Typically, a borrower acquiring or developing real estate will provide a mortgage over land in favour of the lender. A mortgage entitles the lender to take possession of the asset and dispose of it, with priority over unsecured creditors.
A corporate borrower may also provide a security interest in all (or some) of its current and future assets by way of a general security agreement. A general security agreement will include a security interest in circulating assets. Circulating assets form a class of assets which in the course of the borrower’s business changes from time to time and which may be disposed of without consent of the lender.
Guarantees and indemnities from third parties are also often provided to lenders and these may be supported by a mortgage or a general security agreement in favour of the lender.
Security can also be granted over assets such as a lease.
Last modified 31 Aug 2020
Real estate includes land as well as the buildings and other improvements and fixtures on the land.
Title to land may be freehold (where an entity owns the land) or leasehold (where an entity owns the right to occupy and use land that is owned by a third party).
Security may be granted to a lender over freehold land, an entity's interest in leasehold property, or over a lease of freehold land and may include fittings, furniture and moveable objects on the land. Where the government owns the land which is the subject of the lease, consent from the relevant government department may be required before a mortgage over the leasehold property can be registered.
Last modified 31 Aug 2020
Australian law recognizes the concept of a split between legal ownership and beneficial ownership. A split between legal ownership and beneficial interest will occur where a trust is formed so that a trustee owns (or will own) the property on behalf of a beneficiary. The trustee will hold the legal ownership (and therefore will be recognized as the registered owner) and the beneficiary will hold the beneficial ownership.
The trustee is required to manage trust property for the benefit of the beneficiaries pursuant to the terms of the trust.
Last modified 31 Aug 2020
Secured debt is often traded between lenders. The transfer of debt can be effected by agreement and by registering an approved transfer form with the registry in which the associated security is registered. Stamp duty may be imposed on a transfer of security. The Personal Property Securities Act 2009 (PPSA) deals with the transfers of debts and may require registration of a PPS security interest over the transferor of the debt in order to avoid creditors of the transferor seeking to make a claim against the transferee in relation to the debt.
Last modified 31 Aug 2020
There are no restrictions on granting security to foreign lenders. The Foreign Acquisition & Takeovers Act 1975 (Cth) (FATA) treats a mortgagee's interest in Australian land as being an interest the acquisition of which may require approval from the Foreign Investment Review Board. However, approval is not required where the mortgage is granted in the ordinary course of a money-lending business and is provided as security for a money-lending agreement entered into in the course of such business.
Last modified 31 Aug 2020
Generally, fees will be payable for the registration of security interests, however the amount will vary in each jurisdiction (amounts are unlikely to exceed AUD200 per security requiring registration).
Last modified 31 Aug 2020
There are no specific corporate governance rules which must be complied with before a corporate entity can give valid security over its real estate assets where the transaction is between unrelated parties although certain general corporate law provisions will apply. It is prudent for creditors to consider the following issues:
Where a company is providing a loan, security or other financial assistance to acquire shares in the company, appropriate resolutions must be passed by the company and notices must be given to shareholders and the Australian Securities and Investments Commission (ASIC).
Subject to certain exceptions, if a public company proposes to give a financial benefit to a related company (such as providing a loan to the related company), it must obtain the approval of shareholders in a general meeting.
Breaches of the above-mentioned financial assistance rules and related party rules will not affect the validity of the transaction but may constitute breaches of the Corporations Act with consequences to the parties involved in the transaction.
Last modified 31 Aug 2020
There are no restrictions on repayments being made to foreign lenders under security documents or loan agreements. However, parties will need to consider their obligations in respect of payment of withholding tax. There are restrictions on payments that have a prescribed connection with certain countries and terrorist groups.
Last modified 31 Aug 2020
The Personal Property Securities Act 2009 (PPSA) regulates the priority position in relation to competing security interests in personal property (as defined under the PPSA) unless otherwise agreed between the relevant lenders. Generally, if an existing secured debt and a newly created debt are both secured by way of registered security interests in all of the borrower’s assets (ie a general security agreement), the existing secured debt will not be postponed if it was registered first in time on the Personal Property Securities register (PPS register).
However, the PPSA also provides that in some very specific circumstances, newly created debt, can take priority over existing secured debt. For example, if a lender has provided funds to a borrower to purchase a specific piece of equipment, that lender may obtain first priority in relation to the piece of equipment for which it has provided finance.
A further exception to the general position relates to statutory charges (for example, charges to secure payment of unpaid land tax), which take priority over existing securities.
The PPSA should always be carefully considered in determining priority.
Priority in relation to existing debt secured by land (which is largely excluded from the PPSA regime) can be postponed by agreement between the security provider and the new and old security holders. These arrangements are usually documented in the form of a priority deed or inter-creditor deed. In the absence of such agreement, priority is generally determined by reference to the time of registration of the relevant interest on the title to the land.
Last modified 31 Aug 2020
If it is clear that the parties to the security document have made a bona fide choice of law by which the document will be governed, then generally that law will apply and the courts will apply that law in resolving a dispute. However, local courts will not give effect to a foreign law, even where it is clear from the circumstances that the foreign law is intended to apply, where applying that law would be contrary to public policy. For example, local courts will not apply a foreign law where the choice of that law has been made to engage in a sham, evade a law or where the choice of law is unconnected to the transaction (it will be sufficient, however, that there is a reasonable basis for the choice of law).
Similarly, mandatory rules applying in the local jurisdiction may nullify a choice of law clause or may override it in specific factual conditions. For example, it is mandatory in the Australian state of Queensland for 30 days' notice to be given before a mortgagee can exercise its power of sale. If a foreign law has been chosen to apply to a mortgage of land in Queensland, the mandatory 30 day notice period will not be overridden by the choice of a foreign law.
Although parties can determine the law to be applied to a security document, it would be prudent for the law of the place in which the security is located to apply to the security document. This will avoid problems of inconsistency where mandatory local rules are enforceable.
Last modified 31 Aug 2020
Where a security interest is created over a company’s assets (other than land), the security interest must be registered on the PPS register if the security interest is to be enforceable against third parties and in the event of an insolvency. Timing requirements of registration vary depending on the type of security interest which has been granted.
If the security interest is not registered on the PPS register before the latter of six months before either a winding up or an administration began, 20 business days after the security became effective or the date of administration, the security interest may be void as against a liquidator, an administrator of the company, or an administrator of a deed of company arrangement.
Registration of a mortgage over land can be perfected after a borrower becomes insolvent, but if no consideration is given for the grant of the mortgage, payments made to the mortgagee may be clawed back by a liquidator of the mortgagor as being preference payments.
Last modified 31 Aug 2020
In most jurisdictions in Australia, environmental laws can be enforced against an owner or occupier of land irrespective of who caused the problem. Environmental laws will therefore apply to lenders where they are in occupation of the land (for example, where a mortgagee is in possession of the security property following a borrower's default).
Last modified 31 Aug 2020
In most cases, the borrower must be given notice of default and prescribed notice periods must be complied with before a lender can enforce a mortgage over land. The notice period will vary in each jurisdiction but generally 30 days' notice will be required before a lender can enforce its real estate security (such as exercising its power of sale).
Loan agreements and security documents will typically describe the events of default that must occur before a lender can enforce its security. Events of default will usually include failure to repay the loan on time, material adverse changes, and breaches of warranties or covenants.
Except where statutorily prescribed notice periods must be complied with, once the security is enforceable, the lender can enforce its security immediately. Depending on the type of security, lenders may enforce their security by appointing receivers and managers or taking possession of the security property.
Security assets can be disposed of by private agreement between a buyer and a mortgagee exercising its power of sale or between a buyer and a receiver and manager (depending on the type of enforcement procedures that have been implemented by the lender). Receivers and managers and mortgagees exercising a power of sale will be under an obligation to achieve market value for the security assets.
Last modified 31 Aug 2020
A company may be placed in voluntary administration if it is in financial difficulties. A resolution for the company to enter voluntary administration may be made by the directors of the company, a liquidator or by a creditor of the company if that creditor is entitled to enforce a security interest over the whole, or substantially the whole, of the company’s property.
During a voluntary administration, an administrator is appointed to the company for the purpose of attempting a compromise with its creditors or a similar arrangement aimed at saving the company or the business and maximizing the return to creditors.
The administrator investigates the company and is required to submit a report to creditors within a prescribed time frame. The administration ends when creditors either vote to wind up the company, vote to accept a ‘Deed of Company Arrangement’ proposed by the administrator or vote to end the administration process. A ‘Deed of Company Arrangement’ will set out the agreed compromise with creditors and the extent to which the company is relieved from its debts.
The rights of secured creditors are not generally affected by the appointment of an administrator as the secured assets will be outside the reach of the administrator (unless the secured creditor elects to add its security to the pool of assets available to the administrator or elects to become part of the administration process).
However, a secured lender may be prevented from enforcing its security during the administration process. The administration process will usually last 28 business days, but may be extended.
Last modified 31 Aug 2020
Generally, a borrower’s insolvency will not affect a lender’s security (however a moratorium may be placed on the enforcement of securities in some circumstances where an administrator has been appointed).
There may be some transactions that can be set aside by a liquidator if they have been entered into while the company is insolvent or where the transaction is uncommercial or constitutes an unfair preference to a creditor.
Whether the transaction can be set aside by a liquidator will depend on the time that has elapsed since the security was created or the transaction was entered into. The ‘relation back period’, being the period during which a transaction may be set aside by a liquidator, may be six months, two years or four years prior to the date of liquidation of the company depending on the type of security given or transaction entered into and the circumstances of the company at that time.
If a security over non-real estate assets is not perfected by registration before the latter of six months before either a winding up or an administration began, 20 business days after the security became effective or the date of administration, the security interest may be void as against a liquidator, an administrator of the company, or an administrator of a deed of company arrangement.
Last modified 31 Aug 2020
Secured creditors will be paid in accordance with any agreed priority arrangements. If priority arrangements are not in place, the priority of payment will be governed by the priority rules set out in the Personal Property Securities Act 2009 (PPSA) in relation to personal property and generally in accordance with first in time principles in relation to land. As a general rule priority is based on the timing of the registration of security interests however this is subject to numerous exceptions and the priority provisions in the PPSA should always be carefully considered.
Generally, unsecured creditors rank in priority behind secured creditors and will share in any available proceeds pari passu; however, this is subject to various exceptions set out in the Corporations Act 2001 and the PPSA. Before unsecured creditors are entitled to their share of available proceeds, various expenses of liquidators or administrators must be paid (such expenses will include expenses incurred in realizing assets, remuneration and rent) as well as the insolvent company’s employee wages, superannuation, leave entitlements and redundancy payments.
In addition, some employee entitlements (such as wages, superannuation, leave of absence and retrenchment entitlements) will have priority over a security interest in circulating assets (a class of assets which in the course of the borrower’s business changes from time to time and which may be disposed of without consent of the lender).
Last modified 31 Aug 2020
Are there restrictions on granting security over real estate to foreign lenders, and, if so what are they?
There are no restrictions on granting security to foreign lenders. The Foreign Acquisition & Takeovers Act 1975 (Cth) (FATA) treats a mortgagee's interest in Australian land as being an interest the acquisition of which may require approval from the Foreign Investment Review Board. However, approval is not required where the mortgage is granted in the ordinary course of a money-lending business and is provided as security for a money-lending agreement entered into in the course of such business.
Last modified 31 Aug 2020