Introduction to priority and subordination

When taking security, a lender will be concerned to ensure that the security is effective against unsecured creditors, liquidators or trustees in bankruptcy or other secured creditors with a security interest in the same asset. This usually is achieved by taking possession, taking control (in the case of marketable securities and some other forms of personal property), or, and more commonly, registering the security (where registration is available) on the personal property securities register (PPSR).

The priority rules for competing personal property security interests are contained in Pt 2.6 of the Personal Property Securities Act 2009 (Cth) (PPS Act).

If the security is a mortgage over land, priority will be in the order of registration. If a security is not registrable, the general priority rule is that the first in time prevails.

Although most transactions take place without any problem, it sometimes happens that there are multiple people or entities with competing or inconsistent interests in one object.

Determining priorities in real property mortgages — when at least one of the mortgages is registered

Interests in land registered under Torrens system legislation are accorded by that legislation priority according to the time of registration, with interests registered first in time enjoying priority over those registered later in time. Generally, this order can, however, be changed through the registration of an instrument executed by the relevant interest-holders expressly altering the order of priority — after registration of this instrument the new order of priority will be expressly noted in the folio relating to the property. Also, interest-holders can make private agreements between them in relation to priorities.

This guidance note explains the key concepts and the relevant rules, and provides practice tips to aid legal practitioners when determining priorities in real property mortgages where at least one of the mortgages is registered.

See Determining priorities in real property mortgages — when at least one of the mortgages is registered.

Determining priorities in real property mortgages — as between unregistered mortgages

There are different rules when determining priorities in real property mortgages as between unregistered mortgages. This guidance note explains that priorities between equitable mortgages are determined according to two rules:

• • the first is that priority goes to whichever interest enjoys the greatest equity; and
• • the second is that if the equities are equal, the interest created first in time has priority (from the Latin phrase that some legal practitioners would have come across, “qui prior est in tempore, potior est in jure”).

These two rules are then further explored with illustrative examples and case law, accompanied by practice tips.

See Determining priorities in real property mortgages — as between unregistered mortgages.

Understanding further advances and tacking in mortgage priorities

Generally, a first mortgage, once it becomes aware that a second mortgage has also been granted, is limited in its ability to make further advances to the mortgagor and claim the repayment of those advances in priority to the monies due under the second mortgage. The ability to claim first priority for such further advances is known as “tacking”.

This guidance note explores further advances and tacking so legal practitioners can understand their relevance in determining mortgage priorities.

See Understanding further advances and tacking in mortgage priorities.

Understanding marshalling in mortgage priorities

Although a mortgagee holding multiple securities is permitted to realise its securities in such order as it sees fit, if the choice of order negatively impacts a subsequent mortgagee holding fewer securities then equity will intervene to assist that subsequent under the doctrine of marshalling.

This guidance note explains the doctrine of marshalling and its relevance in determining mortgage priorities. It also provides guidance to legal practitioners who may encounter a more complicated marshalling situation where there are two or more subsequent mortgagees.

See Understanding marshalling in mortgage priorities.