Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd
[1998] SASC 6616
•9 April 1998
EPIC FEAST PTY LTD v MAWSON KLM HOLDINGS
PTY LTD (IN LIQ) AND STARMAKER (NO.51) PTY LTD
Full Court
Debelle J
This is an appeal from the decision of a judge of this court ordering a caveator to remove its caveat on the ground that it did not have a caveatable interest.
The caveator was the appellant Epic Feast Pty Ltd (“Epic Feast”). The caveat was lodged on 25 October 1996 and endorsed on the relevant Certificate of Title on 30 October 1996. On 25 October the registered proprietor of the land was the respondent Mawson KLM Holdings Pty Ltd (“Mawson”). On 8 November 1996 Mawson transferred the land to Starmaker (No.51) Pty Ltd (“Starmaker”). The transfer was expressly stated to be subject to the caveat. The transfer has been registered. The registration of the transfer does not defeat the rights of Epic Feast as caveator. Instead, the interest of Starmaker is subject to whatever interest Epic Feast can establish pursuant to the caveat: Coles KMA Ltd v Sword Nominees Pty Ltd (1986) 44 SASR 120; Leros Pty Ltd v Terera Pty Ltd (1992) 174 CLR 407 at 420.
The interest claimed by Epic Feast is described in the caveat in the following terms:
“An Estate and Interest as Equitable Mortgagee under and by virtue of a Loan Agreement dated 13 September 1996 between the said Caveator and the said Caveatee in the sum of $400,000 (Four Hundred Thousand Dollars) plus interests, costs and other charges.”
The trial judge found that Epic Feast had lent amounts to Mawson totalling $310,000, not $400,000 as claimed in the caveat; that on 13 September 1996 the parties had orally agreed that Mawson would grant a mortgage over the land to secure repayment of the loan but that there was no memorandum in writing of the agreement to grant the mortgage; and that, because the agreement was not specifically enforceable, Epic Feast did not have an interest as equitable mortgagee. As Epic Feast did not have an equitable interest, the trial judge ordered that the caveat be removed. The judge further ordered that, even if Epic Feast could establish that it had an equitable mortgage, its equitable interest had to rank after an earlier equitable interest Starmaker had in the land by reason of an option to purchase granted to it on 9 July 1996.
Epic Feast raises three broad issues on this appeal. The first is that the amount of the loan was $400,000 and not $310,000 as found. The second is that it did have an equitable mortgage. The third is that its equitable interest does not rank after the equitable interest of Starmaker. Starmaker not only seeks to uphold the judgment but contends that there was never any clear agreement between Epic Feast and Mawson that Mawson would grant a mortgage. Some time after these dealings in the land, an order was made in this court winding up Mawson. Mawson took no part in the trial. It did not present any argument on the appeal.
Thus, broadly speaking, there are three issues on this appeal. The first is whether there is an enforceable agreement by which Mawson agreed to grant Epic Feast an equitable mortgage. The second is the amount of the loan secured by the mortgage. The third concerns the priorities as between Starmaker and Epic Feast.
Epic Feast Lends Money
Mr Petar Jurkovic is a director of Epic Feast. Mr Keith Bowling is or was a director of Mawson and of a related company Mawson KLM Developments Pty Ltd (“Mawson Developments”). Bowling did not give evidence. Most of the evidence as to the arrangements between Epic Feast and Mawson was given by Jurkovic. It is necessary to notice one other company, Royal Park Salvage Pty Ltd (“Royal Park Salvage”), which is a company related to Epic Feast. Jurkovic was the general manager but not a director of Royal Park Salvage. The facts are quite detailed and convoluted. The trial judge commented upon the looseness of the arrangements made by Bowling and Jurkovic on behalf of Mawson and Epic Feast. It is sufficient to note only those facts which are relevant to the issues in the appeal. The following summary is primarily based on the findings of the trial judge.
Mawson and Mawson Developments had contracted to purchase two adjoining parcels of land at Tennyson from the Minister of Tourism. On one parcel was erected a building known as Estcourt House. Mawson had contracted to buy that parcel of land which was referred to at the trial as “the Estcourt House land”. The other parcel was called “the lower land” and Mawson Developments had contracted to buy it. Mawson, Mawson Developments and other companies with which Bowling was associated intended to develop these two parcels of land. The date for completion of the contract for the sale of the Estcourt House land was 9 July 1996. At different times, both before and after 9 July, Jurkovic agreed with Bowling to lend separate amounts of money to Mawson.
On 3 June 1996 Jurkovic agreed to lend $50,000 to Mawson. The loan was to be repaid by 26 June 1996. Bowling acknowledged receipt on a letterhead which was simply but ambiguously headed “Mawson KLM”. The receipt was dated 3 June 1996 and was in these terms:
“I acknowledge receipt of the sum of Fifty Thousand Dollars ($50,000-00) by way of loan to be repaid at settlement of Escourt (sic) House due on or before 26th June 1996. I will pay interest at bank overdraft rates together with any fees incurred by you. This amount I acknowledge is being loaned to me personally.
Yours faithfully
KEITH BOWLING”
It will be noticed that the loan was to be repaid by 26 June 1996 and the receipt states that the loan was to Bowling personally. Neither Mawson nor Bowling repaid the loan on the due date. Bowling explained to Jurkovic why the loan had not been repaid. Bowling then told Jurkovic that Mawson Developments owed money to another company called Stockport (Civil) Pty Ltd (“Stockport”) for work done on both the Estcourt House land and the lower land but mainly on the latter. He asked Jurkovic for another loan. The evidence is not clear on the amount of the loan. According to Jurkovic, it was $200,000 but that he was able to negotiate with Stockport to reduce its claim to $160,000. The trial judge found that the origin of the sum of $200,000 as the amount of the liability to Stockport was never satisfactorily explained by Jurkovic. As will be seen, on 13 September 1996 Bowling questioned the fact that Jurkovic had negotiated a reduction in the loan. Bowling agreed to pay Jurkovic $100,000 in consideration for the advance to enable the debt to be paid to Stockport and for helping him out.
Stockport was pressing for payment of the monies due by Mawson Developments. It had issued an application out of the Federal Court of Australia to wind up Mawson Developments. Stockport agreed to accept $160,000 in payment of its debt provided that the sum of $160,000 was paid on 9 July 1996.
Completion of the contract for the purchase of the Estcourt House land was arranged for 9 July 1996. Jurkovic attended at the settlement and produced a bank cheque for $160,000 payable to Stockport. The cheque was handed to the solicitors for Stockport. The settlement proceeded and Mawson acquired the Estcourt House land. In exchange for the cheque for $160,000, Bowling had arranged for Jurkovic to be handed a letter dated 8 July 1996 which offered land at Kangaroo Island owned by a company called System One (Australia) Pty Ltd as security for the loan. The letter was again written on paper with the letterhead “Mawson KLM”. It read:
“Dear Sir
Re: Loan $250,000 - to Mawson KLM Developments Pty Ltd
We have today arranged for System One (Australia) Pty Ltd A.C.N. 008 296 660 to execute a mortgage to you over its Flinders Chase property on Kangaroo Island. We will have fresh documentation prepared to replace it over the Tennyson land.
Yours faithfully
KEITH BOWLING”
Enclosed with the letter was an unexecuted copy of a mortgage over the land at Kangaroo Island. Three significant features of that letter will have been noticed. The first is that the loan was stated to be for $250,000. The second is that the heading states that the borrower is Mawson Developments. The third is the reference to the land at Tennyson. I deal first with the amount of the loan. According to Jurkovic, he had by that time lent $400,000. The trial judge did not accept his evidence. To this stage, Jurkovic had lent two sums, one of $50,000 and one of $160,000, and Bowling had agreed to pay $100,000 as some kind of fee or other consideration for financial assistance. The total amount of the loans was, therefore, $210,000. It can only be assumed that the letter referred to what Jurkovic had said was the total liability of Mawson Developments to Stockport, namely, $200,000 together with the loan of $50,000 made on 3 June 1996. The application in the Federal Court suggests that the liability was more than $160,000. However, as will be seen, it is unnecessary to determine the precise amount of the debt. It is sufficient to note that the total amount of the debt is said to be $250,000. Of more significance is the fact that the borrower is expressly stated to be Mawson Developments. All of the documentary evidence shows that it was Mawson Developments, not Mawson, which owed the money to Stockport. Thirdly, the reference to the Tennyson land is ambiguous. The land owned by both Mawson and Mawson Developments was located at Tennyson. The trial judge found that these facts cast doubt over Jurkovic’s evidence that the arrangement made on 13 September 1996 was for a mortgage over the Estcourt House land owned by Mawson.
Jurkovic did not accept the land at Kangaroo Island as security and insisted on other security for the loans which had been made. Despite doubts as to the true identity of the borrower and the land being offered as security, the trial judge found that by mid-July, Bowling had orally promised Jurkovic to grant a mortgage over the Estcourt House land owned by Mawson in consideration for the loan of $50,000, the loan in the form of the payment of $160,000 to satisfy the Stockport claim, and for the sum of $100,000, the lump sum fee agreed as consideration for these loans. The trial judge was unable to determine to what the loan of $50,000 related but held that it was unnecessary to do so because these dealings did no more than provide the background for the events of 13 September.
Unfortunately for Jurkovic, he continued to trust Bowling despite the fact that he knew that Mawson had borrowed money to purchase the Estcourt House land, that the lender had taken as security a first mortgage over the Estcourt House land, and that the consent of the first mortgagee was required for a second mortgage.
In order to purchase the land at Estcourt House, Mawson had borrowed $1.22 million from Starmaker. Repayment of the loan was secured by a registered first mortgage. By clause 1(m) of the mortgage, Mawson had covenanted, among other things, not to enter into a subsequent mortgage without the consent of Starmaker. The trial judge found that Jurkovic knew that Mawson had borrowed money to complete the purchase and that he assumed that the land at Estcourt House was subject to a mortgage. In his evidence Jurkovic conceded that he realised that it was usual for a mortgagee’s approval to be obtained before a second mortgage could be granted. In July 1996, Jurkovic did not know the identity of the lender. It was not until about October 1996 he learned that it was Starmaker.
On 13 September 1996 Jurkovic again met Bowling. The meeting was in Jurkovic’s office. It was Jurkovic’s evidence that he complained to Bowling that he had been waiting for a mortgage, that he had not been provided with it, and that he had nothing in writing. The upshot was that the following document was immediately prepared in Jurkovic’s office and signed by Jurkovic and Bowling. This document records the agreement referred to in the caveat. It reads:
“13th September, 1996
LOAN AGREEMENT
I, Keith Bowling, as agreed have personally and on behalf of my companies loaned from Epic Feast Pty Ltd and Petar Jurkovic the total sum $400,000.00, (Four Hundred Thousand Dollars), plus any incurred fees and interest.
The repayment of this loan is (sic) take the form of the following:
Part 1 $100,000.00 Consultant Fee
Incentive payment to Epic
Feast Pty Ltd for making
the settlement of the
Tennyson Development
eventuatePart 2 $160,000.00 Repayment to Epic Feast
Pty Ltd for moneys paid to
Stockport Civil on behalf of
Keith Bowling &
CompaniesNB. The amount originally owned to Stockport Civil by Keith Bowling was $200,000.00. Epic Feast negotiated this down to $160,000.00 due to the fact that the difference was an outstanding amount owed to Epic Feast.
Part 3 $40,000.00 The difference from the
Stockport Civil settlement
to be paid to Epic Feast Pty
Ltd.Part 4 $50,000.00 Payment to Epic Feast Pty
Ltd for the demolition of
Escort (sic) House plus
variations, (at half price),
for asbestos removal.Part $50,000.00 Lent by Petar Jurkovic over
5(a) and above his personal
overdraft facility charged at
a rate of 20% interest plus
establishment fees and
other bank charges.Part Abovementioned interest,
5(b) fees and charges accruing
and to be calculated at time
of settlement of loan.This loan has a settlement date of no later than the 30th September, 1996.
This loan agreement deals only with the Escort (sic) House Development at Tennyson. In the event of Keith Bowling and/or companies reneging on the above loan and incentive repayments there will be no other alternative but to proceed with legal action for the recovery of all moneys outstanding.
(signed) (signed)
.................................... .......................................
Mr. Keith Bowling Epic Feast Pty Ltd (Petar Jurkovic)Dated..........13th........this day of....September...the year...1996.”
This is the loan agreement referred to in the caveat. It is readily apparent that the loan agreement does not either expressly or by implication refer to the grant of a mortgage to secure repayment of the loans. As the trial judge found, Jurkovic could not explain the absence of any reference to a mortgage. The reference in the concluding paragraph to legal action being the only alternative if payment is not made does not suggest a mortgage but, instead, an action to recover the debt.
The trial judge identified each of the amounts listed in the loan agreement as follows:
Part 1 was the lump sum agreed to be paid by Mawson to Epic Feast in consideration for Jurkovic agreeing on behalf of Epic Feast to help Mawson by lending money. Beside this Bowling had written “Agreed”.
Part 2 was the sum of $160,000 paid to Stockport. Bowling had also written beside this item “Agreed”.
Part 3 was the amount said to be the difference between the amount of the claim by Stockport and the amount paid by Epic to Stockport. Against that item Bowling had written “To be negotiated”. It was Jurkovic’s evidence that Bowling probably wanted a share of the amount of the negotiated reduction. As mentioned earlier, the trial judge found that the origin of the sum of $200,000 as the amount of Stockport’s claim was never satisfactorily explained by Jurkovic.
Part 4 is an amount which Jurkovic said was payable to Royal Park Salvage for salvage work. Alongside that item Bowling had written “Not sure”. Royal Park Salvage had contracted with Mawson to carry out demolition work and removal of asbestos from Estcourt House. The evidence was not clear as to when the contract was made, when the work was done, or when payment was due.
Part 5(a) was a reference to the principal and interest payable on the amount advanced by Jurkovic personally. Bowling had written beside this item “Agreed as to $50,000”.
Part 5(b) is self-explanatory. Bowling had not written any note against it.
The status of the hand-written notations by Bowling is not clear. There is little evidence on that issue. As I have said, Bowling did not give evidence. Jurkovic’s only explanation was that Bowling was “a smooth operator”. It is implicit in the findings of the trial judge that he held that, notwithstanding that Bowling had signed the document at its foot, the handwritten comments in the margin indicated that Bowling did not agree the items in dispute. The trial judge found that by this agreement Bowling acknowledged on behalf of Mawson a liability for at least $310,000 but that liability for $90,000 was not acknowledged. The judge did not expressly state which items were those he found to be in dispute. It can, however, be readily inferred from the reasons for judgment that the items in dispute were those in Parts 3 and 4.
The trial judge also found that it was orally agreed on 13 September that Mawson would grant a mortgage over the land at Estcourt House “to secure the liability to Epic and to Mr Jurkovic”. He found that the giving of security was common ground and had been for some time. In addition, the judge found that on 13 September the earlier arrangements provided the background for this new arrangement. The consideration for the new agreement was the further forbearance on the part of Epic Feast to demand repayment of the loans.
About one week after the agreement dated 13 September 1996 had been signed, Jurkovic and Bowling again met in Jurkovic’s office. Jurkovic again pressed Bowling about the mortgage. While Bowling was present, Jurkovic rang his solicitor and, in consultation with Bowling, gave instructions over the telephone for the preparation of several documents. They were a loan agreement between Epic Feast and Mawson, a mortgage in registrable form granted by Mawson to Epic Feast over the land at Estcourt House, and a personal guarantee by Bowling. But the agreement was different from that which was set out in the loan agreement on 13 September. First, the loan was to be for a period of 12 months; secondly, a new interest rate was fixed; and thirdly, the principal was increased to $600,000. The additional $200,000 was said to be a fee to compensate Epic Feast for the delays and inconvenience and for the extension of the period of the loan. The documents to effect this arrangement were delivered to Bowling soon after. Bowling had promised to sign them but did not do so. At some later time, Bowling told Jurkovic that Starmaker had refused to consent to a second mortgage. Upon the failure of Bowling to execute the documents, Epic Feast lodged its caveat.
The trial judge found that the agreement of 13 September was not terminated by the agreement made on 18 September. He found that, although Bowling agreed to execute the documents discussed by telephone, the effect of the oral arrangements was that the earlier agreement would cease to have effect only when replaced by the new arrangement agreed on 18 September.
I have some doubts whether all of the findings made by the trial judge are justified by the evidence. Little attention was given in the evidence to explaining how Mawson came to assume a substantial liability on behalf of Mawson Developments. Presumably Mawson is the holding company. But there is no evidence of any assignment of the debt. The findings are generous to Epic Feast. But it is possible to put these doubts to one side because, even if the findings are correct, Epic Feast is unable, for the reasons which follow, to establish that it holds an equitable mortgage.
It is convenient here to deal with that part of the appeal which asserts that the agreed amount of the loan was $400,000 and not $310,000 as found by the trial judge. I deal first with the sum of $50,000 in Part 4. There is no evidence to show that the indebtedness of Mawson to Royal Park Salvage was assigned to Epic Feast. Nor is it clear that Mawson had agreed to pay the sum of $50,000 for the work which had been done. The price quoted for the work was $35,000 and Jurkovic’s evidence was that extras resulted in the cost being $50,000. Thus, it can be seen that there is doubt as to both the true identity of the lender and the amount of the debt. As to the $40,000 in Part 3 of the agreement, the evidence is very unclear and does not establish that the indebtedness of Mawson Developments to Stockport was $200,000. Reference has already been made to the fact that the debt, the subject of the winding up application in the Federal Court, was claimed to be $174,537.64. In this uncertain state of the evidence, there is no reason to interfere with the findings of the trial judge.
An Equitable Mortgage?
As already mentioned, even if the doubts as to the correctness of the findings that an oral agreement was made on 13 September 1996 to grant a mortgage are put to one side and that finding is assumed to be correct, it is apparent that Epic Feast did not have an enforceable agreement by which it granted a mortgage over the Estcourt House land as security for repayment of the loan. The trial judge had several reasons for that conclusion. For the reasons which follow, each is correct.
The first reason was that the loan agreement does not state that repayment would be secured by a mortgage. There was, therefore, no sufficient memorandum to satisfy the Statute of Frauds, in this State expressed in s26 of the Law of Property Act, 1936. Section 26 requires either an agreement in writing to secure repayment of the loan by mortgage or a written memorandum to that effect. It is well settled that the written memorandum need not be contained in one document but may be made out of several documents if they can be read together so as to constitute a sufficient memorandum: Stokes v Whicher [1920] 1 Ch 411; Elias v George Shaely & Co (Barbados) Ltd [1983] 1 AC 646; Thomson v McInnes (1911) 12 CLR 562 at 569; and ANZ Banking Group Ltd v Widin (1990) 102 ALR 289 at 297. It is sufficient if the reference to the second document arises by necessary implication: Thomson v McInnes (supra) at 569 and ANZ Banking Group Ltd v Widin (supra) at 298. Documents may not only be connected by reference one to the other but also “if you can spell out of the document a reference in it to some other transaction, you are at liberty to give evidence as to what that other transaction is, and, if that other transaction contains all the terms in writing, then you get a sufficient memorandum within the statute by reading the two together: Harvey v Edwards, Dunlop & Co Ltd (1927) 39 CLR 302 at 307; ANZ Banking Group v Widin (supra) at 299-300. As is noted in ANZ Banking Group v Widin at 298-300, the approach in Harvey v Edwards, Dunlop & Co Ltd is more liberal than that taken in Thomson v McInnes. However, it is unnecessary to examine the consequences of that issue here because even if parole evidence can be given of another transaction, the loan agreement does not refer to another document which evidences a transaction as between Mawson and Epic Feast.
The only other documents are the letter of 3 June 1996 and the letter of 8 July 1996. The letter of 3 June 1996 contains no reference to any security and is not in any sense evidence of an agreement to give security for the loan of $50,000. It cannot, therefore, be relied on as a memorandum to establish the existence of an agreement to grant a mortgage.
The letter of 8 July 1996 has the difficulties which have already been identified; difficulties which prevent it being a sufficient memorandum of an agreement between Mawson and Epic Feast to grant a mortgage to secure repayment of the loan. It is convenient to repeat the difficulties. First, the letter expressly refers to a loan to Mawson Developments and not to Mawson. Secondly, although the letter refers to “fresh documentation... over the Tennyson land”, that is not a sufficient indication that Mawson, as distinct from Mawson Developments, granted a mortgage over the Estcourt House land. Mawson Developments owned the lower land at Tennyson, so that “the Tennyson land” is probably intended to refer to the lower land. Another difficulty is that the letter precedes the agreement of 13 September 1996. Although a document preceding an asserted agreement may in certain circumstances constitute a sufficient memorandum; see, for example, Pirie v Saunders (1961) 104 CLR 149 at 151, the difficulty in referring to the letter of 8 July is that it is evidence of a different arrangement between different parties. It is not, therefore, capable of being linked with the loan agreement so that there is not a sufficient memorandum to satisfy the requirements of s26 of the Law of Property Act.
It is necessary to deal with one other letter. This, too, was written on the notepaper bearing the ambiguous letterhead “Mawson KLM”. It is dated 9 July 1996. It reads:
“9 July, 1996
Mr Petar Jurkovic
1146 Old Port Road
ROYAL PARK SA 5014Dear Petar
RE: SECURITY FOR MONEY OWED TO EPIC FEAST
Thank you so much for helping us to settle Estcourt House; without your help it wouldn’t have happened.
I’m sorry that Keith hasn’t had time to talk to you, but as you would realise he has been very busy trying to get settlement today.
I will arrange to get you a mortgage over the Estcourt House development to properly secure all the money that we owe you.
In the meantime please accept this letter as a Charge over the land.
Yours sincerely
(Signed)
MICHAEL C BOWLING
FOR & ON BEHALF OF MAWSON KLM
HOLDINGS PTY LTD. AND MAWSON KLM
DEVELOPMENTS.”
The trial judge held that the origin of the letter was “somewhat mysterious”. Jurkovic said that he did not receive it on or about 9 July 1996. He thought that he first saw it about February or March 1997 when he found it on his desk one morning while checking his mail. That was all Jurkovic said about the letter. Mr Michael Bowling was the son or Mr Keith Bowling. He was not, however, a director of Mawson and there is no evidence of the role that he played in the affairs of Mawson. There is no evidence that he had any authority to bind Mawson or Mawson Developments. The trial judge held that, in view of the circumstances in which the letter first came to the attention of Mr Jurkovic, he was not prepared to accept on the balance of probabilities that it was written on the date which it bears or with the authority of Mawson. The absence of any proof of the authority of Bowling to write the letter does not warrant this court interfering with the finding. In any event, there is no appeal from this finding.
There is a further difficulty for Epic Feast. The loan agreement made on 13 September 1996 required repayment by no later than 30 September 1996, some 17 days later. Given the relative imminence of the agreed date of repayment, it cannot necessarily be assumed that Jurkovic required a mortgage to secure repayment, notwithstanding the substantial amount of the loan and the earlier failure to repay by the due date. It is fair to add that this factor is not significant in the overall result.
No Part Performance
The trial judge next held that there was no part performance of an agreement to grant a mortgage sufficient to satisfy s26(2) of the Law of Property Act. If the evidence shows that there are acts which are unequivocally and in their own nature referable to some act of the general nature of that alleged, those acts will constitute part performance of the contract: Regent v Millett (1976) 133 CLR 679 at 683 per Gibbs CJ. The test in Steadman v Steadman [1976] AC 536 may be more liberal than that stated in Regent v Millet: see the discussion by Hill J in ANZ Banking Group Ltd v Widin at 301-305. But it is unnecessary in the present case to explore that issue since there is no evidence of any act of part performance. The mere fact of making the loans and the forbearance from suing to recover them when the time for repayment had passed does not, standing alone, prove an agreement to grant a mortgage or some other form of security: cf Riley v Osborne [1986] VR 193 at 199 per Kaye J. The preparation of the documents for the later loan agreement for the sum of $600,000 is quite equivocal. It does no more than establish that Bowling might have agreed to a new arrangement which substituted a larger debt and that he agreed to give consideration for that larger debt. It does not establish that he had earlier agreed to grant a mortgage as security for repayment of the smaller debt.
Like the trial judge, I have considerable sympathy for Jurkovic. Quite obviously, Bowling was very plausible and induced Jurkovic to part with very substantial sums of money without providing any form of satisfactory security for repayment or even any adequate documentation. Obviously, he should have obtained some legal, accounting or other financial advice. Nor did he give any real thought to the separate legal identity of each of the companies he was either acting for or dealing with. As to the latter, his evidence is quite graphic.
“Q.... If you look at that letter it says ‘Loan 250,000 to Mawson KLM Developments Pty Ltd’.
A...... Right.
Q...... At that time did you believe that the debt of $250,000 was to be paid by Mawson KLM Developments Pty Ltd.
A...... To me KLM Developments or Holdings or Keith Bowling, I’m dealing with a person who says ‘I’ll pay you this money back’. As it all happened I didn’t even worry about it.
Q...... In fact, on 8 July or 9 July you did not even know that there was a company called Mawson KLM Holdings Pty. Ltd, did you.
A...... All I knew it as, Mawson KLM.”
To that extent, Jurkovic is unfortunately the author of his own misfortune. If, to use his words, Bowling was “a smooth operator”, there was a greater need to obtain advice.
.................. For these reasons, Epic Feast has failed to prove that it had an equitable mortgage. It, therefore, does not have an equitable interest which is capable of being protected by the caveat. The trial judge was, therefore, correct in ordering the removal of the caveat.
The Equitable Interest of Starmaker
.................. Given this conclusion, it is not necessary to deal with the decision by the trial judge that, even if Epic Feast established that it held an equitable mortgage, its equitable interest ranked after an earlier equitable interest of Starmaker. That equitable interest of Starmaker is said to have arisen in the following way.
.................. The mortgage to Starmaker was executed on 9 July 1996. The loan was to be repaid with interest amounting to $250,000 on or before 4 November 1996. Thus, the principal and interest to be repaid on 4 November 1996 was $1,470,000, an effective rate of interest of approximately 61.5 per cent per annum.
.................. On 9 July 1996 Mawson had also granted Starmaker an option to purchase the land at Estcourt House. The option was to be exercised between midnight on 2 November 1996 and midnight on 3 November 1996. On 1 November, Starmaker exercised the option. Mawson consented to the earlier exercise of the option. Evidence of that consent is to be found in two documents. The first is the document exercising the option. It is dated 1 November 1996 and Bowling had written “Accepted” on the face of the document and had dated the endorsement 1 November 1996. The second document is a Joint Venture Agreement made between Starmaker and Mawson on 1 November 1996 which provided in clause 8:
“The parties further covenant and agree that the Option may be exercised in addition to time set out in the Option Agreement at any time on the 1st November 1996 and may be exercised by Starmaker by serving notice of its intention to exercise the Option on Keith Bowling being the sole director of Mawson.”
This option to purchase was held to be the equitable interest of Starmaker which ranked in priority over whatever equitable interest was held by Epic Feast. An option to purchase land gives the grantee an equitable interest in the land: Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 at 71-76 per Gibbs J; Barba v Gas & Fuel Corporation (Vic) (1976) 136 CLR 120 at 137 per Gibbs J with whom Stephen and Jacobs JJ agreed. The nature of that equitable interest was explained in these terms by Gibbs J in Barba (supra) at 137:
“The equitable interest so created is a contingent interest which will become an absolute interest when the contingency is fulfilled: Griffith v Pelton [1958] Ch. 205, at p.225; Du Sautoy v Symes [1967] Ch. 1146, at p.1163. It was held in Morland v Hales and Somerville (1910) 30 NZLR 201 that the equitable interest which passes to the grantee when an option is granted prevails over the rights of a person who, after the grant of the option but before its exercise, has contracted to purchase the land without notice of the existence of the option.”
It is apparent from these reasons that Gibbs J approved the decision in Morland v Hales and Somerville. Thus, when it was granted the option to purchase on 9 July 1996, Starmaker acquired an equitable interest in the land at Estcourt House which would prevail over the grant of any subsequent equitable interest. Thus, even if it is assumed that the agreement dated 13 September 1996 granted Epic Feast an equitable mortgage, the creation of that equitable interest is later in time than the equitable interest created by the grant of the option.
As between competing equitable interests, the general rule is that if the merits are equal, priority in time of creation gives a better equity: Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265 at 276 per Kitto J. There is no fact which, in the circumstances of this case, displaces the application of that general principle. Although Starmaker was at liberty to lodge a caveat and failed to do so, that fact is not sufficient reason to displace the general principle. Starmaker knew that it had a good deal of protection against a subsequent adverse interest by reason of clause 1(m) of the mortgage which effectively prohibited Mawson from dealing in the land without the written consent of Starmaker. Starmaker was, therefore, in a position to refuse consent to the mortgage. As the equitable interest created by the mortgage is earlier in time, it prevails over the later equitable mortgage, if in fact an equitable mortgage was created.
But there is a further issue to consider. In fairness to the trial judge, it was not raised by the parties during the trial. There is a real question whether the option to purchase is a clog on the equity of Mawson to redeem the mortgage. Where, contemporaneously with the grant of a mortgage, the mortgagor grants the mortgagee an option to purchase the mortgaged property, the option may not be enforceable as a clog on the equity of redemption: Samuel v Jarrah Timber & Wood Paving Corporation [1904] AC 323; Lewis v Frank Love Ltd [1961] 1 WLR 261. In Reeve v Lisle [1902] AC 461 the House of Lords held that an agreement granting the mortgagee an option to purchase was valid but, in that case, the agreement granting the option to purchase was executed some two years after the original loan and 12 days later than a restructuring of the lending arrangement. As Lord Halsbury L.C. noted (at 464):
“Under these circumstances it was a mere question of what inferences ought properly to be drawn from the nature of the instruments, and the object and purpose with which they were entered into, as well as what the documents contained in themselves.”
Other relevant decisions are noted by Young J in Westfield Holdings Limited v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194. These decisions show that a court will not simply apply the equitable principles prohibiting any attempt to clog or fetter the right of redemption and will not interfere to set aside a transaction merely because the mortgagee has an option to purchase the mortgaged property. Instead, they will examine all the relevant circumstances. They will certainly interfere where a collateral advantage has been obtained in circumstances which are unconscionable: see the discussion of Young J in Westfield Holdings (supra) at 197-203.
In this case, although Starmaker’s option to purchase was expressed in a separate document, it was executed on the same day as the mortgage. The option price was $1.47 million, which was an amount equal to the amount of the loan to Mawson plus interest. The date for repayment of the principal and interest was between midnight on 2 November and midnight on 3 November 1996. Thus, the option could be exercised before the last date for repayment of principal and interest. The capacity of Mawson to redeem on 4 November was, therefore, denied. On the face of the document, there is much which points to the conclusion that this was an unconscionable transaction particularly given the usurious rate of interest. However, as the question whether the option was a clog on the equity of redemption was not pursued at the trial and, as Starmaker did not have an opportunity to seek to explain the circumstances of the transaction, it is not possible to express a final view.
Given that there is a real question whether the option to purchase was a clog on the equity of redemption, it is better to refrain from expressing a concluded view on the issue of competing equities.
Conclusion
For the reasons earlier expressed, the trial judge was correct in holding that Epic Feast had failed to establish that it held an equitable mortgage and in concluding that an order should be made requiring Epic Feast to remove its caveat. For all of these reasons, the appeal is dismissed.
Matheson J
I agree with Debelle J that the appeal should be dismissed. Specifically I agree with his reasons for upholding the trial judge’s decision that the appellant only lent $310,000 to the first respondent and that the appellant did not establish that it had an equitable mortgage. Like Prior J, I do not entertain any doubts about the trial judge’s findings that an oral agreement was made on the 13 September 1996 to grant a mortgage. Further, I prefer not to express any opinion on the question whether the option to purchase was a clog on the first respondent’s equity of redemption, an interesting question which was not argued at trial or on appeal.
Prior J
I agree with the Justice Debelle that the trial judge correctly held that Epic Feast failed to establish that it held an equitable mortgage. I do not share Debelle J’s doubts about the trial judge’s finding of an oral agreement to grant a mortgage being made on 13 September 1996. There was no memorandum in writing of any such agreement. Thus there was no equitable mortgage. The order requiring the removal of Epic Feast’s caveat was properly made. The appeal should be dismissed.
18
11
0