Australian Syndicated Mortgage Investments v Evergrand Group Pty Limited

HIS HONOUR: This is an application for the extension of a caveat over the defendant's property at Terry Road, Rouse Hill. The defendant has offered certain undertakings, they should be accepted. For the reasons which follow, I have concluded that the caveat should not be extended.

The defendant is a property developer. It acquired the land in 2015 for $28.4 million. There was development approval for the construction of four residential towers comprising 256 apartments. Excavation of the basement in respect of the towers had been completed prior to the defendant's purchase. Contracts for the sale of 106 apartments have been exchanged. The defendant's evidence is that the value of such "pre-sales" is $65 million. In all but one case the contracts require registration of the relevant strata plan by 31 July 2019.

Subject to the plaintiff's claim in this proceeding, and subject to a charge granted to a consultant Jagbo Pty Limited (“Jagbo”) to secure consultant fees referred to later in these reasons, the land is unencumbered. The defendant's Australian director, Mr Xian, estimates that stage one construction of the proposed development will cost in the vicinity of $46 million, and the construction of the basement and all four towers will cost approximately $75 million. The defendant has not yet obtained construction finance. It complains that the continuation of the caveat on the title to the property will be an obstacle to its obtaining finance.

On 4 November 2016 the defendant entered into an agreement or (or agreements) with the plaintiff, Australian Syndicated Mortgage Investments Pty Limited (“ASMI”) for the purpose of obtaining such finance. The agreement is called a Mortgage Syndication Agreement (“MSA”). On the same day as the parties entered into the MSA, the defendant signed an acceptance of what was called a "Revolving Term Loan Facility - Indicative Letter of Offer."

No construction finance has been arranged by ASMI, but ASMI contends that it is entitled to be paid $2,310,000 pursuant to the MSA. It claims that this debt is secured by an equitable charge over the Rouse Hill land. On 9 December 2016 it lodged a caveat claiming interest as equitable mortgagee. The defendant served a lapsing notice. The caveat has been extended pending the determination of ASMI's application that it be extended until final determination of the proceedings. By way of final relief ASMI seeks judgment for $2.3 million plus interest under section 100 of the Civil Procedure Act 2005 (NSW), and the appointment of a receiver with power to sell.

The MSA contains a statement under the heading, "What this MSA is About" that provides:

However, a director of ASMI, Mr Frank Reynolds, has deposed that its business is in "the facilitation of commercial loans for borrowers". He deposed that in the ordinary course of its business ASMI "arranges for its syndicate partners, underwriters, aggregators and other entities to lend the money."

Clauses 6, 7, 10, 15 and 18 of the MSA provide as follows:

Schedule A includes the following items:

ASMI claims that pursuant to clause 15 it is entitled to payment of the Entry Fee, and it claims that the amount of that fee is $2,100,000 plus GST. This is three per cent of the Loan Amount.

Item 6 of the schedule does not say that the amount of the Entry Fee is three per cent plus GST of the Loan Amount, but of the "Indicative Syndication Fee". The MSA did not define that expression. The defendant submitted in substance that any obligation to pay an Entry Fee was void for uncertainty. It said that it is clear from the schedule that the amount of the Entry Fee is not three per cent of the Loan Amount but of the Indicative Syndication Fee, but because that expression is not defined there is no way of determining what the amount of the Indicative Syndication Fee is.

For its part ASMI contended that the meaning of Entry Fee was established by an Indicative Letter of Offer that was signed on the same day and, it might be inferred, at the same time as the MSA, and by reference to that letter it could be seen that the Entry Fee was three per cent of the Loan Amount, that is, three per cent of $70 million plus GST.

ASMI contended that the Entry Fee became payable under clause 15 on a number of grounds. The first was that the Entry Fee had become payable pursuant to the opening words of the clause, namely that the defendant had received a Letter of Offer, within the meaning of clause 15, for the loan that was summarised in item 3, or on similar terms on or terms that the parties had agreed upon. It said that the letter that was signed on 4 November 2016, which was described as "Indicative" letter of offer, was such a Letter of Offer that triggered the obligation to pay the entry fee.

The letter in question was on the letterhead of ASMI and dated 2 November 2016. It was headed "Revolving Term Loan Facility - Indicative Letter of Offer", and it opened with the statement:

The facility was described as a revolving term loan facility. The mortgagee was described as follows:

The loan amount was for an amount "up to" $70 million. The loan was to be for a term of 30 calendar months at a fixed interest of 8.5 per cent per annum. The security for such a loan was described as:

Against the heading “Conditions” the letter stated:

On the second page of the letter there was a further description of security which repeated the requirement for a first registered mortgage over the Terry Road, Rouse Hill property, included a "GSA" over assets of two individuals and also stated:

The letter was signed for the defendant by its Australian director, Mr Xian under the heading "Acceptance". The text above his signature relevantly stated:

I infer that the caveat that was lodged by which ASMI claimed an interest as equitable mortgagee was based upon this text. But in its statement of claim it is clear that the interest ASMI claims is as equitable chargee pursuant to the charging clause in the MSA.

ASMI did not itself have the funds to lend $70 million to the defendant. Nor had it procured such a loan from a lender who did have the funds and was prepared to lend them. Nor did it procure a willing lender.

Before considering whether it is entitled to payment of the Entry Fee under any of the bases put forward, I will first deal with the question of what is meant by that expression and what the quantum of such a fee is.

Before doing so, it is as well to note that it was common ground that this application for extension of the caveat is to be determined on the same principles as would be applicable to an application by the plaintiff for an interlocutory injunction to restrain the defendant from dealing with the land in which it claims an interest as chargee. The plaintiff must show that there is a serious question to be tried that it is entitled to an equitable charge over the land to secure payment of the Entry Fee, and that there is a serious question to be tried that the defendant is liable to pay the Entry Fee. It must also show that the balance of convenience favours the extension of the caveat.

As this is an interlocutory application I do not purport to make a final determination on the issues that have been the subject of submissions, including issues of construction.

Notwithstanding the absence of definition of the expression "Indicative Syndication Fee", I think it unlikely that the Court on a final hearing would conclude that the obligation to pay the Entry Fee was void for uncertainty because it is impossible to determine its amount. Nonetheless, there are serious difficulties with the plaintiff's construction. I accept its submission that regard can be had to the contemporaneous Indicative Letter of Offer to resolve the uncertainty or ambiguity in the definition of Entry Fee. That letter describes a Syndication Fee of three per cent plus GST of the facility amount. It can appropriately be described as an Indicative Syndication Fee, as it is contained in what is called the Indicative Letter of Offer.

It is a reasonable construction that it is this fee to which reference is made in item 6 of the schedule. But under the Indicative Letter of Offer, the Syndication Fee of $2.1 million plus GST is only payable on settlement. By contrast, the Entry Fee payable under clause 15 of the MSA is not payable on settlement, but becomes immediately payable on receipt of a letter of offer. That, it appears to me, is so whether the loan proceeds to settlement or not. It is also payable if the borrower fails to comply with its obligations under the MSA.

The better construction, and one that makes commercial sense, is that the amount of the Entry Fee as defined in item 6 is not three per cent of the Loan Amount plus GST. If that were the intention that is what the schedule would have stated. Rather, it is three per cent of the Syndication Fee described in the Indicative Letter of Offer, a sum not of $2.31 million, but $69,300.

On the present materials I do not think there is a serious question to be tried that the amount of the Entry Fee payable on receipt of the Letter of Offer is the same amount as would be payable on settlement. Thus I accept the defendant's construction that the entry fee is "3% of the Indicative Syndication Fee", but I do not accept its submission that the amount of the Indicative Syndication Fee cannot be determined.

The next question is whether, as ASMI contended, the Entry Fee became immediately payable on 4 November 2016 because the Indicative Letter of Offer was a Letter of Offer received by the defendant within the meaning of the clause. I do not think that there is a serious question to be tried that the Entry Fee became payable at that time. As I have said, “Letter of Offer” is not defined, but in my view to be a Letter of Offer the offer of a loan must at least be genuine. That is, there must be an offeror in the position then to make or procure the loan. ASMI was not in that position. It did not itself have sufficient funds to lend. Its only liquid funds were a sum of about $100,000. There is no evidence, and it was not suggested, that it had a line of credit on which it could draw to lend the money. It had not then arranged a loan from a third party. It later attempted to do so. In my view the letter was not a Letter of Offer, rather, as its terms expressly stated, it was "indicative", that is, it indicated or suggested what loan might be offered.

Procuring the defendant’s "acceptance" of this indicative loan proposal did not convert the proposal into an offer of a loan. It is unnecessary to decide whether the conditionality of the proposal is an additional reason, as the defendant contended, for the letter not being capable of being characterised as a Letter of Offer.

ASMI relied on other grounds for claiming that the Entry Fee has become payable. It relied on clauses 15.4, 15.5 and 15.2. It is only necessary in these reasons to deal with clause 15.5. That clause provides in substance that the defendant would breach its obligations and the Entry Fee would be payable if it failed to disclose relevant information. What information was relevant was not defined. But by item 11 of the schedule there was a disclosure that the property was free of any encumbrance. It appears that this was not the fact.

There is evidence of a consultancy agreement dated 10 June 2015 between the defendant and Jagbo whereby the defendant appointed Jagbo as its consultant to provide certain services, as set out in the agreement. Clause 3 of that agreement provided that the defendant would pay Jagbo $250,000 plus GST, and an amount of 7.5 per cent of the price paid by Blacktown Council for parkland which forms part of 9 Terry Road Rouse Hill above $4 million. There is no evidence as to what that price is, or indeed if it has been determined. I do not know what amount might be payable under clause 3.1(b).

The fee was payable no later than twelve months from the date of the agreement, that is, by 10 June 2016. The agreement provided that if the fee were not paid on the due date, then it was a debt due to the principal, which seems to be an obvious mistake for consultant. Then the clause provided that "and the Principal [that is the defendant] charges the Property for the amount of the debt." The property is the Terry Road, Rouse Hill property.

Jagbo lodged a caveat in respect of that charge on 8 September 2016. The existence of the charge was apparently not known to ASMI, at least so far as the evidence on this application discloses, at the time it entered into the MSA. Its general counsel and company secretary, Ms Scott, deposed that she was advised by solicitors acting for ASMI on 15 November 2016 of the caveat. Although she does not expressly say so, I infer that prior to then neither she nor, to her knowledge, any other representative of ASMI knew of that fact. If the case were otherwise, it would be a matter she would have been bound to have disclosed under her oath to tell the whole truth.

Hence, on this application I proceed on the basis that the granting of that charge to Jagbo was a matter not known to ASMI.

I think there is a serious question to be tried as to whether the grant of that charge was relevant information, the non-disclosure of which triggered clause 15.5.

The defendant argued that the fee payable to Jagbo was an incurred expense that would be expected to be paid out of the funding, and submitted that this meant that the expense was not relevant information.

The indicative loan terms did not include any term as to a particular purpose or purposes for which the loan moneys could be applied, such that it might become clear that the loan could be applied to discharge such a fee. Even if it did, there would be a serious question to be tried as to whether the information was relevant as affecting a lender's assessment of the sufficiency of the construction finance sought to be raised.

It is at least seriously arguable that item 11 of the schedule itself demonstrates that the existence or absence of any encumbrance is relevant information.

ASMI also argued that this was a breach of clause 10, and hence clause 15.4 was also engaged. The defendant argued that clause 10 was wholly prospective. It is unnecessary to decide that question.

It is also unnecessary to decide whether there is a serious question to be tried that the Entry Fee became payable because the defendant was in breach of other terms of the MSA or because it repudiated the agreement. It is unnecessary to decide whether the exclusivity period under clause 6 was extended until the end of December, as ASMI contended, or whether it concluded on 2 December 2016. I had the advantage of submissions on these questions, but I do not think I should embarrass, or possibly embarrass, a future hearing by expressing views on those matters where it is not necessary to do so.

The defendant submitted that clause 15, requiring payment on the Entry Fee on the basis of any breach of the MSA, or any of the other matters listed in clause 15, was a penalty that operated as a collateral stipulation in terrorem. This issue was considered by Barrett AJA in relation to what appears to be the same form of contract in Sydney Constructions & Developments Pty Limited v Reynolds Private Wealth Pty Limited [2016] NSWSC 1104. His Honour considered that there was a cogent argument requiring further investigation that clause 7 of the agreement was unenforceable as a penalty because it triggered an obligation of the client to pay the Entry Fee whether or not the client had obtained finance from an alternative source, and relieved the broker of any future obligation to the provide the service.

His Honour said (at [51]) that there was a cogent argument that required further investigation that the provision of the MSA, which upon breach of the exclusivity provision by the client, relieved the broker of its performance obligation and required the client to pay in full the sum that would have been payable in return for due discharge of that performance obligation, did not involve a genuine pre-estimate of the broker's probable or possible interest in the performance of the principal obligation, and was in the nature of a punishment for non-observance of the exclusivity obligation.

One of the alleged breaches relied upon by ASMI with which it has not been necessary for me to deal, is its contention that there was a breach of the exclusivity provisions.

I think that there is a cogent argument requiring investigation as to whether the clauses relied upon operate in terrorem as a penalty. But such an argument is nowhere near as strong as it would otherwise be, when it is appreciated that the Entry Fee payable on various events is $69,300, rather than the full amount claimed.

Counsel for the defendant correctly accepted that if the amount of the Entry Fee that was payable following breach or other default under clause 15 was $69,300 and not $2.31 million, then the penalty defence is not so clear as to prevent there being a serious question that the Entry Fee was payable as a result of the breach. The same concession should apply where the Entry Fee is payable pursuant to clause 15.5.

If on the other hand the Entry Fee were $2.31 million, as ASMI claims, prima facie there would be a strong defence to the claim for payment of the fee under the law on penalties.

The next question was whether it is seriously arguable that the land itself is secured by an equitable charge to secure payment of the Entry Fee. Clause 18 states that by entering into the MSA the defendant granted an equitable interest over the "Security listed in Item 2 of Schedule A" to secure its obligations to ASMI. The Security listed in item 2 was not the land, but relevantly, a first registered mortgage over the land. Clause 15.9 distinguishes between a sale of the property and a sale of the Security listed in item 2. Clause 18, by contrast, refers to the Security, not to the property.

The defendant submitted that as there is no first registered mortgage over the property or properties at 9 Terry Road, Rouse Hill, and that as the land itself is not listed as a Security, the plaintiff can have no caveatable interest in the land.

That may well be so on a literal construction of the provisions, and there may be considerable force in the submission that this agreement is to be read contra preferentum against the plaintiff. Nonetheless, I think there is a serious question to be tried that a different and commercial construction should be given. Whilst there is no reason in principle that a mortgagee cannot charge a mortgage as security for a debt, nor any reason in principle why a chargee could not lodge a caveat against the mortgagee's interest in land (see Real Property Act 1900 (NSW), s 74K, and definition of "land" in s 3) it would not be possible for the mortgagor to grant such a charge. It is at least seriously arguable that clause 18 contemplates a security provided by the defendant as chargor, and it would make no sense for the clause to apply to a first registered mortgage under which the defendant was a mortgagor, not a mortgagee. I do not attempt to decide that question, but I accept that there is a serious question to be tried that ASMI has a caveatable interest to secure payment of an Entry Fee of $69,300.

Turning to the balance of convenience, I should say that even if I am wrong in my assessment of the strength or weakness of ASMI's claim and its quantum, in my view the balance of convenience does not favour an extension of the caveat.

Mr Xian deposed that the defendant's holding costs are very expensive. I accept the defendant's submission that a potential financier seeing ASMI's caveat could be expected to ask what was claimed to be secured by the claimed equitable mortgage, albeit that ASMI does not now propound such a title. But the same query would arise if it were permitted to lodge a caveat claiming an interest as chargee. A response that ASMI claimed to be secured for a debt of $2.31 million and interest could well deter a prospective financier.

The continued existence of the caveat, or the lodgement of a new caveat claiming an interest as chargee, could significantly damage the defendant's prospect of obtaining construction finance, and this could result in very substantial losses. Moreover, it could well be very difficult for the defendant to establish that any particular opportunity for obtaining construction finance was lost by reason of the caveat. A prospective financier could not be compelled to set out all its reasons for refusing to offer a loan. Even if the undertakings as to damages that the plaintiff offers are worth - powder and shot - the difficulty of establishing an entitlement to damages is a material consideration in assessing the balance of convenience.

In my view the value of ASMI's undertaking as to damages is at least problematic.

The director of ASMI, a Mr Frank Reynolds, deposes that ASMI has assets consisting of cash at bank of $101,000, cash on trust of $29,500, and non-current assets, being accounts receivable, of $31.85 million. Any damages could well vastly exceed the cash presently available to ASMI. There was no evidence as to the recoverability, or indeed the nature of the accounts receivable. Mr Reynolds did not say that they included debts payable for moneys lent, and having regard to his description of the plaintiff's business that did not include the lending of money, I do not infer that the accounts receivable include loan debts. If the present case is representative of ASMI's business, the recoverability of the claimed accounts receivable must be doubtful. I think there is every prospect that the defendant's damages could exceed ASMI's available assets to a substantial extent.

Mr Reynolds offers his undertaking as to damages, but there is no evidence as to his ability to meet that undertaking. Counsel for ASMI submitted that there was a relevant analogy with cases involving security for costs. I doubt that there is such an analogy. If there is, it is inexact. In cases of security for costs a corporate plaintiff which contends that its poor financial position has been caused or materially contributed to by the conduct of the defendant about which it complains will, at least generally, be required to proffer a guarantee or other security by those who stand behind it and who would stand to benefit if its action succeeds. That consideration is remote from those relevant to the present case when the worth of the undertaking is to be considered.

ASMI contended that the defendant had been unable to raise finance since acquiring the property in 2015 and there was no reason to think it would be thwarted in its attempts to do so between now and the time an expedited hearing could be determined. I do not think that submission lies very well in ASMI's mouth. The defendant's evidence is that it was led to believe that ASMI could arrange such finance. In any event, if no finance is arranged and if ASMI establishes its claim to enforce a charge to secure a debt of $2.31 million and interest, the lapsing of the caveat would not prevent its being entitled to the remedies of an equitable chargee over land that was acquired in 2015 for $28.5 million and has no other encumbrance except the charge to Jagbo. In other words, ASMI would not need the protection of the caveat.

If the caveat lapses and construction finance is obtained, ASMI's risk of loss is if there are insufficient moneys realised from the development to pay out a secured lender. Having regard to the existing equity and the loan to security ratio that a lender could be expected to require, that risk pales into insignificance compared to the risk the defendant faces from continuance of the caveat. In any event, for the reasons I have given I think the only seriously arguable claim is for an entry fee of $69,300, and the defendant has offered an undertaking to the Court to pay that sum, and a little more to cover interest, into Court within seven days.

The defendant also offers undertakings to the Court described as follows in Mr Xian's affidavit:

Those undertakings will be accepted.

ASMI relied on what Brereton J said in Warner v Andrews [2011] NSWSC 956 at [11] and [12] where his Honour said:

That was said in the context of a case in which the caveator's interest was "manifestly established" (at [8]). However, it is true that in Custom Credit Corporation Limited v Ravi Nominees Pty Limited (1992) 8 WAR 42 at 50 Owen J (with whom Malcolm CJ and Walsh J agreed) said that the interlocutory removal of a caveat where an "arguable" case as to the existence of the caveatable interest had been demonstrated, would be unusual. His Honour noted that the purpose of a caveat is to restrain the registered proprietor from dealing with the land in a way which would defeat or derogate from the incidents attaching to the proprietary interest claimed by the caveator until the respective rights of the parties had been honoured if there were agreement, or determined if there were disagreement.

His Honour noted that in many cases removal of the caveat would have the effect of destroying, for practical purposes, the benefit of the proprietary interest. That may be true in some cases, but it is clearly not true in all. For example where alternative security is proffered, as it is in this case, in respect of the sum of $69,300, removal of the caveat does not destroy at all the benefit of the plaintiff's charge for the only amount of debt as to which I think there is a serious issue.

In my respectful view a literal application of the observations of Owen J may well be contrary to the principles governing applications for interlocutory injunctions that are generally accepted to be applicable to applications for removal of a caveat. It is clear that on an application for an interlocutory injunction the prima facie strength or weakness of the plaintiff's case, even if arguable, is relevant to the balance of convenience.

Had I been of the view, which I am not, that there was a serious question to be tried that ASMI is entitled to recover $2.31 million, nonetheless having regard to my assessment of the strength of its case, including the difficulties it would face in respect of the law of penalties in such a scenario, and having regard to the difficulties with its undertaking as to damages, I would not have concluded that the balance of convenience favoured extension of the caveat. Having regard to the additional security offered, and my assessment of the strength and quantum of ASMI's claim, the conclusion that the caveat should not be extended is overwhelming.

I will ask the defendant's counsel to bring in short minutes of order incorporating the undertakings proffered orally during the hearing and as set out in Mr Xian's affidavit. If necessary, I will hear from the parties as to whether ASMI should be restrained from lodging a new caveat claiming an interest as equitable chargee. There may be a question as to whether the lapsing of the existing caveat under which it claims an interest as an equitable mortgagee would preclude its lodging a new caveat, but I doubt that there would be any issue about that. I will also hear the parties on costs and give any further directions that are appropriate for the further conduct of the matter.