If a debtor has loaned money from multiple parties, how do you decide the order in which the parties are repaid? Well, a deed of priority is a contract that determines the order of priority amongst the creditors. This article by Business Kitz will walk you through the basics of what a deed of priority is, and what it includes.
What is a deed of priority?
A deed of priority serves to illustrate the order of priority amongst two or more creditors in relation to a common debtor (the borrower), and the respective rights that this gives rise to. Essentially, the document ranks creditors in order of their rights to negotiate the debts owed and payment plans.
When is a deed of priority actioned?
In the event that the debtor defaults, this document can be consulted to determine the rights each creditor has in recovering the debts. It is vital for outlining the lenders entitlements and respective security, and the borrowers responsibility, obligation and payment plans. This is most commonly used when a debtor becomes insolvent, meaning they owe more money than they are making. Therefore, when the borrower fails to repay their loan, the agreement can assist in stating the respective security of the lender, and who needs to be paid, as outlined in the deed.
Why should I have a deed of priority?
No matter if you are the debtor or the creditor, it is essential that you have a deed of priority in order to limit disputes associated with debt and loans, and assist in negotiating insolvency repayments. If creditors are lending large sums of money, their security is a priority. Becoming insolvent is an extremely tumultuous, stressful and emotional time for anyone, so having clear procedures for sorting out debts and assets is a way of ensuring security for creditors, and clarity for the debtor.
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Who is involved in a deed of priority?
To be effective, a deed of priority must involve all creditors so they can be aware of the agreements in place. It is essential that the debtor is transparent in disclosing the other parties that are creditors, in order to properly communicate how each party will be ranked. This level of honesty is beneficial to both the creditors and debtor, so payments can be made and negotiated without any extra surprises.
Is this different to an inter-creditor agreement?
An inter-creditor agreement also serves to 'rank' creditors, but this kind of loan agreement document is a bit more complex. It usually also details the rights, obligations and entitlements of debt and equity providers and involved parties, as well as procedures that enforce these rights.
What are deeds of priority used for?
The most common circumstances that this agreement is used for is when multiple loans or mortgages are taken out for the purchase of a property. For example, if someone already has a first mortgage for their home, but requires further assistance, they may register a second mortgage. Depending on the jurisdiction, a deed of priority is drafted when the first mortgagee's consent is required for the proposed second lender to enter the agreement. In New South Wales, it is compulsory to obtain the first mortgagee's consent before registering a second mortgagee for a property, in which a deed of priority is usually a condition of consent. This is different to Queensland laws, in which the first mortgagee cannot object to a second mortgage being instated. Across all jurisdictions, a first mortgagee is required to account to second mortgagees for any extra proceeds when effecting power of sales. This should ensure that current liability, interests and any guarantees under the existing loan or mortgage statement do not negatively effect the first lender.
How does this work for multiple mortgages?
Usually the signed agreement guarantees that the first registered mortgage has priority in being repaid first, then the second lender will be entitled to be paid by the borrower for their loan after this.
Legal advice
A deed of priority is essential for when a loan is taken from multiple parties, in order to determine the order in which the lenders are repaid. If you think you may need to establish a deed of priority, please contact our sister company Legal Kitz for tailored, legal advice! You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.
