Bonanno v Finamore

[2022] NSWCA 276

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Bonanno v Finamore [2022] NSWCA 276

Hearing dates:

25 October 2022

Date of orders:

20 December 2022

Decision date:

20 December 2022

Before:

Ward P at [1];
Macfarlan JA at [2];
Basten AJA at [55]

Decision:

(1) Grant leave to appeal;

(2) Dismiss the appeal with costs.

Catchwords:

MORTGAGES AND SECURITIES — whether Deed recorded a transaction that was in substance a mortgage — whether obligation to transfer interest in property was a collateral advantage — unconscionability of obligation — Kreglinger (G&C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 considered — Lord Parker’s three propositions

Legislation Cited:

Real Property Act 1900 (NSW), s 57

Cases Cited:

Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18

Epic Feast Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161; [1998] SASC 6616

Gurfinkelv Bentley Pty Ltd (1966) 116 CLR 98; [1966] HCA 75

Handevel Pty Ltd v Comptroller of Stamps (Vic) (1985) 157 CLR 177; [1985] HCA 73

House v The King (1936) 55 CLR 499; [1936] HCA 40

Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25

Lift Capital Partners Pty Ltd (in liq) v Merrill Lynch International (2009) 73 NSWLR 404; [2009] NSWSC 7

Waller v Hargraves Secured Investments Ltd (2012) 245 CLR 311; [2012] HCA 4

Westfield Holdings Ltd v Australian CapitalTelevision Pty Ltd (1992) 32 NSWLR 194

Texts Cited:

B Edgeworth, Butt’sLand Law (Law Book Co, 7th ed, 2017)

JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis)

K and SF Gray, Elements of Land Law (OUP, 5th ed, 2009)

Category:

Principal judgment

Parties:

Salvatore Antonio Bonanno (Appellant)
Nicola Finamore (First Respondent)
Weisen Zhou (Second Respondent)

Representation:

Counsel:
G Foster (Appellant)
S Aspinall / D Woods (Respondent)

Solicitors:
Phillip A Wilkins & Associates (Appellant)
LegalVision (Respondent)

File Number(s):

2022/186533; 2022/254111

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity

Citation:

[2021] NSWSC 1558

[2022] NSWSC 641

Date of Decision:

1 December 2021
23 May 2022

Before:

Robb J

File Number(s):

2015/228434

HEADNOTE

[This headnote is not to be read as part of the judgment]

On 25 February 2011 Mr Nicola Finamore and Ms Weisen Zhou (the present respondents) entered into a Deed with Mr Salvatore Bonanno (the present appellant). Mr Finamore and Ms Zhou were the registered proprietors of a property that was being used as a boarding house.

The operative provisions of the Deed provided, inter alia, that in consideration of Mr Bonanno paying $130,000 to Mr Finamore and Ms Zhou, they would transfer one-third of their interest and title in the property to Mr Bonanno. The Deed also provided that, in the event the property was sold, the parties agreed that Mr Bonanno would receive $130,000 plus one-third of the remaining net proceeds of sale.

Mr Bonanno filed a statement of claim seeking a declaration that the respondents held a one-third share of the property on trust for him. By cross-claim the respondents sought an order setting the whole Deed aside on the ground of its unconscionability.

In his judgment of 1 December 2021, the primary judge rejected the respondents’ contention that the entire transaction ought to be set aside as unconscionable but accepted that the provisions of the Deed providing for the transfer of property were unconscionable and therefore invalid as inter alia, the advance of $130,000 had to be repaid to the appellant and there was relevantly no other consideration for their agreement to transfer an interest in the property. In his judgment of 23 May 2022, the primary judge ordered that the appellant pay 60% of the respondents’ costs.

The appellant advanced two grounds of appeal. The first challenged the primary judge’s finding that the Deed did not entitle the appellant to a one-third interest in the property and the second challenged the primary judge’s costs orders.

The Court (Macfarlan JA; Ward P and Basten AJA agreeing) granted leave to appeal and dismissed the appeal with costs: [1], [54]-[55].

As to whether the Deed incorporated an option and whether Mr Bonanno’s property right vested immediately

The appellant’s complaint about the use of the term “option” cannot be sustained in circumstances where he submitted at first instance that the Deed had an added facility akin to an option. Even if the appellant would have acquired an immediate equitable interest in the property if the Deed were wholly valid, that would not have contradicted the primary judge’s conclusion that the Deed in substance gave rise to a mortgage, and a collateral advantage. The acquisition by a mortgagee of a proprietary interest does not prevent a court from considering the substance of the transaction to determine if the interest was acquired by way of security: [34]-[35] .

As to whether the primary judge erred in finding that the Deed was in effect a mortgage

In determining whether an instrument gives rise to a mortgage as distinct from an absolute transfer, regard is to be had to the substance of the transaction and not simply its form. The application of the principles depends on the real intention of the parties: [38].

Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25; Gurfinkelv Bentley Pty Ltd (1966) 116 CLR 98; [1966] HCA 75 considered.

As to whether the primary judge erred in finding the transfer terms unconscionable and erred in considering an arrangement made prior to entry into the Deed.

The lack of an obligation in the Deed on the appellant to perform repairs, maintenance or management duties did not contradict the primary judge’s finding of an oral arrangement, that is of an expectation of the respondents engendered by the appellant. The primary judge’s principal reasons for his conclusion, that there was a prior oral arrangement that was not reflected in the Deed, stand without effective challenge from the appellant: [40], [44].

As to whether the primary judge erred in applying Proposition 3 of Lord Parker in Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd

Per Macfarlan JA (Ward P agreeing):

As the appellant did not successfully challenge Proposition (1) there is no need to consider the correctness of the finding on Proposition (3): [47].

Per Basten AJA:

Lord Parker’s three propositions should not be relied upon as if they constituted fixed rules having modern application. The modern doctrine of unconscionability should be the touchstone of invalidity. As a matter of language, Kreglinger is unhelpful as a mortgage under the Real Property Act no longer involves the transfer of title subject to an equity of redemption but the creation of a security: [56]-[57].

Lift Capital Partners Pty Ltd (in liq) v Merrill Lynch International (2009) 73 NSWLR 404; [2009] NSWSC 7; Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194; Epic Feast Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161; [1998] SASC 6616; Waller v Hargraves Secured Investments Ltd (2012) 245 CLR 311; [2012] HCA 4 considered

G & C Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25 distinguished.

As to the costs order

The appellant’s success on the issue of back rent and other questions was taken into account and led to a substantial discount in the respondents’ entitlement. The outcome was well within the range of reasonable outcomes: [52].

Judgment

1. WARD P: I agree with Macfarlan JA.

2. MACFARLAN JA: This is an appeal and an application for leave to appeal from decisions of Robb J given in the Equity Division on 1 December 2021 and 23 May 2022 (Bonanno v Finamore [2021] NSWSC 1558 and Bonanno v Finamore (No 2) [2022] NSWSC 641). The appeal is the subject of an objection to competency but as I consider that the proposed appeal grounds are without merit, it is unnecessary to determine the validity of that objection. As the appeal has been fully argued, it is appropriate to grant leave to appeal but then to dismiss the appeal, with costs.

3. The appeal concerns a deed dated 25 February 2011 entered into between the present respondents, Mr Nicola Finamore and Ms Weizen Zhou, as “transferors”, and the present appellant, Mr Salvatore Bonanno, as “transferee” (“the Deed”). Mr Bonanno contended that the Deed provided for him to “advance” a sum of $130,000 to the respondents in return for the transfer to him of one third of the respondents’ interest in a property at Roseberry in Sydney, as well as their repayment to him of the $130,000. The primary judge rejected the respondents’ contention that the entire transaction ought to be set aside as unconscionable but accepted that the provisions of the Deed providing for the transfer of property were unconscionable, and therefore invalid, for a number of reasons. The reasons included that as the advance of $130,000 had to be repaid by the respondents to the appellant, there was relevantly no other consideration for their agreement to transfer an interest in the property to him.

4. The appellant’s challenge on appeal was, of necessity, primarily directed at the finding of unconscionability of the transfer provisions. In mounting that challenge, he faced the difficulty that the primary judge identified the primary circumstance of unconscionability as the absence from the Deed of a provision reflecting an expectation that the respondents had, engendered by communications with the appellant, (to which his Honour had earlier referred as an “arrangement”) that the appellant would undertake one third of the responsibilities for the operation, maintenance and repair of the boarding house on the property. On appeal the appellant provided no sound reason for departure from his Honour’s findings in this respect or in relation to any of the other matters that his Honour took into account on the issue of unconscionability.

5. Separately from these matters, the appellant challenged his Honour’s decision of 23 May 2022 to order the appellant to pay 60% of the respondents’ costs of the proceedings below. As indicated below at [48] – [53], the appellant identified no reason, consistent with the principles stated in House v The King (1936) 55 CLR 499; [1936] HCA 40, for interfering with this exercise of discretion by his Honour as to the award of costs.

THE FACTUAL CIRCUMSTANCES

6. The background circumstances of the parties were usefully summarised as follows in the recitals to a deed dated 29 April 2010, entered into some 10 months before the Deed the subject of the proceedings. This deed was made between Ms Zhou and Mr Bonnano only.

“A.    Zhou and her de facto partner Nicola Joseph Finamore (‘Nicola’ hereafter) are the registered proprietors as joint tenants of a property situate and known as … [address deleted] Rosebery NSW 2018 being the whole of the land contained in Certificate of Title Folio Identifier … which is valued at $750,000.00 approximately (called ‘the Property’ hereafter).

B.    The property is currently subject to a mortgage to National Australia Bank Limited (called ‘the Mortgage’ hereafter) and other encumbrances (including but not limited to business & personal loans secured by the Property) in the sum of $700,000.00 approximately.

C.    The Property can be used and is currently registered as a boarding house. There are currently 6 tenants in the Property with a rental income [of] $1,200 per week approximately.

D.    Zhou has separated from Nicola late last year and is currently in the process of negotiating with Nicola a financial settlement of their de facto relationship of more than 20 years, with respect to which she intends to and believes that she is entitled to claim to be the sole proprietor of the Property.

E.    Since around the time of the separation, Zhou has been solely responsible for and has been experiencing difficulty with making payments of the Mortgage and other loan repayments and running expenses of the Property as Nicola has not made any contribution. There has been [sic] approximately $130,000.00 of mortgage and loan repayments currently in arrears. Zhou and Nicola have been served legal notice in respect to their default in mortgage and loan repayments.

F.    Sal [the appellant] has been a business associate and a family friend of Zhou and Nicola for more than 3 years. He is reasonably aware of and has certain knowledge about Zhou’s financial difficulties caused by the breakdown of the relationship between Zhou and Nicola.

G.    At the request of Zhou, Sal has agreed to advance a loan in the sum of $130,000.00 to Zhou to assist her in making repayments of the Mortgage and loans in respect of the Property currently outstanding and overdue according to terms and conditions agreed herein.

H.    The parties wish to enter this deed to record their intentions and terms of agreements in respect of their respective interest in the Property.”

7. As Mr Finamore was not a party to that deed, it is not appropriate, nor is it necessary, to treat these recitals as any more than indications of the general background to the later Deed. The deed of 29 April 2010 was superseded by the Deed of 25 February 2011 and has no bearing on the outcome of the proceedings.

8. The Deed of 25 February 2011 has a prominent heading, “DEED OF TRANSFER OF ONE THIRD INTEREST ON PROPERTY” (sic), with the address of the property then being stated.

9. The Deed recites that the property is subject to a mortgage in favour of the National Australia Bank (“NAB”) and that:

“3.    Upon the request of the transferors, the transferee [the appellant] has agreed to advance a sum of $130,000.00 to the transferors and part of this money had [sic] already given to the transferors in or about May 2010.

4.    The transferors agree to transfer one third of their title and interest of the property to the transferee.”

10. The operative provisions of the deed are then stated as follows:

“2. (a)    In consideration of the transferee paying a sum of one hundred and thirty thousand dollars ($130,000.00) (‘the consideration’) to the transferors, the transferors will transfer one third of their interest and title of the property to the transferee.

(b) The transferee covenants with the transferors that he will pay to the transferors so much of the sum of $130,000.00 as shall remain unpaid within 7 days from the date of this Deed.

3.    The transferors will do all acts and sign all necessary documents to transfer the interest and title of the property to the transferee within seven day[s] upon the request of the transferee.

4.    After this Deed is executed, the transferee will be responsible for one third of all outgoings associated with the property including but not limited to Council Rates, Water Rates and all repairs and maintenance of the property and will be entitled to one third of the income from the rental of the property.

5.    After this Deed is executed, the transferors will be responsible for two third[s] of all outgoings associated with the property including but not limited to Council Rates, Water Rates and all repairs and maintenance of the property and will be entitled to two third[s] of the income from the rental of the property.

6.    The parties agree that the transferors will be solely responsible to the NAB [for] mortgage repayments.

7.    In the event that the property is sold, the parties agrees [sic] to divide the proceeds of sale as follows:

i.    The transferee will be entitled to take $130,000 plus one third of the remaining net proceeds of sale;

ii.    The transferors will be entitled to two third[s] of the remaining net proceeds of sale.

For the purpose of this clause, the expression of ‘remaining net proceeds of sale’ means the sale price minus payment of mortgage and associated costs, minus legal costs, minus $130,000 and all costs in relation to the sale of the property, e.g. commission to real estate agent and etc.”

11. In evidence, and apparently handed by the respondents to the appellant on or about 25 February 2011, is a signed form of Real Property Act 1900 (NSW) transfer to the appellant of a one-third interest in the subject property. The consideration is stated in it as follows:

“The transferor acknowledges receipt of the consideration of $130,000.00 and as regards the abovementioned land transfers to the transferee an estate in fee simple”.

12. As indicated by the terms of the Deed, part of the $130,000.00 had already been paid by the appellant to the respondents by the date of the Deed. The remainder was transferred on or about its date. Ultimately that sum was repaid by the respondents to the appellant pursuant to the primary judge’s order of 22 March 2022, made in consequence of his Honour’s principal judgment of 1 December 2021. Pursuant to that order, the respondents also paid $75,000 to the appellant in relation to the appellant’s entitlement under clause 4 of the Deed to one third of the property’s income.

13. After filing a summons in the Equity Division, the appellant, on 9 October 2015, filed a statement of claim seeking, inter alia, a declaration that the respondents hold a one third share of the property in trust for him. By cross-claim the respondents sought, inter alia, an order setting the whole Deed aside on the grounds of its unconscionability.

THE PRIMARY JUDGMENT OF 1 DECEMBER 2021

Whether the appellant had an obligation to assist in the boarding house business

14. The first issue that his Honour addressed was whether on the proper construction of the Deed, the appellant assumed an obligation to do one-third of the work required in the operation, repair and maintenance of the boarding house. This was relevant, first, to whether the respondents validly terminated the Deed, as they had sought to do that in reliance on the breach of a term of the Deed that the appellant would do that work. The primary judge found that they had not because the Deed did not contain such a term. Nevertheless, he found, for the reasons described below, that the appellant had engendered in the respondents an expectation to that effect and that the absence of any recognition of that arrangement in the Deed was a matter of significance in determining whether the transfer of property provisions in the Deed were unconscionable.

15. The primary judge dealt at some length with the circumstances of the boarding house and discussions between the parties about its operation, maintenance and repair. His Honour included reference to an affidavit of Ms Zhou dated 22 August 2016 which contained the following at [71]:

“In or around late December 2010 or early January 2011 I had a conversation with Bonanno with words to the following effect:

I said: ‘I still have a problem with the bank, you haven't paid me all of it yet and I can't find any other finance. You didn't pay, so the first contract is nothing. How about we keep it as we discussed when we first started talking, the three of us work together and look after the place together.

Bonanno said: Okay, but we'll need a new contract.’”

16. The primary judge noted that in response to this paragraph of the affidavit the appellant, in his affidavit of 26 September 2016, said:

“There was a conversation with the Second defendant at some stage along the lines suggested by her.”

17. His Honour then said:

“As Mr Bonanno had full opportunity to respond to Ms Zhou’s evidence in detail, I take this response to be an acceptance of the substance of the evidence given by Ms Zhou in par 71 of her affidavit.”

18. That acceptance led his Honour to make findings including that, prior to entry into the Deed, Ms Zhou (and through her, Mr Finamore) agreed with the appellant “that the arrangement would be that the three parties would work together and look after the boarding house”. To similar effect, his Honour then said:

“145   … I do accept that Mr Bonanno made statements to Ms Zhou that led her to believe that Mr Bonanno would make substantial contributions to the operation of the boarding house, including in respect of its day-to-day management, repair and maintenance, and would take steps to improve its financial return.”

19. As noted earlier, the primary judge found that the Deed did not contain any term reflecting this prior arrangement and that the respondents were not therefore entitled to terminate the Deed for breach of such a term. Nevertheless, his Honour found that Ms Zhou, on behalf of the respondents, had a reasonable expectation that the Deed would contain such a term and that there was no evidence that the respondents received an adequate explanation of the contents of the Deed.

20. Having referred to the decision of the High Court in Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18, his Honour nevertheless concluded that the appellant’s conduct in relation to the Deed was not “sufficiently unconscientious to justify the Court in making an order that the deed in its entirety be set aside” and that the respondents had not established that the appellant’s conduct demonstrated “a level of victimisation or exploitation that would justify the order sought by the [respondents]”.

Validity of the transfer provisions Deed

21. The primary judge concluded that in providing for an “advance” by the appellant, the Deed contemplated a loan by him that was to be repaid by the respondents, at least on the sale of the property. That accorded with the appellant’s submissions to the primary judge to which his Honour referred as follows:

“237   Mr Bonanno submitted, at page 27 of his final written reply submissions, that the second agreement [the Deed] did not create a mortgage or security: ‘[b]ut is in principle a loan document with an added facility akin to an option which may or may not be exercised.’ He submitted at page 28 that: ‘The entitlement to request the 1/3 interest is not predicated on any failure by the Defendants to perform obligations, but is effectively nothing more than an option exercisable by the Plaintiff to request it, which may have never been exercised.’”

22. His Honour added the following:

“237   … Mr Bonanno has therefore accepted that the deed involved a loan. It is true that the deed did not create a charge in the conventional sense, but it did create a collateral entitlement. If that entitlement was in the nature of an option to acquire an interest in the property, it could be exercised for no additional consideration other than the making of the advance.”

23. His Honour then quoted the following statement of Lord Parker in Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 at 61 concerning the validity of collateral advantages conferred by a mortgage:

“… [T]here is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either (1.) unfair and unconscionable, or (2.) in the nature of a penalty clogging the equity of redemption, or (3.) inconsistent with or repugnant to the contractual and equitable right to redeem.”

24. His Honour then noted Young J’s discussion in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 of whether Propositions (2) and (3) as stated by Lord Parker remained independent bases for holding that a collateral advantage conferred on a mortgagee was invalid. His Honour considered a number of authorities addressing that question and concluded that they were, subject to some modification of Proposition (3). His Honour concluded that, on his revision of Proposition (3), the transfer provisions in the present Deed are invalid “because they constitute a collateral advantage created by a mortgage whereby the mortgagor is obliged to transfer the title to part of the mortgaged property without any consideration additional to the making of the loan.”

Unconscionability of transfer provisions

25. Against the possibility that he might be found to be in error in concluding that Propositions (2) and (3) had independent operation, his Honour considered the application of Proposition (1) to the present case and concluded that enforcement of the transfer provisions in the Deed would be unfair and unconscionable, with the result that they are invalid.

26. The primary judge first noted the appellant’s argument that the interest he claimed in the property might only be worth in the order of $20,000, and therefore was arguably insignificant, and accepted that there was “some strength” in that point. Against that, his Honour noted that on the appellant’s case he would have been entitled to one-third of any increase in that value.

27. His Honour described the respondents’ circumstances as follows:

“372   … [O]n the whole of the evidence, I am satisfied that the defendants were, at the time they entered into the deed, extremely distressed borrowers, who depended upon the profits of the boarding house, and had no other realistic way of raising money to cover substantial existing defaults on their mortgage, as well as other debts, than to borrow the $130,000 from Mr Bonanno. That money was to be used substantially for catch up debt payments. The borrowing of the money only permitted the defendants to stave off action by NAB to enforce its mortgage, and did not provide the defendants with additional capital for the purpose of improving the boarding house or increasing its profitability in order to improve the defendants' ability to service their debts in the future.

…

374    Further, Ms Zhou, while reasonably astute, was not commercially sophisticated and was unable at the time the deed was entered into to comprehend spoken English in a technical legal context.

375    Mr Bonanno did not suggest that the defendants receive independent legal advice from a lawyer instructed by the defendants who understood the need to fully advise the defendants concerning the effect of the deed and the extent to which it was in their interests to enter into the deed.”

28. His Honour concluded as follows that enforcement of the transfer provisions of the Deed would be unconscionable (and therefore, unfair), and that they are therefore invalid:

“380    The deed granted to Mr Bonanno an option to require the transfer to him of a one third interest in the property without any consideration in addition to the advance of $130,000 for which he was entitled to be repaid in full.

381    The defendants agreed to transfer the one third interest in the property to Mr Bonanno in the expectation, induced by comments made by Mr Bonanno in discussions with Ms Zhou, that the deed would oblige Mr Bonanno to contribute actively to the management, repair and maintenance of the boarding house and the improvement of the business, and Mr Bonanno did not ensure that the deed contained a term to that effect.

382    This is the primary reason why I consider that the inclusion of the transfer terms in the deed was unconscionable. It would have been a natural commercial step for the defendants to take to agree to transfer one third of the interest in the property to Mr Bonanno if he was to be liable under the deed to contribute equally to the maintenance, repair and operation of the boarding house. In that case, Mr Bonanno would in effect have become a partner of the defendants and he could reasonably have expected to become a one third owner of the property. I am satisfied that the defendants acted in the expectation that the deed would achieve that result, but for the reasons that I have explained above it did not. Moreover, Mr Bonanno did not in fact provide the benefits that the defendants expected in return for his entitlement under the deed to become a one third owner of the property.

383    In reality, the deed created the legal result that Mr Bonanno became a mortgagee of the property entitled to repayment of the $130,000 plus a one third share of the net profits from the operation of the boarding house, plus a one third interest in the property and its net market price on sale, without any obligation upon Mr Bonanno to contribute equally with the defendants in the operation of the boarding house.”

COSTS JUDGMENT OF 23 MAY 2022

29. The primary judge noted, and “to some extent” accepted, the respondents’ submission that the most important issue in the case was whether the Deed gave the appellant ownership of one-third of the property or whether it only gave him security, by way of a charge over the property, for the repayment of his $130,000 advance. The respondents succeeded on this issue because his Honour found that to the extent that the terms of the Deed purported to have the effect of transferring to the appellant an ownership interest, as distinct from one by way of security, it was invalid because the appellant’s reliance on it was unconscionable (Lord Parker’s Proposition (1)) and constituted a collateral advantage (Lord Parker’s Proposition (3)).

30. His Honour noted that, on the other hand, the appellant succeeded in obtaining an order for payment to him of the amount of $75,000 due to him under clause 4 of the Deed (being one-third of the rental of the property). The respondents’ argument in response to the claim for this order (that the Deed as a whole was invalid) was unsuccessful.

31. Taking these matters into account, the primary judge concluded that the respondents’ prima facie entitlement to costs, arising out of their success on the principal issue, should be the subject of a substantial discount in light of the measure of success also achieved by the appellant. As a result, the primary judge ordered the appellant to pay 60% of the respondents’ costs of the proceedings.

DETERMINATION OF THE APPEAL

32. The appellant advances two grounds of appeal. The first challenges the primary judge’s finding that the Deed does not entitle the appellant to a one-third interest in the subject property. This is supported by six particulars (i)–(vi). The second ground challenges the primary judge’s costs order.

Ground 1: The property interest issue

Particular i: “The Appellant asserts the Primary Judge was wrong to find the Deed as between the parties incorporated an option to require the transfer [reasons 380], when the Respondents were required to do so under Cl 2a of the Deed, such that there was no 'option' by which the Appellant could elect to acquire a 1/3 interest.”    

Particular ii: “The Primary Judge misunderstood the Deed and the immediacy of the vesting in the Appellant of a 1/3 interest in the property upon the parties entering into the Deed.”   

33. The primary judge referred to the Deed’s grant to the appellant of “an option to require the transfer to him of a one-third interest in the property without any consideration …” (see Judgment [380] quoted in [28] above). This language was understandable as clause 3 of the Deed requires the transfer of the relevant interest to the appellant “within 7 days of a request by the appellant for a transfer” (see [10] above). Moreover, as the primary judge recorded (Judgment [237]), the appellant had submitted, at first instance, that the Deed was “in principle a loan document with an added facility akin to an option which may or may not be exercised” (emphasis added). The appellant’s complaint about the primary judge’s use of the term “option” cannot in these circumstances be sustained.

34. The point apparently sought to be made by the appellant by particulars i and ii, and reiterated in oral argument, is that the Deed did not give him “an option to acquire” an interest in the property but created that interest in his favour, such that he had “an absolute equitable interest” from the moment that the Deed was entered into. This was said to support his submission that the “’better view’ is that the Deed is not a mortgage”. Even if the appellant would have acquired an immediate equitable interest in the property if the Deed were wholly valid, that fact would not have contradicted his Honour’s conclusion that the Deed in substance gave rise to a mortgage, and a collateral advantage. As the “advance” of $130,000 was required to be repaid, there was, as his Honour found, no consideration given or required to be given by the appellant for his acquisition of a one-third interest in the property. The provisions for the transfer of that interest to him are clearly an attempt to confer a collateral advantage on him to be obtained, and retained, by him in return for, and notwithstanding the repayment of, the advance. They are therefore subject to the rules stated by Lord Parker in Kreglinger (see [23] above).

35. Contrary to the appellant’s apparent contention, the acquisition by a mortgagee of a proprietary interest, whether legal or equitable, does not prevent a court from considering the substance of a transaction to determine if the interest was acquired by way of security. For example, a formal conveyance of Old System land is not inconsistent with the existence of an equity of redemption if that reflects the true nature of the transaction.

36. Particulars i and ii do not in these circumstances advance the appellant’s case as the points they make, even if correct, do not vitiate his Honour’s conclusion that the transfer of property provisions in the Deed were unconscionable and therefore invalid.

Particular iii: “The Primary Judge erred in finding that the Deed was in effect a mortgage such that the Appellant became a mortgagee of the property [reasons 383], as opposed to the Deed being an agreement for an absolute transfer of a one third interest in the ownership of the property to the Appellant [reasons 218] or finding something otherwise not consistent with the Deed being a mortgage. The Deed specifically stated the Respondents were obliged under Cl 2a of the Deed to transfer one third interest to the Appellant and so the Deed could not have amounted to a mortgage.”

37. This particular effectively asserts that because the Deed provided for the appellant’s unqualified acquisition of a one-third interest in the property, it could not have constituted a mortgage because a mortgage does not involve an absolute transfer but one that is qualified by its role as security for repayment of the mortgage debt.

38. This contention however ignores the fact that in determining whether an instrument gives rise to a mortgage as distinct from an absolute transfer, regard is to be had to the substance of the transaction, and not simply its form. This is so because the principles described by Lord Parker in Kreglinger are equitable principles and equity looks to the intent, rather than to the form (see Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis) at [3-145] and following). As Lord Parker indicated at 47, the application of the principles depends on the “real intention of the parties”. To similar effect in Gurfinkelv Bentley Pty Ltd (1966) 116 CLR 98; [1966] HCA 75, each member of the Court sought to ascertain the real intention of the parties as to whether a conveyance was intended to be absolute or by way of security only, even going so far as to permit oral evidence on that question (see for example at 114, 118 and 122).

Particular iv: “The Primary Judge erred when he found the inclusion of the transfer terms was unconscionable [reasons 361, 382, 384] and invalid.”

Particular v: “The Primary Judge erred when he found as a relevant fact that the Respondents agreed to transfer the one third interest in the property to the Appellant in the expectation, induced by comments made by the Appellant in discussions with the second Respondent that the deed would oblige the Appellant to contribute actively to the management repair and maintenance of the boarding house and the improvement of the business, and the Appellant did not ensure that the Deed contained a term to that effect [reasons 381].”

39. Particular v challenges the finding that the primary judge treated as of most significance on the question of unconscionability (Lord Parker’s Proposition (1)), that is, that the Deed did not contain a provision reflecting the parties’ prior oral arrangement, that the appellant would contribute equally to the management, repair and maintenance of the boarding house. The appellant made the following points in relation to that finding.

40. First, the appellant referred to some general, rather inconclusive, evidence that he gave at first instance. That reference did not however demonstrate that the primary judge was wrong in relying on the specific evidence given by him in relation to paragraph [71] of Ms Zhou’s affidavit (see [15] above). The appellant also pointed out that Mr Finamore did not give evidence of the oral arrangement found by his Honour. His Honour did not however suggest that he did and the absence of such evidence was not of significance. The appellant then referred to Ms Zhou’s evidence and pointed out that an obligation on the appellant to perform repairs, maintenance or management duties was not contained either in the earlier or the later Deed. This did not however contradict his Honour’s finding of an oral arrangement, that is of an expectation of the respondents engendered by the appellant.

41. In his written submissions, the appellant then made a number of general assertions which did not seek, by references to the evidence, to contradict his Honour’s findings about the relationship between the parties. The following are examples of these assertions:

“a.    The Plaintiff was not the stronger party; he was approached by Zhou;

b.    The Plaintiff did not take advantage of the defendants. Both defendants had jobs, could read English, had the opportunity to seek further legal advice, and could if he/she chose have taken the Deed home prior to signing and so neither could be seen as being impaired;

…

e.    The Plaintiff did not exhibit predatory or exploitative behaviour; he was willing to loan monies at the request of Zhou on promises Zhou was prepared to give, contained in the Deed;

… ”.    

42. The only attempt to contradict his Honour’s specific finding that an oral arrangement was made prior to the date of the Deed (see [4] above) was as follows:

“The defendant's ‘expectation’ was not based on either agreement [referring to the two deeds], and in Finamore’s case, not even on what the Plaintiff had said to him. Zhou would have been well aware the Plaintiff wasn't required to perform the duties. This is demonstrated by Zhou's message to the Plaintiff … wherein Zhou stated ‘You are more than welcome to participate in any activities regarding the house, like registration, rent collection, cleaning, repair, there are many things as you observed before yourself, to maintain it is a full time job! ... as I have requested you to help register clients and help collect rent … so many times.’”. (Emphasis in original.)   

43. It is not to the point to say, as put in the opening words of that submission, that the respondents’ expectation was not based on either of the deeds as his Honour’s finding was of an oral, not written, arrangement. Moreover, the “message” quoted (which was part of an email of 23 May 2012, sent 15 months after the date of the Deed), did not contradict the primary judge’s finding of an oral arrangement, certainly not in any clear fashion. The passage quoted is contained in a long email listing complaints by Ms Zhou which is well open to the construction that she was trying, so far as possible, to be diplomatic. As such, it is at its highest for the appellant, ambiguous.

44. In summary, nothing in the appellant’s submissions demonstrates that the findings that his Honour made concerning the relationship between the parties, which formed part of his reasoning relating to unconscionability, were wrong. Moreover, his Honour’s principal reasons for his conclusion stand without effective challenge from the appellant. These were that there was a prior oral arrangement concerning the maintenance, repair and operation of the boarding house that was not reflected in the Deed, with the consequence that, bearing in mind that the advance of $130,000 was required to be, and was, repaid in full, the provisions in the Deed for the transfer to the appellant of a one-third interest in the property were not supported by any consideration (See [380]–[383] quoted in [28] above).

43. I add that, in my view for good reason, the appellant did not contend that the provisions for transfer of the one-third interest in the property were in effect an interest payment which was agreed to be made in consideration for the loan of $130,000. The Deed does not suggest that they have that character and there is in any event elsewhere in the Deed (that is in the provision in clause 4 for payment to the appellant of one-third of the net rent) an obligation tantamount to one to pay interest.

44. I also add that the appellant asserted that the primary judge’s conclusion, that the Deed as a whole was not unconscionable, is inconsistent with his conclusion that its property transfer provisions were unconscionable. I do not consider that this is so as the focus of the former conclusion was understandably on the appellant’s conduct vis a vis the respondents’ special disadvantages, whereas the latter focused on the fairness of the appellant receiving under the Deed a collateral advantage in the form of a proprietary interest for no consideration. Even if there were however an inconsistency, it would not assist the appellant because it is only the latter conclusion that is under challenge and, for the reasons I have given, it withstands that challenge.

Particular vi: “The Primary Judge erred when he applied Lord Parker's Proposition (3) to find the transfer provisions contained in the Deed were invalid [reasons 349] contrary to current and accepted law”.

47. This particular concerns Lord Parker’s Proposition (3). Although the primary judge found that the transfer provisions of the Deed were invalid on the basis of this Proposition, his Honour decided that they were equally invalid on the basis of Lord Parker’s Proposition (1), that is, they were unconscionable and, in my view, it must follow, unfair. For the reasons I have given above, the finding based on Proposition (1) has not been successfully challenged. There is no need therefore to consider the correctness of the finding based on Proposition (3).

Ground 2: The Costs Order

48. The appellant’s particulars in relation to this ground of appeal assert that he succeeded on a majority of the issues in dispute, that the majority of the hearing time at first instance was spent on issues on which he succeeded and that the issue as to the validity of the transfer provisions in the Deed “was mainly decided on historical cases and so not relevant to the issue of costs”.

49. In his written submissions, the appellant contends that he was ultimately successful because the Court found that the Deed was valid, “apart from the transfer terms” and he was entitled to “$75000 by way of back rent – contrary to the defendants’ claims that the deed was void”.

50. The primary judge did not however approach the exercise of his discretion as to costs on the basis of any misunderstanding as to the issues and how they were resolved.

51. It was open to his Honour to treat the primary issue as the entitlement of the appellant to an interest in the property. The respondents succeeded on this issue. It was not, as the appellant’s submissions suggested, “mainly decided on historical cases”. Rather, it was decided on the basis of the unconscionability of the transfer provisions, considered in the context of the Deed as a whole and the circumstances and nature of the relationship between the parties as found by his Honour.

52. The appellant’s success on the other issue, that of back rent and related questions, was taken into account by his Honour and led to a substantial discount in the respondents’ costs entitlement. The outcome was well within the range of reasonable outcomes open to his Honour, consistent with the principles in House v The King.

53. The appellant contended that the primary judge’s costs order did not give the benefit of costs he had been awarded in the course of the proceedings at first instance but costs orders earlier made by the Court were specifically preserved by the subsequent general costs order.

ORDERS

54. For the reasons given above, there is no merit in the appellant’s grounds of appeal. Accordingly, I propose the following orders:

1. Grant leave to appeal;

2. Dismiss the appeal with costs.

55. BASTEN AJA: I agree with the reasons and proposed orders of Macfarlan JA. The following observations relate to ground 1(vi) which challenged the primary judge’s application of the principle known as “proposition (3)” identified by Lord Parker of Waddington in G & C Kreglinger v New Patagonia Meat & Cold Storage Co Ltd. ^[1] The principle is set out by Macfarlan JA at [23] above. Lord Parker’s three propositions, stated as exceptions to a principle identified as a negative, should not be relied upon as if they constituted fixed rules having modern application.

    1. [1914] AC 25 at 61.

56. As a matter of principle, the modern doctrine of unconscionability should be the touchstone of invalidity, in the manner identified with clarity and reference to authority by Barrett J in Lift Capital Partners Pty Ltd (in liq) v Merrill Lynch International,^[2] adopting the approach of Young J in Westfield Holdings Ltd v Australian Capital Television Pty Ltd. ^[3] Although the trial judge expressed some reticence in applying that approach, the principles were cited with apparent approval by the Full Court of the Supreme Court of South Australia in Epic Feast Ltd v Mawson KLM Holdings Pty Ltd (in liq). ^[4] That gave the support of an intermediate court of appeal which should generally be followed by trial judges. Indeed, it should be followed by this Court, unless comfortably satisfied that the principle stated is wrong.

    2. (2009) 73 NSWLR 404; [2009] NSWSC 7.

    3. (1992) 32 NSWLR 194.

    4. (1998) 71 SASR 161 (Debelle J, Matheson and Prior JJ agreeing); [1998] SASC 6616.

57. As a matter of language, Kreglinger is unhelpful. Whilst the method of obtaining the release of a security interest still has application, the form of a mortgage under the Real Property Act 1900 (NSW) no longer involves the transfer of title subject to an equity of redemption, but the creation of a security: s 57(1). This is not without significance. The application of the Kreglinger principle required the characterisation of a transaction as a “mortgage”. That term is now defined in s 3(1) of the Real Property Act as “[a]ny charge on land (other than a covenant charge) created merely for securing the payment of a debt.”^[5] Characterising a contract or deed with a constraint on the release of the security as a “mortgage”, rather than a different form of transaction, depends very much upon the elements of a mortgage. Professor Edgeworth states that the definition in the Real Property Act may have restricted the general law meaning of mortgage:^[6] that is clearly so with respect to registered titles.

    5. Waller v Hargraves Secured Investments Ltd (2012) 245 CLR 311; [2012] HCA 4 at [46] (Heydon J).

    6. B Edgeworth, Butt’s Land Law (Law Book Co, 7th ed, 2017), at [11.170]; for the general law meaning, see Handevel Pty Ltd v Comptroller of Stamps (Vic) (1985) 157 CLR 177 at 192 (Mason, Wilson, Deane and Dawson JJ); [1985] HCA 73.

58. As a matter of social history, the function of the mortgage as a means of utilising the capital value of land, both for commercial and residential purposes has changed dramatically over the course of a century. ^[7] The shackles of judicial principle formulated over 100 years ago, in another country, and reflecting different purposes, should not bind this Court.

    7. K and SF Gray, Elements of Land Law (OUP, 5th ed, 2009) at [6.1.3]-[6.1.6].

59. Nevertheless, these observations do not assist the appellant. The principle which the trial judge in fact adopted was the qualified version of proposition (3) identified at [24] above. Further, he determined the matter on an alternative basis, concluding that the transfer provision was unconscionable.

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Endnotes

Decision last updated: 20 December 2022