Nags Head Horse Hotel Limited v Forest Trustee Limited
[2012] NZHC 2748
•18 October 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-001739 [2012] NZHC 2748
BETWEEN NAGS HEAD HORSE HOTEL LIMITED Plaintiff
ANDFOREST TRUSTEE LIMITED First Defendant
ANDOTIUM TRUSTEE LIMITED Second Defendant
ANDZEBRA CROSSINGS TRADING LIMITED AND PETER WILLIAM MAWHINNEY
Third Defendants
Hearing: 17 October 2012
Appearances: L A O'Gorman for Plaintiff
P W Mawhinney in person
Judgment: 18 October 2012
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 18 October 2012 at 4:45 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date………………………
Solicitors: Buddle Findlay, P O Box 1433, Auckland 1140
Fax: (09) 358-2055 – Email: [email protected]
Copy to: P W Mawhinney, P O Box 95157, Swanson, Auckland
Email: [email protected]
NAGS HEAD HORSE HOTEL LTD V FOREST TRUSTEE LTD HC AK CIV-2012-404-001739 [18 October
2012]
[1] This application for interim injunction concerns the question of priority between two mortgages registered over a property in West Auckland. The holder of one of the mortgages is the plaintiff, Nags Head Horse Hotel Limited (Nags Head). The other mortgage was originally held by Sixty-six Auckland Ltd (Sixty-six), but subsequently transferred to the second defendant, Otium Trustee Limited (OTL), and then to the third defendants, Zebra Crossings Trading Limited (Zebra) and Peter William Mawhinney.
[2] Nags Head is seeking to enforce a Deed of Priority executed by the then registered proprietor and Sixty-six that it says is binding on Zebra and Peter Mawhinney. Nags Head has applied for summary judgment. Pending determination of the summary judgment application, it seeks interim relief preventing further dealing with the Zebra/Peter Mawhinney mortgage.
[3] The application is to be determined on the accepted principles applying to interim relief; the major considerations are whether there is a serious question to be tried and where the balance of convenience lies.[1] However, these two aspects are non-exhaustive, with the ultimate consideration being where the justice of the case lies.[2]
[1] American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL).
[2] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
[4] Only Mr Mawhinney appeared in opposition to the application for interim injunction. I reserved my decision until today so that I could fully review the extensive material that he had filed. I find that there is a serious question to be determined, that the balance of convenience favours Nags Head and that the interests of justice warrant granting interim relief. For the reasons that follow I grant the
application and make orders in the form sought by Nags Head.
[5] Ms O’Gorman, for Nags Head, submitted that there is a serious question as to whether the Nags Head mortgage takes priority over the mortgage registered to Zebra/Peter Mawhinney because the various assignees of that mortgage, including Zebra and Peter Mawhinney, had knowledge of Nag’s Head’s rights under the Deed of Priority.
[6] Mr Mawhinney, however, maintained that there is no serious question regarding priority because the Nags Head mortgage no longer exists; he argued that since the the property has now been sold by Zebra/Peter Mawhinney under their mortgagees’ power of sale to a bona fide purchaser who did not have notice of the Deed of Priority and that the effect of s 105 of the Land Transfer Act 1952 was to extinguish the Nags Head mortgage upon that sale.
[7] The Nags Head mortgage was given in August 2010 as security for a loan from Nags Head to the then registered proprietor, Richard Vesey. At the time there were already two mortgages registered in favour of Sixty-six (one was later discharged and is not relevant). Under the Deed of Priority it was agreed that the Nags Head mortgage would take priority over the Sixty-six mortgages. Although Nags Head had the right to require registration of a priority instrument it did not make that request until after the events that are relevant to this application had occurred.
[8] The Sixty-six mortgage was transferred to OTL and in September 2011, exercising its power of sale under the mortgage, OTL sold the property to Mr Vesey in his personal capacity (he previously having held title as trustee).[3] Sixty-six and OTL had the same director (Anthony Mawhinney) and co-trustee (Peter Mawhinney).
[3] It appears that this exercise of power of sale and transfer to Mr Vesey was engineered to dislodge a caveat by Avanti Finance Limited from the title. No issue arises from this step.
[9] In October 2011 Mr Vesey transferred the property to Forest Trustee Limited
(FTL) of which Anthony Mawhinney (Peter Mawhinney’s brother) was the sole
director.
[10] In January 2012 FTL entered into an agreement for the sale and purchase of the property with End of the Line Limited (EOTL). Registration of the transfer was refused, with further documentation required. Between March and April 2012 OTL adopted the sale and amended the transfer instrument to show the transfer as being undertaken pursuant to the mortgagees’ power of sale. Registration of that transfer has also been refused.
[11] Finally, in May 2012 OTL transferred the mortgage to Zebra (as trustee for
Sixty-six) and Peter Mawhinney. Anthony Mawhinney is the sole director of Zebra.
[12] The transfers of the mortgage from Sixty-six to OTL and on to Zebra do not create any barriers in terms of Nags Head’s claim to priority because all three companies are controlled by Anthony Mawhinney and therefore fixed with Sixty- six’s knowledge of the Deed of Priority. The transfer of the property to Mr Vesey personally and onto to FTL do not pose any barrier for the same reason. Mr Mawhinney’s argument turn’s on whether the agreement to sell to EOTL and the subsequent adoption of that agreement by OTL resulted in EOTL being entitled by s 105 to the transfer of the property free of the Nags Head mortgage.
[13] Section 105 provides that:
Upon the registration of any transfer executed by a mortgagee for the purpose of any sale as aforesaid, 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 and 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 for which by reason of the consent of the mortgagee is binding on him.
[14] Whether Mr Mawhinney’s argument is correct turns on the application of the so-called rule in Otter v Vaux.[4] This rule extended the general principle that a mortgagor could not set up against his own incumbrancer any other incumbrance created by himself to the situation where the mortgagor’s title arises under the power of sale of the first mortgagee. Lord Cranworth explained that:
[4] Otter v Vaux (1956) 43 ER 1381.
The case is therefore to all intents and purposes that of a mortgagor liable to pay a sum of money to his first incumbrancer paying it and getting a transfer; but that transfer is something which upon general principle he
cannot set up against a creditor claiming by a title subsequent to that of the person whose charge he has so paid off: he pays it off for the benefit of the inheritance; and all persons who are entitled to any portion of the inheritance under him are also entitled to the benefit of his having liquidated a demand prior to their title.
[15] Although not considered in New Zealand the context of the Torrens system the application of that rule has been confirmed to apply under the Torrens system in Australia; considering the Victorian equivalent of s 105[5] in R v The Registrar of
[5] Section 150 of the Transfer of Land Act 1928.
Titles; ex parte Watson[6] Herring CJ discussed the development of the power of sale
[6] ex parte Watson [1952] VLR 470.
in mortgages, the statutory power conferred and the effect of registration of a transfer pursuant to the power of sale on prior mortgagees:
The object of this power of sale, as of the express power in mortgages under the general law, was to destroy the right of redemption, but this is not mentioned in the section, nor was anything to this effect stated in the clauses that conferred an express power. Such overriding effect was well understood and formed the basis of the argument that the Vice Chancellor referred to in Otter v Lord Vaux.
So, too, under the statutory power conferred by sec. LIII, it is the contract of sale that destroys the right of redemption, not completion. For once a valid contract of sale has been entered into it is too late for the mortgagor to come in and redeem. He cannot do so on the mere ground that the purchaser is not yet registered as the proprietor …
There remains the matter of completion under the Act: the putting of the legal estate in the purchaser. Under the registration system brought into force by it, nothing short of an alteration of the register will confer upon the purchaser any interest in the land. So provision had to be made for such an alteration. And it was necessary, too, that the register should be cleared for his benefit of the mortgage which, of course, appears on the register and any mortgage registered subsequent thereto, so that he might receive the clean title he had contracted to buy from the mortgagee. It is with these matters that sec. LIIV of the original Act (and now sec. 150 of the Transfer of Land Act 1928) is concerned. It operates to vest in the purchaser on registration the mortgagor’s estate and interest at the time of the registration of the mortgage freed and discharged from all liability on account of the mortgage and of any mortgage, charge and incumbrance registered subsequent thereto. Such a provision was necessary in view of the registration provisions, if the power of sale was to be made truly effective as a means of enforcing the mortgage.
…
The Legislature was concerned to provide statutory mortgages under the Act with a power of sale that would provide as satisfactory a method of enforcing the mortgage as did the express power of sale in a mortgage under
the general law and would function on similar lines to such express power. Every piece of the legislation was necessary for this purpose and from the scheme adopted no indication I think can be obtained one way or the other on the question whether or not the Legislature had any intention of excluding the application of the rule in Otter v Lord Vaux to land under the Act…
The equity that arises under the rule in favour of a second mortgagee is based, as we have seen, upon the contract between the mortgagor and that mortgagee. A similar relation of contract exists between a statutory mortgagor of land under the Act and his mortgagees. Now it is only in the completion stage of the sale, when the legal title is being transferred to the purchaser, that, according to the argument, the exclusion of the rule occurs. It is not suggested that up till that time there was anything in the language used in the sections relied upon to relieve the mortgagor of his obligation to fulfil the contracts he has made with his second and subsequent mortgagees and so to exclude the operation of the rule …
For, as I understand the position, the equity in favour of subsequent mortgagees arising under the rule does not have to await completion for its creation, but comes into being at the moment when the right of redemption is destroyed, and that is when the contract of sale is made. At that moment equity says to the mortgagor, who has become the purchaser, true it is that the right of redemption has gone and with it all subsequent charges on the land, but what you have done by purchasing is virtually to pay off your first mortgagee and you will be treated so far as your second and subsequent mortgagees are concerned as if this were really the position; and so you cannot be allowed to hold that you have purchased from the first mortgagee without fulfilling your contracts to your subsequent mortgagees. This may, as Vice Chancellor Sir William Page Wood said, appear to give the second mortgagee more than he contracted for, because he will by reason of the equity raised in his favour have the full benefit of the charge of the first mortgagee being paid off. But it is important to bear in mind that he gets this benefit under the equity that the rule in Otter v Lord Vaux raises in his favour and not under his mortgagee, which disappeared, so far as it was a charge on the land, when the right of redemption was destroyed. And his mortgage having gone, he has the further added advantage of his remedy against the purchase money received for the property after satisfaction thereout of the first mortgagee …
Let me now turn to consider completion of the contract, when the legal title is being transferred to the purchaser. He has purchased the land free from the right of redemption and it is a title commensurate therewith that secs 148 and 150 secure to him, that is to say he takes the land freed and discharged from the mortgage and all mortgages and charges registered subsequently thereto. But, pending completion, where the mortgagor is the purchaser and there were subsequent mortgages made by him, there have come into being in favour of the subsequent mortgagees equities under the rule in Otter v Lord Vaux, which arise in the way I have indicated, and bind the purchaser’s interest in the land. And the question is whether there is anything in the section relied upon that precludes these equitable rights being recognised. I can find nothing that touches them. Equity, in bringing them into being, recognises the disappearance of the charges on the land that previously existed, and raises them out of the contracts that subsisted despite the destruction of the right of redemption, the right to redeem the land. I
therefore conclude that there is nothing in the Act to exclude the operation of the rule in Otter v Lord Vaux to mortgages of land under the Act.
[16] Mr Mawhinney argued that the rule in Otter v Vaux does not apply to the present situation because the property is not being acquired by the mortgagor but is to be transferred to EOTL as an arm’s-length purchaser. Anthony Mawhinney made an affidavit in opposition to the summary judgment application in which he described the circumstances of the sale of the property to EOTL. He has deposed that neither he nor Peter Mawhinney nor any of the corporate defendants are associated or connected with EOTL. He has exhibited Companies Office records showing the names of EOTL’s directors and shareholders. It does not appear that EOTL is controlled by those people who control Sixty-six, OTL or FTL.
[17] Nevertheless, there are aspects of the sale that are very troubling. These appear from Peter Mawhinney’s affidavit sworn 7 September 2012. First, under a loan agreement dated 20 January 2012, the same date as the sale and purchase agreement between FTL and EOTL, Sixty-six agreed to lend EOTL $4,509,990 to assist in the completion of the sale and purchase agreement under which the purchase price was $4,510,000. The loan was to be secured by a mortgage registered against the property.
[18] Secondly, Sixty-six is recorded as acting on the loan and mortgage as trustee of Sixty-six Auckland Trust of which Peter Mawhinney is named as “Initial Protector” with the power to appoint and remove trustees (including himself). Mr Mawhinney has deposed that he has appointed himself a trustee.
[19] Thirdly, it was a term of the sale and purchase agreement that less than a month after the sale and purchase agreement was entered into EOTL would transfer the property back to FTL:
It is agreed and declared between the parties that the purchaser shall to (sic) transfer the Property on 15 February 2012 to the Vendor or its nominee, and to that end agrees to execute a transfer instrument in the preprinted form of the District Law Society REF:7002 together with statutory declarations from both the persons executing the mortgage instrument and their witnesses in the forms 27 and 28 under Regulation 16(3)(a) of the Land Transfer Regulations 2002 and to deliver those documents to the Vendor prior to settlement date.
[20] Fourthly, Mr Mawhinney is a trustee of the Waitakere Forest Land Trust (along with a trust company the director and shareholder of which is Anthony Mawhinney). Waitakere Forest Land Trust is party to an agreement which has not been produced in evidence but which is referred to in Mr Mawhinney’s document filed in this proceeding, under which it would receive an undivided share of the property in return for resource management work connected with the subdivision of the property. Waitakere Forest Land Trust also holds an option to purchase the property for $10. Mr Mawhinney explained that this $10 option was effectively a legacy from the original subdivision consent and retained as a means of retaining control over how the property is developed.
[21] In these circumstances it seems obvious that, notwithstanding the apparent sale to EOTL at arm’s length, the legal and beneficial ownership of the property will ultimately come back to entities associated with and controlled by Peter and Anthony Mawhinney. EOTL may not have had notice of the Deed of Priority. But I am far from convinced that it should be regarded as a bona fide purchaser. There is, therefore, a serious question as to the status of the Nags Head mortgage.
Balance of convenience
[22] I questioned Mr Mawhinney at length about the possible prejudice that would result to him from an injunction in the terms sought by Nags Head. It came down to the proposition that the current mortgagee, Zebra/Peter Mawhinney, may seek to sell the mortgage with the attendant power of sale to a property developer and may lose a deal through having to come back to court to obtain a variation of any injunction to allow that transfer to proceed. Although Mr Mawhinney referred to negotiations that were on foot, there was no evidence of them and nothing to suggest that real prejudice or even a risk of real prejudice to Mr Mawhinney, or indeed any of the other parties to this proceeding, would result from granting the relief sought.
[23] Mr Mawhinney also challenged the extent to which Nags Head would be able to meet an award of damages, notwithstanding the undertaking as to damages given. However, I do not accept that there is any significant concern on the evidence that
damages would be irrecoverable in the event of Mr Mawhinney prevailing on the substantive hearing.
[24] Nor do I accept Mr Mawhinney’s submission that Nags Head’s own failure to require a priority instrument for some 18 months after the loan was made as a factor that should count against it on the balance of convenience assessment. All the parties who were involved in the subsequent transfers of the mortgage and the land have been associated with or controlled by Peter and Anthony Mawhinney, except for EOTL (and I have already expressed my concerns about that transaction). The parties were all well aware of the terms of the Deed of Priority and of their obligations under it. With hindsight it would have been prudent for Nag’s Head to have required registration of a priority instrument but in the circumstances that fact could not count against it in assessing the balance of convenience.
[25] I am satisfied that the balance of convenience strongly favours the plaintiff. There are no other factors that would cause me to refuse relief.
Relief
[26] Nags Head sought a widely framed order that would preclude any dealing with the Zebra/Peter Mawhinney mortgage. Mr Mawhinney submitted, however, that if relief were granted it should not be in such wide terms but instead should be in terms that would permit certain dealings with the mortgage. The reason given was that Nags Head has always known and accepted that the subject land was intended to be subdivided and that some allowance for dealings should be made so that Mr Mawhinney (and the other defendants) can pursue this objective without the cost and delay of returning to court to seek variations of an injunction.
[27] However, I do not accept that it is feasible to allow continued dealing with the mortgage to any extent. The circumstances surrounding the EOTL transaction are of sufficient concern to me to doubt that anything other than preservation of the status quo will provide sufficient protection for Nags Head. Further, the summary judgment application is due for hearing on 30 November 2012 so determination of
the substantive issue is close and there are no grounds for thinking that there will be any genuine need to deal with the mortgage between now and then.
[28] The application is granted and there will be an order that:
The third defendants are restrained from registering any instrument having the effect of charging or transferring or otherwise affecting mortgage
7998827.2 on computer freehold register 80938 (North Auckland Registry).
[29] The plaintiff is entitled to costs and disbursements on the application.
P Courtney J
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