Southlea Holdings Pty Ltd v Gregory

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
SOUTHLEA HOLDINGS PTY LTD v GREGORY
[2022] SASC 66
Judgment of the Honourable Auxiliary Justice Dart
REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES - POWERS AND REMEDIES OF MORTGAGEE - POSSESSION
Respondent borrowed money over four tranches - renovation of residential property - subdivision of other land - loans for short-term - term extended - term expired - monies not repaid - applicant seeks an order for possession and judgment for the debt due - respondent says transactions were unjust - National Credit Code - unconscionable.
Held:
1. The transactions were neither unjust nor did the applicant act unconscionably.
2. Applicant entitled to orders for possession.
3. Applicant entitled to judgment on an amount to be fixed.
Real Property Act 1886 (SA) Part 17; National Consumer Credit Protection Act 2009 (Cth) Schedule 1, referred to.
Corporation of the Town of Moonta v Rodgers & Rodgers (1980) 26 SASR 143; Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161; Bendigo & Adelaide Bank Ltd v Brackenridge [2020] SASC 114; Hraiki v Beljon [2008] NSWSC 775; Perebo Pty Ltd v Wayville Residential Investments Pty Ltd [2019] SASC 35; Blomley v Ryan (1956) 99 CLR 362, considered.

SOUTHLEA HOLDINGS PTY LTD v GREGORY
[2022] SASC 66

The applicant seeks an order for possession in respect of two properties owned by the respondent. It also seeks a judgment in a dollar amount for the debt said to be owed by the respondent. The applicant is a registered second mortgagee in respect of the land. The respondent borrowed money in four tranches. Each loan was for a fixed term subject to agreed variations. The final agreed term expired in August 2018. The debt was not repaid at that time, or any time since. The applicant is entitled to the order for possession.
Factual background
At the relevant time the respondent was a manager employed by a company called Wanted Worldwide. It was a debt collection business. The owner of the business was Mr Frank Carbone. He was an acquaintance of Mr Frank Quaini who is the director of the applicant.
In December 2013 Mr Carbone sent an email to Mr Quaini on behalf of the respondent. He indicated that the respondent was looking to renovate a property at Blackwood and get it ready for sale. Funds were sought from Mr Quaini at that time. It appears that nothing developed from that email. At about that time it appears that monies were borrowed by the respondent from CEG Finance Pty Ltd. That debt was repaid.
On or about 21 November 2016 the respondent sent an email to Mr Quaini enclosing a budget and details of the renovation works to be carried out at the Blackwood property. She sought a loan to permit the work to be carried out. On 25 November 2016 parties entered into a loan agreement in the amount of $100,000. The concessional interest rate (if no default) was 2.5% per month. The money was to be repaid by 31 May 2017.
In March 2017 there were further email exchanges. A second loan of $100,000 was agreed. This was to be used to complete a subdivision of land at Coromandel Valley. One of the subdivided blocks was to be sold. It was to be repaid on 6 March 2018.
On 28 June 2017 a deed of variation was agreed which had the effect of extending the date for repayment of the first loan until November 2017.
On 31 August 2017 a third loan of $100,000 was entered into. This was recorded in a document called a Deed of Variation. At the same time the respondent signed a document called Declaration of Purpose, which stated that the money was to be used for the Blackwood renovations and/or the Coromandel Valley subdivision. The repayment date for the first two loans did not change. The third loan was due to be repaid on 1 August 2018. The concessional interest rate was reduced to 2% per month.
In December 2017 a fourth advance was agreed in the amount of $40,000. This was for the purpose of finalising the subdivision and the work at the Blackwood property. The mortgage was registered at that time. At the time of the first advance a caveat had been lodged on the title noting the interest of the applicant as mortgagee. The final loan agreement acknowledged that the total sum borrowed was $367,831.74. It provided that all of the money due was to be repaid on 24 August 2018. The loan was not repaid by the date agreed between the parties. A notice of default and intention to sell was served on or about 27 August 2018.
At all material times the two properties were subject to a first registered mortgage in favour of Westpac. During the trial, the respondent gave evidence that whilst working for Mr Carbone he had convinced her to borrow some money to lend to his company. It was secured by the Westpac mortgage on her two properties. The arrangement was that the company would make the monthly repayments. The company ended up going into administration. Mr Carbone made some payments but then stopped making payments altogether. The respondent has been left with the obligation to service the Westpac loans.
It appears that most of the respondent’s financial difficulties are because of the Westpac loans. The loans are not related in any way to the lending by the applicant. The applicant was unaware of the basis on which the Westpac debt was incurred until that was revealed at the trial.
The history of the litigation and the pleaded defence
This matter commenced on 14 August 2019. Ordinarily possession matters are dealt with pursuant to Part 17 of the Real Property Act 1886 which provides a summary procedure for dealing with such matters. If a respondent is able to articulate an arguable defence, the matter is not dealt with summarily.[1] It becomes a normal civil dispute. I made an order on 1 May 2020 for the filing of pleadings.
[1] Corporation of the Town of Moonta v Rodgers & Rodgers (1980) 26 SASR 143.
The matter was first listed for trial on 8 July 2020 before a Justice. The trial was adjourned from time to time. The matter went to another Justice and the trial was further adjourned. Generally the trials were adjourned because the respondent was seeking legal assistance.
The matter was listed for trial on 6 December 2021 before me. The respondent made a further application for an adjournment to seek legal representation. If the application had been allowed, it would have been the sixth time the trial had been adjourned. The application was dismissed and the trial proceeded over several days in December. The respondent was unrepresented at trial. The matter then adjourned for a period, as the respondent wished to obtain legal representation for the closing submissions. The respondent was represented by counsel on the closing submissions.
The respondent admitted most of the applicant’s claim in the Defence, but denied that the applicant was entitled to the remedies sought. The defences included an alleged failure to comply with the National Credit Code as a result of which the loan agreements were unjust. In the alternative, it was claimed that the applicant’s conduct was unconscionable for the purpose of the Australian Consumer Law and also in equity.
Is the applicant entitled to an order for possession?
The matter is slightly complicated by the applicant seeking judgment in relation to the loan amount presently due. That involves a more complex process than would ordinarily be the case in relation to a simple claim for possession. The exact amount owed is not usually an issue if all that is sought is an order for possession. The starting point is the decision of Walsh J in Inglis v Commonwealth Trading Bank of Australia:[2]
In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.
The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed.
[2] (1972) 126 CLR 161 at [15]-[16].
In Bendigo & Adelaide Bank Ltd v Brackenridge[3] Doyle J noted as follows:
As the plaintiff’s case acknowledges, there are three essential prerequisites to an order for possession pursuant to a mortgage, namely:
(i)a valid mortgage;
(ii)money secured by the mortgage; and
(iii)an event of default under the mortgage giving rise (upon the giving of the requisite notices and the default not being remedied) to a right of possession.
[footnotes omitted]
[3] [2020] SASC 114 at [228].
Each of the three elements identified by Doyle J have been established by the applicant. The debt due to be repaid in full in August 2018 has not been paid. There is no real issue here that the applicant is entitled to possession of the two properties. Counsel who appeared on behalf of the respondent on the closing submissions conceded as much.
The National Credit Code
The real issue in dispute is the amount due pursuant to the final version of the loan agreement. That document aggregated all of the earlier loans. The respondent is seeking to reduce the amount owing in the hope that she will be able to refinance. The effluxion of time makes that more difficult.
The question becomes whether all or any of the transactions were unjust, as that term is used in the National Credit Code.[4] Counsel for the respondent conceded that the test for what is unjust is broader and easier to establish than the test for unconscionable conduct in equity or pursuant to statute. The respondent will therefore succeed under the National Credit Code, or not at all.
[4] Schedule 1 National Consumer Credit Protection Act 2009 (Cth).
The respondent’s submission is that the loan contract is unjust. Of course, it is necessary to remember there are four such contracts entered into over a period. The unjustness is said to arise from two matters. The first is the circumstances by which the contracts were entered into. The second element said to be unjust are the terms of the agreement itself. It was submitted that the Court should find the transaction as unjust and then reopen the transaction and rewrite it in a way that would be just to the respondent. The applicant conceded that the Code applies.
The relevant provisions of the Code are:
76    Court may reopen unjust transactions
Power to reopen unjust transactions
(1)The court may, if satisfied on the application of a debtor, mortgagor or guarantor that, in the circumstances relating to the relevant credit contract, mortgage or guarantee at the time it was entered into or changed (whether or not by agreement), the contract, mortgage or guarantee or change was unjust, reopen the transaction that gave rise to the contract, mortgage or guarantee or change.
Matters to be considered by court
(2)In determining whether a term of a particular credit contract, mortgage or guarantee is unjust in the circumstances relating to it at the time it was entered into or changed, the court is to have regard to the public interest and to all the circumstances of the case and may have regard to the following:
(a)     the consequences of compliance, or noncompliance, with all or any of the provisions of the contract, mortgage or guarantee;
(b)     the relative bargaining power of the parties;
(c)     whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;
(d)     whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;
(e)     whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;
(f)     whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;
(g)     the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;
(h)     whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;
(i)    the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;
(j)    whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;
(k)     whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;
(l)    whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;
(m)    whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;
(n)     for a mortgage—any relevant purported provision of the mortgage that is void under section 50;
(o)     the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases;
(p)     any other relevant factor.
Representing debtor, mortgagor or guarantor
(3)For the purposes of paragraph (2)(f), a person is taken to have represented a debtor, mortgagor or guarantor if the person represented the debtor, mortgagor or guarantor, or assisted the debtor, mortgagor or guarantor to a significant degree, in the negotiations process prior to, or at, the time the credit contract, mortgage or guarantee was entered into or changed.
Unforeseen circumstances
(4)In determining whether a credit contract, mortgage or guarantee is unjust, the court is not to have regard to any injustice arising from circumstances that were not reasonably foreseeable when the contract, mortgage or guarantee was entered into or changed.
Conduct
(5)In determining whether to grant relief in respect of a credit contract, mortgage or guarantee that it finds to be unjust, the court may have regard to the conduct of the parties to the proceedings in relation to the contract, mortgage or guarantee since it was entered into or changed.
Application
(6)This section does not apply:
(a)     to a matter or thing in relation to which an application may be made under subsection 78(1); or
(b) to a change to a contract under this Division.
(7)This section does apply in relation to a mortgage, and a mortgagor may make an application under this section, even though all or part of the mortgage is void under subsection 50(3).
Meaning of unjust
(8)In this section:
unjust includes unconscionable, harsh or oppressive.
The contract must be unjust at the time it was entered into. That means there are four relevant dates as there are four separate loans. If a contract or loan is unjust the Court may reopen the contract and substitute just terms. The following section is relevant to that task:
77 Orders on reopening of transactions
The court may, if it reopens a transaction under this Division, do any one or more of the following, despite any settlement of accounts or any agreement purporting to close previous dealings and create a new obligation:
(a)reopen an account already taken between the parties to the transaction;
(b)relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;
(c)set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;
(d)order that the mortgagee takes such steps as are necessary to discharge the mortgage;
(e)give judgment for or make an order in favour of a party to the transaction of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;
(f)give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person;
(g)make ancillary or consequential orders.
A consideration of what is and what is not unjust in this context was undertaken by McDougall J in Hraiki v Beljon[5] where his Honour said:[6]
It is clearly established, in applications under the Contracts Review Act, that ordinarily relief will not be granted against an innocent party. For example, in Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256, Meagher JA at 277 said in substance that very strong reasons would need to be demonstrated before the legal rights taken by an innocent party under a contract could be disturbed because, by reason of circumstances for which that party had no responsibility, the contract could be regarded as "unjust."
In my view, those considerations should be taken to apply with equal force to an application to reopen under s 70 of the Code. In this case, as I have sought to make clear, the circumstances that are alleged to make the relevant transactions unjust are not circumstances for which the defendants are said to possess any responsibility. This is not a case where the very terms of the credit contract or the mortgage are harsh or usurious. Nor is it a case where the means employed by the defendants to procure the plaintiffs' assent to those transactions were overbearing or oppressive or in any other way unjust.
If the matters of which the plaintiffs complain are correct, one can not but feel sorry for them. But feeling sorry for them does not mean that their sorrows should be visited upon the defendants.
[5] [2008] NSWSC 775.
[6] [2008] NSWSC 775 at [35]-[37].
His Honour was dealing with a provision of the New South Wales Consumer Credit Code which allowed the court to reopen a credit contract if it was unjust. His comments appear to have application to the Code. The Court should consider the matters in s 76(2) of the Code when determining if the transactions are unjust.
Were any or all of the transactions unjust?
The first proposition put by the respondent is that the loans were unjust because of the circumstances in which they were entered into. The respondent submits that Mr Carbone, who made the original introduction, was acting in a sense as a broker. It was submitted that the applicant had an obligation to inquire as to whether he had the authority of the respondent to act in the way he was. The submission evolved into one of the necessity for a lender to make checks into an applicant’s ability to service or repay the loan. The respondent says that it is contrary to the public interest to simply rely on what the lender is told by an intermediatory acting as a broker. It is clear that Mr Carbone made the original introduction in 2013. It is not clear that he had much of a role in the transactions that proceeded. The respondent was communicating directly with the director of the applicant.

This was never intended to be a loan of the usual type that is ordinarily obtained from a bank. It was not a long-term loan with the obligation to make monthly payments. Each of the loan transactions was for a specific purpose and intended to be short-term. The respondent volunteered that she intended to sell the Blackwood property and that she needed money to renovate it so as to get a better price on sale. It was not the type of transaction that required an inquiry into serviceability. That is at least the case with the first loan in respect of the Blackwood property.
The second loan was similar to the Blackwood loan. The respondent told the applicant that she owned land at Coromandel Valley which she wished to subdivide into two blocks. It was her expressed intention to then sell one of the blocks created. Again, it was a short-term loan for a purpose with the respondent volunteering that she was going to realise part of the asset. Serviceability was not an issue.
All of the loans were for the purpose of renovating the Blackwood property and/or subdividing the Coromandel Valley property. The third loan of $100,000 was for the same purpose. The final loan in the amount of $40,000 was to allow the Blackwood renovations to be completed. At the time of each of the four transactions the respondent intended to sell her properties.
The failure of the applicant to inquire into serviceability does not make the loans unjust. The respondent told the applicant the purpose of the loans. The submission extends to a failure to inquire into the amount of equity. The evidence did not suggest that, at the time the loans were obtained, there was insufficient equity to repay the loans as anticipated. The respondent had assured the applicant that there was sufficient equity.
One of the unresolved mysteries of this matter is what the respondent did with the money she obtained from the applicant. She gave undertakings to use it for one of the two nominated purposes. It appears, however, she did not use it, or at least all of it, for those purposes. She was asked about that when giving evidence. Her answer was quite unclear. It seems likely that the money was used for purposes other than the specified purposes. I do not regard that fact as reflecting adversely on the applicant. The contracts are not unjust by reason of a failure of the applicant to make inquiries.
The second basis for saying the transaction was unjust is because of the interest rate. The respondent was not able to borrow on normal commercial terms from a first tier lender because both of her properties were subject to registered first mortgages. That led the respondent to seeking funds from other sources. In the result that was the applicant. Interest rates will always be higher when all that can be offered is a second mortgage.
Counsel for the respondent accepted that the principal has to be repaid. The issue is whether the Court should find the interest rate was unjust and then rewrite the contract as permitted by s 77 of the Code to reduce the amount payable.
All of the earlier loan agreements were incorporated into the final agreement. The interest rate in that agreement was 4% compounded on a monthly basis. The agreement provided that if the respondent met all of the obligations under the loan agreement, the lender would accept the concessional interest rate of 2% per month compounded. That is the interest rate that we are dealing with. The respondent says the interest rate is excessive and makes the final loan unjust. The Court should rewrite the contract to impose a lower interest rate to reduce the amount payable.
I note that in Perebo Pty Ltd v Wayville Residential Investments Pty Ltd[7] Stanley J held that an interest rate of 5% a month compounding was not unconscionable.
[7] [2019] SASC 35.
The applicable contractual rate, given the circumstances of default, is 4% per month capitalising on a monthly basis. At trial the applicant, partly to assist in settlement negotiations, agreed to limit its claim to 2% simple interest. That means that the interest rate sought by the applicant is well under half of the contractual interest rate, given that it is not capitalising on a monthly basis. I find that the interest rate being charged by the applicant in this matter is not unjust. Even if the final transaction had been held to be unjust, it is difficult to see that there would have been any basis on which to reduce the interest rate by any more than 50%.
For completeness, I also note that the respondent is an intelligent and articulate person. She was able to conduct the trial efficiently and effectively. The loan proposals she put to the applicant, if complied with by her, were entirely achievable in the timeframe nominated in the loan agreements. The cause of her present difficulties is that the respondent took the loan monies and did not utilise them for the purposes that she had specified. That is not the fault of the applicant. The fact that the respondent is now in a difficult position is not something to be visited on the applicant.
At its highest for the respondent, it might be said that the transactions she entered into with the applicant were imprudent. It is not clear that that is so but, assuming it to be the case, that provides no basis to make a finding that the transactions were unjust. They were transactions entered into by two people willingly. Unless there is a sound reason to do otherwise, the Court should leave people to the consequences of their contractual bargain. This is not a case of a person being at a disadvantage and a lender taking unconscientious advantage of that.[8]
[8] Blomley v Ryan (1956) 99 CLR 362.
Conclusion
The four contracts entered into between the parties are not unjust. There is no evidence of unconscionable conduct by the applicant. The applicant is entitled to an order for possession and for judgment on the debt due to it. I will hear the parties as to the form of the orders.

[2022] SASC 66

1 July 2022