Perpetual Trustee Company Ltd (original plaintiff). Performance Capital Mortgage Pty Ltd v Motive Finance & Leasing Pty Ltd

CITATION : Perpetual Trustee Company Ltd (original plaintiff). Performance Capital Mortgage Pty Ltd v Motive Finance & Leasing Pty Ltd [2010] NSWSC 429

CATCHWORDS : REAL PROPERTY - equitable mortgage - whether the mortgage secured any debt or obligation - whether sufficient note or memorandum in writing - Conveyancing Act 1919 (NSW) s 54A - REAL PROPERTY - distribution of surplus funds of sale by registered first mortgagee - determination of priorities - equitable interests - unregistered mortgages - effect of withdrawal of caveat - EQUITY - equitable interests - priority - postponing conduct

Conveyancing Act 1919 LEGISLATION CITED : Real Property Act 1900 Real Property (Amendment) Act 1970 Trustee Act 1925

Australia & New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129 Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78 Clark v Raymor (Brisbane) Pty Ltd (No 2) [1982] Qd R 790 Commonwealth Bank of Australia v Platzer [1997] 1 Qd R 266 Courtenay v Austin [1962] NSWR 296; (1961) 78 WN (NSW) 1082 Double Bay Newspapers Pty Ltd v AW Holdings Pty Ltd (1996) 42 NSWLR 409 Elderly Citizens Home of SA Inc v Balnaves (1998) 72 SASR 210 Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646 GE Commercial Corporation (Australia) Pty Ltd v L&B Enterprises Pty Ltd [2009] NSWSC 770 Green v Commonwealth Bank of Australia (No 2) (1994) 29 ATR 599 CASES CITED : Heid v Reliance Finance Corp Pty Ltd [1983] HCA 30; (1983) 154 CLR 326 J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 Lapin v Abigail (1930) 44 CLR 166 Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265 Nearhaze v The Official Trustee [1999] NSWSC 959 Perpetual Trustees Victoria Ltd v English [2009] NSWSC 478 Provident Capital Ltd v Printy [2008] NSWCA 131 Shawyer v Amberday Pty Ltd (In Liq) [2001] NSWSC 399 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Taddeo v Catalano (1975) 11 SASR 492 Thomson v McInnes [1911] HCA 30; (1911) 12 CLR 562 Timmins v Moreland Street Property Co Ltd [1958] Ch 110 Tonitto v Bassal (1992) 28 NSWLR 564

PARTIES : Performance Capital Mortgage Pty Ltd - third plaintiff Motive Finance & Leasing Pty Ltd - defendant

COUNSEL : D Blackah - third plaintiff R Glasson/M Auld - defendant

SOLICITORS : Hunt & Hunt - third plaintiff Maunder & Jeffrey Solicitors - defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

09/290987 Perpetual Trustee Company Ltd (original plaintiff). Performance Capital Mortgage Pty Ltd v Motive Finance & Leasing Pty Ltd JUDGMENT Outline 1 His Honour: Performance Capital Mortgage Pty Ltd (PCM) and Motive Finance & Leasing Pty Ltd (MFL) were each unregistered mortgagees of a property sold by a first mortgagee. The proceeds of sale were sufficient to pay out the first and second registered mortgagees. The surplus funds from the sale (Surplus Funds) have been paid into court. The mortgage of PCM was prior in time to that of MFL. PCM was added as a plaintiff and MFL as a defendant. The issue is which of PCM and MFL is entitled to the money. This requires determination of two questions: (1) whether any moneys owing to PCM are secured on the property 2 Gow Street, Balmain NSW (the Property) pursuant to an unregistered mortgage from Punch Street Pty Ltd (Punch Street) dated 24 December 2007; and

(2) if so, whether or not in determining the priority between the competing equitable interests, PCM's action in withdrawing a caveat it had lodged is postponing conduct so as to displace its priority as first in time. Facts

2 Punch Street was the registered proprietor of the Property. On about 20 December 2007, Punch Street granted a first registered mortgage over the Property to Perpetual Trustee Company Ltd in its capacity as custodian for Perpetual Managed Investments Ltd as responsible entity for the Challenger Howard Mortgage Fund (Perpetual). On about 9 January 2008, Punch Street granted a second registered mortgage over the Property to Eclipse Prudent Mortgage Corporation Ltd (Eclipse). 3 On about 6 March 2008, Punch Street defaulted under the second mortgage. On about 18 April 2008, Punch Street defaulted under the first mortgage. As a result, Perpetual was entitled to, and obtained, possession of the Property. 4 On 6 October 2009, Perpetual as mortgagee in possession completed the sale of the Property pursuant to the terms of the mortgage and s 58 Real Property Act 1900. The sale price was $2,280,000.00. Surplus Funds of $355,923.69 remained after discharge of the first and second mortgages. Perpetual deposited the Surplus Funds less its costs of acting, into court pursuant to s 95 Trustee Act 1925. PCM and MFL each claim to be entitled to the Surplus Funds. 5 On about 5 December 2007, PCM approved a loan of $150,000.00 to Hot Tuna Pty Ltd (Hot Tuna). The terms of the letter of offer from PCM to Hot Tuna dated 5 December 2007 (Offer Letter) included as security required an unregistered mortgage by Punch Street over the Property. Mr George Markos, director of Punch Street and also of Hot Tuna was required to guarantee the loan. 6 On 11 December 2007, a loan contract was entered into between PCM and Hot Tuna (Loan Contract) and the loan was drawn down on about 24 December 2007. Punch Street was not a party to the Loan Contract. On 22 January 2008, PCM lodged a caveat, dealing no. AD716250 (PCM Caveat), over the Property. 7 MFL is a financier. Greenstein Shakenovsky Solicitors (Greenstein), of which Mr David Greenstein is a partner, acted for MFL. On 31 January 2008, MFL received an email from Mr Greenstein asking whether MFL would grant a loan to Punch Street. The email set out the terms of the required loan, and stated that Mr Markos would guarantee the loan if approved. 8 On 6 February 2008, Mr Greenstein obtained a title search over the Property and noticed the PCM Caveat. There is no evidence he searched the PCM Caveat. 9 On about 7 February 2008, Mr Greenstein and Mr Markos had a conversation to the following effect: "Greenstein: 'George I am not sure if Rory has told you, but there is a caveat on the Gow Street property by Performance Capital Mortgages. Before we can give you the money we must receive a withdrawal of that caveat from Performance Capital'.

Markos: 'Ok leave it with me and I will organise it for you'.

Greenstein: 'Please organise it. I will need the original given to me before MFL will instruct me to give you the money'.

10 On about that date, Mr Phillip Cunningham, mortgage broker for the loan granted by PCM to Hot Tuna, and Mr Gary Steinberg, director of PCM had a conversation to the following effect: "Mr Cunningham: 'George Markos has called me and has asked for the caveat to be withdrawn as he was not told a caveat would be lodged and it was not referred to in the Letter of Offer. I will arrange Norton White to prepare the document, if that is ok with you.'

11 By letter dated 8 February 2008, Norton White Lawyers wrote to Mr Cunningham of Balmain Commercial enclosing a withdrawal of the PCM Caveat. The letter and withdrawal of caveat were hand delivered by Mr Markos to Mr Greenstein on 8 February 2008. 12 The loan to Punch Street from MFL settled on 9 February 2008. Punch Street granted a mortgage over the Property as security for the loan. On about 13 February 2008, Mr Greenstein lodged the withdrawal of the PCM Caveat, and a caveat in respect of MFL's interest. Mr Greenstein gave evidence in his affidavit dated 23 December 2009 (par 17) that he would not have released any funds to Punch Street if a withdrawal of the PCM Caveat had not been provided to him prior to settlement or if the PCM Caveat remained on title. 13 By 11 August 2008, Punch Street had defaulted on the loan from MFL and failed to repay the loan after being notified of its default by a letter dated 12 August 2008 from Mr Greenstein. 14 On 22 August 2008, Mr Markos was declared bankrupt. 15 By 24 December 2008, the loan advanced by PCM pursuant to the Loan Contract was due for repayment. It was not repaid. 16 On about 15 January 2009 PCM re-lodged a caveat over the Property.

Were moneys owing to PCM from Hot Tuna secured on the Property?

17 To be valid, an equitable mortgage must be in writing, signed by the mortgagor (Conveyancing Act 1919 s 23C and s 54A). An unregistered mortgage is not effective and is not enforceable unless it is created or evidenced by a written instrument that sets out its terms (Bryson J in Double Bay Newspapers Pty Ltd v AW Holdings Pty Ltd (1996) 42 NSWLR 409 at p 418). 18 The writing must identify the essential terms of the mortgage (Nearhaze v The Official Trustee [1999] NSWSC 959; Shawyer v Amberday Pty Ltd (In Liq) [2001] NSWSC 399; GE Commercial Corporation (Australia) Pty Ltd v L&B Enterprises Pty Ltd [2009] NSWSC 770). The term establishing what debt or obligation is to be charged on the land is an essential element of any mortgage (Double Bay Newspapers). 19 In this case, the PCM mortgage form dated 24 December 2007 (PCM Mortgage Form) does not set out in writing what debt or obligation is to be charged on the Property. On its face the PCM Mortgage Form does not secure anything. 20 The next issue is whether the PCM Mortgage Form incorporates a document that identifies what debt or other obligation is charged upon the land. There is space in the PCM Mortgage Form for referring to an annexure or a memorandum filed in the Land Titles Office, but the part of the PCM Mortgage Form where reference can be made to an annexure has the letters "N.A." filled. Memorandum Q860000 (Memorandum) is incorporated into the PCM Mortgage Form but the Memorandum does not refer to any document or transaction. Clause 6 of the Memorandum refers to default and the words "…shown in the mortgage of the principal sum … observance or performance of any of the covenants contained herein or in the mortgage" clearly contemplate repayment obligations being detailed in the PCM Mortgage Form or Memorandum. However, no reference is made to the Loan Contract, nor any other documents, nor any reference to any debt of Hot Tuna to PCM. 21 The PCM Mortgage Form thus does not identify what debt or other obligation is charged upon the land either on its face or through the incorporation of another document. The PCM Mortgage Form does not identify an essential term of the mortgage. 22 After evidence and submissions had concluded a document, namely "Company Certificate of No Advice" attached to a letter dated 19 December 2007 was admitted by leave as Ex A (Certificate). Counsel for PCM and MFL were asked to make written submissions as to whether this document had any bearing on the issue as to whether moneys owing to PCM from Hot Tuna were secured on the Property. 23 Neither counsel made written submissions on whether or not the Certificate could by reference to other documents establish the existence of a sufficient note or memorandum to satisfy s 54A Conveyancing Act 1919 of an agreement creating an interest in land as an equitable mortgage or charge. However, as the Certificate has been introduced into evidence, I have decided I should examine this issue. 24 Section 54A Conveyancing Act 1919 provides that: "(1) No action or proceedings may be brought upon any contract for the sale or other disposition of land or any interest in land, unless the agreement upon which such action or proceedings is brought, or some memorandum or note thereof, is in writing, and signed by the party to be charged or by some other person thereunto lawfully authorised by the party to be charged." 25 If a note signed by the party to be charged refers expressly to some other document in such a manner as to incorporate it by reference in the note signed, the two documents may be read together (Thomson v McInnes [1911] HCA 30; (1911) 12 CLR 562; Australia & New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21). 26 In this case, the Certificate is signed by Mr Markos as sole director and secretary on behalf of Punch Street, the party to be charged. Clause 1 of the Certificate states that Punch Street "is giving" a mortgage to PCM over the Property as security for all the obligations of Hot Tuna to PCM pursuant to various documents. The Certificate then expressly refers to the Loan Contract, Offer Letter and the "security documents" mentioned in the Offer Letter. The relevant security document mentioned in the Offer Letter is the "Unregistered mortgage by Punch Street Pty Limited over 2 Gow St, Balmain", which with the aid of extrinsic evidence (which may be by parol) would identify the PCM Mortgage Form (Tonitto v Bassal (1992) 28 NSWLR 564; Timmins v Moreland Street Property Co Ltd [1958] Ch 110 at p 130; Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646). As such, the Certificate, Loan Contract, Offer Letter, and PCM Mortgage Form may be read together (Thomson v McInnes). 27 The terms of the contract need not be contained in one document. It does not matter that the Loan Contract failed to require the Property to be made as security for the loan (the Secured Debt Term), or that the conflict clause in the Offer Letter means that the Offer Letter is ineffective to bring the Secured Debt Term as a term of the PCM mortgage contract. This is because the Secured Debt Term is contained in the Certificate. Reading the four documents together would provide all the relevant terms of the PCM mortgage contract, and as such would constitute a sufficient note or memorandum for the purposes of s 54A Conveyancing Act 1919 (Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310). There is no need for additional evidence if the document signed by the party to be charged when placed alongside the other documents obviously refers to those documents. 28 The evidence disclosed by the Certificate could lead to an order for rectification. However, counsel for PCM did not make any claim for rectification. Nor was a claim made based on part performance. Neither claim could have assisted PCM in a priority claim in any event. 29 The cases of Provident Capital Ltd v Printy [2008] NSWCA 131 and Perpetual Trustees Victoria Ltd v English [2009] NSWSC 478 which counsel for MFL and PCM relied on, deal with the construction of mortgages in the context of forgery, registration and indefeasibility, and are not applicable to the circumstances of this case. 30 As the PCM mortgage contract does identify in writing the essential term of what debt or other obligation is charged upon the land, it satisfies s 54A Conveyancing Act 1919, and is not defective. PCM therefore has an effective equitable charge over the Property, and as such a priorities contest between two competing equitable interests arises. I should add, the interest of PCM is not identified in the PCM Caveat which claims an equitable interest pursuant to a mortgage dated 24 December 2007.

31 The equitable interest of PCM is prior in time to that of MFL. It is now necessary to consider, among other things, whether or not PCM's action in withdrawing the caveat it had lodged is postponing conduct so as to displace the priority afforded to it for being first in time. 32 In applying the general principles for determining priority between competing equitable interests, the approach has been to discern where the 'better equity' lies (Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265 at p 276 (Kitto J); Heid v Reliance Finance Corp Pty Ltd [1983] HCA 30; (1983) 154 CLR 326 at p 341 (Mason and Deane JJ)). In searching for the better equity, a court is free to consider all relevant factors and resorts to the maxim 'qui prior est tempore potior est jure' - the first in time has the better right, only where the parties' respective merits are equal and there exists no other sufficient ground for preferring one over the other (Lapin v Abigail (1930) 44 CLR 166 at p 185-186 per Isaacs J; Clark v Raymor (Brisbane) Pty Ltd (No 2) [1982] Qd R 790 at p 795-797; Heid v Reliance Finance at p 339-343 per Mason and Deane JJ). 33 In considering the merits of the two competing equitable interests, an important factor is whether the conduct of the earlier interest holder ought to be regarded as 'postponing'. Failure to caveat to protect an earlier interest results in postponement only where the failure, considered in the light of all the circumstances, allows another person to acquire a later unregistered interest in the land on the mistaken assumption that the earlier interest does not exist (Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78 at p 91-92, 97; J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 at p 554; Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129 at p 135-137; Double Bay Newspapers). This is because by failing to lodge a caveat, the holder of the earlier interest may have lulled the holder of the later interest into thinking that the earlier interest did not exist, and in such circumstances the later interest may prevail (Green v Commonwealth Bank of Australia (No 2) (1994) 29 ATR 599 at p 603). 34 However, being first in time but failing to lodge a caveat does not of itself mean that postponement will ensue (J & H Just). In J & H Just, the bank did not register the mortgage it took, but instead took the certificate of title into custody. When another unregistered interest came into existence and a priority dispute arose, the court held that the bank's interest would not be postponed, although it had failed to lodge a caveat. The court considered that prudent conduct on the part of a person acquiring an interest, in circumstances when the title disclosed no prior mortgages, would have been to require the certificate of title to be produced or its absence explained and to check up on the explanation. However, in the present case the certificate of title would presumably have been with Perpetual. Therefore, the relevance of PCM lodging a caveat assumes greater importance, and PCM's withdrawal of caveat carries greater significance. 35 Just as failure to lodge a caveat may constitute postponing conduct, so may a withdrawal of a caveat. In Elderly Citizens Home of SA Inc v Balnaves (1998) 72 SASR 210 it was held that the act of withdrawing the caveat gave notice that the caveator no longer sought to sustain the interest which the caveat had sought to protect. A person searching at the Land Titles Office would not know the reason why the caveat had been withdrawn but would be entitled to assume that one reason why the interest holder had failed to uphold the caveat was that the debt had been repaid. It was held that for these reasons the interest holder's equitable mortgage was liable to be defeated by the holder of a subsequent interest who had searched and seen the registration of the caveat and its later removal (Elderly Citizens at p 227). 36 In this case, Mr Greenstein gave evidence in his affidavit dated 23 December 2009 (par 12) that MFL would not give the loan unless he received a withdrawal of the PCM Caveat. PCM's action in withdrawing the caveat caused MFL to lend money to Punch Street. The act of withdrawing the caveat gave notice to MFL that PCM no longer sought to protect its interest (Elderly Citizens at p 227), or that it no longer had an interest to protect. MFL would be entitled to assume that one reason why PCM had withdrawn the caveat was that any debt had been repaid. It had warranties from Punch Street (in the Deed of Loan dated 9 February 2008 between MFL and Punch Street and George Markos, cl 6.2) that the Property was not held as security for any monies owed by Punch Street other than to Perpetual and Eclipse. PCM's interest is therefore liable to be defeated by MFL whose solicitor had searched and seen the presence of the PCM Caveat and had been handed a withdrawal. The position would have been the same had the solicitor searched and seen the caveat and then searched later and seen the entry of the caveat had been removed (Elderly Citizens at p 227). 37 A later unregistered interest holder cannot prevail over an earlier interest where at the time of acquiring its later interest, it had notice of the earlier, for notice affects the later holder's conscience (Courtenay v Austin [1962] NSWR 296; (1961) 78 WN (NSW) 1082 at p 1097; Taddeo v Catalano (1975) 11 SASR 492 at p 498-501). There is no evidence that at the time MFL acquired its interest on 9 February 2008 (the settlement date) it had actual notice that PCM's interest was still in place. Any actual notice by MFL some time prior to the date it acquired its interest (in this case being 6 February 2008) is irrelevant to the notice issue here because the relevant time of notice is at the time MFL acquired its interest. This is because during the intervening period (in this case from 6 to 9 February 2008), MFL may have acquired notice of changes to the circumstances of PCM's interest. Actual notice by MFL on 6 February 2008 is however relevant to show that MFL had searched and seen the presence of the PCM Caveat and its later withdrawal so that it would be entitled to assume that PCM no longer sought to protect its interest or that it no longer had an interest to protect (Elderly Citizens at p 227). 38 McPherson JA in Commonwealth Bank of Australia v Platzer [1997] 1 Qd R 266 held that notice could also be acquired if one should have known about the previous unregistered interest but did not make reasonable inquiries to find out about it. In this case, there is no reason why MFL should have known that PCM's unregistered interest was still in place at the time MFL acquired its interest and no reason that MFL should have made inquiries to find out because MFL was entitled to assume that the reason PCM withdrew its caveat was because it no longer sought to protect its interest or that it no longer had an interest to protect. 39 Stupidity is not in itself postponing conduct, but stupidity in handing over a withdrawal pursuant to a request based on an unsustainable argument is a different matter if that action results in further moneys being lent on the Property.

40 In the circumstances of this case, the withdrawal of the caveat constituted postponing conduct on the part of PCM, and as MFL had no notice of PCM's interest at the time of acquiring its interest, MFL's later equitable interest prevails over PCM's earlier equitable interest.

Conclusion 41 MFL is entitled to priority to the Surplus Funds. Subject to evidence being given to establish that the amount due to MFL is greater than the amount of money in court, I will make an order for payment out. Law reform 42 I add that one of the problems in this case and in others referred to has resulted from the Department of Lands approved form of mortgage available for purchasers, which on its face when combined with Memorandum Q860000, secures no debt or obligation. In earlier times the standard form of mortgage showed the principal sum lent as the consideration for the mortgage, and included covenants to repay the sum and to pay interest on it. The form appeared originally in Sch 9 to the Real Property Act 1900. Section 56(1) of the Real Property Act 1900 required the form to be used and s 103(2) authorised variations that were not substantial. The Real Property (Amendment) Act 1970 deleted Sch 9 and inserted the requirement that the mortgage be in an "approved form". It defined "approved form" as a "Form approved by the Registrar-General for the purposes of the provision of this Act in relation to which the expression is used". For many years after that, as I remember from practise as a solicitor, the approved form showed the consideration. I do not know when the change was made so that the approved form on its face secured no debt or obligation. I do not know why this occurred but I consider a return to the previous practice would be very desirable and could eliminate at least some litigation.

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