Plaintiff v First Defendant

5 The plaintiff issued proceedings by way of writ filed on 22 December 2014. On 23 March 2015, the defendants filed a defence and a counterclaim by the second defendant. The plaintiff subsequently filed an amended statement of claim on 25 June 2015. The defendants filed an amended defence on 15 July 2015.

6 It is useful to outline some of the agreed facts below.

The plaintiff and the defendants enter into a loan agreement in which the plaintiff agrees to loan the first defendant $425,000 and the second defendant agrees to provide a guarantee and mortgage security to the plaintiff.[4] The mortgage security is given by the second defendant to the plaintiff in the form of a mortgage over the land described in the property.[5] The second defendant provides a guarantee and indemnity to the plaintiff.[6]

The parties enter into a deed of variation of the loan agreement to extend the draw down date by 12 months (the 'deed of variation').[7]

The plaintiff serves a Default Notice and Demand by Mortgagee on the defendants requiring payment within 7 days of $446,832.12 (the 'default notice') (whether this is a valid notice is in dispute).[8]

Defendants' solicitors write to plaintiff's solicitor referring to communications with a third party and stating that their client is able to proceed with refinance subject to addressing the amount of the payout.[9]

Plaintiff's solicitors respond and state they will prepare documents for assignment of the loan and securities and attach document with calculations indicating that up to 30 December 2014 the amount of principal and interest due is $461,727.90.[10] The assignment does not occur.

Plaintiff's solicitors send Default Notice and Demand to Defendant's solicitors.[11]

7 The legal issues for determination are as follows:

(d) How is interest to be calculated on the loan?

8 The default notice was served on the defendants under cover of letters from the plaintiff's solicitors dated 18 September 2014.[12]

9 Following the hearing, the Court invited the parties to make further written submissions referring to any authorities regarding the validity of default notices. The parties both filed written submissions in response.

10 The defendants submit that the default notice is invalid. They submit that the default notice was wrong and/or misleading in the following aspects.

11 Firstly, there was no default. The default notice asserted that the borrower and mortgagor had defaulted by failing to pay interest due on 31 May 2014 or at all. Immediate repayment was then demanded. However, interest had been paid as part of a six month pre-payment of interest in the sum of $20,187.50 on 20 December 2013, for the period 14 December 2013 to 14 June 2014 pursuant to provisions of clause 1.1(b) of the deed of variation.

12 Secondly, paragraph 9 of the default notice refers to a failure to pay amounts payable on demand but then does not refer to any such demands, nor are they referred to in the plaintiff's pleadings.

13 Thirdly, amounts are demanded that are not owing under the loan agreement and mortgage. That is, an amount of $446,832.12 is demanded. It includes $20,008.12 default interest from 18 May 2014. The interest has been wrongly calculated on the full amount of the loan from the commencement of the loan rather than the outstanding amount of the loan, in breach of clause 5.2 of the loan agreement.

14 The defendants submit that the consequence of the invalidity of the default notice, is that it is not effective to allow a mortgagee (in this case, the plaintiff) to exercise its power of sale under s 77 of the TLA, or its contractual powers to accelerate the principal on default.[13]

15 The defendants make an alternative submission that the plaintiff waived compliance by the defendants with the default notice. This is not a matter pleaded in their defence. This submission was made in the further written submissions. The plaintiff objected to it. Submissions were closed following the hearing, with the exception of the matters referred to in the orders made on 1 September 2015. Relevantly, the further submissions which the parties were given leave to file were 'clarifying each party's respective calculations and also addressing any authorities on default notices'.[14] The defendants' submission that the plaintiff waived compliance went beyond the scope of this order and it would be unjust to allow it in circumstances where submissions were otherwise closed.

16 Prior to the default notice being served, notification was given to the defendants' solicitors by way of letter with the subject line 'Demand for Payment' from the plaintiff's solicitor dated 25 August 2014 (the '25 August letter').[15] That letter referred to monthly interest payments due on 14 June 2014, 14 July 2014 and 14 August 2014 that had not been paid and stated that default interest was therefore payable pursuant to clause 5.2 of the loan agreement. A demand for an immediate payment of $15,939.90 was made, noting that it was the third default.

17 The plaintiff submits that interest was overdue and unpaid as at the time of the default notice on 19 September 2014. Interest payments due on 30 June 2014, 31 July 2014 and 31 August 2014 and had not been made by the date of the default notice. The default notice should be read in context with the 25 August letter. Given that the plaintiff was relying upon a default in payment of interest under the loan agreement that dated back some months, and no payments had been made, the default notice was effective both as an acceleration of the repayment of the principal under the loan agreement and as a demand under the guarantee and mortgage.

18 The plaintiff concedes that there was an error in the amount of interest claimed in the default notice.[16] At the hearing, the plaintiff submitted that she relied upon the default notice as being valid for the acceleration of the loan (and consequently demand for repayment) and no other purpose.[17]

19 The plaintiff submits that any error in the description of the default notice (including any error in respect of overstatement of the debt) does not mean that the acceleration of the payment of the debt under clause 8.1 of the loan agreement and the demand for payment of the debt were ineffective.[18] That is, the plaintiff submits that any error in amount of interest claimed does not affect the basic proposition that the loan was accelerated for non-payment of interest for a period of 3 months.[19]

20 The plaintiff concedes that a notice of demand was required to accelerate the loan.[20] If she did not comply with clause 8.1 and failed to make a demand, then clause 8.1 would not be activated to accelerate the loan.[21] That is, the requirement for immediate payment of any money due under the loan agreement would not be activated.

21 The plaintiff submits that the demand was made pursuant to contract rather than enforcement of a statutory right. She submits that the notice will not be invalid because it specifies the wrong date for payment of interest, providing interest is due at the time the notice was given.[22] Nor will the notice be invalid if it requires payment of an amount greater than the true amount of the debt.[23] Further, a party who takes a step pursuant to contract is entitled to justify it if the objective facts which justify it existed at the relevant time, even though that party at the time did not know of them.[24]

22 The plaintiff submits that if the Court considered the demand insufficient to accelerate the loan then it would impact on the interest rate which would change from 13.5% penalty interest to 9.5% from 14 or 23 September 2015,[25] until 14 December 2014 when the loan expired, and thereafter 13.5%.[26]

23 The principles regarding whether an incorrect default notice is valid or not are discussed in Whild v GE Mortgage Solutions Ltd.[27] Relevantly, they are as follows:

(a) There is a fundamental distinction between the overstatement of an amount owed because of a correctly identified event of default as distinct from the inclusion of an act or event of default in the notice of default which did not exist at all.

(b) A default notice may be valid if it overstates the amount owed but the default is correctly identified.

(c) So long as the object of guarding the rights of the mortgagor is achieved and, in particular, no 'non-defaults' are relied upon, the courts will not adopt a narrow and pedantic approach in considering the validity of a notice of default. They are valid so long as they reasonably convey to the recipient the message that the section intends the borrower to receive and the borrower is not misled.

(d) A default notice that materially misleads the recipient as to the nature of the debt demanded will be invalid.

(e) A notice should specify with reasonable particularity and accuracy the facts of the default, the nature of the default, and the manner in which the default can be remedied. A notice which specifies that the mortgagor is in default on a particular day when in fact payments have been made between the date of the alleged default and the date of the notice is more likely to mislead than inform.

(f) A notice which misdescribes the month of default may be valid.

(g) A different approach applies to agreements regulated by legislation.[28]

24 Although the default notice stated that it was given under s 76 of the TLA, the plaintiff does not rely upon it to enforce its statutory rights but rather as a demand under contract.

25 The default notice is incorrect in respect of the amount due. It is conceded that interest was incorrectly calculated.

26 The defendants contend that the default notice is also incorrect in its reference to a demand in clause 9. It states, 'The Borrower has defaulted under the Mortgage and the Loan Agreement by failing to pay amounts payable upon demand by the Mortgagee (Payment Default).' This was presumably a reference to the demand dated 25 August 2014.[29] That demand contains incorrect calculations of interest and is incorrect in respect of the date interest payments were due (referring to the 14th of the month instead of the end of the month). Accordingly, it is incorrect to state that there has been a default by failure to pay the amount on demand.

27 The defendants submit that there was no default because interest had been paid as part of a six month pre-payment of interest of $20,187.50 on 20 December 2013 for the period from 14 December 2013 to 14 June 2014 pursuant to provisions of clause 1.1(b) of the deed of variation. The 20 December 2013 payment is consistent with clause 1.1(b) of the deed of variation made on 23 December 2015 that provided that the borrower would pay interest of 6 months in advance on the date of the deed.[30]

28 The default notice is incorrect when it states in clause 7 that there has been a default in respect of interest payable on 31 May 2014 because it had already been prepaid. Accordingly, the default notice does not correct identify the default. Interest had already been paid up to 14 June 2014.

29 Save for the period the subject of the deed of variation and the pre-payment (14 December 2013 to 14 June 2014), interest was due at the end of the month consistently with the definition of 'interest payment date' and 'interest period' in clause 1 of the loan agreement.[31] Interest was due on 30 June, 31 July and 31 August 2014. It had not been paid at the time of the default notice.

30 The definition clause contained in clause 2 of the loan agreement provides that the 'Interest Payment Date' 'means the last day of each Interest Period' and that the 'Interest Period' means 'each period of 30 days ending on the last day of each month except that...' Clause 5.1 of the loan agreement provides:

Calculation and Payment of Interest

Interest is payable by the Borrower on the Loan (including on interest that is capitalised by the Lender) at the Interest Rate applicable during each Interest Period and will be calculated on the daily balance of the Loan on the basis of a 365 day year, and is payable by way of telegraphic transfer by the Borrower monthly on each Interest Payment Date as follows:

[bank details omitted]

Interest is payable until the Loan has been repaid in full. All accrued interest (if any) shall be repaid in full by the Borrower to the Lender on the Repayment date.

31 The default notice is, on balance, invalid. The invalidity is not caused by the error in the amounts owing, but rather the incorrect identification of the default. The default was not on 31 May 2014 as identified. Interest had already been paid up until

14 June 2014. The default notice made reference to a demand, presumably the

25 August letter. That demand also had incorrect dates in it referring to the 14th of the month instead of the end of the month. Overall, the default notice was more likely to confuse than inform.

32 The effect of the default notice being invalid is that it is insufficient to accelerate payment of the loan. Clause 8.1(a) of the loan agreement requires a demand for immediate repayment of the loan before acceleration and there was no such demand.[32]

33 The defendants counterclaim for a taking of accounts based on a right to redemption. They assert and rely upon evidence given by Mr Katz, a solicitor, that there was another person, who was prepared to refinance the loan, subject to the amount being agreed.

34 The plaintiff submits that the evidence does not support the proposition that the defendants have sought to redeem the mortgage. At its highest it suggests that there was an inquiry from another person about taking an assignment from the second defendant of her debt and mortgage in December 2014. The plaintiff asserts that an assignment is different from a redemption. Only the mortgagee and mortgagor are parties to a redemption. An assignment involves a third party.

35 The plaintiff also submits that there is no legal basis upon which a person desiring to take an assignment of a debt and securities from a secured creditor can compel this to occur. A right to redeem is an equitable right to obtain a discharge of the mortgage in exchange for the tender of the amount demanded. There is no evidence of any tender of the debt claimed by the plaintiff, which is a prerequisite to redemption.

36 The authorities provided by counsel outlined relevant principles:

(a) A mortgagor coming into equity to redeem, must do equity and pay principal, interest and costs before he can recover property which at law is not his.[33]

(b) The money owed should be paid into Court or deposited.[34]

(c) No doubt it is the duty of a mortgagee, on proper notice, or without notice in a case where notice is not required, to accept proper tender.[35]

(d) A mortgagor must not only make it tender but hold the amount tendered available even though it has been refused by the mortgagee.[36]

(e) To stop interest running on the mortgage, the mortgagor ought to have made formal tender of an amount sufficient to pay off all moneys due and owing under the mortgage. An assertion of its willingness to make such a payment is not enough.[37]

(f) It is not the practice to leave the parties in an unfortunate stalemate until the accounts are settled, with the mortgagor out of pocket for the maximum sum possibly payable but not in possession of the title deeds and the mortgagee not in possession of the money but holding security and unable to realise it. Consideration of the underlying principles involved make it clear that a proper tender can include the offer of any undertaking to pay the amount sworn to by the mortgagee in court.[38]

(g) A registered mortgagee has a right of possession upon default under s 78(1) of the TLA[39] It is not dependent on establishing a right of sale.[40]

37 It is common ground that the loan has not been repaid. The defendants have not tendered or deposited the unpaid amount. If the defendants wished to redeem, they should have tendered or deposited the amount they claimed was owing. It would then have been open to the plaintiff or accept or reject it.

38 The offer of the third party to pay out monies owing on the mortgage did not constitute redemption. There was no obligation on the plaintiff as a mortgagor to agree to an assignment of the mortgage. No authority was cited in support of this contention. Even the defendants' witness, Mr Katz, agreed that there was no obligation to accept an assignment.[41]

40 The plaintiff seeks possession of the property pursuant to s 78 of the TLA by reason of the expiry of the loan, or non-compliance with the default notice or a subsequent letter of demand issued on 24 June 2015[42] (the 'second default notice'). The default referred to in clauses 4 and 5 of the second default notice is a failure to repay the loan by the repayment date of 14 December 2014.

41 The plaintiff does not seek any relief to exercise the power of sale.

42 The defendants submit that at all times the default notice was disputed. They submit that the defendants were ready willing and able to refinance the loan subject to the correct amount due being agreed and the formalities associated with the assignment of loan and security documents being concluded. The defendants initially sought a taking of accounts, however this was not pursued at the hearing.[43]

43 Section 78 of the TLA provides:

1. Power to mortgagee or annuitant to enter into possession or bring ejectment

(1) The mortgagee or annuitant upon default in payment of the principal sum or interest or annuity or any part thereof respectively at the due time -

(a) may enter into possession of the mortgaged or charged land by receiving the rents and profits thereof; or

(b) may bring an action of ejectment to recover the land, either before or after entering into the receipt of the rents and profits and either before or after any sale of the land as aforesaid.

(2) A mortgagee of or annuitant upon leasehold land after entering into possession of the land or the receipt of the rents and profits thereof shall, during such possession or receipt and to the extent of any benefit rents and profits which are received, be subject to and liable for the payment of the rent reserved and the performance and observance of the covenants contained or implied in the lease on the part of the lessee.

44 Section 78(1) provides for possession upon default. It is common ground that the plaintiff is the first-ranking mortgagee and that the loan was due on

14 December 2014 and has not been paid. The preconditions of s 78(1) have been met. Accordingly, the plaintiff is entitled to possession.

45 The parties agree that the applicable interest rate up to the period ending 14 or 23 September 2014 is 9.5% per annum, calculated and payable in the terms of the agreement being 9.5% per annum or 13.5% for default. Given the finding above in respect of the default notice, the loan was not accelerated and therefore the principal did not become owing until the date of the loan maturing, namely on 14 December 2014. Indeed, during the course of the hearing, the plaintiff conceded that interest up to the period of 23 September 2015 should be at 9.5% (and 13.5% for outstanding interest payments).[44]

46 Interest should be calculated at 9.5% per annum or 13.5% per annum for any periods of default. As conceded by the plaintiff, the application of default interest of 13.5% should be calculated only on the outstanding amount, not the entire amount of the loan. This is a correct construction of clause 5.2 of the loan agreement.

47 The defendants characterise the payment on 20 or 23 September 2015 as both a retrospective payment for the overdue interest payments and a pre-payment of interest for the balance of the term of the loan. The plaintiff submits that the defendants have not explained why an assumption should be made that the payment on 20 or 23 September 2014 included a pre-payment of interest for the balance of the term of the loan. They submit the payment followed the letter of demand.

48 There was no express agreement to pre-pay the balance of interest for the remainder of term commencing 15 June 2014 and extending to 14 December 2014.

49 Clause 1.2 of the deed of variation contains a clause stating that other than the variations in it, the terms of the loan agreement remain in full force and effect. There is no clause in the deed of variation that provides for a further prepaid interest period that explains the September 2014 payment.

50 The defendants' submission that the payment on 20 or 23 September 2015 should be considered a pre-payment of interest is rejected. The payment is more properly characterised as a payment of outstanding and overdue interest. Any remainder after the existing interest liability has been paid, should be applied to the principal amount. This is consistent with clause 6(3) of the memorandum of common provisions for the mortgage.[45]

51 In respect of the period subsequent to 14 December 2014, the plaintiff seeks interest at the default rate of 13.5% per annum. The defendants oppose that. During the hearing, the defendants conceded that interest might be payable on that period seeing they had use of the monies owed and if so, it might be at a rate of 9.5%.[46] At first sight, the period subsequent to 14 December 2014 attracts default interest of 13.5% in accordance with clause 5.2 of the loan agreement. Clause 6.1 of the loan agreement provides that the borrower must repay and finally discharge the loan on the repayment date. The deed of variation states the repayment date is to be 24 months since the drawdown date. Consistently with this, the parties agree the repayment date is therefore 14 December 2014. Clause 7(a) of the loan agreement provides that an event of default includes a failure to pay money when due. Clause 5.2 provides for default interest to apply to outstanding amounts.

52 The loan was due on 14 December 2014 and has not been repaid. The default rate of interest subsequent to 14 December 2014 is applicable from that date.

53 For the sake of clarity, the findings in relation to the calculation of interest are as follows.

(a) a loan of $425,000 was made on 14 December 2012 with the first interest payment due on 31 December 2012 and thereafter interest was due on the last day of each month save for a period where interest was prepaid (14 December 2013 to 14 June 2014);

(b) the standard interest rate is 9.5% per annum and the default interest rate is 13.5% per annum;

(c) consistently with clause 5.2 of the loan agreement and plaintiff's concession, default interest is only applicable to the amount in default;

(e) the loan was not accelerated by the default notice accordingly, the default interest is not applicable to the whole outstanding loan amount for the period from 20 or 23 September 2014 until 14 December 2014 but only to any outstanding amounts; and

(f) the loan expired on 14 December 2014 and the default rate of interest applies to the whole outstanding amount from that date.

54 At trial, a Dobbs[47] certificate[48] was tendered by the plaintiff pursuant to clause 31(10) of the memorandum of Common Provisions to the Mortgage.[49] Clause 31(10) provides that such a certificate will be 'prima facie evidence of such matter, fact or thing stated in such certificate'.

55 Exhibit P5 provides that the amount owing at 1 September 2015 is $547,679.76 and relies on the demands of 19 September 2014 and 24 June 2015. This consists of $478,231.67 plus costs.[50]

56 The defendants say the amounts in the Dobbs certificate (and other calculations provided by the plaintiff) are wrongly calculated and rely on the Outline of Evidence of David Luttrell.[51] Attachment B to Mr Luttrell's Outline of Evidence is a table of calculations which provides that as at 14 December 2014, the amount owing is $419,982.23. In comparison, the plaintiff's Exhibit P6 provides that as at 14 December 2014, the amount of principal and interest owing is $428,435.48.

57 The decision of Croft J in Bank of Western Australia Ltd v Abdul[52] outlines some of the relevant principles and refers to the Dobbs case:

(a) It is unnecessary to rely on a Dobbs certificate. The provision of a certificate is 'merely provides a ready means of establishing indebtedness'.[53]

(b) 'The principal task of the Court is always to construe and to give effect to the terms of the particular clause providing for such a certificate.'[54]

58 Clause 31(10) of the memorandum of common provisions provides the Dobbs certificate is prima facie evidence. The plaintiff need not rely upon it to establish the debt. And in this case is not required to do so. It is common ground that the loan monies were advanced and have not all been repaid. The amount repaid to date is not in dispute. The date the loan expired is not in dispute. The only real controversy is the amount of interest payable. This issue is determined above.

59 Accordingly, the plaintiff is entitled to judgment for debt based on the mortgage.

60 The Court will make orders for possession of the Property and payment of the judgment debt in favour of the plaintiff.

61 The Court will make orders dismissing the second defendants' counterclaim.

62 The parties are requested to confer regarding their respective calculations for debt in light of the findings above, and the appropriate orders that follow.