Guardian Loans Pty Ltd v FTFS Holdings Pty Ltd & Ors

Guardian Loans Pty Ltd (Plaintiff) PARTIES : FTFS Holdings Pty Ltd (R&M App) (First Defendant) Suncorp-Metway Ltd (Second Defendant) Abeeda Khan a.t.f. Khan Family Trust (Third Defendant

COUNSEL : M.J. Bleasel (Plaintiff) N.J. Kidd (First & Second Defendants)

SOLICITORS : The Law Company Pty Ltd (Plaintiff) Allens Arthur Robinson (First & Second Defendants)

4732/09 Guardian Loans Pty Ltd v FTFS Holdings Pty Ltd & Ors

1 This is an application under s 74K Real Property Act 1900 (NSW) for an order extending the operation of a caveat. 2 The Plaintiff ("Guardian") is the unregistered second mortgagee of a commercial property in Ramsay Road, Fivedock. The First Defendant ("FTFS") is the registered proprietor of the property. The Second Defendant ("Suncorp") is the registered first mortgagee of the property. 3 The facts relevant to this application are not in dispute. 4 On 14 April 2004 FTFS executed a mortgage over the property in favour of Suncorp, together with a fixed and floating charge, securing an advance in excess of $7M. The mortgage and charge were duly registered. 5 On 8 March 2006, FTFS executed a mortgage over the property in favour of Guardian, securing a loan of $214,000. FTFS consented to the lodgement by Guardian of a caveat against the title to the property and a caveat was lodged shortly afterwards. 6 On 29 June 2006, Suncorp and Guardian entered into a Deed of Priority. The Deed gave priority to Suncorp's securities over Guardian's securities for the whole of Suncorp's debt and interest, together with any further advances to be made in order to complete "the Project" being developed on the property. 7 Clause 11.2 of the Deed of Priority relevantly provides: "Notwithstanding anything to the contrary contained elsewhere in this Deed the Mortgagee and the Bank agree as follows:

(a) The Bank has advanced and may in the future advance funds and undertake various obligations in connection with the Project.

(b) The Bank's first priority is for the money set out in the Second Schedule together with all moneys whatsoever (now or in the future) which the Bank may in its absolute discretion lend, pay or advance in relation to the Project so as to enable the Project to be fully developed and completed, or which the Bank believes are intended to relate to the Project or matters arising from it or which may be incidental to the Project and which are owed or which might become owing to the Bank at some future time or for which the Bank is liable or might become liable from time to time.

(e) The Mortgagee shall not without the prior written consent of the Bank (which is not to be unreasonably withheld or delayed) take any action (directly or indirectly) of any kind whatsoever against the Mortgagor or its officers or the property in the event of a default under the Mortgagee's Securities before the Bank has received the moneys which constitute the Bank's first priority.

(f) Until the Bank has received all of the moneys which constitute its first priority, the Mortgagee shall not take any action of any kind whatsoever which might prevent or hinder or delay the Mortgagor or the Bank or any of their respective agents or contractors or other representatives from completing the Project (other than action consented to by the Bank under clause 11.1(e)) above." 8 On 22 January 2008, Suncorp's solicitor notified Guardian that FTFS was in breach of Suncorp's securities and that Suncorp intended to appoint receivers to FTFS under its charge. The receivers were subsequently appointed. 9 On 6 July 2009, Suncorp's solicitors wrote to Guardian as follows: "Our clients are proceeding with the sale of the Property. We are instructed that it is unlikely that there will be surplus funds available from a sale of the property after the proceeds of any sale are paid to Suncorp pursuant to its interest as first registered mortgagee of the Property.

In the circumstances, can you please confirm that your clients will release their caveat at settlement.

If your clients are unwilling to release their caveat, or if we have not heard from you within seven business days from the date of this letter, we will have little choice but to lodge an application for preparation of lapsing notice in respect of your client's caveat." 10 It is to be noted that Suncorp does not require withdrawal of Guardian's caveat immediately, but only "at settlement" of the sale of the property. This requirement is in accordance with common conveyancing practice: on settlement of a sale by a first mortgagee a junior unregistered mortgagee will deliver to the first mortgagee an executed withdrawal of caveat in exchange for whatever is due to the second mortgagee from the balance of proceeds of sale after satisfaction of the first mortgagee's debt. 11 On 8 July 2009, Guardian's solicitor advised Suncorp's solicitor by e-mail: "Our client has an unregistered second mortgage over the property.

On our instructions, there is, or should be, sufficient equity in the property to pay our client.

I am instructed that our client will not remove its caveat until after the property is sold . Indeed, I am instructed that about 12 months ago you [sic] client agreed to the registration of our client's mortgage." (Emphasis added.) 12 It is to be noted that Guardian does not refuse outright to withdraw its caveat. Rather, it says that it will remove that caveat "after the property is sold", meaning thereby, I assume, that after exchange of contracts by the first mortgagee it will hand over a withdrawal of caveat at settlement of the sale in accordance with common conveyancing practice. 13 However, the e-mail went on to advise that Guardian had an interest in purchasing the property. 14 On 10 September 2009, Suncorp's solicitors served on Guardian a lapsing notice under s 74J. As at that time, neither the receivers of FTFS nor Suncorp itself, in exercise of its power of sale under its mortgage, had entered into any contract for the property. No such contract had been entered into at the time of hearing of this application. 15 Guardian filed its Summons for extension of its caveat on 28 September 2009. 16 The caveat is in the form prescribed by the Regulations under the Real Property Act. It states, in Schedule 1, the nature of the estate or interest claimed in the land as "pursuant to unregistered mortgage and Deed of Loan between the mortgagor and mortgagee dated 8 March 2006". Particulars of the Deed of Loan are then given. 17 Schedule 2 in the caveat is headed "Action prohibited by this caveat". There are then listed six numbered possible kinds of dealings which could be prohibited. A section on the front page of the caveat identifies those dealings which the caveator intends to prohibit as being Items 1 and 4 in Schedule 2, namely: "1. The recording in the Register of any dealing other than a plan affecting the estate or interest claimed by the caveator and set out in Schedule 1. … 4. The granting of any possessory application with respect to the land referred to above." 18 Mr N. Kidd of Counsel, who appears for Suncorp to oppose extension of the caveat, does not submit that Guardian, as unregistered second mortgagee, does not have a caveatable interest in the property. Neither does he submit that Guardian's estate or interest is incurably misdescribed in the caveat. Rather, he submits that the caveat should be allowed to lapse because:

• the caveat is incurably bad in form since it seeks to prohibit any dealing at all with the property whereas Guardian's interest as second mortgagee cannot prevent Suncorp as first mortgagee from exercising its power of sale;

• the caveat was lodged in breach of clauses 11.2(e) and (f) of the Deed of Priority;

• the Court should, in its discretion, allow the caveat to lapse because the interests of Guardian are fully protected by the Deed of Priority and, in any event, the property cannot be sold for an amount sufficient to discharge even Suncorp's mortgage. 19 In support of the first proposition, Mr Kidd relies upon a decision of Young CJ in Eq in Business Australia Capital Mortgage Pty Ltd v Randwick Nominees Pty Ltd [2004] NSWSC 643. There the plaintiff, an unregistered second mortgagee, sought the extension of a caveat to protect its interest after the first mortgagee had caused the issue of a lapsing notice. As in the present case, the first mortgagee intended to exercise its power of sale but had not yet entered into a contract for sale of the property. 20 His Honour noted that the matter had come before him late in the day in the Duty Judge list and that that he had had to determine "what appeared to be a very complex matter in something like fifty minutes". His Honour then delivered an ex tempore judgment. 21 At [5], his Honour said: "The caveat states an interest in the land as under an equitable mortgage dated 9 December 2003 for an amount of $2.7 million. … The action prohibited by the caveat under schedule 2 was the recording in the register of any dealing with certain irrelevant exceptions. It is, of course, completely incompetent for a person claiming an interest as subsequent mortgagee to claim that he or she has the right to effect [sic] a superior mortgage. The caveat, accordingly, in its present form, is something that just cannot stand." 22 Mr Kidd says that this passage is directly in point and completely disposes of Guardian's case. He relies upon the prohibition in Item 1 of Schedule 2 of the present caveat, which prohibits "The recording in the Register of any dealing … affecting the estate or interest claimed by the caveator and set out in Schedule 1". Mr Kidd says that "any dealing" includes the exercise by a senior mortgagee of a power of sale, in the same way as did the standard form of caveat in Business Australia, so that in accordance with the decision of Young CJ in Eq in that case, the present caveat cannot stand. I am unable to accept Mr Kidd's submission. 23 Mr Bleasel of Counsel, who appears for Guardian, says that the caveat in this case does not prohibit the exercise of a power of sale by a superior mortgagee. He relies upon s 74H(5)(g) of the Real Property Act, which provides: "(5) Except in so far as it otherwise specifies, a caveat lodged under section 74F to protect a particular legal or equitable estate or interest in land, or a particular right arising out of a restrictive covenant, does not prohibit the Registrar-General from recording in the Register with respect to the same land:

(g) in relation to a mortgage, charge or covenant charge recorded or lodged in registrable form before the lodgment of the caveat - a dealing effected by the mortgagee, chargee or covenant chargee in the exercise of a power of sale or other power or a right conferred by the mortgage, charge or covenant charge or by or under law," 24 Mr Bleasel says that, by virtue of this provision, Guardian's caveat does not prevent the registration of a transfer of the property pursuant to the exercise of a power of sale in Suncorp's mortgage because that mortgage was registered prior to the lodgement of Guardian's caveat. 25 Mr Kidd responds that s 74H(5)(g) does not apply to save Guardian's caveat because the caveat "otherwise specifies" - that is, it specifically excludes the operation of subsection (g) because it expressly forbids "any dealing … affecting" Guardian's interest, which means "every dealing", regardless of whether it is by Suncorp in exercise of its power of sale or otherwise. I am not able to accept that contention. 26 It is to be observed first that Schedule 2 in the caveat form is part of a prescribed form which is required to be used by all persons wishing to lodge a caveat: s 74F(5)(a). Section 74F(5)(b)(v) requires that the particular interest or estate claimed by the caveator be stated with some precision. The caveat protects only against subsequent dealings affecting that particular estate of interest and no other: s 74F(1). 27 While the caveat remains in force, the Registrar-General must not, except with the caveator's consent, register any dealing with the land if it appears to the Registrar-General that such dealing "is prohibited by the caveat": s 74H(1)(a). However, in determining whether a dealing is "prohibited by the caveat" - being a caveat in the form prescribed and including Schedule 2 Item 1 - the Registrar-General must, clearly, have regard to the other provisions of s 74H. Subsection (1)(b) provides that the caveat does not prohibit the recording of a dealing except to the extent that recording of the dealing would affect the caveator's claimed estate or interest. In order to ascertain what is the caveator's claimed estate or interest and how it could be affected by the dealing, the Registrar-General would have to look not only at the particulars given in Schedule 1 of the caveat but also at the state of the title of the land as appearing in the Register. 28 In the present case, the Registrar-General would see from Schedule 1 in the caveat that the interest claimed by Guardian is as unregistered mortgagee pursuant to an instrument dated 8 March 2006. An examination of the title to the property would show that a mortgage in favour of Suncorp was registered in April 2004, so that Suncorp's mortgage is clearly registered prior to the lodgement of Guardian's caveat and the interest which Guardian's caveat seeks to protect is that of an unregistered second mortgagee, subject to Suncorp's prior registered mortgage. 29 The Registrar-General would then have regard to s 74H(5)(g) because Guardian's caveat protects only a particular and limited interest in the property. The effect of that subsection is that a dealing by Suncorp pursuant to exercise of its power of sale in its mortgage, being a mortgage registered prior to the lodgement of Guardian's caveat, is not prohibited unless Guardian's caveat "otherwise specifies". 30 Guardian's caveat, however, specifies only that registration of a dealing affecting the interest which it claims is prohibited. That interest, as appears clear on the face of the title, is only as second mortgagee. The exercise by a first mortgagee of its rights does not alter or diminish the rights of a second mortgagee because the second mortgagee's interest is always subject to the first mortgage. Accordingly, a caveat by a second mortgagee protecting its unregistered mortgage which does no more than adopt the wording in Schedule 2, paragraph 1 of the prescribed form of caveat can not, and does not purport to, prohibit registration of a dealing by a registered first mortgagee in exercise of rights under the mortgage. Such a caveat, therefore, is not invalid. 31 I appreciate that my conclusion is contrary to the result at which Young CJ in Eq arrived in Business Australia (supra). However, it is clear from his Honour's judgment that his attention was not drawn to s 74H(5)(g) and that he was compelled to give an urgent ex tempore judgment without the benefit of full argument or time for reflection. In those circumstances, with the greatest respect, I feel able to depart from his Honour's conclusion. 32 Mr Kidd's second point is that maintenance of the caveat is in breach of clause 11.2(e) of the Deed of Priority. I do not agree. That covenant prevents Guardian from taking "any action … against the property in the event of a default" under Guardian's security. Even if the lodging of a caveat against the title to the property is taking "an action … against … the property" - which is highly arguable - such action was not taken "in the event of default", i.e. upon default, because the caveat was lodged in 2006, well before FTFS committed any default under any of the securities. 33 Mr Kidd's third point is that retention of the caveat on the title at this time is in breach of Guardian's obligations under clause 11.2(f) of the Deed of Priority. I do not agree. 34 There is no evidence that Guardian refuses to remove the caveat at any time and in any circumstance. On the contrary, its solicitor has said that Guardian will withdraw the caveat on completion of a contract for sale of the property. As I have observed, this is in accordance with common conveyancing practice, which maintains protection of the caveator's interest until that interest no longer requires protection because it has been transformed into a right to an immediate money payment. If Guardian conforms to the usual conveyancing practice and delivers to Suncorp a withdrawal of caveat upon settlement of a sale in exchange for its share of the proceeds, if any, then it will not be, and will never have been, in breach of its obligations under clause 11.2(f) of the Deed of Priority. 35 Mr Kidd's fourth point is that the Court should, in the exercise of its discretion, allow the caveat to lapse because Guardian's interest in the property is already protected under the Deed of Priority. This submission appeals to the discretion which the Court always has, whether the application is for extension of a caveat under s 74K or for removal of the caveat under s 74M. The discretion exists even when the caveator unquestionably has a caveatable interest and the particular caveat is in un-impeachable form. Essentially, the discretion depends upon the balance of convenience and is governed by considerations very similar to those applicable in an application for an interlocutory injunction. 36 The present state of the law is, I think, succinctly summarised by Brereton J in Tadrous v Tadrous [2009] NSWSC 407 at [6]-[8] (citations omitted): "[6] … I accept that where there is a seriously arguable or even undisputable caveatable interest, the court retains a discretion, based on the balance of convenience, as to whether it will maintain the caveat or require its withdrawal … . Thus the circumstance that a caveator has a caveatable interest is not so conclusive that the caveat will not be removed, and the Court may order the withdrawal of an indisputably valid caveat where the balance of convenience favours that course … .

[7] Circumstances in which such a course may be appropriate include where the party applying for removal of the caveat has an interest in the land superior to that of the caveator, particularly where that party is being prevented by the caveat from a legitimate exercise of its rights, a typical instance of this is where a caveat by an unregistered second mortgagee is preventing the registered first mortgagee from exercising its power of sale with clear title … . A valid caveat may also be removed by the Court if it prevents the registered proprietor from the legitimate exercise of a right in respect of the land, including a proper sale or refinance … . Again, this usually occurs where the registered proprietor can point to other interests in the land superior to that of the caveator, such as a first mortgagee where the caveator is a subsequent encumbrancee … .

[8] Thus, where the registered proprietor wishes to refinance an existing first mortgage, there may be a strong case on the balance of convenience to permit it to do so, at least where that course will not prejudice or derogate from the caveator's claim. But it is always a highly relevant consideration whether the removal of the caveat will derogate from the caveator's claim, and it is a rare case indeed, if there is any, where a valid caveat will be removed for reasons of balance of convenience, if to do so would have an adverse effect on the priority of the caveator's claim … . If the priority of the caveator's interest would be adversely affected by the removal of the caveat, it is at least ordinarily inappropriate to remove the caveat having regard to considerations of the balance of convenience … . At least, ordinarily speaking, if the removal of the caveat would have the practical effect of deferring the priority of the caveator's equitable interest, its removal ought not be countenanced. One reason for this is that to do so is practically to prefer unsecured rights over the proprietary rights of the caveator." 37 In the present case there is no evidence that Guardian's intention to retain its caveat on the title to the property until settlement of Suncorp's sale is having an adverse effect on the endeavours of Suncorp or the Receivers to sell the property at the best possible price. It is difficult to conceive that the presence of the caveat could be a difficulty because the Deed of Priority regulates what is to happen between Suncorp and Guardian upon a sale and guarantees that Suncorp will be able to convey a clear title. 38 There is no clear evidence that, if the caveat is removed, Guardian's equitable interest could be deferred by some subsequent dealing with the property. I note, however, that there are two other caveats on the title to the property, both lodged later in time than Guardian's caveat. There is no evidence as to what interests those caveats seek to protect and whether they might be advanced over Guardian's interest if Guardian's caveat were to be removed. 39 Mr Kidd also submits that there is no point in Guardian's caveat remaining on the title because the market value of the property is less than required to discharge Suncorp's mortgage and, in reality, Guardian has no interest in the land to protect. However, as there is no valuation evidence to support this submission, I do not propose to act upon it. 40 Bearing in mind that Guardian has an undeniable caveatable interest, that the caveat is valid in form, that there is no evidence that its retention up to settlement of Suncorp's sale will prejudice Suncorp's rights, and that there are two other caveats on the title apparently protecting interests subsequent to Guardian's interest, I see no reason to permit Guardian's caveat to lapse. In taking this view, however, I am assuming that Guardian will in fact, at the appropriate time, proffer a withdrawal of the caveat to permit settlement of a sale by Suncorp to take place. 41 As I have noted, Guardian itself has expressed an interest in purchasing the property. I note also that it has alleged breach by Suncorp of a duty to protect Guardian's interest as second mortgagee in that Suncorp has failed to procure the carrying out of building work on the property in a proper and workmanlike fashion. If Guardian ultimately makes out such a case, it will have a claim for damages against Suncorp or the Receivers but that claim cannot possibly be protected or prosecuted by the maintenance of Guardian's present caveat on the title. If Guardian refused to withdraw the caveat in order to improve its position in negotiating to purchase the property or in order to obtain some satisfaction of its claim for damages, the caveat would be removed at once on the application of Suncorp under s 74M. 42 However, as there is presently no evidence to support an apprehension that Guardian will seek to maintain the caveat for an improper purpose, I will continue its operation until further order. 43 I will hear the parties as to costs.

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