This case concerned whether a lenders’s costs of defending a suit to set aside mortgage were a contingent liability of the borrower secured by the mortgage and whether a borrower was obliged to provide security for contingent liability in order to obtain discharge.
The Plaintiff (“Liberty”) was the lender of a property owned by the Defendant (“Mrs Steele-Smith”) at Caves Beach under a Registered Mortgage dated 8 July 2002.
Mrs Steele-Smith sought orders setting aside the mortgage on the ground that Liberty, by its agent or employee, procured the grant of the mortgage by taking unconscientious advantage of her inability, through infirmity and age, to protect her own interests. In those proceedings and the current Mrs Steele-Smith was represented by her son.
Those proceedings had not yet come to trial, and the parties raised an ancillary but pressing problem.
Mrs Steele-Smith was in default in paying the interest due under the mortgage for the months of September and October 2004. By Notice dated 12 October 2004 Liberty informed Mrs Steele-Smith that unless she remedied the default within a specified period it would exercise its rights under the mortgage.
Mrs Steele-Smith then decided to sell the property. She entered into a contract for sale at a price of $520,000. Settlement of the sale was to take place on 9 November 2004. However, a dispute arose between Liberty and Mrs Steele-Smith as to the terms upon which Mrs Steele-Smith was entitled to have a discharge of the mortgage delivered upon settlement of the sale.
There was no dispute as to the amount of principal and interest outstanding under the mortgage. However, by letter dated 3 November 2004 Liberty’s solicitors asserted that the mortgage secured not only the principal and interest but also Liberty’s costs and expenses incurred in defending the other proceedings. Accordingly, they required the balance of the proceeds of sale to be paid into Court until the other proceedings were finally determined.
Mrs Steele-Smith had a solicitor acting for her on the sale of her property, but not in the litigation with Liberty. Mrs Steele-Smith’s solicitor replied to Liberty’s solicitors, saying that the conveyance and the litigation were entirely separate matters and that Liberty’s costs of the litigation were its own responsibility. The requirement for payment of the balance of the proceeds of sale into Court was rejected. An appointment for settlement of the contract for sale was subsequently made.
Liberty’s solicitors then advised Mrs Steele-Smith’s solicitor by letter that orders by consent should be made whereby the surplus of proceeds of sale from the contract be paid into the trust account of Mrs Steele-Smith’s solicitor to await determination of the other proceedings. Mrs Steele-Smith’s solicitors rejected the proposal for consent orders. The purchaser under the contract for sale then served a notice to complete requiring settlement. Both parties were anxious to have a determination of the issue in dispute as urgently as possible. Both parties were anxious that the contract for sale not be lost.
The summons sought the following relief:
1. “A declaration that, subject to other order by the court, the ‘reasonable expenses’ referred to in clause 20 of the memorandum of mortgage number 5040194 include:
a) the reasonable expenses incurred by Liberty Funding Pty Limited to date in proceedings number 4778 of 2004 filed in the Equity Division of the Supreme Court of New South Wales (‘the Proceedings’); and
b) the further reasonable expenses to be incurred by Liberty Funding Pty Limited in the Proceedings.
2. An order that upon settlement of the sale of the defendant’s property known as 9 Seaspray Close, Caves Beach NSW (‘the Property’), the balance of the sale proceeds (or such amount of those proceeds as the court orders) after payment of the principal and interest owing to Liberty Funding Pty Limited be paid into court, or into a trust account as agreed between the plaintiff and the defendant.
3. A declaration that unless the balance of the proceeds of sale of the Property (following payment of all principal and interest owed by the defendant to the plaintiff) are paid into Court, or into a trust account as agreed between the plaintiff and the defendant, the plaintiff is not obliged to provide the defendant with a discharge of its mortgage over the Property.”
The plaintiff submitted merely that the conveyance of the property had nothing to do with the mortgage and Liberty’s rights thereunder.
The defendant relied upon two provisions of the mortgage. Clause 20 of the registered memorandum provided:
“When we ask, you must pay us the reasonable expenses we reasonably incur in enforcing this mortgage after you are in default (including in preserving and maintaining the property – such as by paying insurance, rates and taxes for the property). This applies to expenses we incur before or after taking action under clause 19.”
The definition in the Memorandum of “amount owing” was:
“… at any time, all money which one or more of you owe us, or will or may owe us in the future, including under this mortgage or an agreement covered by this mortgage …”
Liberty said the legal costs it had incurred and would continue to incur in defending the other proceedings were enforcement expenses as defined in Clause 20. Accordingly, they were monies which Mrs Steele-Smith will /may owe Liberty in the future under the mortgage if and when Liberty was successful in defending the other proceedings, so that they were within the definition of “amount owing”.
Liberty relied on a decision of the Full Court of the South Australian Court in Perpetual Trustees Australia Ltd v Barker  SASC 58.
In that case, the lender took steps to enforce a power of sale upon the borrower’s default. The borrower then applied to the Court for relief against the exercise of the power of sale pursuant to s.55A(3) of the Law of Property Act 1936 (SA). That application was unsuccessful and the borrower was ordered to pay the lender’s costs. The question was whether the costs should be taxed on the party/party basis or, as the lender contended, upon a full indemnity basis.
The lender relied on a provision in the mortgage which required the borrower to pay to the lender on a full indemnity basis “all reasonable enforcement expenses the lender reasonably incurs or expends in exercising its rights under the mortgage”. The judge at first instance held that “enforcement expenses” did not include the expenses of the lender in defending an application by the borrower for relief under s.55A(3). The Full Court unanimously changed this decision on an appeal.
Duggan J said:
“I respectfully disagree with the view expressed by the judge at first instance that an application by a borrower under the section is independent of any steps taken by the lender to enforce its rights. The application is a direct response to steps taken to enforce the lender’s rights and it determines whether or not they are able to be exercised. The application permitted by s 55A(3) is not collateral to the enforcement procedures, but a part of procedures which regulate the enforcement of rights against the borrower.
In my view, there is no basis for confining the words in cl 7.2 of the mortgage ‘all reasonable enforcement expenses the Mortgagee reasonably incurs or expends in exercising its rights under the Mortgage’ to expenses incurred in actions or procedures initiated by the lender in contradistinction to responses by the lender to actions or procedures instituted by the borrower to prevent the enforcement of rights by the lender.”
The Court here followed the same reasoning. The enforcement of a lender’s rights, as contemplated in Clause 20 of the Memorandum, was not confined to the taking of steps to exercise a power of sale or other right conferred by the mortgage: it encompassed whatever was necessary to protect and preserve the lender’s rights when their validity is challenged or their exercise is sought to be prevented or impeded.
However, there is a qualification in Clause 20: the enforcement expenses recoverable and secured under the mortgage are only those incurred after the borrower is in default. In the present case, this qualification probably made little, if any, difference to the amount secured because the other proceedings were commenced on 30 August 2004 and Mrs Steele-Smith went into default in the payment of interest after that date.
It followed that if Liberty’s defence in the other proceedings succeeded so that the mortgage was not set aside, the mortgage would secure Liberty’s reasonable costs of the defence. This was so because the definition in the mortgage of “amount owing” included money which Mrs Steele-Smith may owe Liberty pursuant to the terms of the mortgage and the reasonable costs of Liberty’s defence of the other proceedings was money which may become owing under Clause 20. By Clause 1.4 of the mortgage Mrs Steele-Smith was only entitled to a discharge of the mortgage “when there is no amount owing”.
Mrs Steele-Smith’s possible liability for Liberty’s costs of defending the other proceedings was clearly a contingent liability. It is now well established that if at the time a borrower seeks redemption of the mortgage there is a contingent liability outstanding which is secured by the mortgage the borrower is not entitled to a discharge until the contingent liability is secured.
The usual way in which a borrower can obtain a discharge where a contingent liability remains secured under the mortgage is to pay into Court the amount of the contingent liability or a reasonable estimation thereof if the amount cannot be fixed with certainty. So, for example, where a borrower threatens proceedings for the taking of an account, the lender is entitled to retain the security to recover the anticipated reasonable costs of such proceedings and the borrower may obtain a discharge either by providing alternative security for such costs or by paying into Court an amount equal to the probable reasonable costs of the proceedings.
Liberty sought a declaration that its reasonable costs of defending the other proceedings were secured by the mortgage. The Court held it was entitled to a declaration in those terms, provided that it was made clear however that such costs were confined to its defence and did not extend to the costs of its Cross Claim against the agent who procured the mortgage. The claim by Liberty to secure an indemnity from its agent should the agent have been found to have procured the mortgage in circumstances entitling Mrs Steele-Smith to set it aside were not properly costs incurred by Liberty in enforcing the mortgage against Mrs Steele-Smith, within the contemplation of Clause 20 of the mortgage.
Liberty also sought an order for payment of the balance of the proceeds of sale into Court or into a trust account. It sought a declaration that unless the balance of proceeds of sale was so dealt with, Mrs Steele-Smith was not entitled to a discharge of the mortgage. The court held it was not entitled to that order and declaration for two reasons.
- It is not usually open to a lender to compel, by order of the Court, a borrower to avail himself of a means of redemption which the court of equity affords the lender. If a discharge of the mortgage is sought, the lender’s rights are limited to those conferred by the mortgage. If the borrower does not tender the amount due under the mortgage, the lender is not obliged to give a discharge. If a contingent liability is still secured when the borrower seeks to redeem, the Court will, at the instance of the borrower, order a discharge on condition that the borrower provides alternative security or pays the requisite amount into Court.
- If Mrs Steele-Smith were to seek an order for discharge of Liberty’s mortgage on condition that she pay into Court an amount to cover Liberty’s reasonable costs of defending the other proceedings, the Court would not order that the whole of the balance of proceeds of sale of the property be paid in, as Liberty required.