How can lenders protect their rights and interests? What does a good mortgage look like? Let’s define what key items should be included in all mortgage documents.

Why is the mortgage document crucial?

The mortgage document is crucial. It also forms the foundation in legal disputes between lenders and borrowers in default. Many lenders, however, find themselves exposed due to flawed documents. Frequently these do not grant the mortgagee the rights it requires.

The most common issue is the failure to include all the material terms that the mortgagee relies on at the enforcement stage. Another classic error is not adding a well drafted ‘interest rate’ clause, or relying on an ‘all monies’ mortgage.

Each mortgage implies a set of limited rights for the lender. These vary from State to State but generally include that, in an event of default, a mortgagee will:

• have a right to possession of the mortgaged property

• have a right to appoint a receiver of the income of the mortgaged property.

However, these implied obligations do not cover all potential issues of concern for a lender. In addition, the above need elaboration to ensure the mortgagee can enforce its rights. That is why it is so important for lenders to use a properly drafted mortgage document.

What items should be included in all mortgages?

A good mortgage document should include the following core content:

• the right to repayment of the Principal (not just in the Loan Agreement)
• the right to charge interest, the applicable rates, how interest accrues and when it is payable
• the Mortgagee’s right to possession of the security property
• the right to recover legal and other enforcement costs on the indemnity basis
• the right to appoint a Receiver to the security property
• a Charging Clause
• the right to exercise various powers on default
• a Power of Attorney Clause

Finally, if the mortgage you are using to secure your loans does not include all of these items, your funds may be exposed. 

Our clients demand the immediate drafting and issuing of mortgage documents. We understand this. Our customised, all-in-one mortgage document, has been drafted to ensure quick turnaround times without compromising their rights. View our Mortgage Memorandum here.

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This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.

The post Mortgage Document: Should Lenders Be Concerned About Quality? appeared first on Elliott May.

In the matter of Donnelly v Australia and New Zealand Banking Group Ltd [2014] NSWCA 145 the court held that a borrower who voluntarily engages in risky business is not entitled to call upon equitable principles to be redeemed from the consequences inherent in taking those risks.

Background

Mrs Donnelly and her husband drew down HK$4,105,056.00 (about AUD600,000) under an “Expat Mortgage Loan Facility”. ANZ Asia Ltd (the Bank) granted it to them on 12 June 2008. The loan agreement contained a “clawback clause”. The clause entitled the Bank to convert the currency of the borrower’s liability from Hong Kong Dollars to Australian Dollars. This clause operated where, as a result of exchange rate fluctuations, the borrower’s liability when converted to Australian Dollars exceeded 85% of the assessed value of the security property.

After the loan was made, the Australian Dollar depreciated sharply against the Hong Kong Dollar. Therefore the Bank exercised its right under the clawback clause. The Bank converted the borrower’s indebtedness to approximately AUD730,000. This was about AUD130,000 more than the original value of the loan.

The Bank then commenced proceedings in the New South Wales Supreme Court against Mrs Donnelly. It sought for possession of the security property and judgment for the debt.

Decision at Trial

Mrs Donnelly alleged that the Bank had engaged in conduct that was unconscionable under equitable principles. This argument was based on the Bank’s purported failure to inform Mrs Donnelly that deterioration in the value of the Australian Dollar against the Hong Kong Dollar would adversely affect her interests under the loan facility.

The trial judge rejected her defences and entered judgement for the Bank against Mrs Donnelly in the sum of $879,685.55. The judge also made orders for possession of the security property. In short, the court held that the Bank had not acted unconscionably. 

Mrs Donnelly appealed this decision.

Decision on Appeal

Defence on appeal

Mrs Donnelly relied on the following to support her defence on appeal:

• the loan facility documents were signed at the ‘urging and direction’ of a representative of the Bank;
• the Bank’s representative failed to inform her that a deterioration in the value of the Australian Dollar against the Hong Kong Dollar would cause an increase in her indebtedness;
• no independent financial or legal advice was offered before signing the facility;
• an indemnity that Mrs Donnelly signed was not the subject of any ‘explanation as to its meaning or relevance’;
• the Bank’s representative misrepresented to her that the currency of the loan could only be changed with her consent.

The principles of unconscionable conduct

Macfarlan JA stated the authoritative principles of unconscionable conduct expounded in Kakavas v Crown Melbourne Ltd [2013] HCA 25:

“ … equitable intervention does not relieve a plaintiff from the consequences of improvident transactions conducted in the ordinary and undistinguished course of a lawful business. A plaintiff who voluntarily engages in risky business has never been able to call upon equitable principles to be redeemed from the coming home of risks inherent in the business. The plaintiff must be able to point to conduct on the part of the defendant, beyond the ordinary conduct of the business, which makes it just to require the defendant to restore the plaintiff to his or her previous position.”

The Court’s findings

The evidence suggested Mrs Donnelly did not have a perfectly clear understanding of the terms of the facility agreement. However, the Court of Appeal found that this was an insufficient basis for a claim of unconscionable conduct. As the above extract shows, a plaintiff has to point to some conduct on the part of the defendant which goes “beyond the ordinary conduct of business”. In this case, Mrs Donnelley’s allegations and evidence did not satisfy this requirement.

Also, the Court of Appeal found that the Bank had taken reasonable steps to inform Mrs Donnelly of the risk a depreciation of the Australian Dollar posed to her indebtedness to the Bank. The evidence presented by the Bank included the Bank’s usual practice of explaining the effect of exchange rate fluctuations to potential borrowers.

In addition, the Bank’s failure to recommend that Mrs Donnelly obtain independent legal advice was not unconscionable in the circumstances. In fact Mrs Donnelly’s personally chose not to seek such advice. The court also noted that Mrs Donnelly was sophisticated in her commercial dealings. She had entered the facility for the purpose of currency gains. As a result, all this contributed to a rejection of her defence.

Mrs Donnelly’s appeal was dismissed with costs.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Courts Won’t Assist Borrowers with Imprudent Transactions appeared first on Elliott May.

The Facts

Before the registered owner of the mortgaged security property went bankrupt, he entered into a contract to sell the land to the plaintiffs, George and Francesca Koovousis. There was a mortgage registered over the land in favour of Monaco Solicitors Pty Ltd. The mortgage secured all monies lent by it to the owner.

The owner of the property was declared bankrupt. Thereafter, the plaintiffs sought an order for specific performance of the contract against his trustee in bankruptcy (being the first defendant in these proceedings). Or alternatively a declaration that they were entitled to a return of the deposit. The plaintiffs joined to the proceedings all parties who claimed a security interest in the land. This included Elliott May’s client as mortgagee (being the fifth defendant in the proceedings). The fifth defendant as mortgagee applied for an order that the plaintiff’s proceedings be summarily dismissed.

Judgment

What rights did the plaintiffs have against the land as purchasers under the contract?

The Court considered the various and competing interests the parties had to the land. From the plaintiff’s perspective, the contract of sale gave rise to a personal right against the registered proprietor of the land. To enforce the contract, the plaintiffs called upon the court’s equitable jurisdiction to enforce this right by an order of specific performance.

The plaintiffs never contended that they had a cause of action or any equity enforceable against the mortgagee. This meant that any rights they had under the contract were enforceable only against the first defendant (i.e. the trustee in bankruptcy). But they could not defeat the registered legal interest of the mortgagee. The plaintiffs’ interest was subordinate in every way to the legal interest of the registered mortgagee.

The Court’s Discretionary Jurisdiction under the Real Property Act 1900 NSW

In exceptional circumstances, the Court has a discretionary jurisdiction in equity to make an order for judicial sale of land despite the objection of the registered mortgagee. This jurisdiction is enlivened “when conduct of a mortgagee, in prospective enforcement of its rights under a mortgage, would operate inequitably to the prejudice of the mortgagor”.

According to the facts, Justice Lindsay found no basis upon which the discretionary jurisdiction could be exercised. It was also noted that the mortgagee had taken steps to enforce its security by taking possession of the property. In relation to this point, Justice Lindsay stated:

“The Court will not ordinarily make an order for a judicial sale on an application by a mortgagor (still less, a purchaser from a mortgagor) where there is a negative equity and the mortgagee actively wishes to enforce its security”.

Orders

The plaintiffs’ proceedings against the mortgagee were summarily dismissed. Justice Lindsay found that any rights the plaintiffs had against the bankruptcy trustee were subject to those of the registered mortgagee. Therefore this enabled Elliott May’s client to re-agitate a claim for possession of the land to enforce its security. The Court ordered the plaintiff to pay costs for the proceedings.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Judicial Sale of a Mortgaged Property appeared first on Elliott May.

In J P Morgan Trust Australia Limited v Anthony Robert Bridge [2013] NSWSC 668, the Court was required to consider the rights and standing of a mortgagor who re-enters possession of a property after execution of a writ by the sheriff.

Background

J P Morgan lent Mr Bridge and his partner the sum of $225,150 pursuant to an agreement made in February 2007. A mortgage over their property secured the loan. There was no dispute that the borrowers defaulted under the agreement by failing to make payments when due. The lender commenced proceedings by statement of claim filed on 13 September 2012. Mr Bridge filed no defence to the statement of claim. The lender obtained judgment by default for possession of the security property and a money judgment for $335,363.69. The Court issued a writ of possession. And on 30 April 2013 the sheriff executed the writ and the lender took possession of the security property. After the execution of the writ, Mr Bridge re-entered the property and remained in possession.

Arguments

By a notice of motion filed on 14 May 2013, the lender sought leave to apply for the issue of a writ of restitution. This in order to restore to the lender possession of land where a defendant has wrongfully regained possession. Mr Bridge opposed the issue of a writ of restitution on the following grounds:

• Mr Bridge argued that the loan was predatory and should be set aside. He said that the lender advanced the loan without any concern as to whether or not he had the capacity or the ability to meet repayments due under the agreement on a monthly basis;
• The lender was tardy in implementing a direct debit system for the repayments that he was required to make;
• Mr Bridge did not achieve success when he complained to the banking and financial services ombudsmen;
• Mr Bridge could not afford legal advice and had no success obtaining pro bono assistance.

Based upon the facts and in light of authority dealing with writs of restitution, the lender argued that Mr Bridge did not have a case. In reliance upon the Supreme Court’s decision in Perpetual Limited v Kelso [2008], the lender contended that the execution of a writ of possession meant that it was too late for Mr Bridge to revisit the issues or to seek to set aside the judgment giving rise to the writ. Any attempt to oppose a writ of restitution would be ‘hopeless’ as it was necessarily based upon the same judgment.

Judgment

The associated concepts of certainty and finality of judgments and orders of the courts underpinned the Court’s judgment. Whilst the court has an inherent power to stay the execution of a judgment, even once a writ for enforcement of the judgment has been issued, Justice Harrison held:

“Once the writ has been executed…and practical effect has been given to the order of the Court, the force of the writ has been spent and the rights of the parties correspondingly subsist only in their respective legal and physical positions as the party in possession of the property on the one hand and the party who has been legally ejected on the other, together with all of, but only, the usual rights and obligations that come with those positions”

Accordingly, once the sheriff executed the writ of possession, Mr Bridge became a ‘legal stranger’ to the land. Once he re-entered the property he became in status nothing more that a trespasser. He had no right to retake possession of the property, or any standing to make the arguments he did.  Therefore, Mr Bridge’s only remaining rights were that the lender conduct the sale of the property in a proper manner. And to account to him in accordance with its obligations as a mortgagee exercising its power of sale.

The Court granted the lender the relief it sought, being leave to apply for the issue of a writ of restitution.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Mortgagor Unlawfully Takes Possession of Security Property appeared first on Elliott May.

In Secure Funding Pty Ltd v Colin West [2013] NSWSC 746 a short stay of execution was granted by the Supreme Court to allow the borrowers to make the missed payments and to provide evidence of the progress of an application for further finance. The decision demonstrates the scope of the court’s discretionary power to stay proceedings.

In Tringali v Stewardson Stubbs & Collett Pty Ltd, it was held that the power to stay execution of a judgment or order could be exercised “in any situation where the requirement of justice demands it”. This case heard by the Supreme Court of New South Wales concerned an application for a stay upon a writ of possession of a residential property.

Facts

Mr and Mrs West mortgaged their property to Secure Funding. The mortgage fell into default and at the time of the proceedings the loan account was some $31,000 in arrears. The total loan balance owed to the lender was $164,000.

This was not the first time Secure Funding had sought judgment for possession in relation to this loan facility. Secure Funding’s first application was compromised upon terms that involved Mr and Mrs West having an opportunity to sell the security property to their daughter and her partner. It was proposed that their purchase be funded through Indigenous Business Australia (“IBA”). The eviction was to be stayed for a period of three months provided Mr and Mrs West made the minimum monthly loan repayments in a timely fashion. They were also to keep the lender informed about the progress of the proposed sale of the property (“First Compromise”). If the required payments were not made on time, the borrowers would be required to deliver vacant possession of the property to the lender within 7 days after the service of a notice to that effect.

The very first loan payment due under the First Compromise was not made and the borrowers were thus in default. The borrowers also did not comply with the lender’s request to deliver vacant possession of the security property. And so and eviction was scheduled.

Application to Stay Proceedings

The borrowers applied to stay the eviction proceedings for seven weeks. The basis of this application was to give their daughter the chance to advance her loan application with IBA. Evidence supported the borrower’s contention that an application for finance had been made to IBA, but had somehow gone astray. An urgent application for finance was re-lodged once it became clear the Sheriff’s execution of the warrant was imminent. IBA informed Mrs West that a conditional approval might be available within seven days. But this required an adequate valuation of the property. However, settlement of the loan application would take four to six weeks. This evidence made it clear that the loan application had not advanced beyond the most preliminary stages.

The lender argued that the court should not grant a stay on the terms outlined by the borrowers. The Judge agreed, finding that it was unclear whether the loan application was in adequate terms or whether the application had been received and accepted. Therefore, the court was not prepared to grant a seven week stay. Especially as evidence about the reasons for the stay were so manifestly inadequate.

However, the Judge noted that the borrowers had made at least one payment under the First Compromise. Also, Mrs West, her daughter and her daughter’s partner were all in paid employment. And in the course of the discussion with the Court, Mrs West had offered to ensure compliance with the First Compromise which would effectively bring the payments up to date.

Execution of writ of possession stayed for seven days

On this basis, the Judge was prepared to grant a stay for seven days only to allow for evidence to be provided which would show:

• that the arrears had been cleared;
• documentary evidence of the loan application made to IBA; and
• evidence of the likely timetable for IBA to approve and deal with that application.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Execution of a Writ of Possession Stayed by Supreme Court appeared first on Elliott May.

Is a lender precluded from enforcing its rights against a guarantor if there is a period of inactivity after it takes possession of a security property? The Supreme Court of News South Wales was recently required to consider this issue in the matter of Commonwealth Bank of Australia v Thompson [2013] NSWSC 149.

Facts

RHT Developments undertook residential developments in Biloela, Queensland. To fund construction of certain townhouses, it obtained a loan from the Commonwealth Bank of Australia (CBA). A registered mortgage secured the loan. Mr Thompson, a director of RHT Developments, was a guarantor under this mortgage. The property venture failed before completion. Therefore on 11 April 2011, CBA entered into possession of the security property as a mortgagee in possession. CBA took preliminary steps to market the property, but then did nothing for over 18 months. By February 2013, $3.068m remained outstanding under the guarantees, with $1,468 interest accruing daily. The CBA then commenced proceedings against Mr Thompson to recover the $3.068m pursuant to his guarantee.

Arguments

The lender relied upon Westpac v Kingsland which stated that a mortgagee in possession is not obliged to:

• sell at all or at any particular time;
• lease or permit occupation of premises at any particular time;
• exercise its power of sale in circumstances where its exercise would extinguish the liability of its debtors and guarantors.

Counsel for the guarantor cited the case of Palk v Mortgage Services Funding. This case held that a mortgagee does not have an unfettered discretion to delay a sale indefinitely. The guarantor argued that the bank should have taken reasonable steps to sell the property before it enforced the guarantees. Evidence showed that after the bank had taken possession of the properties, its advertising had been inadequate or insufficient. Also, the real estate agent had demonstrated a lack of interest and had not properly maintained the property.

Judgment

The Judge recognised that the bank had done very little to market or maintain the properties until very recently, when CBA took steps to market and sell the property. The Judge however considered the English Court of Appeal decision of Palk v Mortgage Services Funding where it was found that:

‘[A] mortgagee can sit back and do nothing. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor.’

Possibly sensing that the court was considering granting some relief to the guarantor, the bank effectively dropped its claim for the accrued interest. Therefore, although the court found the bank had been tardy in selling the property, it held the bank had not breached its duties to the borrower because it had not sought to claim the interest which had accrued during the period of inactivity.

The Court ordered the borrower to pay the bank the sum of $1,900,000 and the bank’s costs. It also granted the bank the right to enforce the guarantee against the guarantor.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Mortgagee Delays in Selling Security Property Impacts Rights appeared first on Elliott May.

In Wolfe v Permanent Custodians Limited [2012] VSC 275 the Supreme Court of Victoria dismissed several claims made by a plaintiff borrower. An agreement whereby the lender agreed to refrain from enforcing a judgment and warrant for possession over the borrower’s property in return for payment of the owed money was held to not interfere with the lender’s right to enforce a judgment and Warrant of Possession.

Background

On 10 August 2009, the lender obtained judgment against Mr Wolfe, the borrower, for payment of $326,602.66 plus costs and interests and judgment for possession of his mortgaged property. In September 2009, the lender’s solicitors wrote to the borrower’s solicitors advising that the lender had obtained judgment against Mr Wolfe. The letter stated that should the borrower pay the arrears and make all future instalment payments, enforcement action would not ensue (“the 2009 Agreement”). This arrangement was without prejudice to the lender’s rights to rely on the existing judgment and warrant for possession.

The 2009 Agreement included a term that if the borrower defaulted in any way, the lender would enforce its rights under the judgment and Warrant without notice.

Mr Wolfe subsequently defaulted and the lender exercised its rights under the 2009 Agreement. Mr Wolfe was evicted and he later claimed damages. He argued that the conduct of the lender ran contrary to the law.

Doctrine of Merger

A final judgment extinguishes the cause of action and the rights and liabilities that underlie it. ‘The extent of the parties rights and liabilities are contained within the judgment and their character is defined by it’.

In this instance, there was a default judgment granting the lender possession of the security property. And also an enforceable warrant and judgment debt. Therefore, the mortgage, the loan and associated security guarantee were merged into the judgment of the Court.

As the borrower made no attempt to set aside this judgment, there could be no independent cause of action. The judge found that the only source of Mr Wolfe and the lender’s remaining rights and obligations was the default judgment and the subsequent 2009 Agreement.

Key Arguments and Judgment

Lack of consideration

The lender argued that the 2009 Agreement relied on by the borrower was unenforceable because of a lack of consideration. Consideration can be defined as the price, detriment or forbearance given as value for a promise. A contract is generally only binding if the promise is supported by consideration. In essence, the bank was saying there was no consideration because the borrower had given nothing in return for it agreeing not to immediately enforce its rights under the judgment.

The Judge disagreed and characterised the issue in terms of a benefit conferred on the bank by Mr Wolfe. It was found that the benefit to the bank was avoiding the inconvenience of having to sell the security property. Therefore, there was valid consideration according to the Judge.

Mr Wolfe argued that the 2009 Agreement contained an implied term that the bank could no longer rely on the judgment and warrant for possession but would in fact have to commence new enforcement proceedings in the event of a fresh default. This argument was rejected on the grounds that it conflicted with the 2009 Agreement’s express terms. The Judge stated that a court will “only imply terms to the extent that are consistent with the actual term of the contract. The parties can therefore expressly agree to exclude terms that might otherwise be implied”.

The case of BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977)

The case of BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) provides an outline of the considerations a court must satisfy before implying a term into a contract.

The term must be

• reasonable and equitable;
• necessary to give business efficacy to the contract;
• so obvious that ‘it goes without saying’;
• capable of clear expression and
• must not contradict any express term.

Mr Wolfe wanted to reinstate all rights and obligations in the original mortgage agreement already the subject of a court judgment. The Court disagreed and found that the 2009 Agreement established a new set of rights and obligations between lender and borrower. It was an independent source of contractual rights and obligations. Also, there was an express term (as per the BP Refinery test) by which the lender reserved its rights under the judgment. This express term contradicts the implied term asserted by Mr Wolfe.

Claim of misleading and deceptive conduct

Mr Wolfe also argued that the lender engaged in misleading and deceptive conduct. This prevented him from performing the 2009 Agreement. He claimed the lender failed to notify him that he had incorrectly completed the direct debit form. Thus resulting in his breach of that agreement.

However, the lender had no knowledge that Mr Wolfe had difficulties completing forms. Or that he did not have access to assistance to complete forms if necessary. The instructions contained in the form were written in plain English. And Mr Wolfe had the opportunity to receive help in completing the form.

At no stage did the lender represent or imply that the incorrect form would be accepted. The Judge referred to the decision in Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited [2010] and stated that “to find Permanent acted in a manner that can be characterised as misleading and deceptive would be to impose an obligation on them to volunteer information in order to avoid the consequences of Mr Wolfe’s own carelessness in completing the form”. The lender therefore had not misled or deceived the borrower.

Mr Wolfe submitted that by allowing him to in essence meet his obligations under the Loan Agreement and Mortgage, the lender had waived its right to rely upon the judgment. This was rejected by the Judge who considered that the 2009 Agreement subsumed the Loan Agreement and Mortgage. The lender could rely on the judgment if Mr Wolfe failed to discharge his obligations under the 2009 Agreement.

Terms of the 2009 Agreement unjust

In his Statement of Claim, Mr Wolfe contended that the terms of the 2009 Agreement were unjust.

According to s 70 of the Consumer Credit Code, in considering whether a transaction is unjust, a court is to have regard to the public interest and all the circumstances of the case. In West v AGC Advances Ltd, Justice McHugh stated “a contract will not be unjust… unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means he has employed to make the contract”.

Even though there was to some extent inequality in bargaining power, it was not taken advantage of by the lender.  The Judge referred to Mr Wolfe’s experience in borrowing money in reaching this conclusion. There was also no substantive evidence that Mr Wolfe did not understand the effect of the transaction. Therefore the Court dismissed this aspect of Mr Wolfe’s claim.

Conclusion

The proceedings brought by Mr Wolfe were dismissed and he was ordered to pay the lender’s costs of the proceeding.

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Judgment for Possession: Compromise if Mortgagee Delays? appeared first on Elliott May.

In Bateson v Jones [2013] WASC 8, Justice Pritchard of the Supreme Court of Western Australia was required to determine an application for the extension of a caveat filed by a lender in response to a lapsing notice issued by a prior registered mortgagee. The reasons for the Judge’s dismissal of the application are discussed below.

Facts

Mr Bateson, as lender, entered into an agreement with Mr and Mrs Jones, as borrowers, whereby he loaned to Mr and Mrs Jones the sum of $100,000.

According to the lender, the borrowers agreed to repay the loan either on or before 31 October 2012, or thereafter upon the sale of a property they owned. The lender claimed that the borrowers consented to a caveat being lodged against the title of their property to better secure the monies loaned, and so lodged a caveat on the title to the property. The lender also said that the borrowers did not repay the loan as required. The lender later received a notice from the Registrar indicating that his caveat would lapse unless he applied to the court for an order extending the operation of the caveat.

Previously the Commonwealth Bank had loaned Mr and Mrs Jones just over $1.012 million, in October 2008. This loan was secured by way of a first registered mortgage. Mr and Mrs Jones defaulted on the loan and voluntarily surrendered vacant possession of the property to the bank to enable the Bank to exercise its rights under the mortgage to sell the property as mortgagee in possession. The property was then marketed for sale.

The Commonwealth Bank, as mortgagee in possession, entered into a contract with purchasers for the sale of the property for $1.2 million. The contract of sale contained a condition noting that the purchasers were aware of caveats on the certificate of title and that these were to be lifted at settlement.

The Bank then wrote to the three caveators on the title, including Mr Bateson, advising them of the sale of the property and requesting that they state the amount secured by their respective caveats. The two other caveators agreed to withdraw their caveats pending the payment of the monies owed to them. However, Mr Bateson did not agree to withdraw his caveat.

The Bank then applied to the Registrar to issue a notice pursuant to s 138B of the Transfer of Land Act 1893 (WA). A notice under this provision requires the caveator to obtain from the Supreme Court an order extending the operation of the caveat. If an extension is not obtained, the caveat will lapse. A caveator who is served with a notice under s138B may apply to the Supreme Court for an order extending the operation of the caveat. Justice Pritchard summarised the Court’s power to extend a caveat in the following terms:

‘The Court’s power to make an order under s 138C(2) of the TLA arises only if the Court is satisfied that the claim by the caveator (that is the interest in land that is claimed in the caveat) has or may have substance, and on that question the caveator bears the onus of demonstrating that there is a serious question to be tried as to whether the interest claimed in the caveat exists. In determining whether to exercise its discretion under s 138C, the Court will also consider where the balance of convenience lies.’

Did the lender have a caveatable interest in the land?

Where there is a loan or guarantee agreement, there is legal authority for the proposition that in the event of a default by the borrower ‘the lender will be entitled to attach the debt due to an asset of the borrower or guarantor, and may register a caveat against any property registered in the name of the borrower or guarantor’. This, together with the lodgement of the caveat itself, will give rise to an interest in the land by way of an equitable charge over the land. This equitable charge grounds the caveatable interest.

Justice Pritchard accordingly found that there was a sufficient basis for Mr Bateson to lodged his caveat over the borrower’s property.

Balance of convenience with respect to the lender’s application

The court may exercise its discretion when deciding whether or not to extend the operation of a caveat.

The lender argued, on balance of convenience grounds, that:

• the lapse of the caveat would remove any chance of him recovering any moneys from the borrowers;
• he was in ill health and financial difficulties;
• he had commenced proceedings in the District Court to recover the debt he claimed was owed to him by the borrowers;
• the CBA had behaved improperly in allowing the sale of the security when caveats were still registered on title;
• the CBA was effectively liable to him for the debts of the borrowers because it was exercising its power of sale as mortgagee in possession;
• his interest in the security property was more valid than the Bank’s because his interest in the property represented his economic and physical wellbeing.

Justice Pritchard identified several countervailing considerations. His Honour noted that while the sale of the property was delayed, the borrower and the other caveators were potentially prejudiced. The interest the borrowers owed to the bank as prior registered mortgagee would continue to increase, which meant that the surplus remaining from the future sale of the property decreased – meaning those claiming an entitlement to the surplus after the bank would be adversely affected.

Counsel for the bank, which opposed the lender’s application to extend the caveat, pointed out that the lender had not provided an undertaking in support of his application for an extension of the caveat. Without an adequate undertaking, the bank argued that the application to extend the caveat should be refused. Justice Pritchard restated the importance of undertakings as follows – “in the context of an application for an interim injunction an undertaking as to damages is often described as the price a plaintiff must pay for the injunction, and as such it is a very important, if not essential, means of preventing injustice before the rights of the parties have been determined”.

However, where the financial position of a plaintiff renders him or her unable to give an undertaking as to damages which has real value, the lack of such an undertaking will not be determinate of the result of an application to extend a caveat (see Iron Resources Pty Ltd v Argyle Iron Ore Pty Ltd [2009] WASC 20).

Conclusion

Justice Pritchard dismissed the lender’s application to extend his caveat, identifying the following key factors:

• The CBA’s mortgage was registered prior to his caveat;
• There was no evidence that the CBA had acted fraudulently or improperly in exercising its power of sale as mortgagee in possession;
• The CBA was to retain the surplus funds from the sale for distribution amongst the caveators;
• The potential prejudice to the borrowers as a result of the delay of the sale of the security property;
• The balance of convenience did not support an extension of the lenders caveat.

This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Competing Interests in Security Property appeared first on Elliott May.