Rule Against Tacking vs Expenditure Incurred in Exercising Power of Sale.
In the matter of Matzner v Clyde Securities Ltd  2 NSWLR 293 the Supreme Court considered the issue of competing priorities between three successive mortgagees holding registered mortgages over a single property.
Clyde Securities (“First Lender”) registered a mortgage over the security property to secure a loan of $273,600. The lender was to advance this amount to the borrower via a series of instalments. The borrower used the security property to carry out construction of three separate blocks of home units.
Subsequent lenders register mortgages
The second and third mortgagees (“Subsequent Lenders”) later registered mortgages to secure their loans. They advanced the subsequent loans before the First Lender had completed all of the instalment advances. However, the subsequent advances occurred with the consent of the First Lender. After registration of the subsequent mortgages, the First Lender continued to make instalment advances as agreed with the borrower.
The borrower defaulted under the First Lender’s mortgage. Therefore the First Lender began an enforcement action to recover the outstanding debt by exercising its power of sale. Prior to selling the security property the First Lender incurred significant expenses in making improvements to the building complex.
Rule against tacking
However, the Subsequent Lenders contended that the pre-sale improvement amounts spent by the First Lender constituted further advances. This was over and above the instalment loan amount of $273,600. The Subsequent Lenders argued that the improvement costs (characterised as ‘further advances’) occurred after registration of their mortgages. Therefore they sought the postponement of these amounts. They argued that the First Lender’s mortgage did not secure these amounts ahead of their registered mortgages. Rather they contested that the rule against tacking applied in this case.
The Court needed to consider and decide on the following:
- Did the First Lender’s mortgage secure all claimed amounts? In other words, both the instalment advances and pre-sale improvement costs?
- Alternatively, should there be a postponement of some of these amounts in favour of the Subsequent Lenders?
- Was the First Lender improperly seeking to ‘tack on’ to amounts secured by its prior registered mortgage?
Holland J, confirmed the principle against tacking as follows:
“…that upon receiving actual notice of a second mortgage, a first mortgagee is not entitled to priority for any further advances it may make”
The rule against tacking is applicable to mortgages registered under the Real Property Act 1900 (NSW). This applies even in circumstances where a borrower is contractually obliged to accept further advances made by the lender (West v Williams).
However, his Honour expressed such rule as having no application in cases where the monies expended by the prior mortgagee increases the value of the security property. Such monies could not properly be characterised as further advances.
His Honour stated:
“The money expended by the first mortgagee in order to complete and subsequently sell the buildings, if regarded as further advances, would be subject to the rule against tacking – because such expenditure was optional”
His Honour concluded that the pre-sales amounts expended by the First Lender were not further advances but rather expenses incurred by a mortgagee in possession to perfect its security. And as a result there could be no postponement due to the rule against tacking.
Ultimately, the equitable principles regarding expenditure or improvements allowed the First Lender to enjoy priority for all amounts claimed under its prior mortgage over the claims of the second and third mortgagees.
- The decision confirmed that principles in West v Williams are still valid in cases where the further advances do not facilitate improvements in the value of the security property.
- Put simply, where two or more mortgagees register mortgages over a common security, the prior mortgagee cannot claim priority for further advances made after the registration of subsequent mortgages. However, where further amounts increase the marketable value of the property (or in construction cases complete buildings in order for sale) the first mortgagee may enjoy priority. Why? Because without such expenditure by the first mortgagee, the subsequent mortgagee’s interest in the security property may be reduced.
- Prior mortgagees wishing to make further advances and avoid assertions of improper tacking, should enter into a Priority Deed with all subsequent security holders before making any further advances.
- Subsequent mortgagees wishing to limit the scope for further advances being made by a prior mortgagee that could erode the equity in the security property should be vigilant in ensuring notice has been sent to the prior mortgagee in accordance with State legislation prior to advancing funds.
This publication is for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.