Effective from Monday 11 October 2021, all Certificates of Title (CT) in NSW are abolished – CTs no longer have any legal effect.

The change is regulated by the Real Property Amendment (Certificates of Title) Act 2021 (NSW) which amends the Real Property Act 1900 (NSW) and regulations.

There are a number of implications of this monumental change that will impact mortgagees in NSW.

Similar to the position in QLD and SA, consent from a first ranking mortgagee is now no longer required for the registration of a subsequent mortgage. If you have been granted a second or subsequent mortgage, you will be permitted to register it on title without requiring the first ranking mortgagee to produce the CT. If however there is a caveat on title, the caveat will still prevent the registration of the mortgage.

It is important to note however that whilst you will be able to register the mortgage on title without consent, if the mortgagor enters a second mortgage without the first mortgagee’s consent it will almost certainly be a default under the terms of the first mortgage and the first mortgagee will be at liberty to enforce.

Whether the change in law is good news or bad news for mortgagees depends on whether you are the first mortgagee or the second mortgagee.

First Mortgage

If you hold a first ranking mortgage, you will not receive any notice of the registration of a second mortgage, nor will you be able to prevent the registration of that second mortgage. Practically, this means:

• If you want to know whether a subsequent mortgage has been lodged in breach of your loan documents, you will be put to the administrative burden of doing regular title searches; and
• It is critically important to do title searches prior to making any further advance on a loan for the purposes of tacking. If you fail to do a title search prior to making a further advance and a second mortgage has been registered, the further advance cannot be tacked on to your first mortgage and the further advance (with some exceptions e.g. some construction loans) will rank behind the second mortgage in priority.

Prior to the change in law, it would be usual practice for a first mortgagee to enter into a Priority Deed/Subordination Deed with all subsequent mortgagees giving it absolute priority (even in respect of further advances). Given the change in law, it is unlikely that the second mortgagee will agree to enter into a Priority Deed, particularly if the second mortgage has already been registered.

Second Mortgage

If you have been granted a second ranking mortgage, the change in law means that the process of registering the mortgage is now more efficient and no longer dependent on the consent of the first mortgagee.

There are however a few points to consider:

1. As noted above, the registration (or for that matter the mere granting) of the second mortgage without the first mortgagee’s consent will almost always be a default under the terms of the first mortgagee which may result in the first mortgagee enforcing its security, thereby eroding the equity in the property though the charging of default interest and enforcement costs.
2. The common law principles of tacking and priority still apply. In the circumstances, notwithstanding you can register your second mortgage, you will still need to attend to the following:
   • confirm the debt position of the first mortgagee; and
   • put the first mortgagee on notice of the second mortgage. The caselaw has not yet determined whether registration of the second mortgage alone constitutes sufficient notice to prohibit the first mortgagee from tacking. To avoid the risk, you should always put the first mortgagee on notice to fix the priority position.

Our view is that Priority Deeds will have little utility in NSW moving forward so confirming the debt position of the first mortgagee and putting it on notice are absolutely critical.

Furthermore, the inevitable disappearance of Priority Deeds in NSW will also remove the opportunity for a mortgagee to negotiate the right to be put on notice as soon as there is any default under the terms of the first mortgage. This will lessen the ability of the second mortgagee to payout the earlier mortgagee in a quick and efficient manner before default interest and enforcement costs start to erode the equity in the mortgaged property.

CT’s as security

The depositing of / holding certificates of title as security (to create an equitable mortgage) rather than registering a mortgage or caveat has largely become an unpopular practice.

However, to the extent you are a lender / mortgagee that still holds security in this form, you will need to immediately consider an alternative form of security.

Holding the CT will no longer act as a reliable form of security because the mortgagor will be entitled to mortgage the land and /or sell the property without requiring the CT.

As an alternative you will need to consider lodging a caveat or procuring a mortgage in registrable form.

Should you wish to know more about any of the matters discussed in this article, please do not hesitate to contact our Loan + Securities team.