Khalid v Perpetual Limited

Factual background 4The factual background to the matter can be stated shortly. 5The second respondent Marwa Dilati (Mrs Dilati) is the registered proprietor of the land. Perpetual holds a first registered mortgage over the land entered into with Mrs Dilati in October 2003. The mortgage secured monies owed pursuant to a loan contract between Mrs Dilati and Perpetual dated 1 October 2003. 6In 2004-2005, Mr Khalid entered into an arrangement with Mrs Dilati through the auspices of her husband and son, whereby Mrs Dilati agreed to sell the property to Mr Khalid for $840,000 payable by instalments. The arrangement was negotiated in this way in conformity with an Arab custom that a man should not deal directly with a woman, who is not a member of his family. The instalment arrangement was to facilitate a prohibition of the Muslim religion upon borrowing money at interest. A written note as to the terms of the arrangement was made. 7Mr Khalid was given the keys to the property at the end of 2005, although he did not take possession at that time, as he allowed Mrs Dilati's son and wife to have occupation of the premises. Mr Khalid and his family entered into occupation of the property in 2009. Mr Khalid had made substantial payments to Mrs Dilati on account of the purchase price.

The loan contract 8Pursuant to the Schedule to the loan contract, cl 1, Mrs Dilati was required to make monthly repayments in the amount of $3,722.08. 9Under the "General Conditions" of the loan contract, cl 3 provided for a redraw facility. This was utilised on two occasions: first, on 12 June 2007 when the sum of $130,000 was redrawn, increasing the then debit balance of $270,415.13 to $400,415.13; and secondly, on 23 January 2009 when a sum of $200,000 was redrawn, increasing the then outstanding debit balance of $340,013.55 to $540,013.55. 10Pursuant to the "General Conditions", cl 10.2, interest on the outstanding capital balance was calculated on a daily basis. 11The "General Conditions", cl 14 dealt with "Payments". Clause 14.2 provided that Mrs Dilati was required to make the repayments "set out in the Schedule (as varied from time to time) at the times specified in the Schedule". An examination of Mrs Dilati's statement of account with Perpetual indicates that the amount of the monthly payment varied from time to time in accordance with changes in the interest rate. In my opinion, the variations in the monthly payments were based on cl 14.2 of the loan contract.

The mortgage 12Clause 3 of the mortgage memorandum dealt with "Things That You Must and Must Not Do Relating to the Land". 13Clause 3.6 specified the mortgagor's obligations in dealing with the land. Clause 3.6(e) provided: "Selling or leasing. Subject to any laws ...You must obtain the Mortgagee's prior written consent before dealing with the Land in any way. For example, You must obtain the Mortgagee's prior written consent before You sell ... the Land ..." 14Clause 5 of the mortgage memorandum dealt with "Default". 15Clause 5.1 provided: "... If any one or more of the following occur the Mortgagee may decide default has occurred. (a)You fail to pay the Debt on time. ... (e)The Land is resumed, surrendered, exchanged or taken out of Your control in any way." 16Clause 5.2, "The Mortgagee's rights on default", provided: "At any time after default occurs, the Mortgagee can take any of the actions listed below provided notice has been given in accordance with laws governing the exercise of power of sale as mortgagee ... (a)Exercise any right, power, or privilege conferred by any law, [or] the Mortgage ..." 17Clause 8 dealt with "General Matters". 18Clause 8.2 was headed "Statutes" and provided: "There may be some statutes (ie. laws passed by parliament) or other law (usually called the common law) intended to limit mortgagees' rights. Subject to clause 8.9, none of these statutes or laws will operate to limit the Mortgagee's rights under the Mortgage unless by law those rights cannot be negated. In particular, the Mortgagee need only wait for one day after default occurs and need not give any notice before exercising any right, power (including the power of sale), obligation or remedy under the Mortgage unless required by law, and if the law does require notice, the Mortgagee need only give one day's notice or the shortest notice required by that law. If any of the provisions of the Mortgage are illegal or become illegal at any time, the affected provisions will cease to have effect, but the balance of the Mortgage will remain in full force and effect." (original emphasis) 19Mrs Dilati failed to obtain Perpetual's prior consent to the sale of the property to Mr Khalid. Mrs Dilati also had an unfortunate payment history. The mortgage account reveals that the mortgage was paid on a fortnightly basis by way of direct debit. However, many of those payments were dishonoured. At other times, payments were missed altogether. 20By notice dated 17 September 2009, given pursuant to the Real Property Act, s 57(2)(b), Perpetual issued a default notice in respect of the non-payment of the amount due for August and September 2009. The notice stated: "Overdue Amount $7,506.68 Enforcement Expenses $450.00 Account Balance $546,500.19 (as at 16 September 2009) including Enforcement Expenses

1.                This notice is given by Perpetual Limited ACN 000 431 827 (formerly Perpetual Trustees Australia Limited) of Angel Place, 123 Pitt Street, Sydney in the State of New South Wales ('Perpetual') as credit provider under the Facility and as mortgagee under the Mortgage.
   

2.                The Total Amount has not been paid as follows:
   

Account Number Date Due Particulars Amount 37101621 3 August 2009 Outstanding Amount $3,753.34 1 September 2009 Outstanding Amount $3,753.34 Subtotal $7,506.68

Enforcement Expenses $450.00 Total Amount Due $7,956.68"

21The notice further stated that an event of default had occurred and that the Total Amount Due must be paid no later than 30 days from the date of receipt of the notice. The notice also stated, inter alia, that if the Total Amount Due was not paid as required, "Perpetual may start proceedings in a court to recover any payment due ... [and] may exercise its power of sale". 22On 12 November 2009, Perpetual filed a statement of claim in which it claimed (i) possession of the land; (ii) leave to issue a writ of possession; and (iii) judgment against Mrs Dilati in the sum of $551,529.33, being the amount alleged to be owing under the loan contract as at 4 November 2009, together with interest on that sum. 23In early February 2010, in consideration for the deferment of any action on the default notice, agreement was reached between Perpetual and Mrs Dilati whereby Mrs Dilati agreed to pay the arrears and agreed to make all future repayments on time (the repayment agreement). It was a term of this agreement that Mrs Dilati sign a consent judgment, to be held in escrow by Perpetual for six months until 12 August 2010. If, as at that date, Mrs Dilati had complied with the terms of the agreement, Perpetual would consent to the proceedings being dismissed. However, if any of the conditions were not complied with, Perpetual would apply for default judgment without further notice. 24Mrs Dilati failed to comply with the terms of the agreement. In fact, she did not make any payments at all, either by way of bringing arrears up-to-date, or by paying the monthly payments as and when they fell due. Accordingly, Perpetual applied for default judgment. 25On 3 March 2011, default judgment was entered, giving possession of the land to Perpetual. Mr Khalid sought to have that judgment set aside. He was successful in doing so before Harrison AsJ. Perpetual appealed. The appeal was heard by James J, who set aside her Honour's orders. Before James J, Perpetual raised a further argument that Mrs Dilati had committed a non-monetary breach of the mortgage by the sale of the property to Mr Khalid without its prior consent and that, pursuant to cl 8.2 of the mortgage memorandum, a s 57(2)(b) notice of that default was not required.

Issues on the appeal 26Mr Khalid advanced 12 grounds of appeal. Those grounds raised the following essential issues: (1)whether James J misconstrued Harrison AsJ's reasons so that there was no basis for his Honour to exercise his own discretion in accordance with the principles in House v R [1936] HCA 40; 55 CLR 499; (2)whether the default notice given under the Real Property Act, s 57(2)(b) was invalid; (3)whether James J erred in permitting Perpetual to argue that a s 57(2)(b) notice was not required in any event, as Mrs Dilati had committed a default under the mortgage by selling the property to Mr Khalid, in circumstances where that argument had not been raised before Harrison AsJ; and (4)whether cl 8(2) of the mortgage memorandum operated so as to constitute an agreement within the terms of the Real Property Act, s 58A(1) between Perpetual and Mrs Dilati dispensing with the requirement to give notice under s 57(2)(b). This issue only arises if the Court determines that there was no error in allowing the question referred to in (3) to be raised.

First issue: was there a House v R error? 27This issue can be disposed of briefly. Harrison AsJ recorded in her reasons that Perpetual argued it had a superior legal right to possession, whereas, at best, Mr Khalid had an equitable interest in the land "since Perpetual possibly had constructive notice of Mr Khalid's possession of the property". It was common ground in the proceedings before James J that no submission relating to Mr Khalid's possible equitable interest in the land, based on Perpetual's constructive notice of Mr Khalid's possession of the property, had been made. However, as his Honour noted, much of her Honour's reasoning in acceding to Mr Khalid's motion was based upon this proposition. In my opinion, this was a sufficient error to entitle his Honour to exercise his own discretion in the matter in accordance with the principle in House v R. In any event, I am of the opinion her Honour's conclusion that Mr Khalid had an arguable case was itself an error which would have been sufficient to fall within the principles in House v R.

Second issue: whether the default notice given pursuant to s 57(2)(b) was valid 28The s 57(2)(b) notice served upon Mrs Dilati specified that the overdue amount was $7,506.68 in respect of the failure to pay the monthly instalments due in August and September 2009, each in the amount of $3,753.34. It may be inferred from the evidence that the amount of each of those payments was calculated on the basis of the then interest rate as applied to the outstanding principal of approximately $546,000, which was barely $50,000 less than the borrowed amount. The stated indebtedness at that time was due to the two redraws referred to above at [9]. 29The evidence revealed that Mr Khalid was shocked to learn of the extent of Mrs Dilati's indebtedness under the mortgage. In a conversation with Mrs Dilati's husband, he was told that Mrs Dilati's son had made the two redraws without any authority to do so and had forged Mrs Dilati's signature on the redraw applications. Mr Dilati also told Mr Khalid that there was no more then $160,000-$165,000 owing on the loan and that Perpetual were "cheating". Mr Dilati told Mr Khalid that as the redraws were not authorised, those amounts were not "part of what we owe under the mortgage". However, Mr Dilati also told Mr Khalid that they were not going to "help [him] with the court". 30It is apparent from the repayment agreement entered into by Mrs Dilati with Perpetual in February 2010, after she had been served with the s 57(2)(b) notice and the statement of claim, that Mrs Dilati accepted liability to pay the full amount claimed by Perpetual, notwithstanding Mr Dilati's assertion to Mr Khalid that the redraws made by their son were unauthorised. It should also be noted that Mrs Dilati was provided with monthly statements of her account, which clearly showed the redraws and the consequent increase in the balance owing. There was no evidence as to whether Mrs Dilati ever protested to Perpetual that it had permitted the alleged unauthorised redraws to be made. However, Mrs Dilati had legal representation at the time she entered into the repayment agreement with Perpetual in 2010. 31Mr Khalid contended that default judgment should not have been entered because the s 57(2)(b) notice was invalid. Underlying this argument was Mr Khalid's contention that the two redraws were not authorised and that the balance owing on the mortgage and the monthly instalments due were substantially less than specified in the notice. He submitted, therefore, that Mrs Dilati did not have a reasonable opportunity to comply with the demand because the instalment amount stated to be owing was "wildly misstated". 32Mr Khalid further submitted that even if Mrs Dilati knew that she was only required to pay the amount, on Mrs Khalid's argument that was actually due, the calculation of the instalment amount alleged to be due was so complicated that a computer program was required to do so. It followed that Mrs Dilati had no reasonable opportunity to comply with the notice. 33Mr Khalid submitted, therefore, that the requirements of a valid notice had not been satisfied: see Bunbury Foods Pty Ltd v National Bank of Australasia Ltd [1984] HCA 10; 153 CLR 491. Mr Khalid submitted that James J had erred in his interpretation of this decision, in that his Honour held that an overstatement of the amount due in a s 57(2)(b) notice could never be the source of invalidity. 34In Bunbury Foods, a statutory demand to pay monies due had failed to specify the amount owing. In considering the validity of the notice in that case, the High Court (Mason, Murphy, Wilson, Brennan and Dawson JJ) stated at 503-504: "It is of some materiality to note that it is not essential to the validity of a notice calling up a debt that it correctly states the amount of the debt. Even a notice given to the mortgagor by the mortgagee as a condition precedent of a power of sale is not rendered invalid because it demands payment of more than is due ... the interests of the parties will be more adequately protected by the principle that the debtor must be allowed a reasonable opportunity to comply with the demand before the creditor can enforce or realize the security than by the adoption of the suggested proposition that the notice of demand must specify the amount of the debt. In determining whether the debtor has had such an opportunity it will be relevant to take account of the debtor's knowledge, lack of knowledge and means of knowledge of the amount due and of the information which the creditor has provided in that respect, including the response which he has made to any inquiry by the debtor." (emphasis added) 35Bunbury Foods did not involve a s 57(2)(b) notice, but rather a demand in respect of monies due under a debenture. Nonetheless, the principles stated in the decision have been accepted as applying to the validity of a s 57(2)(b) notice: see Websdale v S & JD Investments Pty Ltd (1991) 24 NSWLR 573 at 578-9; Wongala Holdings Pty Ltd v Mulinglebar Pty Ltd (1994) 6 BPR 13, 527 at 13,529 and 13,532-3; and Notaras v Sly & Weigall [2005] NSWCA 275; 12 BPR 23,765. 36Mr Khalid submitted that the correct test for the determination of the validity of a s 57(2)(b) notice is as stated in the bolded portion of the passage from Bunbury Foods set out above, to which James J did not refer. According to Mr Khalid, this led his Honour into error. Mr Khalid submitted that not only had his Honour applied an incorrect principle, but had failed to address the argument he had advanced. Mr Khalid said he had argued before his Honour that, given the difference in the amount claimed and the amount Mr Khalid contended was due after the deduction of the redrawn amounts, Mrs Dilati did not have a reasonable opportunity to pay the amount actually due within the period specified in the notice. Mr Khalid further submitted that in accordance with Bunbury Foods, the question whether Mrs Dilati had that reasonable opportunity was to be evaluated not only by looking at the notice, but also having regard to her knowledge, or lack thereof, as to the amount actually due. 37It is apparent from his Honour's reasons that he did not deal with the second part of the passage in Bunbury Foods. To that extent, there is some basis for the complaint raised by Mr Khalid. However, in my opinion, there was no error in the conclusion his Honour reached in respect of the validity of the notice. As Mr Khalid's submissions recognised, in determining whether the recipient of a notice has had a reasonable opportunity to comply with it, it is necessary to look at the circumstances, including the recipient's knowledge as to the amount due. 38In this case, Mrs Dilati received monthly statements that specified the amount of principal outstanding, the current interest rate, the amount of interest debited to the account each month and the amount of the instalment payment also debited monthly. Mrs Dilati continued to make payments of principal and interest on the balances specified in the statements from time to time. Given that the statements disclosed the fact, the dates and the amounts of the redraws, as well as the resultant increase in the balance outstanding, it must also be inferred that Mrs Dilati was aware her son had redrawn the two amounts from the account. The conversation Mr Dilati had with Mr Khalid also supports that inference. 39However, notwithstanding that Mr Dilati contended that Perpetual was responsible for the increased indebtedness that resulted from the redraws, I am of the opinion that, as Mrs Dilati continued to make instalment payments calculated on the amount specified in the statement from time to time, she accepted her liability for the outstanding balances stated to be due, including the increased balance amounts due to the redraws. 40It follows, in my opinion, that Mrs Dilati had the requisite knowledge to enable her to determine what amount was due by way of the two monthly instalments specified in the s 57(2)(b) notice. There was no evidence that Mrs Dilati denied or disputed her liability for the amount stated in the notice or that she had sought any clarification of the amount claimed. Indeed, to the extent there is any evidence on the point, it is apparent that Mrs Dilati did not contest the amount claimed in the notice. Otherwise, she would not have entered into the repayment agreement with Perpetual to pay the arrears and to maintain payments as and when they fell due. Any unhappiness Mr and Mrs Dilati may have had with their son's conduct does not impact upon the position that Mrs Dilati did not contest her liability under the mortgage. 41In my opinion, this challenge to the trial judge's decision must be rejected. 42Before leaving this particular ground of appeal, it should be noted that Perpetual, by way of notice of contention, contended that Mr Khalid did not have standing to set aside the default judgment. That issue had been raised before James J. However, his Honour considered it unnecessary to deal with, as it was sufficient for his determination to dismiss the appeal on the basis that the s 57(2)(b) notice was valid and because, in any event, there was a non-monetary default in respect of which notice was not required. The second of these two matters is dealt with below. 43On the hearing in this Court, Mr Khalid contended that he had sufficient interest to set aside the default judgment because Mrs Dilati held the land on constructive trust for him. He submitted that the transaction between him and Mrs Dilati constituted a valid and enforceable agreement for sale and that he had thereby acquired a beneficial interest in the land: see KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] HCA 63; 155 CLR 288 at 296, although the interest so acquired was conditional on payment of the whole of the purchase price. Mr Khalid submitted that he thus had an equitable interest in the land, so that Mrs Dilati held the land for him upon a constructive trust. Accordingly, it was said he could bring a redemption suit against Perpetual, claiming that in the calculation of the amount due to redeem the equity of redemption, a deduction should be made for the two redraws made by Mrs Dilati's son. 44In Chang v Registrar of Titles (Vic) [1976] HCA 1; 137 CLR 177 Mason J noted, at 184, that "[i]t has long been established that a vendor of real estate under a valid contract of sale is a trustee of the property sold for the purchaser". However, as his Honour observed, there is a controversy as to the time when the trust relationship arises and the character of the relationship. It was unnecessary for his Honour to resolve that controversy in the case before him. It was sufficient to accept as correct the proposition that a vendor becomes a constructive trustee of the property sold when the purchaser has paid the purchase money, and is a trustee within the meaning of the provisions of the statute relating to vesting orders. In that circumstance, it would be open to a court to make a vesting order where a vendor, who had been paid the purchase price, failed to execute a transfer or was disabled from so doing. 45Given the observations made in Chang, it remains an open question as to the proper characterisation of the relationship between Mrs Dilati and Mr Khalid. However, it is not necessary to determine that question on this appeal. As counsel for Perpetual pointed out, the only issue before this Court is whether the default judgment should be set aside. Whatever rights Mr Khalid might have by way of an equity suit for redemption of the mortgage, those rights do not impact upon Perpetual's entitlement to default judgment. In my opinion, this submission is correct. 46Nor is it necessary to determine the question of Mr Khalid's standing to set aside the default judgment having regard to my conclusion that the s 57(2)(b) notice was valid.

Third and fourth issues: the s 58A(1) issue 47It is convenient to deal with the third and fourth issues together and which I will simply refer to as "the s 58A(1) issue". 48The s 58A(1) issue raises the question whether cl 8.2 of the mortgage memorandum constituted an effective agreement within the meaning of s 58A dispensing with the requirement to give a s 57(2)(b) notice (a dispensing agreement). 49Clause 8.2 is set out above. Mr Khalid submitted that the effect of the clause was the same as the clause considered by this Court in Farrow Mortgage Services Pty Limited v Ragata Developments Pty Limited (1993) 32 NSWLR 333. In that case, the relevant provision of the mortgage (cl 40) provided that upon default being made by the mortgagor, the mortgagee was entitled to exercise all the powers of a mortgagee under the Real Property Act and the Conveyancing Act 1919. The clause continued: "40.The said powers may be exercised immediately upon or at any time after default as hereinbefore mentioned, without the necessity of giving the Mortgagor any notice whatsoever (except as may be required by the said Acts or otherwise)." 50Farrow had submitted that the effect of this clause was that pursuant to s 58A(1) it was not required to give a s 57(2)(b) notice. In other words, the clause was a dispensing agreement within that section. Giles J, whilst acknowledging that it was always a question of construction of the particular clause, stated, at 341, that as the statutory scheme was directed to giving a mortgagor notice of default and time to remedy any such default, some relatively clear agreement was required for s 58A to operate. 51Giles J noted that cl 40 in Farrow initially disclaimed the necessity for notice. However, that was qualified by the words in brackets, viz: "except as may be required by the said Acts or otherwise". His Honour considered that those words were intended to preserve any statutory or other requirement that notice be given. As his Honour said, at 342: "The words 'or otherwise' [in cl 40], while obscure, contemplate that the disclaimer of the necessity for notice is not to the fullest extent allowed by the Real Property Act and the Conveyancing Act." 52Accordingly, as the clause did not satisfy the provisions of s 58A(1), a s 57(2)(b) notice was required. 53Mr Khalid submitted that in this case, although cl 8.2 commenced with an apparent general dispensation from compliance with statute or other law that limited mortgagees' rights, the words "unless required by law" provided an exception to that dispensation where notice was required by law, including the notice requirements in s 57(2)(b). This argument had an initial attraction. However, after a careful examination of the clause, I am persuaded that it is not correct and the proper construction of cl 8.2 was that advanced on behalf of Perpetual. 54Perpetual's construction focused in the first instance on the words, "none of these statutes or laws will operate to limit the Mortgagee's rights under the Mortgage unless by law those rights cannot be negated". The requirement to give notice under s 57(2)(b) was not of that nature. That is, the s 57(2)(b) notice requirement could be negated by entering into an agreement that satisfied the provisions of s 58A. Perpetual submitted that the phrase "unless required by law" related back to the phrase "unless by law those rights cannot be negated". 55In my opinion, the construction advanced by Perpetual is correct. Although the clause is awkwardly expressed, once the structure and syntax of the sentence is understood, its meaning is clear. This is apparent from the fact that the phrase, "unless required by law", is contained in a sentence that provides an explanation, by way of an example, as to the manner in which the clause was intended to operate. 56The construction for which Perpetual contended is also supported by authority. In Topfelt Pty Limited v State Bank of New South Wales Limited (1993) 6 BPR 13, 209 Sheller JA (Priestley and Cripps JJA agreeing) held that a clause in the following terms: "18.2Upon the occurrence of an Event of Default, the Mortgagee may in its absolute discretion and at any time and from time to time and without giving any notice to the Mortgagor, to all or any one or more of the following ... 18.2.1sell the mortgaged premises" constituted a dispensing agreement for the purposes of s 58A. 57In Notaras v Sly & Weigall, the Court (Mason P, Hodgson JA and Mathews AJA agreeing) was concerned with an identical clause to the clause under consideration in Topfelt. Mason P applied the reasoning in Topfelt and held that the clause was a dispensing agreement for the purposes of s 58A. In doing so, Mason P did not disagree with the observation of Giles J in Farrow that whilst it was not essential for there to be an express recitation of those rights that were to be affected by the clause, nonetheless, there had to be "a relatively clear agreement that the protection had been bargained away". However, his Honour accepted the correctness of the construction given to the identical clause in Topfelt, noting that the clause with which the Court was concerned in Notaras was "pellucid in its indication of the right conferred by s 58A". 58The clause in the present case does not bear the same clarity as the clauses in Topfelt and Notaras. Clause 8.2 in this case is different from the clause in Farrow. In particular, the qualifying phrase to the dispensation provision clause under consideration in Farrow was in terms "except as may be required by the said Acts or otherwise". In the present case, the qualifying clause is in terms "unless by law those rights cannot be negated" (original emphasis). Clause 8.2 must then be read as a whole, so the words "unless required by law" must on their proper construction relate back to those rights that cannot be negated. 59In my opinion, this in itself is a sufficient basis to dismiss the appeal. It will be recalled that Perpetual was granted leave to amend its statement of claim so as to rely upon Mrs Dilati's default in failing to obtain its prior consent to the sale to Mr Khalid. Accordingly, even if it were to be determined that I was wrong in finding that the s 57(2)(b) notice was valid, Perpetual would be entitled to rely upon that non-monetary default in respect of which no notice was required. It follows that it would be futile to set aside the default judgment.

Proposed orders 60Accordingly, I would propose the following orders: 1.Grant leave to appeal; 2Appeal dismissed; 3.The appellant to pay the respondent's costs of the appeal. 61WHEALY JA: I agree with Beazley JA. 62TOBIAS AJA: I agree with Beazley JA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 May 2012