Stone v Leonardis
[2011] SASC 153
•23 September 2011
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
STONE & ANOR v LEONARDIS & ANOR
[2011] SASC 153
Judgment of The Honourable Justice White
23 September 2011
REAL PROPERTY - TORRENS TITLE - CAVEATS AGAINST DEALINGS
The plaintiffs applied under s 191(d) of the Real Property Act 1886 (SA) for an order directing the Registrar-General to remove a caveat lodged by the defendants on the title to a property of which the defendants are the registered proprietors.
Whether an interlocutory application could be a "summons" for the purposes of s 191(d) - whether plaintiffs had a duty broader than a duty to act in good faith in the exercise of their mortgagees' power of sale - whether a breach of that duty may give rise to a caveatable interest - whether the defendants raised a serious question to be tried - whether the balance of convenience favoured the continuation of the caveat.
Held: the caveat should be removed - applications under s 191(d) should be determined in a manner similar to applications for interlocutory injunctions - the plaintiffs' interlocutory application constitutes an appropriate "summons" for the purposes of s 191(d) - application determined on the basis that the duty of a mortgagee exercising a power of sale is no greater than a duty to act in good faith - a claim that the exercise of a mortagee's power of sale is wrongful is capable of giving rise to a caveatable interest (Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd (1994) 1 VR 672 not followed) - defendants have not established a serious question to be tried as such caveatable interest as they have is of little or no value - even if the defendants caveatable interest was of some value, the balance of convenience does not favour the continuance of the caveat.
Corporations Act 2001 (Cth) s 459G; Real Property Act 1886 (SA) s 191; Australian Consumer Law s 30; District Court Civil Rules 2006 (SA) r 131, referred to.
Swanston Mortgage Pty Ltd v Trepan Investements Pty Ltd [1994] 1 CR 672, not followed.
Whallin v Bailbart Investments Pty Ltd (1987) 47 SASR 198; J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546; Black v Garnock (2007) 230 CLR 438; Eng Mee Yong v V. Letchumanan [1980] AC 331; Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42; Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; Adplan Pty Ltd v Gerblich [2011] SASC 118; Australian Continental Resource Ltd v Service Leasing Pty Ltd (1971) 24 SASR 489; In re Martin [1900] SALR 69; McEacharn v Colton [1902] AC 104; Barry v Heider (1914) 19 CLR 197; Re an Application by Haupiri Courts Ltd (No 2) [1969] NZLR 353; Sinclair v Hope Investments Pty Ltd [1982] 2 NSWLR 870; Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; Forsyth v Blundell (1973) 129 CLR 477; Citicorp Australia Ltd v McLoughney (1984) 35 SASR 375; Upton v Tasmanian Perpetual Trustees (2007) 158 FCR 118; Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; Vasiliou v Westpac Banking Corporation (2008) 19 VR 229 (Court of Appeal); RMBL Investments Ltd v Lorbay Pty Ltd (Unreported judgment, Judge Burley, Supreme Court of South Australia, 19 May 2010); Patmore v Upton (2004) 13 TAS R 95; McCourt v National Australia Bank Ltd [2010] WASC 121; Capital Finance Australia Ltd v Bayblu Holdings Pty Ltd [2011] NSWSC 24; Nubank Finance Pty Ltd v NBY Trust (Australia) Registry Limited (No 2) (Unreported judgment, Judge Withers, Supreme Court of South Australia, 9 April 2010); Jacem Pty Ltd v RMBL Investments Ltd [2010] SADC 97; NWL Ltd v Woods (The Navada) (No 2) [1979] 1 WLR 1294; Yara Australia Pty Ltd v Burrup Holdings Ltd [2010] FCA 1273; Australian Workers' Union v BHP Iron Ore Pty Ltd [2000] FCA 39; Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42; Nexus Mortgage Securities v Mawson KLM Holdings v Starmaker (No 51) Pty Ltd (1997) 193 LSJS 474; Cini v Pets Paradise Franchisings (SA) Pty Ltd (2008) 102 SASR 177; Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161; Andrew Garrett Wine Resorts Pty Ltd v National Australia Bank Ltd [201] SASC 60; Bayblu Holdings Pty Ltd v Capital Finance Australia Limited [2011] NSWCA 39; Varley v Varley [2006] NSWSC 1025, considered.
STONE & ANOR v LEONARDIS & ANOR
[2011] SASC 153Civil Application
WHITE J. The plaintiffs seek an order from this Court directing the Registrar-General to remove a caveat lodged by the defendants on the title to land at Highbury of which they (the defendants) are the registered proprietors. They make their application under s 191(d) of the Real Property Act 1886 (SA) which provides:
[T]he registered proprietor or any other person claiming estate or interest in the land may, by summons, call on any caveator, including the Registrar-General, to attend before the Court to show cause why the caveat should not be removed; and the Court may, after allowing the parties a reasonable opportunity to be heard, make such order as appears just in the circumstances; (if the caveator does not appear in response to the summons, the Court may, if satisfied that the summons was duly served, proceed to hear and determine the application in the caveator’s absence).
The defendants’ caveat is preventing the plaintiffs’ settling on a contract of sale into which they have entered as mortgagees exercising the power of sale. Because of that circumstance, the Court was asked to deal with the application urgently.
Background
The plaintiffs and the defendants entered into a written loan agreement on 28 January 2010 under which the plaintiffs agreed to advance to the defendants $800,000 secured by registered first mortgage over their home at Highbury. The loan was for a period of six months. The defendants did not make the required repayment on 28 July 2010, and have not since made any payments at all.
On 18 November 2010, a Master made an order granting the plaintiffs possession of the property. Subsequently, the defendants sought a stay of that order and, when that was refused, commenced an appeal against the refusal. They discontinued that appeal on 18 March 2011.
The plaintiffs then moved to exercise the power of sale. They appointed Brock Harcourts, a real estate firm, as the agent to market and sell the property. The plaintiffs agreed to allow the defendants to remain in occupation during the sale process, upon the defendants’ agreement to cooperate in that process and, in particular, to facilitate inspections by prospective purchasers. After a period of advertising and open inspections, an auction (the First Auction) was scheduled for 27 May 2011.
In the meantime, the plaintiffs obtained a valuation of the property from Mr Zwaans, a valuer employed by Valcorp Australia Pty Ltd. Mr Zwaans valued the property, apparently as at 2 May 2011, at $890,000 (range $850,000-$950,000). On 5 May 2011 Mr Zwaans valued the property on a forced sale basis at $800,000. Both values were a reduction from the value of $1,150,000 given by a different valuer, Mr Centofanti, on 14 January 2010 at the plaintiffs’ request when they were considering making the loan.
On 12 May 2011, Knight Frank Valuations (SA) (Mr Hill) made a valuation of the property, apparently at the request of the ANZ Bank. Mr Hill valued the property at $950,000.
The First Auction did not proceed. The plaintiffs’ solicitor has deposed that this was because there were no potential purchasers present.
Thereafter, and against the defendants’ opposition, the property was presented for sale as a “mortgagee sale”. On 15 June 2010, this Court issued a warrant of possession.
A second auction was held on 18 June 2011. Apart from one vendor bid, this auction attracted only one bid ($360,000) and the property was passed in. Subsequently, the property was advertised for sale at nominated prices.
Mr Zwaans made a further valuation on 21 July 2011. On this occasion he valued the property at $670,000, with a forced sale value of $600,000.
On or about 30 June 2011 the defendants informed the plaintiffs’ real estate agent and solicitors that they had located a potential purchaser for the property at $1,300,000. However, despite requests by the plaintiffs for details of this prospective purchaser and the delivery of an executed binding contract, this prospect did not materialise into a sale.
On 26 July 2011 the plaintiffs, exercising their power of sale, entered into a contract to sell the property for the sum of $685,000. Settlement was scheduled for 24 August 2011 but did not proceed at that time. The plaintiffs asked the defendants to vacate the home by 17 August 2011 but the defendants did not do so. The plaintiffs then instructed the Sheriff to enforce the warrant of possession.
On 22 August 2011 the defendants lodged with the Registrar-General the caveat which is the subject of the present application. I will set out the relevant content of that caveat shortly.
As a result of various orders made by this Court, execution of the warrant of possession has been stayed until Sunday, 25 September 2011. A Master has refused to set aside the order of possession. The plaintiffs wish to be able to proceed to settlement as soon as practicable after 25 September but are unable to do so because of the defendants’ caveat.
On 3 June 2011, the plaintiffs commenced proceedings in the District Court seeking recovery of the advance of $800,000 together with interest. By their defence, the defendants acknowledge the essential elements of the plaintiffs’ claim, but plead that the sale price of $685,000 is less than market value, and that the plaintiffs were thereby in breach of their duties as mortgagees exercising their power of sale. Those proceedings have now been transferred to this Court.
The background I have just recounted is not of course a complete recitation of the steps which the parties have taken in relation to the plaintiffs’ attempts to enforce the loan and to exercise their security. It is however sufficient to indicate the background to the issues now raised for the Court’s determination.
The Caveat
The panel form caveat contains the following entry under the heading “Certificate(s) of Title being Caveated”:
Memorandum of Mortgage No 11334663 over the Whole of the Land in Certificate of Title Registered Volume 5680 Folio 742
There is some inaptness in those particulars but the plaintiffs did not suggest that that was of any moment.
The defendants’ description of the land in the caveat is (again somewhat inaptly) the same as the description of the certificate of title being caveated. The caveat goes on to identify the interest claimed by the defendants as follows:
An interest as registered proprietors and mortgagors pursuant to Memorandum of Mortgage No 11334663 and claiming that the said caveatee has improperly purported to exercise the power of sale under the Mortgage:
1. when as at 12 May 2011, the Property had a Market Value of $950,000 pursuant to a Valuation Report prepared by Knight Frank Valuations (SA) (the Market Value).
2. by entering into Contract for the Sale and Purchase of the Property on 26 July 2011 for a Purchase Price in the sum of $685,000 which Purchase Price was far less than the Market Value of the Property.
Finally, the caveat states on its face that it:
FORBIDS THE REGISTRATION OF ANY TRANSFER OF THE SAID LAND by the said caveatee pursuant to their powers of sale under Memorandum of Mortgage No 11334663 arising from the Order for Possession of Property made on 18 November 2010 UNLESS SUCH DEALING IS MADE SUBJECT TO THE CLAIM OF THE CAVEATOR.
Principles to be Applied on an Application under s 191(d)
Apart from allowing a caveator voluntarily to withdraw a caveat (s 191(h)), s 191 provides two means by which a caveat may be removed: sub-s (d) and (e)‑(g). The latter provisions permit the caveatee to warn the caveat whereupon the caveat will be removed unless the Court, on the caveator’s application, extends the period of 21 days. In Whallin v Bailbart Investments Pty Ltd,[1] Cox J recommended a procedure for “the general run of [such] cases”.[2] The effect is that applications under s 191(g) are commonly dealt with as interlocutory applications and in a manner similar to applications for an interlocutory injunction.
[1] (1987) 47 SASR 198.
[2] Ibid at 203-4.
A number of matters indicate that a similar approach is appropriate on applications under s 191(d).
In J & H Just (Holdings) Pty Ltd v Bank of New South Wales,[3] Barwick CJ described the purpose of a caveat under the counterpart provisions in the Real Property Act 1900 (NSW) in the following passage:
Its purpose is to act as an injunction to the Registrar-General to prevent registration dealings with the land until notice has been given to the caveator. This enables the caveator to pursue such remedies as he may have against the person lodging the dealing for registration.[4]
Similarly, Windeyer J said:
[T]he primary purpose of a caveat against dealings is not to give notice to the world of an interest. It is to warn the Registrar-General of a claim. The word caveat has long been used in law to describe a notice given to an official not to take some step without giving the caveator an opportunity to oppose it … If a person intending to deal with the registered proprietor becomes aware of a caveat, it is notice to him of a claim that an interest is outstanding: and then caveat emptor …[5]
This underlying nature of a caveat suggests that it has some similarities with an interlocutory injunction, and is therefore a proper subject for an interlocutory application.
[3] (1971) 125 CLR 546.
[4] Ibid at 552.
[5] Ibid at 558. See also Black v Garnock [2007] HCA 31 at [7], [76]; (2007) 230 CLR 438 at 442, 463.
The Privy Council in Eng Mee Yong v V. Letchumanan[6] held, in relation to the Malaysian equivalent of s 191(d), that a procedure which is similar to that adopted on applications for an interlocutory injunction is appropriate.
The caveat under the Torrens system has often been likened to a statutory injunction of an interlocutory nature restraining the caveatee from dealing with the land pending the determination by the Court of the caveator’s claim to title to the land, in an ordinary action brought by the caveator against the caveatee for that purpose. Their Lordships accept this as an apt analogy with its corollary that caveats are available, in appropriate cases for the interim protection of rights to title to land or registrable interest in land that are alleged by the caveator but not yet proved. Nevertheless their Lordships would point out that the issue of a caveat differs from the grant of an interlocutory injunction in that it is issued ex parte by the registrar acting in an administrative capacity without the intervention of the Court and is wholly unsupported by any evidence at all. Unless there were some speedy procedure open to the registered proprietor to get the caveat set aside in cases where the caveator’s claim is baseless or frivolous or vexatious, the Torrens system of land registration and conveyancing, so far from giving certainty to title to land … would leave the registered proprietor in a more precarious position as regards his powers of disposition of his land than an unregistered proprietor under English law.[7]
Their Lordships went on to state the onus on a caveator on an application of the present kind in the following passage:
[The caveator] must first satisfy the Court that on the evidence presented to it his claim to an interest in the property does raise a serious question to be tried; and having done so, he must go on to show that on the balance of convenience it would be better to maintain the status quo until the trial of the action, by preventing the caveatee from disposing of his land to some third party.[8]
[6] [1980] AC 331.
[7] Ibid at 335-6.
[8] Ibid at 337.
A similar approach has been taken in relation to the interstate counterparts of s 191(d).[9]
[9] See, for example, Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 48; Capital Finance Australia Ltd v Bayblu Holdings Pty Ltd [2011] NSWSC 24 at [5].
The approach to be adopted in relation to an interlocutory injunctions is well settled. It was discussed by the High Court in Australian Broadcasting Corporation v O’Neill.[10] Gummow and Hayne JJ said:
[10] [2006] HCA 46; (2006) 227 CLR 57.
The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd. This Court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries and continued:
The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief ... The second inquiry is ... whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.
By using the phrase "prima facie case", their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the Court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument. With reference to the first inquiry, the Court continued, in a statement of central importance for this appeal:
How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks.[11]
(Citations omitted)
Gleeson CJ and Crennan J agreed with this part of the reasons of Gummow and Hayne JJ, saying:
[I]n all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff's entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances of the case, under which issues of justice and convenience are addressed. We agree with the explanation of these organising principles in the reasons of Gummow and Hayne JJ, and their reiteration that the doctrine of the Court established in Beecham Group Ltd v Bristol Laboratories Pty Ltd should be followed. …[12]
(Citations omitted)
[11] Ibid at [65], 81-2.
[12] Ibid at [19], 68.
Accordingly, I proceed on the following basis. The defendants have the onus of persuading the Court not to remove the caveat. This requires that they establish that there is a serious question to be tried concerning the existence of the asserted caveatable interest and that the balance of convenience favours the continuation of the caveat.
Plaintiffs’ Use of an Interlocutory Application
The plaintiffs sought the order for the removal of the caveat by an interlocutory application in the District Court proceedings. By paragraph 2 of that application they seek:
An order pursuant to s 191 of the Real Property Act 1886 that Caveat No 11631083 lodged in the Lands Title Office in respect of Memorandum of Mortgage No 11334663 be removed forthwith.
The interlocutory application indicated on its face that it would be heard in the District Court at 2.30 pm on 9 September 2011. By this means the defendants were informed both of the relief which the plaintiffs were seeking, and of the date and time when the Court would hear their application.
The defendants submitted that by proceeding in this way the plaintiffs had not validly invoked the Court’s jurisdiction under s 191(d). They submitted that s 191(d) requires that proceedings for the removal of a caveat be commenced by an initiating summons so that the plaintiffs’ interlocutory application, issued under r 131 of the District Court Civil Rules 2006, was ineffective.
The only authority which the defendants relied upon in support of this submission was the decision of Judge Lunn in Adplan Pty Ltd v Gerblich.[13] In that case, Judge Lunn held that a debtor could not seek the setting aside of a statutory demand under s 459G of the Corporations Act 2001 (Cth) by issuing an interlocutory process unless that process could be said to be adjectival to the substantive proceedings in which it was issued. As the defendants did not submit that the interlocutory application was not adjectival to the plaintiffs’ District Court proceedings, the decision in Adplan appears to be of little assistance in the present context.
[13] [2011] SASC 118.
The word “summons” is not defined in the RPA.[14] It is however a word used in a number of provisions within the RPA. For the most part it appears to be used in a general sense, ie, to indicate a court process by which a person is notified that they must appear before the court for the hearing and determination of some issue. Commonly such a process is likely to be the initiating process but I cannot see any indication that s 191(d) is to be construed as requiring a summons to be in that form in all cases. It is pertinent to note that in at least two provisions, the RPA itself distinguishes between an originating summons, on the one hand, and a summons in a more general sense, on the other. See s 169(6) and s 193. This suggests that the word “summons” is not used to indicate an originating process only.
[14] Cf s 226 which specifies a form of summons to be issued by the Registrar-General under the authority of the RPA.
One thing is plain: there is no warrant for construing the word “summons”, which has been in s 191(d) in the RPA since it was first enacted, by reference to the procedural regime established by the District Court Civil Rules 2006, made some 120 years later.
It may be that the word “summons” is more usually understood as connoting some form of initiating process. But the concept of an interlocutory summons is not unknown in procedural regimes. Further, it is difficult to discern any reason why the legislature in 1886 should have contemplated that the Court could exercise the power under s 191(d) only after the issue of an originating summons. The protective nature of a caveat and the fact that proceedings under s 191(d) are to be determined in a way similar to that applicable to interlocutory injunctions contraindicates such a legislative intention.
In my opinion, the word “summons” in s 191(d) should be understood as referring to some form of formal court process by which the jurisdiction of the court is invoked. The caveator is to be called upon to show cause, by such a process, rather than by any other means, why the caveat should not be removed. An interlocutory summons or an interlocutory application is such a process.
It was not suggested that the omission by the plaintiffs to use in their interlocutory application the actual words contemplated by s 191(d) (ie, calling on them to attend before the Court “to show cause” why the caveat should not be removed) was of any significance. I note that in Australian Continental Resources Ltd v Service Leasing Pty Ltd,[15] Hogarth J considered that the difference between a form informing a defendant that it should attend before the Court on the hearing of an application “for an order” of the kind specified in the summons and a form summonsing a caveator “to show cause why the caveat should not be removed” was immaterial.[16]
[15] (1971) 24 SASR 489.
[16] Ibid at 490-1.
This submission of the defendants fails.
Can a Registered Proprietor Lodge a Caveat on its own Title?
On one view it could be said that a registered proprietor should not be able to lodge a caveat on its own title. It has by its status as registered proprietor the highest possible interest in the land. However, when the protective nature of the caveat is appreciated, there is no reason in principle why a registered proprietor may not, at least in some circumstances, lodge a caveat to protect its interests. In any event, the Full Court of this Court held, as long ago as 1900, that a registered proprietor could caveat its interest as lessor to prevent an assignment of the lease by the lessee.[17]
[17] In re Martin [1900] SALR 69. See also McEacharn v Colton [1902] AC 104.
The authorities recognise a number of other circumstances in which it may be appropriate for a registered proprietor to lodge a caveat. For example, by a registered proprietor to prevent the registration of a transfer until payment of the purchase money;[18] or by a registered proprietor to prevent a fraudulent transfer when the duplicate certificate of title has been stolen or lost, or provided to the transferee in anticipation of a transfer.[19]
[18] Barry v Heider (1914) 19 CLR 197.
[19] J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 at 553. See also Bradbrook, MacCallum and Moore, “Australian Real Property Law”, 4th Ed, Thomson Law Book Co (2006) at [4.450].
However, some authorities indicate that in order to lodge a caveat on its own title, a registered proprietor must have some interest, or point to some circumstance, going beyond its status as registered proprietor: see, for example, Re an Application by Haupiri Courts Ltd (No 2);[20] Sinclair v Hope Investments Pty Ltd.[21] The submissions in the present case proceeded on the basis that the approach taken in Haupiri Courts and in Sinclair was correct.
[20] [1969] NZLR 353 (1982).
[21] [1982] 2 NSWLR 870 at 872.
In the view I take of the matter, it is unnecessary for me to consider the correctness of that position. I will approach the matter on the same basis as did counsel.
Does a Sale at Undervalue Give Rise to Caveatable Interest?
The duty of a mortgagee exercising a power of sale is, at least, to act in good faith, ie, without fraud and without wilfully or recklessly sacrificing the interests of the mortgagor.[22] I note that the defendants assert that the plaintiffs are subject to both a statutory and common law duty to take reasonable care to sell the property for not less than its market value, or otherwise the best price reasonably obtainable (Defence [3.5]). The authorities concerning a possible more extensive duty of the kind alleged by the defendants or otherwise were reviewed by the Full Court of the Federal Court in Upton v Tasmanian Perpetual Trustees[23] and the existence of such a duty was rejected. I propose to proceed on the basis that the plaintiffs were subject to a duty in the terms articulated above.
[22] Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; Forsyth v Blundell (1973) 129 CLR 477 at 493, 506; Citicorp Australia Ltd v McLoughney (1984) 35 SASR 375 at 379 et seq.
[23] [2007] FCAFC 57; (2007) 158 FCR 118.
The pertinent question for present purposes is whether such a duty will, if breached in a way which results in the property being sold for undervalue, give rise to an equitable interest in the land which may be caveated.
In Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd,[24] that question was answered in the negative in the context of s 89(1) of the Transfer of Land Act 1958 (Vic). Brooking J, in the judgment of the Court, concluded that a mortgagor in such circumstances did not have an equitable interest but a mere equity to apply to a court to have the mortgagee’s sale set aside. Brooking J distinguished the equitable interest of a mortgagor (the equity of redemption) which would exist once a court had determined that a mortgagee’s sale should be set aside from the mere equity which existed prior to the Court making that determination. His Honour did so for a number of reasons: first, the recognised differences in the way in which the term “an equity” may be used; secondly, an analysis of the decision of the High Court in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)[25] which led him to conclude that the approach of each of Kitto and Menzies JJ meant that a mortgagee’s entitlement to have a wrongful sale set aside was a mere equity, and not an interest in the land; thirdly, by reasoning that the equity did not become an interest in the land until it had been vindicated by action; and, fourthly, by declining to follow the decision in Sinclair v Hope Investments Pty Ltd[26] in which Needham J had held that when a mortgagee of land exercising its power of sale enters into a voidable contract of sale, the proprietary right of the mortgagor to restrain completion of that contract amounts to an equitable interest sufficient to found a caveat. I note that before the decision in Swanston, courts in Queensland had also applied the approach of Needham J in Sinclair.[27]
[24] [1994] 1VR 672.
[25] (1965) 113 CLR 265.
[26] [1982] 2 NSWLR 870.
[27] Re McKean’s Caveat (1988) 1 Qd R 524; Re Cross v National Australia Bank Ltd [1992] Q Conv R 54-433.
The decision in Swanston has been followed in a number of later decisions in Victoria, including Vasiliou v Westpac Banking Corporation;[28] and by a Master in this Court in RMBL Investments Ltd v Lorbay Pty Ltd.[29]
[28] [2007] VSCA 113, (2008) 19 VR 229 (Court of Appeal).
[29] (Unreported judgment of Judge Burley, 19 May 2010).
On the other hand, a number of courts have either declined to follow, or noted criticisms of, Swanston. These decisions include Patmore v Upton;[30] McCourt v National Australia Bank Ltd;[31] and Capital Finance Australia Ltd v Bayblu Holdings Pty Ltd.[32]In this State both Judge Withers in Nubanc Finance Pty Ltd v BNY Trust (Australia) Registry Limited (No 2)[33] and Judge Clayton in Jacem Pty Ltd v RMBL Investments Ltd[34] have held that a caveat may be lodged by a mortgagor who contends that the mortgagee’s exercise of its power of sale is improper. In addition, the decision in Swanston has been the subject of criticism by academic writers[35] and by the authors of Meagher, Gummow and Lehane’s “Equity: Doctrines and Remedies”[36]
[30] [2004] TASSC 77; (2004) 13 TAS R 95 (Underwood J).
[31] [2010] WASC 121 (Murphy J).
[32] [2011] NSWSC 24 (Pembroke J).
[33] (Unreported judgment delivered on 9 April 2010).
[34] [2010] SADC 97.
[35] David Wright “Does the Registered Proprietor have a Caveatable Interest?” (1995) 65 ALJ 935.
[36] 4th Ed, Butterworths LexisNexis 2002 at [4-170].
The criticisms of Swanston have included the following:
(1)It failed to recognise that until the registration of a transfer by a mortgagee exercising its power of sale, the mortgagor retains the legal interest, that being an interest which can be protected by caveat,[37] and that even if the mortgagor has only an equitable interest arising from the equity of redemption, it is still an interest which can be caveated.[38]
(2)Brooking J had said that on the approach of Kitto J in Latec, the mortgagor in Latec could not on any view be said to have had a caveatable interest. However, Kitto J had not made any statement to that effect and had not addressed the issue of a possible caveatable interest.[39]
(3)Although Brooking J had construed the reasoning of Menzies J in Latec as indicating that the registered proprietor’s interest in circumstances such as the present was only a mere equity, Menzies J had not addressed the position and his reasoning did not have to be construed in that narrow way.[40]
[37] Meagher, Gummow and Lehane at [4-170].
[38] Ibid.
[39] Wright at 937, Patmore at [45]-[46], Capital Finance at [24].
[40] Wright at 677; Patmore at [45], [49]-[54]; Capital Finance at [24].
The decision in Swanston, being a decision of an intermediate Court of Appeal in another State on a legislative provision which is in comparable terms to s 191, does of course command considerable respect. This Court should not depart from the approach in Swanston unless convinced that the decision is plainly wrong.[41]
[41] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [135]; (2007) 230 CLR 89 at 151-2; CAL No 14 Pty Ltd v Motor Accidents Insurance Board [2009] HCA 47 at [50]; (2009) 239 CLR 390 at 412.
However, as already noted, Swanston has been the subject of considerable criticism. Courts in at least two States (Patmore in Tasmania and Capital Finance in New South Wales) have declined to follow it.[42] I note also that the decision of Needham J in Sinclair v Hope Investments has continued to be followed in New South Wales. Although the Court of Appeal in Victoria followed Swanston in Vasiliou v Westpac Banking Corporation,[43] the Court noted the criticisms which had been made and accepted that the correctness of Swanston may require reconsideration.[44]
[42] See also Schmidt v 28 Myola Street Pty Ltd (2006) 14 VR 447; Western Australian Real Estate Custodian Pty Ltd (Receiver and Manager Appointed)v Chesson [2005] WASC 33.
[43] [2007] VSCA 113; (2007) 19 VR 229.
[44] Ibid at [121], 246.
In my respectful opinion, the criticisms of Swanston are well made. I consider, with respect, that this Court is entitled to hold that the decision in Swanston is clearly wrong and that this Court should not follow it.
Accordingly, to the extent that it may be necessary for the defendants to establish some circumstance going beyond their registered proprietorship of the land, I am satisfied that their claim that the plaintiffs’ exercise of their mortgagee power of sale is wrongful is capable of giving rise to an equitable interest capable of being caveated.
Before leaving this section of the reasons, I wish to record the assistance which I derived from the reasons of Judge Clayton in Jacem Pty Ltd v RMBL Investments Ltd.[45]
[45] [2010] SADC 97.
The Form of the Caveat
The plaintiffs contended that there are deficiencies in the form of the caveat.
I set out the relevant terms of the caveat earlier in these reasons. I noted that there was some inaptness in the manner in which the caveat is expressed.
The plaintiffs contended that the caveat operates to forbid the registration of any transfer of the land at all unless that transfer is made subject to the claim of the caveator. It is not entirely clear how such a transfer could be made so subject.
The plaintiffs submitted further that the caveat was also bad in form because, on its face, it appears to forbid the registration of any transfer of the land for an amount of less than $950,000, even though such a transfer may be a perfectly proper exercise of the mortgagees’ power of sale.
I consider that there is force in these submissions but that it is not necessary to reach a concluded view about them. I consider it preferable instead to proceed on the basis that such defects as may exist in the caveat would be capable of being remedied by amendment. In that circumstance, it is preferable that the present application be determined by reference to the substantive merits rather than by matters of form.
Is there a Serious Question to be Tried?
The defendants relied on a combination of circumstances to indicate that there was a serious question to be tried on their claim that the property was being sold at undervalue, and in breach of the plaintiffs’ duties as mortgagees exercising the power of sale.
First, they pointed to the valuation of 14 January 2010 (market value $1,150,000, forced sale value $900,000), the valuations of 2 and 5 May 2011 (market value $890,000, forced sale value $800,000) and 12 May 2011 (market value $950,000). The sale price of $685,000 is significantly less than each of those valuations.
Secondly, Mr Zwaans had given his opinion as to the value of the property if sold “within a normal marketing period of say 10-14 weeks” or on a forced sale basis “with a limited marketing period of say 4-6 weeks”. In his valuation of 21 July 2007, Mr Zwaans had referred to “a normal marketing period of say 15‑20 weeks” and “a limited marketing period of say 6-8 weeks”. The defendants pointed out that the plaintiffs had not exposed the property for sale for periods of this kind as advertising had commenced on 30 April 2011, the First Auction occurred on 27 May 2011 and the Second Auction on 18 June 2011.
Thirdly, the defendants drew attention to the fact that, commencing on 25 June 2011 the plaintiffs had advertised the property for sale at a price of $700,000-$745,000 even though the lowest of the valuations which they then held indicated that the property had a value of $800,000. The defendants contended that by failing to engage in a marketing campaign over a period of 10-14 weeks, and offering the property for sale at a nominated price which was less than the lowest of the valuations, the plaintiffs had not exercised properly their power of sale.
The defendants acknowledged that there is evidence in Mr Zwaan’s valuation of 21 July 2011 of a decline in real estate values generally but submitted that this was insufficient to explain the difference between the valuations and the price in fact realised.
Finally, the defendants drew attention to the absence of evidence as to the way in which the price of $685,000 was negotiated with the purchasers.
The plaintiffs raised a number of matters which militated against the existence of a serious question to be tried. They referred to the evidence of what they described as “a falling real estate market”; to their retention of a reputable real estate firm; to the fact that two auctions were held; to the fact that the defendants themselves delayed the sale process by their resistance to the application of the order for possession and their pursuit of a stay of that order; and their own interest in maximising the sale price bearing in mind the prospect of a shortfall in their recovery if they have to pursue the defendants personally for the balance of their liability. The plaintiffs also drew attention to the fact that the circumstances of this sale do not have any unusual features, such as sale to a purchaser who is not at arm’s length, or a failure to market the property at all, or a sale conducted in a secretive way.
The defendants also sought to establish a serious question to be tried by reference to s 30 of the Australian Consumer Law. They relied upon a hearsay assertion contained in the first defendant’s affidavit to the effect that the plaintiffs’ real estate agent had told a prospective purchaser (not necessarily the ultimate purchaser) that at the advertised price the property was a bargain compared with the valuation. It was said that this statement was, in some way not elaborated upon in the submissions, a contravention of s 30(1) of the Australian Consumer Law. Even though the statement said to be misleading had not been made to the defendants, the submission was that the defendants could nevertheless rely upon it in seeking an order under s 243 of the Australian Consumer Law.
In my opinion, the defendants’ attempt to establish a serious issue to be tried by this means must fail. It is not at all clear that the statement said to have been made by the agent was misleading or deceptive and, even if it was, how it could have been productive of loss to the defendants, and even if it was, how it could give rise to a caveatable interest. The argument has all the appearances of a makeweight in the present context.
It was common ground that as at 26 July 2011 (the date of entry into the contract) the indebtedness of the defendants to the plaintiffs for both principal and interest exceeded $950,000. In addition, the plaintiffs have incurred various expenses in connection with their application for an order for possession and the process of sale, which they are entitled, by cl 2.3 of the Memorandum of Mortgage, to recover from the defendants. It is improbable therefore that even if the property was sold at the value suggested by the defendants, it would realise any residue to them. In turn, this suggests that although as a matter of principle the circumstances relied upon by the defendants may give rise to a caveatable interest, such an interest does not in fact arise. That conclusion applies with even greater force if the defendants’ indebtedness to the plaintiffs is assessed at the present time.
In my opinion, if regard is had only to the circumstances relied upon by the defendants as indicating a sale at undervalue, a serious question to be tried would exist. At least some of the contemporaneous valuations indicate a significant disparity between the estimates of value and the ultimate sale price. This is not a conclusion that there has been a sale at undervalue, only a conclusion that, if these circumstances are considered alone, there would be a serious question to be tried. However, the extent of the defendants’ indebtedness negates the possibility of this conclusion being appropriate. On the valuation of $950,000 for which the defendants themselves contend (as specified in the caveat itself) a sale at that price would not result in the equity of redemption having any value or, if it did, it would be so minor as to be able to be disregarded in the present context.
Balance of Convenience
In case my conclusion concerning the existence of a serious issue to be tried is wrong, I will also consider where the balance of convenience lies. In doing so, I will assume, contrary to my own findings, that the defendants do, in the circumstances, have a caveatable interest which is of some worth. That is a significant assumption in the defendants’ favour because some authorities suggest that if a caveator does establish a caveatable interest, or can show at least that the existence of such an interest is reasonably arguable, courts should be cautious before ordering the removal of the caveat.[46] In part this is because the whole purpose of a caveat is to restrain dealings with the property until the caveator’s claim is determined. In part it is because courts appreciate that an order for removal of the caveat may effectively be a final determination of the caveator’s claim. Lord Diplock spoke of this consideration in the context of injunctions in NWL Ltd v Woods (The Navada) (No 2)[47] when he said:
Where, however, the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that the plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial, is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other.[48]
The approach stated by Lord Diplock in NWL Ltd v Woods has been applied in Australia: see Yara Australia Pty Ltd v Burrup Holdings Ltd.[49]
[46] Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 48-50; Nexus Mortgage Securities v Mawson KLM Holdings & Starmaker(No 51) Pty Ltd (1997) 193 LSJS 474 at 479-80; Cini v Pets Paradise Franchisings (SA) Pty Ltd [2008] SASC 287 at [51], (2008) 102 SASR 177 at 192.
[47] [1979] 1 WLR 1294.
[48] Ibid at 1307.
[49] [2010] FCA 1273 at [79]-[85]; Australian Workers’ Union v BHP Iron Ore Pty Ltd [2000] FCA 39 at [60]-[63].
I keep in mind, as Doyle CJ observed in Nexus Mortgage Securities Pty Ltd v Mawson KLM Holdings & Starmaker (No 51) Pty Ltd, that the Court is exercising a statutory discretion under s 191(d) and not its equitable jurisdiction.[50]
[50] (1997) 193 LSJS 474 at 480.
The defendants submitted that four matters pointed the balance of convenience in their favour. The first was that while the caveat continues in force, the plaintiffs continue to be secured as first mortgagee. This submission is correct as a matter of form, but overlooks that the plaintiff’s total indebtedness is, on the valuation upon which the defendants rely, no longer secured to its full extent.
Secondly, the defendants submitted that the plaintiffs have the protection of s 191(j) of the RPA which provides:
[A]ny caveator other than the Registrar-General who shall have lodged or refused or neglected to withdraw any caveat wrongfully and without reasonable cause, shall be liable to make compensation to any person who may have sustained damage thereby, and such compensation may be recovered by action: Provided that, if proceedings shall have been taken in the Court by the caveatee or other person interested, the amount of such compensation may be assessed by the Court acting in the same proceedings; or the Court may direct an action to be brought to ascertain and recover such amount;
The submission is similar to a submission that damages will be an adequate remedy. However, the submission overlooks that all s 191(j) does is to create an entitlement or liability in certain circumstances. It is not itself a security. The right of action is valuable only if the defendants have the means of satisfying any order for compensation which may be made against them. The defendants have provided no evidence at all to that effect. In this context it is pertinent to note the plaintiffs’ uncontradicted assertion that the defendants have made no payment of interest at all since 28 July 2010. This, together with other evidence, suggests that the defendants are in financial difficulties. In those circumstances, the right of action provided by s 191(j) may be illusory as a form of protection.
Thirdly, the defendants submit that the removal of the caveat will have the effect for practical purposes of destroying the potential benefit to them of their caveatable interest. Again, this submission is true so far as it goes but takes no account of the fact that the accumulated indebtedness of the defendants to the plaintiffs secured by the mortgage makes it likely, even on the valuation upon which the defendants rely, that their equity of redemption will have no value.
Finally, the defendants submit that the property in question is their family home. As to this, it is sufficient to note that the caveat protects a caveatable interest, when such an interest exists, and not a right of occupation. This Court has already made an order for possession and a stay of that order will expire on 25 September 2011.
In assessing the balance of convenience, it is particularly significant, in my opinion, that the defendants have not sought to provide any security to the plaintiffs. The general rule that courts ought not restrain the exercise of a power of sale unless the amount of the mortgage debt, or at least the amount claimed by the mortgagee, is first paid into court is well established. In Inglis v Commonwealth Trading Bank of Australia,[51] Walsh J said:
A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court.[52]
Barwick CJ agreed with this statement saying:
The case falls fairly, in my opinion, within the general rule applicable when it is sought to restrain the exercise by a mortgagee of his rights under the mortgage instrument. Failing payment into court of the amount sworn by the mortgagee as due and owing under the mortgage, no restraint should be placed by order upon the exercise of the respondent mortgagee’s rights under the mortgage.[53]
[51] (1972) 126 CLR 161.
[52] Ibid at 164.
[53] Ibid at 169.
Later decisions have suggested that the approach stated in Inglis should be confined to the so-called “ordinary case” and that there may be a number of circumstances in which that general approach is inappropriate. See, for example, the authorities reviewed by Besanko J in Andrew Garrett Wine Resorts Pty Ltd v National Australia Bank Ltd[54] and the decision of the Court of Appeal in New South Wales in Bayblu Holdings Pty Ltd v Capital Finance Australia Limited.[55] However, I see no reason in principle why the approach in Inglis should not be applied in the present case. The defendants should provide security for at least the purchase price under the contract. Apart from submitting that the provision of such security should be made a condition of any order the Court may make, the defendants have not provided any evidence at all that they would be able to meet the condition, or that otherwise it would serve any practical purpose.
[54] [2004] SASC 60.
[55] [2011] NSWCA 39.
The defendants have given “the usual undertaking as to damages”. They have not, however, provided any evidence of either a willingness, or an ability, to provide security for $685,000 or that they will be able to honour the undertaking if called upon to do so.
I consider it appropriate to take this circumstance into account in relation to the balance of convenience. It is of course not a conclusive consideration but it is, to my mind in the present circumstances, a very material consideration.[56]
[56] Varley v Varley [2006] NSWSC 1025 at [56], [62].
Finally, I accept that if the caveat is not removed the plaintiffs will be put to additional inconvenience and expense. They will effectively be restrained from completing a sale of the property until the defendants’ claims can be determined. In the meantime, the defendants’ indebtedness to them will increase at a time when that increased indebtedness is unsecured. The plaintiffs will also incur additional expense.
In my opinion, in this combination of circumstances the balance of convenience points in favour of the plaintiffs.
Conclusion
For the reasons given above, I consider that the Court should order the removal of the caveat. Accordingly I order pursuant to s 191 of the Real Property Act 1886 that caveat No 11631083 lodged in the Lands Titles Office in respect of Memorandum of Mortgage No 11334663 and Certificate of Title 5680 Folio 742 be removed forthwith. I will hear from the parties as to any other orders.
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