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Improving a property as mortgagee in possession

Friday, April 26, 2013 - Posted by Philip Harvey

The case of Southwell v Roberts (1940) 63 CLR 581 determined principles that a mortgagee in possession should consider when considering property improvements. In this case the mortgagee in possession made a judgment that the properties were in such poor repair it was not economically possible to repair them. They subsequently demolished and rebuilt the properties. The court considered whether the mortgagor was able to redeem  the property without paying for the money spent by the mortgagee to improve the property by building the new buildings.

The judgment is detailed below;

In my opinion the amount expended was neither reasonable in amount nor reasonable having regard to the nature of the property. The mortgagee expended double the amount of the principal debt and changed the character of the buildings upon the land, and indeed on the vacant portion of the land she erected a building where none had been before. The case is an example of a mortgagee in possession effecting improvements without regard to the mortgagor’s interest and calculated to improve him out of his property. In these circumstances the expenditure cannot be allowed, unfortunate though it be for the mortgagee. But she could have protected herself by obtaining the consent or acquiescence of the mortgagor or possible by fore-closing.

Upon the facts in the present case there can, I think, be only one conclusion when these matters are regarded. The disproportionate amount of the expenditure and the alteration in the nature of the premises produced by demolishing the old buildings and erecting new semi-detached cottages on the vacant portion of the land and a single cottage on the site of the former building combine to make it impossible to allow the mortgagee to add the cost to the mortgage moneys.

It is no doubt very unfortunate for the mortgagee, and at the same time there can be almost as little doubt that the result to the mortgagor is a windfall. But the loss to the mortgagee arises altogether from her ignoring the mortgagor’s position and proceeding to build upon the tacit assumption that she was an absolute owner and not simply a mortgagee in possession of a security for a debt.

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