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[2012] VSC 573
General information, not legal advice.
Supreme Court of Victoria
2012-11-26
LANSDOWNE AsJ
Original judgment source is linked above.
FUNDS IN COURT - Application for payment out by claimed equitable chargee or mortgagee - Dispute as to nature of equitable interest of applicant - Dispute between caveators as to priority of equitable interest of applicant - Construction of loan agreement - Applicant found to hold interest as be equitable mortgagee from date of agreement - No basis established for postponement of that interest to that of later caveator.
1 This is an application for payment out from funds in court, being the balance of the proceeds of sale of land at 14 Hiscock Street, Chadstone by the second mortgagee. The second mortgagee deposited the sum of $70,345.73 in two instalments in April 2010 after payment of itself and the first registered mortgagee. As at 13 November 2012 the amount is $71,484.45 with an amount to be added for interest, and an amount deducted for tax.
2 The proceedings were commenced by originating motion filed on 13 December 2010. In accordance with the usual practice, the plaintiff did not join any defendants to the application but she did serve all persons who had been notified by the Funds in Court Office of the receipt of the funds, being, broadly speaking, the former registered proprietor of 14 Hiscock Street Pty Limited and other caveators.
3 A number of the other caveators attended the return date of the originating motion. On that date, 16 February 2011, I ordered the plaintiff to file and serve a statement of claim joining as defendant all persons other than herself and the second mortgagee issued with a certificate of moneys received by the Senior Master's office. I further directed that further pleadings be in accordance with the Supreme Court (General Civil Procedure) Rules 2005 ("the Rules"). The plaintiff filed a statement of claim on 4 April 2011. The second defendant filed a Notice of Appearance on 9 April 2011 and an Amended Defence on 6 May 2011. I am satisfied by reason of the affidavit of service filed in court by the plaintiff at the hearing of the proceedings that all other required defendants had been served. No other Notice of Appearance was filed and no other party attended the trial.
4 The statement of claim specifically pleads that the first defendant is joined "as a necessary party only" and "without prejudice to any other rights the Plaintiff may otherwise have against the First Defendant".[1] The effect of this plea, if any, on any issue or other estoppel as between the plaintiff and the first defendant was not argued before me and I make no finding in relation to it.
5 The application was heard as a trial before me on 28 November 2011. Such an application is within the original jurisdiction of an Associate Judge pursuant to r 77.01(2)(b) of the Rules. The parties proceeded on the basis of affidavit evidence without crossexamination and submissions. The affidavit evidence consists of the affidavit of the plaintiff sworn 8 December 2010, the affidavit of Mr David Brandi, director of the second defendant, sworn 16 February 2011, and the further affidavit of the plaintiff sworn 22 November 2011.
6 The defendant by its amended defence disputes the plaintiff's claim on the funds in court but does not formally make its own application for payment out of those funds. It is clear, however, from the submissions that the second defendant itself claims the whole of the funds in court, on the basis that its interest in the land predates that of the plaintiff.
7 For the reasons set out below, I consider that the plaintiff has proved an equitable interest as mortgagee arising on execution of the Loan Agreement between herself and the first defendant, which predated the equitable interest of the second defendant as chargee, and ranks in priority to it. I do not consider any basis is established by which that interest should be postponed to that of the second defendant. On updating evidence establishing that the first defendant remains indebted to the plaintiff, I will order payment to her from the funds in court to the extent of that indebtedness.
8 The plaintiff deposes that she and her husband attended seminars in 2005-2006 run by the "Quantum 8 Property Group", which described itself as a property investment company, in relation to investment. She there met a Mr Socrates Michanicos and she and her husband made what she describes as an "investment" in a company associated with him. She says it transpired that that "investment" was a sham, and she has commenced separate proceedings in relation to the ultimate proceeds of sale of the land there in question.
9 In mid 2007 she and her husband had a number of conversations with Mr Michanicos at premises described as the headquarters of the Quantum 8 Property Group. Mr Michanicos told her and her husband that if they wished to "come in on a development" they "could go in as partners".[2] She says that Mr Michanicos told her that the first defendant had already entered into a contract of sale with respect to the land at 14 Hiscock Street, Chadstone ("the Property") and that she and her husband could advance $300,000 "as partners in an investment". Of this sum, $200,000 would be used for the purchase of 14 Hiscock Street and a further $100,000 would be later advanced after settlement for the development costs of apartments. She deposes that "Mr Michanicos said that Michael and I would have security and that we would get a caveat over the title of the Property".[3]
10 The company search exhibited to the plaintiff's affidavit shows that Mr Michanicos became a director of 14 Hiscock Street Pty Ltd, the first defendant, when the company was registered on 11 September 2007. The historical title search exhibited to the affidavit of Mr Brandi shows that a transfer of the fee simple in 14 Hiscock St to the first defendant was lodged on 7 January 2008.
11 It is not disputed between the plaintiff and the second defendant that the plaintiff and the first defendant entered into an agreement entitled "Loan Agreement" dated 2 November 2007, which made provision for the plaintiff, described as "the Lender", to advance to the first defendant, described as "the Borrower", in respect of the property at 14 Hiscock St (called subsequently in these Reasons "the Land") "the sum of up to $300,000 for the settlement of the Land, the Development and any associated costs" (clause 1). I will return to a detailed consideration of this agreement, as the parties are in dispute as to the nature of the interest in the Land, if any, conferred on the plaintiff by it. The plaintiff's evidence is that the agreement was prepared in this form by or on behalf of the first defendant and she did not obtain her own legal advice before entering into it.
12 The plaintiff pleads that she advanced to the first defendant the sum of $200,000 on or about 2 November 2007. The plaintiff's evidence in her affidavit of 22 November 2011 is that the sum was paid on her behalf on 5 November 2007 and that she believes that the sum was in fact used as part of the purchase price of the Land. The first defendant also caused a caveat to be prepared in the name of the plaintiff as caveator, which she signed on 5 November 2007. The caveat[4] ("the first caveat") describes the estate or interest claimed as "an interest as chargee" and the grounds as "pursuant to loan agreement signed by the registered proprietor and the caveator dated 2nd November 2007". The first caveat was lodged and registered by Parker Property Solutions on 29 November 2007.
13 As set out above, the first defendant was not, at the time of lodgement of this caveat the registered proprietor of the Land. The transfer to the first defendant was lodged on 7 January 2008 together with a mortgage to the Westpac Bank and both were registered on 15 February 2008. At that time the plaintiff's first caveat lapsed. The intervening period may have been to allow for notices to the plaintiff as caveator. The evidence before me does not show if any such notice was sent. The plaintiff deposes that she did not receive any notification prior to the first caveat lapsing and was not informed by the lodging party, Parker Property Solutions, the first defendant or the entity associated with the first defendant with whom she had dealt that any such notification had been received. The plaintiff suggests in her second affidavit that Parker Property Solutions was associated with the second defendant. Neither counsel adverted to this evidence at hearing, and I do not make any finding in relation to that evidence. The address for service of notices given on the first caveat was c/- 113 Kangaroo Road, Hughesdale Vic 3166, which was the address of the first defendant.
14 The plaintiff says she was not aware that the first caveat had lapsed until 2010 when she engaged her current solicitors. Those solicitors lodged a further caveat on her behalf on 19 February 2010. That caveat[5] ("the second caveat") recites the estate or interest claimed as "An equitable interest as chargee" and the grounds as "Pursuant to a Loan Agreement between the Caveator and 14 Hiscock Street Pty Ltd dated 2 November 2007."
15 The second defendant does not plead to the paragraphs in the statement of claim that plead the origin, execution or terms of the Loan Agreement; the advance; the purpose of the advance; or the circumstances surrounding the first caveat, and did not adduce any evidence to dispute that of the plaintiff in relation to these matters. The content of the second caveat was clarified by evidence lead by the second defendant, subsequently adopted by the plaintiff, and not otherwise disputed. I find these matters proved as set out above. The second defendant does dispute that the Loan Agreement created an equitable charge or mortgage over the Land which arose, as pleaded, on 2 November 2007 or 7 January 2008 and the other pleaded characterisations of the plaintiff's interest in the Land.
16 The second defendant relies on an interest as chargee pursuant to a charge contained in a loan agreement dated 31 July 2009 between the first defendant (and other companies associated with the Quantum 8 Group) and the second defendant. The second defendant caused a first caveat to be lodged in respect of this claimed interest on 16 November 2009, and a second on 25 February 2010. There is also evidence of an earlier caveat lodged on behalf of the second defendant on 30 June 2009 said to be pursuant to a mortgage dated 1 March 2008, but at the hearing counsel for the second defendant withdraw any reliance on this claimed interest.
17 The loan agreement dated 31 July 2009 between the second defendant (described in the agreement as "the Lender") and thirty one other companies and individuals, including the first defendant, collectively described in the agreement as "the Borrowers" and "the Quantum 8 Group of Companies" provides for the second defendant to lend a "Principal Sum" to the Borrowers, and provides that all Borrowers are jointly and severally liable under the loan agreement. Clause 7 of the agreement provides:
To better secure the Loan the Borrowers and Guarantors hereby charge any land or assets which the Borrowers and Guarantors or their related parties may from time to time own ... to secure the Loan Amount.
18 The "Loan Amount" is defined to mean the "Principal Sum and interest and other monies owing from time to time by the Borrowers to the Lender".
19 Mr Brandi's affidavit deposes to an advance of more than $3 million made by the second defendant to the first defendant and the other Borrowers pursuant to the loan agreement. By paragraph 17 of his affidavit, Mr Brandi deposes that the second defendant has not been paid any of the sum advanced to the Borrowers, including the first defendant, pursuant to the loan agreement.
20 The plaintiff does not dispute that the second defendant acquired an equitable interest as chargee in the Land pursuant to this loan agreement on or about 31 July 2009. She relies on her interest being more than eighteen months earlier, in November 2007.
21 On 17 November 2009, a discharge of the mortgage to the Westpac Bank and first and second mortgages to Steme Pty Ltd, Loto Investments Pty Ltd and Jorell Pty Ltd as first mortgagees and Fauborg Saint Honore Pty Ltd as second mortgagee were lodged for registration on the Land. These were registered on 26 November 2011 after the withdrawal or removal of, amongst other caveats, the caveat lodged on 16 November 2011 by the second defendant in respect of the 31 July 2009 loan agreement. As stated earlier, the second defendant lodged a fresh caveat in respect of its interest pursuant to this agreement on 25 February 2010, shortly after the plaintiff's second caveat lodged on 19 February 2010 and rectified on 22 February 2010.
22 Interests in the Land were also claimed by the tenth and eleventh defendants (caveat lodged 26 March 2010 in the claimed capacity of mortgagee in respect of a claim dated 31 October 2009) and by the third to ninth defendants (caveat lodged 17 December 2009 in the claimed capacity of chargee in respect of claim dated 14 November 2009). The third defendant attended the first return date of the plaintiff's originating motion, but none of these defendants have entered an appearance to the plaintiff's statement of claim. I conclude that they make no claim on the funds in court in priority to that of the plaintiff or second defendant.
23 The plaintiff pleads[6] that the development of the Land did not proceed in accordance with the terms of the Loan Agreement within a reasonable time or at all, amounting to breach of the Loan Agreement. The second defendant does not plead to this paragraph. The plaintiff also pleads that there has been a total failure of consideration in relation to the Loan Agreement. This is disputed.
24 The plaintiff deposes that she has not been repaid any of the $200,000 she advanced to the first defendant.[7] There is no evidence to the contrary, and I find it to be the case as at the date of the plaintiff's affidavit. She also deposes that she has not been paid "any interest in relation to my investment" with the first defendant.[8] Again, there is no evidence to the contrary and I find this proved as at the date of her affidavit. The plaintiff says in both her later November affidavit and her initial affidavit that the development has not proceeded. As will become clear, this is relevant to the nature of her interest in the Land. She gives, however, inconsistent accounts as to the basis for that belief. In her first affidavit sworn 8 December 2010 she says that "At settlement, the Land was vacant land. It remains vacant land. The Development has not proceeded and 'Development Approval' has not been reached."[9] In her affidavit of November 2011 she says;
Since advancing the moneys to the Company, I have on a number of occasions gone past the site. The existing property was a dwelling which was to be removed such that the development could be undertaken. The last time I looked, the dwelling had not been removed. However, the power had been disconnected and a Notice of Planning had been erected out the front of the property. Otherwise the development had not proceeded.[10]
25 There is no evidence as to the date of this observation by the plaintiff, or the dates of any of the events she describes. When this was the subject of submission at the hearing, counsel for the plaintiff sought to adduce further evidence orally from the plaintiff. The application was opposed, and subsequently withdrawn. I will set out my findings on this matter, to the extent relevant, shortly.
26 There is no dispute that the land was sold by the registered second mortgagee in possession following default by the first defendant. The second mortgagee gave notice of this intention to the plaintiff and the second defendant by letter dated 17 March 2010. That letter enclosed a Notice to Pay pursuant to s76 of the Transfer of land Act 1958 directed to the first defendant alleging default in payment of principal and interest from 10 December 2009.
27 The plaintiff claims an equitable interest in the Land first in time on two distinct, and inconsistent bases, arising from the Loan Agreement with the first defendant. The first basis of the plaintiff's case is that the Loan Agreement created on 2 November 2007 an equitable charge or equitable mortgage in her favour over the Land. The alternative basis she advances, is that she has an equitable interest in the Land as beneficiary of a resulting trust to the extent the moneys she advanced represented a proportion of the purchase price. This alternative basis is said to have arisen either on the date of the Loan Agreement, 2 November 2007, or on the date of settlement of the purchase in January 2008. This basis is inconsistent with the assertion of an interest as equitable chargee or mortgagee, because the resulting trust principle does not arise where A lends money to B and B uses the money to buy property from X.[11] If on its proper construction the Loan Agreement provided for a loan then there is no presumption of a resulting trust. If this were not the case then resulting trusts could be presumed in many conventional instances of loans by financial institutions to facilitate a purchase.
28 In the statement of claim the plaintiff advanced a third possible basis for her claim being as beneficiary pursuant to a purposive trust. She does not press that claim at trial.
29 I have set out the history of the various caveats lodged in respect of claimed interests in the Land in detail above. The parties agree that the priority of their respective interests dates from the creation of those interests, not from the date of lodgement of a caveat to protect such interest. The second defendant did put an argument that, if the Court considered the plaintiff's interest to be first in time, the Court could consider that the circumstances justified that interest being postponed to that of the second defendant's interest. The argument was not strongly pressed, and it was conceded by the second defendant that the mere failure to lodge a caveat does not of itself warrant postponement of the interest that would have justified the lodgement of a caveat.[12] Thus the second defendant would require something more than the mere fact that at the time it obtained its interest as charge, the plaintiff's caveat had lapsed and was not on the title. There is no evidence of any reliance by the second defendant on the absence of such caveat in entering into its loan to the first defendant, which loan related to a number of properties in any event. I do not consider that there is any basis on the evidence established by which the plaintiff's interest, if first in time, should be postponed to that of the second defendant.
30 The second defendant's principal submission is that the plaintiff had no interest in the Land until a point in time later than the creation of its own equitable interest as chargee (which interest is not disputed by the plaintiff), and accordingly it is first in time.
31 Dealing firstly with the plaintiff's assertion of an equitable interest as chargee or mortgagee, the second defendant says that the Loan Agreement on its proper construction did not create any such charge or mortgage. The second defendant says that the Loan Agreement created by clause 4 a contingent equitable interest in the plaintiff as to 50% of the land, contingent on the development of the land not occurring. Clause 4, the second defendant says, is properly regarded as a contingent declaration of trust, whereby the first defendant declared that, if the development did not proceed, it would hold its interest in the Land as to 50% for the Plaintiff.
32 There is no dispute between the parties that the development of the land has not occurred. In answer to my question as to when this equitable interest arose, the second defendant says that, while theoretically it is possible that it arose at some point in time prior to its own equitable interest, i.e. prior to 31 July 2009, on the evidence the only conclusion the Court can draw is that the contingent equitable interest of the plaintiff vested when the second mortgagee gave notice of its intention to exercise its rights. This was by letter dated 17 March 2010, i.e. after the second defendant's equity had arisen.
33 In relation to the claim said to arise from a resulting trust, the second defendant says that the arrangement between the plaintiff and the first defendant was a loan for the purchase of a property by the first defendant only. Accordingly, no question of an equitable interest by way of resulting trust can arise. Further, in relation to this asserted basis, the second defendant says that, even if properly construed the arrangement between the plaintiff and first defendant was a joint purchase, the registration of title in the name of the first defendant was not without consideration passing from the first defendant to the plaintiff. In particular, the second defendant relies on the terms of the Loan Agreement as to payment of interest.
34 Thirdly, even if there was a failure of consideration flowing from the first defendant to the plaintiff, the plaintiff's claim is only as that portion of the funds in court that represents her interest as part purchaser, being the percentage shown by her contribution to the purchase price.
35 It is clear that as between the plaintiff and the second defendant, it was the plaintiff who first lent money to the first defendant. It is not necessary to construe the exact nature of the contractual rights thereby created in her favour as against the first defendant, because a mere contractual right against a borrower arising from a loan in respect of land is not sufficient to ground a claim for payment of part of the proceeds of sale of that land. What is required is a proprietary right i.e. an estate or interest in the land and, here, a proprietary right that arose earlier in time to that of the second defendant.
36 The first issue is whether in making the advance to the first defendant the plaintiff was acting as purchaser or as a lender. If a purchaser, the registration of title in the first defendant's name only was subject to a trust in favour of the plaintiff as to the proportion the amount she advanced bore to the purchase price (a little under a third) if there was no consideration flowing from the first defendant to the plaintiff. If a lender, then it is next necessary to consider whether the Loan Agreement created a charge or mortgage, or only the contingent interest asserted by the second defendant.
37 There are some indications that the advance was regarded by the parties to the Loan Agreement as an investment, which could suggest a purchase or part purchase by the plaintiff of the Land. The plaintiff describes the advance as an "investment" in her affidavits, and says that it was described in that way to her and her husband by Mr Michanicos. The Loan Agreement commences with the following words prior to the Recitals: "Where the Lender at the request of the Borrower has agreed to invest the sum of $300,000" (emphasis added).
38 A loan could also, of course, be described as an investment, in the sense that it is to be repaid with interest. Accordingly, I do not regard the use of the word "investment" as determinative. What is persuasive in my view is that the terminology in the Loan Agreement, commencing with that title itself, is predominately that of a loan, incurring interest. I consider that the better view is that the Loan Agreement is just that, and accordingly the advance did not ground the creation of a resulting trust in favour of the plaintiff. I rely on the following to support this conclusion.
39 In addition to the title of the document, the parties are described as the "Lender" (the plaintiff) and the "Borrower" (the first defendant). The Recitals recite that the Borrower has purchased 14 Hiscock St, Chadstone "with a proposed development plan to construct 3 townhouses for the sum of $632,000"; that the Lender is "lending funds towards the development" and that the "excess of the funds lent that were not utilised towards settlement will be used to cover all associates (sic) costs to the development and/or project". In the Definitions the "Lender" (i.e. the plaintiff) is defined as "the party that is lending the necessary funds required to settle the land plus stamp duty at approximately 30% of the Land cost plus all the associated costs with the development" and the "Borrower" as "the party that is doing all the work, managing the project and borrowing any necessary funds (usually between 65% to 80%) to settle and develop the Land".
40 The Loan Agreement makes provision for the payment of interest. Clause 3 provides:
The Borrower agrees to give to the Lender 50% of the profit as per above in the Land and 50% profit sharing in the event of the sale of the Land with the Development approval and/or the Development of the Land as repayment of interest on the amount borrowed by the Borrower from the Lender under this Loan Agreement.
The interest payable by the Borrower to the Lender on the amount borrowed which shall be repaid by the Borrower to the Lender as a 50% holding in the Land and Development.
42 The reference to "profit as per above" in clause 3 presumably refers to the definition of "Profit". That definition is not clear, but appears to contemplate either sale of the Land and units, if constructed, less costs, or valuation of the Land and units, if constructed, less costs.
43 I conclude from the conjunction of Clause 3 and the definition of "interest" that the 50% interest in the "profit" is intended to be in repayment of interest, not principal and interest. I am fortified in this construction by the definition of "Default by the Borrower" which is defined to mean that the Borrower "is refusing to pay the Lender the amounts advanced and the 50% of any profit at the sale of the Land and/or the Development in repayment of the interest payable, when the development is finalised at the rate of interest payable to the Lender" (emphasis added). The emphasised words show, in my view, that "Default by the Borrower" relates to both principal and interest, and that the "50% of any profit" relates to interest only.
44 Curiously, there is only one specific reference to repayment of principal in the operative provisions of the Loan Agreement, and that reference does not specify when it is to be repaid. Clause 5 provides:
To secure repayment of the principal sum outstanding from time to time the Borrower if necessary hereby agrees to provide a transfer of 50% of shares from the Borrower to the Lender to be held in Escrow in the event of a Default by the Borrower.
45 Although indirect, I consider that this reference is sufficient to imply into the Loan Agreement an obligation to repay the advance, and with interest, and accordingly the advance is properly to be regarded as a loan, not a part purchase. It is not necessary for current purposes to determine when such repayment was, or could be, required.
46 If I am incorrect in this conclusion, and the advance was by way of part purchase, then in any event the obligation to pay interest means there was consideration for the registration of title in the first defendant only, and so no purchase price trust was created.
47 There is a third reason why the characterisation of the plaintiff's interest as one of part purchaser fails to secure her payment out of the funds in court in my view. Both parties assumed in their submissions that, if the plaintiff was a part purchaser, she would be entitled to take from the proceeds of sale in priority to other caveators -the plaintiff said she was entitled to the whole of the proceeds because this sum was less than her proportionate interest; the second defendant said she would be entitled to only the same proportion as her contribution to the purchase price bore to the purchase price.
48 On further consideration, I am not persuaded that either view is correct. I consider that even if the plaintiff had an interest as equitable part purchaser, that interest would ordinarily rank with that of the first defendant , who she permitted to hold the legal title. It flows that, arguably, her interest would ordinarily be subsumed to that of other lenders or persons acquiring interests in the land due to the actions of the first defendant, to the same extent as the interest of the legal owner is so subsumed. An exception may arise if the first defendant acted fraudulently or unconscionably towards the plaintiff in granting those interests. It is not necessary to take this issue further, given my conclusion that no purchase price trust was in fact created, and in the absence of appearance by the first defendant and full elaboration of this issue, it is not possible nor appropriate to do so. I am not persuaded, however, that the plaintiff would necessarily take, even as part owner, in priority to the other caveators, commencing with the second defendant.
49 I turn now to the characterisation of the plaintiff's interest, if any, in the Land acquired as lender.
50 The plaintiff asserts clause 6 creates an equitable mortgage, and clause 4 an equitable charge. She asserts that the clauses can and should be read independently of each other. The second defendant says that they must be read together, and clause 6 is merely the mechanism for the implementation of the interest afforded by clause 4- it creates no independent rights. The second defendant says that interest was an equitable interest as owner as to 50% contingent on the development not proceeding, and that this interest did not vest until after the creation of the second defendant's interest as chargee.
51 I consider the second defendant's construction of clause 4 to be the correct one, and accept the submission that that interest did not vest until after the creation of the second defendant's interest. In my view, however, clauses 4 and 6 deal with separate subject matter, and clause 6 is not merely the mechanism to implement the interest created by clause 4 as the second defendant asserts. I accept the plaintiff's submission that clause 6 created an equitable mortgage, and did so on execution of the Loan Agreement. Accordingly, I will uphold the plaintiff's claim on this basis. My detailed reasons for these conclusions follow.
52 I begin with the usual principles of construction, on the basis of which the clauses should be construed having regard to the whole of the document. I have set out some of the operative clauses earlier, but for ease of reference set out the relevant operative clauses again below. I consider the construction of the Loan Agreement that makes most sense of it reflects the format and sequencing of these operative clauses.
53 The relevant operative clausese 1-7 are as follows:
54 In my view, in summary, clauses 1 and 2 of the Loan Agreement provide for the advance by the Lender. Clauses 3 and 4 relate to interest only. Clause 5 provides for security for repayment of the principal sum, and so implies the obligation to make that repayment. Clauses 6 and 7 relate to default by the Borrower, or Lender, and in the case of clause 6 relates to either or both of principal and interest. Clauses 8,9 and 10 are machinery provisions.
55 Returning to clauses 3 and 4, they are informed by the definitions of "Interest" and "Profit" discussed earlier. They are also informed by the definition of "the Development", which is defined to mean "the construction and completion of the parts (sic) as per the Development Approval". The use of the words "and" after the first phrase, ending with "the Land", and "and/or" after the words "Development approval", mean in my view that clause 3 provides for the payment of interest as a contractual right in any of the following circumstances- on sale of the Land alone, on sale of the Land with Development Approval or on sale of the Land with the Development. Clause 4, by contrast, applies only where "the Development of the Land does not occur" i.e. where the construction contemplated by the definition of Development has not taken place. It confers rights on the Lender in relation to interest, which once the clause is read with clause 3, apply if the Development has not occurred whether or not the Land is sold.
56 As a straightforward matter of construction it is impossible, in my view, not to accept the submission of the second defendant that, whatever the nature of the interest conveyed by clause 4, it is contingent on the Development of the Land not occurring. I say this notwithstanding the submission by the plaintiff that, if there is any ambiguity, the clause should be construed in favour of the plaintiff and against the first defendant. I do not consider there is any ambiguity.
57 First, and most persuasively, the clause begins with a clear and unambiguous expression of a contingency. Secondly, the interest thereby acquired is expressed in the future, and not present, tense. In these respects, the clause can be contrasted with clauses 5 and 6, which immediately follow. Clause 5 expressly deals with security, and the Borrower's obligation to provide same is expressed to be both "hereby", i.e. by this document, and in the present tense. The obligation is only "if necessary" (perhaps on request), but in my view this is not an expression of a condition precedent to the obligation, but rather the expression of the occasion for its exercise. Similarly, in clause 6, the Borrower agrees to appointment of the Lender as its attorney for sale of the Land in the present tense and "irrevocably". The qualifier "if it is in default of any money due under this Agreement" is in my view the occasion for the exercise of the appointment, which appointment has already been made by the Loan Agreement, and not a condition precedent to the appointment.
58 The plaintiff submits that the promise of the first defendant to give a caveat to the plaintiff to protect her interest, the fact that it did so, and that it did not object to or seek to remove her second caveat, support her construction that the interest created by clause 4 took effect immediately as a charge, as expressed in the caveat. She relies on Troncone v Aliperti ("Troncone")[13] a decision of the New South Wales Court of Appeal in this regard. In that decision, Mahoney JA, with whom Priestley and Meagher JJA agreed, held that because a caveat cannot be entered against land unless the caveator has a proprietary interest (in NSW as here):
Therefore, unless there be evident an intention to the contrary, the grant to the creditors of an authority to lodge a caveat on the relevant property carried with it by implication such an estate or interest in land as was necessary to enable the authority to be exercised.[14]
59 In my view, Troncone is distinguishable from this case. The clause in question there provided "the Debtor authorises the Creditors to lodge a Caveat on any property owned by the Debtors (sic) to protect his interest" and the Court held there was no intention to the contrary shown on the evidence. Here, by contrast, clause 4 by its very terms is evidence against an immediate equitable interest. Further, the debtor in Troncone was a solicitor, and this appears to have influenced the Court, because to find that he authorised the lodgement of a caveat while withholding the creation of the interest in land necessary for that purpose could amount to deception by him, or authorising an abuse of process or a statutory offence by his creditors.[15]
60 I conclude that, notwithstanding the grant by the first defendant of a right to lodge a caveat immediately, and the actual lodging of same by the grantor, clause 4 on its face did not grant an immediate equitable interest.
61 The next issue is whether this interest vested, and, if so, when.
62 It is conceded that the units were not constructed by the time the Land was sold by the second mortgagee, and so the Development had not occurred by that point in time. I accept the submission of the plaintiff that a term that the Development occur within a reasonable time should be implied into the Loan Agreement and clause 4 in particular. The second defendant did not plead to this assertion, and the implication is necessary in my view to give commercial sense to the transaction. Assuming that non construction by the time of forced sale was a breach of this term, and so triggered clause 4, this nevertheless does not assist the plaintiff in competition with the second defendant, because the second defendant's interest arose well before this. There is no evidence on the basis of which I can be satisfied that breach of the implied term occurred on any specified date at an earlier point in time. I do not consider in any event that it could be said to have arisen prior to the loan agreement between the first and second defendants. This is because it is clear that the Loan Agreement contemplated further borrowing by the first defendant for the purposes of the Development. There is specific reference to priority payment to a first mortgagee in clauses 6 and 7, and further borrowing may also be contemplated by the definition of "the Borrower". There is no evidence that the entry by the first defendant into the loan with the second defendant was done in anything other than furtherance of this purpose.
63 I conclude that the interest conferred upon the plaintiff by clause 4 arose after the equitable charge in favour of the second defendant created by the loan agreement of 31 July 2009 and, for that reason, does not confer priority on the plaintiff.
64 Strictly, given this finding, it is not necessary to determine the exact nature of this interest. The matter has been argued, however, and so I will give my conclusion.
65 The interest claimed by the plaintiff by virtue of clause 4 is that of chargee, not mortgagee. By contrast, the interest claimed by the plaintiff by virtue of clause 6 is that of mortgagee. The parties were in broad agreement in relation to the principles that apply to equitable charges and equitable mortgages, but did not address in detail the differences between them.
66 A charge is described in Fisher and Lightwood's Law of Mortgage[16] ("Fisher and Lightwood"), to which both parties took me, as follows:
A charge is a security whereby real or personal property is appropriated for the discharge of a debt or other obligation, but which does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right of possession, but only a right of realisation by judicial process in case of non-payment of the debt.[17]
67 There is no similar succinct definition of equitable mortgage in Fisher and Lightwood. The text defines first the essential character of "any transaction" by way of mortgage (i.e. including legal mortgage) as:
(1) that a debtor confers upon his creditor a proprietary interest in property of the debtor, or undertakes in a binding manner to do so, by the realisation or appropriation of which the creditor can procure the discharge of the debtor's liability to him, and (2) that the proprietary interest is redeemable, or the obligation to create it is defeasible, in the event of the debtor discharging his liability.[18](emphasis added)
If there has been no legal transfer of a proprietary interest, but merely a binding undertaking to confer such an interest, that obligation, if specifically enforceable, will confer a proprietary interest in the subject matter in equity.(emphasis added)
69 The emphasised words reflect the common instance of an equitable mortgage created by the deposit of title deeds.[19] Other examples, relied upon by the plaintiff, given in Fisher and Lightwood include:
70 Neither the creation of a charge nor an equitable mortgage require particular words. An equitable mortgage in respect of land must be by deed if the mortgagee is to have the power of sale and other powers conferred upon a mortgagee by statute. The Loan Agreement is in the form of a deed. Fisher and Lightwood observes that it will often be difficult to determine if a transaction creates an equitable mortgage, or charge, or some other legal relationship, there being no clear touchstone. All the relevant circumstances and the terms of the documentation must be considered.[21]
71 An equitable mortgage contains the right to seek an order for foreclosure i.e vesting of the mortgaged property in the mortgagee.[22] The right of foreclosure is not vested in a "mere chargee"[23]. It is expressed this way by Sykes and Walker[24]: "the chargee can never convert her or his interest by way of charge into full ownership".
72 Fisher and Lightwood summarise the difference between an equitable mortgage and a charge as follows:
An equitable charge is created when real or personal property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation. It creates an equitable interest and confers on the chargee a right of realisation by judicial process. Equitable charges differ from equitable mortgages. Sykes and Walker, p197, say that the essential theoretical difference is that an equitable mortgagee takes some equitable rights of property whereas an equitable charge is a pure hypothecation. The practical difference is that the equitable mortgagee may foreclose, but the chargee merely has the remedy of judicial sale.[25]
73 The second defendant submits that the interest created by clause 4 cannot be that of chargee (nor, presumably, mortgagee, if that were asserted), because use of the word "own" is inconsistent with an interest as chargee or mortgagee of Torrens title land. Under old system title, a mortgage was created by way of transfer of the legal interest, with the mortgagor retaining an equity of redemption on discharge of the liability. A mortgage of Torrens title land, by contrast, does not involve any ownership of the land the subject of the security, but an interest which, on default, can lead to sale of the land to repay the amount owing.[26] Accordingly, the second defendant submits that the interest created by clause 4 was an equitable interest as part owner, not chargee or mortgagee, which interest was also contingent on the Development not occurring.
74 On balance, I consider this to be correct. The use of the phrase "as security" in clause 4 might suggest a charge or mortgage, rather than ownership interest, but the contrast to clause 5 in my view tips the scales towards an ownership interest. Clause 5 also refers to security, but contains no provision for ownership except in the case of default. It provides for a transfer of shares (presumably in the Borrower) but these are to be held in escrow i.e. the transfer not effected unless the Borrower is in default. I do not conclusively construe clause 5 because it is not necessary to do so in these proceedings, as it does not relates to an interest in the Land, and it may also be undesirable to do so in the absence of the first defendant as contradictor, but at first blush clause 5 creates an equitable mortgage over shares- the Lender can require the transfer or share certificates to be provided to her, but she is not permitted to effect the transfer unless the Borrower is in default. It would appear to fall within the first example of equitable mortgage cited above from Fisher and Lightwood.
75 Given the clearer words used in clause 5 to create security, although in that instance over shares, not the Land, I accept the submission of the second defendant that the interest created by clause 4, which uses the words of ownerships, is as part owner.
76 If I am wrong in this conclusion, and the interest created by clause 4 is that of chargee, then this does not assist the plaintiff in any event, because it remains a contingent interest, which did not vest prior to the second defendant's interest.
77 The parties focused most of their attention on clause 4, although the plaintiff submitted that clause 6 was independent of clause 4 and created an equitable mortgage. The second defendant submitted that it was merely the machinery provision for clause 4.
78 Clause 6 is expressed to relate to "default of any money due under this Agreement" by the Borrower (emphasis added). It confers a power of sale on the Lender in that event. As discussed earlier, "Default by the Borrower" is defined to mean that the Borrower "is refusing to pay the Lender the amounts advanced and (interest quantified as there set out)" (emphasis added). Applying this definition to clause 6, it may be that the power of sale thereby conferred could only be exercised if the Borrower was in default in respect of both principal and interest. It is not necessary to determine, for current purposes, however, when the power of sale could have been exercised. The critical issue in these proceedings is whether clause 6 refers only to, and is dependent on, clause 4 (in which case, the interest thereby conferred vested only when the interest created by clause 4 vested) or whether it created an independent interest. If so, if that interest was created on execution of the Loan Agreement, it is earlier in time to the interest of the second defendant.
79 In my view, clause 6 is independent of clause 4. I reach this conclusion for the following reasons. First, it applies to both principal and interest, not just interest, as does clause 4. Secondly, the triggering event in clause 4 is differently expressed. It is expressed as the Development not occurring, not default. It may be that the circumstances that amounted to one would in some instances also amount to the other, but the different terminology suggests that that is not necessarily the case. Thirdly, in my view the sequencing and content of clauses 4-6 inclusive show an intention to protect the Lender's advance in different ways. Clause 4 relates to interest, and the Development not occurring. In that event, the Lender owns 50% of the Land in equity. If the Development not occurring also constituted default, then the power of sale afforded by clause 6 could be utilised. If it did not also constitute default, for example because default in payment of both principal and interest was required to establish default, and the principal had been repaid, then the Lender could have recourse to the courts to seek sale as a part owner. Clause 5 relates to repayment of the principal, not interest, and provides for security by deposit of share transfers (not an interest in land), to be held in escrow pending default.
80 On this interpretation clause 6 may be utilisable in the event of the ownership interest conferred by clause 4 vesting, but it is not so limited. It relates to the Land, not other security. It confers a power of sale in the event of default. For these reasons, it creates an interest in the Land by way of equitable mortgage, within the examples given earlier. As discussed earlier in relation to clause 4, I consider that the use of the present tense in clause 6 and the word "irrevocably" means that this interest was created at the time of execution of the Loan Agreement, although the occasion of its exercise is only on default. Accordingly, it is earlier in time to the interest of the second defendant as chargee, conferred by its agreement dated 31 July 2009.
81 For these reasons I consider that the plaintiff has established that she has the earlier proprietary interest. I do not consider any basis is established on the evidence for the postponement of that interest to that of the second defendant. Given the delay in the delivery of this judgment, for which I express my regret and apologies, I will require an updating affidavit from the plaintiff as to whether she has received any amount due to her from the first defendant. If that evidence establishes that the first defendant remains indebted to her, I will order payment out to her of that amount of the funds in court that represents all or part of that indebtedness.
82 I will hear the parties as to costs if required.
IMPERIUM DESIGNS AUSTRALIA PTY LTD (ACN 099 775 747)
[2] Plaintiff's affidavit sworn 22 November 2011, at [9]..
[3] Paragraph 9 of affidavit sworn 22 November 2011.
[4] Exhibit DB-11 to Mr Brandi's affidavit.
[5] Exhibits DB-5 to Mr Brandi's affidavit and MM-6 to the plaintiff's affidavit sworn 22 November 2011.
[7] Plaintiff's affidavit sworn 8 December 2010 at [23].
[8] Paragraph 25 of affidavit sworn 22 November 2011.
[9] Paragraph 11 of affidavit sworn 22 November 2011.
[10] Paragraph 25 of affidavit sworn 22 November 2011.
[11] Jacobs' Law of Trusts in Australia, edited Heydon and Leeming 2006, p 241.
[12] Jacobs v Platt Nominees Pty Ltd [1990] VicRp 14; [1990] VR 146
[15] Ibid, Mahoney JA at 13,292 and Meagher JA at 13,294.
[16] Tyler, Young and Croft, 2nd Australian Edition, Lexis Nexus Butterworths, 2005
[24] Sykes and Walker, The Law of Securities 5th Edition Law Book 1993 at pp329-330
[25] Fisher and Lightwood, op cit, at p37
[26] Fisher and Lightwood, op cit, at p103 and Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd and anor [1994] VicRp 47; [1994] 1 VR 672, per Brooking J. at 674.
McGarry
14 Hiscock Street Pty Ltd & Ors [2012] VSC 573