Mancewicz v Truong

Case •

[2024] VSC 167

•

9 April 2024
IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

PROPERTY LIST
PRACTICE COURT

S ECI 2024 01337

JACEK MANCEWICZ First Plaintiff
ANNA MANCEWICZ Second Plaintiff
v 
HUNG TRUONG First Defendant
KIM NGO Second Defendant
REGISTRAR OF TITLES Third Defendant

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JUDGE:

Ginnane J

WHERE HELD:

Melbourne

DATE OF HEARING:

27 March 2024

DATE OF JUDGMENT:

9 April 2024

CASE MAY BE CITED AS:

Mancewicz v Truong

MEDIUM NEUTRAL CITATION:

[2024] VSC 167

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REAL PROPERTY – Sale of land – Caveats – Whether caveators have an interest in land – Interest in land created by Construction Loan Agreement – Whether caveators charge obliged to remove caveats to permit sale of land – Whether serious question to be tried – Balance of convenience – Order for removal of caveats – Transfer of Land Act 1958 ss 89(1), 90(3).

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APPEARANCES:

 Counsel Solicitors
For the Plaintiffs Mr T B D Gorton Gadens Lawyers
For the First and Second Defendants Mr J Searle Belleli King & Associates
For the Third Defendant No appearance

HIS HONOUR:

  1. The plaintiffs, Jacek and Anna Mancewicz, who are husband and wife, seek the removal of caveats lodged by the first and second defendants on titles of land being Lots 1 and 2, 10 Killara Avenue, Sunshine West.  The plaintiffs are property developers and the registered proprietors of those lots and Lot 3, on each of which they have had a unit built. They entered into contracts of sale of Lots 1 and 2 on 25 March 2021 and 26 July 2021 respectively which were due for settlement on 2 April 2024  and they wish to proceed with the settlements.

  1. The caveatable interest claimed by the first and second defendants is contended to be pursuant to a charge contained in a Construction Loan Agreement (‘the Loan Agreement’) made with the plaintiffs on 5 March 2021.  On 19 July 2022, the first and second defendants lodged a caveat upon the title of the  Sunshine West land. That land was later subdivided into 3 lots, being Lots 1, 2, and 3, and caveats in the same terms as the First Caveat are now recorded on the titles of those lots.  

  1. The first and second defendants, Hung Truong and Kim Ngo, who are husband and wife, were the lenders to the plaintiffs under the Loan Agreement. For ease of reference, I will refer to Mr Truong and Ms Ngo, as the defendants, because the third defendant, the Registrar of Titles, although making written suggestions about the appropriate form of orders, as is the custom, did not appear at the hearing. Mr Truong, or the company of which he is director and shareholder, HDT  Constructions Pty Ltd, was the builder of the three units under a HIA New Homes Contract (‘the Building Contract’). The defendants contend that they lent the plaintiffs $517,000 under the Loan Agreement, which together with interest is now owing to them.  They obtained the money which they loaned to the plaintiffs by mortgaging their own property. The plaintiffs dispute that they owe the defendants the amount that they claim.

  1. I will note here two matters which are in dispute. First, the amount that the defendants loaned or were authorised to loan to the plaintiffs for the construction of the three units is in dispute. The context of this disputed issue is that when advancing money under the Loan Agreement, the defendants did not pay the money to the plaintiffs directly, but transferred it to the builder as cl 2(c) of the Loan Agreement required. The plaintiffs dispute that some of those payments transferred to the builder should have been made. The second issue in dispute concerns the identity of the builder. The defendants’ case is that while the building contract was made with the first defendant as builder, it was amended to name HTD Constructions as the builder.  I note that the building permit was issued in the name of HTD Constructions and that it issued all the invoices for payments that are in dispute.  The Loan Agreement defines the Builder to be HTD Constructions.  However, it is unnecessary, in order to decide this caveat removal application, to decide whether the builder was the first plaintiff or HDT Constructions, and so my references in this judgment to the builder are not intended to decide that issue.

  1. On 10 March 2023, the plaintiffs as borrowers issued a Notice of Withdrawal under the Loan Agreement and requested the defendants not to advance any further money to the builder. 

  1. On 6 April 2023, the plaintiffs served a Default Notice under the Building Contract to which the defendants responded on 14 April 2023. On 2 May 2023, the plaintiffs served a Termination Notice on Mr Truong and HTD Constructions Pty Ltd because of a dispute about variations required to the windows of the units. The defendants contend that the builder could not continue with building works until this dispute was resolved. 

  1. On 23 June 2023, the defendants by their solicitors’ letter sought to terminate the Loan Agreement on the basis that the plaintiffs had repudiated it.

  1. On 19 July 2023, the plaintiffs commenced proceedings in the Victorian Civil and Administrative Tribunal alleging that the defendants had breached the Building Contract and claiming relief as a result of those alleged breaches. On 9 November 2023, the defendants commenced proceedings in the County Court against the plaintiffs claiming $569,000 as a debt due under the Loan Agreement or as damages.

  1. On 1 March 2024, the plaintiffs’ solicitors requested the defendants to remove the caveats on the land in Lots 1 and 2. On 4 March 2024, the defendants’ solicitors replied that caveats on the three lots would be withdrawn upon payment of the sum of $569,000 which they claim in the County Court proceeding.

Terms of the Construction Loan Agreement

  1. Clause 3  of the Loan Agreement, which is headed ‘Caveat’, states:

(a) The Borrower agrees this deed is intended to create an interest in the Land, and that a caveat (the First Caveat) may be lodged against the title to support the Lender’s interests for the Principal Sum and interest.

(b) Within three (3) business days following a written request by the Borrower, the Lender shall withdraw the First Caveat to allow the Borrower to register the relevant plan of subdivision in relation to the Land.

(c) Following subdivision of the Land, the Borrower agrees that this Deed is intended to create a caveatable interest on one of the Resultant Lots.

(d) After the subdivision, the Lender may lodge a caveat (the Second Caveat) against the title of one each of the Resultant Lots to support the Lender’s Interests for the Principal Sum and interest.

(e) The Lender acknowledges and agrees if the Borrower enters into a contract of sale for any or all of the Resultant Lots prior to the end of the Loan Term, the Lender will promptly sign any necessary documents for the withdrawal of the Second Caveat and for the settlement of the sale to occur.

(f) Upon withdrawal of the Second Caveat the Borrower acknowledges and agrees it shall either make payment towards the Principal Sum or, alternatively, allow the Lender to lodge a caveat on one of the remaining Resultant Lots.

  1. Clause 1 of the Loan Agreement defines the ‘First Caveat’ as the caveat described in cl 3(a) and defines the ‘Second Caveat’ as the caveat described in cl 3(d). Clause 1 defines ‘Resultant Lots’ as meaning the lots resulting from the subdivision of the Sunshine West land. Clause 4 deals with a failure to finish construction and enables the Borrower to issue a Notice of Withdrawal to the Lender. Clause 5 provides for repayment of the principal sum and interest which are required to occur within twelve months from the date on which the building permits are obtained or at the completion of the construction if it takes less than twelve months from the date of obtaining the building permits. But cl 5(b) provides that:

Regardless of anything else in this agreement, both parties understand and acknowledge, the Borrower is not obliged to repay the Principal Sum and interest until and unless the Construction Project reaches the Completion of Construction.

  1. The term ‘completion of construction’ is defined in cl 1 to mean the date the occupancy permits under the Building Act 1993 are issued and served upon the Borrower for all units of the Construction Project. Clause 12 provides for Notices of Default to be sent by the Lender to the Borrower and specifies events in which the Lender may give written notice of 14 days requiring the Borrower to repay the total amount advanced to the Builder by the Lender and any accrued interest. One of the specified events is the failure by the Borrower in the due and punctual payment of any money as payment falls due under the Deed (the Loan Agreement).

The plaintiffs’ submissions

  1. The plaintiffs’ case is that the Building Contract provided for a 365-day building period which commenced on or around 23 August 2021.  The plaintiffs stated that the builder had claimed three extensions of time under the Building Contract:  the first dated 21 November 2022 in relation to a disputed window variation, claiming an ongoing extension of time; the second dated 14 April 2023 in relation to delays with steel sought a six weeks extension; and the third also dated 14 April 2023, sought an extension of three months in relation to a delay in roof trusses.

  1. The plaintiffs’ case is that, although the Building Contract and the Loan Agreement had an expected term of 12 months, by 2023 construction was not complete and had not even reached the lock-up stage. However, the building works are now complete, having been performed by a subsequent builder appointed after termination of the plaintiffs’ Building Contract with the first defendant. The occupancy permits were issued by the building surveyor on 18 March 2024.

  1. The defendants have not advanced the balance of the funds under the Loan Agreement and the plaintiffs have had to obtain a private loan, totalling $804,240, from friends,  Mr and Ms Ilievski, who mortgaged their principal residence in order to obtain the loan funds. That private loan is repayable in June 2024 and is not secured over the Sunshine West land, and will not be required to be paid out of the proceeds of the sale of Lots 1 and 2. The first plaintiffs’ business partner, Mr Jose Bello, has agreed to help service the loan on an interest-free basis.

  1. The plaintiffs argued that cl 3 of the Loan Agreement does not give the defendants an interest in the land that satisfies the requirements of s 89(1) of the Transfer of Land Act 1958 so as to permit the lodging of caveats. The language of cl 3 of the Loan Agreement does not expressly charge any real property or create any estate or interest in land but rather refers to ‘support’ of the defendants’ interest. In any event, any interest the defendants may have arising from cl 3, does not continue beyond the circumstances the clause describes. The caveators claim an interest wider than any that they are entitled to protect by a caveat. Clause 3 provides a commercial mechanism that relates only to the defendants’ interest in obtaining repayment of the loan amounts.

  1. The plaintiffs contended that the defendants’ right to lodge the caveats was subject to an obligation that they would not prevent completion of the plaintiffs’ development or the sale of the Resultant Lots. Upon the settlement of the contracts of sale of Lots 1 and 2 and withdrawal of the caveats from their titles, the plaintiffs can either repay the defendants an amount towards the principal of the loan or permit a caveat to be lodged upon another Resultant Lot. Upon sale of the property, the plaintiffs were not obliged by the terms of the Loan Agreement to pay any money to the defendants.  Instead, the caveat could ‘hop’ to a Resultant Lot.  Clause 3(e) requires the defendants to now withdraw the caveats in respect of Lots 1 and 2 which are the subject of the contracts of sale. A caveat cannot be used as a bargaining chip. The defendants will continue to have the benefit of the caveat on the title of Lot 3. 

  1. The plaintiffs accepted that the Court could proceed on the basis that, as their sub-division was registered on 27 February 2024, the defendants could register caveats upon the three Resultant Lots thereby created, but subject to their obligations imposed by cl 3(e) to remove caveats over the land that was subject to the contracts of sale.

  1. The plaintiffs submitted that the balance of convenience favours the removal of the caveats from the titles of Lots 1 and 2.  Unless they are removed, the plaintiffs and the purchasers of Lots 1 and 2 will be prejudiced by being unable to complete their contracts of sale. The defendants can sue the plaintiffs for sums, if any, that they are owed. The plaintiffs will receive significant net proceeds from the sales of Lots 1 and 2, as the only amount required to be paid from them is the approximate amount of $385,198.18 to the ANZ Bank, which holds a mortgage over the three lots. The remaining proceeds of sale and the plaintiffs’ net equity in Lot 3 are far greater than the amount claimed by the defendants in the County Court proceeding. The plaintiffs have offsetting claims which they believe will be greater than the amount claimed by the defendants. The plaintiffs contended that the quantum of the defendants’ claim in the County Court proceeding is in dispute and in the plaintiffs’ defence they allege that both defendants have breached the Loan Agreement by making payments that the defendants claim have been transferred to the builder.

  1. The sale price of unit 1 was $505,000 and of unit 2 $720,000. The lower price for unit 1 was explained by the plaintiffs as being due to Victoria being in the midst of rolling lockdowns due to the COVID-19 pandemic at the time of the sales; the property market, particularly for off-the-plan sales, being very uncertain and the plaintiffs valuing certainty over profit maximisation. Unit 1 was sold to the son of Jose Bello, the first plaintiff’s business partner, who is now assisting the plaintiffs with servicing the alternative financing loan from the Ilievskis, and ‘so a substantial amount of goodwill was factored into the price’.  Unit 3 was briefly advertised for $780,000 but has been taken off the market until the issue of the caveat removal has been resolved.

The defendants’ submissions

  1. The defendants’ case is that the parties to the Loan Agreement intended to create an interest in the Sunshine West land to enable them to lodge the caveats and that they have the right to maintain them.

  1. The defendants contended that the Loan Agreement and the Building Contract for the construction of the three units were interdependent and therefore, upon termination of the Building Contract, or at least following the issue of the Certificates of Occupancy on 18 March 2024, the Loan Agreement came to an end. Thereupon, any monies paid to the plaintiffs by the defendants’ transfers to the builder were due and payable to them pursuant to cl 5(a) of the Loan Agreement. In the County Court proceeding, the defendants claim payments pursuant to the Loan Agreement in the sum of $569,000 and interest of $52,000.

  1. Clause 3(e) of the Loan Agreement was only intended to operate during the term of the loan, which has now expired. The defendants are entitled to repayment pursuant to cl 5(a) and (b) of the Loan Agreement of amounts transferred to the builder. The Loan Agreement does not require the defendants to await the sale of Lot 3 to be repaid.  The Loan Agreement does not provide for the caveat to be withdrawn absolutely in the absence of the loan monies being repaid. The plaintiffs’ construction of cl 3 of the Loan Agreement would mean that they could sell all three lots and oblige the defendants to agree to the removal of the caveats over them.

  1. The defendants contended that the delays in the construction of the units were caused by the plaintiffs who would not approve the window variation, as well as delays outside the builder’s control for which extension of time notices were served.

  1. The defendants stressed that the builder and the lenders were not the same persons and that whatever claims, if any, that the plaintiffs had under the Building Contract against the first defendant, Mr Truong, assuming he was the builder, were not claims that could be made against the second defendant, Ms Ngo, who is a lender under the Loan Agreement.

  1. The defendants submitted that the balance of convenience favoured the continuation of the caveats. There was no evidence establishing that the settlement of the sale of Lots 1 and 2 could not be delayed.  Even if the sales were lost, the Lots could be resold at a much higher price. The plaintiffs have left this application to the last minute thereby depriving the defendants of time to fully prepare their response to it. 

  1. The defendants will suffer significant prejudice if the caveats in respect of Lots 1 and 2 are removed.  In order to provide construction finance to the plaintiffs under the Loan Agreement, the defendants mortgaged their own property and are paying interest on the amount they borrowed.  The plaintiffs have disclosed debts totalling $1,189,438.18.  They have sold Lots 1 and 2 for a total of $1,225,000 and so will barely clear those debts from the proceeds of sale. The defendants are concerned that those sale proceeds will be distributed to other creditors, including the Ilievskis, who do not have a registered interest securing their loans and whose interests should not be prioritised over the defendants’ interest in recovering the amounts they loaned to the plaintiffs.  The net proceeds of Lot 3 would be approximately $677,000, although it has been taken off the market. Its sale price will be adversely affected because aspects of the unit’s construction contravene the planning permit conditions.  

  1. Furthermore, the plaintiffs’ application should be refused because they do not come to the Court with clean hands.  Their sale of Lot 1 was a sham sale at $505,000 to a person known to them, a transaction not at ‘arms-length’, which did not include any goodwill for providing alternative financing arrangements as the plaintiffs allege. In addition,  the plaintiffs waited until the last minute to make their application and serve the court papers containing the application. Also said to be relevant is the first defendant’s allegation that the first plaintiff told him in respect of another property, that he was planning ‘to undersell’ it ‘in order to avoid or reduce tax’.

Analysis

  1. The principles relating to the withdrawal of a caveat were set out by Warren CJ in Piroshenko v Grojsman.[1]These include that the Court’s power under s 90(3) of the Transfer of Land Act is discretionary and that the onus falls on the caveator to satisfy the two-stage test and that:[2]

This two-stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question, and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial.

[1](2010) 27 VR 489.

[2]Ibid 491 [7].

  1. I consider that the defendants have established that the Loan Agreement gives rise to a serious question to be tried, as to whether that Agreement, and in particular cl 3 (a) and (e), gave them an interest in the Sunshine West land for the purposes of s 89(1) of the Transfer of Land Act. Clause 3(a) makes clear that the Loan Agreement was intended to create an interest in that land and that a caveat could be lodged in respect of that land’s title to support the defendants’ interests in the principal sum and interest advanced to the plaintiffs under the Loan Agreement.

  1. Although cl 3(a) may not be a charging clause, it is arguable that it created an interest in land that satisfied s 89(1) of the Transfer of Land Act as the Court can fairly gather from the Loan Agreement that the parties intended that the Sunshine West land should constitute a security.[3]  The caveats lodged on the title to the Sunshine West land were based on that interest.  I do not accept that the plaintiffs are merely seeking the enforcement of contractual rights.

    [3]Dominion Lifestyle Tower Apartment Pty Ltd v Global Capital Corporation Pty Ltd [2004] VSC 307 [19] (Habersberger J) quoting Cradock v Scottish Provident Institution (1893) 69 LT 380 at 382 and Crampton v French [1995] V Conv R 54-529.

  1. However, that conclusion does not resolve the present application because the question remains whether the defendants have established that there is a serious question to be tried that they have the right to maintain the caveats on the titles of Lots 1 and 2 until the trial of the litigation with the plaintiffs or some other date.  That question is to be answered by the construction of the Loan Agreement. In cl 3(e) the Lender acknowledged and agreed that if the Borrower entered into a contract of sale for any or all of the ‘Resultant Lots’ prior to the end of the Loan Term, the Lender would promptly sign any necessary documents for the withdrawal of the Second Caveat, which term is to be read as including the caveats now registered on the titles of Lots 1 and 2, and for the settlement of the sale to occur.  Clause 3(e) therefore applies to the situation that now exists. The defendants submitted that clause 3(e) should be read as referring only to contracts for sale which were settled prior to the end of the Loan Term.  I do not accept that construction and it would require the rewriting of cl 3 (e).

  1. Because of the provisions in cl 3, and especially cl 3(e), of the Loan Agreement, I do not consider that the defendants have established that there is a serious question to be tried that they have an interest in the land in Lots 1 and 2 that permits them to maintain the caveats that affect those lots. Their interest ceased when the circumstances dealt with by cl 3(e) arose upon the plaintiffs entering into contracts to sell Lots 1 and 2 and wishing to settle those contracts.

  1. I note that the drafters of cl 3, by referring to First and Second Caveats, may not have anticipated the present situation in which the First Caveat was not withdrawn to permit the subdivision of the land and thereafter replaced by a Second Caveat or caveats, but rather upon the subdivision being approved, the ‘First Caveat’ was attached to the land in the three lots that resulted from it. However, no parties submitted that cl 3 did not continue to apply to the circumstances that now exist and the determination of the question of whether the defendants can maintain the caveats over the Lots 1 and 2 land.  In my opinion, the parties were correct not to make such a submission as it would not be the approach adopted by a reasonable business person[4] seeking to give effect to the commercial purpose[5] of the Loan Agreement, particularly when the defendants did not follow the procedure that cl 3 envisaged when the plaintiffs wished to subdivide the Sunshine West land.

    [4]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104,116 [48] (French CJ, Nettle and Gordon JJ).

    [5]Electricity Generators Corporation v Woodside Energy Ltd (2015) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan and Kiefel JJ).

  1. I do not consider that the defendants have established that the contract for the sale of Lot 1 was a sham or not genuine. The plaintiffs have provided an explanation for the lower price for Lot 1, an explanation which I see no basis to reject in this application, which has been argued on conflicting affidavits. The comments that the first defendant alleges that the first plaintiff made in respect of another property, even if ultimately proved, provide no basis for rejecting the plaintiffs’ explanation for the sale price of unit 1.  

  1. The defendants argued that the plaintiffs’ construction of cl 3 would mean that they could sell all three lots and oblige the defendants to sign any necessary documents for the withdrawal of the Second Caveats and for the settlement of the sales to occur.  However, cls 3(e) and (f) must be read together so as to ensure, as the plaintiffs accept, that the defendants be able to maintain a caveat on the title of one of the Resultant Lots. That is what cl 3(f) envisages as an alternative option available to the plaintiffs upon the withdrawal of the Second Caveats.  

  1. If I had concluded that the defendants had established a serious question to be tried to maintain the caveats on Lots 1 and 2, I would, in any event, have concluded that they had not established that the balance of convenience favoured their maintenance. 

  1. In reaching that conclusion I have taken into account that the second defendant, Ms Ngo, is a lender and not the builder and is not liable for any breaches of the Building Contract, which may be established in the VCAT proceedings commenced by the plaintiffs. Ms Ngo claims in the County Court proceeding amounts that she and Mr Truong have lent to the plaintiffs. But the quantum of any judgment that Ms Ngo and Mr Truong may obtain in the County Court proceeding is unclear and will have to be determined in that litigation. The current plaintiffs’ defence to the County Court proceeding includes that if payments were made to the builder, as the current defendants allege, the payments were made in contravention of the Domestic Building Contracts Act 1995 (Vic) (‘DBCA’), the Building Contract and the Loan Agreement. The current plaintiffs rely on s 40 of the DCBA which fixes the maximum percentage of the contract price, i.e. the progress payments, that the owner can be required to pay at various stages of the construction project. The plaintiffs allege that the frame stage and lock-up stage of the construction works were not complete. These issues will have to be determined in the County Court proceeding. Until they are determined uncertainty exists as to the amount that the current defendants will recover from the current plaintiffs in the County Court/VCAT proceeding.

  1. That consideration means that the defendants have not established the extent of the risk that their maintenance of the caveat on Lot 3 will be insufficient to protect their recovery of any judgment they may obtain against the plaintiffs.

  1. Even if contrary to the plaintiffs’ case, the amount due to the Ilievskis is repaid from the proceeds of sale of Lots 1 and 2, or the mortgage debt to the ANZ of $385,198.18 is sought to be paid from the sale of Lot 3, the plaintiffs would still appear to have a net equity in Lot 3, if it is sold, in excess of $300,000, on the basis of a value of  $780,000 that the plaintiffs give it. I have insufficient information to conclude that the defendants’ allegation of breach of the planning permit conditions in the construction of the unit on Lot 3 will have any significant effect on its sale price. The caveat over Lot 3, while it is maintained, will prevent the settlement of any sale of it.

  1. I am not persuaded that the defendants have suffered a disadvantage through the plaintiffs’ delay in making this application. The defendants did not seek an adjournment of the application in order to provide them with further time to prepare a response.

  1. While there is no evidence that the plaintiffs will lose the sale contracts for Lots 1 and 2 if settlement cannot soon occur, that situation may change if those caveats remain in place until the end of the County Court/VCAT proceedings which may be at least a year away.  In any event, the caveats on Lots 1 and 2 should not remain in place when the caveators have not established the justification for that to occur in accordance with the principles I have stated.

Conclusion

  1. For those reasons the first and second defendants have not established that the caveats on the titles of Lots 1 and 2 should remain and prevent the settlement of the sale of those lots.  I will make orders for the removal of those caveats.


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