Second mortgagee brushed aside

In a decision that has significant implications for construction funders, developers and mezzanine financiers the NSW Supreme Court brushed aside a registered second mortgage which stood in the way of the borrower’s sale contract.

The decision handed down on 3 May 2007 in New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd1 involved a development site at 44 New Beach Road, Darling Point. The site had approval for the construction of three two levels apartments. The land has been excavated and the ground-floor concrete slab had been laid but then the borrower ran out of money.

The first mortgagee was owed $7.7 million, the second mortgagee was owed $5.9 million. On 6 March 2007, the borrower entered into a contract to sell the site for $7.75 million. This was enough to payout the first mortgage but which would give nothing to the second mortgagee. The first mortgagee (not surprisingly) consented to the sale. The second mortgagee refused because it was not satisfied the best available price had been obtained. The offer from the purchaser, it said, was not the result of a transparent marketing process.

The purchaser issued a Notice to Complete and the borrower approached the Court seeking an order for judicial sale to override the second mortgage and allow the sale to proceed. Something strange occurred outside the Court on the day of the trial because the purchaser agreed to increase their offer by $400,000. Ultimately the judge based his reasoning on the fact that if the second mortgagee thought the property was worth more than was being offered they had the option to payout the first mortgage and assume control of the sale – that they had not disentitled them to argue against the sale organised by the borrower.

Until now the law has always been that the second mortgagee could frustrate a sale organised by the borrower and the only way the impasse can be broken was for the first mortgagee to exercise power of sale.

1 [2007] NSWSC 474

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