Mortgages – let’s get your priorities straight
By Emma Donaghue and Kate Dart
The priority of interests in Torrens title land is generally determined by the order of registration. So, a mortgage over real property registered first in time will usually have priority over an unregistered mortgage or a mortgage registered later in time.
We explain the importance of priority and how the equitable doctrine of marshalling may assist lenders with a lower ranking mortgage.
What you need to know
- It is important for lenders to understand their mortgage priority and how this may affect the recovery of monies owed if a borrower defaults under a loan agreement.
- Generally, a lender with a first registered mortgage will be able to enforce its security interest ahead of any person holding a lower priority mortgage registered on title to the same property.
- If a lender wishes to secure the priority of their mortgage on title before making an advance, they may consider asking the borrower to register a priority notice prior to settlement.
- The equitable principle of marshalling may also assist a lender with a lower priority mortgage to recover monies owed in certain circumstances by allowing it to access the additional security held by a lender with a higher priority mortgage.
Why your priority matters
A lender with a first priority mortgage will have the right to enforce its security interest over a property ahead of a lender with a lower priority mortgage registered over the same property. For this reason, a lender with a first priority mortgage is more likely to recover against a defaulting borrower than a lender with a lower priority mortgage. Given this risk, loans secured by a lower priority mortgage often have a higher interest rate than loans secured by a first registered mortgage.
A priority notice registered on the relevant land registry temporarily reserves priority on title by restricting registrations on title to those interests identified in the notice. To protect their interest, incoming lenders may require a borrower to register a priority notice before making an advance. Priority notices will generally have effect for 60 days from the time of lodgement in Queensland, New South Wales, South Australia, and Victoria. In Tasmania, however, a priority notice will have effect for 90 days from the time of lodgement. Some dealings may continue to be lodged even with a priority notice in place, so it is important to be aware of any exceptions that may apply in your jurisdiction. It is also important to note that priority notices cannot be lodged in the Australian Capital Territory, Northern Territory, or Western Australia.
The equitable doctrine of marshalling may assist a lender with a lower priority mortgage to recover monies owed from the additional security held by a lender with a higher priority mortgage. As an equitable principle, marshalling is based on ‘fairness’. It may apply where—
- two or more lenders have security over the same property
- the lender with the higher ranked security has additional security for the same debt (for example, a mortgage over another property of the borrower), and
- the lender with the higher ranked security chooses to enforce its security in a way that prejudices the rights of the lender with the lower ranked security.
For example, a lender ‘A’ holds mortgages over two properties (Blue and Green) securing the same debt. Another lender ‘B’ holds a second ranking mortgage over the Blue property. If A enforces and chooses to sell the Blue property to satisfy its debt, B’s mortgage would effectively become worthless. In this instance, equity would intervene to treat B’s mortgage as if it extended to the Green property to allow B to recover from the sale proceeds of the Green property. In this way, marshalling would allow B to take the benefit of A’s security in the Green property by allowing B to step into the shoes of A and be subrogated to A’s rights to enforce and realise A’s remaining security.
It is also worth noting that certain senior lenders may seek to exclude a second lender’s right to marshal pursuant to the terms of an intercreditor or priority deed.
How we can help
If you require assistance with a lending transaction or mortgage or would like to discuss priority of interests in further detail, please reach out to a member of our Investment Funds team.
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