Australia: First come first serve - or so you thought: Restriction on the rights of a first ranking mortgagee

Key Points:

The registration of a subsequent mortgage without the first mortgagee's consent or an appropriate priority arrangement has the potential to derail a consensual sale process.

A first ranking mortgagee should not assume that its security interest is adequately protected under the terms of a mortgage. A subsequent security interest may be registered without its consent which may cause delays in realisation strategies.

I was here first: The first ranking mortgagee

The Bank was a first ranking mortgagee over property owned by the Mortgagor, a corporate entity. Unsurprisingly, the mortgage contained a negative pledge such that the Mortgagor could not without the Bank's consent "create or allow to come into existence a Security Interest which affects the Secured Property other than a Permitted Security Interest".

In breach of the negative pledge the Mortgagor purported to create a subsequent mortgage without the Bank's consent.

Then you came along: Request to register a subsequent mortgage without the first mortgagee's consent

A third party contacted the Bank to request that the certificate of title be made available to the Registrar of Titles in order to register a third mortgage over the property (there already being a second mortgage and a priority agreement between the Bank and the second ranking mortgagee). The third party relied on section 86¹ of the Transfer of Land Act 1958 (Vic) which provides that:

"[w]hen any instrument subsequent to a first mortgage is made by the registered proprietor of any land and such proprietor or the person entitled to the benefit of the subsequent instrument desires the registration of the subsequent instrument the first mortgagee if he holds the certificate of title concerned shall, upon being requested so to do by the proprietor or person entitled as aforesaid but at the cost of the person making such request, produce such certificate of title to the Registrar."

Further, under section 119(2) of the Transfer of Land Act:

"Any person who contravenes or fails to comply with any provision of this Act or the regulations shall be guilty of an offence and if no penalty is otherwise provided for such offence shall be liable to a penalty of not more than 5 penalty units."

Relevantly, Land Victoria form M1B "Mortgage of Land", which is used to register a dealing (including a second mortgage) on the certificate of title, contains a section titled "Order to Register". The Order to Register is to be signed by the controlling party (the first mortgagee), to allow the Registrar to register a dealing on the certificate of title (for more information see the Department of Sustainability and Environment's The Land Victoria Lodging Book).

The Bank made the certificate of title available to the Registrar in accordance with its obligation to do so under section 86 of the Transfer of Land Act , but did not give its consent to register the subsequent mortgage and expressly requested that no dealings be registered on the title without the Bank's prior written consent. Despite this, the subsequent mortgage was registered. This was not by mistake of the Registrar, who regarded an order to register as merely an administrative requirement that could be waived.

Why does it matter? Restricting the rights of the first ranking mortgagee

Unlike the statutory protection afforded to a caveator and the well defined "show-cause" process enabling the removal of a caveat by a first mortgagee, the registration of a subsequent mortgage without the consent of the first mortgagee or an appropriate priority arrangement has the potential to derail a consensual sale process.

Where a second mortgagee (or indeed subsequent mortgagees) has a conflicting agenda with respect to the mortgaged property, preventing a first mortgagee's right to refuse the registration of a second mortgage may limit the realisation options available to the first mortgagee. The utility in the Bank allowing the Mortgagor of the property to market it on a consensual basis may be questionable given the need to procure the consent of subsequent mortgagees to the ultimate sale.

Accordingly, where subsequent mortgages are registered without appropriate priority arrangements being entered into between the relevant mortgagees, a mortgagee sale pursuant to section 77 of the Transfer of Land Act may be the more appropriate sale strategy as it ensures title can be passed to the purchaser free of all later registered mortgages. Such a strategy is likely to be more costly and time consuming than a consensual sale by the Mortgagor of the property in consultation with the Bank.

Footnotes

¹ See also Conveyancing Act 1919 (NSW) s 96; Law of Property Act 2000 (NT) s 82; Property Law Act 1974 (QLD) s 80; Conveyancing and Law of Property Act 1884 (TAS) s 18 and Transfer of Land Act 1893 (WA) s 127. There are no equivalent provisions in the Australian Capital Territory and South Australia. ^[back]

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.