Blog 63. Mortgages/Charges and Caveats

This Blog covers three recent cases of interaction between caveats and securities taken over land.  In Launch Concept Developers Pty Ltd v Di Mauro & Ors the registered proprietor failed to have caveats based on charges temporarily removed so that it could refinance.   In Hooper v Parwan Investments Pty Ltd (recs apptd) caveats based respectively on a contract of sale and a charge were removed to permit sale by receivers appointed by a mortgagee bank.  In BD78 Pty Ltd & Anor v FGK3GEN Pty Ltd & Anor a caveat based on an equitable mortgage was removed to permit the registered proprietors to refinance by paying out a registered mortgage, on condition that the debt secured by the equitable mortgage was repaid and an amount calculated for interest was paid into court or into trust to be released by agreement or court order.

In Launch Concept Developers Pty Ltd v Di Mauro & Ors [2022] VSC 512, Moore J., (1 September 2022):

  • The plaintiff was registered proprietor of properties at Portland and Elsternwick.
  • The Portland property was subject to a registered first mortgage to a third party securing a debt of approximately $434,000.
  • The first and second defendants had lent money to the plaintiff secured by mortgages over the Elsternwick property and, ranking after the registered first mortgage, charges over the Portland property. The Elsternwick mortgage was in default.
  • Caveats had been lodged over the Portland property based on these charges.
  • The principal of the first defendant’s loan was $390,000, the sum outstanding was approximately $550,000, and interest was running at 23% per annum. The principal of the second defendant’s loan was $55,000, the sum outstanding was approximately $90,000, and interest was running at 36% per annum.
  • The estimated value of the Elsternwick property was only $600,000 and accordingly these debts exceeded the value of that property.
  • The plaintiff desired to refinance by discharging the Portland mortgage (which was in default) in favour of a new registered mortgage securing a loan of $520,000 but incurring less interest than under the current mortgage.
  • The plaintiff sought orders under the Transfer of Land Act s. 90(3) for removal of the Portland caveats to permit this new mortgage but with the caveators being permitted to re-caveat thereafter.
  • At the hearing the parties led differing evidence of the value of the Portland property. However, it was agreed that: on the plaintiff’s valuation plus estimate of building costs, taking into account both the Elsternwick and Portland properties, there would be total equity remaining of about $230,000; on the defendants’ valuation the remaining equity would be approximately $100,000.
  • Moore J. dismissed the application. The caveators indisputably had a caveatable interest and the balance of convenience was in their favour.  The proposed new mortgage would secure about $85,000 more than the existing mortgage and the caveators would suffer practical detriment from losing priority in this amount.  Even assuming that the remaining equity in both properties would be about $230,000, this was marginal given the plaintiff’s apparently parlous financial circumstances, there being no evidence of likely improvement.

Hooper v Parwan Investments Pty Ltd (recs apptd) [2022] VSC 285, Matthews AsJ (2 June 2022). 

The facts were –

  • In 2015 the first defendant (Parwan) entered a contract to purchase a residential property (the Property) with funds obtained from a bank pursuant to a loan agreement with a facility amount of $850,000. On 16 December 2015 it became registered proprietor of the Property subject to a registered mortgage securing the loan.
  • On 21 October 2016 Parwan and the plaintiff (Hooper) entered into a contract of sale of part of the land (Purchased Area) for $900,001, with settlement on 21 March 2018 unless the Purchased Area was a lot on an unregistered plan, in which case settlement was due on the later of 21 March 2018 or 14 days after notice of registration of the plan. Special Condition 7.1 of the contract made settlement conditional on Parwan subdividing the Property within 18 months from the day of sale and required that it use its best endeavours to achieve this.
  • The contract of sale also provided that it was subject to a lease between Parwan and Hooper. That day Parwan agreed to lease the Purchased Area to Hooper for 24 months and thereafter, unless terminated in accordance with the Residential Tenancies Act, to continue as a periodic tenancy, and that each party must comply with that Act.
  • In 2017 Hooper caveated over the Property claiming an interest as purchaser under the contract of sale.
  • In 2018 Parwan executed a deed of charge in favour of Hooper creating an equitable charge over the Property securing payment of $350,000, said to reflect the value of Hooper’s improvements to the Property.  In 2018 Hooper caveated over the Property claiming an interest as chargee based on this document.
  • On Parwan falling into default of mortgage repayments the bank in 2020 appointed receivers of the Property. Thereafter Parwan acted through the Receivers.  In 2021 the Receivers applied to the Registrar of Titles under the Transfer of Land Act s. 89A for a lapsing notice to remove the caveats.
  • On 7 July 2021 Parwan gave Hooper a notice to vacate the Property pursuant to s. 91ZZB of the Residential Tenancies Act, stating the reasons as the receivership and the intent to offer the Property for sale with vacant possession immediately after the termination date specified in the notice. Hooper did not vacate.
  • Subdivision had not occurred. The bank and Receivers did not consent to sale of the Purchased Area to Hooper.  As at 3 December 2021 the mortgage debt was over $1.1m.
  • Hooper commenced a proceeding seeking specific performance of the contract of sale and certain declarations. Parwan filed a Defence and Counterclaim.  Parwan also issued a Summons applying for summary judgment under the Civil Procedure Act ss. 61, 62 and 63 on certain aspects of its pleading, which effectively mirrored the relief sought by Hooper, a declaration concerning the lease, and alternative relief in the form of removal of the caveats.

Matthews AsJ made orders including for removal of the caveats –

  1. Although the appointment of the Receivers extended only to the Property and was not in respect of the whole company, they had standing to counterclaim and press the Application contained in the Summons in the name of the registered proprietor Parwan. Both the mortgage and s. 420 of the Corporations Act gave the Receivers broad powers. [31]-[36]
  2. Although the contract of sale was binding Hooper’s claim for specific performance turned on whether the Property could be subdivided and on whether the sale could be settled given the bank’s attitude and in particular whether it would discharge its mortgage. The weight of evidence was that because the Receivers and the bank did not consent to the sale Parwan was unwilling to, and could not effect, subdivision or transfer whereby it refused to perform its contractual obligations.  In such circumstances the remedy of specific performance would probably require supervision by the court, which was usually a reason not to grant specific performance.  Further even if Parwan took steps towards subdivision, its achievement was outside its control.  A further barrier to specific performance was that Parwan could not deliver clear title to Hooper by redeeming the mortgage, which had priority over Hooper’s interest as purchaser and the mortgage debt now exceeded the purchase price.  When the foregoing barriers, particularly impossibility of settlement because the mortgage would not be discharged, were combined there was no real prospect of specific performance. [57]-[65]
  3. There was a prima facie case of the interest claimed in the purchase caveat. On the balance of convenience –
    1. neutral factors were: (a) that, although the bank desired sale, no contract of sale to a third party yet existed; (b) Hooper’s claim that he remained in possession of the Purchased Area, which in light of the evidence was questionable; (c) possible VCAT enforcement proceedings by the local municipality, on which there was a paucity of evidence; (d) Parwan’s offer to pay the net proceeds of sale into court or a trust account pending determination of Hooper’s claims.
    2. Hooper’s proposed undertaking to pay the difference between the price for the Purchased Area and the mortgage debt did not affect the balance of convenience because it was ambiguous and failed to articulate relevant factors including Hooper’s capacity to pay.
    3. the balance of convenience favoured removal of the caveat because of strong evidence of fundamental barriers to specific performance (and so any remedy for breach of contract would be for damages in lieu of specific performance). [66]-[72], [75]-[79]
  4. Although there was a prima facie case of the interest claimed in the charge caveat Hooper would retain the protection of the charge even without the caveat, there being no evidence that it could not be satisfied out of net proceeds remaining after payment under the bank’s mortgage. Accordingly, the balance of convenience overwhelmingly favoured removal of this caveat on condition that the net proceeds of sale were paid into court or a trust account.  [81]-[83]
  5. Parwan was entitled to summary judgment on its application for a declaration that the Lease Agreement had been validly determined. [91]

BD78 Pty Ltd & Anor v FGK3GEN Pty Ltd & Anor [2022] VSC 361, Ginnane J (23 June 2022)

The facts were –

  • In August 2020 the plaintiffs agreed to sell land to the first defendant for $12.7m. The contract had not yet been settled.
  • The plaintiffs also borrowed $6.9m. from third parties and in September 2020 a mortgage securing that loan was registered.
  • On 5 October 2020 the plaintiffs and the first defendant entered a loan agreement under which the first defendant lent $1.9m. to the plaintiffs secured by an instrument of mortgage over the land which was only to be registered if there was an Event of Default (cl. 8.2(b)). The agreement:
    • permitted the lender to caveat over the land to record its equitable interest as mortgagee (cl 8.2(a));
    • defined “Repayment Date” as the earlier of settlement of the contract and termination of the contract for any reason other than breach of it by the lender;
    • because the land was on an unregistered plan of subdivision, in substance made settlement due 14 days after notice to the purchaser of its registration. If the plan was not registered by 31 August 2022 either party could end it before registration with refund of the deposit (Special Condition 14);
    • made interest payable on the Repayment Date unless the Loan and all other “Secured Money” was repaid on that date (cl. 3). The agreement defined “Interest Rate” and “Default Interest Rate”.
    • defined certain matters as an “Event of Default” and in cl. 10.1 stated “Effect of Event of Default”.
  • On 11 March 2022 the first defendant caveated over the land claiming an interest as mortgagee and stating the prohibition as “unless I/we consent in writing”.
  • The plaintiffs were in default under the registered mortgage and in May 2022 the mortgagee foreshadowed issue of a Callup Notice unless a definite payment date was stated.
  • On 17 June the first defendant served a Notice of Default alleging two Events of Default under the loan agreement, the first being a change of effective control of the borrower. The notice demanded repayment of $1.9m. with interest on that amount and on the “Secured Money” pursuant to cl 10(1) of the loan agreement.
  • The plaintiffs desired to refinance the first mortgage loan on 24 June and to repay the first defendant in return for withdrawal of its caveat. The plaintiffs applied under the Transfer of Land Act s. 90(3) for removal of the caveat, which they contended was preventing this refinancing.  The hearing commenced on 20 June.

Ginnane J held –

  1. As the first defendant’s mortgage was at least an equitable mortgage it had a caveatable interest. [5], [8], [17]
  2. An Event of Default, to at least a degree sufficient for this application, had been established namely a change of control in the shareholding of the borrowers. [16], [21], [27]
  3. The question of whether the plaintiffs could repay the loan amount of $1.9m. before the ‘Repayment Date’ had been overtaken by the service of the Notice of Default. Clause 3 made no provision for early repayment, even following a Notice of Default, and it was arguable that it had to be read with cl. 10 which mandated interest at the ordinary rate when early repayment occurred.  It was reasonably arguable that the plaintiffs were obliged to pay interest on $1.9m. but only at the ordinary rate of 5%. [16], [27], [28], [30]
  4. The first mortgagees had foreshadowed possible enforcement of their rights, which may prejudice both the plaintiffs and first defendant. Further, if the Notice of Default and demand for repayment had not been served, a Repayment Date only two months away (on 31 August 2022) may have been reached based on non-registration of the plan of subdivision, in which case the contract could have been terminated with no interest payable.  The caveat would accordingly be removed on condition that the plaintiffs repaid $1.9m. and paid interest at 5% ($169,758.56) into court (thereby giving the first defendant some security for additional claims for payment) to be released by agreement or court order.  As such security existed no undertaking as to damages by the plaintiffs was necessary. [31], [32], [34]
  5. Because the caveat was removed by court order the first defendant could not, by reason of the Transfer of Land Act s. 91(4), lodge another caveat in respect of its same interest under the loan agreement, but could have done so if the existing caveat had been withdrawn. [33]

       Philip H. Barton

          Owen Dixon Chambers West

        Tuesday, November 22, 2022

 

Blog 62. Caveators lost in blizzard, but obtain injunction.

Reindel & Ors v Confreight Pty Ltd & Ors (No 2) [2022] VSC 442, Daly AsJ (8 August 2022).

This case arises from the same development as that the subject of Blog 61.   It concerns imposition of caveats based on Barnes v Addy claims, no caveatable interest being found to exist. In the 1874 English case of Barnes v Addy (1874) LR 9 Ch. App. 244 at 251 – 252 Lord Selborne LC stated –

“Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility.  That responsibility may no doubt be extended in equity to others who are not properly trustees, if … But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.

Subsequent cases have worked out the scope of these principles, known as the “first and second limbs of Barnes v Addy”, ie knowing receipt of trust property or dishonest assistance in a breach of trust (being an accessorial liability).

The facts were –

  • In around 2015 Messrs Reindel, Murone and Monson decided to carry out a multi – unit residential development in Windsor. A company (WDC) was incorporated to perform the development.  It was trustee of a unit trust in which Confreight Pty Ltd (Confreight) and Supply Chain Logistics (SCL) controlled respectively by Murone and Monson together held 35%, and an entity associated with Reindel held 65%, of the units.  In 2020 the development was completed and WDC was wound up with negligible return to Confreight and SCL.
  • Five residential units in the development valued at approximately $2 m. in total had been transferred by WDC, one to Reindel and four to a company controlled by him (Blizzard Winds).  On 3 February 2021 the liquidator wrote to the unit holders in the trust seeking information including on this transfer.  On 15 February 2021 the liquidator made his statutory report including stating that there were claims totalling over $2 m. by unsecured creditors.
  • In the first half of 2021 Confreight and SCL caveated over the five Windsor units and over a Toorak property of which Reindel’s wife Ms Runhardt had been registered proprietor since 2015. Relevantly the interest in land claimed was as beneficiary of an “implied, resulting or constructive trust”.
  • In July 2021 Reindel and associated parties commenced a proceeding under the Transfer of Land Act s. 90(3) to remove the caveats. The caveators opposed this and, if their opposition failed, applied to restrain the registered proprietors from dealing with the land pending the determination of their proceeding referred to below.
  • In August 2021 Confreight and SCL commenced a proceeding (the investors’ proceeding) alleging inter alia that: Reindel had caused WDC to transfer much cash and the Windsor units to himself and his associated entities for little or no consideration; by reason of his alleged breaches of fiduciary duty and of trust they were inter alia entitled to orders that property of the unit trust be transferred to WDC (in its capacity as trustee), and/or equitable compensation for the value of property transferred from WDC in breach of trust or for less than market value, and certain other relief.
  • The defendants to the investors’ proceeding in substance denied the allegations against them, alleging that transfers were in reduction of debts duly owing.
  • The plaintiffs in the investors’ proceeding also alleged that Reindel had used WDC’s funds for mortgage payments on and renovations to the Toorak property. Reindel admitted these payments into his and Runhardt’s joint account, and that payments were applied to paying the mortgage, but denied misappropriation.  The plaintiffs also alleged that Runhardt participated in Reindel’s breach of fiduciary duty and breach of trust by receiving trust property with knowledge of his breaches.  Runhardt basically denied all allegations concerning her.
  • On 14 September 2021 WDC’s liquidator applied to intervene in the caveat proceeding, supported by an affidavit exhibiting his letter of 3 February and his report. He subsequently did not pursue this application.
  • The caveat and injunction proceedings were heard in October 2021 with judgment reserved. Although no orders were made in the caveat or the investors’ proceeding that the evidence in one proceeding would stand as evidence in the other Daly AsJ would (footnote [92]) if necessary have ordered this now as for then (traditionally “nunc pro tunc”). Her Honour stated ([25]) that the findings and issues raised by the liquidator’s report and letter and WDC’s accounting records were a generally reliable guide to the affairs of WDC and the unit trust, although it was unnecessary for present purposes to determine whether the concerns raised therein had been established.  Her Honour noted ([64]) that the liquidator’s affidavit, his letter, his report and the accounting records revealed evidence of the transfers of Windsor units being for no consideration or at an undervalue, although it was premature to conclusively determine whether in breach of trust or otherwise invalid (also [34]).
  • In January 2022 the liquidator sought, inter alia, court approval to enter an agreement to assign certain unspecified causes of action to a Mr Baker – it was unclear but her Honour inferred that there was a substantial overlap between these causes of action and those in the investors’ proceeding ([31]). The liquidator also applied to be appointed as a receiver of the unit trust, deposing that he believed that this was necessitated by cl. 12.5 of the trust deed which provided that on its liquidation WDC ceased to be trustee of the trust.
  • Clause 37 of the trust deed provided:

“the rights of the trustee to indemnity for losses … and to recoupment for expenditure incurred shall … be limited to the monies and property comprising the Trust Fund … but this clause shall not be construed as in any way limiting the liability of any trustee (or of any director of a company which is a trustee hereof) to the unit holders for any breach of trust involving the dishonesty or wilful act or omission of that trustee or director.”

Daly AsJ removed the caveats but granted an interlocutory injunction restraining Reindel and Blizzard Winds from dealing with their residential units –

  1. The possibility of the caveators having a prima facie case of an interest in the land was undermined if they lacked standing to bring their claims in the investors’ proceeding, or this was in doubt. Generally the proper party to bring a claim to recover trust property was the trustee but this was subject to “special circumstances”, eg collusion between the third party wrongdoer and the trustee, insolvency of the trustee, or where the trustee was unwilling or unable to take action to recover trust property. There were real doubts whether the caveators had standing to, in effect, recover WDC’s property.  Alternatively, any claim for damages and/or equitable compensation would have to be calculated by reference to their shares in the unit trust.  [40]-[41], [46], [47]
  2. Confreight and SCL could also in their capacity as shareholders of WDC apply under s. 237 of the Corporations Act 2001 (Cth) to bring a derivative action to bring the claims in the investors’ proceeding on behalf of WDC. This application had not been made, although they had made an informal application for leave to continue the investors’ proceeding standing in the shoes of WDC in its capacity as trustee. [48]
  3. On the issue of standing, the position was somewhat fluid and far from clear cut. There was some doubt whether on its liquidation WDC remained as trustee of the unit trust or whether the liquidator was ready, willing, and able to pursue any claim by WDC against third parties for the benefit of the beneficiaries (and creditors) of the trust, but it appeared that liquidator had not reached a final position.  Clause 37 of the trust deed preserved the beneficiaries’ entitlement to pursue claims against the trustee and the directors, at least on their own behalf. And although the plaintiffs arguably needed curial leave to proceed with their claims in the investors’ proceeding to recover trust property, it was in the context of the current case neither necessary nor appropriate to determine the possible fate of this application for leave.  It was accordingly difficult for present purposes finally to resolve the question of standing and this undermined the caveats, given that the entitlement to lodge a caveat must exist at the time of lodgement. [55], [56], [57], [62], [63]
  4. The caveators must demonstrate a prima facie case, ie a probability of being found to have the asserted legal or equitable rights or interest in the land. The ‘prima facie case’ test was preferable to the ‘serious question to be tried’ test of such rights or interest. [69]-[70]
  5. The caveats over the Toorak property were unsustainable. Runhardt was alleged at most to have accessorial liability for Reindel’s (and WDC’s) alleged breach of trust.  In Barnes v Addy cases a constructive trust was only imposed over the property concerned on a curial determination to this effect.  Until then there was no proprietary interest, even where it was claimed that trust property could be “traced” to a particular (other) property.  Further, any “notice” Runhardt had of Reindel’s alleged breach of trust postdated her becoming registered proprietor of the Toorak property. [80]-[82], [91(c)], [138]
  6. Even if breach of trust or of fiduciary duty was established against Reindel or WDC, the liability of Blizzard Winds was (notwithstanding that Reindel was its sole director) only accessorial. Further, even if the transfers to Blizzard Winds were arguably tainted by fraud which could be sheeted home to it so it lost the protection of indefeasibility of title, and a court ultimately determined to impose a constructive trust over the units, the entitlement of a former registered proprietor to set aside a transfer for fraud was an in personam claim giving rise to a mere equity, not an equitable and so caveatable interest.  Accordingly the caveats over its property would also be removed. [83]-[87], [91], [94], [96], [138]
  7. The claim concerning the transfer to Reindel was also only an in personam claim incapable of supporting a caveat. [87], [91(a)], [94], [96], [138]
  8. However, Reindel and Blizzard Winds would be restrained from dealing with the units transferred to them. Runhardt would not be restrained from dealing with the Toorak property. [117]-[121], [133], [137], [138]

       Philip H. Barton

          Owen Dixon Chambers West

        Monday, November 7, 2022