The Health Pit II v Lowe [2007] NSWSC 67

The plaintiff held a second equitable mortgage and a caveat over the property. The defendant as guarantor of the first mortgage took an assignment from the first mortgagee and sold the property.

The court affirmed the sale of the property by the first mortgagee confers on the buyer rights superior to all inferior mortgages, legal or equitable, which are extinguished upon registration of the transfer. S.58 of the RPA provides that inferior mortgagees only have a right to the surplus from the sale.

The contract for sale stated the price as $3.5m exclusive of GST (with $350k GST to be paid by the purchaser). The plaintiff contended that the  $350k should be preserved along with the rest of the sale proceeds for a priority dispute.

Justice Young disagreed holding the $350k for GST was an expense of the sale and could therefore be paid to the ATO.

This case highlights how important it is for lenders to assess property valuations on a GST exclusive basis. If a GST inclusive value is adopted lenders will only recoup ten-elevenths of what they expect.

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