National Australia Bank Limited v Nguyen No. Scciv-03-891

NATIONAL AUSTRALIA BANK LIMITED v NGUYEN
[2003] SASC 335

JUDGE BURLEY. The plaintiff seeks an order for possession of a residential property owned by the defendant which is the subject of a mortgage given by the defendant to the plaintiff to secure a loan. The plaintiff asserts, and it is not in dispute, that the defendant is in default in respect of mortgage payments. Various notices have been given by the plaintiff to the defendant requiring him to remedy the default but this has not occurred.
The mortgage in question is one to which the provisions of Section 55A of the Law of Property Act 1936 apply. Section 55A(1) provides that a right to enter into possession of mortgaged land (as is the case here) shall not be enforceable unless the mortgagee (the plaintiff) has served on the mortgagor (the defendant) a notice in writing setting out the breach and requiring it to be remedied within one month after service of the notice.
Section 55A(2) provides that where there is an acceleration clause in the mortgage, that provision is inoperative unless a notice in compliance with sub-section (1) has been served on the mortgagor.
When the plaintiff’s application was first listed for hearing I indicated to the plaintiff’s solicitor that I would need to hear submissions on the question of whether or not Section 55A of the Law of Property Act had been complied with by the plaintiff. The matter was therefore adjourned to 12 September 2003. On that occasion the plaintiff was represented by Ms Tovey and the defendant appeared in person. At the conclusion of Ms Tovey’s submissions the defendant indicated that he did not wish to put any submissions on the point.
It is apparent from the affidavit supporting the plaintiff’s application that the plaintiff served two notices of default upon the defendant. The first is Exhibit BJB5. It asserts that the defendant had failed to make three loan repayments due respectively in October, November and December of 2002 totalling $1,500.00. It was asserted that the defendant was in default under a credit contract, a copy of which is Exhibit P1. Paragraphs 10 and 11 of the credit contract provide respectively for events of default and acceleration of payment. The effect of the two clauses is that where there is a failure by the defendant to make instalment payments as required, the Bank shall immediately have the right to serve a demand upon the defendant requiring payment of the whole of the balance of the loan then due.
It is clear that the first notice of default to the defendant was not sent pursuant to the terms of the mortgage but rather pursuant to the terms of the credit contract. Paragraph 3 of the notice warned the defendant that if he did not pay the instalments totalling $1,500.00 within seven days, the acceleration clause in the credit contract would have the effect of requiring him to repay the whole of the unpaid balance immediately.
At the time of service of Exhibit BJB5 upon the defendant, he was also in default under the mortgage, but only to the extent that he had failed to make three loan repayments totalling $1,500.00. He was not at that stage liable to pay the whole of the amount due because the plaintiff had not invoked the acceleration clause under either the credit contract or the mortgage. On the contrary, it stated its intention to invoke the acceleration clause if the instalments totalling $1,500.00 were not paid within seven days from the date of the notice which is Exhibit BJB5.
I turn now to the memorandum of mortgage which secured the repayment of the loan the subject of the credit contract previously mentioned. A copy of the mortgage is Exhibit BJB3.
Clause 19(b) of the mortgage is as follows:
“19You are in default if:
(b) you do something you agree not to do, or you do not do something you agree to do, under this mortgage or an agreement covered by this mortgage;”
The phrase “an agreement covered by this mortgage” is defined in Clause 31 of the mortgage as follows:
“31agreement covered by this mortgage means:
(a) an agreement between one or more of you and the Bank which all of you acknowledge in writing to be covered by this mortgage; and
(b) each agreement which varies such an agreement.”
It is common ground that the credit contract previously referred to comes within this definition.
Because of the link between the credit contract and the mortgage, a default in respect of the credit contract is also a default in respect of the terms of the mortgage.
The next notice to be given by the plaintiff is Exhibit BJB6. That is a notice which purports to have been given pursuant to Section 55A of the Law of Property Act. It alleges default in respect of the credit contract and the mortgage and requires payment to be made within 31 days of the balance due under the loan together with legal costs. The notice is dated 14 March 2003.
It is clear that the Bank, in serving this notice, has required the defendant to pay the whole of the balance due as opposed to the original instalments amounting to $1,500.00. The question which has arisen is whether or not the notice, Exhibit BJB6, complies with Section 55A of the Law of Property Act.
Given that the defendant was unrepresented, I put to Ms Tovey that Section 55A was not complied with by the plaintiff because it purported to accelerate the payments contrary to the provisions of Section 55A(2) of the Act. She responded by correctly pointing out that Section 55A(2) only applies to a provision in the mortgage (as opposed to the credit contract) providing for acceleration of payments in the event of default. She argued that by the time the plaintiff came to give a Section 55A notice, the defendant was in breach of the credit contract in failing to pay within the required time the three instalments amounting to $1,500.00. That, she argued, entitled the plaintiff to invoke the acceleration clause in the credit contract so that once the defendant had failed to comply with the first notice (Exhibit BJB5) the whole of the amount due under the credit contract became payable. It was therefore lawful for the plaintiff to serve a notice in compliance with Section 55A of the Law of Property Act demanding payment of the whole of the balance due under the mortgage within one month.
In my view, the plaintiff’s argument cannot succeed. I have mentioned earlier in these reasons that any breach of the credit contract is also a breach of the mortgage. Thus, the failure to pay instalments under the credit contract is a breach of both the credit contract and the mortgage. The plaintiff, in proceeding under the mortgage in order to gain possession of the mortgaged property, has ignored the initial breach of the mortgage, namely the failure to pay three instalments. It is not open to the plaintiff to avoid the provisions of Section 55A by ignoring a prior breach of the provisions of the mortgage.
There is at least a two-fold purpose to Section 55A: first, to ensure that anyone in breach of a mortgage has at least one month within which to remedy that breach; and, secondly, it renders inoperative an acceleration clause until notice pursuant to Section 55A(1) has been served and has not been complied with within the required period. To ignore the earlier breach of failure to pay instalments is to be likened to a waiver of such a breach, and if the breach is waived, it cannot give rise to an acceleration of repayment. If there has been no effective acceleration of payment, the second notice, which requires payment of the whole of the debt, is not in compliance with Section 55A of the Law of Property Act and consequently the plaintiff is not entitled to an order for possession. Another way of putting this is that the plaintiff has not complied with Section 55A because it has never given the defendant the opportunity to pay the arrears (three instalments amounting to $1,500.00) within one month.
For the above reasons, the plaintiff’s action is dismissed. There will no order for costs in favour of the plaintiff. Consequently, I direct that the plaintiff is not entitled to treat the costs of this action incurred by it as part of the mortgage debt.

[2003] SASC 335

3 October 2003