BD78 Pty Ltd v Fgk3gen Pty Ltd
[2022] VSC 361
•23 June 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PRACTICE COURT
S ECI 2022 02223
| BD78 PTY LTD (ACN 619 360 271) AS TRUSTEE FOR THE BD78 UNIT TRUST | First Plaintiff |
| BSS1 PTY LTD (ACN 619 324 346) AS TRUSTEE FOR THE BSS1 UNIT TRUST | Second Plaintiff |
| v | |
| FGK3GEN PTY LTD (ACN 643 293 207) | First Defendant |
| REGISTRAR OF TITLES | Second Defendant |
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JUDGE: | Ginnane J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 20 and 22 June 2022 |
DATE OF JUDGMENT: | 23 June 2022 |
CASE MAY BE CITED AS: | BD78 Pty Ltd v FGK3GEN Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2022] VSC 361 |
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REAL PROPERTY – Removal of caveat – Loan agreement giving right to lodge caveat – Equitable mortgage – Borrowers seek removal of caveat to enable refinancing of another loan secured by mortgage – Discretionary considerations – Repayment of Loan amount –Caveator’s other possible claims under Loan agreement – Balance of convenience – Removal of caveats subject to conditions – Costs – Transfer of Land Act 1958 s 90(3).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms G Costello QC with Mr J Masters | Gadens Lawyers |
| For the First Defendant | Mr V Murano | Kyriacou Lawyers Pty Ltd |
HIS HONOUR:
The plaintiffs’ summons seeks an order under s 90(3) of the Transfer of Land Act 1958 for the removal of a caveat on the titles of land at Braeside. The first defendant’s caveat claims as its estate or interest, ‘interest as Mortgagee’. The prohibition in the caveat states ‘unless I/we consent in writing’. The caveat was registered on 11 March 2022. The first defendant loaned the amount of $1,900,000 to the plaintiffs under a Loan Agreement dated 5 October 2020.
On 31 August 2020, the plaintiffs as vendors and the first defendant as purchaser entered into a contract of sale of land at Braeside for $12.7 million (‘the Contract’). On 25 September 2020, the plaintiffs as borrowers granted a mortgage of the land to a number of persons who lent them the amount of $6,900,000, under what was described as the first loan agreement.
The plaintiffs contend that the first defendant’s caveat is preventing them refinancing the first loan agreement secured by a registered mortgage over the property. The plaintiffs envisage refinancing the first loan agreement and repayment of the sum of $1,900,000 to the first defendant, subject to the simultaneous withdrawal of the caveat. They wish to refinance the first loan on 24 June 2022 as they are in default under the mortgage. The solicitor for the existing mortgagees emailed the plaintiffs’ solicitors on 31 May 2022 stating:
Further to your email to our office of the 30th May 2022 as the repayment date is now 2 months overdue our clients have instructed us to issue a Callup Notice unless we are advised of a definite settlement date.
We await your response.
The plaintiffs contend that the incoming financier requires clear title and to that extent the caveat prevents the refinancing occurring.
The first defendant’s mortgage is at least an equitable mortgage recognised by the Loan Agreement under which it loaned $1.9 million to the plaintiffs. The plaintiffs have signed an instrument of mortgage of the land to the first defendant, but it is only to be registered if an Event of Default occurs under the Loan Agreement.
The plaintiffs’ contract of sale with the first defendant is yet to be settled. It is proposed to subdivide the land, which is the subject of the caveat. The first defendant has entered into a Development Management Agreement with Alpha14 Admin Pty Ltd, a company controlled by Mr T Pope, who through another company, is the majority shareholder in the first plaintiff.
Clause 8.2 of the Loan Agreement is headed ‘Registration of Mortgage’ and states:
The Lender and the Borrower agree that:
(a)the Lender may lodge a caveat with Land Use Victoria on Certificates of Title Volume 10444 folios 518 and 527 to record the Lender’s equitable interest as mortgagee;
(b)provided no Event of Default has occurred or is subsisting, then the Lender’s second ranking mortgage of land will not be registered with Land Use Victoria; and
(c)if an Event of Default has occurred or is subsisting, then the Lender’s second ranking mortgage of land will be registered with Land Use Victoria and the Borrower must do all things and execute all deeds, instruments or other documents as may be necessary or desirable to give full effect to [this] sub-clause (c).
Because of the provisions of that clause, the plaintiffs did not dispute that the first defendant had a caveatable interest. Rather, the application focused on the appropriate exercise of the discretion given by s 90(3).
Warren CJ in Piroshenko v Grojsman[1] described the principles applicable in an application to remove a caveat as follows:
Therefore, consistently, in order for a caveator to satisfy the first limb of the test applied by the courts when deciding applications under s 90(3) of the Act, he or she must satisfy the court that:
1.there is a probability on the evidence before the court that he or she will be found to have the asserted equitable rights or interest; and
2.that probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in question in accordance with their normal proprietary rights.
[1](2010) 27 VR 489, 493-4 [18].
Her Honour also stated that:
[A] caveat may only be lodged in a form commensurate to the interest it is designed to protect.[2]
[2]Ibid 498 [40].
The first defendant argued that the plaintiffs lacked clean hands and that the Court’s discretion in determining the caveat removal application should be exercised against them. The lack of clean hands consisted in the plaintiffs’ director, Mr T Pope’s, statement in an affidavit supporting the plaintiffs’ application, that ‘the Plaintiffs did not execute a mortgage of land over the Property in favour of the First Defendant at any stage prior to or after receiving the Loan’. In fact the plaintiffs had executed such a mortgage. Mr Pope made a second affidavit after this matter was raised by the first defendant, saying in effect that he ‘couldn’t remember signing a mortgage previously’. No application to cross-examine him was made. I have no basis for disbelieving Mr Pope’s explanation of the misstatement in his first affidavit and proceed on the basis that his first statement was a careless error, rather than an attempt to deceive. After all, there was no dispute that the first defendant had a caveatable interest because it held an equitable mortgage over the land.
The parties also addressed the issue of whether the plaintiffs could repay the loan amount of $1.9 million before the ‘Repayment Date’. Although by the end of submissions, that issue had ceased to have importance, I will state my conclusions on it. The term ‘Repayment Date’ is defined as:
means the earlier to occur of:
(a) settlement of the Contract; and
(b)termination of the Contract for any reason other than a breach of the Contract by the Lender.
The Contract provides under the heading ‘Settlement (general condition 17 & 26.2)’ that settlement:
Is due on 90 days on the signing of the Contract of Sale
unless the land is a lot on an unregistered plan of subdivision, in which case settlement is due on the later of:
· the above date; and
· the 14th day after the vendor gives notice in writing to the purchaser of registration of the plan of subdivision.
Special condition 14 of the Contract provides, in effect, that if the Plan of Subdivision has not been registered by the Plan Registration Date, which is 31 August 2022, either the vendor or the purchaser may end the Contract at any time thereafter and, before the Plan is registered by the Registrar, by giving notice in writing to the other party that the Contract is at an end. If such a notice is given then the deposit is to be refunded to the purchaser.
The effect of all that is that the Contract remains on foot, but that either party may terminate it after 31 August 2022 if the Plan of Subdivision is not registered.
In my opinion, the question of the plaintiffs’ right to make early repayment has been overtaken by the service of the Notice of Default to which I later refer. By that Notice the first defendant has demanded repayment of the Loan amount or Advance by which I mean the amount of $1.9 million. I consider that the Event of Default, being the change of control in the plaintiff companies, has been proved, at least to a degree sufficient for this application, and, therefore, the Notice of Default has validly demanded the repayment of the amount of the Loan. I reach that conclusion only for the purposes of deciding this application.
As the first defendant has a caveatable interest, the next issue is the appropriate exercise of the discretion under s 90(3) and the consideration of the balance of convenience.
The first defendant resisted the removal of the caveat, but the parties placed most attention on the amount that the plaintiffs have to pay to the first defendant to repay Advance made under the Loan Agreement. The principal of the loan is $1.9 million. Clause 3 provides for the payment of interest:
3.1 Interest rate
Interest is payable by the Borrower on the Loan at the Interest Rate and will be calculated on the daily balance of the Loan on the basis of a 365 day year and shall accrue monthly in arrears.
3.2 Payment of interest
(a)Subject to clauses 3.2(b) and (c), interest is payable on the Repayment Date.
(b)If the Borrower repays the Loan and all other Secured Money to the Lender on the Repayment Date, then the Lender agrees to waive its entitlement to interest.
(c)If the Borrower fails to repay the Loan and all other secured Money to the Lender on the Repayment Date, then interest for the period commencing on the Drawdown Date and expiring on the Repayment Date shall be capitalised in accordance with clause 3.4 and interest will thereafter be payable in accordance with clause 3.3.
3.3 Default interest
Where any sum, or any part of any sum, payable by the Borrower under this Agreement is not paid to, or as directed by, the Lender on or before its due date for payment, default interest will accrue on the outstanding amount. Accrued default interest must be paid by the Borrower to the Lender upon demand by the Lender. Default interest will be calculated at the Default Interest Rate for the period for which the outstanding amount is overdue. Accordingly, default interest will accrue on and from the due date for payment of the outstanding amount up to but excluding its date of payment. It will be computed on a daily basis for actual days elapsed and will be compounded on the last day of each month.
3.4 Capitalisation of interest
If any amount payable hereunder is not paid by the due date for payment of the same then without prejudice to the rights of the Lender to sue the Borrower for such unpaid interest and any other power of the Lender contained in this Agreement, the Lender may if the Lender thinks fit without notice to the Borrower treat such unpaid amount as having been capitalised and in that event such unpaid interest shall be added to and shall form part of the Loan and as such shall bear interest as provided for herein.
The effect of cl 3 is that if the Loan and other Secured Money are repaid to the Lender on the Repayment Date, then the Lender agrees to waive its entitlement to interest.
The term ‘Secured Money’ means:
…, at any time, all money that the Borrower is liable (actually, prospectively or contingently and whether alone or not) to pay to the Lender on any account and in any way whatsoever under or in connection with a Transaction Document and includes, but is not limited to, principal, accrued and capitalised interest, fees, costs, charges, expenses or damages, amounts in respect of indemnities and any other money which the Borrower would be liable to pay but for its Insolvency.
The first defendant contended that the plaintiffs have committed two Events of Default under the Loan Agreement, which it described in a Notice of Default sent last Friday, 17 June 2022. The first default alleged is a change of effective control of the Borrower, being an alteration to a material extent in both the control of the composition of the board of directors of the Borrower and the control of more than half of the voting power of the Borrower. The plaintiffs, while not conceding this default, did not contend to the contrary. The first defendant’s evidence establishes the change of control in the shareholding of the Borrower BD78 Pty Ltd and I proceed for the purposes of this application on the basis that an Event of Default within cl 10.3(d) of the Loan Agreement has occurred.
The other Event of Default was an alleged breach of the Transaction Documents which depended on establishing that the Development Management Agreement is a Transaction Document. For present purposes, I am not persuaded that such an Event of Default has occurred, but it is unnecessary to decide that question finally, because I have found that another Event of Default has occurred.
The Notice of Default claimed entitlement to interest on the Advance and on the Secured Money pursuant to cl 10.1 of the Loan Agreement, as an Event of Default had transpired. Clause 4.2 of the Notice of Default stated that, pursuant to cl 3.1 and 3.2(c) of the Loan Agreement, the Lender was entitled to interest accruing on the Advance and on the Secured Money, which interest was protected by the Lender’s caveat.
As mentioned, as the parties’ arguments progressed, they focused on whether the plaintiffs have to repay any other sum additional to the $1.9 million. The first defendant contended that they do because of the terms of cl 10.1 of the Loan Agreement, which states:
Effect of Event of Default
If any of the events described in clause 10.3 occurs, the Loan and all other Secured Money shall, at the option of the Lender and notwithstanding any delay or previous waiver of the right to exercise that option, become due and payable upon demand by the Lender. In addition, if the Lender exercises that option, the Security will become immediately enforceable.
The plaintiffs argued that no additional amount was payable because the Repayment Date had not yet been reached. They also argued that no default interest was due under cl 3.3 because it was not activated as there was no sum that had not been paid on or before the due date for payment. The plaintiffs’ argument also emphasised the terms of cl 3.2, including the words in cl 3.2(a) ‘subject to cls 3.2(b) and (c) interest is payable on the Repayment Date’, and that cl 3.2(b) provided that if the Borrower repays the Loan and all other Secured Money to the Lender on the Repayment Date, then the Lender agrees to waive its entitlement to interest. The plaintiffs argued that the Loan Agreement intended that interest was not payable if the Loan was repaid by the Repayment Date. However, that argument does not provide for the present situation where the Loan is called up because of a default. In this situation, much turns on the meaning to be given to the words ‘is liable’ in the definition of Secured Money and whether cl 10 imposes a liability on the Borrower to pay interest when an Event of Default occurs.
The first defendant disputed the plaintiffs’ construction of the Loan Agreement. It argued that because of the Event of Default, the Repayment Date can never occur and there could never be a waiver of the interest which had accrued under cl 3.1. The first defendant had demanded, and was presently entitled to, the amount of the Loan and all other Secured Money, including default interest and contingent liabilities such as interest from 18 June 2022 and legal costs pursuant to cls 4 and 7.1. The accrued interest was an actual liability. As a result of the Event of Default, interest became payable by the plaintiffs at the default rate of 10% per annum.
In my opinion, it is reasonably arguable that the plaintiffs are obliged to pay interest on the amount of $1,900,000, but at the ordinary rate. For the purposes of this application, I have accepted that an Event of Default within the meaning of cl 10.1 has been proved. On that basis, the amount of the Loan, and ‘all other Secured Money’, became payable on demand, a demand which was made in the Notice of Default.
Clause 3 makes no provision for early repayment, including early repayment following the service of a valid Notice of Default. The plaintiffs wish to make repayment of the Loan to the first defendant at an earlier date than the Repayment Date. But, it is arguable that cl 3 has to be read with cl 10, and so read, when early repayment occurs, the first defendant is entitled to payment of interest at the ordinary rate on the Loan.
It is inappropriate in the circumstances of this caveat removal application that I express any concluded view on these issues. They are to be determined at any final hearing of this proceeding.
But, I do consider that it is reasonably arguable that the plaintiffs must pay additional interest, at least at the rate of 5% per annum, upon repayment of the Loan of $1.9m following the demands made in the Notice of Default. That interest has accrued under cl 3.1. I consider that the arguments that the plaintiffs must pay default interest is less strong. In addition, I have no evidence to quantify any other amounts that the first defendant may be entitled to under the Loan Agreement.
I consider that upon the plaintiffs repaying the amount of $1.9 million and paying into Court the amount of interest calculated at 5% per annum, the caveat should be removed. This is because the first mortgagees have indicated that they may seek to exercise their rights under the mortgage. If they do, the interests of both the plaintiffs and the first defendant may be prejudiced. It is also relevant to note that if the Notice of Default and the demand for repayment had not been served, the Loan Agreement may well have reached a Repayment Date on 31 August 2022, two months away, but with no Plan of Subdivision having been registered. At that point, either party to the Contract would have had the right to terminate it with the deposit being repaid. In that event, the Lender had agreed to waive its entitlement to interest. I have found for the purposes of this proceeding that an Event of Default has occurred and it appears unlikely that a Repayment Date, as specified in the Contract, will ever be reached. But in deciding whether to remove a caveat, in a case where the borrower’s liability to pay interest is in issue, it is relevant to take into account when the Loan Agreement provided that interest was payable and when it would be waived.
As mentioned the caveat removal order will include a condition that the plaintiffs repay to the first defendant the amount of $1.9 million and also a condition that the plaintiffs pay into Court a sum in respect of interest. This is because the first defendant’s argument that it is entitled to interest is sufficiently arguable to justify the inclusion of the additional condition. The amount of $169,758.56, being the first defendant’s calculation of interest at 5% per annum on the amount loaned, must be paid into Court to provide some additional security should the first defendant pursue, and succeed, on claims for additional payments under the Loan Agreement. That sum can be released by agreement of the parties or order of the Court. If this litigation continues, and the first defendant succeeds in establishing its right to further amounts under the Loan Agreement, it can seek a Court order that the whole or part of the sum paid into Court be paid out to it.
The parties discussed the question whether the first defendant could lodge another caveat in respect of its same interest under the Loan Agreement after the removal of the existing caveat. It appears that this could only occur where the existing caveat is withdrawn, rather than being removed by Court order.[3]
[3]Transfer of Land Act 1958 s 91(4).
At the commencement of the hearing, the plaintiffs offered the usual undertaking as to damages, as a condition of the Court ordering the removal of the caveat. In this case, I do not consider the provision of such an undertaking to be an appropriate or necessary requirement. I regard the payment of moneys into Court that I will order as sufficient protection of the first defendant’s claims, at least to the extent that I am able to assess them at this stage.
The plaintiffs sought their costs on an indemnity basis because of the first defendant’s non-acceptance of a Calderbank offer made on 9 June 2022 of repayment of the $1,900,000 plus $170,000 for interest and costs ‘on the strict condition that your client agrees to remove its Caveat to allow refinance of our clients’ first mortgage on 24 June 2022 (Offer)’. That offer was made at 9:46am and was open to be accepted until 4:00pm the following day. Because of the short period given for consideration and acceptance of the offer, I do not consider that it has been established that it was unreasonably refused. I therefore will not award indemnity costs.
The first defendant sought its costs on a standard basis and relied on cl 4 of the Loan Agreement.
The plaintiffs did succeed in obtaining the removal of the caveat and that was the major event for the purposes of this application and the general principle that costs follow the event. However, they did not succeed completely as the order for the removal of the caveat is being made on the conditions that I have outlined. These conditions have been imposed because the first defendant may have further claims under the Loan Agreement and because the Court has accepted for the purposes of this application that an Event of Default has occurred.
I do not accept the first defendant’s contention that cl 4 of the Loan Agreement requires an order for costs in its favour. I do not consider that clause applies to the current situation, in which the Borrower seeks to remove a caveat registered in March 2022. In my opinion, the words of cl 4 do not apply to that situation.
Taking into account the parties’ respective successes on this application, the appropriate exercise of the costs discretion is that the first defendant pay fifty per cent of the plaintiffs’ costs of this application on a standard basis.
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