At some point every secured lender will encounter a second lender attempting to provide additional secured financial accommodation to their borrower. It is therefore important for the first secured lender to understand the concept of tacking and the complexities of the body of law that governs tacking and how those rules apply in light of the Personal Property Securities Act 2009 (Cth) (PPSA).
In short, the law on tacking will determine if the first secured lender should make further secured advances to their borrower at any time after a second lender:
The most important question that the first secured lender will need to ask in these circumstances is: Will I be able to rely on my existing securities to recover any additional advances made after the second secured Lender enters the picture?
We will explore some of the applications and situations in relation to the rule against tacking in this article.
What is tacking?
Tacking refers to a scenario where a secured lender, having made advances to their borrower up to the facility limit, then seeks to provide additional advances to that borrower, relying on the existing security to secure those additional advances.
The additional advances by this lender that ‘bolt on’ or ‘tack’ to the existing securities are known as tacking.
Until recently, the common law determined that ‘tacking’ by a first secured lender is not permitted in the scenario where it has had knowledge of:
Should an advance be made by the first secured lender despite this knowledge, then any additional advances will rank behind the advances made by the second secured lender.
The rule against tacking in Hopkinson v Rolt (1861) 9 HL Case 514; 1861 WL 7196 (Hopkinson v Rolt) provides that a first lender is not able to tack further advances if it had actual notice of the existence of a subsequent financier’s security.
When combined with the rule in Devaynes v Noble, Clayton’s Case (1816) 1 Mar 572 it has the added effect that following notice of the existence of a subsequent lender’s security, any payments made in reduction of the financial accommodation provided by the first lender will result in a reduction of that first lender’s priority amount in an amount equal to the amounts of those reductions. For example, if the second lender or a third party pays down the obligations owed to the first lender, then the priority amount of that first lender will reduce by that same amount.
Personal Property Security
Since the introduction of security interests over personal property under the PPSA and the repeal of the prospective liability requirements in Chapter 2K of the Corporations Act 2001 (Cth) in relation to ASIC registered securities, tacking (in the majority of circumstances) has been permitted.
Section 18 of the PPSA does away with the rule in Hopkinson v Rolt by permitting tacking of future advances by the first lender regardless of any subsequent lender. As a result, provided the security agreement provides for future advances, a first lender’s security interest will extend to all future advances made in relation to the security interests created under that security agreement.
However, there are some exceptions. These exceptions include:
Real Property Security
Although the rule against tacking has been largely negated in relation to security interests under the PPSA, the rule still generally applies in relation to real property mortgages, subject to a few exceptions. Some of these exceptions to the rule are detailed in the matter of Matzner and others v Clyde Securities Ltd  2 NSWLR 293 – 29 August 1975 (Matzner v Clyde).
In Matzner v Clyde it was held:
Accordingly, for the reasons outlined above, tacking by the first lender was permitted in these circumstances and the first lender was entitled to have priority over the claims of the second and third lenders.
As a lender or more importantly, a subsequent lender, it is important to identify your key asset and ultimately your key security that is being relied upon in the provision of financial accommodation to the borrower.
As a first lender in this scenario, where you are relying on the real property mortgage as your key security, the rule against tacking would apply and accordingly you should not make any further advances without entering into appropriate priority arrangements with the second lender. If, however, your key security is the PPSA security interest, then you are free to continue making advances to the borrower as a first lender and retain your priority without entering into priority arrangements.
If, as a first lender, both the PPSA security interest and the real property mortgage are key securities, then you would need to confirm your priority position by entering into appropriate priority arrangements with the subsequent lender before making any further advances to the borrower.
Subsequent 3rd mortgage by first lender
Theoretically, following the principles of tacking in relation to real property, if the first lender was granted a third mortgage behind the second lender’s mortgage, and gave the second lender notice of the same, then theoretically the first lender should re-gain priority for any advances beyond the limit of the second lender’s mortgage.
However we note that the ultimate outcome will depend on considerations of justice and fairness (equitable principles) as between the mortgagor and competing lenders.
The best position to avoid uncertainty or a priority dispute between secured parties is to negotiate and enter into priority arrangements to confirm priority limits, ranking of securities and also to determine the distribution of proceeds, amongst other things. However, we note that there are some situations where such terms are unable to be agreed and documented.