When a Registered Mortgage Isn't Enough: Lessons for Private Lenders

In Director of Consumer Affairs Victoria v F. Paparone Nominees Pty Ltd [2026] VSC 429, the Victorian Supreme Court enforced a statutory charge over retirement village land that ranked ahead of every registered mortgage on the scheme. Lenders were left competing over what remained: a fund pool that could not come close to satisfying more than $28 million in claimed mortgage debt against land valued at approximately $8.55 million, and that was before costs and government charges reduced the available pool further.

The title history behind part of the security was described by the Court as "somewhat mysterious", and the mystery was not carefully investigated.

The case raises three issues that every private and non-bank lender should have on their radar, issues that go well beyond retirement villages: title risk in strata and community title schemes, statutory interests that can silently displace mortgage priority, and valuations that can look robust on paper but collapse under scrutiny.

1. Title Risk: Make Sure the Security Actually Exists

A title search confirms a registered interest exists. It does not confirm that the underlying title is legally sound.

In this case, part of the security traced back to land, referred to as "Lot B", carved out of what had been common property within the retirement village strata scheme. The evidence could not satisfactorily explain how that land moved from the owners corporation to the borrower, and then into a mortgage. Under Victorian law, owners corporations cannot mortgage common property, meaning the validity of that security interest was doubtful from the outset, but this was overlooked.

The lender advanced $875,000 in 2008. By 2025, with default interest accruing at 15.15% per annum over approximately 16 years of mortgagee in possession, the claimed debt had grown to over $12.28 million, secured by a mortgage the Court has questioned.

When lending against specialist property, specific specialist due diligence should be undertaken:

• Do not rely on a current title search alone. Consider how the interest and title were created
• Investigate any subdivision, strata restructuring, or common property transactions in the title history
• Be especially cautious where security has been carved out of retirement villages, community schemes, or mixed-use developments

2. Priority Risk: A Title Search Does Not Show You Everything

A registered first mortgage does not always mean first recovery. Depending on the asset and jurisdiction, a range of statutory interests can rank ahead of a registered mortgagee, and the scary part is that many of them do not appear on a standard title search at all.

In this case, a statutory charge under the Retirement Villages Act 1986 (Vic), registered in 1987, ranked ahead of every mortgage granted after that date. Council rates, land tax, and water authority charges added a further approximately $716,000 in priority claims. By the time those amounts were accounted for, the pool available to mortgagees was substantially reduced before they received a cent.

The critical question is not what the property is worth. It is what will be left after every prior-ranking claim has been satisfied. Mapping that waterfall across rates, taxes, statutory charges, and owners corporation liabilities is an essential step in any due diligence on specialised security.

3. Valuation Risk: The Number Is Only as Good as the Assumptions Behind It

A valuation prepared on information supplied by the borrower is not independent, regardless of the firm that signs it.

In this case, an earlier valuation of the retirement village was built on information from the borrower and subsequent assumptions about ownership and planning approvals. Once corrected, the underlying equity in the asset was negative.

The fix is not necessarily a better valuer. It is controlling the instruction. Lenders should commission valuations independently, require the valuer to state every material assumption clearly, and verify those assumptions against title records, planning certificates, and financial accounts, not the borrower's representations.

Specialised Security. Experienced Advice.

Private lenders succeed by lending where mainstream banks will not. That flexibility is a genuine advantage, but it demands a depth of diligence that matches the complexity of the asset.

At Baystone Legal, our Banking and Finance team has been built around senior, experienced practitioners, with over 75 years of combined practice experience across the team. We bring senior lawyers to every matter: people who understand the issues, can identify the risks that standard reviews miss, and can explain them clearly, in English, in Mandarin Chinese, and other languages.

If the issues raised in this bulletin are live in your current transactions or loan book, we would welcome a conversation.

Contact our Banking and Finance team at Baystone Legal

nbl@baystonelegal.com

This bulletin is prepared for general informational purposes only and does not constitute legal advice. Please contact Baystone Legal for advice specific to your circumstances.

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