The borrowers sought to set aside a mortgage taken over the family home in 1988. The lender sought to enforce the mortgage. The interest rate on the mortgage was 20% per annum. This was not unusual, at the time of the loan the interest-rate on Court judgments was 18% per annum.
The mortgage contained a covenant allowing unpaid interest to be added to the principal sum and to attract further interest liability monthly. This was in effect compound interest with monthly rests.
At the time the mortgage was taken out the borrowers were 66 and 58 years old. At the time of trial the husband was 89 and the wife being cared for in a nursing home. The husband understands a few English words, ‘sufficient to assist him in managing undemanding conversations in English but no more’.
The basis upon which the borrowers sought to impeach the mortgage was that they were under a special disability at the time the mortgage was entered into. They also say that because the loan debt was not enforced for such a long time it was barred under the Limitation Act 1969 (NSW). The judge summed up the issues as:
- whether the mortgage is an unjust contract under the Contracts Review Act;
- whether the lender’s son exercised undue influence over the borrowers;
- Whether the lender engaged in unconscionable conduct at the time when the loan contract was entered into or whether it is unconscionable for him now to maintain the contract;
Contracts Review Act
The court concluded that there was no negotiation of any of the terms of the mortgage. The bargain was wholly constrained by the borrower’s relationship and their trust in their solicitor, who was the lender’s son. In this regard the judge singled out the compounding interest clause, noting that at the time this loan was entered into the possibility of future default was real because of the borrower’s poor performance under an earlier loan.
The court found relevant that the lender had no evidence as to the borrower’s capacity to repay the loan, that no independent advice was urged upon borrower, nor did the lender’s son (who was the borrower’s solicitor) suggest they borrowers go to a bank or seek other financial advice. Under the circumstances if the lender’s son had been an independent solicitor the circumstances would have required him to give very strong warnings about the inadvisability of proceeding and emphasized alternate choices.
The court then noted that the principles in Perpetual Trustee Company Ltd v Albert & Rose Khoshaba  NSWCA 41 had been activated, namely that where the security for a loan is the family home of a low income earner, the decision of a lender not to verify employment and income and thereby in substance to engage in the practice of asset lending is of significant weight against the lender in the determination of unjustness.
The judge concluded by ordering the compounding interest clause removed from the mortgage and reduced the simple interest payable to the rate payable on judgments of the Court. The judge did not whether that was the current rate or historical rates over the history of the loan. Given the very high rates in the 1980s it would seem unfair if the former was the intent.
On this question the court noted that undue influence is presumed whereever a solicitor enters into a contract with his or her client: Dowsett v Reid (1912) 15 CLR 695. The judge concluded that no evidence sufficient to rebut the presumption has been advanced. However no additional relief flowed from this finding with the relief being identical to the relief already granted under the Contracts Review Act. The court rejected the application to set aside the loan noting that:
The applications by borrowers to set aside lenders’ securities provide one example of the application of the equitable maxim that a person who seeks equity must do equity. In money lending cases where a borrower seeks to set aside a lender’s security the lender can insist that no relief be granted in equity unless the borrower offers to do equity and compensate the lender for the money actually advanced to him together with reasonable interest. In order to obtain relief setting aside this loan and mortgage on the ground of undue influence the borrowers will need to repay the sum borrowed together with reasonable interest. That is in substance the relief the Court is granting under the Contracts Review Act.
After reviewing Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, the court made a waffling finding that “many of the factors identified in relation to relief under the Contracts Review Act also justify the conclusion that this contract was unconscionable. With respect it would have been less sloppy for the judge to simply conclude that his earlier finding made addressing this claim unnecessary.
The Limitation Act
The limitation period for payment of principal under a mortgage expires after twelve years, Limitation Act s 42. Twelve years is the limitation period for claims for possession: Limitation Act s 27. The limitation period for payment of interest under a mortgage is six years Limitation Act s 43.
The court noted that while a registered mortgage may create a contractual entitlement of the mortgagee to possession to which the Limitation Act would apply, a mortgagee is also entitled to remedies conferred by the Real Property Act 1900 (NSW) itself and these remedies are preserved by the Limitation Act. Accordingly a mortgagee can still exercise the rights conferred by the Real Property Act “without limitation as to time”. The judge alluded to the fact that had it been an all monies mortgage the outcome may have been different.