What is the obligation of a registered second mortgagee to account for surplus funds that it has received following the sale of the mortgaged property by the first mortgagee?

In Residential Housing Corporation v Esber & Ors [2011] NSWCA 25, Residential Housing Corporation was the registered second mortgagee which was paid the surplus proceeds of sale after the registered first mortgagee exercised power of sale. Resi paid the surplus after its debt was satisfied to an unregistered third mortgagee (Kimberley). The owner had challenged its liability to Kimberley. Kimberley became insolvent.

The Court of Appeal upheld the trial judge’s decision that Resi owed fiduciary obligations concerning the surplus proceeds, that it did not act in accordance with either section 58(3) Real Property Act 1900 (NSW) or its equitable obligations in paying the surplus proceeds to Kimberley, and that in consequence it was obliged to compensate the Esbers.

The Court decided that section 58(3) imposed a duty on all mortgagees (whether selling or not) to account for the surplus proceeds but that they could only be paid to registered mortgagees (in contrast to section 88 of the Property Law Act 1974 (Qld) which under section 77A applies to both registered and unregistered mortgagees).