Unregistered mortgage? What’s the issue?

It is becoming more common for mezzanine lenders to accept an unregistered mortgage as security for a loan. While an unregistered mortgage gives the lender priority over any of the borrower’s unsecured creditors, an unregistered mortgage does not give a lender the same entitlements or benefits as a registered mortgage.

So what does registration get me?

Under ACT and NSW law the holders of registered mortgages can only be challenged in limited circumstances and are subject only to such interests that were registered prior to the mortgage. One of the most important rights that the holder of a registered mortgage has is the ability to sell the property as mortgagee in possession without interference from any other lender.

What do I get if I don’t register?

Depending on the circumstances, an unregistered mortgage may give priority over subsequent unregistered mortgages and all unsecured creditors. However, it does not give priority over any registered mortgage nor does it prevent the holder of an existing registered mortgage from lending further money to the borrower. Depending on the terms of the mortgage document, the holder of an unregistered mortgage may have the right to appoint a receiver and manager to the property who can sell the property. However, a receiver and manager does not have the same entitlement as a mortgagee in possession to overreach the interest of other lenders registered on the title. Consequently, they may have difficulty in selling the property.

The holder of an unregistered mortgage may be able to apply to the Supreme Court for an order to enforce the terms of the unregistered mortgage and secure the sale of the property, however the court will have a wide discretion as to whether to grant such a request. If the lender has acted unconscionably in any way, the court may not grant the order.

What if I include a clause that entitles me to register the mortgage if the borrower defaults?

In the ACT and NSW, in order to register a mortgage on the title to the land, the Certificate of Title for the land needs to be produced to the Land Titles Office. Where a borrower has already mortgaged the property to one lender and wishes to grant a second mortgage to another lender, the first lender will need to consent to the second lender’s mortgage and produce the Certificate of Title to enable registration to occur.

Where a default has occurred and the only reason that the lender wants to register the mortgage is to take enforcement action, it is unlikely that the borrower will cooperate and ask the first lender to produce the title. It is even more unlikely that the first lender will co-operate to enable the second mortgage to be registered. Instead, the first lender may take enforcement action under their own mortgage.

Is there anything else I can do?

The holder of an unregistered mortgage can apply to the Supreme Court to obtain an order compelling the Land Titles Office to register the mortgage. However, this would take time and expense, and the holder of any existing mortgage would have to be informed of the proceedings. There is no guarantee that a judge would grant an order compelling registration of a mortgage.

At least I get priority over all other subsequent creditors

This is not necessarily the case. If the first unregistered mortgage is not protected by a caveat and the borrower grants a subsequent unregistered mortgage to another lender, priority may be lost. There is potential for the second unregistered mortgage to take priority over the first unregistered mortgage where:

  • the second lender has made all appropriate and diligent enquiries and searches as to all debts and interests affecting the property and doesn’t discover the existence of the existing unregistered mortgage and
  • the second lender can demonstrate that they relied on the results of their enquiries in lending money to the borrower.

So it’s not worth much then, is it?

Whilst an unregistered mortgage does not have the same benefits as a registered mortgage, depending on the circumstances it can be a useful and effective means of security for a loan.

Where the secured property is subject to a prior mortgage, the holder of the first mortgage is likely to take enforcement action under their own mortgage if the subsequent lender attempts to appoint a receiver or seek a court order. This is because:

  • the granting of the unregistered mortgage and the taking of steps to enforce the unregistered mortgage will likely be a default under the loan facility secured by the registered mortgage and
  • the prior lender is unlikely to want to get involved in unnecessary and complex legal proceedings or have the sale of the property controlled by a receiver appointed by someone other than themselves.

In this scenario, after the holder of the registered mortgage has sold the property and recovered all that they are owed, the surplus would be made available to the other secured creditors such as the holder of an unregistered mortgage.

Take away

Unregistered mortgages can and do provide security for a loan, however the effectiveness of that security and its ability to provide the lender with a means of recovering their losses following a default by a borrower depend very much on the circumstances of the loan, the property and any other security held by the lender.

It is recommended that careful consideration and appropriate advice be obtained before a lender lends funds on the basis of an unregistered mortgage.

John Morrissey is a Senior Associate with MV Law with over 17 years’ experience in commercial property acquisition, development, realisation and finance who has worked both in private practice and as in-house counsel for a European bank during the Global Financial Crisis.

For more information contact:

John Morrissey
Senior Associate | Property, Commercial and Finance
(02) 6279 4439 

Christine Murray
Managing Partner | Property, Commercial and Finance
(02) 6279 4402