Launch Concept v Di Mauro
[2022] VSC 512
•1 September 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2022 02969
In the Matter of an application pursuant to s 90(3) of the Transfer of Land Act 1958
| LAUNCH CONCEPT DEVELOPERS PTY LTD (ACN 149 182 258) | Plaintiff |
| v | |
| JOSEPH DI MAURO AND CLEMENTINA DI MAURO as trustee for DI MAURO FAMILY SUPERANNUATION FUND | First Defendant |
| MORTGAGE CUSTODIAN PTY LTD (ACN 624 909 299) | Second Defendant |
| REGISTRAR OF TITLES | Third Defendant |
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JUDGE: | Moore J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12 August 2022 |
DATE OF JUDGMENT: | 1 September 2022 |
CASE MAY BE CITED AS: | Launch Concept v Di Mauro & Ors |
MEDIUM NEUTRAL CITATION: | [2022] VSC 512 |
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REAL PROPERTY – Caveats – Interlocutory application made to temporarily remove caveat to enable proprietor to refinance — Whether balance of convenience favours removal —Application unsuccessful — Transfer of Land Act 1958, s 90(3) – Oceanview Group Holdings v Anastazija Balaz & Anor [2006] NSWSC 1469; Hanson Construction Materials Pty Ltd v Roberts [2016] 93 NSWLR 1.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Tennant | Jem Lawyers |
| For the First and Second Defendants | Mr H Forrester | DSA Law |
HIS HONOUR:
The plaintiff is the proprietor of properties at 53 Percy Street, Portland (the Portland property) and 1/88 Orrong Road, Elsternwick (the Elsternwick property).
Drosten Pty Ltd (Drosten) has a first registered mortgage on the Portland property, securing $434,739.53 (the Drosten mortgage). The first and the second defendants have charges over the Portland property, secured by caveats, securing approximately $550,000 for the first defendant, and approximately $90,000 for the second defendant (the caveats).[1]
[1]For convenience, unless otherwise required, I will refer to the first and second defendants collectively as ‘the defendants’. The third defendant did not appear at the hearing on 12 August 2022.
The charges over the Portland property arise from loan agreements between the defendants and the plaintiff pursuant to which the defendants have mortgages over the Elsternwick property. The principal of the loan made by the first defendant to the plaintiff is $390,000, with the current amount outstanding being approximately $550,000, with interest running at 23% per annum. The principal of the loan made by the second defendant to the plaintiff is $55,000, with the current amount outstanding being $90,000 and interest running at 36% per annum.
The Elsternwick property was purchased by the plaintiff in April 2020 in circumstances which are the subject of other proceedings in this Court.[2] Its current estimated value is $600,000, being less than the total current indebtedness of the plaintiff to the defendants in relation to the property of about $640,000.
[2]Proceeding S ECI 2022 01574.
On 4 August 2022, the plaintiff filed a summons and originating motion in which it sought orders providing for the removal of the first and second defendants’ caveats over the Portland property to permit it to refinance its debt. The proposed refinancing would discharge the Drosten mortgage and result in the incoming lender replacing Drosten as a first registered mortgagee. This proposed new financing arrangement is attractive to the plaintiff because it would incur about $2,322.20 less interest per month than is currently payable under the Drosten mortgage which is currently in default. However, the proposed new mortgage would provide security in the amount of $520,000, being about $85,000 more than is secured under the Drosten mortgage. The plaintiff expressly sought orders lifting the caveats on the basis that the defendants be permitted to re-lodge the caveats over the property once the proposed refinancing was complete.
There was an apparent urgency to the plaintiff’s application because the proposed new financier had informed the plaintiff that it would withdraw its proposed loan if settlement did not take place on Monday 15 August 2022.
The matter first came before me in Practice Court on 8 August 2022, at which time the further hearing of the summons was adjourned by consent to enable the parties to file further expert evidence on the valuation of the Portland property. The hearing of the summons proceeded on Friday 12 August 2022. At the conclusion of the hearing I made orders dismissing the plaintiff’s summons. These are my reasons for judgment in so ordering.
Legal principles
The plaintiff’s application was brought pursuant to s 90(3) of the Transfer of Land Act 1958 which provides as follows:
Any person who is adversely affected by any such caveat may bring proceedings in a court against the caveator for the removal of the caveat and the court may make such order as the court thinks fit.
The Court‘s power to order the removal of a caveat is discretionary. The exercise of that discretion is ordinarily approached in a similar manner to that used in determining whether or not to grant an interlocutory injunction. The caveator bears the onus of establishing that there is a serious question to be tried that it does have the claimed estate or interest in the land. If it establishes a serious question to be tried, it must further establish that the balance of convenience favours the maintenance of the caveat until trial.
It was uncontroversial that the defendants had a caveatable interest over the Portland property. The only question was whether or not the balance of convenience favoured the maintenance of the defendants’ caveats over the property.
In considering whether the defendants had discharged their onus of establishing that the balance of convenience favoured the maintenance of the caveats over the Portland property, the parties referred to the judgment of Brereton J in Oceanview Group Holdings v Anastazija Balaz & Anor in which his Honour stated as follows:[3]
As to the balance of convenience, I accept that where there is a seriously arguable or even indisputable caveatable interest, the Court nonetheless retains a discretion, based on the balance of convenience, as to whether or not it will maintain the caveat or permit it to lapse. The circumstance that a caveator has a caveatable interest is not conclusive that the caveat will not be removed. The Court will order its withdrawal even where the caveat is indisputably valid, where the balance of convenience favours that course [Buchanan v Crown and Gleeson Business Finance Pty Ltd [2006] NSWSC 1465 (and the cases there cited)]. Circumstances in which such a course may be appropriate include where the party applying for removal of the caveat has an interest in the land superior to that of the caveator, particularly where that party is being prevented by the caveat from a legitimate exercise of its rights. Thus a caveat by an unregistered second mortgagee will be removed if it is preventing the registered first mortgagee from exercising its power of sale with a clear title [see, for example, Kerabee Park Pty Ltd v Daley (1978) 2 NSWLR 222]. A valid caveat may also be removed by the Court if it prevents the registered proprietor from the legitimate exercise of a right in respect of the land, including a proper sale or refinance.
A highly relevant consideration is whether the removal of the caveat will derogate from the caveator's claim, and it is a rare case indeed, if there is any, where a valid caveat will be removed for reasons of balance of convenience if that will result in a derogation from the priority of the caveator's claim [Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42, 50 (Owen J)]. In my view, if the priority of the caveator's interest would be adversely affected by the removal of the caveat, it is ordinarily inappropriate to remove the caveat, having regard to considerations of the balance of convenience.
[3][2006] NSWSC 1469, [10]-[11].
The parties also referred to the judgment of the Court of Appeal of New South Wales in Hanson Construction Materials Pty Ltd v Roberts.[4] Counsel for the plaintiff submitted that it had certain analogies to the present application. The primary Judge had made orders providing for the removal of a caveat to enable the refinancing of a loan which was secured by a first mortgage over real property. The orders were subject to conditions, the effect of which was to permit a fresh caveat to be lodged over the property after refinancing had occurred. The case is significant for reasons including that, analogously to the present matter, the orders would reduce the caveator’s equity in the property as the replacement first mortgage would secure a loan approximately $200,000 greater than the loan secured by the existing mortgage.
[4][2016] 93 NSWLR 1.
In dismissing an appeal from the orders of the primary Judge, Sackville AJA (with whom the other members of the Court agreed) noted that, if the nature and extent of a caveator’s interest was undisputed and removal of the caveat would clearly destroy the caveator’s interest, it was fair to say that it would be very unusual for the application to be granted.[5] A registered proprietor seeking an order for the removal of a caveat to permit the refinancing of a mortgage might have a stronger case if there was real doubt as to whether the interest claimed by the caveator was valid and enforceable.[6]
[5]Ibid [78].
[6]Ibid [79].
In concluding that the primary Judge did not commit any error of principle in making the orders to which I have referred above, Sackville AJA identified that the case had two features of particular significance. This included that there was real doubt about whether the caveator’s claimed equitable charge over the relevant property was valid and enforceable. Further:[7]
The second feature is that although the primary Judge found that the orders sought by Ms Roberts would reduce the equity in the Property available to Hanson, his Honour also found that it seemed likely that there would be sufficient equity to protect Hanson’s interest. Bearing in mind that the onus rested on Hanson to establish that the balance of convenience favoured continuation of the caveat, this amounted to a finding that his Honour was not satisfied that the orders would cause Hanson to suffer financial loss. In other words, his Honour accepted that the orders would necessarily displace the priority Hanson enjoyed over the other creditors who had lodged caveats (assuming its claimed interest to be valid), but was not satisfied that it would suffer a practical detriment as a consequence of losing its priority.
[7]Ibid [82].
In finding no error in this approach by the primary Judge, Sackville AJA continued:[8]
The primary Judge cited Buchanan and Tadrous v Tadrous for the proposition that only in a “rare case” will a caveat be removed for reasons of balance of convenience if to do so would have an adverse effect on the priority of the caveator’s claim. If anything, this proposition was too favourable to Hanson. For the reasons I have given, depending on the strength or weakness of the caveator’s case and other considerations material to the balance of convenience, it will not necessarily be “rare” for an order to be made for the withdrawal of a caveat, even if there is a potentially adverse impact on the caveator’s claimed priority. In any event, s 74MA of the Real Property Act does not require the Court to make a finding that the case is “rare” before the power to order withdrawal of a caveat is enlivened.
In assessing the balance of convenience, the primary Judge took into account that the validity of Hanson’s claimed interest turned on the “stark question” of whether Ms Roberts’ signature had been forged. His Honour accepted that there was “some substance” to Ms Roberts’ contention that she never signed the Agreement, a conclusion clearly supported by the evidence. The primary Judge’s observation that “a balance has to be struck” referred to the strength of the competing contentions of the parties as to the validity of the Guarantee. In my view, his Honour was entitled to give consideration to the strength of Ms Roberts’ contention in determining whether the balance of convenience favoured continuation of the caveat.
…
Contrary to Mr Giles’ submissions, I do not accept that the primary Judge was required to make a finding that the proposed orders would not derogate from Hanson’s security position before considering whether the balance of convenience favoured continuation of the caveat. The impact of the orders on Hanson’s security position was clearly a material matter to be taken into account in determining where the balance of convenience lay and his Honour did take the impact of the orders on Hanson’s interest into account. But even if there was a prospect that Hanson’s security position would be detrimentally affected, that did not necessarily preclude an order requiring the withdrawal of the caveat. Whether an order having that effect could be justified depended on the weight to be given to all the material circumstances.
[8]Ibid [84]-[85], [87].
Plaintiff’s submissions
The plaintiff advanced four principal contentions as to why I should conclude that the balance of convenience favoured the removal of the caveats.
First, it was submitted that the maintenance of the caveats was prejudicial to the plaintiff’s interests because their effect was that, while they were maintained, it was unable to exit its relationship with the current mortgagee and prevented from refinancing its first mortgage on the Portland property. This was in circumstances where it was in default of that mortgage and therefore paying a very high rate of interest rate of 24%, with monthly interest payments of $7,820.95. In comparison, under the arrangements with the new proposed financier, the interest repayments would be about $2,322 per month less.
Secondly, it was submitted that, under the terms of the contract with the proposed new financier, if settlement of those arrangements did not occur on 15 August 2022, the plaintiff would be responsible for legal costs, valuation fees and associated costs of approximately $47,710.
Thirdly, it was submitted that the proposed new finance arrangements provided for capitalised interest repayments for the first 12 months which would have a beneficial effect on the plaintiff’s cashflow.
Fourthly, it was submitted that, under the proposed refinancing arrangements, there would not be any practical impact on the caveator’s position. It was common ground between the parties that, as a result of the deferral in interest for the first year of the proposed new loan, the amount secured by the proposed new mortgage would increase from $436,000 to about $520,000. In that way the defendants’ priority would be reduced by approximately $85,000. However, the plaintiff submitted that an analysis of the valuation of the Portland property and the costs associated with its proposed development meant that there would be sufficient equity remaining in the property after the refinancing so that the position of the defendants was protected.
The plaintiff adduced evidence to show that the value of the property was $830,000. This evidence was challenged in various ways by the defendants who adduced evidence that the value of the property was $700,000. It was not possible in the short time available to resolve the various controversies raised by counsel in relation to the challenges to the valuation evidence and the associated evidence about the cost of construction of the proposed development on the Portland property; it is ultimately unnecessary to do so. In particular, it was agreed that, on the plaintiff’s valuation of the Portland property and estimate of building costs, taking into account both the Elsternwick and Portland properties, there would be total equity remaining of about $230,000. It was also agreed that, on the defendants’ valuation, the remaining equity would be approximately $100,000. The plaintiff’s central contention was that, on both approaches, there would be sufficient equity such that there would be no practical detriment to the defendants from losing priority in the amount of $85,000.
Consideration - balance of convenience
Having regard to the contentions advanced by the plaintiff, in my view the defendants have discharged the onus upon them of justifying the maintenance of the caveat on the balance of convenience. Central to my conclusion is a rejection of the plaintiff’s submission that the defendants will not suffer any practical detriment in losing priority in the amount of $85,000.
Even assuming in the plaintiff’s favour that the equity remaining across the Elsternwick and Portland properties is about $230,000 in the event that the proposed financing occurred, that amount is very marginal given the plaintiff’s apparently parlous financial circumstances. The plaintiff has been in default under the two mortgages over the Elsternwick property since October 2021. As a consequence, interest is running at a very high rates of 36% and 23%.[9] Counsel for the defendants submitted, without demurrer from the plaintiff, that this equated to about $172,000 per annum. Accordingly, even on the plaintiff’s estimate of the amount of equity in the properties of about $230,000, there is a real likelihood that that equity would be eroded in less than about 18 months.
[9]See [3] above.
Counsel for the plaintiff sought to avoid the implications of this analysis by submitting that the Court should not speculate as to the financial position of the plaintiff over the next 12 months, including in relation to payment of interest and property valuations. This submission is unpersuasive in circumstances where the undisputed facts are that the plaintiff has been in default of the Elsternwick mortgages for 10 months and in default of the Portland mortgage since April 2022. Neither has the plaintiff adduced any evidence about its broader financial position which might provide a basis to resist the obvious inference to be drawn from its defaulting position that its inability to meet its financial commitments is unlikely to change in at least the short term. Further, contrary to counsel’s invitation, it is not appropriate for me to speculate about the possibility that either the Elsternwick property or the Portland property might increase in value over the coming year.
On the evidence, the clear inference to be drawn is that the plaintiff does not currently have the capacity to meet its financial obligations under its existing mortgages; there is nothing in the evidence to suggest that this is likely to change in the near future. Contrary to the plaintiff’s submissions, I am accordingly satisfied that the defendants will likely suffer a practical detriment as a result of losing their priority in the amount of about $85,000 under the proposed refinancing arrangements.
The significance of this conclusion is heightened once it is acknowledged that, unlike the circumstances in Hanson Construction, there is no doubt that the defendants have a caveatable interest over the Portland property. In such circumstances, putting aside the advancement of the plaintiff’s commercial interest, there is no good reason, such as the need to dispose of the Portland property or because of a change in the mortgagee’s position, which might warrant the lifting of the caveats. To do so in the circumstances of this case would in effect amount to transferring the burden of a year’s interest repayments from the plaintiff to the defendants in circumstances which would be prejudicial to the defendants and where the validity of their interest in the Portland property as a result of security previously granted by the plaintiff is not in doubt.
The circumstances of urgency asserted by the plaintiff also do not weigh the balance of convenience in favour of the removal of the caveats. The claimed imperative to secure alternative finance by 15 August 2022 does not arise from any objective or pre-existing circumstance, but is solely a condition imposed by the proposed new financier. Although the avoidance of the substantial costs which apparently will be incurred by the plaintiff in the event that the proposed new financial arrangements are not established by 15 August 2022 is a matter which I take into account in favour of the removal of the caveats, the plaintiff’s liability for those costs is a consequence of its decision to enter into contractual obligations with the proposed new financier. This is in circumstances where there is no evidence that the plaintiff sought to obtain alternative finance and where, as is apparent from correspondence from the defendants’ solicitors to the plaintiff, the defendants are open to renegotiating the interest payments due by the plaintiff under the loans advanced by the defendants. There is no evidence that the plaintiff made any such approach to the defendants before commencing this proceeding.
In the circumstances, I am satisfied that the defendants have discharged their onus of establishing that the balance of convenience favours the maintenance of the caveats over the Portland property.
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