Can a borrower rely on s.94 Conveyancing Act 1919 to compel a transfer of a prior mortgage to itself when a subsequent mortgagee has also sought to compel a transfer of that prior mortgage?

In Geitonia Pty Ltd t/as Trustee for the Annandale Unit Trust v Westpac Banking Corporation [2015] NSWSC 419 the court was required to decide whether the 1st mortgagee was required to transfer its mortgage to the borrower or to the 2nd mortgagee.

Facts

Westpac and Huizhong held first and second ranking mortgages respectively over property registered in the name of Geitonia (“Borrower”). All three parties entered into a subordination and priority deed. This prevented Huizhong, as 2nd mortgagee, from taking any enforcement action without Westpac’s prior written consent. The Huizhong loan matured at which time the Borrower was required to pay Huizhong the sum of $5.4 million.

Westpac also declared events of default under its 1st registered mortgage. And thereafter the Bank demanded payment of all amounts due under its facility. The Borrower responded by claiming to exercise its rights under s 94(1) of the Conveyancing Act 1919 (“Act”). It required Westpac to transfer its mortgage first to the Borrower. And then to transfer it to a company known as Yellow Express Messengers Pty Ltd.

The 2nd mortgagee also gave Westpac notice under sections 94 and 95 of the Act. It required a transfer of Westpac’s mortgage to itself.

The Borrower sought a declaration from the court that it was entitled to require a transfer of Westpac’s mortgage to Yellow Express upon payment to Westpac of the balance owing to it. And it sought an injunction restraining Westpac and the Borrower from transferring Westpac’s mortgage to the Borrower.

Judgment

Justice Ball’s judgment turned on the interpretation of the following sections of the Act:

• Section 94 – Obligation on mortgagee to transfer instead of discharging

  • Where a mortgagor is entitled to redeem the mortgagor shall by virtue of this Act have power to require the mortgagee instead of discharging, and on the terms on which the mortgagee would be bound to discharge, to transfer the mortgage to any third person as the mortgagor directs; and the mortgagee shall by virtue of this Act be bound to transfer accordingly.

• Section 95 – Person entitled to require transfer

  • The right of the mortgagor under the last preceding section shall belong to and be capable of being enforced by each incumbrancee or by the mortgagor, notwithstanding any intermediate incumbrance; but a requisition of an incumbrancee shall prevail over a requisition of the mortgagor, and as between incumbrancees a requisition of a prior incumbrancee shall prevail over a requisition of a subsequent incumbrancee.

Conclusion

As mentioned earlier, the Borrower wished to have the Westpac mortgage transferred to itself. And thereafter to a nominated company. This brought into question the application of s 94(1), specifically the expression ‘any third person’.

It was held that ‘any person independent of the mortgagor’ was the meaning most consistent with the purpose of the provision. S 94 was part of broader reforms intended to improve the position of mortgagors. However, the reforms weren’t intended to provide a mechanism by which mortgagors could interfere with the rights of subsequent mortgagees. This would have been the effect if the Borrower could itself obtain an assignment of the first mortgage, which is what it proposed to do.

Justice Ball stated:

‘It makes no commercial sense, and it is inconsistent with the policy behind s 94, if the borrower has to enter into a new agreement and a fresh mortgage with [an existing lender] but could require the transfer of an existing mortgage to an entirely new lender’.

The Court concluded there was nothing to prevent Huizhong, as 2nd mortgagee, from requiring Westpac to transfer the Westpac’s mortgage to itself. This right in favour of the 2nd mortgagee took priority over any right the Borrower had.

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