Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd

Mortgagee's entitlement to its costs

1. A mortgagee is ordinarily entitled to add to their security all costs, charges and expenses reasonably and properly incurred in ascertaining or defending their rights or in recovering the mortgage debt: Charles v Jones (1886) 33 Ch D 80 at 84. The Court may disallow a mortgagee's costs sought to be added to the mortgage security under "the power of courts of equity to fix the terms of which redemption will be allowed": Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1992] WLR 723 at 742 (per Scott LJ).
2. In Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, Hodgson JA summarised the mortgagee's general law entitlement at [61]: Even where there is no express provision in the mortgage, a mortgagee is generally entitled to all costs it incurs in ascertaining or defending its rights, in preserving the security or in recovering the mortgage debt: see Fisher & Lightwood's Law of Mortgage (Aust.Ed) [40.3], National Provincial Bank of England v Games (1886) 31 Ch D 582. A mortgagee does not lose the right to costs merely by making a bona fide claim beyond its entitlement, at least so long as that claim has some merit: Fisher & Lightwood [40.11], Cotterell v Stratton (1872) 8 Ch.App. 295, Credland v Potter (1874) 10 Ch.App. 8, Bird v Wenn (1886) 33 Ch.D. 215, Kinnaird v Trollope (1889( 42 Ch.D. 610.
3. Expansion on these principles may be found in Fisher & Lightwood's Law of Mortgage (LexisNexis Butterworths, 3rd Australian Edition), where the learned authors observe that, if a mortgagee institutes a foreclosure action but it is shown that nothing was due at the commencement of the proceedings, then the mortgagee must bear the whole expense of the action: at [40.10]. The mortgagee may be deprived of costs where his claim is unfounded though bona fide. A claim is not classed as 'unfounded' if fairly arguable; in a doubtful case as to the right of foreclosure or to redeem, it may be that no costs will be given to either side: at [40.11]. It is the duty of the mortgagee to pursue its remedies so as not to incur unnecessary costs. Thus the mortgagee must bear the costs of proceedings so far as they are mistaken or useless: at [40.13]. The Court may except from the general costs the costs of a particular issue on which the mortgagee has failed, although the remainder of the action was justified: at [40.13].
4. Rule 42.25 of the UCPR confirms the general law, providing: Costs of trustee or mortgagee (1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of … mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person … out of the mortgaged property …. (2) The court may order that the person's costs not be so paid if - (a) the … mortgagee has acted unreasonably …
5. The rule does not indicate the basis upon which those costs are to be calculated, that is, whether on an ordinary or indemnity basis: Re Budniak (No 2) [2015] NSWSC 1317 at [41] (per Hallen J). When considering the comparable provisions of the Rules of the Supreme Court 1965 (UK), the Court of Appeal concluded the Court retains a discretion as to whether to make a costs order; where there is a contractual right to costs, the discretion should ordinarily be exercised to reflect that contractual right: Gomba v Minories Finance at 742.
6. In Overton, Hodgson JA observed that rule 42.25 raises two questions: first, are the relevant costs incurred "in the capacity of a mortgagee". If so, did the mortgagee act unreasonably: at [60]. Further, at [62]-[63]: 62 … In my opinion, costs incurred by a mortgagee in making a claim that the mortgage includes debts which the mortgage on its true construction does not include, even if this claim has some support in the text, are not necessarily incurred in the capacity of a mortgagee, or in respect of the mortgage, or in respect of something that the mortgagee is permitted to do under the mortgage. The more doubtful the question, and the more reasonable the claim, the readier the Court would be to find in the mortgagee's favour on this matter … 63 If the mortgagee does not specify a payout figure which bears some reasonable relationship to the amount truly owing and anticipitated costs, then this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs subsequently incurred in determining the rights of the parties …
7. As Slattery J observed in Bell v Hartnett Lawyers (No 2) [2021] NSWSC 1270 at [34]-[35]: 34 … the Court retains jurisdiction to fix costs as between mortgagee and mortgagor notwithstanding the costs provision in a mortgage. The Court's discretion to fix costs is not ousted by the mortgage costs indemnity provisions: Bank of Western Australia Ltd v Marsh [2000] WASC 2008 at [4], (per Sanderson M) and Watson Wyatt Superannuation Pty Ltd v Oberlechner (2008) ASC 155-091; [2008] NSWSC 272 at [36] (per Brereton J, as his Honour then was). 35 There are multiple sources of authority identifying the Court's power to adjust the costs as between the mortgagor and the mortgagee, and to have them quantified independently. It is sufficient to refer to UCPR, r 42.25, which expressly authorises the Court not to allow payment to a mortgagee, who has acted unreasonably. The ordinary equitable principal is that the mortgagee would be unable to recover costs which are the result of misconduct or where the mortgagee has acted unreasonably: Road Chalets Pty Ltd v Thornton Motors Pty Ltd (1986) 47 SASR 532. …
8. As Slattery J also observed in JKAM Investments Pty Ltd v Damien (No 2) [2022] NSWSC 763, "It is always to be remembered that what … are reasonable costs is to be assessed against the particular facts of the case. What is reasonable in any one case may not be reasonable in another case involving a mortgage indemnity": at [40]. For example, in JNN Investments Pty Ltd v Francis (No 2) [2022] NSWSC 1349, Davies J ordered the mortgagor to pay 80% of the mortgagee's costs on an indemnity basis, where it was not reasonable for the mortgagee to adopt the approach it had taken on a particular issue, which was a significant matter in terms of what was found to be owing by the mortgagor: at [21]-[22].

Submissions

1. The plaintiffs sought an order that the Lender pay their costs of the proceedings, where they had succeeded on Contracts Review Act claim. Costs should follow the event: UCPR, rule 42.1. Whilst the facts for which the plaintiffs contended did not ultimately support a finding of duress or unconscionable conduct, those facts engaged the provisions of the Contracts Review Act. The findings in the second judgment were said to fundamentally undermine the Lender's case, so that it would have failed even if the plaintiffs' argument concerning the Dobbs' certificate had not been accepted. Where the Court found that the provisions for interest accruing at the Higher Rate and the Intensive Management Fee in the Senior Facility Agreement were void, this had the consequence that a substantial part of the sum alleged by the Lender was not payable. (The latter submission misunderstands my second judgment. My conclusions in respect of the provisions concerning the Higher Rate only concerned the words "until the Secured Money was fully and finally repaid." That is, the Higher Rate remained payable for so long as an Event Default subsisted but was not payable after the Event of Default had been rectified: Hoho (No 2) at [15]-[16], [49]. Here, the plaintiffs accepted that they were in default, and the Event of Default had not been rectified, such that the Higher Rate continued to be payable).
2. Further, the plaintiffs submitted that even if the Dobbs' certificate was not found to be invalid, the effect of the order pursuant to the Contracts Review Act was to establish that the certificate was incorrect, where clause 21.5 of the General Security Agreement provided: "The certificate is sufficient evidence of the amount or matter, unless it is proved to be incorrect." It was said to follow that the plaintiffs had wholly succeeded on their claims against the Lender and defeated its cross claim.
3. The Lender submitted that it should have its costs paid out of the mortgaged property on an indemnity basis or, alternatively, 80% of its costs, to be assessed on the indemnity basis. While there was no finding as to the extent of the debt owed to the Lender, the plaintiffs did not contest that some money was owing or that the facility was in default. There could be no valid suggestion that the Lender had acted unreasonably in its conduct of the proceedings. It was said that the Lender was largely successful. The plaintiffs sought orders to the effect that the finance documents, including securities, were void and of no force and effect or should be set aside. No orders of that kind were made, and the finance documents and securities remain in place. There was said to be no unreasonable conduct in the Lender's defence of the small part of the plaintiffs' claim that succeeded. While the Lender's cross-claim on the guarantors' personal covenant and for possession had failed, that outcome of itself did not disentitle the Lender as mortgagee to be paid its costs of the proceedings out of the secured property. That would only follow if there were some disentitling conduct on the Lender's part (such as the prosecution of a hopeless case). There had been none.
4. Alternatively, the Lender submitted that the Court should order that the plaintiffs pay 80% of the Lender's costs of the proceedings. The majority of the litigation concerned the plaintiffs' failed claims to avoid or set aside the finance documents and securities. The Lender called no witnesses and tendered only the Dobbs certificate. Apart from the issue about the Dobbs certificate (which occupied little hearing time), both the plaintiffs' claim and the Lender's cross-claim depended on the resolution of the plaintiffs' claim, which was mostly unsuccessful. The aspects of their claim on which the plaintiffs succeeded was said to occupy an insignificant proportion of the written argument or hearing time. Most of the costs were incurred on issues in respect of which the plaintiffs failed and the costs order should reflect that.
5. In reply, the plaintiffs submitted that the Lender was not "largely successful" but left with a sterile mortgage that secured nothing and was liable to be discharged. In contrast, the plaintiffs succeeded on one of their principal claims and successfully defeated the Lender's claims. Overton was said to be irrelevant. The Court dismissed the Lender's Cross-Summons that sought inter alia judgment in such amount "as the Court finds owing under" the finance documents: prayer [1]. The Lender's Cross-Claim List Statement pleaded that "[a]ll costs and expenses (including legal costs on a full indemnity basis) incurred or paid by the Cross-Claimant directly or indirectly in respect of the [finance documents] are payable by the [plaintiffs] and these costs have been excluded from the outstanding loan amounts owed to the Lender": at [66]. The dismissal of the Cross-Summons was said to be the end of the matter insofar as any entitlement to costs under the finance documents or UCPR 42.25 was concerned.
6. Further, the plaintiffs submitted that rule 42.25 only entitles a mortgagee to payment of costs out of the "mortgaged property" but does not otherwise provide an independent entitlement for a mortgagee's costs. Covenants in agreements concerning costs do not impact the general costs discretion. Alternatively, the plaintiffs submitted that the Court would find the Lender engaged in the kind of unreasonable conduct that disentitles it to an order for costs. The findings of the Court in Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd (No 2) [2023] NSWSC 493, and especially the threats referred to at [42] and [66], spoke powerfully against the Lender acting reasonably. Moreover, the mortgagee's claims were wholly dismissed. Thus, the amounts demanded by the Lender bore no relationship to the amount to which it was ultimately entitled: Overton at [63]. Such conduct was said to disentitle the mortgagee to any costs subsequently incurred in these proceedings.

Consideration

1. The plaintiffs commenced these proceedings in May 2021. The plaintiffs contended that the Lender had exerted duress and engaged in unconscionable conduct. The plaintiffs sought to be set aside the finance documents under the Contracts Review Act 1980 (NSW).
2. In August 2021, the Lender filed a Cross-Summons seeking judgment against the plaintiffs in such amount as the Court found was owing under the Senior Facility Agreement, declarations that Events of Default had occurred and were subsisting, together with an order for possession of the couple's Cabramatta home.
3. In my first judgment, I concluded that the Dobbs certificate relied upon by the Lender did not conform to what the parties had stipulated in the General Security Agreement. Nor had the Lender adduced any other evidence to establish what was owed. As such, the Lender's cross-claim failed: Hoho at [307]. For practical purposes, this had the consequence that the plaintiffs' success or failure on their claims became academic, where the Lender had failed to prove that it was owed any money. In short, the plaintiffs were now doing a "Steven Bradbury."
4. In any event, I concluded that the plaintiffs had failed to establish duress or unconscionable conduct as against the Lender: Hoho at [327], [369], [379], [403]. In my second judgment, I concluded that some of the provisions of the Senior Facility Agreement were unjust and declared the relevant provisions void under section 7(1) of the Contracts Review Act. (Only one of these provisions is relevant in the circumstances which unfolded, being clause 6.5, which would otherwise have entitled the Lender to an Intensive Management Fee). As such, the couple's guarantee does not extend to performance of those provisions and nor does the mortgage secure payment of monies due as a consequence of those provisions. Again, my conclusions in the second judgment were somewhat academic. Whether the finance documents were set aside or not mattered little, where the Lender had failed to prove it was owed any money and thus entitled to exercise enforcement rights conferred by these documents.
5. In short, the plaintiffs succeeded because the Lender failed to prove its debt. Had the Lender succeeded in proving its debt, then the plaintiffs would have been liable to pay a lesser sum than that sought by the Lender, as the Intensive Loan Management Fee was not payable. Using the ill-fated Dobb's certificate as a starting point to estimate the amount of that deduction and, by this means, the extent of the plaintiffs' notional success, the Lender put forward a total amount due and payable of $2,568,527. The Intensive Loan Management Fee was $474,825 per annum payable from an Event of Default. A notice of default was issued in April 2021. Taking this as the starting point, the Intensive Loan Management Fee would have been some $790,000 by the time of the hearing, being a deduction of roughly one-third of the amount which may otherwise have been payable to the Lender.
6. Of course, when endeavouring to assess the measure of the plaintiffs' success, it should not be forgotten that it was the plaintiffs who took issue with the validity of the Dobb's certificate. Overall, the plaintiffs have enjoyed some success.
7. Turning then to the mortgagee's position, the mortgage over the couple's home is security for the due and punctual payment of the Secured Moneys: clause 2.1, Memorandum of Mortgage. Secured Money means all money that Hoho Property, Ms Ly or Mr Ho are liable to pay the Lender, including costs: clause 1, Senior Facility Agreement. By the Guarantee and Indemnity, Ms Ly and Mr Ho agreed to pay on demand to the Lender all costs and expenses (including legal fees) incurred by the Lender "in connection with the actual or contemplated enforcement of or the preservation or consideration of any right or Power" under the deed. That is, the mortgage over the couple's home secures their guarantee to pay the Lender's costs.
8. However, the finance documents do not expressly provide that the Lender's costs are to be paid on an indemnity basis. A mortgagee will be limited to party and party costs unless the mortgage plainly and unambiguously provides for costs on some other basis: Perpetual Trustees Australia Ltd v Barker [2004] SASC 58 at [21]-[22] (per Duggan J, with whom Doyle CJ and Anderson J agreed). As such, the Lender is not entitled to costs on an indemnity basis by dint of the finance documents.
9. The next issue is whether the Lender incurred costs in its capacity as mortgagee. Whilst the bulk of the plaintiffs' claims concerned the Senior Facility Agreement and, thus, the Lender as lender, in defending these claims the Lender was seeking to preserve debts that were secured by the mortgage. Thus, the Lender was acting in its capacity as a mortgagee when defending the plaintiffs' claims. The Lender was also acting in its capacity as mortgagee when bringing the cross-claim seeking judgment for amounts owing under the Senior Facility Agreement and an order for possession.
10. Turning then to whether the mortgagee acted unreasonably, the plaintiffs relied on my findings in respect of the Lender's conduct in my second judgment. Ordinarily, the focus of the Court when making costs orders is on the parties' conduct in the litigation rather than the conduct that is the subject of the substantive dispute: In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356 at [8] (per Black J). I have found no different approach in the authorities summarised at [4]-[10]. The mortgagee's conduct in procuring the mortgage will be relevant to whether the mortgage is enforceable. Whether a mortgagee is entitled to its costs depends on whether it acted reasonably in the steps taken to enforce the mortgage, which logically post-dates execution of the document. I do not think the conduct the subject of my second judgment is relevant conduct for the purpose of rule 42.25. There was nothing unreasonable about the Lender defending the plaintiffs' claims nor advancing its cross-claim, including seeking orders for possession.
11. However, the mortgagee has instituted a foreclosure action which has proved useless where the Lender failed on a central issue, being to prove its debt. Under the general law, a mortgagee would struggle to satisfy a court of equity that it was entitled to add its costs to the security: see [18]. I do not apprehend rule 42.25 to impose a different test. That is, the Lender's costs of the cross-claim, at least, are unreasonable in the relevant sense. I see no reason to depart from the ordinary consequence that the Lender would pay the plaintiffs' costs of the cross-claim. Such an order would acknowledge the plaintiffs' success on the issue which it raised as to the Dobb's certificate. I regard it as counter-intuitive to award the Lender costs of the cross-claim in the circumstances.
12. The Lender was largely successful in defending the plaintiffs' claims. As the Lender submitted, the portion of the trial occupied by the cross-claim was relatively small. The plaintiffs' claims occupied the bulk of the hearing. That said, the outcome of the cross-claim would likely turn on the outcome of the plaintiffs' claims: if the plaintiffs succeeded in their claims of duress, unconscionable conduct and the Contracts Review Act, then the cross claim would also fail.
13. Applying the principles described at [6] and [10], the Lender may be entitled to a portion of its costs of defending the plaintiffs' claim, excluding the costs on the issue on which it failed, being in respect of the Intensive Loan Management Fee. For example, the Lender may be entitled to two-thirds of its costs of defending the plaintiffs' claim but obliged to pay the plaintiffs' costs of the cross-claim. Put another way, the plaintiffs would be entitled to, say, a third of their costs of their claims, together with the costs of the cross claim. That would be one way of doing it. However, the length of time spent on the plaintiffs' claim as opposed to the cross claim is not an accurate indication of the portion of costs which should be borne by a particular party where the claim and cross-claim were inter-connected. In circumstances where, when considered as a whole, the parties enjoyed a roughly equal measure of success and failure on the claims and cross claim, I remain unpersuaded that the costs order made following the primary judgment should be varied, either as suggested by the plaintiffs or the Lender. I make no further orders.

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