MSW Property P/L v Law Mortgages P/L
[2002] QSC 218
•7 August 2002
SUPREME COURT OF QUEENSLAND
CITATION:
MSW Property P/L v Law Mortgages P/L [2002] QSC 218
PARTIES:
MSW PROPERTY PTY LTD (ACN 063 814 479)
(plaintiff)v
LAW MORTGAGES QUEENSLAND PTY LTD (ACN 010 858 107)
(defendant)FILE NO:
S 892 of 2001
DIVISION:
Trial Division
PROCEEDING:
Trial
DELIVERED ON:
7 August 2002
DELIVERED AT:
Brisbane
HEARING DATES:
8, 9 April 2002
JUDGE:
Wilson J
ORDER:
Parties to submit a draft order
CATCHWORDS:
MORTGAGES – MORTGAGES AND CHARGES GENERALLY – RIGHTS AND LIABILITIES OF MORTGAGOR AND MORTGAGEE - where mortgage granted by the plaintiff to the defendant – true construction of that mortgage – whether mortgage secures moneys owing under a certain loan agreement and the rate at which the defendant is entitled to debit interest to the moneys secured by that mortgage – where plaintiff is trustee of unit trust – where defendant was a solicitors’ mortgage company – whether defendant has right to cross-collateralise the securities.
MORTGAGES – MORTGAGES AND CHARGES GENERALLY – REMEDIES OF THE MORTGAGEE - where defendant claims certain default interest and default management fees under terms of loan agreement – whether there was an event of default under that agreement.
Geelong Building Society v Encel (1996) 1 VR 594, referred to.
Fountain v Bank of America National Trust & Savings Association (1992) 5 BPR 11,817, applied.
COUNSEL:
B J Clarke for the plaintiff
M R Bland for the defendantSOLICITORS:
Plastiras Meredith Mohr for the plaintiff
Quinn & Box for the defendant
[1] WILSON J: This proceeding is concerned with the true construction of a mortgage granted by the plaintiff to the defendant, in particular whether it secures moneys owing under a certain loan agreement and the rate at which the defendant is entitled to debit interest to the moneys secured by that mortgage.
[2] The plaintiff, as trustee of the Windermere Terrace Unit Trust, acquired land at Jindalee on which townhouses were subsequently constructed ("the Windermere Terrace land").
[3] The defendant was a solicitors' mortgage company - ie it was the vehicle through which solicitors invested their clients' moneys against the security of registered mortgages over land.
[4] Wickham Developments Limited ("Wickham Developments") was a property developer.
(a)It undertook the development of the Windermere Terrace land pursuant to a Development Agreement with the plaintiff dated 20 November 1997.
(b)It acquired land in Brookfield Road, Kenmore ("the Kenmore land").
[5] In order to carry out the development of the Windermere Terrace land, Wickham Developments obtained finance from the defendant pursuant to a Loan Agreement dated 3 March 1998 ("the Windermere Terrace Loan Agreement"). The plaintiff gave the defendant a mortgage over the Windermere Terrace land in order to secure repayment of the moneys borrowed by Wickham Developments (registered mortgage no 702565285). Those moneys were also secured by a mortgage debenture which the defendant took over the plaintiff's assets and a guarantee and indemnity given by RBL Wickham and the plaintiff in its own right and as trustee of the Windermere Terrace Unit Trust ("the Deed of Guarantee and Indemnity").
[6] In order to fund the development of the Kenmore land, Wickham Developments entered into a loan agreement with the defendant dated 17 December 1997 ("the Kenmore Loan Agreement"). Repayment of moneys advanced was secured (inter alia) by a mortgage over the Kenmore land which Wickham Developments gave the defendant (registered mortgage no 702464260).
[7] The Windermere Terrace land was to be developed in stages, with moneys being advanced in tranches. In fact the first two of three intended stages were effected.
[8] On the Kenmore land project, $700,000-00 was advanced towards acquisition costs, but the development did not proceed.
Issues
[9] The principal issue in this proceeding is the defendant's alleged right to cross-collateralise the securities - ie whether moneys owing under the Kenmore Loan Agreement are secured by the mortgage over the Windermere Terrace land.
The second issue is that of the defendants' claim to certain default interest and default management fees under the terms of the Windermere Terrace Loan Agreement. This turns on whether there was an Event of Default under that agreement, viz a failure to comply with a notice to bring the account within the agreed Facility to Security Ratio of 60%.
Cross-collateralisation
Under the deed constituting the Windermere Terrace Unit Trust, MSW Property Pty Ltd as trustee had power to encumber the Windermere Terrace land with the repayment of moneys owing by Wickham Developments under the Kenmore Loan Agreement: see trust deed clause 12.1. The issue is whether it did so.
The debt or liability secured by the mortgage over the Windermere Terrace land was described as –
"The Money Secured referred to in Document No 701964259 lent or advanced or to be lent and advanced to the Mortgagor* or Borrower."
* MSW Property Pty Ltd (ACN 063 814 479) as Trustee under Instrument No 702360250 [the plaintiff]
The charging clause was in the following terms –
“The Mortgagor hereby covenants with the Mortgagee in terms of Document No 701964259 filed in the Land Registry and charges the estate or interest in the land with the repayment/payment to the Mortgagee of all sums of money referred to in item 5**.”
** the description of the debt or liability secured
The following appeared in the attached schedule -
“1. The Mortgagor acknowledges:
(f) that the Loan Agreement made on or about the date of this mortgage between WICKHAM DEVELOPMENTS LIMITED (ARBN 010 915 027) as Borrower and the Mortgagee and the Deed of Guarantee and Indemnity made on or about the date of the mortgage between the Mortgagor and Robert Bryan Latham Wickham as Guarantor in favour of the Mortgagee are Transaction Documents; and
(g) that this mortgage is collateral to and secures the same moneys and obligations as are secured by the abovementioned Loan Agreement and Deed of Guarantee and Indemnity".
Both because of the express terms of clauses 1 (f) and (g) of the schedule to the mortgage and in accordance with general principle, all of the instruments made more or less contemporaneously in relation to the Windermere Terrace land should be read together. (See Geelong Building Society v Encel [1996] 1 VR 594.)
Document No 701964259 consisted of a large set of fairly standard provisions incorporated into the mortgage. Under clause 1.1 -
“’Money Secured’ means the Financial Indebtedness of the Mortgagor and/or Borrower to the Mortgagee and includes all moneys and damages:
(a) which now or in the future are owing (actually or contingently), by the Mortgagor and/or the Borrower to the Mortgagee;
(b) which having become owing (actually or contingently), cease to be owing under any law relating to bankruptcy and remain unpaid by the Mortgagor and/or Borrower and unreleased by the Mortgagee;
(c) that now or in the future there is a prospect may become owing (whether actually or contingently) by the Mortgagor and/or the Borrower to the Mortgagee.
for any reason and, without limitation, includes moneys and damages payable:
(d) by the Mortgagor and/or the Borrower alone or jointly or severally with any other person;
(e) if there is more than one Mortgagor and/or Borrower, by all or any of them;
(f) by the Mortgagor and/or the Borrower the [sic] in its own right or in any capacity;
(g) to the Mortgagee in its own right or in any capacity;
..................................”
"Borrower" was defined as a person described as such in a Transaction Document, and –
"'Transaction Documents' means:
(a) this document;
......................
(e) any agreement or instrument agreed by the Mortgagor and the Mortgagee to be a Transaction Document;
....................”
The defendant's primary argument was that –
(a)the mortgage charged the Windermere Terrace land with the payment to the defendant of the Money Secured referred to in Document No 701964259;
(b)Document No 701964259 defined "Money Secured" to include any indebtedness or other liability of the Borrower to the defendant relating to any financial accommodation to the Borrower;
(c)that document also defined "Borrower" to mean the person described as such in a Transaction Document. By the schedule to the mortgage, the plaintiff acknowledged that the Windermere Terrace Loan Agreement was a Transaction Document. In item 2 of that Loan Agreement Wickham Developments was identified as the Borrower;
(d)it follows that the mortgage was unambiguous in charging the Windermere Terrace land with any indebtedness or other liability of Wickham Developments to the defendant relating to any financial accommodation granted to Wickham Developments. That description included the Kenmore Loan.
Further –
(e)the definition of "Money Secured" in Document No 701964259 would include any indebtedness or other liability of the Mortgagor (the plaintiff) to the defendant under a guarantee given by the Mortgagor;
(f)by the Deed of Guarantee and Indemnity the plaintiff guaranteed to the defendant the payment by Wickham Developments of the "Money Secured";
(g) under the Deed of Guarantee and Indemnity the "Money Secured" was defined as all money now or hereafter owing or payable to the defendant by Wickham Developments;
(h)it followed that, by virtue of the Deed of Guarantee and Indemnity, the mortgage charged the Windermere Terrace land with all money then or thereafter owing or payable to the defendant by Wickham Developments. That description included the moneys owing under the Kenmore Loan Agreement.
The plaintiff's argument was that -
(a)the words "lent or to be advanced to the Mortgagor or the Borrower" in item 5 of the mortgage were ambiguous;
(b)the ambiguity could be resolved by resort to clause 1(g) in the schedule to the mortgage;
(c)by clause 1(g) the mortgage secured the same moneys as were secured by the Windermere Terrace Loan Agreement and the guarantee - and only moneys secured by those two instruments;
(d)moneys owing pursuant to the Kenmore Loan Agreement were not secured by the Windermere Terrace Loan Agreement. The wide definition of "Money Secured" in the Windermere Terrace Loan Agreement should be read in context with clause 3.1 (the repayment covenant) and clause 4.4 (the facility to security ratio) of that agreement;
(e)clause 3.1 of the Windermere Loan Agreement provided for repayment of the total amount of the Money Secured "on the date stipulated in item 5 [of the Windermere Terrace Loan Agreement] or such other date as agreed in writing", and the moneys repayable on the date specified in item 5 (18 months from the first advance) or any date agreed in substitution for it were clearly the moneys advanced under the Windermere Terrace Loan Agreement;
(f)In clause 4.4 of the Windermere Terrace Loan Agreement the expression "Money Secured" could not have the extended meaning contained in the definition, because if it did, there would have been default from the very inception of the loan;
(g)the guarantee did not secure the Kenmore debt. By clause 2.3 of the guarantee, the Guarantor guaranteed performance by the Borrower of all covenants, etc "of the Security, including without limitation, the payment of the Money Secured by the Borrower at the time or times and in the manner provided for in the Security Agreement and/or the Security". Although "Money Secured" was widely defined, its meaning was restricted by the reference to the "Security" which, it was submitted, meant prospective, as well as contemporaneous, documents, but not past documents such as those securing the Kenmore debt;
(h)therefore, the mortgage did not secure the Kenmore debt.
The terms of the various security documents, if read literally, were very wide. However, as Gleeson CJ pointed out in Fountain v Bank of America National Trust & Savings Association (1992) 5 BPR 11,817 at 11,819-820, provisions defining a party's liabilities in wide terms "must be confined in their operation by reference to the context in which they appear and by reference to the commercial purpose which they were intended to serve."
The commercial purpose of the Windermere Terrace Loan Agreement was clearly the funding of the Windermere Terrace development project. Clause 26 of the Windermere Terrace Loan Agreement contained detailed provisions applicable if the loan or part of it were to be applied for construction purposes. Then by clause 28 certain special covenants set out in item 13 of the schedule to the agreement were incorporated. They were further very detailed provisions about advances in the context of construction works. Even the Facility to Security Ratio (item 12 in the schedule) referred to the value of the Security as at the Construction Completion Date.
The liability of the plaintiff as guarantor was expressly limited to the realisable value of the Windermere Terrace land and improvements and the realisable value of all other assets and property listed as being Secured Property under the Deed of Charge. Under the Deed of Charge the Secured Property was all related to the development of the Windermere Terrace land. This suggests that the commercial purpose of the guarantee, too, was the funding of the Windermere Terrace project. For this reason and for the reason advanced by the plaintiff, I am persuaded that the liability of the plaintiff under the guarantee did not extend to satisfaction of the Borrower (Wickham Developments)’s obligations under the Kenmore Loan Agreement.
Having regard to the provisions of clauses 1(f) and (g) of the mortgage and the context of its execution as one of a number of associated agreements, I am satisfied that the commercial purpose of the mortgage was the funding of the Windermere Terrace project. The potentially wide liability of the plaintiff was restricted by clauses 1 (f) and (g) to the moneys and obligations secured by the Windermere Terrace Loan Agreement and the Deed of Guarantee and Indemnity. Neither of them secured the Kenmore debt.
It is unnecessary to consider the plaintiff’s alternative claim for rectification of the mortgage and associated securities, or its contention that retention of the Kenmore debt under the Windermere Terrace mortgage would be unconscionable.
Facility to Security Ratio
Pursuant to clause 3.2 of the Windermere Terrace Loan Agreement interest was payable at the Higher Rate of 14% per annum, but the defendant would accept the Lower Rate of 10% per annum if there were prompt payment and compliance with all the covenants, etc in the agreement.
Clause 4.4 of that agreement provided -
“(a)If at any time the Lender determines that the ratio between the Money Secured and the value of the Security exceeds the Facility to Security Ratio then the Lender may by notice in writing to the Borrower require the Borrower within seven days of the date of service of such notice either (at the option of the Lender):
(i) to reduce the Money Secured by paying to the Lender such amount as would reduce the ratio between the Money Secured and the value of the Security to the Facility to Security Ratio; or
(ii) to provide further or additional security......
............................
(c)..................... In the event the Borrower does not fully comply with the terms of any such notice then:
(i) the Borrower shall have committed an Event of Default under this Agreement; and
(ii) the Lender shall be entitled to exercise the discretions, powers, rights and remedies conferred on the Lender by this Agreement and/or Security."
The defendant claimed to have sent a fax in the following terms to Tony Mifsud, the Queensland manager of Wickham Developments, on 31 August 1999.
“Dear Tony
Thanks for your facsimile today.
Please now find enclosed the Valuation revisions provided by REA as at 30 June, 1999.
At present the LVR exceeds 70% and we will require the loan to value ratio to be brought back into line without delay. Notwithstanding that the Loan agreement dated 3 March 1998 provides for a loan to value ratio of no more than 60% to be maintained during the term of the facility we are prepared until further notice to agree for the loan to value ratio under this facility be reduced to and maintained at 66.66%.
Please advise how and when you will provide additional funds to achieve this result.
Obviously with this situation we are in no position to advance further funds at this point.
We look forward to hearing from you."
It was signed by Shelley Chalmers, a para legal in the defendant’s employ. It was expressed to be "Page 1 of 4", and I am satisfied that the other three pages were a valuation from REA Australia dated 30 August 1999. It bore a stamped mark “FAXED”.
Two questions arose in relation to this fax –
(i) whether it was in fact sent; and
(ii) if it was, whether it was effective as a notice under clause 4.4.
Mr Mifsud had no recollection of receiving it. He said that had he received it, he would have passed it on to Wickham Developments' solicitors and to the company’s Auckland office. He was not aware of any record of his having done so. Ms Chalmers said she typed the original message. She had no assistant in the office, and it was her invariable practice to type a message, send it through the fax machine herself and stamp it with the “FAXED” stamp. No facsimile transmission report was in evidence, but Ms Chalmers could not remember whether at the time the fax machine printed out such reports.
Both Mr Mifsud and Ms Chalmers gave credible evidence. There is no reason to think that she departed from her invariable practice on that occasion. Wickham Developments was not a party to the proceeding, and it was not suggested that either party had had access to its records in Queensland or New Zealand. I accept that Mr Mifsud had no recollection of receiving the fax, but it does not follow that he or someone else in the employ of Wickham Developments did not receive it. On the balance of probabilities I am satisfied that the fax was sent and that it was received by Wickham Developments.
Even if it could otherwise be regarded as a demand that the moneys owing be brought into line with the Facility to Security Ratio, the fax did not satisfy the requirements of clause 4.4 of the Windermere Terrace Loan Agreement because it failed to require that it be done within seven days of service of the notice. Accordingly there was no Event of Default as alleged by the defendant, and the defendant is not entitled to debit to the amount of the moneys secured by the Windermere Terrace mortgage interest at the Higher Rate or default fees on account thereof.
Thus it is unnecessary to deal with the alternative arguments that the defendant is estopped from relying on non-compliance with fax as an Event of Default or that it waived the requirement or the breach arising out of non-compliance.
I consider that the plaintiff is entitled to declarations in terms of paragraphs A and B of the claim filed on 25 January 2001 and to costs. I shall ask counsel to submit a draft order.
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