Palmer v Talijancich

First Letter of Offer

1. On 11 September 2014, Pleiades' solicitor sent a letter of offer to the first defendant. The offer was for $500,000. The letter included the statement: The Borrower grants Pleiades a caveatable interest in respect of the property at 2A Coolong Road, Vaucluse, NSW, 2030 (the Caveat). (emphasis added) It continued: The Caveat will be discharged upon the earlier of either the repayment of the Repayment sum in accordance with this clause or Pleiades exercising the Option set out in Clause C'. (emphasis added)
2. It seems obvious, without more, that the parties contemplated by that language that in consideration for the proposed advance, the first defendant would be required to grant to Pleiades an equitable interest described as a 'caveatable interest' in the land to secure the 'Repayment sum'. The letter of offer stipulated that the caveat recording the interest granted to Pleiades would only be 'discharged' upon repayment or in accordance with Clause C of the letter of offer.
3. The parties then negotiated a minor variation to the language of Clause C and the first defendant signed the letter of offer on 12 September. The letter contained the following provisions under the heading 'ACCEPTANCE': (5) the Borrower by its signature acknowledges, accepts and declares that: (A) This offer is an offer only, and is subject to the discretion of Pleiades may refuse to fulfil the Offer at any time, without notice to the Borrower. (B) Where there is a material difference to the Principal, Interest or Fixed Sum, the terms of the Agreement shall prevail over this Offer. (C) The Offer has been made by Pleiades to the Borrower for business and investment purposes only and that the National Consumer Credit Protection Act 2009 (CTH) and the National Credit Code do not apply to this Offer or to any loan arrangements as will be contained in the Agreement. (6) Upon Pleiades receipt of the Borrower's signed Offer, Pleiades will seek confirmation of the Principal, Interest and Fixed Sum before Pleiades prepares the Agreement.
4. A final version of the letter of offer for a sum of $550,000 was formally signed on 17 September 2014 - by Pleiades pursuant to a power of attorney and by the first defendant attested by her solicitor, Judy Swan. Apart from the increased loan amount, the terms were materially identical to those in the first letter of offer.

First Loan Agreement

1. Also on 17 September, the parties executed a loan agreement. It is not a shining example of legal professionalism, but the commercial intention is clear. The loan agreement did not contain an entire agreement clause and should be construed in its context, including to the extent necessary, by reference to the letter of offer, which is expressly referred to in the agreement. The Recitals provided as follows: A. The Borrower requires a loan in order to consolidate debts in respect of the Borrower's business. B. The Borrower has provided security by way of the Property. C. The Lender wishes to provide a loan to the Borrower on the terms of this Agreement.
2. 'Caveat' was defined to mean 'the preparation and lodgement of a caveat over the Property with the Land and Property Information office in Sydney…'. 'Letter of Offer' was defined to mean 'the letter of offer in respect of the Loan executed by the Lender and Borrower on 17 September 2014'. 'Loan' was defined to mean the sum of $612,000 made up of the Loan amount of $550,000, a 10 per cent line fee of $55,000 and legal fees of $7,000.
3. The loan agreement contains no specific charging clause, save possibly for Clause 2(b). It is sloppy, but in the search for intention in a commercial arrangement, 'no narrow or pedantic approach is warranted': Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1967-68) 118 CLR 429 at 437 (Barwick CJ). Clause 2(b) provides: '(b) In support of the Loan, on the Advance Date the Borrower will sign the Caveat and any other security agreement or document required to procure its registration …. There then follows three words which appear to be inadvertent surplusage which can be ignored: '…such suitable registers'.
4. Clause 8 is headed 'UNDERTAKINGS BY BORROWER'. Clause 8(a) provides: (a) negative pledges: not without the Lender's prior written consent to create or allow to exist any Encumbrance to secure any indebtedness upon any of the present or future property undertaking assets or revenues of the Borrower, save for the Caveat or Mortgage existing as, and notified to the Lender, at the Advance Date. (emphasis added)

Second Letter of Offer

1. On 6 November 2014, the first defendant signed a second letter of offer relating to a further advance of $250,000 for a term of six months. The letter contains the following statement: The Borrower acknowledges that it has previously granted Pleiades a caveatable interest in respect of the property at 2A Coolong Road, Vaucluse, NSW 2030 (the Caveat) based on an earlier loan made on or about 17 September 2014. That Caveat will be discharged upon: i. the repayment of the Repayment sum in respect of the earlier loan; ii. the repayment of the Repayment sum in respect of any funds made under this letter of offer; and iii. in accordance with this clause or Pleiades' exercising the Option set out in clause C. (emphasis added)

Second Loan Agreement

1. A second loan agreement was executed by the parties on 14 November 2014. The Recitals refer to the previous loan and the security purportedly provided in support of it. They state: RECITAL: A. The Lender has previously provided a loan to the Borrower by way of the First Loan Agreement. B. The Borrower has provided security for the First Loan Agreement by way of the Property. C. The Borrower requires a loan in order to consolidate debts in respect of the Borrower's Business (the 'Purpose'). D. The Borrower agrees to provide security for the loan by way of the Property. E. The Lender wishes to provide a loan to the Borrower on the terms of this Agreement. (emphasis added)
2. 'Caveat' is defined differently to the way which it is described in the first loan agreement. In this instance, it refers to, and effectively incorporates, the registered caveat numbered AI12170 that was lodged in connection with the first loan. (The actual number is AI12170L but the mistake is obvious and can be disregarded). The 'Repayment sum' was $325,845 made up of the Loan Amount, line fee, legal fees and interest for the six month term.
3. Once again, the loan agreement contains no specific charging clause, save possibly for Clause 2(b), which provides as follows: (b) The Borrower agrees that the Caveat and any other security agreement or document required under or created for the purposes of the First Loan Agreement shall be extended in effect so that they are valid and enforceable by the Lender in respect of the Loan and any obligation of the Borrower under this Agreement. (emphasis added)
4. Clause 8 contains undertakings by the first defendant as borrower. They include in Clause 8(a) an undertaking not 'to create or allow to exist any Encumbrance to secure any indebtedness' on the property 'save for the Caveat existing' with the consent of Pleiades. (emphasis added)

The Caveat

1. The caveat itself describes the claimed estate or interest in the land by stating that the property 'has been put as security for the repayment of a loan agreement'. (emphasis added) This is a somewhat woolly way of describing the equitable interest created in favour of Pleiades by the grant of an equitable mortgage or charge over the land to secure the repayment of the loan. But the key concept is 'security for the repayment of a loan agreement'. Those words make adequately clear in the context what the intention was, notwithstanding the unconventional language. It was that the borrower grant an interest in the land to Pleiades as security for the loans advanced by it.
2. The language of the caveat becomes more obscure when describing the source of the claimed estate or interest. However, I do not think any legal consequence results from it. The caveat states that the interest arises by virtue of 'clause 1.1 of the Loan Agreement'. This could not be correct. If anything, it should possibly be Clause 2(b) or the loan agreement taken as a whole and construed in its context.

Creation of Equitable Interest in Land

1. I accept the following principles and adopt the following submissions in relation to the correct approach to contractual construction that should be taken: The documents ought to be read together for the purpose of ascertaining their proper construction and legal effect, especially that in relation to each loan, they were executed contemporaneously or almost contemporaneously: Lewison and Hughes, The Interpretation of Contracts in Australia (2012, Lawbook Co) (at '3.03'); EDW Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 at [104] (Buss JA; Owen and Newnes JJA agreeing); Zhang v BM Sydney Building Materials Pty Ltd [2016] NSWCA 166 at [45] (McColl JA; Ward JA and Sackville AJA agreeing). In construing the loan documents, a court must give the agreement a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result', and so as to avoid it 'making commercial nonsense or working commercial inconvenience': Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640, [2014] HCA 7 at [35] per French CJ, Hayne, Crennan, and Kiefel JJ.
2. Bryson AJ emphasised this approach in connection with a caveat dispute in Taleb v National Australia Bank Ltd [2011] NSWSC 1562 at [60-[61]: [60] … In my view the meaning conveyed by a contractual document, including what is conveyed by implication, must be understood by addressing the terms and the whole terms of the document in question, and there is no principle or true principle establishing what implication must be drawn in all cases from authority to lodge a caveat in connection with an obligation to pay money. In my opinion Mahoney JA did not state such a principle in Troncone v Aliperti and in my opinion there cannot be such a principle, because a principle of law of that kind would divert the court from addressing the terms of each document to discover what it means, by expression and by implication. [61] The circumstances that there was a debt and that there is to be a caveat, together with the nature of the caveat, certainly direct attention to whether it was intended that the debt should be protected by a charge or some other interest. It is quite likely that there was some such intention in the mind of one party or of both, but if that intention is not found expressed or by implication in their document there is no equitable interest. Authorisation to lodge a caveat does not create by necessary implication the conclusion that there must have been an intention to create an equitable interest, and that there must have been the further intention that that interest should be a charge over the property.
3. In Ta Lee Investment Pty Ltd v Antonios [2019] NSWCA 24, the Court of Appeal (at [98]) agreed with the observation made by Bryson AJ in Taleb at [60]. See also Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174; [2013] NSWCA 393 at [82]-[83] per Gleeson JA (Meagher and Leeming JJA agreeing).
4. The question in this case is whether the language and circumstances reveal a contractual intention by the parties, objectively ascertained, to create an equitable interest in the land as security for the repayment of the loans. The circumstances in relation to the first loan may be summarised as follows: There was a loan; a caveat; an intention that the caveat be 'discharged' on repayment of the loan; an intention that the loan be secured; and an intention that the borrower sign the caveat 'in support of' the loan.
5. In connection with the second loan, the circumstances may be summarised as follows: There was an acknowledgement that the borrower had 'previously granted Pleiades a caveatable interest in respect of the property'; that the borrower had provided security for the first loan; and that the borrower agreed to provide security for the second loan. In addition, the circumstances included the incorporation by reference of the registered caveat in respect of the first loan; an agreement to extend the caveat created for the first loan so that it would be 'valid and enforceable' for the second loan; and an undertaking not, without the consent of Pleiades, to create or allow any encumbrance 'to secure any indebtedness' on the property 'save for' the existing registered caveat.
6. Whether or not the documents have been poorly drafted, the root question is whether expressly or by necessary implication the property has been 'made liable or specifically appropriated to the discharge of [the] debt': Swiss Bank Corporation v Lloyds Bank Limited [1982] AC 584 at 594-5 (Buckley LJ). It is not necessary that particular words of charge be used. Cradock v The Scottish Provident Institution (1893) 69 LT 380 at 382; Peters v Lithgow Forge Pty Ltd [2010] NSWSC 283 at [46].
7. The following passage from the judgment of Buckley LJ in Swiss Bank Corporation at 594-5 is helpful and I adopt it: An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter upon the mortgage, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so: see Fisher and Lightwood's Law of Mortgage, 9th ed (1977), p 13. An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale: see Fisher and Lightwood, p 14.
8. I am satisfied that in this case, unlike in Ta Lee Investment at [103]-[104], there are sufficient references in the contractual language to concepts such as 'secured' and 'caveatable interest', as well as other language, that taken as a whole, adequately demonstrate a contractual intention that Pleiades have an equitable interest in the land as security for the repayment of its loans.
9. Having regard to the language used in the documents that I have explained and extracted, and the inferences that flow from that language, I am satisfied that the contractual intention was that an equitable interest in the land would be created to secure the repayment of the loans to Pleiades. The caveat, however imperfectly expressed, was recognised by the parties as evidencing the creation of that interest. I therefore find against the plaintiff on the first ground.

Equitable Interest in Fund

1. The property has been sold. The second question is whether Pleiades' interest in the land has been converted to an interest in the proceeds of sale. This would follow in the case of a sale by a mortgagee: see Re Miles; Ex parte National Australia Bank Ltd (1988) 20 FCR 194 at 200; AVCO Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679; La Trobe Capital & Mortgage Corporation Ltd (No 2) [2009] NSWSC 1372 at [33].
2. It would also generally follow, in my view, in the case of a sale by the registered proprietor rather than by the mortgagee, unless the particular circumstances dictate a different conclusion. See Aircon Heating & Airconditioning Pty Ltd (in liquidation) v Crane Distribution Ltd [2006] VSC 76 esp at [47]-[51] and Cheetham v 805 Archer Road Pty Ltd (in liq) [2015] VSC 96 at [63].
3. In this case, the plaintiff contends that the circumstances dictate a different conclusion and that Pleiades has forfeited its equitable interest because the land was sold by the borrower as registered proprietor pursuant to terms of settlement in earlier debt recovery proceedings (2015/321848) between Pleiades as plaintiff and the borrower as first defendant.

Terms of Settlement

1. The terms of settlement were agreed on 22 June 2016. They provided for the borrower to pay $1.25 million to Pleiades within six months, subject to certain qualifications. Clause 7 stipulated: The plaintiff shall be entitled to retain its caveat on title pending either completion of a sale of the first defendant's property or a refinancing of her indebtedness on the property but shall do all things to ensure that the caveat is removed contemporaneously with the first defendant's discharge of her liability under the agreement whether by sale, refinance or otherwise. For the avoidance of any doubt, the plaintiff is entitled to refuse to release his caveat to the extent that the sale price of the property or the refinance does not pay out the first defendant's monetary liability including interest in full. (emphasis added)
2. Clause 10 of the terms of settlement was added in handwriting. It provides: These terms are in full and final satisfaction of the claims and counter-claims in the proceedings referred to in paragraph 2.
3. It is apparent in my view, that when the document is read as a whole, Clause 10 should be read subject to the reservation of rights in Clause 7. I do not think it was intended, in the particular circumstances, that the effect of Clause 10 should be to deprive Pleiades of the rights that were recognised and preserved by Clause 7. Such a conclusion is neither compelling nor likely as a matter of construction of the document.
4. Nor do I think that this is the sort of case, such as that described by Emmett AJA in Lum v MV Developments Pty Ltd (in liquidation) [2018] NSWSC 247 at [87], where it should be inferred that the authorisation of the right to retain a caveat on the title to the land by Clause 7 was for solely pragmatic commercial reasons, rather than in recognition of a subsisting equitable interest in the land. I do not think that such a construction is consistent, in this case, with the context, including the course of events preceding the terms of settlement and the contractual intention of the parties that I have concluded was formed in 2014.
5. Another consideration advanced by the plaintiff is that when he commenced these proceedings, seeking orders among others, that Pleiades' caveat was invalid, Pleiades lodged a submitting appearance. I would not necessarily have regarded that as a concession, if that were all there was to it. But in any event, Darke J permitted Pleiades to withdraw its submitting appearance after receiving evidence and being satisfied that it was filed in error.

Waiver or Abandonment

1. All of these matters constitute the context in which the plaintiff contends that Pleiades has lost the rights or the interest that it would otherwise have had in the proceeds of sale. Counsel for the plaintiff said 'Effectively, it is a waiver or abandonment'. I do not think so. An inference of abandonment of a right (whether a contractual right or an equitable interest) is not lightly made. It requires 'an unequivocal expression of an intention to abandon those rights or that interest (or conduct inconsistent with or repayment to those rights)': Shaw v Minsden Pty Ltd [2011] NSWSC 764. There must be an intentional act done with knowledge, indicating an intention to act as if the right did not exist: Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 at 326.
2. In the particular circumstances, Pleiades' consent to the withdrawal of its caveat cannot, without more, amount to waiver or abandonment of its equitable interest. It is equally consistent with Pleiades relying on its equitable rights in relation to the proceeds of sale. The reasoning in Cheetham at [65], [67] and [68] in respect of the lapsing of a caveat is analogous. In my view, it applies with equal force: [65] The Plaintiff's conduct in taking no step pursuant to s90(2) of the Act is consistent with him placing reliance on his equitable rights referred to above, and cannot amount to an abandonment or waiver of those rights as submitted on behalf of the Defendants. [67] Further, and in any event, it is trite law that a caveat creates no interest in land. As observed by Kitto J in Lamshed v Lamshed: [20] … the lodging of a caveat does not turn the caveator's interest into a registered interest: it has the effect of a statutory injunction which continues in force until the caveat is removed or lapses. [68] Accordingly, merely permitting a caveat to lapse, without more, cannot amount to a positive act of abandonment or waiver of rights secured under an interest in land or its proceeds.
3. Given the above, the failure by Pleiades to obtain an undertaking or agreement from the plaintiff to preserve the sale proceeds for its benefit, as suggested by counsel for the plaintiff, is not enough, in my view, to amount to waiver or abandonment. It was not necessary for Pleiades to obtain such an undertaking or agreement - because, in the circumstances of this case, Pleiades' charge over the land converted to a charge over the proceeds of sale.
4. In my view, Clause 7 of the terms of settlement preserved the equitable interest in the land that was protected by the caveat. This is clear from the operative words of the clause which I have italicised in paragraph [31] above. Clause 10 did not, in my view, override Clause 7. It dealt with a different question.
5. Pleiades was therefore entitled to an equitable charge in relation to the proceeds of sale. Its equitable interest in the land attached to the proceeds of sale or was converted to an equivalent interest in the proceeds. As Hansen J recognised in Aircon Heating & Airconditioning at [50], there is a 'more general principle that after sale of the secured property, an equitable mortgage is converted to a charge on the proceeds of sale for the interest of the mortgagee'. That principle is subject, of course, to the particular circumstances of a given case. But I see no reason on the facts of this case why the general principle should not apply.

Conclusion & Orders

1. The fifth defendant's position does not arise. It was agreed that if Pleiades succeeded, no monies would be available to the fifth defendant even if it had a secured interest in the proceeds of sale. It conceded in submissions that if Pleiades' claim is upheld 'there will not be sufficient funds available to meet any claim pursuant to the caveats lodged by the fifth defendant, which then become nugatory'. The claims against the second, fourth and sixth defendants also do not arise or were not pursued. The plaintiff did not address submissions in relation to them.
2. I dismiss the further amended summons. I order the plaintiff to pay the costs of the third and fifth defendants. 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: 05 July 2019