Lenders beware when releasing property

Lenders providing facilities for the acquisition or refinance of land (or other assets) owned (or to be owned) by a company usually require a release of the land (or other assets) from any existing charges over the company.  This is to avoid priority issues in relation to the land (or other assets).

An issue for both incoming and existing lenders alike is exactly what assets need to be released to avoid issues with respect to priorities?  This question was recently considered by the Queensland Court of Appeal in Bank of Queensland Limited & Ors v Dodrill & Anor [2011] QCA 130.

Background

In this case, the Bank of Queensland had fixed and floating charges over all the assets of the company.  The Bank of Queensland released the land identified as 3 Sherwood Road, Toowong (Property) from its charges.

The incoming lender, Bankwest, then obtained a first registered mortgage over the Property.  

Creditors of the company (who were successful in proceedings against the company) registered writs of execution over the Property after Bankwest’s mortgage.

Bankwest appointed receivers who proceeded to sell the Property.  A surplus remained after Bankwest was paid out.

A dispute arose between the judgment creditors and the Bank of Queensland as to who was entitled to the surplus.  The Bank of Queensland claimed that it had priority over the surplus as a secured creditor because it only released the Property from its charges, not proceeds arising from the sale of the Property.

The Court found that while the Bank of Queensland released its charges over the Property, this was a ‘partial release’ limited to the Property only and was not a release as to the benefits and interests arising from future contracts (ie sale contracts), including the proceeds which ultimately arose from the sale of the Property.  Consequently, Bank of Queensland retained a security interest in the proceeds of the sale.

Lavan Legal comment

The case is an important one as it demonstrates that:

  1. Existing lenders may retain security in the proceeds of sale from an asset, even if they have released the asset from their security.  This could apply to any category of asset.

  2. Incoming lenders therefore need to exercise great care to ensure that they obtain releases from other charge holders as to not only the land (or other assets) they are interested in, but also as to all of the rights, interests and proceeds that may be realised from the land (or other assets), both now and in the future.

For more information, please contact:
Geoff Stevens                                                                Joseph Abberton
Partner                                                                          Senior Associate
(08) 9288 6926                                                              (08) 9288 6765
geoff.stevens@lavanlegal.com.au                                    joseph.abberton@lavanlegal.com.au