Residential Housing Corporation v Esber

The case of *Residential Housing Corporation v Esber* concerned a dispute over the surplus proceeds of a mortgagee sale. The land in question was subject to two registered mortgages and one unregistered mortgage. The first registered mortgagee exercised its power of sale and, after satisfying its own debt, paid the entire surplus to the second registered mortgagee. The second mortgagee then paid the surplus to the third, unregistered mortgagee. Subsequently, the third mortgage was found to secure no debt, and the third mortgagee became insolvent. The mortgagor sought to recover the amount paid to the third mortgagee from the second mortgagee.

The Court of Appeal was required to determine whether the second mortgagee was obliged to compensate the mortgagor for the amount paid to the third mortgagee. This involved considering the application of section 58(3) of the *Real Property Act 1900* (NSW) (RPA) to mortgagees other than the one exercising the power of sale, and whether this section mandated payment to an unregistered mortgagee. The court also examined the interaction between the statutory provisions of the RPA and the equitable obligations of a mortgagee holding surplus proceeds of sale.

The Court of Appeal held that section 58(3) of the RPA applies to the distribution of surplus proceeds by the mortgagee exercising the power of sale, and that its provisions are not intended to create a direct obligation on a subsequent mortgagee to repay funds received in good faith. The court reasoned that the statutory scheme prioritises registered interests and that the second mortgagee had acted in accordance with the order of priority established by the RPA when it received the surplus funds. While acknowledging the equitable obligation of a mortgagee to account for surplus proceeds, the court found that this obligation did not extend to requiring the second mortgagee to repay funds that had been lawfully paid to the third mortgagee in accordance with the registered priority, especially given the third mortgagee's subsequent insolvency and the finding that no debt was owed.

The appeal was dismissed. The court granted leave to appeal if necessary, but ultimately upheld the decision of the lower court, finding no obligation on the second mortgagee to compensate the mortgagor for the amount paid to the third mortgagee.