Bonanno v Finamore - [2021] NSWSC 1558

Supreme Court

New South Wales

Medium Neutral Citation: Bonanno v Finamore [2021] NSWSC 1558
Hearing dates: 29 March to 1 April 2021; 6 and 7 April 2021; final submissions received 7 July 2021
Decision date: 01 December 2021
Jurisdiction: Equity
Before: Robb J
Decision:
The defendants have established their case to have the transfer provisions in the deed set aside. See pars [89], [105], [144], [161], [187], [190], [217], [234], [235], [237], [349], [384]-[388]. The parties are required to confer and agree short minutes of order to give effect to these reasons for judgment and to provide draft short minutes of order to my Associate.

Catchwords:
CONTRACTS — Termination — Breach of term — Where the plaintiff sought enforcement of a deed — Where the defendants argued that there were additional oral terms that operated in conjunction with the deed — Where the defendants argued that the plaintiff seriously breached an additional oral term and that the plaintiff had repudiated the deed — Where the defendants claimed that they terminated the deed in response to the plaintiff’s breach or in acceptance of the plaintiff’s repudiation — Where the defendants argued that they had effectively communicated termination of the deed — Where the Court found that the defendants had not effectively communicated termination of the deed — Where the Court held that deed had not been terminated
EQUITY — Unconscionable conduct — Special disability or disadvantage — Where the defendants argued that a deed should be set aside in its entirety because it was procured by the plaintiff taking unconscientious advantage of special disadvantages suffered by the defendants — Where the Court found that the defendants did suffer from some special disadvantages — Where the Court found that the plaintiff was not in a powerful bargaining position when the deed was entered into — Where the Court held that the conduct of the plaintiff in entering into the deed was not sufficiently unconscientious to justify the Court setting the deed aside
MORTGAGES AND SECURITIES — Mortgages — Whether a deed recorded a transaction that was in substance a mortgage — Where the plaintiff argued that the transaction was not a mortgage but rather a loan document with an added facility similar to an option — Where on its face the deed was an amalgam of a loan secured by an option granted to the plaintiff to call for a transfer of a one third interest in property, plus a collateral right to receive one third of the net price of the property on sale — Where the Court found that the transaction was in substance a mortgage — Where the Court held that the obligation to transfer the one third interest in property was a collateral advantage
MORTGAGES AND SECURITIES — Mortgages — Mortgage contracts — Clogs on equity of redemption — Where the plaintiff and defendants executed a deed which would give the plaintiff a one third interest in property in consideration of the plaintiff lending the defendants money — Where the deed contained a term that allowed the plaintiff to compel the transfer of the one third interest by way of notice — Where the deed did not provide for the defendants being able to repay the plaintiff the loan without the sale of the property — Where the plaintiff brought proceedings to enforce the transfer provisions in the deed — Where the defendants resisted the claim on several grounds including on the basis that the transfer provisions were a clog on the equity of redemption — Where the Court found that the transfer provisions were a clog on the equity of redemption — Where the Court held that the transfer provisions were void

Legislation Cited:
Conveyancing Act 1919 (NSW)
Real Property Act 1900 (NSW)
Supreme Court Act 1970 (NSW)

Cases Cited:
Amcor Ltd v Barnes [2016] VSC 707
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30
Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18
Baker v Biddle (1923) 33 CLR 188
Biggs v Hoddinott (1898) 2 Ch 307
Bradley v Carritt [1903] AC 253
Charmelyn Enterprises Pty Ltd v Klonis (1980) 2 BPR 9527
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161
Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98
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 (2019) 73 NSWLR 404; [2009] NSWSC 7
Lisle v Reeve [1902] 1 Ch 53
Noakes v Rice [1902] AC 24
Re Funds in Court; Application of Mango Credit Pty Ltd [2016] NSWSC 199
Re Matcove Pty Ltd [2020] NSWSC 625
Sam Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320
Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323
Santley v Wilde [1899] 1 Ch 747
Sun North Investments Pty Ltd (as Trustee of Sun Development Trust) v Dale [2014] 1 Qd R 369; [2013] QSC 44
Thomas v Silvia; Re Modular Design Group Pty Ltd v CDG (Canberra) Pty Ltd (1994) 35 NSWLR 96
Vernon v Bethell (1762) 2 Eden 110; (1762) 28 ER 838
Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194
Wily v Endeavour Health Care Services Pty Ltd (No 5) [2003] NSWSC 616
Wily v Endeavour Health Care Services Pty Ltd [2003] NSWCA 321

Texts Cited:
Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths)
Tyler, E L G, P W Young and C E Croft, Fisher & Lightwood’s Law of Mortgage (3rd ed. Aust, 2013, LexisNexis Butterworths)

Category: Principal judgment
Parties: Salvatore Antonio Bonanno (plaintiff)
Nicola Finamore (first defendant)
Weisen Zhou (second defendant)
Representation:
Counsel:
G Foster (plaintiff)
D A Woods (first and second defendant)
Solicitors:
Phillip A Wilkins & Associates (plaintiff)
LegalVision (first and second defendant)

File Number(s): 2015/228434

Judgment

The plaintiff in these proceedings is Mr Salvatore Antonio Bonanno. Mr Bonanno commenced these proceedings by summons filed on 5 August 2015 and pleaded his claim in a statement of claim filed on 9 October 2015.
The active defendants are Mr Nicola Finamore and Ms Weisen Zhou, who are the first and second defendants respectively. There was a third defendant against whom Mr Bonanno’s case has not proceeded. I will refer to Mr Finamore and Ms Zhou as the defendants. Mr Finamore and Ms Zhou filed a further amended defence on 25 November 2019. They also filed a further amended statement of cross claim on that date.
Mr Bonanno filed an amended reply and a defence to the further amended statement of cross claim on 24 and 23 December 2019 respectively.
These proceedings primarily concern a property at Rosebery (the property) which is jointly owned by the defendants and at all material times has been operated as a boarding house. Mr Bonanno and the defendants executed a deed on 25 February 2011. The deed had unusual characteristics in that it provided for Mr Bonanno to make an advance of $130,000 to the defendants and contained a term that gave Mr Bonanno a right to require the defendants to transfer a one third interest in the property to Mr Bonanno. Mr Bonanno advanced the $130,000 but the defendants have declined to transfer the one third interest in the property to Mr Bonanno. By these proceedings, Mr Bonanno seeks to enforce the deed in accordance with its terms. The defendants have resisted Mr Bonanno's claim, primarily on grounds that they terminated the deed for breach by Mr Bonanno. The defendants have also argued that the deed should be set aside in its entirety because it was procured by Mr Bonanno taking unconscientious advantage of special disadvantages suffered by the defendants, that the deed is in substance a mortgage and Mr Bonanno has not proved that he is entitled to exercise his security rights; and finally that the term requiring the defendants to transfer the one third interest in the property is an invalid clog on the defendants’ equity of redemption.

Course of proceedings

As noted, the proceedings were commenced on 5 August 2015. They were listed in the Real Property List. The proceedings were listed on two occasions for hearing but each time the hearing was vacated. In each case it had been estimated by the parties that the hearing would take three days. Darke J vacated the hearing that commenced on 18 September 2017, it appears primarily because the defendants were not able to proceed as their legal representatives had ceased to act. On 21 November 2019, Rein J vacated a three-day hearing fixed to begin on 2 December 2019, on the ground that the parties had informed him that the hearing could not be completed in three days. The proceedings were then removed from the Real Property List.
The proceedings were fixed to be heard by me over six days commencing on 29 March 2021. The hearing did not finish in the allotted six days. That was so, notwithstanding that the parties during the course of the hearing were able to reduce the number of issues in contest by filing an agreed statement of facts, to which I will refer below. That had the result that it was not necessary for the parties to tender expert accounting evidence that had been filed. Other evidence that had been tendered also ceased to be relevant.
Although the Court had some limited time to receive oral submissions by the parties, it was necessary to make directions for the provision of final written submissions, which was an exercise that was not completed until 7 July 2021.
These circumstances have had collective consequences. First, I have found it necessary to engage in an analysis of the pleadings in a level of detail that would not ordinarily be necessary to ensure that I have identified the issues, and made the necessary adjustments for the abandonment of issues and the agreements as to facts. As the whole of the evidence was tendered before issues were abandoned and facts agreed, a considerable part of the evidence ceased to be relevant but remained before the Court. Consequently, I have had to place exceptional reliance upon the parties' final written submissions to identify the evidence still relied upon by the parties. Finally, the detailed cross examination of the parties on issues that ceased to be relevant and the delay between the end of the hearing and the receipt of final submissions have impeded the Court's ability to make sound judgments about the credibility of the witnesses. This last factor has not been of great significance, because this is one of those cases where the Court judges that the only safe course is to rely primarily on the objective evidence and the probabilities that logically arise from that evidence.

Relief claimed in statement of claim

Paraphrasing and simplifying the prayers for relief in the statement of claim, Mr Bonanno seeks the following:

a declaration that the defendants hold a one third share of the property on trust for Mr Bonanno (prayer 1);

an order that within 28 days the parties do all things necessary to sell the property through a real estate agent (prayer 3);

if the property is not sold within two months of the date of listing, an order that the parties do all things necessary to list the property for auction (prayer 4);

an order that within 28 days the proceeds of sale on settlement be dealt with as follows (prayer 5):

payment of $130,000 to Mr Bonanno;

repayment of any mortgage owing to National Australia Bank Ltd (NAB);

payment of all the costs and commissions of sale;

payment of one third of the balance of the sale proceeds to Mr Bonanno;

payment to Mr Bonanno of one third of the amounts received by the defendants as rents for the property since 25 February 2011, less one third of certain specified costs associated with the property and amounts of rent paid to Mr Bonanno, less amounts previously paid by Mr Bonanno for costs;

payment of the balance to the defendants equally;

alternatively, an order that Mr Bonanno’s solicitor be appointed as trustee for sale (prayer 6);

alternatively, an order that within 28 days the defendants pay to Mr Bonanno $130,000 plus one third of the value of the property as determined by the Court less the sum of $130,000 and the amount of the debt owed to NAB (prayer 7);

an order that the defendants account to Mr Bonanno for profits, including all revenues and rents less expenses and outgoings in respect of the property from 25 February 2011 to date (prayer 8);

an order that the defendants pay to Mr Bonanno the sum equivalent of the amount referred to in prayer 5(e) above (prayer 9); and

alternatively, damages or equitable compensation as assessed (prayer 10).

National Australia Bank Ltd is not a party. There can be no basis for the Court to order that $130,000 be repaid to Mr Bonanno before the debt owed by the defendants to NAB is repaid. If the property is sold, NAB will not be required to deliver a discharge of mortgage until the debt due to it is repaid first.
Mr Bonanno seeks orders to enable him to receive the money that he claims under the deed in three ways; namely, by the Court ordering the defendants to sell the property, or alternatively by appointing Mr Bonanno's solicitor as trustee for sale, or by ordering the defendants effectively to buy out Mr Bonanno on the same terms as if the property had been sold, with the Court determining the value of the property. Mr Bonanno did not explain how the Court could make the first and third of these orders. It appears that if any order could be made, it would be an order for the appointment of a trustee for sale under s 66G of the Conveyancing Act 1919 (NSW), if Mr Bonanno establishes that he has an equitable one third interest in the property.
It will be convenient to note at this point that, as will be explained below, during the hearing, the parties agreed that the amount payable by the defendants to Mr Bonanno under the relief summarised in [9(4)(e) and (8)] above is $75,000, assuming Mr Bonanno establishes an entitlement to that relief. A consequence of the agreement is that Mr Bonanno no longer needs an order for an accounting as summarised in [9(7)] above. Additionally, if Mr Bonanno succeeds in proving an entitlement to be paid the $75,000, it will not be necessary for the Court to consider the alternative claim for damages or equitable compensation referred to in [9(9)] above.

Statement of claim and further amended defence

It will be convenient to set out the material parts of Mr Bonanno’s pleading followed by the defendants’ responses to those parts in their further amended defence.
Mr Bonanno pleaded in par 4 that, in about April 2010, Ms Zhou requested Mr Bonanno to lend the defendants $100,000 to repay NAB in consideration of Ms Zhou entering into a partnership with Mr Bonanno (the first agreement) under which he would receive a 50% interest in the property, together with 50% of the net rents, such net rents being exclusive of mortgage payments to NAB. Those payments would remain the responsibility of Ms Zhou: par 4. Mr Bonanno alleged that Ms Zhou represented that the rooms in the property rented for a total of $1,200 to $1,500 per week.
The defendants responded by admitting that, in February 2010, Ms Zhou engaged in discussions about the property with Mr Bonanno. They admitted that Ms Zhou requested financial assistance from Mr Bonanno in relation to the NAB mortgage, and that Mr Bonanno and Ms Zhou discussed entering into a partnership in respect of the boarding house at the property. The defendants referred to their further amended cross claim and said that Ms Zhou was entitled to an order setting aside the first agreement entered into on 29 April 2010. They denied that Ms Zhou made the alleged representation concerning the rent received in respect of the property. See pars 4 to 6 of the further amended defence.
Mr Bonanno then alleged that, on or about 29 April 2010, Mr Bonanno and Ms Zhou entered into an agreement pursuant to which, in about May 2010, Mr Bonanno loaned Ms Zhou $30,000, called the first payment: par 5.
In par 7 of the further amended defence, the defendants admitted that Mr Bonanno and Ms Zhou entered into the first agreement and said that payments of $20,000 and $10,000 were received. They said that Ms Zhou was entitled to an order setting aside the first agreement.
In par 6, Mr Bonanno alleged that, notwithstanding the first payment, Mr Finamore refused to release his share of the property, and so no portion of the property was transferred to Mr Bonanno, nor was the first payment repaid to him.
The defendants admitted, in par 8 of the further amended defence, that no portion of the property was transferred to Mr Bonanno but said that Mr Finamore was not obliged to release any share of the property to Mr Bonanno.
Mr Bonanno alleged that, in about November 2010, Ms Zhou advised him that the outstanding amount owed to NAB was in the order of $130,000, and offered Mr Bonanno a one third share in the property on the condition that he loaned such additional money that, when added to the money already loaned, would total $130,000: par 7.
The defendants denied this allegation in par 9 of the further amended defence.
Mr Bonanno alleged in par 8 that, on about 25 February 2011, Mr Bonanno and the defendants executed a written agreement (the second agreement), which included terms that in substance were as follows:

moneys already paid by Mr Bonanno to the defendants were acknowledged;

Mr Bonanno covenanted to lend the defendants further money which, when added to the money already loaned, would total $130,000, within seven days, in consideration of which the defendants agreed to transfer one third of their interest in the property to Mr Bonanno within seven days of a request by Mr Bonanno to do so;

the defendants agreed to be solely responsible for the NAB loan repayments;

Mr Bonanno would be responsible for one third of all outgoings associated with the property including rates, repairs and maintenance;

Mr Bonanno would be entitled to one third of the rental income from the property;

upon execution of the agreement, the defendants would be responsible for two thirds of all outgoings associated with the property, in addition to being solely responsible for the NAB mortgage repayments;

in the event the property was sold, Mr Bonanno was entitled to receive $130,000 plus one third of the ‘remaining net proceeds of sale’ as defined.

The defendants admitted, in par 10 of the further amended defence, that the parties executed a written agreement, known as the Deed of Transfer of One Third Interest on Property, on 25 February 2011 (the deed). They said that they are entitled to an order setting aside the deed. They admitted that the deed contained the terms pleaded in par 8(b)(ii), (iii), (iv) and (v) of the statement of claim – see the terms summarised above at [22(3) to (6)].
Further, the defendants denied in par 10(c) of their further amended defence that the deed contained all the terms agreed to by the parties and alleged that there were additional terms (which the defendants also called the second agreement) as follows:

Mr Bonanno would be responsible for one third of all outgoings associated with the property including but not limited to rates, repairs and maintenance;

Mr Bonanno would be responsible for one third of all repairs and maintenance of the property or would regularly assist with the repairs and maintenance of the property; and

Mr Bonanno would share in the responsibilities of operating and maintaining the boarding house at the property.

It should be noted, in order to minimise confusion, that a consequence of the defendants admitting that they executed the deed, but alleging that there were the additional terms agreed that are set out immediately above, is that the defendants’ pleadings refer to the deed and the second agreement in ways that sometimes overlap but are sometimes distinct. Mr Bonanno pleaded the first agreement (29 April 2010) and the second agreement (25 February 2011). The defendants admitted that there was a first agreement but alleged that, on 25 February 2011, a deed was entered into between the parties. The deed did not, they alleged, contain all of the terms. What the defendants called the second agreement was the aggregate effect of the deed and the oral terms.

The issue of whether the effect of the second agreement was only to make Mr Bonanno a lender to the defendants, or whether he was in addition required to participate equally with the defendants in the operation of the boarding house, is a crucial issue in these proceedings.
The defendants further alleged that Mr Bonanno was estopped from denying that the second agreement contained these oral terms, by reason of the circumstances alleged in par 20 of the further amended defence.
Mr Bonanno alleged in par 9 that he paid the defendants an additional $105,514 (the second payment).
In par 11 of the further amended defence, the defendants accepted that they received a total of $130,000 from Mr Bonanno under the first and second agreements.
In par 10, Mr Bonanno alleged that the property was at all material times capable of being, and had been, rented for $1,200 to $1,500 per week, such that he should have received in the order of at least $400 to $500 per week.
The defendants denied this allegation in par 12 of the further amended defence.
Mr Bonanno alleged that the parties executed a transfer of the property in accordance with the written agreement: par 11.
In par 13 of the further amended defence, the defendants admitted this allegation, but said that the defendants were entitled to an order for the transfer to be cancelled or destroyed.
Mr Bonanno alleged in par 12 that the defendants have been responsible for collecting the rents and paying Mr Bonanno his share. He said that the defendants have breached the second agreement by failing to pay Mr Bonanno his one third share of the net rents.
The defendants responded to this allegation in par 14 of the further amended defence by denying that the second agreement contained a term making them responsible for collecting rents from the tenants and paying the net rents to Mr Bonanno.
On 21 November 2014, Mr Bonanno requested the defendants to transfer to him a one third share in the property, but the defendants have failed to do so: pars 14 and 15.
The defendants admitted this allegation in pars 16 and 17 of the further amended defence, but added that by that time the second agreement had already come to an end, as the defendants had elected to terminate the second agreement by reason of the repudiation by Mr Bonanno, or serious breach of his obligations under the terms summarised at [24] above.
The defendants then pleaded a number of separate defences to the whole of Mr Bonanno’s statement of claim.
First, in par 19, the defendants pleaded that, if they breached the second agreement, Mr Bonanno had failed to mitigate his loss. The defendants alleged that Mr Bonanno ought reasonably to have arranged with NAB, as the holder of the certificate of title, to cause the transfer to be registered. Secondly, Mr Bonanno failed to contribute to the work, expenses, responsibilities, repairs and maintenance associated with the property and the boarding house to sustain and increase the rental income. Thirdly, Mr Bonanno could have accessed the online St George Bank account in order to regularly reconcile the rental income receipts and expenses for the property and the boarding house.
I am not sure of the fate of this failure to mitigate defence. I think that a consequence of the parties' agreement that Mr Bonanno is entitled to be paid $75,000, if he establishes that the defendants have failed to pay him what he is due under the second agreement, is that there is now no longer room for a claim that he did not mitigate his loss. I have not noticed a reference to failure to mitigate in the defendants' final submissions.
Secondly, in par 20, the defendants alleged that Mr Bonanno is estopped from insisting on his legal rights under the second agreement. That estoppel is alleged to have arisen out of an assumption made by the defendants that it was a term of the second agreement that Mr Bonanno would be responsible for one third of all repairs and maintenance of the property, and that he would share in the responsibilities of operating and maintaining the boarding house at the property, and that he would own and operate the boarding house together with the defendants as equal and contributing partners.
As I will explain below, the defendants abandoned this estoppel claim in their final written submissions.
Finally, the defendants pleaded in par 21 of the further amended defence that, if Mr Bonanno was entitled to receive any part of the proceeds of sale of the property, the defendants were entitled to set off the proportion of the one third of all outgoings and expenses incurred in respect of the property that Mr Bonanno has not paid.
As I understand it, the defendants have not attempted to quantify the amount of any set off. I think that a consequence of the parties' agreeing to the $75,000 being payable by the defendants, if Mr Bonanno upholds the validity of the second agreement, is that any set off has been taken into account in the determination of that amount.

Amended reply

Mr Bonanno responded to the defendants’ further amended defence in his amended reply in substance as follows:

he was unable to mitigate his loss by assisting in the operation of the boarding house because the defendants threatened and were aggressive to him and did not give him access to any documents;

he denied that he was obliged by the deed or the second agreement to share in the responsibilities of operating and maintaining the boarding house at the property;

he denied that it was reasonable for the defendants to assume that he would share in the responsibilities of operating and maintaining the boarding house at the property, having regard to the terms of the deed; and

he said that he contributed to the operation and maintenance of the boarding house at the property on a minimal basis and advised the defendants that he was not experienced in these matters and could not do so on any regular basis.

Although I will explain my reasons more fully below, I record my understanding that issues (1), (3) and (4) in Mr Bonanno's reply no longer arise. Issue (2) remains relevant and is one of the central issues in the proceedings.

Relief claimed in further amended cross claim

In their further amended cross claim the defendants sought relief that may be summarised as follows:

an order setting aside the first agreement dated 29 April 2010 (prayer 1);

an order setting aside the deed dated 25 February 2011 (prayer 2);

an order that the defendants pay Mr Bonanno $57,360.75, being the $130,000 paid to them by Mr Bonanno less $72,639.25 paid by them to Mr Bonanno from the proceeds of the operation of the boarding house (prayer 3);

an order that all signed transfers of a one third share of the property be destroyed (prayer 4);

a declaration that the defendants do not hold a one third share of the title to the property on trust for Mr Bonanno (prayer 5);

an order that Mr Bonanno withdraw a caveat that he had lodged against the title to the property (prayer 6);

damages or equitable compensation, or alternatively an order that Mr Bonanno pay the defendants $29,169 (prayers 7 to 9).

At the hearing, the defendants withdrew their claim for the order set out above in (1) that the first agreement be set aside. However, their counsel explained, at T 269.3, that they maintained a claim that they had terminated the first agreement on the ground that breaches of that agreement by Mr Bonanno constituted a repudiation of the agreement. Alternatively, on the proper construction of the deed and the second agreement, their effect was to replace the first agreement.
The defendants’ counsel explained in oral submissions, at T 262.12, that the defendants’ claim for damages in prayer 7 is for the consequences of the failure by Mr Bonanno to pay the defendants $130,000 immediately, as required by the first agreement. Prayer 8 is for breach of the second agreement, if it is not set aside by the Court.
Counsel also explained, at T 262.35, that the defendants’ position that Mr Bonanno does not have an interest in the property as a one third owner is not only based on their claim for an order that the second agreement be set aside, but is also based on the argument that the second agreement should be characterised as a loan made upon security over the property, and not as an agreement for the sale of a one third interest in the property. The defendants submitted that, once the $130,000 loan has been repaid, the defendants will have an ‘equity of redemption’. In essence, the defendants’ position was that the second agreement was in substance a mortgage and that the term giving Mr Bonanno a one third interest in the property was an unfair and unenforceable collateral advantage or clog on the equity of redemption.
The defendants submitted that, even if the second agreement created a secured loan, Mr Bonanno is not entitled to an order for sale, as no demand for repayment has been made, and the second agreement does not give Mr Bonanno a power of sale.

Grounds pleaded in further amended cross claim

I will now explain the principal grounds pleaded in the further amended cross claim supporting the claims for relief summarised above. It will not be necessary to refer in detail to Mr Bonanno’s defence to the further amended cross claim, as that defence largely denied or put the defendants to proof of their allegations.
It is not necessary to refer to the allegations in pars 1C to 6A of the further amended cross claim, as they relate to the prayer for an order setting aside the first agreement which has now been abandoned.
In the further amended cross claim, the defendants pleaded a number of grounds to support their claim that the deed (or the second agreement) should be set aside. I will focus only on the paragraphs that set out the principal grounds for this relief.
First, in par 7C, the defendants pleaded that each of them was at a special disadvantage to Mr Bonanno when they entered into the deed. The particulars of the special disadvantage were stated as follows:

[Mr Finamore’s] disadvantage was:
i   he was in financial distress: the [defendants] were still in default under their loan facilities with the Bank and the Mortgage, he was having difficulties in paying the monthly loan repayments to the Bank and the outgoings of the boarding house, his plastic recycling business had failed, the [defendants] could not afford to repay [Mr Bonanno] the $30,000 he had paid in respect of the First Agreement;
ii   health difficulties: diagnosis and surgical removal of a large benign tumour in his leg and post-surgery recovery;
iii   his de-facto relationship with [Ms Zhou] had broken down;
iv   the property was run-down and required repairs and improvements;
v   the responsibilities of running and maintaining the boarding house were time-consuming;
vi   stress, emotional and anxiety difficulties caused by the medical issues, relationship breakdown and financial difficulties described above;
vii   language and communication difficulties: he had a stutter and below average reading and comprehension skills.
[Ms Zhou’s] disadvantage was:
viii   she was in financial distress: the [defendants] were still in default under their loan facilities with the Bank and the Mortgage, she was having difficulties in paying the monthly loan repayments to the Bank and the expenses of the boarding house; the [defendants] could not afford to repay [Mr Bonanno] the $30,000 he had paid in respect of the First Agreement;
ix   her de-facto relationship with [Mr Finamore] had broken down;
x   the property was run-down and required repairs and improvements;
xi   the responsibilities of running and maintaining the boarding house were time-consuming;
xii   she did not have the skills or experience to complete the routine repairs and maintenance required at the property;
xiii   she felt physically intimidated by [Mr Bonanno]; and
xiv   English language difficulties: she had had no formal education in English and experienced difficulties in understanding and expressing herself in English (both in written form and in conversation).

The defendants also alleged, in par 7F, that Mr Bonanno knew that the defendants, prior to entry into the deed, believed that Mr Bonanno was agreeing to become an equal contributing partner with them in respect of the boarding house at the property. They alleged that he knew that belief was erroneous, but he did nothing to disavow the defendants of their belief.
Paragraph 7H pleads that Mr Bonanno made representations to one or both of the defendants, before the deed was entered into, that he would be an equal contributing one third partner in the boarding house; that he would contribute his time, labour and money towards running, maintaining and improving the boarding house and property; that he would pay one third of the outgoings; that he was willing and able to carry out minor repairs and maintenance to the property; and that, by his silence, his contributions towards the operation of the boarding house and property in the period of April 2010 to 25 February 2011 would continue.
The defendants alleged, in pars 7I to 7K, that the representations were made by Mr Bonanno with the intent of inducing them to enter into the deed. The defendants alleged that they entered into the deed in reliance on the representations, and that, contrary to the representations, following entry into the deed, Mr Bonanno made no material contribution of his time, labour or money towards running, maintaining or improving the boarding house or the property; he did not pay one third of the outgoings; he ceased carrying out minor repairs and maintenance; and he denied that he had any obligation to assist in the running and maintenance of the boarding house and the property.
Paragraph 7L contains an allegation that, by reason of all of the matters previously pleaded in relation to the second agreement, the defendants are entitled to orders setting aside the deed, for all transfers to be cancelled and destroyed, and for the return of the $72,639.25 that they had paid to Mr Bonanno.
In pars 7M to 17, the defendants alleged that they had terminated the first and second agreements for breach or repudiation by Mr Bonanno. Alternatively, the first agreement was terminated by the parties entering into the second agreement.
The defendants alleged that Mr Bonanno breached or repudiated the first agreement by failing immediately to pay $130,000 by way of a bank cheque in favour of NAB, and instead only paid $30,000.
The defendants also alleged that, on 25 February 2011, the parties entered into an agreement whereby Mr Bonanno would pay the defendants $130,000 to be granted a one third interest in the boarding house partnership and the property. They alleged that this second agreement was constituted by the deed and the terms that have been summarised above at [24]. In essence, the defendants’ claim was that it was part of the second agreement that the parties would conduct the operation of the boarding house on the property as a partnership, in which Mr Bonanno would be an equal and active participant with the defendants. The defendants alleged that Mr Bonanno repudiated the second agreement by failing to perform his obligations, and that the defendants accepted the repudiation and terminated that agreement.
In par 17A, the defendants made a claim for damages for breach of the second agreement by Mr Bonanno. Those damages comprised unpaid outgoings, payments made by the defendants to Mr Bonanno, additional bank charges and interest paid as a result of cash flow shortages caused by Mr Bonanno’s failure to pay his share of outgoings, together with the value of extra labour expended by the defendants by reason of the failure of Mr Bonanno to contribute to the operation of the boarding house and the property.
Finally, in par 17E, the defendants pleaded an equitable estoppel claim against Mr Bonanno. The essence of this claim was that, if the second agreement did not contain the terms summarised at [24] above, Mr Bonanno induced the defendants into assuming that the agreement did contain those terms, and that he was at all material times aware that the agreement did not contain those terms although the defendants assumed that it did. The defendants claimed that Mr Bonanno is estopped from denying that the second agreement contained the terms alleged.
In final oral submissions, counsel for the defendants explained at T 263.3 that, even if the Court does not accept that the second agreement should be set aside in full because it was procured by unconscionable conduct on the part of Mr Bonanno, the formula contained in the second agreement for calculating the amount payable to Mr Bonanno on the sale of the property should separately be set aside on the basis that its inclusion in the second agreement was unconscientious, and had the effect of a collateral advantage or clog on the equity of redemption.

Agreed facts and related orders

During the hearing, the parties came to an agreement that obviated the need for them to read their expert evidence concerning the accounting issues that had been raised. On 31 March 2021, the third day of the hearing, the Court made the following orders:

1.   By consent makes orders in terms of the short minutes of order signed by Robb J and dated today’s date.
2.   Notes that the counsel for the defendants has explained the effect of those orders as will be recorded on the transcript.
…
Short minutes of order
1   There be no order as to costs in relation to the expert reports of Wendy Thai and Brett Goodyear, it being the case that the parties will pay their own costs relating to those reports.
The Court notes:
2   The parties have consented to the above order as part of their agreement to the attached Agreed Facts.
3   The Agreed Facts contained in paragraph 2 of the attached document is agreed on the basis that it would follow that the defendants would not pursue the relief sought in paragraph 9 of the Further Amended Cross Claim (moneys had and received claim).
4   The Agreed Facts contained in paragraph 2 of the attached document is without prejudice to the defendants’ claims for: moneys had and received in relation to amounts they paid to the plaintiff after the date the agreement dated 25 February 2011 was terminated (if applicable); or damages (unrelated to outgoings associated with the property).
Agreed Facts
In accordance with s 191 of the Evidence Act 1995 (NSW):
1   If the Court determines that the plaintiff is entitled to a 1/3 share of the net income of the [boarding house at the property] up to the date of the hearing (or beyond), the parties agree that the amount of that share that remains unpaid is the sum of $75,000.
2   If the Court determines that:
a   the first defendant and second defendant validly terminated the agreement dated 25 February 2011 prior to 21 November 2014; and
b   the plaintiff is entitled to a 1/3 share of the net income of the boarding house at the Property up to the date of termination only,
the amount of that 1/3 share of the net income up to the date of termination that has not been paid is $7,000.

The explanation by counsel for the defendants referred to in Note 2 (excluding comments made by the Court) is as follows: T 108.27-T 109.26

WOODS: I can give a rough outline, and as you notice, it’s in the event of a scenario. So paragraph 1 of the agreed facts is really my learned friend’s main contract claim, if the contract isn’t [should read: is] on foot, and he has an entitlement still to a third of the net income from the property. That’s the amount that remains unpaid.
Paragraph 2 is more for the defendant’s case, our claim that the contract has come to an end, and the third of the net income that the plaintiff had accrued or was entitled to up to the date of termination, that would be the amount that represents what is outstanding. It might not be apparent now, but there were payments made after the defendants purported to terminate the agreement, on a different basis, just like unaccounted, like an interest payment for the moneys that they had borrowed. And our claim in the cross-claim is that that’s moneys paid by mistake after the date of termination. And there’s a claim therefore, a restitution claim for that money to be paid back. That would fall away in the event of paragraph 1, but paragraph 2, in the event the agreement was terminated, the defendants can still pursue that claim for the amount that they paid after the agreement. That’s covered in the notation to the short minutes of order.

…
... Just in relation to the contract claims. We’ve considered some other claims in the defendants’ case of seeking to set aside the agreements and the parties restored to their original position, so in that event this agreed fact doesn’t kick in. And there’s a claim for damages for breach of the contract in the further amended statement of claim as well. And to the extent the defendants prove such damage, that would continue.
HIS HONOUR: Yes. What about the handwritten paragraph 3? The agreed fact contained in paragraph 2 of the agreed facts, is agreed on the basis that it would follow that the defendants would not pursue the relief sought in paragraph 9 of the further amended cross-claim, which is a claim for moneys having received.
WOODS: That would mean that the characterisation of those payments that were made from 2014 through to 2015 by the defendants to the plaintiff are categorised as a share of the rental income. So the claim that moneys were paid by mistake and need to be paid back falls away.
HIS HONOUR: All right, thank you.
WOODS: The effect, if the orders are made, well, the agreed facts have been tendered, is that the expert reports, the accounting reports of Wendy Thai and Brett Goodyear would not be tendered at the hearing. They wouldn’t obviously then be required to give evidence. And there’s also the property valuer, Miguel Hermiz, his reports will be tendered as evidence, but he won’t be required for cross-examination, based on this agreement.

The effect of this agreement between the parties to limit the matters in issue was that a substantial part of the evidence ceased to require consideration by the Court. It has also had the subsidiary effect of making it difficult to identify the evidence that remained relevant at the conclusion of the six-day hearing.

Abandonment of defences by defendants

In par 17 of her final written submissions dated 20 May 2021, the defendants' counsel stated:

… the defendants do not press their claims for:
a)   setting aside the first agreement by reason of unconscientious
conduct (Cross Claim at [3]-[6A]);
b)   equitable estoppel in its Defence or Cross Claim; or
c)   rescission of the second agreement on the alternative basis of innocent misrepresentation (Cross Claim at [7H] to [7K]).

The defendants did not explicitly seek a declaration that the terms of the second agreement that require them to transfer a one third interest in the property to Mr Bonanno were invalid, even if the balance of the second agreement was not, on the ground that the second agreement was in substance a mortgage, and the requirement for an absolute transfer of the one third interest was an invalid collateral advantage.
The defendants made a submission, based upon the second agreement being in substance a mortgage, in pars 122 to 132 of their final written submissions.
Mr Bonanno appears to have responded to the defendants' submissions made on the basis that the second agreement was in substance a mortgage at pages 26 to 30 of his submissions in reply.

Issues for determination

It will be appropriate for me now to set out my understanding of the real issues that need to be determined in this judgment. The ultimate issue is the enforceability of the second agreement. In relation to that agreement:

The parties agree that, if the second agreement is valid, Mr Bonanno is entitled to an order that he be paid $75,000, being the unpaid amount of his one third share of the net rents from the operation of the boarding house.

The defendants claim that they terminated the second agreement for breach by Mr Bonanno, before he exercised his right to call for the transfer of a one third interest in the property to him. It will be necessary to decide whether the second agreement contained the terms relied upon by the defendants, and, if so, whether they validly terminated the second agreement at the time alleged.

The defendants also claim that, in any event, the second agreement should be set aside from the date of its commencement on the ground that they each suffered from a number of special disadvantages, and the conduct of Mr Bonanno, in procuring the defendants to enter into the second agreement, was unconscionable or unconscientious in equity.

Mr Bonanno has not sought an order for specific performance of the second agreement, but instead has sought a declaration that the defendants hold a one third interest in the property on trust for Mr Bonanno. Mr Bonanno will only be entitled to the declaration if he proves that an order for specific performance of the second agreement should now be made in his favour. That is the only source of his equitable interest in the property.

Just as Mr Bonanno has not sought an order for specific performance of the second agreement, the defendants have not raised the equitable defences that are available to such a claim. That may be because, even if the Court refused an order for specific performance, that would leave the defendants liable to an action for damages at common law for breach of the second agreement, if the Court declined to set it aside. The defendants resist this outcome by claiming that the second agreement is in substance a mortgage, and the obligation to transfer the one third interest in the property to Mr Bonanno is an invalid collateral advantage in equity. They claim that equity will not permit the enforcement of the collateral advantage by an action at common law, so that Mr Bonanno is not entitled to damages for breach of the second agreement. If the defendants succeed in their claim that the obligation to transfer is an invalid collateral advantage, that will obviate the need for the Court to consider separately whether an order for specific performance should be declined. If Equity will not permit the enforcement of a common law obligation, it plainly will not order that the obligation be performed.

In reliance upon his claimed equitable interest in the property, Mr Bonanno seeks an order for the appointment of a trustee for sale (or an order that would have the same practical effect), as well as an order that the net proceeds of sale be disbursed in accordance with the terms of the second agreement. This approach to the relief claimed by Mr Bonanno omits the step of causing the one third interest in the property actually to be transferred to Mr Bonanno. That may be a sensible practical course to take, but sight should not be lost of the fact that the consequence will be that Mr Bonanno’s rights will be determined as if the second agreement had been specifically performed. That means that the defendants’ claim that the second agreement gives Mr Bonanno an invalid collateral benefit, because it is in substance an agreement to lend on the security of a charge over the property, must be determined on the same basis as if the defendants had actually transferred the one third interest in the property to Mr Bonanno.

The final issue requires the classification of the second agreement, in respect of whether it is in substance a mortgage, and if so whether the obligation on the defendants to transfer a one third interest in the property to Mr Bonanno is a collateral advantage to the mortgage that is invalid in equity. As will be seen, this issue involves a difficult question of principle, as there is a divergence in opinion between first instance judges in this country concerning the principles that govern the issue.

Credibility of witnesses

This is a convenient point to record the conclusions that I have reached concerning the credibility of the witnesses.
As Mr Bonanno is effectively suing to enforce the deed, credit is not a significant issue for his case. However, credit is potentially a significant matter in the assessment of the defences and cross claims raised by the defendants.
The conclusion that I have reached in relation to the reliability of the oral evidence given by all three parties is that, while they generally attempted to give candid evidence in cross-examination based upon their recollection of events, they were not impressive witnesses, and for varying reasons did not cause me to be confident that I could rely upon their uncorroborated evidence. Nor could I confidently select which witness to believe in circumstances where the evidence of two witnesses was incompatible. The sense I got was that each witness responded to questions from their own perspective, and that their answers were filtered, most likely subconsciously, through the prism of their long involvement in these proceedings and their perceptions of their own interests.
That is not to say that I have concluded that any of the witnesses were dishonest. It is more that none of the three witnesses responded with the immediacy and apparent candour that is usually necessary for a judge to act upon the oral evidence of a witness where that evidence is not supported by documentary evidence or the objective circumstances.
Mr Bonanno was not always a responsive witness and tended to say what he wanted to say. Ms Zhou had to contend with the usual problems involved in giving her evidence through an interpreter. Mr Finamore, who I am satisfied did his best to answer questions, was seriously impeded by a quite exceptional stutter.
It must also be acknowledged that most of the significant events relevant to the proceedings occurred a decade ago and none have been recorded in contemporary documents. Even the accounting records prepared by Ms Zhou were created in an unprofessional manner, which led to confusion (thankfully obviated by the agreement as to facts referred to above).
I have made judgments as to the facts that should be found based upon the broad testimonial evidence of the witnesses that have not given rise to serious contention, the documentary evidence, and the inferences that should be drawn from an objective consideration of the established circumstances.

The first agreement

It will be convenient to begin the determination of the issues that remain in this case by setting out the terms of the first agreement. I will then explain the residual significance of the first agreement.
The first agreement is a deed dated 29 April 2010 between Ms Zhou and Mr Bonanno. It materially provided as follows:

RECITALS
A. Zhou and her de facto partner Nicola Joseph Finamore (“Nicola” hereafter) are the registered proprietors as joint tenants of [the property] 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 $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 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. [Bonanno] 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, [Bonanno] 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.
OPERATIVE PROVISIONS
NOW THIS DEED WITNESSES that in pursuance of the premises and in order to give effect to the agreement so reached the parties do mutually covenant each with the other as follows:
…
3.   Upon execution of the agreement, [Bonanno] shall immediately provide Zhou with a bank cheque in favour of National Australia Bank Limited in a sum of $130,000.00.
4.   Subject to Clause 3 above, it is agreed that Zhou shall:
(a)   deposit the said bank cheque into the mortgage account of the Property with National Australia Bank Limited and provide [Bonanno] with evidence of such deposit.
(b)   duly observe all her obligations pursuant to the Mortgage and do all things necessary to prevent or avoid any default which may result (sic) a Mortgagee Sale of the Property,
(c)   acknowledge and irrevocably consent that [Bonanno] is entitled at his absolute discretion to lodge a caveat over the Property at any time as from the date of this agreement.
(d)   do all such things and/or take such steps necessary, including but not limited to commencing legal proceedings, to finalize a financial settlement with Nicola in respect of her de fact to (sic) relationship (sic) Nicola as soon as possible and
(e)   endeavour to procure and cause all right, interest, and title of the Property to be transferred to her name only, in any event, shall promptly inform [Bonanno] as to the progress of her financial settlement and relevant issues relating to the Property.
(f)   shall not cause or permit any person to acquire any further interest in the Property and shall not incur any debt or monetary obligation (actual or contingent) to a holder, other than those (sic) are existing and/or have been disclosed to [Bonanno], of a security interest over the Property without [Bonanno’s] express and written consent.
(g)   shall indemnify [Bonanno] against any claim, encumbrances, debts, tax, bills, expenses and all other liabilities relating to the property incurred prior to the date this agreement,
5.   Further to Clause 4 above, it is agreed that as from the date of this agreement
(a)    Both parties shall immediately set up a joint account with a financial institution of [Bonanno’s] choice.
(b)    Zhou must deposit all rental payments collected from the boarding tenants of the Property into the said joint account and use all monies in the account for repayments of the Mortgage and other payments which are directly related to the Property only and shall not use such money for any other purposes without [Bonanno’s] written consent.
(c)    Subject to subclause (b) above, Zhou and [Bonanno] shall make equal contribution towards and be jointly and severally responsible for all payments other than repayments of the Mortgage (including but not limited to facility bills, rates, tax, maintenance and repairs and all other running expenses) in respect of the Property.
(d)    Zhou shall keep all relevant accounting information, receipts, documentation and records in respect of the Property and make such available for inspection by both parties at all times.
6.   Further to Sub-Clause 4 (e). above, it is agreed that:
(a)   in the event that Zhou becomes the sole registered proprietor of the Property after her financial settlement with Nicola is finalized, Zhou shall promptly do all such acts and things necessary to transfer 50% of all her right, interest and title to [Bonanno] at such time when she receives written notice from [Bonanno].
(b)   In the event and when it will have become apparent that Zhou is unable to procure/obtain the full ownership or to become the sole proprietor of the Property by any reason, either party may rescind this agreement by serving upon the other party a three (3) months written notice, provided that Zhou shall repay [Bonanno] on or before the last day of the notice period:
i   The Principal sum of the loan being $130,000.00 and
ii   Interest on the principal sum as from the date (sic) this agreement to the date (sic) repayment, which shall be calculated at the rate of 2% plus standard variable rate of the Mortgagee (NAB) and
iii   All other payments and/or contribution made by [Bonanno] towards or in respect of the Property and
iv   All reasonable expenses (including legal costs) incurred in respect of or relating to this agreement, provided such expenses shall not exceed $3,000.00.
7.   Subject to Clause 3 above, to the extent that (sic) is not prohibited by law or any orders of the court, as from the date of this deed, Zhou shall duly and promptly inform or notify, and shall not make any decision without giving prior written notice upon [Bonanno], as to all matters or issues relating to the Property (including but not limited to sale, transfer, assignment, refinance, discharge of mortgage, lease, and renovation).
8.   [Bonanno] expressly acknowledges and declares that
(a)   he has actually obtained (or has been afforded adequate opportunity but has decided not to obtain) independent legal and financial advice in respect to terms of this agreement and
(b)   he has conducted and satisfied himself as to the result of necessary searches and enquiries in respect of the Property prior to entering this agreement and
(c)    he does not rely upon any warranty or representation made by Zhou or any person on behalf of Zhou other than such as are expressly provided herein and relies entirely upon his own searches, enquiries and relevant advice obtained in respect of the Property to enter this agreement.
…
11.   Both parties acknowledge that the terms contained in this agreement are the entirety of the deed and that this agreement is intended to be legally binding and enforceable from the date of execution, and that any variation of this agreement can only be made in writing and executed by both parties.
…

The first agreement contained separate written acknowledgements by Ms Zhou and Mr Bonanno that:

prior to execution of the agreement… I have obtained/been afforded adequate opportunity to seek but have declined to obtain independent legal advice in relation to:
The effect of the agreement on the rights of the parties;
The advantages and disadvantages, at the time that the advice was provided, to the party of making the agreement

As I have explained above, Mr Bonanno has only pleaded the terms of the first agreement as background for his claims based upon the deed made between all three parties on 25 February 2011.
The defendants no longer seek an order setting aside the first agreement, but they maintain a claim that they terminated the first agreement on the basis that Mr Bonanno repudiated the first agreement, or alternatively that he committed a breach of it that was of a seriousness that justified the defendants in terminating the agreement. The defendants sought damages. They also claim that the first agreement was superseded by the second agreement.
As Mr Bonanno accepted that the first agreement had been superseded by the second agreement, and, as the defendants' alternative position was the same, the case has been conducted on the basis that the only agreement between the parties that could be effective is the deed that they executed on 25 February 2011.
Consequently, the defendants' maintenance of their claim based upon the first agreement is only relevant to their claim for damages for breach of that agreement.
In par 87(m) of the defendants' final written submissions, they accept that the evidence of monetary loss as a result of Mr Bonanno's alleged breach of the first agreement is limited to the $300 enforcement costs charged by NAB for failure to comply with a demand for repayment served on the defendants dated 1 April 2010. The Supreme Court of New South Wales is not required to deliver complex reasons to determine a claim made by a party for damages of $300.

In any event, I do not accept that the defendants have established that they validly terminated the first agreement, or that Mr Bonanno is liable to Ms Zhou for damages of $300.
There is no evidence of any act by Ms Zhou, before the parties entered into the deed on 25 February 2011, that is capable of operating as a termination of the first agreement for breach by Mr Bonanno.
It is true that Mr Bonanno appears to have breached clause 3 of the first agreement, because he did not provide Ms Zhou with a bank cheque in favour of NAB for $130,000 immediately upon execution of the agreement. Mr Bonanno only provided Ms Zhou with the amount of $30,000 sometime after the first agreement was made. Ms Zhou said in par 64 of her 22 August 2016 affidavit that Mr Bonanno made additional payments, so that, by the date of the deed, he had paid a total of $83,597.46, leaving $46,402.54 outstanding.
Clause 4(d) of the first agreement obliged Ms Zhou to take all steps necessary, including by commencing legal proceedings, to finalise a financial settlement with Mr Finamore as soon as possible.
Further, clause 4(e) required Ms Zhou to endeavour to procure the property to be transferred to her name only.
The property was in the joint name of the defendants. The first agreement recited at D that Ms Zhou had separated from Mr Finamore the previous year, and was currently in the process of negotiating a final settlement of their de facto relationship "with respect to which she intends to and believes that she is entitled to claim to be the sole proprietor of the Property".
On the evidence, Mr Finamore declined to transfer his interest in the property to Ms Zhou. The evidence does not appear to bear out Ms Zhou's claim that she was currently in the process of negotiating a financial settlement with Mr Finamore. While the evidence is not clear, it appears that the defendants did not communicate with each other until approximately December 2010, while Mr Finamore was recuperating after an operation that he had for the removal of what proved to be a benign tumour, but caused Mr Finamore to fear that he might have cancer: (first Zhou affidavit at [67]-[68]). The point of this observation is that it is not clear, on the evidence, that Ms Zhou complied with her obligation under the first agreement to endeavour to procure that Mr Finamore transfer his interest in the property to her, so that she could, in performance of clause 6(a), transfer 50% of the title to the property to Mr Bonanno. Consequently, Ms Zhou was probably in breach of the first agreement herself, and so disabled from enforcing against Mr Bonanno a promise made in the expectation that Ms Zhou would put herself in the position where she could transfer a 50% interest in the property to Mr Bonanno.
Even if the first agreement no longer remains the source of any legal rights for Mr Bonanno or Ms Zhou, in a number of important respects it is significant to the context in which the parties entered into the deed made on 25 February 2011. Those matters are:

Recital A establishes that Mr Bonanno and Ms Zhou understood that the property was worth approximately $750,000.

Mr Bonanno must have learned from Recital B that the property was subject to a mortgage to NAB, and other encumbrances secured by the property in the sum of $700,000, and that the defendants only had a small equity in the property.

Recital D informed Mr Bonanno that the defendants had separated and were in the process of negotiating a financial settlement to their de facto relationship of more than 20 years.

Recitals E, F and G establish that Mr Bonanno was aware that Ms Zhou was experiencing difficulty with making payments towards the mortgage and other loan repayments and running expenses of the property. Ms Zhou was in arrears of mortgage and loan repayments in the amount of $130,000, and the defendants had been served with a default notice in respect of mortgage and loan repayments. The breakdown of the relationship between the defendants had caused Ms Zhou financial difficulties.

Recital G recorded that Mr Bonanno had agreed to advance a loan in the sum of $130,000 to Ms Zhou. That provides evidence that the $30,000 that was in fact advanced was in the nature of a loan. That will be relevant to the issue of whether the payment made by Mr Bonanno under the deed made on 25 February 2011 should be characterised as a loan, rather than a payment for the transfer of an interest in the property.

It is also relevant to the issue of whether the second agreement should be set aside because Mr Bonanno took unconscientious advantage of special disadvantages suffered by the defendants that, by the time the deed was made, Mr Bonanno was effectively exposed to having made an unsecured loan of $83,597.46 to Ms Zhou.

The first agreement does not contain any express terms that would create a partnership between Mr Bonanno and Ms Zhou in the operation of the boarding house, after the property became owned in equal shares by Mr Bonanno and Ms Zhou. There is no reference to an intention to create a partnership in the recitals. Clause 5 required that a joint account be set up in the names of Mr Bonanno and Ms Zhou. Ms Zhou was required to deposit all rental payments into the account and use those monies for repayment of the mortgage and other payments directly related to the property. Ms Zhou could not use that money for any other purpose without Mr Bonanno's written consent. Mr Bonanno and Ms Zhou were obliged to make equal contributions towards and be jointly and severally responsible for all payments other than repayments of the mortgage. It may well have been implied in the first agreement that Mr Bonanno was to be a silent partner in the operation of the boarding house.
However, as noted above, Mr Bonanno pleaded in his statement of claim that Ms Zhou asked him to lend her money in consideration of her entering into a partnership with Mr Bonanno, and the defendants agreed that Mr Bonanno and Ms Zhou discussed entering into a partnership.

Caveat lodged by Mr Bonanno

On 4 June 2010, Mr Bonanno lodged a caveat against the title to the property. The nature of the estate or interest in the property, as stated in the caveat, was: “private loan to Weisen Zhou for mortgage repayments of the property and unpaid costs for renovation work on the property provided by the caveator”. The facts relied upon were: “The caveator provided a loan in a sum of $30,000.00 to Weisen Zhou, one of the proprietors of the property and has performed renovation work on the property valued (sic) about $10,000.00 at the proprietor’s request but has not been paid.”
This is further evidence that the payments made under the first agreement were loans.
Although clause 4(c) of the first agreement constituted a consent by Ms Zhou to Mr Bonanno lodging a caveat over the title to the property, that consent could not bind Mr Finamore as he was not a party to the agreement.
In any event, clause 4(c) could only reasonably be construed as a consent to Mr Bonanno lodging a caveat to protect the rights granted to him by Ms Zhou under the first agreement, to the extent that the first agreement may have vested an estate or interest in the property in Mr Bonanno. While the issue is far from clear, it may be that the first agreement created some enforceable right in Mr Bonanno to a share of Ms Zhou's interest in the property. Such an entitlement would be debatable on a number of grounds, including that Mr Bonanno did not provide Ms Zhou with the $130,000 cheque to NAB forthwith as required by clause 3.
While it is arguable that the first agreement created some form of equitable proprietary right to which Mr Bonanno was entitled in Ms Zhou's interest in the property, that right was not in the nature of a mortgage or charge. Mr Bonanno was required to pay $130,000 off the NAB mortgage. Ms Zhou was required to take the steps that were necessary to cause Mr Finamore to transfer his interest in the property to Ms Zhou. If she succeeded, Ms Zhou was required to transfer a 50% interest in the property to Mr Bonanno. If Ms Zhou failed to obtain the transfer from Mr Finamore, Mr Bonanno would become entitled to rescind the first agreement by giving three months’ notice, and Ms Zhou would be required to repay the $130,000 plus interest, as well as the other payments set out in clause 6(b). The first agreement did not give Mr Bonanno a security interest in the property.
Further, the mere fact that Mr Bonanno may have performed renovation work on the property at the request of one of the joint owners would not give Mr Bonanno an estate or interest in the property capable of being supported by a caveat.
Hence, the defendants are entitled to an order that Mr Bonanno withdraw the caveat that he lodged against the title to the property on 4 June 2010.

The second agreement

The deed called Deed of Transfer of One Third Interest on Property made on 25 February 2011 is expressed to be between the defendants as transferors and Mr Bonanno as transferee. It recites that the transferors are the registered owners of the property, which is subject to a mortgage to NAB. It then recites:

3. Upon the request of the transferors, the transferee has agreed to advance a sum of $130,000.00 to the transferors and part of this money had (sic) already (sic) given to the transferors in or about May 2010.
4. The transferors agreed to transfer one third of their title and interest of (sic) the property to the transferee…

The relevant substantive terms of the deed are the following:

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 (sic) 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 (sic) 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 (sic) 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 (sic) of the income from the rental of the property.
6.   The parties agree that the transferors will be solely responsible to the NAB (sic) mortgage repayments.
7.   In the event that the property is sold, the parties agree 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 (sic) 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.

Involvement of Mr Alan Ng, solicitor

The deed has been signed by the parties, whose signatures were witnessed by the solicitor who prepared the deed, Mr Alan Ng.
On 25 February 2011, Mr Ng wrote a letter to Mr Bonanno in which he stated: “We refer to the above and confirm that we have (sic) upon your instruction to prepare the Deed and we merely assist you to prepare the Deed to reflect what has been agreed among you and Nicola Finamore & Weisen Zhou and we do not represent any of you”.
The defendants submitted that, as this letter was written to Mr Bonanno and there was no evidence that a similar letter was written to the defendants, the Court should infer that Mr Bonanno retained Mr Ng. I consider that is an inference that should be drawn.
Mr Ng's letter is a clear statement that his only involvement was to document, in the form of the deed, the agreement as he understood it to have been reached between the parties. The evidence shows that Mr Bonanno and Ms Zhou initially attended upon Mr Ng for the purpose of his drafting the deed and witnessing their signatures on the document. Mr Ng was apparently chosen because he was able to speak Chinese and so could communicate with Ms Zhou. Mr Finamore met Mr Ng later on the same day and signed the deed with Mr Ng as witness.
As Mr Ng clearly stated that he did not represent any of the parties, the Court should infer that, even though Mr Ng may have engaged in discussions with Mr Bonanno and Ms Zhou, in order to ascertain the substance of their agreement, he did not feel that he was under a professional duty to give them full advice, or act in their separate interests in relation to the terms of the deed. It seems to be clear from the fact that Mr Ng felt the need to write the letter that Mr Ng had a professional concern that he had become involved in preparing the deed, where the parties were not separately represented, and he did not consider that he had provided the separate professional services that would have been required of him if he had accepted a retainer to act for any of the individual parties to the deed for the purpose of protecting their interests.

Execution of the transfer by defendants

On the same day that they executed the deed, the defendants executed a transfer of a one third share in the property for a consideration of $130,000. The signatures of the parties were witnessed by Mr Ng.
This transfer has never been registered. As noted above, the defendants seek an order that the transfer be cancelled.
The evidence is silent on why the transfer was executed by the defendants, given that clause 3 of the deed required the defendants to transfer a one third interest in the property to Mr Bonanno within seven days of a request by Mr Bonanno that they do so. It is unclear whether Mr Bonanno had made a request on the day the deed was executed pursuant to clause 3. The transfer was an annexure to Mr Bonanno’s first affidavit. I infer that the certificate of title for the property was in the possession of NAB, so Mr Bonanno would have required the cooperation of NAB in order to register the transfer.
No party made any submission concerning the significance of the transfer, including as to its relevance to the issue of whether or not the second agreement was in substance a mortgage.

Questions as to construction of the second agreement

As I have noted above, by his prayers for relief in these proceedings, Mr Bonanno seeks orders to enforce the deed in accordance with its terms. On Mr Bonanno’s case, the second agreement is the deed and no more. In substance, Mr Bonanno seeks an order for the sale of the property and the repayment to him of the $130,000, plus one third of the net proceeds of sale after repayment of the NAB mortgage.
The following questions as to the construction and effect of the second agreement are important to the determination of the dispute between the parties. The first is whether, on the proper construction of the deed, or by some ancillary agreement, Mr Bonanno was obliged to participate in the operation, repair and maintenance of the boarding house, as if he were an active partner of the defendants. The existence of that obligation is the foundation of the defendants' case that they terminated the second agreement on the ground of breach by Mr Bonanno before he exercised his right in clause 3 of the deed to require the defendants to transfer a one third interest in the property to Mr Bonanno.
The second question is whether the deed, in substance, consisted of a loan on the security of the property and accordingly whether, in the circumstances, the term requiring the defendants to transfer a one third interest in the property to Mr Bonanno is invalid on the equitable principles that prevent a mortgagee enforcing a collateral advantage against the mortgagor in some circumstances.
Although these questions depend upon the construction of the wording of the deed applying conventional principles of construction, it will be necessary to consider the relevant history of the negotiations between the parties. That is because the defendants have submitted that the parties' dealings form part of the substratum of facts known to them when they agreed to the terms of the deed and are relevant to its proper construction.
Further, parol evidence is admissible for the purpose of proving the real nature of the transaction recorded in the deed, as to whether it should be treated as in substance creating a loan on the security of the property: Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 (Kreglinger) at 37 and 47; Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98 at 108, 112 and 114.

History of the negotiations

I will deal first with the issue of whether Mr Bonanno was required to take an active role in the operation, maintenance and repair of the boarding house on the property.
The evidence of Mr Bonanno and Ms Zhou is primarily relevant to this question. As I have explained, the defendants were temporarily separated, and Mr Finamore was dealing with the operation to remove the tumour from his leg and the necessary recuperation from the operation. He did not take part in the operation of the boarding house for a period and he did not participate in the negotiation of the terms of the deed. He was also not present at the conference attended by Mr Bonanno and Ms Zhou at which Mr Ng drafted the deed.
It seems to be uncontroversial that the parties met each other in about mid-2009, when the defendants either brought a towbar to the workshop operated by Mr Bonanno for repair or bought a new towbar from him. The parties developed a friendship.
Ms Zhou gave evidence of the circumstances in which the first and the second agreements were made in her 22 August 2016 affidavit. Mr Bonanno had already given evidence on this subject in his 30 July 2015 affidavit that was filed in support of his summons. That affidavit was relatively cursory, as it was prepared in support of a case based upon the enforcement of the deed. Mr Bonanno replied to Ms Zhou's evidence in his affidavit of 26 September 2016. However, that affidavit was prepared in an unconventional form in that, similarly to a pleaded defence, it identified a particular paragraph in Ms Zhou's affidavit and stated whether Mr Bonanno admitted, did not admit or denied Ms Zhou's evidence. Responses were added that were sometimes cursory and in the form of a comment. Consequently, much of the evidence in response given by Mr Bonanno in relation to significant issues was not in the form of a statement of Mr Bonanno's recollection of the particular event.
Ms Zhou gave detailed evidence concerning the work involved in operating the boarding house. It is much more onerous than the work required by an owner of a residential property who leases the property to a long-term tenant. It is necessary to advertise rooms, to carefully select boarders, to obtain bonds, to collect the rent regularly, to provide room keys and change locks when boarders do not return keys, to provide basic services such as toilet paper, dishwashing liquid, sanitary and cleaning products, to provide furniture and to maintain and repair the premises.
Because of Mr Finamore's illness and the break in the de facto relationship between the defendants, during 2010 most of the work in managing the boarding house fell upon Ms Zhou.

In response to the majority decision of the House of Lords in Bradley v Carritt, which reached a similar conclusion, the Lord Chancellor said that the House of Lords was not bound to follow all the dicta in the judgments, and concluded (at 42):

It is binding on your Lordships in any case in which the transaction is really of the same kind, although it does not follow that all the dicta in the judgments of those of your Lordships' House who were in a majority must be taken as of binding authority. And it certainly cannot, in my opinion, be taken as authoritatively laying down that the mere circumstance that after redemption the property redeemed may not, as the result of some bargain made at the time of the mortgage, be in the same condition as it was before that time, is conclusive against the validity of that bargain. To render it invalid the bargain must, when its substance is examined, turn out to have formed part of the terms of the mortgage and to have really cut down a true right of redemption… The true view is, I think, that judges ought in this kind of jurisdiction to proceed cautiously, and to bear in mind the real reasons which have led Courts of Equity to insist on the free right to redeem and the limits within which the purpose of the rule ought to confine its scope…

The Lord Chancellor was required to distinguish the earlier decisions of the House of Lords because those decisions were binding.
In summary, the Lord Chancellor held that collateral advantages to the lender that were stipulated in the same transaction as the mortgage (that is, advantages in excess of repayment of the principal and payment of interest and costs) were no longer to be considered invalid if the mortgagee has not “acted unfairly or oppressively”, “no unfairness is shewn” and the bargain is not “unconscionable”, provided always that the mortgage “cannot be made irredeemable”. However, the Lord Chancellor appears to have distinguished Noakes v Rice by reasoning that the option of pre-emption in the case before him did not clog the equity of redemption because of a failure to return the property to the mortgagor free of all covenants in the mortgage, because the mortgage was a floating charge and not fixed over the mortgagor’s property, so that it authorised the mortgagor, in the ordinary course of business, to choose to whom to sell its stock in trade. Consequently, the mortgagor could choose to sell to the mortgagee.
That appears to be a very limited adjustment to the old doctrine. Although the Lord Chancellor clearly recognised that a mortgage instrument could contain two quite different transactions, his Lordship did not appear to decide the case on the basis that the option of pre-emption was a separate transaction standing outside the mortgage, as Lord Parker did. Rather, the Lord Chancellor treated the option of pre-emption as a collateral advantage to the mortgage, but found a reason based on the nature of a floating charge for holding that the option did not clog the equity of redemption.
The Lord Chancellor explained (at 35) the historical reasons for the development of the old doctrine in terms that will assist in deciding whether the change suggested in Westfield should be adopted. His Lordship said:

The reason for which a Court of Equity will set aside the legal title of a mortgagee and compel him to reconvey the land on being paid principal, interest, and costs is a very old one. It appears to owe its origin to the influence of the Church in the Courts of the early Chancellors. As early as the Council of Lateran in 1179, we find, according to Matthew Paris (Historia Major, 1684 ed. at pp. 114–115), that famous assembly of ecclesiastics condemning usurers and laying down that when a creditor had been paid his debt he should restore his pledge. It was therefore not surprising that the Court of Chancery should at an early date have begun to exercise jurisdiction in personam over mortgagees. This jurisdiction was merely a special application of a more general power to relieve against penalties and to mould them into mere securities. The case of the common law mortgage of land was indeed a gross one. The land was conveyed to the creditor upon the condition that if the money he had advanced to the feoffor was repaid on a date and at a place named, the fee simple should revest in the latter, but that if the condition was not strictly and literally fulfilled he should lose the land for ever. What made the hardship on the debtor a glaring one was that the debt still remained unpaid and could be recovered from the feoffor notwithstanding that he had actually forfeited the land to his mortgagee. Equity, therefore, at an early date began to relieve against what was virtually a penalty by compelling the creditor to use his legal title as a mere security.

As appears from the speeches in Kreglinger that have been analysed above, the repeal of the usury laws in 1854 provided a basis for Equity to permit collateral advantages of a commercial nature contained in mortgages, provided that they were not exacted in an unconscionable way. However, that part of the old doctrine that was a response to the characteristics of English common law mortgages, and which led to the maxim ‘once a mortgage, always a mortgage and nothing but a mortgage’, was not substantially an augmentation of the usury laws, but was designed to protect the ability of the mortgagor to redeem the property on payment of the debt.
This aspect of the old doctrine had led Lord Henley LC (later the Earl of Northington) in Vernon v Bethell (1762) 2 Eden 110; (1762) 28 ER 838 at 839 to say:

This court, as a court of conscience, is very jealous of persons taking securities for a loan, and converting such securities into purchases. And therefore I take it to be an established rule, that a mortgagee can never provide at the time of making the loan for any event or condition on which the equity of redemption shall be discharged, and the conveyance absolute. And there is great reason and justice in this rule, for necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them.

It is this judgment upon which Lord Macnaghten relied in Samuel (at 326-7) to accept, with regret, that an option to purchase cannot be granted by a mortgage.
Just as the usury laws have long since ceased to have effect, substantial changes have occurred in respect of the legal operation of mortgages and of commercial practices, which justify a conclusion that the attributes of English common law mortgages no longer justify the application of the old doctrine to the same extent as in the past. Of particular significance is the fact that, under the Torrens system, mortgages have been transformed into statutory charges that do not involve a conveyance of the property to the mortgagee or the need for a reconveyance. The registration of a discharge takes effect as a removal of the charge from the title. The mortgagee can only gain title following default through a successful application for an order for foreclosure. That said, a review of Part 7 of the Conveyancing Act 1919 (NSW) and Division 3 of Part 7 of the Real Property Act 1900 (NSW) concerning mortgages shows that statutory intervention has been piecemeal and assumes the continued underlying operation of the common law and equitable principles governing mortgages. Consequently, care must be exercised in dismantling the effect of Lord Parker's Proposition (3).
The judges who decided Westfield and the cases that have followed it have reasoned that legal and commercial changes have occurred that call for a revision of Lord Parker's Proposition (3). I accept that conclusion but consider that it should be given a carefully calibrated effect.
I do not accept that Lord Parker's Proposition (3) should be replaced solely by his Proposition (1), at least by means of judgments at first instance. I have already explained why I do not think that the circumstances of the present case justify any interference with Proposition (2). The change that I consider is justified involves a significant but focused adjustment of the nature of the transactions that will engage Proposition (3), and a removal of those transactions so that they fall within the operation of Proposition (1). In essence, that change would be to permit the parties to include in the one transaction both a mortgage and an option to purchase, where the option gives the mortgagee a right to require the mortgagor to enter into a contract to sell the property to the mortgagee for a proper price that is in an appropriate way referable to its value. There should no longer be any absolute exclusion of the right of parties to a mortgage, at the same time as the mortgage is granted, to freely enter into an option to sell the property on just terms. What the law permits the parties to do a day after the mortgage is granted, should be permitted to be done at the same time as the mortgage.
This change would have the effect of adding to the commercial collateral advantages that were upheld in Kreglinger an advantage, created by the free decision of the mortgagor, to sell the property for a real price considered by the mortgagor to be adequate. It would reverse the currently untenable presumption that all mortgagors are "necessitous men" liable to "submit to any terms that the crafty may impose upon them". The change would return to mortgagors their right to decide how to deal with their property without the imposition of a rule, to use Lord Macnaghten's words in Samuel, that is "founded on sentiment rather than on principle". It would accord with what I think is the modern lawyer's conception that repugnancy to the terms of an agreement should depend on what the agreement actually is, and that an agreement to reconvey (where still relevant) does not have some inviolable significance so that any genuine, contrary agreement between the parties is necessarily repugnant.
While, if this change were adopted, it would be easier to apply the new principle when the interest payable on the loan and the price payable for the transfer were separately identified in the transaction documents, I do not suggest that this separate identification is essential. It should usually be possible for the Court to determine whether the mortgagor is entitled to receive a real price for the transfer of the property.
However, I would otherwise uphold the continuing operation of Lord Parker's Proposition (3). To the extent that it depends upon Proposition (3), the general body of equitable principles upholding the mortgagor's equity of redemption would not be affected. In essence, the collateral advantage of the mortgagee under a freely agreed sale or option for a genuine price would be distinguished from a term of the mortgage under which the mortgagee could acquire title to the property without paying a separate price. The latter collateral advantage would still engage Lord Parker's Proposition (3).
As I understand the reasoning in the Westfield line of cases, this more limited change would achieve the intended purpose, without going to the length and inviting the possible unintended consequences that may follow from removing Lord Parker's Propositions (2) and (3) in their entirety.
On this view of the continuing operation of Lord Parker's Proposition (3), the transfer provisions 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

Against the possibility that I am wrong in these conclusions, and the Court should only declare the transfer provisions to be invalid if their inclusion in the deed or their reinforcement would be unconscionable, I will now consider that question.
It will first be appropriate to address the question of the nature of the conduct of the mortgagee in obtaining the collateral advantage that may justify a finding in equity that it will be unconscionable to permit the mortgagee to enforce the advantage.
A review of the decided cases demonstrates that judges have used many different expressions to describe the nature of the conduct that will cause the collateral advantage to be invalid.
In Noakes v Rice, Lord Davey at 33 used the expressions "oppressive and unconscionable" and "no unfair advantage". In Lisle v Reeve, Romer LJ at 73 used the expression "unconscionable or unfair". In Kreglinger, the Lord Chancellor at 36 used the term "oppressive", at 37 the term "unfairly or oppressively", and at 38 his Lordship referred to "no unfairness". At 55, Lord Parker referred to the need for the mortgagor to be "protected from oppression", and referred to “the pains always taken by the Court of Chancery to see that the bargain between borrower and lender was not unconscionable”. The first time Lord Parker formulated his Proposition (1) at 56 he used the term "unconscionable", and the second time he did so, at 61, he used the expression "unfair and unconscionable". In Westfield, at 202-3, Young J variously used the expressions "unfair or unconscionable", "unconscionable" and "no unfairness or unconscionable conduct".
The expressions "oppressive", "unconscionable" and "unfair" are capable of having subtly different meanings.
The question was addressed by the New South Wales Court of Appeal in Charmelyn Enterprises Pty Ltd v Klonis (1980) 2 BPR 9527, where Reynolds JA said (at 9535-6), with the agreement of Glass JA:

The three grounds upon which courts of Equity would hold stipulations for collateral advantages invalid were identified in that case and the only one submitted to be in point in this case is that the stipulation is unfair and unconscionable as found in this mortgage.
In Multiservice Bookbinding Ltd v Marden [1979] 1 Ch 84, Browne-Wilkinson J reviewed the authorities which throw light on the test to be met before equity will intervene under this heading. He concluded that something more must be shown than that the provision called in question was unreasonable. He came to the following conclusion (at 110):
In my judgment a bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience.

I respectfully adopt that view…
This has only to be stated to indicate that the terms of the mortgage fall far short of demonstrating by themselves that the contract is so unconscionable or oppressive that it ought not to be enforced in a court of equity…

Mahoney JA spoke in terms of the conduct being "unreasonable" but added (at 9542): "I have to this point used the term ‘unreasonable’ in its ordinary sense. It may be that, as a test of the validity of such a requirement, it should be given a stricter meaning, such as ‘unconscionable and oppressive’: compare the Multiservice case, above, at 107–110; Halsbury’s Laws of England (4th ed) vol 32, para 590. However, for present purposes, I do not think it necessary to determine this question."
Therefore, mere unreasonableness of a collateral advantage will not be sufficient to establish that its inclusion in the mortgage was unconscionable, although the unreasonableness of the collateral advantage will be a relevant factor.
The proposition that a collateral advantage should not be enforced if it is so unconscionable or oppressive that it ought not to be enforced in a court of Equity tends to beg the question. Some assistance is gained from Reynolds JA's reasoning that the parties were represented by solicitors and had received appropriate advice, that they were not overborne and that they were sui juris.
Furthermore, in Westfield, Young J referred to the classic case where the Court can see that a necessitous borrower is not, truly speaking, a free borrower. In Lift Capital, Barrett J referred to the principle of protecting the distressed borrower who was necessitous and not free at [124].
It is not advisable for a Court to classify the conduct that will be considered to be unconscionable, as that will always depend upon the facts of the particular case, but I think that it is proper, having regard to these authorities, to note that, in determining whether the inclusion of a collateral advantage in a mortgage is unconscionable and so invalid, the Court is entitled to have regard to the common experience that parties who would otherwise be competent and without any special disadvantage may be rendered highly susceptible if they find themselves in necessitous circumstances that will only be alleviated by access to borrowed money.
I will now explain why, if as a matter of law, it is necessary for me to do so, I would find that the inclusion in the deed of the transfer terms should be held to be unconscionable.
It will be appropriate first to refer to a number of preliminary matters concerning the evidence.
As noted above, recital A to the first agreement made on 29 April 2010 recorded that the property had an approximate value of $750,000.
When the defendants’ counsel explained to the Court the effect of the statement of agreed facts, she advised that the joint valuation expert’s reports would be tendered, but there would be no cross examination. It will be convenient at this point to record the opinions expressed by the valuer, Mr Michel Hermiz. In his initial report, Mr Hermiz valued the property as at 2010 at $810,000, and as at 12 May 2020 at $1,460,000. In his second report, Mr Hermiz valued the property as at 12 March 2021 at $1,600,000.
Recital B to the first agreement recorded that the defendants were indebted to NAB and had a total debt of approximately $700,000.
Of the $130,000 paid by Mr Bonanno, only $81,402.54 was paid to NAB as an amount of $48,597.46 was paid to a company called Ausnik IT Holdings (T 53).
Mr Bonanno put an argument, at page 16 of his final written submissions in reply, that as the property was valued at $810,000 as at 2010, the net equity in the property after $81,402.54 had been paid off the $700,000 apparently secured on the property would have been in the order of $191,402. If $130,000 is deducted from that amount, the remainder is only $61,402.
Mr Bonanno's argument was that the terms of the deed that gave him an interest in the property and its proceeds of sale were only worth in the order of $20,000 to Mr Bonanno at the date the deed was made.
Even though the evidence concerning the indebtedness of the defendants at the date of the deed is sparse, and insufficient to enable the Court to determine the effect of the deed on the capacity of the defendants to continue to service the NAB mortgage and any other indebtedness of the defendants, I accept that there is some strength in this argument put by Mr Bonanno.
Mr Bonanno submitted, at page 21 of his final written reply submissions, that there were periods in which the defendants received rents for four weekly periods of between $5,000 and $6,000 and that, as the mortgage payments were in the order of $2,000 per fortnight: "It is clear that the rents could cover the mortgage repayments. The expenses would in nearly all cases also be covered”.
Mr Bonanno submitted, at page 24 of his final written reply submissions, that as his entitlement upon the sale of the property after repayment of all loans was no greater than $20,000: "The property was no golden goose".
However, on 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.

While it is true that, at the date of the deed, the value of the collateral advantage granted to Mr Bonanno over and above his right to be repaid the $130,000 may only have been in the order of $20,000, he became entitled to one third of any increase in the net market value of the property at any time in the future when he was able to cause the sale of the property.
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.
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.
The deed contained no term that entitled the defendants to repay the advance made by Mr Bonanno without having to sell the property first.
The deed did not provide a mechanism for determining when the property should be sold, if there was not unanimous agreement between the parties as to when that should happen.
The defendants were not advised that the terms contained in the deed would, if the transfer was valid, give Mr Bonanno a right to apply to the Court to appoint a trustee for the sale of the property at any time. If that was the legal result, that would have been entirely inconsistent with the commercial purpose of the defendants in entering into the deed. Alternatively, if there was some implied limitation on the right of Mr Bonanno to apply at any time for the appointment of a trustee for sale, the absence of any term that provided clearly for the timing of the sale of the property would likely embroil the defendants in contentious litigation.
The deed gave Mr Bonanno a right to be repaid the whole of his $130,000 advance in priority to the defendants out of the net proceeds of sale of the property, together with one third of the net rents of the boarding house, when the defendants had contributed capital valued at $750,000, and the defendants were to be solely responsible for the repayment of the NAB mortgage out of their remaining two thirds share in the net rents from the boarding house. Although the $130,000 that Mr Bonanno advanced to the defendant would enable them to pay an amount to NAB in response to the default notices, some of that money would go to pay outstanding interest and costs, and would not reduce the outstanding principal by the full amount of the payment. The overall principal indebtedness of the defendants would have increased, but they would be required to service the remaining amount due to NAB out of two thirds of the net profit from the operation of the boarding house.
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.
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.
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.
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.
Consequently, if the validity of the transfer terms depends upon whether or not their inclusion in the deed was unconscionable, I would find that the transfer terms are invalid.

Relief

I will require the parties to confer and agree short minutes of order to give effect to these reasons for judgment and to provide draft short minutes of order to my Associate.
As to the submissions made on behalf of the defendants to the effect that Mr Bonanno is not entitled to any relief under the deed, because he has not complied with any formal requirements imposed upon mortgagees, such as the service of notices on the defendants, I do not consider that those submissions provide an impediment to the Court making all orders that may be necessary to finally resolve all legal controversies between the parties. The Court has found that the deed has had the effect of creating a charge over the property in favour of Mr Bonanno to secure repayment to him of the $130,000 and any other money that may be owed to Mr Bonanno under the terms of the deed. Section 63 of the Supreme Court Act 1970 (NSW) requires the Court to grant all such remedies as any party may appear to be entitled to so that, as far as possible, all matters in controversy between the parties may be completely and finally determined by the orders that are to be made.
I am not aware that the Court was provided with any evidence at the hearing as to the outstanding amount of the debt owed by the defendants to NAB, or whether the defendants have been complying with the term of the deed that required them to make all periodical payments required by their mortgage. Consequently, the Court has no means of determining the orders that must be made to give effect to these reasons, and in particular whether or not it will be necessary for the property to be sold so that Mr Bonanno may be paid the amount that is due to him.
It will also be necessary for the parties to address the issue of costs which may now be an exceedingly difficult and complex question given the history of these proceedings and the findings made by the Court in these reasons.

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Decision last updated: 01 December 2021

Medium Neutral Citation:	Bonanno v Finamore [2021] NSWSC 1558
Hearing dates:	29 March to 1 April 2021; 6 and 7 April 2021; final submissions received 7 July 2021
Decision date:	01 December 2021
Jurisdiction:	Equity
Before:	Robb J
Decision:	The defendants have established their case to have the transfer provisions in the deed set aside. See pars [89], [105], [144], [161], [187], [190], [217], [234], [235], [237], [349], [384]-[388]. The parties are required to confer and agree short minutes of order to give effect to these reasons for judgment and to provide draft short minutes of order to my Associate.
Catchwords:	CONTRACTS — Termination — Breach of term — Where the plaintiff sought enforcement of a deed — Where the defendants argued that there were additional oral terms that operated in conjunction with the deed — Where the defendants argued that the plaintiff seriously breached an additional oral term and that the plaintiff had repudiated the deed — Where the defendants claimed that they terminated the deed in response to the plaintiff’s breach or in acceptance of the plaintiff’s repudiation — Where the defendants argued that they had effectively communicated termination of the deed — Where the Court found that the defendants had not effectively communicated termination of the deed — Where the Court held that deed had not been terminated EQUITY — Unconscionable conduct — Special disability or disadvantage — Where the defendants argued that a deed should be set aside in its entirety because it was procured by the plaintiff taking unconscientious advantage of special disadvantages suffered by the defendants — Where the Court found that the defendants did suffer from some special disadvantages — Where the Court found that the plaintiff was not in a powerful bargaining position when the deed was entered into — Where the Court held that the conduct of the plaintiff in entering into the deed was not sufficiently unconscientious to justify the Court setting the deed aside MORTGAGES AND SECURITIES — Mortgages — Whether a deed recorded a transaction that was in substance a mortgage — Where the plaintiff argued that the transaction was not a mortgage but rather a loan document with an added facility similar to an option — Where on its face the deed was an amalgam of a loan secured by an option granted to the plaintiff to call for a transfer of a one third interest in property, plus a collateral right to receive one third of the net price of the property on sale — Where the Court found that the transaction was in substance a mortgage — Where the Court held that the obligation to transfer the one third interest in property was a collateral advantage MORTGAGES AND SECURITIES — Mortgages — Mortgage contracts — Clogs on equity of redemption — Where the plaintiff and defendants executed a deed which would give the plaintiff a one third interest in property in consideration of the plaintiff lending the defendants money — Where the deed contained a term that allowed the plaintiff to compel the transfer of the one third interest by way of notice — Where the deed did not provide for the defendants being able to repay the plaintiff the loan without the sale of the property — Where the plaintiff brought proceedings to enforce the transfer provisions in the deed — Where the defendants resisted the claim on several grounds including on the basis that the transfer provisions were a clog on the equity of redemption — Where the Court found that the transfer provisions were a clog on the equity of redemption — Where the Court held that the transfer provisions were void
Legislation Cited:	Conveyancing Act 1919 (NSW) Real Property Act 1900 (NSW) Supreme Court Act 1970 (NSW)
Cases Cited:	Amcor Ltd v Barnes [2016] VSC 707 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18 Baker v Biddle (1923) 33 CLR 188 Biggs v Hoddinott (1898) 2 Ch 307 Bradley v Carritt [1903] AC 253 Charmelyn Enterprises Pty Ltd v Klonis (1980) 2 BPR 9527 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161 Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98 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 (2019) 73 NSWLR 404; [2009] NSWSC 7 Lisle v Reeve [1902] 1 Ch 53 Noakes v Rice [1902] AC 24 Re Funds in Court; Application of Mango Credit Pty Ltd [2016] NSWSC 199 Re Matcove Pty Ltd [2020] NSWSC 625 Sam Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320 Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323 Santley v Wilde [1899] 1 Ch 747 Sun North Investments Pty Ltd (as Trustee of Sun Development Trust) v Dale [2014] 1 Qd R 369; [2013] QSC 44 Thomas v Silvia; Re Modular Design Group Pty Ltd v CDG (Canberra) Pty Ltd (1994) 35 NSWLR 96 Vernon v Bethell (1762) 2 Eden 110; (1762) 28 ER 838 Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 Wily v Endeavour Health Care Services Pty Ltd (No 5) [2003] NSWSC 616 Wily v Endeavour Health Care Services Pty Ltd [2003] NSWCA 321
Texts Cited:	Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) Tyler, E L G, P W Young and C E Croft, Fisher & Lightwood’s Law of Mortgage (3rd ed. Aust, 2013, LexisNexis Butterworths)
Category:	Principal judgment
Parties:	Salvatore Antonio Bonanno (plaintiff) Nicola Finamore (first defendant) Weisen Zhou (second defendant)
Representation:	Counsel: G Foster (plaintiff) D A Woods (first and second defendant) Solicitors: Phillip A Wilkins & Associates (plaintiff) LegalVision (first and second defendant)
File Number(s):	2015/228434