King Investment Solutions v Hussain [2005] NSWSC 1076

This was an appeal by the Hussains from an order made by an Associate Justice for sale of the land subject to the lender’s second mortgage. The Hussains granted a second mortgage to the plaintiff to secure a loan of $95,000 for a period of two months. Interest was payable at $118.8% per annum, reducing to 60% if paid within 7 days of the due date. The Hussains did not repay the loan or the interest on the loan. Importantly, the second mortgage was unregistered.

The plaintiff sought orders for possession and sale from the Court, being unable to exercise legal rights to possession and power of sale under the Real Property Act as the mortgage was unregistered.     

An unregistered mortgage gives rise to an equitable interest in land. Justice Campbell explained the nature of equitable interests in Real Property Act land

Part of the reason for examining the situation concerning old system land, even though the land in question in this appeal is under the provisions of the Real Property Act 1900, is that unregistered equitable estates and interests can exist in Real Property Act 1900 land.  Even though the Real Property Act 1900 establishes a system of title by registration, not a system of registration of title (Breskvar v Wall (1971) 126 CLR 376 at 385 per Barwick CJ) it is not complete code.  The means by which title is transferred (by a government official making an entry in a register), is vastly different under the Real Property Act 1900 to the way that title is transferred under the old system, by private individuals executing documents.  Even so, there can still be dealings with Real Property Act 1900 land of a type which, though not creating or transferring any interest of a type which is recognised by the Real Property Act 1900 itself, still create an obligation of conscience amounting in the eyes of equity to a right of property in the land.  In particular, there can be equitable interests in land arising from unregistered mortgages:  Re Elliot (1886) 7 LR (NSW) 271; J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546.  Further, concerning Real Property Act 1900 land, “ … the existing conveyancing practice is only repealed so far as inconsistent with the Real Property Act”: Tietyens v Cox (1916) 17 SR (NSW) 48 at 53; see also Hemmes Hermitage Pty Ltd v Abdurahman and Another (1991) 22 NSWLR 343 at 345 per Kirby P.

It has been held that:

“… the whole course of judicial interpretation of the Real Property Act has recognised the old law and practice of conveyancing as still applicable to equitable interests in land under the Act … the new practice as to foreclosure, which especially provided for registered interests under the Act, has left the whole practice as to foreclosure undisturbed so far as equitable interests are concerned.”: Tietyens v Cox (1917) 17 SR (NSW) 48

Similarly, if there is a respect in which the Real Property Act 1900 does not provide a means of enforcing the type of interest in land which an equity court recognises, it is to the practice and principles which were developed in accordance with old system land that a court administering equitable jurisdiction will now turn to decide what, if any, remedy is appropriate.

His Honour proceeded to consider the old system mortgage, the equity of redemption to which it gave rise and the right of foreclosure (at [45]-[46]). The second, third etc mortgages granted under the old system were mortgages of the equity of redemption. His Honour said 

Foreclosure was a procedure through which equity would regard the equity of redemption as having come to an end.  In general, the procedure involved in a foreclosure action against a mortgagor involved a taking of accounts between the mortgagee who was seeking to foreclose and the mortgagor.  Once the amount owing had been ascertained in this way, and a court official had certified the amount owing, the mortgagor was given an opportunity to redeem.  This was done by an order nisi for foreclosure, that unless the mortgagor paid within a stipulated period of time he would be forever foreclosed of his right of redemption.  If the mortgagor did not pay within that time, the court would then make an order absolute for foreclosure. 

To enforce their security a subsequent mortgagee was required to ‘redeem up’ or pay out all mortgages of higher priority and ‘foreclose down’ or give the mortgagees of lower priority an opportunity to redeem before foreclosing quoting United Travel Agencies Pty Ltd v Cain (1990) 20 NSWLR 566).

By contrast, a registered mortgage has effect as security but does not transfer title in the land: s 57 Real Property Act. Upon default the mortgagee has statutory power to sell the land without Court proceedings: s 58 Real Property Act.

Where a mortgage is unregistered the parties’ rights are conferred by the contract and the general law. His Honour concluded  that s 109 of the Conveyancing Act 1919 also provided a power of sale to the holder of a charge over the land such as the equitable ‘charge’ created by the unregistered second mortgage.

The power of sale under s 109 is only exercisable of the conditions in s 111 of the Conveyancing Act 1919 are met, including the service of a notice under section 111(2)(b).

However, s 109 does not enable a second registered mortgagee to sell the interest of the first registered mortgagee. The route provided by s 109 is not commercially viable, since the sale of land subject to a first mortgage is not likely to be attractive to potential purchasers.

A Court order for sale under s 103 Conveyancing Act 1919 appeared to be the only route available for the second unregistered mortgagee to enforce its security. 

However, his Honour held that s 103 does not apply to unregistered mortgages of Real Property Act land

This conclusion is the same as the conclusion reached, for a different reason, by Young J in Yarrangah Pty Ltd v National Australia Bank Ltd (1999) 9 BPR 17,061; [1999] NSWSC 97

It also accords with the view expressed by Steytler J in Sandgate Corporation Pty Ltd (in liq) and Others v Ionnou Nominees Pty Ltd and Others (2000) 22 WAR 172

His Honour proceeded to set out the general law jurisdiction to order sale

In Yarrangah Pty Ltd v National Australia Bank Ltd (1999) 9 BPR 17,061; [1999] NSWSC 97 Young J considered a mortgagor’s application to restrain a mortgagee from exercising, out of court, a power of sale of the mortgaged property.  Though his Honour concluded that there was no basis for restraining the mortgagee from exercising the power, he gave consideration to whether there would be jurisdiction for the court itself to order a judicial sale of the property at the suit of the mortgagor, and held that there probably was jurisdiction to order judicial sale.  From the context, it is clear that his Honour regarded this jurisdiction as being part of the jurisdiction of the Court to apply the principles of the law of equity.  His Honour also held, however, that the circumstances of the case before him did not justify the making of such an order.  It was these remarks which were followed by Wood CJ at CL in Guardian Mortgages v Miller, as mentioned at para [38] above.

No party argued that Part 30 of the Supreme Court Rules 1970 provided a jurisdictional basis for the order.  That Part, which is reproduced in substance in Part 27 UCP Rules, allows the court to make orders for the disposal of land in certain circumstances.  It is derived from section 55 of the Chancery Procedure Act 1852 (Imp).  It does not seem to provide a promising candidate for a basis for the jurisdiction in the present case: notes to section 14 Equity Act 1901 in Parker’s Practice in Equity (NSW)

Ultimately, a clause in the mortgage which provided for a contractual power of sale was sufficient to order sale, by way of an action for specific performance. An order for judicial sale would be another way to enforce an equitable charge or interest in land such as the second mortgage.

The failure to join the first mortgagee to the proceedings was enough reason to set aside the order for sale made by the Associate Justice.

There was no evidence of the value of the land to be sold. His Honour stated

A sale will usually not be ordered where there is no evidence of value of the property: Smithett v Hesketh (1890) 44 Ch D 161 at 163; Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 at 380.  In fact there is at least one example of a sale being ordered even though there was no evidence of value: Wickham v Nicholson (1854) 19 Beav 38; 52 ER 262.  However, in most cases it would not be a proper exercise of a judicial discretion to order sale at the suit of a second mortgagee unless there was some evidence of value.  Without that evidence, it would not be possible to fix a reserve price for any sale, would not be possible to form a view about whether it was appropriate to give the mortgagors time to pay before a sale could be made (and if so how long), and there would be serious difficulties in deciding who should have the conduct of the sale, and what conditions ought be imposed for the protection of the first mortgagee.

An order for the payment into court of an amount to protect the first mortgagee is also necessary when ordering the sale of the land by the second mortgagee.

If the Court makes an order for sale there is a discretion to make an allowance of time in which the mortgagor can redeem before sale.

If the security is sufficient the conduct of the sale will likely be given to the mortgagor, otherwise the mortagee will have conduct of the sale. That highlights the importance of valuation evidence in seeking an order for sale.

The holder of an equitable interest in land has no right to an order for possession under s 20 of the Civil procedure Act 2005 (NSW). However, such a right may be created by a clause in a mortgage, stipulating that upon default the equitable mortgagee is entitled to a declaration that it is entitled to possession and an order for specific performance. The second mortgage contained such a clause. Taking into account the statutory power of the first mortgagee to take possession upon default meant that it was   inappropriate to order specific performance of that clause.

His Hononur conlucded

There is an inherent power for the Court to make an order for sale of land at the suit of an unregistered second mortgagee.  However in the present case there are significant shortcomings in the exercise of that power.  The most significant is the absence of the first mortgagee from the suit, even though its interests were directly affected by the orders sought.  Another is that the inherent power of the Court to enforce the second mortgage enables it to order sale of only the interest of the mortgagor which has been mortgaged to the second mortgagee.

These have the effect that the power has not in substance been exercised.  The orders for possession and for issuing of a Writ of Possession are likewise ones which were not justified. Though the making of an order for specific performance of the covenant to give possession upon default is the sort of remedy which can in some circumstances be given in relation to an unregistered Real Property Act 1900 mortgage, in the present case it was done in the context of the making of the other orders which were flawed.  Even that order is infected by the errors in the others.  Each of the orders which are listed in subparas (a) to (h) in para [24] above should be set aside. 

Justice Campbell considered whether the interest rate of 118.8% was a penalty. The mortgage was not attacked as unconscionable or subject to the Consumer Credit Code. His Honour decided that the rate was not a penalty stating: 

One requirement for a provision in a contract being a penalty is that it states a consequence which is agreed to follow from breach of one of the provisions of the contract.  The structure of the interest clause in the present case is not like that.  Rather, the interest clause in the contract involves a promise by the mortgagors to pay interest at 118.8%, and a promise by the mortgagee that, if the mortgagors pay the interest on time, or no more than 7 days late, the mortgage will accept interest at 60%. A clause structured in that way is not regarded as a penalty:  Wallingford v Mutual Society (1880) 5 App Cas 685 at 702; CJ Belmore Pty Ltd v AGC (General Finance) Ltd [1976] 1 NSWLR 507. 

The order for sale made by the Associate Justice was set aside.

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