Can a borrower sue a lender after discharge of its mortgage?

24 Aug 2017

A recent decision in the Supreme Court of NSW reinforced existing authority that, once a borrower has paid out its mortgage, it has limited rights against the lender.

Summary

In Australian Securities Ltd v Borina Pty Ltd [2017] NSWSC 1073, the Supreme Court of NSW found that a borrower who had paid out its mortgage was not entitled to pursue the lender for damages for alleged breaches of the loan agreement because, once a mortgage has been discharged, the only remedy available against the lender is for an 'accounting' between the parties.

In this context, an accounting is a process by which the court ascertains on a final basis what is owing between the lender and the borrower pursuant to the mortgage and the loan agreement.

Kemp Strang acted for the lender in the case.

Background facts

Australian Securities Limited (ASL) provided to Borina Pty Ltd a loan secured by a mortgage.

A dispute arose as to the expiry date of the loan and ASL commenced proceedings against Borina seeking possession of the secured property.

Before the dispute was heard, Borina refinanced ASL's debt in exchange for a discharge of its mortgage.

ASL then discontinued its claim for possession and Borina sought leave to file a cross-claim alleging several causes of action against ASL including a claim for damages for alleged breaches of the loan agreement.

Judgment

Justice Davies of the Supreme Court of NSW held that the only right available to a borrower after redemption of its mortgage (excluding statutory rights) is for an accounting between the borrower and the lender.

This principle applies whether the redemption was by way of foreclosure, sale or discharge and includes claims relating to a lender's conduct in realising its security.

Accordingly, Justice Davies declined to grant Borina leave to pursue its claim for damages.

Other relevant principles

Other important principles that emerge from the cases in this area of the law are:

  • a borrower cannot select one or more aspects of the accounting and litigate that alone, rather all aspects of the account must be determined at the same time
  • the lender is generally entitled to the costs of an accounting unless the lender is guilty of misconduct

Conclusion

Where a borrower has redeemed its mortgage, the only right available to the borrower (excluding statutory rights) is for an accounting between the borrower and the lender.

A borrower cannot pick one or more aspects of the account. Rather, an account must be taken on a final basis. 

Where a borrower redeems its mortgage and then seeks to make a claim against the lender, the lender should consider whether the borrower is entitled to bring such a claim having regard to this case.

For further information please contact Kemp Strang Partner kaunitzp [at] kempstrang [dot] com [dot] au (Phil Kaunitz).

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