What is a deed of priority, and who signs it?

Registration order on the title gives a basic ranking: first registered, first paid. For two professional lenders that is not enough, because a bank mortgage usually secures all moneys owing at any time, not a fixed sum. Without an agreement, the bank could lend more later and that new money could rank ahead of the second mortgage. The deed of priority closes that gap.

What it contains

• The ranking. The first mortgagee has first priority, the second mortgagee has second priority.
• The priority amount. A cap on what the first mortgagee can recover in priority. Typically the facility limit, plus a set period of interest, plus enforcement costs. Anything the bank lends above the cap ranks after the second mortgage.
• Further advances. The bank agrees not to lend above the cap in priority without the second mortgagee’s agreement. This defeats tacking, the rule that can let further advances rank ahead of a later security.
• Consent. The first mortgagee consents to the second mortgage, so granting it is not a default under the bank’s terms.
• Enforcement. Notice requirements before either lender enforces, who controls a sale, and how proceeds are applied.
• Insurance and title documents. Who holds what, and whose interest is noted on the insurance policy.

Who signs

The first mortgagee, the second mortgagee and the borrower, along with any guarantor who has given security. The borrower signs because the deed varies how its property and loans are dealt with.

Why the borrower should care

The deed is the reason the bank’s consent is real and not just tolerated. It removes the risk that the second mortgage is a breach of the first. It also affects the borrower directly: the cap can limit the ability to redraw or increase the bank facility while the second mortgage is in place. If the business expects to need more from the bank during the term, raise it before the cap is set.

Timing and cost

Banks produce their own standard form, and turnaround runs from days to weeks. Because it is the slowest step in most second mortgage settlements, the request should go to the bank as soon as terms are accepted. See how long a second mortgage takes. The bank’s fee and both sets of legal costs are paid by the borrower and should be quoted upfront.