Queensland court confirms ‘commercially orthodox’ approach to priority deeds

The ruling, which came in last month’s ProLend Solutions No 50 Pty Ltd v Monaco Solicitors Pty Ltd decision, highlights the importance of ensuring deeds are carefully written when connected to security.

In short, if the mortgage secures it, priority is likely to follow—even where the underlying liability arises under a different instrument, such as a step‑in arrangement or statutory charge.

The case

Aushome obtained development funding from two lenders – ProLend, as first mortgagee, and Monaco as second mortgagee. The parties also entered a deed of priority, which governed distribution of enforcement proceeds, along with a step‑in deed, which gave ProLend the right to complete the project if Aushome defaulted.

Following default, ProLend exercised its step‑in rights, completed the works and paid substantial sums to the builder and approximately A$1.9 million (approx. US$1.35m) in infrastructure charges required to register the subdivision. However, sale proceeds were insufficient to repay both lenders, making the priority position commercially critical.

There was no dispute that the step‑in payments and infrastructure charges were owed by Aushome to ProLend and secured under the ProLend mortgage. However, the key issue was whether those amounts fell within the defined “First Priority Amount” under the deed of priority, and whether they ranked ahead of Monaco’s claim.

Under the deed of priority, the First Priority Amount was defined as a scheduled amount, plus interest, costs, fees, charges and expenses, and “any other amount which may be debited to the account under the terms of the First Mortgage”.

Why the appeal proceeded

At first instance, the primary judge held that the step‑in payments and infrastructure charges fell outside the First Priority Amount, on the basis that those liabilities arose from ProLend acting in its own capacity when stepping in, rather than as amounts incurred by or on behalf of Aushome under the mortgage.

However, the Court of Appeal rejected that approach and allowed the appeal. It held that the payments made by ProLend to complete the development works and to meet infrastructure charges necessary to realise the subdivision were properly payable by Aushome.

As a result, those amounts were capable of being brought within the secured money under the ProLend mortgage and therefore formed part of ProLend’s first-ranking entitlement under the Deed of Priority.

The central issue was the meaning of amounts “which may be debited to the account under the terms of the mortgage”.

The primary judge treated this as requiring a liability to arise under the mortgage itself. The Court of Appeal rejected that approach, holding that the proper question is whether the amount is properly brought to account by the lender as part of the secured debt, rather than identifying the instrument from which the liability originates. If the amount falls within the secured money definition under the mortgage and is recoverable, it forms part of the priority entitlement.

The court also placed weight on the structure of the transaction. The ProLend mortgage adopted a deliberately broad definition of secured money, extending to liabilities arising “for any reason” and to amounts paid by the lender in exercising its rights. The step-in deed reinforced that position by expressly providing that completion payments would be treated as secured and recoverable under the mortgage.

Read together, those provisions made it clear that the disputed payments were not external to the secured arrangement. They were precisely the type of expenditure the security was intended to capture: funding required to preserve and realise the development.

Monaco argued that the definition of “First Priority Amount” imposed a narrower limit than the secured money definition. The court rejected that construction.

The drafting did not support a fixed or capped entitlement. The scheduled amount operated cumulatively with further categories of amounts, including any sums capable of being brought to account under the mortgage.

It was also consistent with the commercial structure that the first mortgagee might have priority for all amounts owed to it. The scheduled amount itself exceeded the loan principal, indicating that the parties contemplated additional exposure beyond base advances.

Importantly, this broader construction did not deprive the priority regime of any effect. The priority deed continued to distinguish between amounts falling within the First Priority Amount and any excess secured debt, which remained subject to the remaining priority tiers. Monaco’s construction ultimately relied on an implied limitation that was not expressed by the parties in the documents, and the court declined to read one in.

What this means for you

This decision highlights several important considerations for financiers in drafting and enforcing priority arrangements.

First, priority provisions will generally operate consistently with the secured money definition, rather than as an independent constraint on it. Where priority is tied to amounts capable of being brought to account under a mortgage, courts are unlikely to impose additional limits based on how liability arises.

Secondly, step‑in and completion funding is likely to retain first‑ranking priority where the mortgage and related documents are drafted in the usual expansive terms. This reflects the commercial purpose of step‑in rights: allowing a senior lender to protect the value of its security without diluting its position.

Finally, headline priority figures should not be assumed to operate as a cap. A scheduled amount will only limit priority if the drafting clearly and consistently gives it that effect.

Where broader categories of secured debt are included, first‑ranking exposure may be significantly greater than the headline number suggests.