Mayes v Southern Cross Finance Limited

[2013] NZHC 972

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-10 [2013] NZHC 972

UNDER  Section 145A of the Land Transfer Act

1952

IN THE MATTER OF     Caveat 9224582.1

BETWEEN  JOHN WILLIAM NEWTON MAYES Applicant

ANDSOUTHERN CROSS FINANCE LIMITED

Respondent

Hearing:         3 May 2013

Counsel:         SA Grant for applicant

DS McGill and K White for respondent

Judgment:      6 May 2013

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application that caveat not lapse]

Solicitors:           Sharp Legal, PO Box 9686, Wellington

Duncan Cotterill, PO Box 5326, Auckland 1141

MAYES V SOUTHERN CROSS FINANCE LIMITED HC AK CIV-2013-404-10 [6 May 2013]

[1]      The applicant applies for an order pursuant to s 145A of the Land Transfer

Act 1952 that Caveat 9224582.1 not lapse.  The application relates to a property at

2/1 Waitara Road, Glendowie, Auckland.  The property is owned by the applicant’s

mother.

[2]      The caveat claims an estate or interest:

Pursuant to a  cestui que trust  between the registered  proprietor and the caveator contained in a option to purchase dated 17 October 2012.

[3]      The respondent, who is the second mortgagee of the subject property and whose mortgage was registered on 17 May 2001 opposes the order sought.   The grounds advanced in opposition are:

(a)      The  respondent  holds  the  second  registered  mortgage  over  the property as security for loan advances made to the applicant and the applicant’s joint borrower, his mother;

(b)The applicant and his mother have defaulted under the terms of the term loan held with the respondent and have failed, upon demand, to repay moneys due and owing to the respondent;

(c)      As at 3 February 2013, the applicant and his mother were indebted to the respondent in the sum of $203,519.86;

(d)Pursuant to the powers contained within the term loan agreement, the respondent issued Property Law Act notices to the applicant and his mother   on   or   about   15 October   2012,   such   notices   requiring repayment of all outstanding moneys, failing which the respondent would exercise powers of sale under the mortgage;

(e)      The  applicant  and  his  mother  failed  to  remedy  the  defaults  in accordance with the Property Law Act notices;

(f)      On 12 November 2012, the respondent instructed real estate agents to market the property for mortgagee sale;

(g)On 14 December 2012, following a tender process, the respondent entered  into  a  sale  and  purchase  agreement  for  the  sale  for  the property pursuant to the powers held by the respondent as mortgagee;

(h)Settlement of the agreement for sale and purchase of the property was scheduled to take place on 25 January 2013;

(i)The settlement of the sale and purchase agreement has been deferred to 25 May 2013 pending resolution of the applicant’s application;

(j)The respondent has the right pursuant to the mortgage executed in its favour to sell the property and has done so;

(k)The respondent’s right of sale as mortgagee takes priority over the applicant’s claim to an interest in the land pursuant to an option to purchase dated 17 October 2012; and

(l)       The applicant’s caveat should be removed to allow completion of the

mortgagee sale of the property to proceed to settlement.

[4]      This application is made pursuant s 145A of the Land Transfer Act 1952 which provides:

145A   Early lapse of caveat against dealings

(1)       The  registered  proprietor  of  any  estate  or  interest  in  the  land protected by a caveat against dealings (other than a caveat lodged by the Registrar) may apply to the Registrar for the caveat to lapse.

(2)      The Registrar must give the caveator notice of an application under subsection (1).

(3)      The caveat lapses with the close of the prescribed period after the date on which the notice under subsection (2) is given unless—

(a)       the caveator has earlier given to the Registrar notice that an application for an order to the contrary has been made to the High Court; and

(b)       an order to that effect has been made and served on the Registrar  within  the  prescribed  period  after  the  date  on which the notice under paragraph (a) is given to the registrar.

[5]      The  applicable  principles   which   apply  when   considering  applications pursuant to s143, 145 and 145A of the Land Transfer Act 1952 are well known and can be shortly stated. They are:

a)       Ss 143, 145 and 145A of the Land Transfer Act 1952 give no guide as to the circumstances in which the court may make an order that a caveat be removed:[1]   Catchpole v Burke;

[1] Catchpole v Burke [1974] 1 NZLR 620 (CA) at 623.

b)If it is clear that there was no valid ground for the lodging of a caveat, or that the interest which in the first place justified the lodging of the caveat no longer exists, such a caveat should be removed:[2]    Sims v Lowe;

[2] Sims v Lowe [1988] 1 NZLR 656 (CA) at 659.

c)       The onus under s 143 of the Land Transfer Act 1952 lies on the caveator  to  show  that  he  has  a  reasonably  arguable  case  for  the interest he claims:[3]   Castle Hill Run Ltd v NZI Finance Ltd;

[3] Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104–106 (CA).

d)The caveat, being a creature of statute, may be lodged only by a person upon whom a right to lodge it has been conferred by statute.  It is not enough to show that the lodging and continued existence of the caveat  would  be  in  some  way  advantageous  to  the  caveator:[4]

Guardian Trust & Executor Co of New Zealand Ltd v Hall;

e)       What the caveator must establish is an arguable case for claiming an interest of the kind referred to in s 137 of the Land Transfer Act 1952; and

[4] Guardian Trust & Executor Co of New Zealand Ltd v Hall [1938] NZLR 1020 (CA) at 1025.

[6]      Even if the caveator establishes an arguable case for the interest in the land claimed, the court retains a discretion to make an order removing the caveat although

it will be exercised cautiously:[5]   Pacific Homes Ltd (in rec) v Consolidated Joineries

Ltd.

[5] Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 at 656.

[7]      The court has a discretion to impose conditions in respect of any order made sustaining a caveat.[6]

[6] Raiser Developments Ltd v Trefoil Properties Ltd [2008] NZCA 73.

[8]      On or about 6 April 2001, the applicant and his mother signed a term loan agreement with the respondent pursuant to which a loan of $60,000 was advanced. The applicant and his mother were named as co-borrowers in the loan documents. The loan was used to repay an existing second mortgage on the applicant’s mother’s house of $40,000.  That second mortgage was discharged as a result.  The applicant’s mother granted the respondent a mortgage over the property at Waitara Road as security for the loan.   The applicant signed the mortgage as covenantor.   The mortgage was registered on 17 May 2001.   The loan was advanced on or about

3 May 2001.  The term was initially for one year.  It was subsequently rolled over following expiry of the initial one-year term.

[9]      The loan contract contained the following terms:

(a)       The term of the loan was 12 months from the date of the advance;

(b)The interest rate was 13 per cent with a penalty rate of 9 per cent above the ordinary rate;

(c)      Interest for the full twelve months of $7,800 was to be retained at draw down;

(d)A funding reserve fee of $1,500 was required.  Part of that fee, $500 being a non-refundable fee, was payable on acceptance of the loan by the borrowers. The balance was to be deducted at draw down;

(e)       $250 was required to be paid by the borrowers on account of the

lender’s solicitor’s costs.  The loan offer concluded by requiring the

$500 part of the reservation fee and the legal fees to be paid by cheque and forwarded with the acceptance of the loan offer.

[10]     On  or  about  3  May  2001  the  initial  loan  advance  was  made.     The respondent’s issued a statement to the applicant and his mother.   That discloses a deduction of:

(a)        $7,800 being the interest retained on draw down;

(b)the balance of the funding reserve fee of $1,000 and a number of other disbursements which were not specifically raised as relevant for the purpose of this application.

The statement discloses that $48,756.25 was in fact forwarded to the applicant and his mother.   For the purposes of this case, the parties proceeded on the basis that

$8,800 was deducted from the loan advance of $60,000 and retained by the respondent.   There is a dispute as to whether an additional $500 was paid by the applicant as part of the funding reserve fee.   The applicant says he paid this fee. There is a pencil notation on the respondent’s letter of offer apparently retained on its behalf with a tick alongside $500 and marked “received”.  The respondent says it has no evidence of having received that sum.  This is a matter that I cannot resolve in this proceeding but there is at least a foundation for what the applicant says is the position by reference to the documents.

[11]     On or about 15 March 2006, the respondent advanced further sums to the applicant and his mother of $15,000.

[12]     Following  the  issue  of  the  Property  Law  Act  notices,  the  respondent conducted the mortgagee sale of the property at Waitara Road.  That sale took place on 12 December 2012.  The respondent alleged that as at 9 October 2012, the sum of

$213,377 was due and owing under the mortgage.  The respondent now claims that further interest and costs, as a consequence of the mortgagee sale, are also owed by the applicant and his mother.

[13]     On 17 October 2012, the applicant’s mother, acting by her attorney, granted the applicant an option to purchase the property.   The option to purchase is the interest referred to in the caveat.  The caveat was registered on 2 November 2012.  In normal  circumstances,  the registered  mortgagee’s  title will  be paramount.   That includes  the  mortgagee’s  right  to  exercise  its  power  of  sale:    Congregational

Christian Church of Samoa Henderson Trust Board v Broadlands Finance Ltd.[7]

[7] Congregational Christian Church of Samoa Henderson Trust Board v Broadlands Finance Ltd

[1984] 2 NZLR 104 (HC).

[14]     Section 105 of the Land Transfer Act 1952 provides:

105      Transfer by mortgagee

Upon  the  registration  of  any  transfer  executed  by  a  mortgagee  for  the purpose of [exercising a power of sale over any land], the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser,  freed  and  discharged  from  all  liability  on  account  of  the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.

[15]     The  applicant’s  case  is  that  his  estate  or  interest  has  priority  over  the mortgage as the mortgage ought to have been discharged because initial disclosure was not correctly made and the contract between the applicant and his mother, on the one part, and the respondent, on the other part, was cancelled before any initial or modification disclosure was made.  In addition, the applicant asserts that the initial disclosure was not made correctly.

[16]     The factual foundation for the applicant’s case is that the initial disclosure documents fails to take into account the $500 that applicant says was paid and, indeed, was required to be paid as the funding reserve fee.  It is common ground that if  the  $500  was  paid,  the  finance  rate  that  should  have  been  included  in  the disclosure document issued to the applicant and his mother should have been 18.34 per cent. What was recorded in that document, however, was 17.19 per cent.

[17]     Ms Taefi referred to the repeal of the Credit Contracts Act 1981 effective from 1 April 2005 by the Credit Contracts and Consumer Finance Act 2003.  That

Act contained transitional provisions.   Under the transitional provisions the Credit

Contracts Act  1981  continued  to  apply to  loan  transactions  entered  into  before

1 April 2005 unless and until the financier, in this case the respondent, complied with the provisions of s 142 of the Credit Contracts and Consumer Finance Act 2003. That required the financier to notify the borrower in writing that the financier had made an election under s 142 of the Credit Contracts and Consumer Finance Act

2003 and that that Act would apply from the effective date of the election.

[18]     There is no formal evidence of any election having been made under s 142. Accordingly, by the operation of s 143, the Credit Contracts Act 1981 continues to apply to the transaction between the applicant and the respondent.

[19]     On 16 March and 17 October 2012 the applicant and his mother respectively exercised their right under s 22(1)(a) of the Credit Contracts Act 1981.  That section gives the debtor the right to cancel the contract not later than the end of the third working day after the day initial disclosure or modification disclosure (as the case may be) of a contract is made.  The effect of that cancellation is provided for in s 23 of the Credit Contracts Act 1981.  No party to the credit contract shall be obliged, or entitled, to perform it further.   There are other provisions relating to the return of property and the release of securities.

[20]     Mr McGill properly acknowledged that if there was a factual dispute that I could not resolve in this case and which, if found in favour of the applicant, could well lead to the position where initial disclosure had not been given and the potential result, that is as a result of the cancellation there was nothing due and owing on the mortgage, it was inevitable that I sustain the caveat.

[21]    In advancing her case, Ms Taefi quite properly submitted that an order sustaining the caveat could well be the subject of a condition requiring the issue of proceedings in which the applicant would seek a declaration that there was no money due under the loan contract and mortgage to the respondent, and possibly such other relief as was appropriate.

[22]     This is a case where the applicant has satisfied the test for sustaining a caveat, at least pending the resolution of proceedings to determine whether there is any

money due and owing under the mortgage.  As I have already mentioned, the Court of Appeal has approved of the imposing of conditions in appropriate cases.   Counsel confirmed to me that there is adequate security in the property at Waitara Road.  The respondent is unlikely to be prejudiced by a lack of security should it successfully defend the applicant’s proceedings.   The current mortgagee sale has provision for cancelation if the caveat is not removed before settlement. Accordingly, there are no grounds for refusing the order.

[23]     Both counsel agreed that this was a Category 2 case and that Band B for all appropriate steps applied.  Ms Taefi invited me to make an order in the applicant’s favour at this time.  Mr McGill invited me simply to fix the quantum of costs and reserve costs to await the outcome of the anticipated proceedings.  I consider that it is appropriate that costs be ordered in favour of the applicant because it should have been apparent to the respondent that there was a triable issue involved and that it was appropriate that the caveat be sustained subject to a condition.   In recording this position,  I do  not  overlook  the  rather  unusual  course  that  was  adopted  by  the applicant.  One would normally have assumed that an applicant, in the position of Mr Mayes, would have applied for an injunction to restrain any action to enforce the respondent’s powers as mortgagee.  However, at the end of the day, the outcome has been much the same and it is apparent that some action was required to stop the completion of a sale while the issue of whether there was any money due and owing under the mortgage was determined.   That all leads me to the conclusion that an order for costs is appropriate.

Orders

[24]     I order that caveat 9224582.1 not lapse pending further order of the court.  It is a condition of this order that the applicant file and serve proceedings seeking a declaration to the effect that there is no money due and owing by the applicant and his mother in relation to the loan and mortgage granted in favour of the respondent within 21 calendar days of the date of this decision and diligently prosecute such proceeding.    In  the  event  that  such  proceeding  is  not  issued  and  prosecuted diligently, leave is reserved to the respondent to apply for the immediate removal of the caveat.

Costs

[25]     I order that the respondent pay the applicant’s costs on this application based on Category 2 Band B of the High Court Rules together with disbursements as fixed

by the Registrar.

JA Faire

Associate Judge