This article was written by Nancy Wang Principal Solicitor at W & G Lawyers.
Recent Queensland Supreme Court decision is a useful reminder of where a financier stands when a development collapses and the lender has to pick up the tools itself. The short answer: a mortgagee who takes possession and completes a half-built project can usually recover what it spends ahead of the other lenders holding security over the property — but only if its security and any priority arrangements are drafted to allow it.
The scenario every development financier knows
A developer borrows to build a staged residential project. Part way through, the money runs out, the developer is wound up, and the site sits half-finished. A partly built development is worth far less than either the land alone or the finished product. So the first mortgagee takes possession and makes a hard commercial choice: walk away and sell a stalled site at a discount, or fund the remaining construction, obtain titles to the completed lots and sell them for a far better return.
If the lender finishes the build, it can easily spend many millions more. The legal question is whether it can recoup that spend from the sale proceeds before the secured debts are paid out in their usual order — or whether the money it pours in simply benefits the other lenders ranking behind it.
The general rule: completion costs can come off the top
Equity has long recognised that a mortgagee in possession who improves a property [“in order to complete and subsequently sell”] so that it can be sold should not be out of pocket for doing so. The principle is usually traced to Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293. Costs of this kind are not treated as fresh “further advances” competing for priority; they attach to the first mortgage and rank ahead of the mortgages registered later. The same result can be reached through the statutory order for applying the proceeds of a mortgagee sale — in Queensland, section 118(2) of the Property Law Act 2023 (the successor to section 88(1) of the 1974 Act) — which takes the costs and expenses of realisation off the top before the debts are discharged.
The equity is not unlimited. Three conditions are usually required:
1. The expenditure must not change the nature of the property. It must be a reasonable step to improve the property’s state for sale, and it must actually increase what the property will fetch.
2. A lender ranking behind cannot take the surplus without paying the sum that produced the increase. In other words, a lender further down the order cannot enjoy the uplift created by the money the lender in possession spent and refuse to pay for it.
3. Where the lender ranking behind knew about the works and behaved in a way that signalled consent or acquiescence, the lender in possession does not even have to prove the costs were reasonably incurred.
Put simply: if you spend money sensibly to make a stalled project saleable, and the value goes up, the law will usually let you recover that spend in priority.
The twist: a priority deed can switch the rule off
That default position can be displaced by agreement — and that is the real lesson of JSY Securities Pty Ltd v Dakabin Homes Pty Ltd [2026] QSC 106.
The two lenders in that case were co-mortgagees of a ten-stage townhouse site. They had signed a priority deed under which one of them — the lender that would later take possession and complete the build — had absolute priority, but only up to a fixed capped amount of about $11.79 million. The other lender ranked next.
When the developer was wound up after five stages, the lender in possession completed further stages, spending roughly $32.3 million and recovering about $35.1 million in sales. It then argued it should recover that $32.3 million completion spend ahead of the other lender — both as money needed to “preserve or protect” the property’s value under the deed, and under the improvement equity and section 118(2).
The Court rejected the first argument on the wording. Building further stages does not preserve value; it creates value by realising the site’s development potential. “Preserve or protect” covers holding costs — keeping a development approval alive, paying rent to avoid forfeiture, maintaining insurance, securing the site against vandalism — not value-creating construction.
On the second argument, the Court accepted that the improvement equity and section 118(2) would ordinarily have let the lender recover the completion costs in priority. But the deed’s absolute, fixed-cap priority language was clear enough to exclude both the equity and the statutory order. The parties had set an exhaustive order of priority, and that order governed. The completion spend above the cap ranked behind the other lender’s mortgage.
The commercial sting is obvious: the bulk of a $32.3 million spend ended up ranking behind the other lender’s mortgage of about $1.44 million.
Practical takeaways
For lenders and developers documenting a build, the case carries a few clear lessons:
A fixed-sum priority cap protects the lender ranking behind, but it can trap the financier that later has to finish the job. If there is any realistic chance you will complete the works yourself, say so expressly: the priority amount should capture post-default completion and realisation costs, not just the original advances.
“Preserve or protect value” is a narrow phrase. It covers holding the asset, not building it out. Choose language that matches the real commercial risk.
Do not assume the improvement equity or the statutory proceeds rule will rescue an unrecouped completion spend. Both can be contracted out of by clear words.
A mortgagee’s silence about its priority rights will rarely estop it or amount to misleading conduct unless it actually knew the other side was mistaken.
Priority and accounting questions can be resolved by court declaration during a staged sell-down — the duty to account can arise lot by lot, rather than only once the whole project is finished and sold.
The overarching message is simple. The law gives a lender who finishes a stalled development a fair chance of recovering the cost — but that protection is a default, not a guarantee, and a poorly fitted priority deed can take it away.
How W & G Lawyers can help
The wording of a priority deed can be the difference between recovering your money and ranking behind someone else’s. W & G Lawyers can prepare a tailored deed of priority and postponement that deals expressly with completion and realisation costs, so your priority is not capped in a way that leaves you exposed if a project stalls and you have to finish the build yourself. And if you are a second mortgagee considering lending into a development, we can review the existing security and priority arrangements before you commit, so you know exactly where your money will sit. Contact us for a confidential discussion.
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Disclaimer
This article is general information only and does not constitute legal advice under Australian law. For advice specific to your situation, please contact W & G Lawyers. For further details, please click here to view our disclaimer.