty of the English law of security—due entirely to the adoption of the system of mortgages—must be a source of amazement to a French or German lawyer. Whatever can be done by way of mortgage in securing a debt can be done equally well by way of lien, and the lien avoids all that extraordinary disturbance and complication of legal relations which is essentially involved in the mortgage. The best type of security is that which combines the most efficient protection of the creditor with the least interference with the rights of the debtor, and in this latter respect the mortgage falls far short of the ideal. The true form of security is a lien, leaving the full legal and equitable ownership in the debtor, but vesting in the creditor such rights and powers (as of sale, possession, and so forth) as are required, according to the nature of the subject-matter, to give the creditor sufficient protection, and lapsing ipso jure with the discharge of the debt secured.[[440]]
Liens are of various kinds, none of which present any difficulty or require any special consideration.
1. Possessory liens—consisting in the right to retain possession of chattels or other property of the debtor. A power of sale may or may not be combined with this right of possession. Examples are pledges of chattels, and the liens of innkeepers, solicitors, and vendors of goods.
2. Rights of distress or seizure—consisting in the right to take possession of the property of the debtor, with or without a power of sale. Examples are the right of distress for rent, and the right of the occupier of land to distrain cattle trespassing on it.