Re Sam Industries Pty Ltd
[1998] QSC 158
•12 August 1998
IN THE SUPREME COURT
OF QUEENSLAND O.S. No. 17 of 1998
CAIRNS
[Re Sam Industries Pty Ltd]
IN THE MATTER of Order 64 Rule 1(I) or alternatively Order 64, Rule 1A of the Supreme Court Rules
and
IN THE MATTER of an Application by SAM INDUSTRIES PTY.LTD. ACN 010 252 061
REASONS FOR JUDGMENT
BEFORE THE HONOURABLE JUSTICE JONES
DELIVERED THE 12TH DAY OF AUGUST, 1998
The applicant Sam Industries Pty.Ltd., (“Sam Industries”) is the registered second mortgagee in respect of two parcels of land described respectively as follows:-
(I)Lot 3 on RP 892253, County of Nares, Parish of Cairns Title Reference 50091649 (“the Duane Close land”); and
(ii)Lot 1 on RP 892255, County of Nares, Parish of Cairns (“the Hook Close land”).
These two allotments were formerly owned by the applicant who, in separate contracts, sold them to Far Northern Holdings Pty.Ltd., for a price of $145,000.00 each. Far Northern Holdings Pty.Ltd., is a builder who on the security of the land proposed to raise funds to finance the construction of a house on each allotment. This company shall hereinafter be referred to as “the mortgagor”.
To effect the sale, Sam Industries provided vendor finance to the extent of half the sale price on each block. To secure the repayment of this advance Sam Industries took a second mortgage over each allotment behind a mortgage in favour of the respondent Mortgages North Pty.Ltd., (“Mortgages North”). The respondent is a financier, from whom the mortgagor had arranged to obtain money ostensibly to facilitate, by way of progressive payments, the construction of the dwelling houses. Sam Industries had agreed that Mortgages North would hold the first mortgage subject to its giving certain undertakings.
During the months of October and November, 1997 Mortgages North advanced monies to the mortgagor on the basis that the initial advance would be used in the purchase of the land and the later ones in payments for the construction work on buildings. In fact, the mortgagor carried out no construction work on the lands and it seems has used the monies advanced for other purposes. The mortgagor is in default of its loan arrangements with both Sam Industries and Mortgages North and has now been placed in liquidation. Mortgages North exercising its power of sale, has sold one parcel of land and is attempting also to sell the other. The proceeds of the completed sale and the intended sale will be insufficient to repay the advances made by the two mortgagees.
Two documents were prepared by Mortgages North to establish the terms and extent of the priority it enjoyed as first mortgagee in respect of each transaction. The documents are described as a letter of undertaking, dated 10 October, 1997 and the other is a letter of priority which is undated. The parties do not agree on what is the true construction of these documents and consequently therefore the extent of the priority enjoyed by Mortgages North. This application seeks declarations and orders based on the true construction of those documents.
The documents used in respect of the Duane Close land were, apart from dates and description, basically in identical terms with documents used in respect of the Hook Close land. For convenience I will simply refer to the documents relevant to the Duane Close transactions. My findings however related to each allotment and orders will be made accordingly.
Before looking at either document it is important to note as part of the factual background that the contract for sale of land by the applicant to the mortgagor, dated 14 October, 1997 contains the following special term:-
“Payment of Purchase Price
(a)The Buyer must pay to the seller the purchase price...in the following manner...
(I)the sum of seventy two thousand five hundred dollars less the deposit (if any) on the Settlement Date in exchange for the matters referred to in Standard Condition 5.3;
(ii)...
(b)Payment of the Outstanding Balance will be secured by the buyer granting to the seller a second mortgage over the land (“the seller’s mortgage”) provided that the first mortgage in favour of the Financier will secure no more than the sum of 70% (seventy percent) of the total build cost in principal. The seller’s mortgage will be prepared by the solicitors for the buyer at the cost of the buyer and the buyer will be responsible for stamp duty and registration fees on the seller’s mortgage.”
Mortgages North though not a party to the contract would have been aware of that contractual background when preparing the documents now to be construed.
The terms of the undertaking given by Mortgages North to Sam Industries prior to its execution of the contract was in the following terms:-
“Mortgages North undertakes that it will not advance any monies on the security of the vendor’s mortgage which is to rank or intended to rank in priority to the Sam Industries Pty.Ltd. other than on the basis of a cost to complete the construction of the building.”
The letter of priority addressed to Sam Industries by Mortgages North contains the following relevant terms:-
“As first mortgagee of the above property we hereby consent to the registration of a second mortgage in your favour to secure $72,500.00.
We confirm as follows:-
1.This priority binds our successors and ..........
2.If applicable the relevant Certificate of Title will be made available...
3.We, as first mortgagee, will have priority for $220,500 plus interest, costs, fees, charges, duties and expense (including legal expenses) which may be debited to the mortgagor under the terms of the first mortgagees mortgage.”
It is not known when this letter of priority was in fact delivered to Sam Industries. An unsigned copy of the letter of priority was sent to the builder under cover of a letter dated 20 October, 1997. It is accepted that the undated letter of priority was executed after the undertaking and that both documents were delivered prior to the settlement of the sale.
The date of settlement of the contract of the sale of land was 29 October, 1997. Of the $100,000.00 then advanced by Mortgages North, $94,319.50 was used in connection with the purchase of the land.
It is argued on behalf of Mortgages North that there is an inconsistency between the terms of the undertaking and the letter of priority and uncertainty in the undertaking’s terms. On its behalf it is argued that the letter of priority reflects the agreement between the mortgagees and that therefore the first mortgagee has priority for $220,500.00 free of any qualification. Alternatively the priority is determined by the order in which the mortgages were registered.
For Sam Industries it is argued that the insertion of the amount - $220,500.00 - is simply stating the maximum amount of the intended priority but at all times of priority for that amount, or any part of it, was subject to the undertakings given previously, viz. priority applied only to monies used as a “cost to complete the construction of the building”.
The right of mortgagees to alter the priorities of the mortgages by agreement between themselves is undoubted. The statutory provision fixing priority according to order of registration has been held to be a “machinery” provision. See Australia & New Zealand Banking Group Ltd. -v- Evans (1992) 2 Qd R 230 and the cases there cited. It is clear that the mortgagees in this instance intended to alter the priority which would have followed the unconditional registration of the respective mortgage documents.
The amount of $220,500.00 (plus costs etc.) was the total amount to be secured by the first mortgage but this amount was never intended to be provided as a lump sum. The purpose of the loan was to provide construction funds. The loan agreement between Mortgages North and the mortgagor provides the basis upon which construction funds were to be advanced. This was, that funds would be advanced only upon the Mortgages North being in receipt of a satisfactory report from its quantity surveyor as the following stages of the construction were completed, namely -
(i)Slab
(ii)Frame
(iii) Roof
(iv) Completion
The actual advances paid to the builder as set out in the affidavit of Pamela Dickenson (para 11) are as follows:-
29 October, 1997 $100,000.00
30 October, 1997 $ 35,000.00
19 November, 1997 $ 20,000.00
19 December, 1997 $ 5,500.00
The intention of the parties is to be determined by the reading of the two documents against the contractual background referred to above. I reject the suggestion that the letter of priority being later in time was the only basis for an agreement restructuring the priorities. For that to be the case there would be no need for any document at all because the priorities would then be determined in accordance with statutory provisions.
The reading together of these documents is not made easy by reason of the different styles of expression. The undertaking does not use direct terms to express an alteration to the mortgage priority. Rather it uses negative terms to exclude advances from the priority except those which have a particular characteristic - “a cost to complete the construction of the building”. The undertaking does not preclude Mortgages North from making an advance in whatever amounts or for whatever purpose it wishes, but it simply describes the type of advance in respect of which it is entitled to claim a priority against Sam Industries.
For Sam Industries the only protection it had for maintaining any value in its security was the adherence by Mortgages North to its undertaking. The rationale for making such an alteration to priority was clearly to see both mortgagees protected. For Sam Industries this could only be done if the intended advances by Mortgages North also added value to the land. Yet within two days of the settlement of the sale of the land, Mortgages North had advanced a total of $135,000.00 without, one expects, there being any significant change in the value of the land.
The reference to the amount of $220,500.00 plus the extras, I accept as simply providing the upper limit on the priority. That was the figure contemplated to be no more than 70% of the total cost of land and building and was significantly higher than the advances intended to be made under the loan agreement.
However, by reading the two documents together the result is to my mind clear. For Mortgages North to claim against Sam Industries priority for $220,500.00, or any part of it, the amount claimed must have the characteristic required by the undertaking, namely an advance made on the basis of “a cost to complete the construction of the building”. Giving those words their ordinary meaning, an advance to assist in the purchase of land would not to my mind fit this description. These words in this context mean the actual cost of construction, as only this is likely to add value to the land. It would not include an advance made for the purpose of construction which did not actually become “a cost to complete the construction”. Such an interpretation accords with commercial reality.
As it has been conceded that no part of any advance was applied to the cost of construction of a building it seems to me that Mortgages North cannot, consistent with adherence to its undertaking, claim any priority.
This being a construction summons in relation to documents affecting the rights of the parties before me it is not open for me to consider whether any particular advances made by Mortgages North were justified in the sense that such advances were made on the basis of engineering certificates which subsequently turned out to be false. My task, as I see it, is simply to decide whether the advances had the character of the advances contemplated in the undertaking.
In all the circumstances I determine that none of the advances made by Mortgages North in respect of either allotment is of the kind which the undertaking protects. I therefore grant the following relief:-
(i)I declare that the interest of Sam Industries Pty.Ltd. As Mortgagee under Mortgage No. 702332867 registered in respect of Lot 3 on RP 892253, County of Nares, Parish of Cairns ranks in priority to the interest thereon of Mortgages North Pty.Ltd as Mortgagee No.702306078;
(ii)I declare that the interest of Sam Industries Pty Ltd as Mortgagee under Mortgage No. 702332870 registered in respect to Lot 1 on RP 892255 ranks in priority to the interest thereon of Mortgages North Pty Ltd as Mortgagee No. 702306059;
(iii)I order that the proceeds of any sale in respect of each of Lot 3 on RP892253 and Lot 1 on RP892255 both in County of Nares Parish of Cairns be paid into Court to the extent of the sum of $72,500.00 for each sale.
(iv)I further order that the respondent pay the applicant’s costs of and incidental to the application to be taxed.
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JONES J.
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