Legal Tip 378: Security for a Debt Who Takes Priority?

What happens if someone has given a mortgage over their property to 2 different people and a default occurs and the value of the asset is not enough to pay both out? What if there is a registered mortgage and an unregistered mortgage? In other words, who takes priority?


Generally, the following is the rule:

· First in time takes priority over later in time, and

· Registered/legal takes priority over unregistered/equitable



Example

Homer mortgages his house to ANZ bank. He subsequently mortgages his house to a private lender. Both a registered mortgages, not different to each other really. But because ANZ got in first with the registration they will take priority over the later registered mortgage of the private lender.



Example 2

Lisa’s house is unencumbered, meaning it is not being used as security for any debts.

Lisa borrows $100,000 from Millhouse under a written loan agreement incorporating a mortgage, but Millhouse doesn’t register the mortgage.

Lisa then goes and borrows $400,000 from CBA who take a registered mortgage.

In this situation CBA will generally have priority over Millhouse because they have a registered mortgage on title but Millhouse doesn’t.


These general rules may not always apply though. If a later registered mortgage had knowledge of a prior unregistered mortgage then the unregistered mortgage could take priority. In Example 2 above for example, CBA may have lost priority if they knew about Millhouse’s unregistered mortgage.


Of course, if the debt is unsecured there will be no security and therefore no priority over anyone. First in time with an unsecured debt doesn’t mean anything, with the creditor being lumped with all the other unsecured creditors if things go bad.


Seek legal advice before relying on this as it is a complex area.

 

Some creditors may also possess powers to make themself a priority or stop dealings where the proceeds may be a risk of loss

• State land tax may be a first charge over the land.
• Unpaid state taxes / rates etc
• ATO may have powers to charge property and caveat interests. This wont make them a priority as asuch but it can lead to a need for parties to negotiate the tax OR the ATO may impose orders to sieze proceeds after a mortgage is discharged. This wont make them a priority but it ca frustrate and aim to limit dealings.
• A court could impose limits (injunction, freezing, controlled money orders etc) on dealings eg family court, crimes act etc
• Statutory limited examples too like GST on a new dwelling and withholding taxes on property sale wither a domestic or foreign vendor.

I have seen the ATO impose orders on a buyer of property to pay 100% of proceeds after discharge of specific agreed amounts of debt to be paid to the ATO.
ATO can also garnishee and take the proceeds from bank accounts but this is prone to being bypassed. Hence the orders on the buyer are not effective. It makes the buyer liable for non-compliance.