Equitable mortgage: Can a lender rely on the certificate of title as security for a loan even though a borrower fails to sign any loan agreement?

Hatala v Graglee Pastoral Company Pty Ltd [2017] NSWSC 155 provides insight into this.

The Parties Involved

The lenders entered into a loan agreement with Grag Group Pty Ltd, as the borrower, for the sum of $300,000.00. A property at Sutton Forest stood as security for the loan. The security property was registered in the name of Graglee Pastoral Company Pty Ltd (Defendant).

At that time, Mr Coady was the sole director, secretary and shareholder in Grag Group Pty Ltd. While his wife, Mrs Coady, was the sole director, secretary and shareholder in Graglee Pastoral Company Pty Ltd. Together they owned the registered business named “Grag Group”.

On 6 May 2013, Mr Coady delivered to his solicitor’s office the following items:

• the certificate of title for the Sutton Forest property,
• the loan agreement signed by Mr Coady on behalf of Grag Group Pty Ltd,
• and the bank account details for Mr Coady’s St George Bank account, held in the name of ‘Grag Group’.

Mr Coady told his solicitor, Mr Silk, that Mrs Coady would “come to sign tomorrow”. 

On 7 May 2013, the lenders visited Mr Silk’s office. He showed each of them the certificate of title for the Sutton Forest property and a title search of this property. He also warned them that Mrs Coady had not yet signed the loan agreement.

The lenders then proceeded to sign the loan agreement. They each transferred $150,000.00 into the Grag Group bank account provided by Mr Coady. They did so even without Mrs Coady signing the loan agreement on behalf of her company as borrower and mortgagor.

The Loan Agreement

The loan agreement included the following:

• The security provider agreed to provide the certificate of title to the property known as Graglee, 54 Village Road, Sutton Forest NSW. They also agreed that the lenders had a genuine interest in securing the loan. This created a caveatable interest in the Sutton Forest property. It also allowed the lenders to register a mortgage over the title to the Sutton Forest property;
• Each party agreed not to use the Sutton Forest property as security for any loan. Nor to charge, mortgage or encumber the land. Nor to lodge a caveat against it. Except as permitted by the loan agreement;
• The parties agreed that the Title would remain in the custody of Mr Silk. Except to lodge with Land and Property Information if registering a mortgage or caveat.

Liquidation

In October 2014, Grag Group Pty Ltd went into liquidation. At this time it had not repaid any of the loan or interest to the lenders. The lenders lodged a caveat over the Sutton Forest property in September 2015. They claimed an equitable interest as mortgagee due to the deposit of the certificate of title with Mr Silk on 6 May 2013.

The lenders started proceedings in the New South Wales Supreme Court. They sought a declaration that the Sutton Forest property was subject to an equitable mortgage in favour of the lenders.

Does the delivery of the Certificate of Title with a lender create an equitable mortgage?

It has been well established in past decisions, such as Theodore v Mistford Pty Ltd (2005), that the owner of land may create an equitable mortgage over the land by depositing the title documents with the intention of providing the land as security for the repayment of debt.

No evidence presented to the Court showed that Mrs Coady ever signed the loan agreement on behalf of the Defendant. However, Bank of New South Wales v O’Connor (1889) established that an equitable mortgage may be created by the deposit of the certificate of title. This despite there being a lack of writing signed by the land owner.

Main issues in determining the existence of an equitable mortgage     

In determining if the lender held an equitable mortgage over the Sutton Forest property, the Court had to consider the following. Did the delivery of the certificate of title by Mr Coady to Mr Silk occur in a way showing the clear intended use of the property as security for the loan?

The Court had no doubt that Mr Coady delivered the certificate of title with the intention of providing the Sutton Forest property as security. However, the property was registered in the name of the Defendant. So the Court had to decide if Mr Coady was authorised to deposit the certificate of title as security. There was no direct evidence to suggest he held such authority.

The lender’s counsel submitted to the Court that, given Mrs Coady’s status as the sole director and shareholder of the Defendant, and her involvement with the family’s broader business affairs, it was likely that Mr Coady was acting with her knowledge and approval.

Mr Coady previously acted as an agent for the Defendant. So the Court could infer that Mr Coady was authorised to deliver the certificate of title as security for the loan. Also the evidence showed that after the lenders transferred the loan proceeds into the nominated account, Mr Coady then transferred a portion of the loan funds to Mrs Coady’s ANZ Bank account.

Therefore, the Court held that it was unlikely Mr Coady would have transferred loan proceeds to Mrs Coady if acting in a fraudulent manner and without her knowledge or approval. Mrs Coady’s use of the loan funds confirmed this, showing that she was aware of and did not disapprove of the loan transaction.

Conclusion

With the evidence provided the Court concluded that Mr Coady had authority to deposit the certificate of title with the intention of providing the Sutton Forest property as security for the loan.

The Court therefore found that the delivery of the certificate of title by Mr Coady to Mr Silk created an equitable mortgage over the Sutton Forest property. It granted declaratory relief to the effect that the lenders held an equitable mortgage. And such a mortgage secured the obligations of the Defendant under the unsigned loan agreement.  

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