The parents came to the rescue of their son who needed security for a loan by mortgaging two homes they owned. The son defaulted on the loan causing the sale of the two properties. The mortgage was expressed to secure all monies owing by the parents to the lender but no monies had been lent to the parents and there was no deed of loan or guarantee.
The parents sued the lender for wrongful exercise of power of sale and sought a declaration that the proceeds of sale were held on trust for their benefit. The lender argued that the stamp duty notation on the mortgage or the variation of mortgage amounted to a credit contract and that the parents had acknowledged the debt and were estopped from denying it.
The court made the following findings:
- The parents were bound by the mortgage but the mortgage secured nothing since there was no credit contract or guarantee.
- The stamp duty notation did not constitute a credit contract.
- The covenant in the variation of mortgage that “the mortgagors shall repay $1.3m on or before 1 October 2009” did not constitute a credit contract or guarantee because no money was advanced and so there was nothing to be repay.
- There was no acknowledgement of the debt because there was no certainty of agreement and the requirements of section 126 of the Instruments Act were not met because it did not make the parents liable for their son’s debt.
- Even if the parents were estopped from denying the mortgage, it secured nothing.
- The court found that the lender was not authorised to exercise power of sale and his claim for the unsecured loan failed because there was no enforceable agreement with the parents.
The lender appealed.
The Appeal Court upheld the lower court’s findings and agreed that the notation and variation did not constitute credit contracts; the parents were not estopped from arguing that the mortgage secured nothing and the mortgage and variation did not satisfy the requirements of s 126 of the Instruments Act.
The Appeal Court was of the view that section 4(1) of the Code requires money to be been advanced to the mortgagor saying:
Section 4(1) of the Code speaks in terms of credit being provided. In my view, the appellant strains the statutory language too far by its submission that a deferred debt within the meaning of the Code may be incurred by a party to whom nothing has been provided….
The court found that even if the Code only required an obligation incurred by the mortgagor and no loan by the mortgagee, the parents did not assume any obligation after the variation because the use of the expression ‘principal sum’ in the variation which amended the mortgage did not appear in the mortgage and hence there was no secured money owing under the mortgage. The court found that the variation was not a stand-alone document – the mortgage was the primary document.
Click here to read the full judgment