Security for threatened proceedings

The decision of the NSW Supreme Court in Australia and New Zealand Banking Group v Mishra [2012] NSWSC 1333 provides guidance for lenders faced with a borrower seeking a discharge of their mortgage on the one hand, while threatening proceedings challenging the mortgage on the other hand. The lender can legitimately ask not only for the payout figure on the discharge but the estimated costs of the threatened proceedings because the property secures not only the mortgage debt but any contingent liability. The additional legal costs of the lender are permitted by the terms of the mortgage which defined ‘secured money’ as money actually or contingently owed to the lender for any reason.

The court referred to the NSW Court of Appeal cases of Liberty Funding Pty Limited v Steele-Smith and Overton Investments Pty Limited v Cuzeno RVM Pty Limited  and held that a mortgagor seeking a discharge can either pay into court the amount of the contingent liability (or a reasonable estimate of the amount) or provide alternative security for such costs and it does not matter that the proceedings are threatened and have not been brought. This is to ensure the mortgagee is not deprived of its security.

The court did caution that a lender cannot demand a deed of release as a condition to discharge the mortgage, as that would be inconsistent with the contractual and equitable right to redeem. In this case, the bank accepted that the borrower would not release the lender and instead demanded security for the probable reasonable costs of litigation.

The court found that a lender’s right to all reasonable enforcement expenses pursuant to the terms of the mortgage is not confined to the exercise of a power of sale but encompasses whatever is necessary to protect the lender’s rights. The court also noted that if the lender failed to require security for the probable costs of litigation, it lost the right to do so later and complain that the payout figure was insufficient to cover its costs. Accordingly, lenders should ask for security for costs on a discharge if they are threatened with legal action.

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