Category: Mortgage

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

 

32. Where B wrongfully acquires monies from A, which B passes on to a third party, who uses such monies to purchase land of which it becomes registered proprietor – Or where B fraudulently transfers land owned by A to a third party who becomes registered proprietor – Caveat by A upheld if there is a constructive trust in A’s favour, but not if there is a mere equity to set aside the transfer – Contrast between AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd and Super Jacobs & Anor v Esera Faalogo & Ors.

In AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688 (15 October 2019) Ginnane J. the facts were –

  • Esposito Holdings Pty Ltd (Esposito Holdings) agreed to sell and the first defendant (UDP) agreed to purchase the issued shares in a company. An arbitration occurred related to disputes arising under that agreement.  The arbitral award stated that Esposito Holdings had engaged in misleading and deceptive conduct contrary to s. 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and director Mr Antonio Esposito was involved in the contravention within the meaning of s. 2(1) and for the purposes of s. 236 of Schedule 2.  The award also declared that on and from 31 January 2014 Esposito Holdings held the purchase price on constructive trust for UDP which had suffered loss of $54,144,847.
  • The plaintiff (AE Brighton) purchased and became registered proprietor of four properties.
  • There was prima facie evidence that, when Mr Esposito was also sole shareholder and director of AE Brighton, part of the purchase price received from UDP under the share sale agreement was paid by Esposito Holdings, possibly through another company controlled by Mr Esposito, to AE Brighton to purchase the properties, possibly in the case of one purchase through repayment of an earlier loan used for that purchase.
  • In 2018 the Supreme Court gave UDP leave to enforce the award and ordered that the award was given effect as a judgment of the Court.
  • UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
  • Subsequently AE Brighton entered a contract to sell two of the properties.

Ginnane J dismissed an application by AE Brighton for the caveats to be removed, but required the caveator to commence proceedings promptly to support its claim, on the following grounds –

  1. Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It was irrelevant whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.  This principle was not reliant on proof of fraud, merely on breach of trust. [32]-[33]
  2. Based on this principle there was a prima facie case that the caveator had an estate or interest in the properties as a beneficiary under a constructive trust. This arose from money (ie the purchase money under the share sale agreement) obtained by Esposito Holdings as a result of misleading or deceptive conduct, from which the caveator suffered loss, held on trust by Esposito Holdings for the caveator, being paid in breach of trust by Esposito Holdings to AE Brighton which used it to purchase the properties.  While the evidence in the arbitration did not bind AE Brighton, because it was not a party to the arbitration, it was relevant in determining this prima facie case. [28], [36], [37], [38], [40], [41]
  3. AE Brighton had more than a mere equity, which was not an equitable estate and so not caveatable. [30]-[31]
  4. Although the court took into account that AE Brighton had entered into two contracts of sale, the caveats predated the contracts and AE Brighton had made no submission about how, taking into account the interests of the mortgagees and other caveators, the caveator’s security interest in the properties could be protected if the caveats were removed. Accordingly the balance of convenience favoured maintenance of the caveats on terms requiring the caveator to commence its proposed proceeding promptly. [42]-[43]

An application for leave to appeal against this decision has been lodged, the respondent’s application for security for costs being dismissed: AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 43.

In Super Jacobs & Anor v Esera Faalogo & Ors [2019] VSC 778 (3 December 2019) Daly AsJ the facts were –

  • The defendants were registered proprietors of a residential property. They were migrants, of limited means, not highly educated or familiar with legal or financial matters.  In 2016 they gave a general power of attorney to a mortgage broker who they believed was arranging finance for them to be secured against their property.
  • In 2017 the mortgage broker, the defendants’ claimed fraudulently, used the power to execute a contract of sale of the land to the plaintiffs who became registered proprietors in June 2018. The sale was not by auction or private treaty or advertised and had other unusual features.
  • The defendants received no funds from sale, subsequently discovered this transfer, and later in 2018 caveated on the ground of: “Registered proprietor(s) being entitled to possession of the certificate of title for the land and to prevent improper dealings”. This was one of the grounds of claim in the drop-down menu in the Registrar of Titles’ electronic lodgment service.
  • The plaintiffs applied for removal of the caveat and for an order for possession.

Daly AsJ removed the caveat, holding –

  1. Even if (which they denied) the plaintiffs obtained the property by fraud or improper dealing the caveators’ claim to have the transfer set aside on the grounds of a fraud by, or which could be sheeted home to, the registered proprietors was not an interest or estate in land. They did not hold an equitable interest in the property until the claim was made good in a court.  Until then their equitable right to assail the transfer for fraud was a ‘mere equity’, being a personal right of action.  On the same principle, if a mortgagee sold land in breach of its duties to the mortgagor the mortgagor had only an equity to set aside the pending transfer of land and could not caveat. [18]-[20], [28]-[32]
  2. Accepting for present purposes that the mortgage broker owed the defendants a fiduciary duty, and that as such, if (as they denied) the plaintiffs were knowingly concerned in the broker’s breach of trust, or were a knowing recipient of trust property (being the land), then the plaintiffs may be liable to the defendants pursuant to the principles in Barnes v Addy (1874) LR 9 Ch. App. 244 with the remedy of a remedial constructive trust. However, this did not convert the defendants’ potential claim into an equitable interest as opposed to a personal claim against the plaintiffs.  This was to be contrasted with an equitable interest arising from proprietary estoppel or a common intention constructive trust: in such a case the equitable interest arose from when the promise was relied upon or the common intention was given effect. [34]-[36]
  3. It was accordingly unnecessary to consider whether the caveat ought to be removed because the grounds of claim did not refer to an interest in land known to the law, or whether the caveat should be amended. [37]
  4. If the defendants had had an interest in the land the balance of convenience would have been in their favour. [17]

Comment.  Both cases considered the decision of the Full Court in Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672 that where, under the Torrens system, a mortgagee sells in breach of its duties to the mortgagor, the mortgagor has an equity to set aside the pending transfer of land, but until the equity is made good by bringing a successful claim the mortgagor has no equitable interest in the land and therefore no right to caveat.  The first case distinguished it.  The second applied it.

The principle that the interest claimed in the caveat must be in existence at the time of its lodgment – it was not enough that the caveator had commenced proceedings which may result in such an interest being vested in him or her – was also asserted in Boensch v Pascoe [2019] HCA 49 which was the subject of Blog 29.

Philip H. Barton

Owen Dixon Chambers West

20 April 2020

 

26. Four disparate cases – (1) Injunction against caveat – (2) Residuary beneficiary and prospective testator's family maintenance claimant with no caveatable interest – (3) Offer of caveat not sufficient security for costs – (4) Failure to remove caveat as breach of mortgage.

This blog deals with 4 cases not warranting a blog in their own right, at times however dealing with arcane points. They are –
R.G. Murch Nominees Pty Ltd v Paul David Annesley & Ors [2019] VSC 107 (26 February 2019) Sloss J. – A further contribution by Mr Annesley, the subject of Blog 4, to the law on injunctions against caveats, he succeeding in this instance.
In the matter of the Will of Dorothea Agnes Baird [2019] VSC 59 (13 February 2019) Keogh J. – A reminder that a residuary beneficiary of an estate does not have a proprietary interest in a specific asset during administration, nor does a prospective testator’s family maintenance claimant have an interest in land in the estate.
Brooklyn Landfill & Waste Recycling Pty Ltd v Commonwealth Golf Club Inc [2019] VSC 52 (6 February 2019) Hetyey JR. – which in short held that the offer by the plaintiff’s director to consent to lodgment of a caveat over her property was insufficient security for costs. [40], [42]
S Pty Ltd v B V [2019] VSC 125 (4 March 2019) Lansdowne AsJ. – which in short, in the course of a much wider dispute, noted that a registered proprietor, who commenced a proceeding for caveat removal but by orders agreed that the proceeding be stayed, was in breach of his obligation under a mortgage to cause a caveat lodged without the consent of the mortgagee to be removed. [34]

R.G. Murch Nominees Pty Ltd v Paul David Annesley & Ors [2019] VSC 107 (26 February 2019) Sloss J.
The facts were:

  • The first defendant (Annesley) was director of a company which owned a rural property mortgaged to a bank. There had been lengthy litigation between the bank and the company.  In August 2018 the bank conducted a mortgagee’s sale at which the plaintiff, whose sole director was Mr Murch (Murch), entered a contract to purchase the property. The contract was settled, the plaintiff became registered proprietor and a mortgage by it was registered.
  • After settlement of the sale there were altercations between Murch and Annesley, allegations of violence by Murch, intervention orders, and the execution by the defendants of a document whereby certain defendants were purportedly appointed to take control of property of the plaintiff for the purpose of enforcing a security interest.
  • The plaintiff brought this proceeding in substance to prevent the defendants interfering with the plaintiff or what it purchased, including seeking an injunction against registering or attempting to register any caveat over the land and certain other land of which the plaintiff was registered proprietor. It relied on the body of past conduct of Annesley in the improperly lodging caveats and similar documents, recorded in judgments of various courts, as manifesting his modus operandi.

As to caveats her Honour found or held –

1.    The plaintiff was in substance applying for a quia timet injunction and so was required to demonstrate a threatened infringement of the plaintiff’s rights sufficiently clearly to justify the court’s intervention.  This application did not arise from previous caveat lodgment over the land but from the defendants’ history. [79]  

2.     Authorities related to quia timet injunctive relief established the following principles –

(a)  the plaintiff must show that what the defendant intended or was likely to do would cause immediate (or imminent) and substantial damage to its property or business.  However, no fixed or absolute standard of proof was required;

(b)  the court would have regard to the degree of probability of apprehended injury, the degree of the seriousness of the injury, and the requirements of justice between the parties. [79]

3.     There being no evidence of the relevant defendants threatening or intending to lodge caveats over the plaintiff’s land, the plaintiff’s apprehension that they may do so did not qualify as an ‘imminent’ threat, and accordingly no injunction would issue. [87]

In the matter of the Will of Dorothea Agnes Baird [2019] VSC 59 (13 February 2019) Keogh J.

The facts were –

·     Dorothea Baird, who had two sons Peter and Michael, was registered proprietor of a property at Rhyll and was also registered as a one third proprietor of a property at Wonthaggi. 

·     On her death Peter obtained probate of her will under which she left her interest in the Wonthaggi property to him, made dispositions of property other than of land, and left the net residue of her estate to both sons equally as tenants in common. 

·    Michael foreshadowed a testator’s family maintenance proceeding.  He also lodged caveats against both properties stating as the grounds of his claim
that he was a beneficiary under the will.

·      Peter brought this proceeding inter alia under the TLA s. 90(3) to remove the caveats.

His Honour held –

1.    That the caveator had not raised a serious question to be tried that he had an interest in the properties.  In particular –

(a) as a residuary beneficiary he did not have a legal or equitable interest in a specific asset of the estate during the course of administration, only a chose in action, or personal right, to compel proper administration of the estate by the executor.  Further, the residue did not come into existence until administration of the estate was complete;

(b) the proposed testator’s family maintenance gave him no interest in the property. [21]-[22]

2.   The balance of convenience also favoured caveat removal. [23]