Military Road No 158 Pty Limited v Lion Pacific Projects

Judgment 1REIN J: In this matter the third defendant, ING Bank (Australia) Limited ("the Bank"), for whom Mr A. Kaufmann of counsel appears, lent Lion Pacific Projects (Neutral Bay) Pty Ltd ("Lion Pacific"), the first defendant, $8.16M to enable it to purchase land in Neutral Bay, Sydney. Lion Pacific and a related company (the second defendant) purchased the land and granted the Bank a first registered mortgage over the land. Nothing turns on the distinction between Lion Pacific and the second defendant and both have been placed in receivership and liquidation. I shall refer to both as "Lion Pacific". Between the 7 July 2006 and the 17 October 2012 further advances were made by the Bank to Lion Pacific within the loan facility to enable construction of buildings on the land leading to a debt of $11.5M approximately which as of now has been reduced to $5.9M. The Bank anticipates that there will be a $1M shortfall after all of the real estate of Lion Pacific is sold. 2On or about the 20 October 2010 the first plaintiff, which conducts a medical practice, entered into a lease with Lion Pacific of lots 1 and 5 forming part of the development on the land, to which lots I shall refer as "the properties". On the same date the second plaintiff entered into a call option deed ("the call option"), which deed granted the second plaintiff the right to call for sale of the properties to it at a price of $3.948M (see pages 132-143 of Exhibit 1.). Ms Nolan of counsel appeared for the plaintiffs yesterday and Mr Fernon of counsel appeared today in her stead. 3Lion Pacific defaulted under the facility agreement and the Bank exercised its rights as mortgagee, entering into possession and requiring tenants to pay rent to it. On the 18 April 2013 the Bank held a public auction of the properties. The directors of the plaintiffs attended at the auction and bid $1.95M but the bid was less than the reserve and the properties were not sold at auction. 4On the 13 August 2013 the Bank, as mortgagee in possession, exchanged contracts to sell the relevant properties for $2.4M with the contract to be completed by the 30 September 2013 to Cuppacrino Pty Limited ("the purchaser"). 5On the 8 October 2013 the second plaintiff offered to buy the property for $2.5M and also to release the Bank and Lion Pacific from any claims in respect of the lease (see page 268 of Exhibit 1). 6The facts which I have recounted are taken from the affidavit of the plaintiff's solicitor Mr Farshad Amirbeaggi of the 23 September 2013, of the 3 October 2013 and of 17 October 2013 and an affidavit of Mr Stephen Parker, solicitor for the Bank, sworn 16 October 2013, which affidavits were read on the motion. 7The first plaintiff commenced these proceedings by Summons on the 23 September 2013. The first plaintiff had lodged a caveat claiming an interest under the call option. The first plaintiff in fact had no interest under the call option as it was not a party to the call option deed. The Bank filed a Cross Summons seeking withdrawal of the first plaintiff's caveat. 8There were various actions taken by the parties in the proceedings on the assumption that the first plaintiff was the option holder (although the caveat in fact lapsed in that period) but subsequently the fact that the first plaintiff had no claim to an interest was discerned and a new caveat was lodged last week in the name of the second plaintiff. An Amended Summons adding the second plaintiff was filed, with leave, by which the second plaintiff maintains its entitlement to the new caveat, which is in precisely the same terms as the caveat lodged by the first plaintiff save for the change of identity of the caveator. Ms Nolan contended that since the second plaintiff has not previously lodged a caveat, it is not affected by s 74O of the Real Property Act 1990 (NSW) ("RPA") which severely restricts the effect of a second caveat being lodged where a previous caveat has lapsed. By a notice of motion the plaintiffs seek to prevent the sale of the properties and to prevent the Bank from taking action to evict the first plaintiff from the properties. The Bank by its Amended Cross Summons seeks orders that the second plaintiff's caveat be removed and that lodgement of a new caveat in like terms must not occur until after registration of the transfer to the purchaser. 9There is an underlying issue relating to the lease. The Bank has claimed that the first plaintiff is in breach of the lease by reason of its failure to pay rent. The first plaintiff accepts that it has not paid rent but claims that it is entitled to offset moneys it claims are due from Lion Pacific. 10Although the contract for sale to the purchaser is not before me today, it is agreed that the contract acknowledges the existence of the lease to the first plaintiff and that the property is sold subject to that lease. It appears that whether Lion Pacific, the Bank, or the incoming landlord on the one hand or the first plaintiff on the other are in breach of the lease is a matter which will need to be determined. The Bank has agreed not to take steps inconsistent with the first plaintiff's right to possession of the premises: see para 3(c) of the plaintiff's notice of motion iled 15 October 2013 to which the Bank accedes. The Bank also has agreed to provide the purchaser with all documents relating to the lease dispute which it has received from the first plaintiff including the disclosure statement, to the extent that any of those documents have not previously been provided to the purchaser. 11The Bank has proposed a scheme which will preserve the option in favour of the second plaintiff. The purchaser has agreed to grant an option to the second plaintiff in precisely the same terms as the call option granted by Lion Pacific save for the inclusion of an assignment clause should the purchaser itself wish to sell the properties. The Bank has offered not to transfer title to the purchaser unless the proposed new option agreement is executed by the purchaser and handed over on settlement to allay concerns which were expressed in the course of argument yesterday. Mr Kaufmann stated that there would be no difficulty with a requirement that the existing caveat be relodged immediately upon settlement and registration of the transfer to the purchaser. 12Ms Nolan contends that there are serious questions to be tried and that the balance of convenience favours the granting of an injunction preventing the Bank from settling on the contract of sale with the purchaser. 13Ms Nolan identified the questions to be tried as: (1) whether the second plaintiff has an interest capable of protection by a decree of specific performance; (2)whether the call option can be assigned by Lion Pacific to anyone; (3)whether the mortgagee can, having given consent to a call option, exercise its rights as a mortgagee as this would involve it "approbating and reprobating". Today Mr Fernon submitted that it was this last point which was the key point that needs to be determined at trial, but I will deal with the other points as well in a moment. 14Ms Nolan articulated the following matters as supporting her claim that the balance of convenience favoured preventing the sale until the court has determined whether or not the second plaintiff is entitled to maintain the option and prevent sale: (1)The second plaintiff has lodged a caveat to protect its position and that its rights will be fully preserved if the injunction is granted particularly if there is no undertaking from the purchaser that, at time it registers its own interest after settlement, to lodge the caveat protecting the second plaintiff's equitable interest immediately. Without such an undertaking, Ms Nolan submitted, the second plaintiff might cause lose its priority; (2)To undertake the course which has been proposed by the Bank would be to require the second plaintiff to deal with a third party purchaser with whom it has previously had no dealings and with whom it does not want to enter into relations; (3)Ms Nolan also maintained that there was a need for further evidence to be obtained. 15Mr Kaufmann accepted that the second plaintiff, as the holder of an option, has an equitable interest in the property but he submits that it cannot trump the Bank's registered first mortgage and preclude the sale of the property to a third party under the mortgage. Furthermore having regard to the letter which the Bank sent at the time that it gave its consent which included the following words: This consent does not constitute a waiver of any rights arising under the facilities provided by the mortgagee. (see page 150, Exhibit 1) the Bank, he says, did not agree to waive any right to sell the properties in the event of a default by Lion Pacific and the giving of consent to the call option, qualified as it was, cannot support the claimed estoppel. 16None of the issues said to be serious issues to be tried relate to the lease and given that the sale is subject to the lease and that the Bank does not seek to oust the first plaintiff from the premises, the question of whether Lion Pacific has breached the lease does not appear to be relevant to whether an injunction should be granted, although Ms Nolan did refer to the fact that the purchaser has not formally agreed that it is bound by the lease as a matter relevant to the inadequacy of the position in which the first plaintiff finds itself. It is true that the letter from Mr Pickering of the 17 October 2013 (Exhibit 2) stated that his instructions are that the purchaser: ...does not intend to take any action: - 1. Against the tenant because of any failure by the tenant to pay rent from the date of sale to settlement; and 2. In reliance on any notice of breach of covenant issued by ING on the tenant in respect of unpaid rent. so that it is expressed as a matter of intention and is not, or may not be, binding on the purchaser. It also does not expressly acknowledge that the tenant, the first plaintiff, will have the same rights as against the purchaser as it would against Lion Pacific. Mr Fernon today however expressed a concern for the purchaser that the purchaser will be bound by any obligations arising out of the disclosure statement and all the circumstances that have occurred prior to the purchaser taking over the lease. This contention seems to accept that the first plaintiff has the same rights against the purchaser as it would against Lion Pacific, and which appears to me to be likely to be correct. The purchaser has not to date been dissuaded from completing the purchase by reason of the threatened claims of the first plaintiff. 17The basis for the implicit contention made yesterday that a tenant has a right to demand acknowledgements from an incoming purchaser, where the purchase is subject to an existing lease, has not been explained and I am not persuaded there is any basis for that contention. That is not the subject of the caveatable interest which is granted, not to the first plaintiff but to the second plaintiff, as I have already noted, and it is not a basis for an injunction precluding the sale. 18Turning to what are said to be the serious issues to be tried in respect of the call option, the Bank does not dispute that the second plaintiff has an equitable interest capable of protection. The only question as between it and the second plaintiff is whether the second plaintiff's equitable interest can override the Bank's registered mortgage and prevent the sale by the Bank exercising its rights as mortgagee. 19Mr Fernon accepts that the Bank qualified its consent to the call option in the manner which I have described, but drew attention to Tattley v Wagstaff [1924] NZLR 813. That case concerned a lease which contained a clause to the effect that the agreement to lease was entered into subject to the consent of the mortgagees of the property. These were three mortgages and two, of them gave unconditional consent. The third mortgagee gave consent which was expressed to be "without prejudice, however, to our rights and remedies under [the mortgage]". The defendant refused to accept the lease asserting that the consent was not unconditional and hence not really a consent. 20The Court (Stringer J) held that the consent did not mean that the mortgagee, in exercising his powers under the mortgage, could disregard the lease. His Honour said: ....the only intelligible meaning I can find for such consent is that, being satisfied with the rent reserved, and the terms and conditions imposed, by the lease, the mortgagee was satisfied that his security was not impaired thereby, and he was therefore willing that the property should be burdened with the lease. His Honour also said: The consent of the mortgagee to a lease does not in any way prejudice or affect his rights and remedies under his mortgage, except that, if he exercises his powers under the mortgage, he can only do so without derogation to the lease to which he has consented. 21There may be relevant differences between a lease and an option deed and precisely how the consent is to be interpreted is a matter for another day but I am satisfied that it is arguable that the Bank, even though it is not a party to the option deed, cannot ignore the existence of the option when selling so as to derogate from the option. The Bank however has procured an offer from the incoming purchaser which, in a practical way, protects the second plaintiff's rights and seems even to improve the second plaintiff's position given the parlous state in which Lion Pacific is now placed. There are several ways in which the call option can be protected- by an assignment of the existing deed, by a new option deed or by the mortgage waiting to sell the property until the option expires. The second plaintiff is not amenable to the first two possible ways of protecting the option and wants to force the bank to wait out the option period before it can exercise the power of sale. I regard the combined offer of the Bank and the purchaser as an effective maintenance of the status quo and I see this as a very significant matter in determining whether injunctive relief sought by the second plaintiff should be granted. 22The call option permits the second plaintiff to buy the properties at $3.9M. The properties were passed in at auction with an offer of $1.95M as the highest bid, and it was sold to the purchaser for $2.4M.It is not surprising that the second plaintiff has not exercised its option to buy the property at $1.4M more than it is currently worth. If it viewed it as imperative to obtain the property it has not done so. That is a matter entirely for it but it is relevant I think in determining where the balance of convenience lies in this matter. It is linked to Mr Kaufmann's contention which is that it can be inferred from the attempts to purchase the property and the rejection yesterday by the second plaintiff of the Bank's proposals, that the plaintiffs are seeking to frustrate the completion of the sale to the purchaser so that they can buy the property. This is an inference for which there is I think some foundation. 23Another matter relevant to that is the fact that the second plaintiff contends that a deed varying the option deed, signed and executed by the second plaintiff and Lion Pacific (see Exhibit 1, pp 156-164) is not valid because the deed was not delivered, and hence the deed was capable of rejection by the second plaintiff and was in fact rejected. This rejection seems to be designed to enable the second plaintiff to assert the option deed cannot be assigned to any purchaser. To avoid that difficulty the Bank has procured the agreement of the purchaser to grant an option deed in almost precisely the same terms as the original deed and that offer, as I have noted, has not been accepted by the second plaintiff, on the basis, as it was asserted by Ms Nolan, that its priority will or may be affected. 24If a variation of the deed had been accepted by the second plaintiff there would be no deferral of the creation of the interest and no issue about loss of priority other than the loss due to the failure by the second plaintiff to lodge a caveat until last week. If a new option deed is entered into by the purchaser the first issue outlined above in [13] above that was identified by Ms Nolan would seem to disappear and the second issue would have little significance which is perhaps why Mr Fernon placed emphasis on the third point. 25Mr Fernon claimed that the lack of a notice to complete from the purchaser indicates that there is no pressing urgency about the sale and if it was deferred, given that the second plaintiff had offered $2.5M unconditionally to buy the properties, there is no downside for the Bank that could not be compensated with damages. The offer, whilst it contained a proposed release of the first plaintiff's claim against Lion Pacific, did not include payment of the $40K rent unpaid to date. That the purchaser has been willing to defer settlement since 23 September 2013 whilst the Bank issued the lapsing notice and endeavoured to achieve a result that would end the impasse does not, in my view, lead to the inference that the Bank can delay settlement for months (a hearing even on an expedited matter being unlikely before March next year) without losing the sale. The purchaser indicated a willingness initially to extend time until 8 October 2013 (see Exhibit 2). It is true that the Bank is entitled to terminate the contract of sale by reason of the plaintiff's actions but neither the Bank nor the purchaser at the moment wishes to terminate the contract for sale. 26I have referred to the second plaintiff's contention that it has an equitable interest in the property and noted that the Bank accepts that the second plaintiff does have such an interest. Today, Mr Fernon placed emphasis on the second plaintiff's right in personam. As Mr Kaufmann pointed out the right in personam is as against Lion Pacific, and given the fact that Lion Pacific is in liquidation there is a real question as to what utility or value any right in personam against Lion Pacific has. The failure or inability of Lion Pacific to transfer the property pursuant to the option, if exercised, might sound in damages against Lion Pacific but it would appear to be only the equitable interest to call for the transfer of the property from the Lion Pacific, the Bank or the purchaser (should the option offered be exercised) which has any value and that right will be preserved if the purchaser's offer is taken up by the plaintiffs. 27Mr Fernon contended that by permitting the sale to the purchaser to proceed the Court is determining the issue of whether or not the Bank is entitled to sell notwithstanding the existence of the option. If the Bank has, by selling to the purchaser, breached its obligations to the second plaintiff it will be liable in damages. If the second plaintiff has, as is proposed, the right to purchase the properties from the purchaser it is difficult to see what damages it will have but whether it does or not does not affect its right to claim against the Bank that the sale breached obligations owed to the second plaintiff. 28Mr Kaufmann, in his submissions, contended that the caveat was invalid in form because no details were provided in the section under the hearing "by virtue of the facts state below" (see p 265, Exhibit 1), and he referred to Hanson Construction Materials v Vimwise Civil Engineering (2005) 12 BPR 23, 355 and Schibaia v Elias [2013] NSWSC 1485. There are two answers to this point - the first is that I am not persuaded that the description: Call Option - 29 October - The Registered Proprietors (as Grantor) and the Caveator (as Grantee) is an insufficient description of the second plaintiff's interest. Secondly, even if it were, once the interest is identified as an interest capable of protection (and the Bank concedes that the second plaintiff does have an equitable interest in the properties) the Court does have power to permit lodgement of a fresh caveat in more ample terms (s 74O) and could injuct the sale if satisfied that the conditions warrant it which would seem to involve the same considerations. 29There are some other matters of relevance to the issues and balance of convenience: (1)If the scheme proposed by the Bank is adopted the second plaintiff will obtain an option from the new proprietor which is clearly not in liquidation. There is no evidence that anyone else would have a priority ahead of the second plaintiff other than, I infer, the incoming lender/first mortgagee to the purchaser which is the same position as pertains now; (2)The purchaser entered into a contract of sale with the Bank before the current caveat and that is the only caveat lodged by the second plaintiff; (3)The second plaintiff, aware that the Bank was planning to sell the property at auction and indeed by its directors attending at the auction, did nothing to stop the auction and undertook no steps to injunct the sale until well after the auction and even after the contract was entered into with the purchaser; (4)A further matter mentioned by Mr Kaufmann is that the second plaintiff's caveat, whilst it refers to the claims that the second plaintiff holds an option to purchase, does not state that the caveator claims that a sale effected by a mortgagee exercising a power of sale cannot be registered and, accordingly, it would appear that by virtue of s 74H(5)(g) of the Real Property Act 1900 (NSW) the Registrar will be able to register the sale to the purchaser in any event. Mr Fernon pointed out, however, that the issue in relation to 74H(5)(g) is in effect the same issue that he has raised under the estoppel point in relation to the consent. I think that the question of whether the caveat could be removed under s 74H(5)(g) will, or at least may, involve the same issue. The fact that the Bank seeks removal of the caveat to enable lodgement of the transfer to the purchaser rather undermines reliance by the bank on s 74H(5)(g). (5)Another matter is that assertions were made by Ms Nolan yesterday that the purchaser is, or may be, a competitor of the plaintiffs in the medical field (see ). There is no evidence to support that suggestion and Mr Kaufmann's instructions as relayed to the court are that in fact the purchaser is a firm of actuaries who have bought two other lots for investment. In relation to , I am not satisfied that there is, or can be any genuine concern about replacing the current insolvent grantor with a solvent grantor. (6)In relation to , as Mr Kaufmann pointed out, it is the plaintiff who seeks the injunction and cannot rely on the absence of evidence. 30Taking all matters into account and accepting that there is at least an arguable case on the part of the second plaintiff that the sale will affect its rights in relation to the call option I think that the balance of convenience favours refusal of an injunction preventing the sale. The proposal offered by the Bank seems to me to be a suitable resolution of the problem at least on an interim basis and possibly more extensively. If the option offered by the purchaser is taken up by the second plaintiff and it turns out that it is successful in its claim that the Bank by selling, whether on the basis of estoppel or any other basis, has breached its obligations to the second plaintiff and had caused it loss, that loss will be compensable in damages. The existence of the new option will ensure the second plaintiff will not have lost its right to the property and its potential acquisition of the property on the terms of the option, namely, at a price of $3.9M should it wish to exercise the new option. The relodgement of the existing caveat will add a measure of protection to the second plaintiff, although not as much as the taking up of a new option from the purchaser. 31I should note I indicated a short while ago to counsel what my conclusion was in relation to the injunction and I invited Mr Fernon to obtain instructions about whether or not, even if the injunction is not granted, his client wished to take up the option from the purchaser. 32Mr Fernon took instructions and he advised the court that his client does not wish to enter into an option arrangement with the new purchaser. Accordingly, it is not appropriate to make that a condition of the sale, even though it has been offered by the Bank and the purchaser I have taken it into account in coming to the view that injunctive relief is not appropriate. 33In those circumstances I need now to discuss with counsel what orders should be made. They should be restricted, I think, to the lifting of the present caveat as sought in the Cross Summons and its replacement after the sale goes through.