Schulz v Turner

[2008] NSWSC 24

CITATION:	Schulz v Turner [2008] NSWSC 24
HEARING DATE(S):	5 - 6 November 2007
JUDGMENT DATE :	31 January 2008
JUDGMENT OF:	Nicholas J
DECISION:	pars 97, 98
CATCHWORDS:	EQUITY – equitable mortgage – joint venture agreement for purchase, rezoning and development of rural property – whether lender entitled to an equitable mortgage over the property – whether mortgage created by agreement and/or deposit of certificate of title with lender – principles considered – whether one party agreed to transfer its interest in the property to the other if rezoning unsuccessful – whether claim to beneficial interest in the property established – construction of joint venture agreement
LEGISLATION CITED:	Environmental Planning and Assessment Act 1979 s 65
CATEGORY:	Principal judgment
CASES CITED:	Bank of New South Wales v O’Connor (1889) 14 App Cas 273 Cradock v Scottish Provident Institution (1893) 69 LT 380 Codelfa Construction Pty Ltd v State Rail Authority of NSW; [1982] HCA 24; (1982) 149 CLR 337 Dong v Monkiro Pty Ltd [2005] NSWSC 749 Project Blue Sky Inc. & Ors v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, p 589 Penny Nominees Pty Ltd v Fountain (No. 2) (Supreme Court of New South Wales, Young J, 12 February 1990, unreported) Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 Taylor v Dexta Corporation Limited & Ors [2006] NSWCA 310; (2006) 14 ANZ Ins Cas 61-712 Theodore v Mistford Pty Ltd [2005] HCA 45; (2005) 221 CLR 612 UTC Ltd v NZI Securities Australia Ltd (1991) 4 WAR 349 Westpac Banking Corporation v Cronin (1990) 6 BPR 13,105 Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522
PARTIES:	Karin Schulz – plaintiff Noel Robert Turner – first defendant/cross claimant Brett David Kirkby – second defendant/second cross defendant Allan Hartigan – third defendant/third cross defendant Upper Hunter Developers Pty Ltd – fourth defendant/first cross defendant
FILE NUMBER(S):	SC 6088/06
COUNSEL:	J C Sheller – plaintiff J M White first defendant/cross-claimant Submitting appearance – third defendant/third cross defendant S Galitsky – second defendant/second cross defendant, fourth defendant/first cross defendant
SOLICITORS:	Anthony Murrell - plaintiff Michael Michell & Associates – first defendant/cross claimant Taylor & Scott – third defendant/third cross defendant Osbornes Lawyers – second defendant/second cross defendant, fourth defendant/first cross defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

31 January 2008

6088/06 Schulz v Turner

JUDGMENT

1 His Honour: The first defendant (Mr Turner) and the fourth defendant (the company) are the registered proprietors of the property at Lot 30 Denman Road, Muswellbrook (the property) as tenants in common in equal shares. The second defendant (Mr Kirkby) is the sole director and shareholder of the company. The third defendant (Mr Hartigan) is a former director and shareholder of the company.

2 On 3 November 2004 the plaintiff (Miss Schulz) provided the sum of $450,000 to Mr Turner and the company to finance the payment of the purchase price of the property and related expenses. She claims the defendants agreed to grant her a first mortgage over the property to secure the loan, but have not done so.

3 Miss Schulz claims that she has an equitable mortgage over the property, and seeks orders that Mr Kirkby and the company execute a memorandum of mortgage to give effect to the agreement. Mr Turner and Mr Hartigan do not defend the claims, and submit to the making of all orders sought. Mr Hartigan did not participate in the proceedings.

4 By his further amended cross-claim, Mr Turner claims various forms of relief against the company and Mr Kirkby as cross-defendants, including a declaration that he is entitled to the whole of the beneficial interest in the property, and an order that the necessary steps be taken to transfer to him the whole of the company’s interest in the property, alternatively that the necessary steps be taken to transfer to him the interest in each share held by Mr Kirkby in the company.

Background

5 Miss Schulz and Mr Turner have known each other for many years. They had a de facto relationship between about 2002 and November 2005.

6 In June 2004 Mr Kirkby and Mr Hartigan incorporated the company for the purpose of purchasing and developing the property. It was intended that steps would be taken to have the property rezoned from a rural zoning to one which would allow its subdivision into residential lots. Each held half the shares, and was a director.

7 During June, July, and August 2004 the company applied, without success, to various bodies for mortgage finance for the purchase of the property.

8 On about 4 August 2004 the company exchanged contracts with the vendor, Mr Karl Casben, to purchase the property for the price of $410,000. Mr Hartigan paid the deposit in the sum of $41,000 from his personal funds. Not long afterwards, Mr Hartigan informed Mr Kirkby that he no longer wished to be involved in the transaction, and wanted to sell his shares. Thereafter, Mr Kirkby acted on behalf, and as the alter ego, of the company.

9 In about mid October 2004, Mr Turner, a property consultant, met Mr Kirkby at the property. Mr Kirkby told him that he needed a new partner in place of Mr Hartigan who could take up his shares in the company and proceed with the project. Mr Kirkby expressed confidence that he could successfully arrange for rezoning of the property to rural residential.

10 Miss Schulz was overseas from 1 October to 28 October 2004. During that period Mr Turner telephoned her and spoke about the project. He said he wished to enter into a joint venture with the company, and asked her to finance the project.

11 On the morning of 1 November 2004 there was a meeting between Miss Schulz, Mr Turner, Mr Kirkby, and Mr Hartigan in Muswellbrook during which a draft form of agreement for the purchase and rezoning of the property was discussed, and some changes were suggested. Later that morning there was another meeting in Mr Kirkby’s house, attended by the same people, when Mr Kirkby circulated a revised form of agreement. After some discussion the document (the agreement) was signed by Messrs Turner, Kirkby and Hartigan. It is in the following terms:

“Draft agreement between Brett David Kirkby, Allan Roy Hartigan & Noel Robert Turner re the purchase of Lot 30 DP 1051661 Denman road Muswellbrook.
Re: Skellatar Estate
27 October 2004
The abovementioned parties agree and will be bound by the conditions of this agreement the following of which will apply:
(a) The joint venture partnership agrees to grant to Ms Karin Schulz a first mortgage entitlement over the said property.
(b) The purpose of this acquisition is to endeavour to have the said property re-zoned to Rural Residential and ultimately develop the area into a number or [sic] allotments. For the benefit of this agreement, a time frame required to finalise the re-zoning is 2 years. If this time frame proves to be insufficient, the parties agree to negotiate an extension based on the likelyhood [sic] of re-zoning being imminent.
(c) In the event of the re-zoning being approved, Noel Turner (or his nominated company) agrees to pay to Allan Hartigan, an additional sum of $350,000.00, being payment in full. These funds are to be made available to Allan within ... 90 … days of approval of the re-zoning. Furthermore, I Brett Kirkby, upon the re-zoning being approved, agree to pay to Allan Hartigan the sum of $225,000.00 being payment in full for 50% of the 42 acres and the inventory attached thereto.
(d) In the event of the re-zoning being unsuccessful, the abovementioned clause (c) will be abrogated thus making any further payment by Noel Turner or Brett Kirkby to Allan Hartigan null and void. Furthermore, all interests held in “UPPER HUNTER DEVELOPERS” will be terminated and transferred in full to Noel Robert Turner (or his nominated company). The implementation of this facility will see Noel Turner as the owner of the property in it’s [sic] entirety.
(e) I, Brett David Kirkby, agree to take responsibility for the co-ordination of the re-zoning procedure including liaising with all parties and Government bodies with an interest in it’s [sic] successful implementation. Further, I agree that Noel Turner be given the responsibility to co-ordinate the development procedure in consultation with myself.
(f) I agree to be duly bound and responsible for the borrowing of any funds required by the joint venture to complete the development.
(g) In the event of the re-zoning being approved, the area commonly referred to as the 1 in 20 flood zone (see reference in the John F Berthon proposed subdivision dated 12/08/93 which clearly defines this area extending to Denman road [sic]), is to be retained by Brett David Kirkby and Allan Roy Hartigan for future use as required. This area of land will be identified more clearly once surveyed, and will at that time, have a lot number to which Allan and myself will be entitled to have legal ownership over. The approximate area to be retained is estimated to be 7 to 10 acres and includes the Hay Shed, Cattle Yards, Irrigation Pump, and the Underground Irrigation Mains. The Irrigator can be sold once the development is in progress and its use is no longer required. The proceeds of the sale will be split accordingly. In the event of the re-zoning application being rejected, this clause and its conditions will be null and void.
(f) Allan Hartigan acknowledges the payment from Noel Turner the sum of $450,000.00 being payment for the property settlement and associated costs.”

12 On 2 November 2004 Miss Schulz and Mr Turner met Mr Kirkby at the offices of Mr Vanya Lozzi, of Sparke Helmore, the company’s solicitors. Mr Lozzi acted for the company on the purchase of the property. After some discussion it was proposed that the sum of $450,000 be deposited in the firm’s trust account for payment of the purchase price of the property and related costs and expenses.

13 On 3 November 2004 Miss Schulz obtained from the St George Bank a bank cheque for $450,000 payable to Sparke Helmore’s trust account. Accompanied by Mr Turner, she delivered it to Mr Lozzi in his office.

14 On 9 November 2004 Mr Hartigan ceased to be a shareholder, and Mr Kirkby became the sole shareholder, in the company.

15 On 10 November 2004 the purchase of the property for the price of $410,000 was settled from the funds provided by Miss Schulz. The property was transferred to Mr Turner and the company as tenants in common in equal shares.

16 On 12 November 2004 Mr Lozzi wrote a letter to Mr Turner in the following terms:

“Upper Hunter Developers Pty Limited and Turner from Casben
Property: Lot 30 Denman Road, Muswellbrook
We refer to our meeting on 2 November 2004 and confirm as follows:
* You agreed to finance the company’s purchase of the above property in consideration for receiving a half share in the property.
* You are acting for yourself in this matter and you have not sought our advice in relation of the Contract for Sale or any other matter in relation to this transaction.
We advise that the purchase of the property settled on 10 November 2004 and that the funds provided by you were disbursed in accordance with your authority dated 3 November 2004.
We are attending [sic] the registration of the Transfer. In the interim, we note that you will discuss with our client as to where the Certificate of Title (once issued in your names) will be kept. We note that you are considering registering a mortgage over our client’s half share in the property. If an agreement between yourself and our client is reached in this regard we would be grateful if you could advise us so that we can provide you (or your solicitor) with the Certificate of Title.”

17 By letter dated 7 December 2004, Mr Kirkby and Mr Turner directed Mr Lozzi as follows:

“Attention: Vanya Lozzi
Re Lot 30 Denman Rd Muswellbrook
Your client Upper Hunter Developments Pty Ltd
We, the owners of the above property as tenants in common, hereby authorise you to release the title certificate for the above property Folio Identifier 30/1051661 to Noel Turner or his partner Karin Schulz and thank you for your assistance in this matter.
Yours sincerely
Bret Kirkby
Director
Noel Turner
Co-owner”

18 Mr Turner collected the certificate of title to the property from Sparke Helmore and delivered it to Miss Schulz. She has held it continuously since then.

19 After November 2004 Mr Kirkby retained, on behalf of the company and Mr Turner, various firms to work in respect of the proposal for the rezoning of the property.

20 In December 2005 a written submission in response to the draft Muswellbrook Local Environmental Plan (the draft LEP) was made to the Muswellbrook Shire Council on behalf of Mr Turner and Mr Kirkby. A further submission was made to the council in April 2006.

21 On 16 May 2006 the company lodged a caveat in respect of its interest in the property.

22 By letter of 18 September 2006 to Mr Turner, Miss Schulz’s solicitors requested him to execute the memorandum of mortgage enclosed with the letter. They said that this was necessary in order to fulfil the agreement evidenced by the agreement of 1 November 2004, the transfer of 10 November 2004, and the authority of 7 December 2004. The schedule to the memorandum included paragraph (b) which included a covenant by the mortgagor to pay interest on the sum unpaid as at 10 November 2006. Mr Turner signed and returned the memorandum.

23 By letter of 12 October 2006 to the company, Miss Schulz’s solicitors wrote in similar terms to Mr Turner. They requested the company to execute the memorandum of mortgage which Mr Turner had returned, and which was enclosed.

24 By letter of 23 October 2006, the company’s solicitors advised Miss Schulz’s solicitors that the company would not sign the memorandum. It included the following:

“There has never been any agreement between our client and Karen Schulz for the loan of funds.
It was out [sic] client’s clear understanding at the time of settlement that there was a loan agreement between Karen Schulz and Noel Turner in the sum of $225,000, and it was not until some one year after settlement that our client first became aware that the amount lent by Ms Schulz to Mr Turner was in fact $450,000.”

25 With their letter of 16 November 2006 to Mr Kirkby, Miss Schulz’s solicitors enclosed a fresh memorandum of mortgage which had been executed by Mr Turner. The wording of the first covenant in sub-paragraph (b) of the schedule had been changed by the deletion of the requirement to pay interest. Mr Kirkby was requested to execute the memorandum on behalf of the company, and to return it. He did not do so.

26 On 1 December 2006 Miss Schulz filed the statement of claim.

27 In his letter of 21 January 2007 to the company, Mr Turner requested it to execute a transfer of its interest to him. He claimed that the company was obliged to do so under cl (d) of the agreement, on the basis that the property had not been rezoned within the two year time frame provided by cl (b).

28 By its letter of 26 February 2007 to Mr Turner, the company denied his claims. It did not execute the transfer.

29 On 12 June 2007 Mr Turner filed the cross-claim.

30 On 18 June 2007 the council adopted the draft LEP. In July 2007 the council requested the Department of Planning to issue a certificate under s 65, Environmental Planning and Assessment Act 1979 (the Act). The certificate has not yet been issued. The draft LEP shows that the proposed new zoning applicable to the property is “RU1”. The deadline for finalisation of the draft LEP is said to be March 2008. It is common ground that the present applicable zoning is not “rural residential”.

Principles

31 The relevant principles were stated in Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 by Buckley LJ (pp 594-596):

“An equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage. An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter on the mortgagee, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so …
The essence of any transaction by way of mortgage is that a debtor confers on his creditor a proprietary interest in property of the debtor, or undertakes in a binding manner to do so, by the realisation or appropriation of which the creditor can procure the discharge of the debtor's liability to him, and that the proprietary interest is redeemable, or the obligation to create it is defeasible, in the event of the debtor discharging his liability. If there has been no legal transfer of a proprietary interest but merely a binding undertaking to confer such an interest, that obligation, if specifically enforceable, will confer a proprietary interest in the subject matter in equity …
It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend on the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred.
….
But notwithstanding that the matter depends on the intention of the parties, if on the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts.”

32 In Theodore v Mistford Pty Ltd [2005] HCA 45; (2005) 221 CLR 612 it was said:

“25. Secondly, the term "equitable mortgage" is not used in the texts and the authorities with any single denotation. The nature of the security created must turn upon the intention of the party dealing with the assets to be subjected to the security and the nature of those assets. So it is accepted that a mortgage of an equitable interest, being an equity of redemption, can only be by way of an equitable mortgage, although described as a second mortgage of the land in question.
26. In respect of a legal interest, under the general law an agreement to give a legal mortgage is described as an equitable mortgage. Subject to compliance with any statutory formalities, it may be treated in equity as if a legal mortgage had been granted and therefore as carrying with it the remedies, including foreclosure, incident to a legal mortgage. Hence the statement that while in theory the equitable mortgagee may call for a legal mortgage, in the great majority of cases the mortgagee rests upon its equitable rights. Lord Eldon LC said of the Court of Chancery that "an equitable title to a mortgage is here as good as a legal title". In this way, by looking at the intent rather than the form, equity is able to treat as done that which in good conscience ought to be done.”

33 It is sufficient if the court can fairly gather from the instrument an intention by the parties that the property therein referred to should constitute a security (Cradock v Scottish Provident Institution (1893) 69 LT 380, p 382 per Romer J). However, the agreement to grant a mortgage will not be specifically enforceable unless its terms are sufficiently certain, although it may be enough that the property is in existence and specifically defined (Penny Nominees Pty Ltd v Fountain (No. 2)) (Supreme Court of New South Wales, Young J, 12 February 1990, unreported).

34 The mere deposit of the certificate of title as security for a loan will create an equitable mortgage or charge over the property to which the document relates. (Bank of New South Wales v O’Connor (1889) 14 App Cas 273, p 282; UTC Ltd v NZI Securities Australia Ltd (1991) 4 WAR 349, p 351; Theodore, par 24.)

35 The deposit must be for the purpose of giving a security. “… There is no need for an express agreement as to the conditions or purpose of the delivery of a title deed. A deposit, having regard to the circumstances, may be sufficient to infer or imply an agreement to give a mortgage and hence support an equitable mortgage” (Westpac Banking Corporation v Cronin (1990) 6 BPR 13,105, p 13,110 per Waddell CJ in Eq).

The claim to an equitable mortgage

36 Miss Schulz claims the existence of an equitable mortgage on two grounds. Firstly, that under the agreement Mr Turner and Mr Kirkby, on behalf of the company, agreed to grant her a first mortgage over the property to secure the repayment of the amount she provided to finance its purchase and/or, secondly, that Mr Turner and the company deposited the certificate of title to the property with her as security for the whole of the finance provided.

37 She claims that she advanced the sum of $450,000 for repayment after a period of two years. In accepting her claim, Mr Turner executed a memorandum of mortgage which included a covenant to repay the amount by 10 November 2006, being a period of two years after the date of the transfer of the property to Mr Turner and the company. She now seeks an order requiring the company to do the same.

38 The question for decision is whether Mr Turner and Mr Kirkby, for the company, did something which demonstrated a binding intention to create a security by way of mortgage in favour of Miss Schulz by conferring on her a proprietary interest in the property upon completion of its purchase. A further question is whether, by depositing the certificate of title with her, Mr Turner and the company acted in fulfilment of their agreement to give Miss Schulz an equitable mortgage or thereby acted sufficiently to create an equitable mortgage over the property. (Swiss Bank Corporation pp 595-596; Westpac Banking Corporation p 13,110.)

39 Mr Turner accepts that an equitable mortgage was created by cl (a) of the agreement and/or by the deposit of the certificate of title with Miss Schulz. Mr Kirkby does not. It is therefore necessary to consider the evidence of the circumstances in which the agreement was made, and of subsequent events. There is a conflict between the accounts of Miss Schulz, Mr Turner and Mr Hartigan and the account of Mr Kirkby.

40 Mr Turner’s evidence was to the following effect.

41 Sometime before 1 November 2004 it was arranged between Mr Kirkby and Mr Turner that Mr Turner should organise finance of up to $450,000 for the purchase of the property, and that Miss Schulz would provide it. On the morning of 1 November 2004 he inspected the property with Miss Schulz. He told her she would be provided with a first mortgage to safeguard her interest. They then met Mr Kirkby and Mr Hartigan in a coffee shop in Muswellbrook when Mr Turner read a document (the draft agreement) provided by Mr Kirkby. Relevantly, this document contained the following clauses:

“(a) Noel Robert Turner (or his nominated company) will purchase from Allan Roy Hartigan, his shares in the company “UPPER HUNTER DEVELOPERS PTY LTD” ABN: 20 109 433 221 for the sum of $450,000.00. These funds are to be used to purchase the property at settlement and liquidate all outstanding associated costs incurred by “UPPER HUNTER DEVELOPERS” to date. (See attached summary).
…
(d) In the event of the re-zoning being unsuccessful, the abovementioned clause (c) will be abrogated thus making any further payment by Noel Turner or Brett Kirkby to Allan Hartigan null and void. Furthermore, the shares held in “UPPER HUNTER DEVELOPERS” by myself, Brett David Kirkby, will be terminated and transferred in full to Noel Robert Turner (or his nominated company.) The implementation of this facility will see Noel Turner as the owner of the property in its’ [sic] entirety.
…
(h) In the event of the death of either Noel Turner or myself, Brett Kirkby, an additional 1% of the shares held by the deceased will be assigned to the remaining shareholder so as to give such party a majority holding and legal right to administer the affairs of the company and or this joint venture partnership.”

42 Mr Turner said it was necessary to add a clause granting Miss Schulz a first mortgage over the property. Mr Kirkby agreed to do so, and then departed to make the appropriate amendments.

43 Later that morning there was another meeting, this time at Mr Kirkby’s house. Present were Miss Schulz, Mr Turner, Mr Hartigan, Mr Kirkby and his mother. Mr Kirkby distributed a copy of the agreement to each of Miss Schulz, Mr Turner and Mr Hartigan. A comparison of the agreement with the draft agreement shows that cl (a) and cl (h) of the draft agreement were replaced with cl (a) and cl (f), and in cl (c) the phrase “90 days” was added, and cl (d) was reworded by substituting in the second sentence the words “all interests” for the words “the shares”, and deleting the words “by myself, Brett David Kirkby”.

44 Mr Turner said that Mr Kirkby proceeded to read aloud the clauses, one by one. After each was read he stopped and asked him and Mr Hartigan whether they were satisfied with it. After cl (a) was read Mr Turner stated that he agreed that it covered what was required. Clauses (b) and (d) were also discussed, after which the parties stated their understanding of, and agreement with, their terms. The agreement was then signed by Mr Turner, Mr Hartigan and Mr Kirkby, and witnessed by Mr Kirkby’s mother.

45 Mr Hartigan’s evidence was in his affidavit of 17 May 2007. It was read without objection, and he was not required for cross-examination. It is consistent with Mr Turner’s account. In addition, he said that after Mr Kirkby had read out cl (d), Mr Turner said to him in Mr Kirkby’s presence words to the effect: “You understand that if the property is not rezoned in 2 years you two are out and I own it?”, to which he nodded his agreement.

46 Miss Schulz’s evidence of these events was substantially similar to Mr Turner’s. Neither she nor Mr Turner was cross-examined on the account given in their affidavits.

47 Mr Kirkby’s evidence was to the following effect.

48 By September 2004 he was looking for an amount of $450,000 in loan monies to enable completion by the company of the purchase from Mr Casben. He regarded Mr Turner as the person responsible for the provision of the finance. He said that at a meeting in September 2004, and on a later occasion, Mr Turner had told him that he would be putting in half the money, and his girlfriend would put in the other half.

49 Mr Kirkby said that prior to the agreement being signed, his arrangement with Mr Turner was that Mr Turner would pay for the purchase of the property and the cost of rezoning, and his contribution would be to achieve the rezoning as a result of which the property’s value would be substantially increased. He said that under this arrangement the company was to have an unencumbered one half share, but if the property could not be rezoned it would be transferred to Mr Turner so that he would end up with the entire property, thereby covering him for the money he had put in.

50 Mr Kirkby said that he prepared the draft agreement, and that it was discussed clause by clause during the meeting at the café at 1 November 2004. He said that Mr Turner told him he was not going to purchase Mr Hartigan’s shares in the company and wanted his name on the title, and this was agreed to. He said that Mr Turner said to him: “Because Karin is putting half the money in, do you mind giving her a mortgage?” to which he replied: “I don’t have any problems with that”.

51 His affidavit of 23 April 2007 included the following:

“44. I thought nothing about giving Ms Schultz [sic] a mortgage, although I did not understand the legal obligations of granting a mortgage. I felt obliged to Ms Shultz [sic] as I knew that she did not have any other interest in the deal between me and Mr Turner and I did not know if she had other income or how she supported herself.
45. I believed from Mr Turner’s words at this meeting, as he had also previously represented to me, that he and Ms Schultz [sic] were putting an equal amount of money in the purchase. I considered that any mortgage would secure Ms Schutlz’s [sic] contribution of $225,000. This was my understanding when making this agreement and I did not question it.”

52 Mr Kirkby said that after discussion about the mortgage Mr Turner expressed his concern about the time frame for the rezoning, and stated it should be one year. Mr Kirkby disagreed, and said it should be at least two years. He said it was agreed to leave it at two years as stated in cl (b) of the draft agreement. He said that following discussion about other clauses he departed to make the necessary changes to the document.

53 Mr Kirkby also described what took place on the occasion of the meeting at his house when the agreement was signed. He said that he read the document aloud, and then asked whether all agreed to, and understood, its contents. After Mr Turner and Mr Hartigan stated their agreement, the document, and copies thereof, were signed. Mr Kirkby denied that on that occasion he read aloud each clause as described by the other witnesses, and denied that he asked Mr Turner about the mortgage referred to in cl (a).

54 Under cross-examination, he adhered to his evidence that at the meeting at the café Mr Turner requested the mortgage because Miss Schulz was putting half the money in. He said (T p 47) in effect that he intended to encumber the company’s interest in the property by the grant of a mortgage to Miss Schulz in order to secure the amount of $225,000 which he understood she was providing. He subsequently said that it was not until September 2005 that he first learnt, when she told him, that she had provided the full $450,000.

55 In their affidavits in reply, Miss Schulz and Mr Turner each denied Mr Kirkby’s statement that Mr Turner had requested a mortgage because Miss Schulz was putting half the money in. In oral evidence, Mr Turner also denied that he told Mr Kirkby that Miss Schulz would be providing one half of the funds required. Neither Miss Schulz nor Mr Turner was cross-examined on the account of the meetings given in their affidavits or on their denials.

56 In my opinion the evidence of Miss Schulz and Mr Turner, generally, should be accepted. There is no basis for a different view. In particular, it is to be preferred to that of Mr Kirkby where it conflicts with his. I reject as implausible his evidence that Mr Turner requested the mortgage because Miss Schulz was putting half the money in. Had it been said, it would have been untrue. I do not accept that Mr Turner falsely represented the extent of Miss Schulz’s loan, or that Miss Schulz would not have promptly protested had he done so. I also find to be implausible his evidence that it was arranged with Mr Turner that the company’s interest in the property was to be unencumbered. It is inconsistent with his other evidence that he intended to give her a mortgage over the property, and with his counsel’s acceptance that the agreement evidences the intention to grant a charge as security for the $450,000 provided by her. His evidence on these matters was the product, in my opinion, of faulty recollection.

57 Mr Kirkby impressed me as a person who is not commercially naive. He understood what a mortgage was, and that it required repayment of the loan secured by it. He drafted the agreement so as to accurately record the arrangements for the purchase, rezoning, and development of the property, and made the changes to the draft agreement as described above. The evidence shows that each party considered his respective interest in the transaction before he signed the document.

58 On behalf of Mr Kirkby and the company it was accepted (T p 7) that it was open to the court to find that Miss Schulz was entitled to a charge “… by way of mortgage or whatever …” over the property to secure the advance of $450,000. It was accepted (T pp 95, 103) that she provided this amount.

59 However, the company disputed any obligation to repay. It was put that cl (a) did not evidence an acknowledgment of debt. In essence, as I understood it, it was put that under the agreement the company was required only to make available the property for the purpose of a charge but was not liable for any repayment. Counsel said (T p 99) “… it was certainly the case that my client was prepared to give Miss Schulz some security and certainly paragraph (a) wasn’t qualified”.

60 In addition, it was argued that neither Mr Lozzi’s letter of 12 November 2004, nor the letter of authority of 7 December 2004, nor the delivery of the certificate of title to Miss Schulz supported her claim.

61 In my opinion these submissions must fail. They are contradicted by the plain terms of cl (a). Upon its proper construction, cl (a) evidences the intention of the parties to grant a first mortgage to Miss Schulz over the entire property to be held by Mr Turner and the company, to secure the whole of the amount advanced by Miss Schulz.

62 There is simply no rational basis for concluding that in agreeing to grant a first mortgage the parties were intending to confer a security which did not incorporate an obligation to repay the loan. Had it been agreed that the company would be free from liability to repay and/or that its interest in the property was not to be encumbered by a mortgage which obliged repayment, I have no doubt that the appropriate provision to protect the company would have been included in the document, especially as Mr Kirkby was the draftsman. The fact that cl (a) is unqualified by any such provision supports the rejection of his evidence and the submissions on this issue.

63 Furthermore, my conclusion as to intention is consistent with Mr Kirkby’s evidence earlier referred to that he intended to grant her a mortgage to secure her contribution. In my opinion the fact that he may have had an understanding (stated, for example, in the company’s solicitors’ letter of 23 October 2006) that her contribution was $225,000 not $450,000 is irrelevant having regard to the plain terms of cl (a). As was pointed out in Swiss Bank Corporation (p 596), he must be presumed to have intended the consequences of the agreement.

64 Accordingly, in my opinion, cl (a) proves the intention of Mr Turner and the company to grant a mortgage over the whole of the property to secure the loan which was to be repaid within the period envisaged by the agreement. This period depends upon the proper construction of the agreement as a whole, an issue dealt with later in these reasons. I find that the clause demonstrates a binding undertaking to confer such an interest on Miss Schulz which is sufficient to establish her entitlement to an equitable mortgage over the property, redeemable upon the repayment of the loan. (Swiss Bank Corporation pp 595-596; Theodore par 25; Cradock p 382) It is irrelevant to this finding that Miss Schulz was not a party to the agreement.

65 In the circumstances, I do not attach weight to the letter of 12 November 2004. Mr Kirkby said it was written without his instructions. It appears to reflect Mr Lozzi’s misunderstanding of what the evidence shows was the true position under cl (a) and of the arrangements to secure the funds which were provided for the purchase. Relevantly, it only indicates his understanding that consideration was being given to the registration of a mortgage over the company’s interest in the property.

66 The purpose for which the authority of 7 December 2004 was provided by Mr Kirkby was disputed. In evidence, Mr Kirkby denied that he intended to authorise the provision of the certificate of title as security for the finance for the purchase. He said he was unaware of the relevance of the identity of the person who was to hold the certificate of title. In submissions on his behalf it was put that the document did not demonstrate the company’s intention to deposit the deed as security, and went no further than authorising its provision into the custody of either Mr Turner or Miss Schulz.

67 Having regard to my finding that it was the common intention of Mr Turner and Mr Kirkby to grant Miss Schulz a mortgage, neither the evidence of Mr Kirkby as to the purpose of provision of the certificate of title nor the related submissions should be accepted. The evidence shows that the authority was prepared by Mr Kirkby at Mr Turner’s request as a common instruction to Mr Lozzi who held the certificate of title on behalf of both tenants in common. The evidence supports the finding that Mr Kirkby’s instruction, as director, to the company’s solicitors to release the certificate of title to Mr Turner or Miss Schulz was given in part fulfilment of the agreement to give Miss Schulz a mortgage over the property. It was also consistent with his evidence that he wanted to provide her with security over the property for the amount which he understood she had lent. Nothing in the evidence supports an inference that Mr Kirkby’s purpose differed from Mr Turner’s, and it is highly improbable that it did.

68 Accordingly, I find that the certificate of title was provided to Miss Schulz by Mr Turner and the company as security for the loan. This finding, of itself, is sufficient to establish that they agreed to give her a mortgage which, in turn, founds her entitlement to an equitable mortgage. (Bank of New South Wales; UTC Ltd; Westpac Banking Corporation.)

The cross claim

69 Mr Turner’s claims against Mr Kirkby and the company for a declaration that he is entitled to the whole of the beneficial interest in the property, and for orders that the necessary steps be taken to transfer the company’s interest in the property to him, alternatively that Mr Kirkby transfer his shares in the company to him, turn on the proper construction of the agreement.

70 The proper approach to the construction of the agreement accepts that as it is a commercial contract it should be given a business-like interpretation. Its interpretation requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure. McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, p 589. As with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole. Project Blue Sky v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, pp 381-382; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, pars 15-16.

71 In Taylor v Dexta Corporation Limited & Ors [2006] NSWCA 310; (2006) 14 ANZ Ins Cas 61-712 Santow JA pointed out (par 30) that “… A necessary corollary of that requirement for a commercial contract to be given a business-like interpretation is the frequent emphasis upon the need to arrive at an interpretation which is commercially sensible, and in accord with commercial reality”.

72 I respectfully agree with the summation of Hall J in Dong v Monkiro Pty Ltd [2005] NSWSC 749, par 85:

“At the end of the day, the Court is concerned to determine the rights and obligations of the contracting parties by reference both to the express terms of the contract and with due regard to the essential nature of the transaction embodied in it as determined or reflected by those terms.”

73 The parties’ submissions were directed to the construction of cl (b) and cl (d) of the agreement, which are in these terms:

“(b) The purpose of this acquisition is to endeavour to have the said property re-zoned to Rural Residential and ultimately develop the area into a number or [sic] allotments. For the benefit of this agreement, a time frame required to finalise the re-zoning is 2 years. If this time frame proves to be insufficient, the parties agree to negotiate an extension based on the likelyhood [sic] of re-zoning being imminent.

…
(d) In the event of the re-zoning being unsuccessful, the abovementioned clause (c) will be abrogated thus making any further payment by Noel Turner or Brett Kirkby to Allan Hartigan null and void. Furthermore, all interests held in “UPPER HUNTER DEVELOPERS” will be terminated and transferred in full to Noel Robert Turner (or his nominated company). The implementation of this facility will see Noel Turner as the owner of the property in it’s [sic] entirety.”

Their cases were argued on the basis that the language of the agreement is not so ambiguous as to warrant resort to extrinsic evidence.

74 For Mr Turner it was put that cl (b) should be understood to mean that if, at the expiry of two years from the date of the agreement (1 November 2004) the rezoning of the property was not finalised, and there was a likelihood that the finalisation of the rezoning was imminent, the parties would negotiate an extension of time in which to finalise the rezoning of the property. It was submitted that, on the evidence, rezoning to rural residential has not yet been achieved and, according to Mr Jeuken’s evidence, the timing of any rezoning is a matter for speculation. (Mr Jeuken is an officer of the Muswellbrook Shire Council.) It was put that with regard to the procedure under Pt 3, Div 4 of the Act for the preparation and making of local environmental plans, and on the evidence that a s 65 certificate has not yet been issued, the rezoning was not imminent, even today.

75 Secondly, it was put that cl (d), when read with cl (b) should be understood to apply if rezoning was unsuccessful, or not achieved, within the period of two years from the date of the agreement. It was put that it is plain from the language of (d), read in context that the situation of rezoning was to be determined as at the expiration of the two year time frame or period stipulated in cl (b) unless an extension had been negotiated. It was put that unless cl (b) was construed as imposing a time limit for obtaining approval of the rezoning relevant to the application of cl (c), cl (d) and cl (g) it would serve no purpose and would be merely otiose. In other words, it was put that a commercially sensible interpretation consistent with the intention of the parties is one which provides a time certain with regard to which the rights and obligations of the parties spelt out in the other provisions would be identified.

76 Thirdly, it was submitted that in cl (d) the phrase “all interests held in” (the company) should be construed as if it read “all interests held by” (the company). It was put that substitution of “by” for “in” would give effect to the intention expressed at the meeting that Mr Turner was not to have shares in the company, but title to the property.

77 For the cross-defendants it was put that cl (b) and cl (d) should be read independently. It was submitted that the effect of cl (b) is not to make time of the essence, as to do so would not be a commercially realistic interpretation in circumstances where the parties have no control over the process of rezoning. It was put that the intended purpose is one limited to the provision of a frame work with opportunity for the negotiation of an extension within which the parties would endeavour to do what was required of them in respect of rezoning and development as envisaged by cl (e) and cl (f). It was put that the agreement to negotiate for an extension if the time frame proved insufficient negates the proposition that the two year period was of the essence.

78 With regard to (d), the cross-defendants submitted that, properly construed, it operates only when it is established that the rezoning is unsuccessful, or will not happen. It was put that, on Mr Jeuken’s evidence, the rezoning process is continuing and thus it cannot be said that under the agreement it has been unsuccessful.

79 The cross-defendants disputed the submission that in cl (d) the phrases “all interests held in” (the company) should be read as “all interests held by” (the company). It was put that the sentence in which the phrase is contained reflects the intention that Mr Kirkby and Mr Hartigan would transfer their share interests in the company to Mr Turner if the rezoning was unsuccessful. It was put that, as the company was not a party to the agreement, it would be wrong to interpret the clause as an undertaking from the company to Mr Turner, and not as an undertaking from the shareholders who, at the time, were Mr Kirkby and Mr Hartigan.

80 Taken as a whole, it is evident from the agreement that its purpose was to specify the rights and obligations of the parties with regard to the purchase, mortgage, rezoning, and development of the property. It was made in circumstances where Miss Schulz was to advance funds for the purchase of the property to be secured by a first mortgage over the whole of it, and where the property was to be held by Mr Turner and the company as tenants in common in equal shares. Also, at this time, Mr Hartigan intended to end his involvement in the company and with the transaction, and Mr Kirkby was acting for the company in the transaction.

81 It is also evident from the agreement that the entitlements of the parties depended in different ways upon the success or failure of the application for rezoning. Thus until the fate of the rezoning process was known, the parties were in a state of uncertainty about these entitlements.

82 The first sentence of cl (b) states the twofold purpose of the acquisition as an endeavour to have the property rezoned and “ultimately” to develop it into allotments. The next sentence states that the time frame required for the finalisation of the rezoning is two years, a matter expressed to be “… for the benefit of this agreement…”. Under the terms of the final sentence the parties bound themselves to negotiate with each other for an extension of time if the time frame proved insufficient, based on the likelihood that the finalisation of the rezoning was imminent.

83 In my opinion, cl (b) was intended by the parties to specify the time within which the necessary rezoning was to be obtained which, in this case, was stated to be a period of two years. It is evident from the other terms that much turned on whether or not the property was rezoned. In my opinion, it accords with commercial sense and reality that the parties would require that the period within which this process was to take place should be defined and certain in order to know whether any, and which, of cl (c), cl (d) and cl (g) was to take effect. It may also be inferred that the parties were aware that they had no control over the progress of the rezoning process. This is another reason for a business-like interpretation which gives their arrangement certainty.

84 Furthermore, this interpretation is supported by the meaning which, in my opinion, should be given to the words of the third sentence. Those words reflect the intention of the parties that they should have the opportunity to negotiate an extension if (but only if) at the end of the period rezoning had not been finalised and the likelihood was that it would be imminent i.e. “likely to occur at any moment” (Macquarie Dictionary, 4th ed).

85 To so construe cl (b) is to supply a congruent operation to the other components of the agreement considered as a whole. Significantly, the time frame is stated to be “… for the benefit of this agreement”, a phrase which should be understood to demonstrate the contractual intention that the two year period was to apply in order to determine which of the other clauses were to operate. It follows from the above that I generally accept the cross-claimant’s submissions on this issue.

86 The evidence establishes that the property was not rezoned rural residential within the two year period which expired on 1 November 2006, and has not yet been so rezoned. It also establishes that at or about that time the likelihood of such rezoning was not imminent, with the consequence that the requirement for negotiation of an extension did not arise. It is common ground that the present applicable zoning is not “rural residential”. On the evidence, it cannot be said that the proposed new zoning to “RU1” is imminent. It is unnecessary to attempt to decide whether the proposed rezoning will be the same as “rural residential” as that term was used in the agreement, and, in any event, the evidence would not enable me to do so.

87 From my conclusion as to the proper construction of cl (b), it follows that the event which attracts the application of cl (d) must be determined against the condition that approval be obtained within the two year period. Consistently, therefore, the words “in the event of the rezoning being unsuccessful” should be understood to mean “in the event of the rezoning not being approved within a period of two years from the date of this agreement”. I reject the cross-defendants’ submissions to the contrary. In the circumstances, I find that the contingency provided for in cl (d) has been fulfilled, and the parties’ entitlements and obligations thereunder should be given effect.

88 By the same reasoning, the contingency of approval within the two year period provided for in cl (c) and cl (g) has not been fulfilled, with the result that these provisions are of no effect.

89 I turn now to the issue whether the second sentence of cl (d) should be read as if “by” should be substituted for “in”. The context is:

“Furthermore, all interests held in “UPPER HUNTER DEVELOPERS” will be terminated and transferred in full to Noel Robert Turner (or his nominated company.) The implementation of this facility will see Noel Turner as the owner of the property in it’s [sic] entirety”.

90 I am not persuaded that the construction contended for on behalf of Mr Turner is correct. In my opinion, it is not necessary to make the substitution in order to give effect to the contractual intention of the parties. It is plain that it was intended that if rezoning was not finalised within the period, the outcome would be that, as a matter of substance and reality, Mr Turner or his company would become the owner of the property in its entirety. In my opinion the language of the sentences expresses that intention. Mr Kirkby is required to transfer his shares to Mr Turner or to his company. By this means or, in the agreed words, by “the implementation of this facility”, Mr Turner will achieve ownership of the whole property in that he already holds a one half interest, and the company which he will then control owns the other half.

91 Accordingly, in the events which have happened, Mr Turner is entitled to have transferred to him or to his company all interests held in the company.

Conclusion

92 I have earlier held that under cl (a) Mr Turner and the company agreed to give Miss Schulz a mortgage over the property to secure the amount advanced by her. The clause is silent as to the time for repayment. She claims, and Mr Turner accepts, that it was intended under the agreement that this time was a date two years after the purchase was completed.

93 If there is such a requirement it must arise by implication. The relevant principles are well known. In Codelfa Construction Pty Ltd v State Rail Authority of NSW; [1982] HCA 24; (1982) 149 CLR 337 Mason J said (p 347):

“The conditions necessary to ground the implication of a term were summarized by the majority in BP Refinery Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at 26:—(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

94 In my opinion the agreement evidences the intention that the mortgage was to be for a period of two years. This is consistent with my conclusion as to the proper construction of cl (b) and the reasons for it. As I have said, the agreement as a whole demonstrates the commercially realistic intention of the parties that the time when entitlements and/or obligations would arise should be certain. To give effect to that intention the time frame, for the benefit of the agreement, for finalisation of the rezoning was stated to be two years.

95 Consistently, there is no reason to doubt that it was within the parties’ contemplation and their intention that the time for repayment under the mortgage should also be fixed and certain for a similar period of two years. I am satisfied that it was the common contemplation of the parties that liability for repayment would arise at the end of two years yet was not actually expressed in cl (a) for the simple reason that it was a matter of common assumption. In the circumstances the conditions stated in Codelfa necessary to ground the implication of such a term have been fulfilled.

96 Accordingly, in my opinion, it was intended that time should run from the date the loan monies were used to complete the purchase which, in this case, was 10 November 2004. I find that cl (a) is to be construed accordingly.

97 I hold that Mr Turner and the company agreed to grant a mortgage to Miss Schulz. It was agreed to be a first mortgage over the property to secure the sum of $450,000 to be repaid by 10 November 2006. As the terms are sufficiently certain, the agreement is specifically enforceable (Penny Nominees Pty Ltd).

98 With regard to the cross-claim, in the circumstances the appropriate order to be made is to the effect that Mr Kirkby transfer to Mr Turner the shares held by him in the company, together with such orders as are necessary or ancillary.

99 I direct the plaintiff and the cross-claimant to bring in short minutes of declarations and orders to give effect to these conclusions, and for disposal of the proceedings.

100 Failing agreement, the parties should have the opportunity to put submissions on any issues as to costs. Arrangements for re-listing of the matter should be made with my associate before 4pm, 11 February 2008.

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