Legal Tip 440: Demolition of a House that is Mortgaged

Legal Tip 440: Demolition of a House that is Mortgaged


Where someone borrows money that is secured by a mortgage over land, they will usually be entering into a contract that includes clauses relating to not demolishing or destroying any house on that land without the prior written consent of the mortgagee.


Where this consent is not obtained, and the house has been demolished the mortgagor/borrower will have breached their agreement and this could allow the mortgagee to commence proceedings to take the property to recover the money lent out.


This would be the case even if there is an order that the house be demolished due to being uninhabitable as happened in Secure Funding Pty Ltd v Anand [2023] WASC 441 https://ecourts.justice.wa.gov.au/eCourtsPortal/Decisions/DownloadDecision?id=cefaf7a8-1bf7-447a-b274-fa509591cb52


“The plaintiff loaned the defendant money and took a mortgage

over the defendant's property as security. The property had a house on

it which was demolished at the direction of the City of Stirling because

it was uninhabitable and a health hazard. The terms of the relevant loan

agreement and mortgage provisions provided that the defendant would

be in breach if the house on the property was demolished without first

obtaining the consent of the plaintiff. The defendant did not obtain the

plaintiff's consent to the demolition of the house.



The plaintiff commenced this action against the defendant

claiming possession of the property and payment of the outstanding

amount of the loan. The plaintiff then applied for summary judgment

on the basis that the defendant had no arguable defence to the action”



I have heard some say it’s too late once the house has been demolished as there is not much the lender can do. Some also think the lender will not find out either.


In this case it looks like the loan was made around Jan 2016 and then before October 2022 the house was demolished – not sure how long before, but the lender/mortgagee knew about it before December 2022 as this is when they issued a default notice.


The default notice required them to repay the loan within 31 days before default interest and enforcement expenses would be applied.


This case was about the home owner trying to stop a summary judgement – which they failed to do.


So before you demolish a house, think carefully…

 

This is interesting. All the developments I've done, I don't recall ever asking the bank for permission to demolish the existing house as part of the development. In some of the developments, the same bank has provided finance for the build, whilst others they did not.

 

ha ha, you got away with it!

I think most people probably don't get permission.

 

I never got permission when I knocked down my place. Nervous couple of years but I figured the chances of them finding out is very slim.

 

Most people do not read T&C of a mortgage and the loan agreement associated. The clauses are quite problematic and most people whould be horrified by the degree of action a lender CAN take if the borrower adversely impacts their loan security. eg uninsured, demolition, unauthorised changes, illegal use, failure to maintain etc...

Lenders dont seek to stop improvements but can if they arent satisfied you have a solid financial plan to complete the new build. They dont like people damaging / harming or destroying the value of the security they hold.

Terry - A example of these clauses from a solictor / broker would be interesting