Most Read Contributor in New Zealand, September 2016
The Court of Appeal has confirmed that the New Zealand
Bankers' Association (NZBA) deed of priority,
widely used in the market, limits a mortgagee's priority only
in a mortgagee/receivership sale. It does not apply if the
mortgagor sells the property.
We think the decision is correct. The NZBA form is limited in
scope. It does not limit mortgagees' entitlements for all
purposes at all times. If a financier wants to limit another
mortgagee's entitlement when the mortgagor sells the property,
a further agreement is required.
In ASB Bank
Limited v South Canterbury Finance Limited, the
Court found that ASB Bank Limited (ASB), as first
mortgagee, was entitled to retain the funds paid in repayment of
its debt even though that amount was in excess of its priority
amount under the deed of priority ASB had entered into with South
Canterbury Finance Limited (SCF).
The deed entered by ASB as first registered mortgagee and SCF as
second registered mortgagee provided for first and second mortgage
The mortgagor voluntarily sold the mortgaged property. By the
time the sale was concluded, ASB had received more than $500,000 in
excess of its priority amount.
In a case decided in the High Court before SCF was placed into
receivership, SCF sued ASB seeking return of the excess funds. SCF
was successful at the High Court level. The Court of Appeal has,
however, recently reversed the decision.
At the High Court, Associate Judge Abbott found that the
priority amount specified in an NZBA deed of priority applied to
all money received from the sale of security, however sold. He
decided that this construction made "better commercial
sense" and recognised that "the parties contemplated
specific entitlements from the value of the security".
NZBA deed of priority is limited in scope
The Court of Appeal found that the agreed priority amounts under
an NZBA deed of priority should apply only where the property is
by a mortgagee through exercise of its power of sale, or
by a liquidator, official assignee, administrator, receiver, or
similar person appointed or acting in respect of the
The Court based its conclusions on an analysis of the language
in the deed and, in particular, the references to enforcement.
More powerfully, the Court said that, where a property is sold
by the mortgagor, a first mortgagee is entitled to insist on full
repayment of its debt in exchange for a release of the mortgage.
The fact that the mortgagee has agreed a limit on its priority does
not reduce the debt that the mortgage secures. If the owner wants a
discharge of any mortgage, the owner must repay the whole debt, or
any lesser sum that the mortgagee agrees to accept.
The second mortgagee has the same protection. It may also refuse
to discharge its mortgage unless its debt is paid in full. That
applies even if the first mortgagee has agreed to release its
It follows then that the priority amounts in the deed are
irrelevant in a sale by the mortgagor. Each mortgagee is entitled
to insist on full repayment, or any lesser sum. Obviously, that
lesser sum may be negotiated on the basis that the enforcement
outcome is the practical alternative if there is no agreement.
The lesson for second and subsequent mortgagees
The NZBA deed of priority protects subsequent mortgagees on
enforcement because such mortgages are automatically discharged
when a prior mortgagee exercises its power of sale. The subsequent
mortgagee has no control over the sale, or the discharge of its
mortgage, so the deed provides useful protection in an enforcement
The deed does not, however, operate in a voluntary sale by the
owner of the land. It is possible to limit the amount a first
mortgagee will receive on a voluntary sale by the mortgagor, but
the NZBA form does not achieve that. Mortgagees should be careful,
when entering into a deed of priority, to ensure that its terms
reflect the expectations of the parties.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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