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Mortgagor not entitled to keep security for costs

29/10/2010

A mortgage included the following clauses.

18. In addition to all costs and expenses which the Mortgagor may be liable at law or in equity to pay in respect of this Mortgage, or otherwise in relation thereto, the Mortgagor will upon demand pay all costs and expenses (“Costs and Expenses”), including costs as between solicitor and client, incurred by the Mortgagee, in consequence or on account of any one or more of the following: (a) any default on the part of the Mortgagor; (b) any act taken by the Mortgagee for the preservation of, or otherwise in relation to, this Mortgage; (c) …”

“20. The Costs and Expenses payable by the Mortgagor are not limited to legal costs but include all other disbursements, all internal administrative costs of the mortgagee, and all other Costs and Expenses whatsoever.

The mortgagee sold the property at public auction.  The mortgagee retained $25,000 from the proceeds of sale to (amongst other things) as security for anticipated legal costs and expenses of  future litigation by the mortgagor. The Court found that, as a matter of fact, the mortgage did not allow the retention of any sum in advance of any costs being actually incurred. The provision outlined above is not an adequate basis for the retention of the monies.

It also held that the decision of Hodgson J in Project Research Pty Ltd v Permanent Trustee of Australia Limited (1990) 5 BPR 11,225 was not authority for the proposition that the mortgagor was entitled to retain the monies.  In that case,  a mortgagee had made a reasonable prediction of the redemption amount.  The mortgagee obtained an order for security for costs, because it would have been entitled to all its costs anyway in subsequent proceedings brought by the mortgagor to challenge the figure.  In the instant case, the mortgagee could have no similar expectation to be reimbursed its costs of that litigation regardless of the result.

The Court could find nothing in the terms of the mortgage, or under any principle of law, allowing the proceeds of sale to be retained as security for future costs, and so, ordered that the money be refunded to the mortgagor.

Read the judgement in Ginelle Pty Ltd  v  Singh [2010] NSWSC 1166.

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