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 –
- 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]
- 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]
- There was a prima facie case of the interest claimed in the purchase caveat. On the balance of convenience –
- 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.
- 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.
- 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]
- 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]
- 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 –
- As the first defendant’s mortgage was at least an equitable mortgage it had a caveatable interest. [5], [8], [17]
- 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]
- 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]
- 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]
- 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