Blog 89. Removal of caveat following mortgagee’s sale.

Archer Wealth v Casey [2024] VSC 300, Moore J.  

The facts were as follows.

• The second defendant (Kookee) was the registered proprietor of 100 acres in rural Victoria (the Property).  Its sole director and shareholder was the fourth defendant Ms Lagoutatzis.
• Following a formal letter of offer by the first plaintiff (Archer) to Kookee and Ms Lagoutatzis, signed on 10 August 2023, Archer on 16 August agreed to lend Kookee $4,325,000 secured by first mortgage over: the Property; two properties in Doncaster owned by Kookee (Victoria Street and Daphne Street); and a property in Warrandyte owned by Ms Lagoutatzis where she lived with her husband the first defendant (collectively ‘the security properties’).   Clause 11.1(a)(i) of the Loan Deed required Kookee, within 30 days of the loan advance, to engage or procure a real estate agent acceptable to Archer, to list and market the security properties for sale.  The mortgages also required the mortgagor to pay the land tax and municipal rates.
• On 23 August Archer agreed to lend Kookee an additional $700,000 on the security of second mortgages over the security properties.   The loans were advanced on 23 August, refinancing existing secured debts.
• On 24 August Archer assigned part of its interest in the mortgages to the other plaintiffs.
• Between 25 September and 10 November 2023: a Lender’s Demand by Archer alleged breach of cl. 11.1(a) of the Loan Deed and non-payment of land tax on the Doncaster properties, requiring rectification within seven days; Archer tried to obtain the cooperation of the tenant of Victoria Street to list it for sale; Archer took possession of Daphne St as mortgagee, it subsequently being sold for $1,057,000; a default notice under the Transfer of Land Act s. 76 was served in respect of the mortgages over the Property and the Doncaster properties, giving Kookee one month to remedy its breach of cl. 11.1(a) and to pay certain land tax and rates.
• Following non repayment of the loans on the due date of 23 January 2024 the plaintiffs took possession of the Property, gave another s. 76 notice for over $4 m., obtained an independent valuation of market value at $800,000, and conducted a mortgagees’ sale for $850,000 plus GST due for settlement on 13 May.  The parties were ready, willing and able to complete this sale.
• On 18 April Ms Lagoutatzis sought an injunction restraining sale of the Property for under $1.4 m., resulting not in restraint but in an order that she be provided with a copy of the contract of sale, which was complied with.
• On 15 May a caveat was lodged on behalf of Kookee claiming a freehold estate with an absolute prohibition on dealings based on ‘Registered proprietor(s) being entitled to possession of the certificate of title for the land and to prevent improper dealings’.  Other caveats were lodged which counsel for the defendants acknowledged to be without foundation.

The plaintiffs commenced this proceeding ultimately seeking removal of all three caveats under the Transfer of Land Act s. 90(3).  Ms Lagoutatzis’ deposed that: the Loan Deed was entered into so that Archer could provide the finance necessary to sell the four properties; despite cl. 11(a) of the Loan Deed the plan, of which she had told Archer’s director, had always been only to sell the three Melbourne properties and for her family to move to the Property where they would build a home to live in retirement – the director denied being told this; the couple had spent about $100,000 in preparation for building this dwelling.

A draft counterclaim was provided to the court which among other things pleaded that: Kookee had engaged an agent to list and market the Melbourne properties, which Archer approved, whereby Kookee did not engage another agent; it was exonerated as regards land tax and rates because of a particular representation by Archer; accordingly the Lender’s Demand was void, whereby Archer’s enforcement of the Doncaster mortgages exceeded its power as mortgagee and breached the Loan Deed; on substantially the same grounds as those relied on to invalidate the Lender’s Demand, Archer had no right to serve the November Default Notice, on the basis of which it sold the Property; Archer had engaged in conduct which unreasonably prevented Kookee from refinancing; Archer did not sell Daphne Street and the Property in good faith; the sale of the Property should be restrained and the contract of sale set aside.

Moore J. ordered that the caveats be removed, holding –

1. The improper dealings referred to in the caveat may be taken to be those articulated in the draft counterclaim.  On the authority of Swanston Mortgage v Trepan Investments [1994] 1 VR 672 this did not give rise to an estate or interest in land and a mortgagor’s right to have an improper sale of mortgaged property set aside was a ‘mere equity’.  Accordingly there was no caveatable interest. [42]-[45], [47]
2. The fact that the interest in land claimed in the Swanston Mortgage caveat was an equitable interest as mortgagor, whereas Kookee had asserted a ‘freehold estate’, was immaterial. [46]
3. The balance of convenience would also have favoured removal of the caveat because
   Archer’s exercise of its rights as mortgagee did not infringe Kookee’s proprietary rights.  This informed the general rule that the court would not restrain the exercise of a mortgagee’s power of sale unless the mortgage debt, if undisputed, be paid, or, if it was disputed the amount claimed by the mortgagee be paid into court.  The defendants had not offered any payment. [48]-[50], [58]
4. However, being an application of the equitable maxim that ‘he who seeks equity should do equity’, this general rule was subject to exceptions.  Depending on the facts and circumstances and overall justice of the case, payment into court may not be required if it was alleged that:
   1. the mortgagee’s power of sale was not properly exercisable or was being exercised for an improper motive;
   2. the mortgage was invalid, or had not been breached so as to engage the power of sale, or a notice required to engage that power was ineffective;
   3. the mortgage or the power of sale was impugned pursuant to the Australian Consumer Law or the Australian Securities and Investments Act 2001 or equitable principle. [51]
5. On the basis of the allegations in the draft counterclaim, whatever might be the position of the other security properties, it appeared most unlikely that this sale enlivened any of these exceptions.  Kookee had not complied with cl. 11.1(a)(i) of the Loan Deed (and the alleged representation in the draft counterclaim in relation to the engagement of a real estate agent was limited to the other security properties).  Accordingly it had defaulted under the Loan Deed whereby the total amount owed by it was immediately due and payable.   Further, any allegation that the ‘express purpose’ of the loans was for the couple to build a house on the Property for their retirement was fundamentally weak: whatever their subjective purpose, the plan deposed to by Ms Lagoutatzis was contradicted both by her also deposing that the Loan Deed was entered into to enable Archer to provide the finance necessary to sell all four properties and by the terms of the formal letter of loan offer.  There was also no evidence that the Property was included in the Loan Deed by common mistake. [52]-[57]
6. Accordingly, Kookee was not relieved from the obligation to bring in an amount either sufficient to meet the mortgaged debt, or such other amount as may be appropriate – which was in this case an amount equal to the mortgagee’s maximum possible loss from the sale being lost, this not being the amount of the mortgage debt but the value of the security itself. [58]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, November 26, 2024