Plaintiff v Defendant

1 Swann Road Pty Ltd (Swann Road) has applied for an interim injunction to restrain a mortgagee in possession from selling its land. The defendant, Sterling and Freeman Advisory (Sterling) is that mortgagee.

2 The principles governing applications for interim injunctions in these circumstances are orthodox:

• there must be a serious question to be tried that the plaintiff is entitled to an injunction restraining the defendant from selling the property; and
• the balance of convenience favours the granting of an interlocutory injunction.

3 Incorporated within the consideration of the balance of convenience, or sometimes considered as a separate matter, is the question whether damages would be an adequate remedy.

4 In cases concerning a proposed restraint on a mortgagee's power of sale under a mortgage instrument, the general rule is that, failing payment into court of the amount sworn by the mortgagee as due and owing under the mortgage, no restraint should be placed by order upon the exercise of the mortgagee's rights under the mortgage.[1]

5 But there are exceptions. In Maviglia Investments Pty Limited v BKSL Investments Pty Ltd,[2] Slattery J said at [58] that exceptions to the principle included cases where:

• the mortgagor was alleging that the power of sale had not arisen;
• the mortgagor was alleging a lack of good faith;
• the validity of the mortgage was an issue;
• there was a question whether or not the borrower had breached the terms of the mortgage; or, where,
• the issue is whether the notice of breach has been effective.

6 In very brief compass, the key facts in this application are as follows:

• Swann Road is a builder/developer intent on developing two adjacent parcels of land in Queensland into residential apartments;
• Swann Road contracted to purchase the two lots with a settlement due, ultimately, on 20 August 2018 for a combined price of $2,435,000;
• with some urgency, Swann Road sought a loan to pay the whole, or nearly the whole, of the purchase price and, after some initial delay, obtained a loan from Sterling in the amount of $2,400,000 (inclusive of interest and costs) for a period of one month secured by a registered first mortgage;
• settlement of the purchase and of the mortgage took place on 20 August 2018 at which time the vendor was paid, a transfer of the land to Swann Road was received by Sterling as first mortgagee, and Sterling took a registrable first mortgage;
• the interest rate payable during the term of the loan (the term interest rate) was 2.5% per month;
• the interest rate payable upon default (the overdue rate) was 9% per month, compounding: Swann Road calculates that, annualised, the overdue rate amounts to an effective rate of 188% per annum;
• repayment of the loan fell due on 20 September 2018 but was not paid;
• at 4.35pm on 21 September 2018 Sterling sent a letter to Swann Road, stating that Swann Road was in default and demanding repayment of "the full amount owing under this loan" within one day (the First Notice) ― other than restating what the principal sum advanced was, the notice did not state the specific amount that needed to be paid on that day;
• at 7.23pm on the same day, 21 September 2018, Sterling sent Swann Road a revised calculation of a particular item of cost ― the fee for registering the transfer ― which it claimed was owing under the loan. The calculation was in the form of a spreadsheet (the 21 September spreadsheet) setting out a full reconciliation of what had been drawn down under the loan, how it had been applied and how the outstanding fee for registration had been calculated;
• on 15 October 2018 Sterling lodged the transfer of land to Swann Road, together with its mortgage, and both were registered under the Land Title Act 1994 (Qld);
• on 26 October 2018, via its solicitors, Sterling sent Swann Road a "Notice of Exercise of Power of Sale" under s 84 of the Property Law Act 1974 (Qld),[3] claiming an amount of $2,665,711.37 due under the loan as at that date, notifying Swann Road that if not paid in 30 days Sterling may proceed to sell the land (the Second Notice);
• the amount claimed to be due under the Second Notice ($2,665,711.37) was calculated at the overdue rate of interest;
• none of the loan moneys were repaid;
• on 19 December 2018 Sterling appointed agents to take possession of the land, although by 21 February 2018 no steps had been taken to market the properties for sale;
• as at 18 February 2019 the amount due under the loan at the overdue rate was $3,472,306.08 and at the term interest rate_,_ $2,697,862;
• Sterling obtained a valuation of the properties as vacant sites, as at 5 February 2019, for a combined value of $2,450,000; and
• Swann Road obtained two valuations for the properties "as is", one as at 13 July 2018 and the other as at 21 February 2019, both for a combined value of $3,500,000.

7 Swann Road contends there is a serious question to be tried on two broad bases. The first broad basis is set out as follows:

• first, the overdue rate constitutes a penalty - that is, it is not a genuine pre-estimate of the loss Sterling would suffer upon default under the loan.[4] Further, the overdue rate is presumed for the purposes of the interlocutory application to be a penalty because it claims a lump sum.[5] Especially is this so, it is submitted, where there is no evidence as to the actual loss sustained from the default.[6]
• secondly, Sterling's entitlement to enter possession and sell the properties was preconditioned on there being a valid notice of default and a failure to remedy the default;
• thirdly, both the First Notice and the Second Notice were invalid because they required payment of interest at the overdue rate, and thus demanded a penalty, and constituted unlawful demands;
• fourthly, the First Notice was invalid for an additional reason, namely that it did not comply with s 84(1) of the PLA in that it did not state the amount required to be paid;
• thus, fifthly, Sterling was not entitled to possession because it failed to first satisfy the statutory (and contractual) precondition for entering into possession and therefore has no present, lawful power of sale.

8 The second broad basis for arguing there is a serious question to be tried is as follows:

• Sterling caused Swann Road to default on the loan by failing to register the transfer of title to Swann Road within 30 days of the advance which, in turn, precluded Swann Road from being able to obtain replacement finance to pay out the Sterling loan by the due date;
• to the extent Sterling's failure to register the transfer was caused by Swann Road's failure to pay the requisite transfer fee as a cost due under the loan, that failure was caused by Sterling's inability to provide a consistent figure for that cost: it first claimed $8402, then $4000 and then, under the 21 September spreadsheet, $2487.97;
• in breach of an implied duty of good faith under the loan, by its inaction in failing to lodge the transfer and mortgage for registration before 20 September 2018, Sterling caused Swann Road to default under the loan;
• alternatively, it is unconscionable for Sterling to rely upon a default it has caused as the trigger for serving either notice of default and thereafter entering into possession and exercising a power of sale.

9 Causes of action reflecting these contentions are broadly pleaded in the present statement of claim in which it is alleged:

• the overdue rate constituted a penalty;[7]
• there was an implied term of good faith;[8]
• the implied term was breached by causing the default;[9]
• alternatively, the conduct amounted to unconscionable conduct;[10]
• therefore there was no entitlement to give a notice of default and the notices were invalid;[11]
• further, the notices failed to comply with s 84(1) of the PLA;[12] and
• alternatively, the notices were invalid because they demanded a penalty.[13]

10 Sterling raises numerous arguments against each of these contentions, and particular elements thereof, both factually and legally. For example, Sterling:

• disputes there is an implied term of good faith;
• disputes, if there was such a term, it is a breach of that term not to provide an accurate figure for a cost due under the loan;
• disputes that the failure to transfer the title within 30 days prevented Swann Road from obtaining replacement finance;
• disputes that the alleged conduct could constitute unconscionable conduct under the law;
• disputes the application of s 84(1) of the PLA to the First Notice;
• contends that the First Notice remains a valid basis for entering possession under the contractual provisions of the mortgage; and
• disputes the operation or application of Lord Dunedin's presumption that the overdue rate is a penalty.

11 I will make some brief observations on only three matters. First, there was evidence in the form of an affidavit from an employee of Swann Road, Kavitha Vipulanada, that she had attempted to obtain replacement finance during September 2018 but the fact of Swann Road not being registered on title was an obstacle to obtaining that finance. In argument before me it was suggested, from the Bar table, that such a proposition was implausible. Nevertheless, the evidence was not disputed by other evidence and I am not persuaded it is necessarily implausible. Of course, that also leaves open for argument the characterisation of the failure to register the transfer as a breach of the mortgage or loan but that is a matter for trial.

12 Secondly, on the question whether it can be "presumed" that the overdue rate is a penalty because it is a "lump sum", initially I doubted that could be the case. Here what was stipulated was a rate and not a sum. Nevertheless, that was also the case in Arab Bank[14] where the default rate was 2% (not expressed as a fixed sum) and yet the court impliedly considered the presumption was potentially engaged. On further reflection, it seems logical that an interest rate, which is capable of conversion into a fixed amount, could be presumed to be a penalty on the basis that the resulting amount is arbitrary, and not an estimate of any actual identified loss flowing from the default.

13 Thirdly, there is an argument whether s 84(1) of the PLA applies to the exercise of a power of sale under the mortgage itself as opposed to one conferred by the act. This is relevant to one of the alleged defects to the First Notice. I think that the words "or otherwise" in the opening words to the section may mean that it does; but that is for argument on another day.

14 Beyond these observations, it is enough to say that I do not accept that any of Sterling's arguments amount to knockout points. There remains a serious question to be tried on each basis, perhaps stronger on the first than the second.

16 A key issue on the balance of convenience was the potential that, on present valuation of the properties, there will be a shortfall in recovering the loan and that that situation will only get worse as time progresses.

17 Sterling values the properties at $2.45 million with the present sum due either $3.472 million (overdue rate) or $2.697 million (term interest rate). Swann Road has two valuations, both at $3.5 million. The explanation for the significant differences is probably due to the fact that Sterling's valuation is for the properties as vacant land whereas Swann Road's valuations are for the properties "as is". It seems to me that until the existing improvements on the land are cleared for redevelopment the appropriate valuation for security purposes is in its present state, so I adopt the higher valuation is the appropriate one for current purposes.

18 Secondly, as presently assessed, I consider that the argument that a 9% per month interest rate is a penalty rather than a genuine pre-estimate of loss is a powerful one. So, I think the more reliable figure to adopt as the current outstanding loan balance is the one calculated at the term interest rate, that is, $2.697 million.

19 Using those two parameters, the present security is sufficient to cover the outstanding loan and will remain so for some time, so long as the properties hold their value.

20 On top of that, both Swann Road and its director, Andrew Slawson (in his personal capacity), have offered an undertaking as to damages to support the granting of the injunction. While it is true that I do not have evidence of their respective resources, neither do I have any evidence to suggest that the value of those undertakings is worthless.

21 The competing inconvenience to Swann Road should the injunction not be granted and the sale proceeds, would be the loss of its commercial opportunity to develop the land and recover its sunk costs.

22 Another relevant factor is the adequacy of the remedy of damages available to Swann Road should I not grant the injunction and it later transpires at trial that it had good cause. Sterling is a trustee company where its only asset is a right of indemnity against the assets of the trust. There is no evidence of that value and thus the adequacy of the remedy of damages is questionable.

23 In my opinion the balance of convenience favours the grant of the interlocutory injunction.

24 The final question is whether I should order, as the price of the injunction, that Swann Road pay into Court the outstanding loan balance on the Inglis principle.[15] Undoubtedly, that is the usual order. But, as is well known, there are exceptions. Although Sterling did not concede the position, I see no reason not to adopt the summary of the known exceptions to the Inglis principle as set out by Slattery J in Maviglia:[16]

There are established limited exceptions to Inglis. If the mortgagor is alleging that the power of sale has not arisen or is alleging a lack of good faith there may be no need for any payment into court, but if the mortgagor is seeking to stop the sale for any other reason, payment into court is necessary: Harvey v McWatters [1948] NSWStRp 58; (1948) 49 SR NSW 173, at 177 ("McWatters"). Other examples of these exceptions are where the validity of the mortgage is in issue, or where there is a question of whether or not there has been a breach of the terms of the mortgage, or where the issue is whether notice of breach has been effective.

The learned authors of Meagher, Gummow & Lehane at [3-085], in summary and omitting much of the authority which the authors rely upon, state and synthesize all the relevant law in the following terms. Where a mortgagor in default seeks an interim injunction to restrain the improper sale of the mortgaged property by the mortgagee, the mortgagor is required either to repay all the principal and interest claimed, or to pay it into court. A mortgagor in default who is unable to repay the money secured is almost invariably denied equitable relief and relegated to a pecuniary claim. But an exception exists where the mortgagee is exercising its powers "in a manner which is not a proper exercise of them and which does infringe the rights of the mortgagor": Inglis. Other exceptions are where the amount claimed by the mortgagee is obviously wrong, and where the there is a question as to whether the mortgagee's power has become exercisable at all: McWatters. The learned authors agreed with Campbell JA's conclusion in Bayblu Holdings Pty Limited v Capital Finance Australia Ltd [2011] NSWCA 39; (2011) 279 ALR 166 that it was right to reserve opinion on the correctness of decisions, including Parist, where an interim injunction was awarded to a plaintiff who claimed it would be able to refinance the mortgage and thus redeem in a reasonable time...

25 Here, I accept the application of two of those exceptions, namely that the mortgagor is alleging a lack of good faith and there is an issue whether the notice of breach has been effective. As I mentioned in argument, it would seem inherently at odds with the notion of good faith - if Swann Road could ultimately establish the relevant facts - that a mortgagee could, in good faith, cause a borrower to default on the loan and then use that default as the basis for selling up the security.

26 As I understand it, the present position is that Swann Road now remains unable to secure refinance because there is a mortgagee in possession of the land, and it would need to raise funds on the security of that land to pay the outstanding loan balance.

27 For these reasons I do not intend to require Swann Road to pay into Court any sum on account of the outstanding loan.

1. Upon the plaintiff by their Counsel, undertaking to abide by any order that the Court may make as to damages in case the Court should hereafter be of opinion that the defendant shall have sustained any by reason of this order which the plaintiff ought to pay:

(i) Until the trial of this proceeding or further order of the Court the defendant, its servants, agents and controllers are restrained from:

a) advertising for sale electronically, by hoarding, newspaper or magazine publication or however otherwise;

b) marketing the sale;

c) offering for sale;

d) making it known there is a sale; or

e) selling or purporting to sell as mortgagee in possession -

the property located at 91 Bellevue Terrace, Clayfield in the State of Queensland 4011 being the whole of the land more particularly described in Queensland Title Reference 12372069, and the property located at 93 Bellevue Terrace, Clayfield in the State of Queensland 4011 being the whole of the land more particularly described in Queensland Title Reference 13568077.

(ii) Each parties costs of and incidental to this summons be costs in the cause.

[1] Inglis v Commonwealth Trading Bank of Australia [1969] HCA 44; [1969] 119 CLR 334, (Inglis).

[2] Maviglia Investments Pty Limited (as trustee for the Maviglia Family Trust) v BKSL Investments Pty Ltd (in liq) & Ors [2017] NSWSC 490, [58], ('Maviglia').

[3] Property Law Act 1974 (Qld), ('PLA').

[4] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Company Limited [1914] UKHL 1; [1915] AC 79, 86-87, ('Dunlop').

[5] Ibid 87, see Lord Dunedin's principle numbered 4 (c).

[6] Arab Bank Australia Ltd v Sayde Developments Proprietary Limited [2016] NSWCA 328 [100], ('Arab Bank').

[14] Arab Bank [2016] NSWCA 328.

[15] Inglis [1969] HCA 44; [1969] 119 CLR 334.

[16] Maviglia [2017] NSWSC 490, [58] - [59], citations omitted.