Egan v Egan

1. [1]

   The plaintiff, who is the mother of the defendant, seeks possession of a property at 1 Bettong Lane, Glenning Valley. The defendant owns the property but executed a mortgage to secure a loan from the plaintiff in order to purchase the property. The loan agreement is dated 22 June 2006.

2. [2]

   A notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) was served on the defendant on 17 October 2016. The plaintiff alleges that no money was paid pursuant to the loan agreement and mortgage. The amount outstanding at the date the proceedings commenced, 16 December 2016, was $918,051.61.

3. [3]

   The defendant alleges that the loan agreement and mortgage which she executed was always intended by the parties to be a sham because, at the time the property was purchased using money under the control of her parents, the defendant and her husband were going through a divorce. The purpose of the loan agreement and mortgage was, she alleges, to provide protection to the defendant against her then husband being able to obtain the property or any part of the proceeds of sale of the property in the divorce.

4. [4]

   The plaintiff’s husband, the defendant’s father, died on 20 November 2011. I shall, without disrespect, generally refer to him as Barry as the plaintiff did in her affidavits.

5. [5]

   The defendant has also filed a cross-claim seeking a declaration that the Deed of Loan dated 22 June 2006 and the mortgage are void and of no effect. She seeks an order for the delivery up and cancellation of the mortgage.

6. [6]

   The defendant claims that, by reason of the sham arrangement made between the parties, the plaintiff is estopped from enforcing any mortgage. The defendant claims she acted to her detriment by not seeking independent legal advice prior to executing the documents.

7. [7]

   The defendant alleges the mortgage is unenforceable because no loan was made to her in the first instance. Further, no direction was ever given pursuant to the mortgage as to when payments should be made and how much they should be. In that way there was no default under the mortgage.

8. [8]

   The defendant seeks to set aside the legal arrangement relying on the Contracts Review Act 1980 (NSW). The defendant further claims that she was under a special disability and that the arrangement should be set aside on the basis of unconscionability. Finally, the defendant asserts that she executed the arrangement under the undue influence of her parents.

The plaintiff’s case

1. [9]

   The plaintiff swore two affidavits. The first was dated 17 May 2017 and was more in the form of a formal affidavit proving the essentials of the claim for possession. The affidavit annexed the various documents including a Deed of Loan dated 22 June 2006, the mortgage of the same date and the fact that the monies to purchase the property were provided by the plaintiff and Barry. Those monies were paid to the vendor of the property. The affidavit also identified that no monthly repayments had been made as required by clause 3.2(b) of the Deed of Loan. The plaintiff also swore that it came to her knowledge that by mid to late June 2016 the defendant had not been paying the rates on the property.

2. [10]

   All of that led to the notice dated 17 October 2016 pursuant to s 111(2)(b) of the Conveyancing Act 1919 (NSW) and s 57(2)(b) of the Real Property Act identifying the breaches as: (a) the failure to make repayments of principal and interest; and (b) being unable to pay her debts as they became due in contravention of clause 4.1(f) of the Deed of Loan. The notice required payment of the amount of $610,834.23 being repayments of principal and interest from 22 June 2006 until 22 September 2016.

3. [11]

   The plaintiff’s second affidavit of 1 August 2017 set out the whole of the background of the purchase of the property. That background may be summarised as follows. The plaintiff and Barry had three children. The eldest was Peter, the defendant was the second child born, and the third child was Michael. Barry was an actuary who worked in the life insurance and superannuation industry.

4. [12]

   In around early 2001 the defendant said that she was expecting her first child with her then partner, who later became her husband, David Olteanu. At that time the defendant and David were living with the plaintiff and Barry at their Edensor Park property. David’s family lived in Newcastle.

5. [13]

   The defendant and David decided to look for a place to live on the Central Coast which was about half way between the two families. On 13 May 2001 the defendant rang the plaintiff and said that they had found a house at Bateau Bay, but she said that she and David could not afford it by themselves.

6. [14]

   After having inspected the property, the plaintiff and Barry decided to purchase it and rent it to the defendant and David to provide them with assistance while they started their family. The agreement was that the property would be rented to them for $200 per week, which was below market rent. The defendant and David agreed to that arrangement.

7. [15]

   The plaintiff and Barry did not have sufficient funds to purchase the Bateau Bay property outright. The Edensor Park property was mortgaged in the plaintiff’s name alone and she was unable to obtain a second mortgage to purchase the Bateau Bay property. Accordingly, the plaintiff and Barry decided to buy the Bateau Bay property in the name of a company they controlled called Syswest Services Pty Ltd. The property was purchased on or about 29 June 2001. The defendant and David moved into it. Despite the agreement to pay $200 per week they did not make any payments. The plaintiff and Barry were reluctant to do anything about that because the defendant was expecting her first child.

8. [16]

   The defendant and David married on about 9 May 2003 but separated about 27 December 2004.

9. [17]

   Throughout 2005 and the first half of 2006 the defendant said to the plaintiff and Barry on a number of occasions that she no longer wished to live at the Bateau Bay property. She said that she hated the house because it held too many bad memories. In early 2006 the plaintiff and Barry had a conversation with the defendant around the kitchen table at the Edensor Park property. Barry said words to the effect:

10. [18]

    The defendant then found the property at 1 Bettong Lane, Glenning Valley. The plaintiff and Barry thought it was a suitable property.

11. [19]

    The plaintiff says that she and Barry had previously instructed Tihomic (“Tic”) Stoikovich of Stoikovich Lawyers at Liverpool for legal advice from time to time. They retained him to prepare a Deed of Loan and mortgage in relation to the Glenning Valley property. The plaintiff says that Barry said to her:

12. [20]

    In about June 2006 the plaintiff attended Stoikovich Lawyers’ office with Barry and the defendant. She does not recall any specific conversation on that day. The solicitor had prepared the Deed of Loan and mortgage prior to the meeting and provided the documents to them at that time. She said in her affidavit that she does not recall where the Deed of Loan was signed but in her oral evidence she thought it was at the solicitor’s office. The mortgage is signed by the plaintiff and the defendant and in each case witnessed by Barry. The signature of the witness to each of their signatures on the Deed of Loan appears also to be Barry’s signature and not that of the solicitor as might have been expected. That might suggest that the documents were not signed at the solicitor’s office. In the circumstances of this case it probably does not matter.

13. [21]

    The plaintiff said that at no time did she seek advice formally or informally from the solicitor or anyone else about structuring the purchase of the Glenning Valley property as a sham to protect the defendant for family law reasons or for any other reason. She said she never had a conversation with Barry where it was suggested that the mortgage was not intended to be genuine. She said she did not have any conversations with the defendant where this was suggested, and she does not have any reason to believe that Barry had any such conversation with the defendant.

14. [22]

    The plaintiff said that after settlement of the purchase of the property she expected that there would be a grace period during which the defendant would not be making mortgage repayments as she had limited employment. She expected that once the defendant and the children had moved into the property the defendant would be in a position to find full-time work with the plaintiff assisting with the children. At that stage she expected the defendant would begin to repay the mortgage. There were a number of conversations about this and on one such occasion the defendant said:

15. [23]

    At some point the plaintiff said it became apparent to her that the defendant had no intention or desire to find full-time employment. She can recall conversations where she said to the defendant, “You promised that you would find a full-time job if we helped you with the house” to which the defendant replied “I’m not going to find a job until the kids are older”.

16. [24]

    The plaintiff said that she decided not to enforce the interest repayments on the mortgage as her grandchildren were living in the property with the defendant. The plaintiff was concerned that the grandchildren would not have a home and that she may be prevented from seeing them in the future.

17. [25]

    After the defendant and David’s divorce was finalised in or around December 2006 the plaintiff said that there was no request from the defendant or any other person to discharge the mortgage over the property.

18. [26]

    As mentioned earlier, Barry died on 20 November 2011 after suffering from lung cancer for some months. It took the plaintiff some time to deal with his death and to put her affairs into order. She said that she was not mentally or emotionally able to raise the issue of the mortgage with the defendant and she remained concerned not to do anything that would leave the grandchildren without a home.

19. [27]

    In about 2012 the defendant had a conversation with the plaintiff in these terms:

20. [28]

    In about September 2013 the defendant and the children moved out of the Glenning Valley property into the plaintiff’s house. However, in about December 2015 the plaintiff evicted the defendant, and the defendant returned to live at the Glenning Valley property. The grandchildren remained living with the plaintiff from that time. It was shortly after that time that the plaintiff decided to take steps to enforce the mortgage. The plaintiff said that the grandchildren were living with her and indicated that they did not want to go back to living with the defendant, that the defendant was not living in the Glenning Valley property and its condition, which was not good because of the way it had been looked after by the defendant, was likely to deteriorate further if action were not taken.

The defendant’s case

1. [29]

   There is much common ground in the evidence of the plaintiff and the defendant. The main area of dispute turns on what the defendant asserts that her father said to her.

2. [30]

   After she and her husband separated at the end of 2005 she indicated to her parents that she did not want to continue living in the Bateau Bay property. At dinner at her parents’ place in Edensor Park she and her father had a conversation in the presence of her mother as follows:

3. [31]

   Thereafter the defendant found the Glenning Valley property. She said in May 2006 that Barry purchased the house for her and paid for it in cash. He told her:

4. [32]

   She also recalls her father telephoning her while she was at McDonalds saying words to the effect “I’ve just bought you a house”. She said a few weeks later she went to the real estate agent, picked up the keys and was given a bunch of flowers and a bottle of champagne. The agent said words to the effect of, “The house is yours. Congratulations”.

5. [33]

   The defendant said that she had separated from her husband David, and that they were going through family law property proceedings. The divorce was finalised in about November 2006. She said that Barry said to her words to the effect of:

6. [34]

   The defendant said that in about June 2006 she attended the offices of Stoikovich Macri with her parents to sign the mortgage documents. She said they went into the office of a person introduced to her as Mr Stoikovich. He spoke mostly to Barry and not much to her.

7. [35]

   In her oral evidence the defendant said that Mr Stoikovich said to her,

8. [36]

   The defendant said in July 2006 she had a housewarming party where Barry gave a speech to the guests and said:

9. [37]

   The defendant said that she and David were divorced in November 2006. She did not ask her parents whether the mortgage had been ripped up. She said she relied on them to attend to those matters as Barry had said would be done.

10. [38]

    The defendant said that when she was served with the s 57 notice she was shocked, as she was not aware that she was supposed to make repayments on the mortgage. She said that at no time between 2006 and October 2016 did her parents ask her to pay any mortgage instalments.

Is the arrangement a sham?

1. [39]

   The first matter to be determined is whether the arrangement concerning the Deed of Loan and the mortgage is a sham. If it was a sham and is set aside, the result must be that the land was purchased for the defendant as a gift and she is not obliged to pay any monies to the plaintiff pursuant to the Deed of Loan, the mortgage or otherwise.

2. [40]

   In Lewis v Condon; Condon v Lewis (2013) 85 NSWLR 99; [2013] NSWCA 204, Leeming JA (with whom McColl JA and Sackville AJA agreed) said:

3. [41]

   As Leeming JA makes clear at [62], strong evidence is required in order to displace the orthodox approach to construction; hence, the cases use expressions such as “heavy onus” which applies in a non est factum case, and “clear and convincing proof” in a rectification suit.

4. [42]

   Proof that the loan and mortgage arrangement was a sham is largely but not wholly dependent on acceptance of the defendant’s evidence. Further, it requires rejection of the plaintiff’s evidence at least by a finding that her evidence is unreliable even if not dishonest.

5. [43]

   In my opinion, the defendant has not discharged the onus of demonstrating that the Deed of Loan and mortgage were a sham. I do not consider that there is strong evidence suggesting that they were. My reasons for that conclusion follow.

6. [44]

   First, I found the plaintiff to be an impressive witness. I considered her evidence to be honest and reliable. She was prepared to make concessions and acknowledge when she may have been mistaken about events that occurred a long time ago. My impression was that she felt somewhat frustrated as a result of what she and Barry had done for the defendant, and for the way that things had turned out, particularly for the need to bring the present proceedings. However, I do not think that this caused her to be other than truthful about what had been said and done in relation to the Glenning Valley property.

7. [45]

   Secondly, the impression I had from the defendant was that she believed what she was saying. Her belief was that the property had been given to her by her parents and she was not obliged to repay any part of the purchase price. I do not think she was being deliberately dishonest but she seems to have come to a particular view about what her father, in particular, had said in relation to the purchase of the property. For example, a great deal was made on behalf of the defendant about statements made by Barry at the time of purchase to the effect that he was buying the property for the defendant. While that was certainly the case, these statements said nothing about what the underlying arrangements might have been with respect to repayment of the purchase price.

8. [46]

   Thirdly, the plaintiff gave evidence that in early 2006, at a conversation around the kitchen table with the defendant and the plaintiff, Barry said words to the effect of:

9. [47]

   Although the parties agreed not to challenge statements attributed to Barry, there is still the difficulty associated with the reliability of the evidence about those statements. In circumstances where the defendant herself admits that she had no chance of borrowing money to buy a property, the statement supposedly by Barry, “If I buy you a house you won’t have to worry about a mortgage”, is a statement that seems unlikely to have been made. It suggests that the defendant obtaining a mortgage was a possible alternative.

10. [48]

    Further, the evidence is that, despite what Barry is alleged to have said in that conversation, he did not take any steps to alter his will dated 25 August 1997 which, in a gift over, divided his estate equally amongst the three children. The fact that the will was not changed has a greater significance where Barry did not die for a further five years and did not die suddenly or unexpectedly.

11. [49]

    Fourthly, the defendant relies on a statement by Barry that is set out at [33] above. As the cases frequently note, statements attributed to dead persons which are relied upon must be scrutinised with great care because they cannot be challenged. The issue of reliability arises in relation to this statement also. It was not alleged by the defendant to have been said in the plaintiff’s presence, nor is it asserted that the plaintiff was told about it. In circumstances where I have accepted the plaintiff’s evidence that the statement set out at [30] above was not said in her presence as alleged, I cannot place great weight on the truth of what is alleged in the statement set out at [33] above. To accept the truth of the statement at [33], I would have to find that Barry was telling the defendant one thing and the plaintiff something different.

12. [50]

    In her cross-examination of the plaintiff, Ms Tibbey of counsel for the defendant put a number of questions to her suggesting that she and Barry always discussed business and financial matters together, and that Barry consulted her about financial and investment matters. The plaintiff agreed with all that was put to her in that regard. The plaintiff also said that Barry never saw Mr Stoikovich about matters unless she was present. I accept all of that evidence. In those circumstances, I cannot find that Barry’s dealings with the defendant were kept from, or misreported to, the plaintiff.

13. [51]

    Fifthly, after the divorce between the defendant and her husband was finalised, no person took any steps to “rip up the mortgage” as Barry is alleged to have said. Certainly, the defendant, in whose interest it was on her account of events, took no steps to ensure that that happened in circumstances where she knew that she had signed the Deed of Loan and the mortgage and that it was registered on the title.

14. [52]

    Sixthly, the defendant relies on what she alleges the solicitor said to her after the conference where the documents were signed. She alleges that Mr Stoikovich said to her words to the effect:

15. [53]

    Counsel for the plaintiff objected to that material on the basis that it was hearsay in circumstances where Mr Stoikovich was not being called to give evidence. Counsel for the defendant said that it was not relied upon as to the truth of the representation but only for the fact that it was said by Mr Stoikovich. Counsel for the plaintiff asked that, if the words were admitted, an order should be made under s 136 of the Evidence Act 1995 (NSW) limiting the use to be made of the evidence to the fact that it was said and not as to the truth of the statement. I initially admitted the statement on that basis only to see how the statement would be used in submissions by the defendant.

16. [54]

    Counsel for the defendant agreed that she wished to rely on the statement for the fact that the defendant heard Mr Stoikovich say those words and believed that what he said was right. In those circumstances, the only use that can be made of the statement is as to its truth. It is, therefore, hearsay and should not be admitted.

17. [55]

    When dealing with objections to affidavit evidence, I had rejected a statement made by the defendant that the documents were not adequately explained to her during the conference with Mr Stoikovich, because the statement was bad in form. However, I gave leave to the defendant to lead oral evidence in proper form. When the defendant was asked what explanation of the documents was given, she said that Mr Stoikovich said:

18. [56]

    It seems to me that that statement suffers from the same difficulty as the statement made in her affidavit (at [52] above) about what Mr Stoikovich said. For the statement to have any significance, reliance must be placed on the truth of the statement.

19. [57]

    There is the further difficulty that if the statement is admitted as to its truth, it points to Mr Stoikovich having been involved in the sham transaction that was ultimately intended to deceive the defendant’s husband and the Family Court in any property application the husband might make. Where Mr Stoikovich has not been called to give evidence, and I accept that he was not called by the defendant because he claimed to have no memory of the transaction, I would be loath to draw an inference that he was so involved without giving him the opportunity to provide an explanation. Quite clearly, making a finding against a solicitor in those circumstances might have serious consequences for him.

20. [58]

    Seventhly, in her affidavit the defendant said:

21. [59]

    In fact, as the defendant said a number of times in her oral evidence, there were never any property proceedings, nor was any property claim made by her husband. Neither counsel asked her why she had said what appears in paragraph 18 of her affidavit if it was not correct. The fact that it was not correct causes me to have serious doubts about whether her father ever said what is attributed to him in paragraph 19, in circumstances where the clear inference from the juxtaposition of those paragraphs is that the two matters were connected.

22. [60]

    Finally, the defendant also relies on the evidence of Catherine Gilmore. Ms Gilmore lived at the adjoining property in Glenning Valley at the time the defendant moved to her property there. Ms Gilmore remained a neighbour until 2010.

23. [61]

    In paragraph 10 of her affidavit she said this:

24. [62]

    Ms Gilmore’s evidence in cross-examination was somewhat different. Her evidence relevantly was this:

25. [63]

    In the first instance, Ms Gilmore used the word “frequently” in her affidavit in relation to the conversation that she asserted the defendant had in front of her parents where she said “I don’t have to worry about a mortgage”. In the light of what she said in cross-examination both about the word “frequently” and the fact that she never discussed “mortgage”, I can place no reliance on paragraph 10 of her affidavit. Furthermore, although she agreed that after she moved away from the property in 2010 she had little to do with the defendant, later questioning by me to ascertain how the defendant’s telephone call to her to give evidence occurred, Ms Gilmore disclosed that she and the defendant were Facebook friends and they see what’s going on when using Facebook.

26. [64]

    I note in any event that the conversation in paragraph 10 of her affidavit was never put to the plaintiff in cross-examination. Nor do I think any inference can be drawn that the mortgage was a sham from Ms Gilmore’s statement that neither Barry nor the plaintiff said anything in response to the defendant’s comment about the mortgage, if that remark was even made. There might be any number of reasons why the plaintiff and/or Barry would not have wished to discuss family financial arrangements with a neighbour.

27. [65]

    I do not consider Ms Gilmore’s evidence to be reliable.

28. [66]

    For these reasons I do not consider that the defendant establishes that the Deed of Loan and the mortgage were not intended to have legal effect.

Estoppel

1. [67]

   The defendant relies on estoppel by convention, and in particular upon the assurances by Barry that the Deed of Loan and mortgage were mere devices never intended to be enforced and would be destroyed once there was no prospect of a claim on the property by her estranged husband. These assurances were said to be representations as to future conduct inducing her to sign the documents.

2. [68]

   Any estoppel simply provides the basis for demonstrating that the Deed of Loan and the mortgage are a sham and for identifying the personal equity the defendant relies on to overcome the effect of s 42 of the Real Property Act 1900 (NSW) by the registration of the mortgage.

3. [69]

   Although I have found that the defendant fails to show that the arrangement was a sham, the defendant may have had difficulty in being able to rely on the personal equity because of the equitable maxim of clean hands. The relationship between sham transactions and the equitable maxim has been discussed by Campbell J (as his Honour then was) in Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060. Campbell J reviewed a large number of cases and, in the course of so doing, said:

4. [70]

   Tang v Bongreen [2003] NSWSC 824 was a case where the second and third defendants were seeking an interlocutory injunction to restrain the holding of a meeting of the first defendant requisitioned by the plaintiff, a shareholder in the first defendant. The second and third defendants claimed that the plaintiff’s shareholding was a sham because the allocation of the shares was simply to assist with the plaintiff’s immigration to Australia. The plaintiff raised a defence of unclean hands on the part of the second and third defendants who were said to be part of the sham arrangement.

5. [71]

   Although McDougall J found that the share arrangement was not a sham, he went on to consider the defence of unclean hands. His Honour said:

6. [72]

   If I had determined that the arrangement in the present case was a sham, those authorities point to the difficulty for the defendant in demonstrating that she seeks relief to set the Deed of Loan and the mortgage aside with clean hands. To prove her equity to have the Deed of Loan and mortgage set aside, the defendant necessarily had to rely on the sham arrangement in which she was complicit.

Is the mortgage unenforceable for other reasons?

1. [73]

   The defendant submitted that no loan was ever made to her because she never received any monies into her account, nor did she ever direct the solicitor with carriage of the conveyance to apply any funds held on her behalf to the purchase. The defendant further submitted that if there was no loan there could not be any default on a loan.

2. [74]

   The defendant submitted that the date for payment of the principal (30 years from the date of the advance) had not arrived and there was never any oral or written direction to her as to when payments should be made or how much they should be.

3. [75]

   It is clear that these submissions all depend on the loan being a sham, as the defendant’s written submissions make clear. It is not, in any event, necessary for the purchase price to have passed through the defendant’s hands to establish that a loan had been made. The evidence is clear that the plaintiff paid the purchase price for the property which was, at the same time, put into the defendant’s name.

4. [76]

   There was no necessity for any direction in relation to payment of instalments. The Deed of Loan provided in clause 3.2(b):

5. [77]

   The defendant also submitted that a search of the Register disclosed that all that was registered was the Mortgage itself and a document headed Annexure “A”. The Deed of Loan did not form part of the Register and was not referred to in the Mortgage or Annexure “A”. Accordingly, the covenants in the Deed of Loan were contractual only with the result that the s 57(2)(b) notice was invalid because the defaults relied upon were not defaults under the registered mortgage. Further, the plaintiff was not entitled to possession of land because rights to possession arose only under the Deed and not the mortgage.

6. [78]

   I note that this matter was not pleaded in the Defence nor the Cross-Claim. Since, however, it was argued without opposition from the plaintiff, I will deal with the argument.

7. [79]

   Annexure “A’ relevantly provided:

8. [80]

   The issue arises because Annexure “A” refers to “the Deed of Acknowledgement of Loan” rather than “the Deed of Loan”. The defendant says that the covenant should be construed strictly against the mortgagee, relying on Tsan v Electronic Resources Aust Pty Ltd (Supreme Court (NSW), Hodgson J, 24 July 1997, unrep).

9. [81]

   The mortgage in Tsan, said to have been given by way of guarantee for a loan to a third party, did not contain any acknowledgement or promise that the mortgagors were actually giving the guarantee or mortgage contemplated by the loan agreement with the third party. Furthermore, as Hodgson J noted, since guarantors were involved the contra proferentem principle and the principle that documents are to be construed strictissimi juris both applied. The result was that the mortgage was ineffectual and secured nothing.

10. [82]

    In the present matter the defendant is not a guarantor. Furthermore, as the parties acknowledge, the only documents executed on 22 June 2006 were the mortgage and the document called “Deed of Loan”. There was no such document as a “Deed of Acknowledgement of Loan”.

11. [83]

    In New South Wales Land and Housing Corporation v Australia and New Zealand Banking Group Limited [2015] NSWSC 176 Kunc J said:

12. [84]

    In my opinion, it would have been plain to the parties to the present arrangement that what was meant by the words “Deed of Acknowledgement of Loan” was the Deed of Loan. The words used are clearly a falsa demonstratio (as Hodgson J said in Tsan) for the words “Deed of Loan”. Accordingly, the Deed of Loan is incorporated into the mortgage by Annexure “A” when properly construed. There is no requirement to invoke the principles referred to in Tsan, particularly because there is no real ambiguity.

Contracts Review Act

1. [85]

   A consideration of whether the contract was unjust only arises in circumstances where the defendant does not establish that the Deed of Loan and the mortgage were a sham.

2. [86]

   I said earlier that I consider the defendant now honestly believes what she is asserting. What I cannot determine is whether at the time of execution of the documents she had that belief. That means that there are two possibilities. First, the defendant might have executed the documents in the mistaken belief that the loan and mortgage would never be enforced, whether because she understood it was merely a protection against a claim by her former husband, or for some other reason. The second possibility is that she did not execute the documents under any mistaken belief.

3. [87]

   Whilst, in some circumstances, it might be necessary to consider those possibilities separately, in the circumstances of the defendant’s entry into the transaction, I do not think it needs to be determined which was the case.

4. [88]

   The plaintiff submitted that the contract was not unjust where the arrangement gave the defendant security of accommodation which she would not have been able to achieve in any other way. Further, the Deed of Loan in clause 3.2(b) providing for repayment of the principal and interest gave a flexibility that would not have been possible if she had borrowed from a bank or financial institution. The plaintiff submitted that even if the defendant had received independent legal advice she would have agreed to the arrangement in any event because of the benefit she was receiving of the house. That benefit included any increase in the value of the property over time. The plaintiff pointed to the defendant’s knowledge of what a mortgage was, and that she knew she was executing a Deed of Loan and a mortgage.

5. [89]

   The evidence discloses a financial dependence and reliance on her parents over some years prior to the execution of the documents. Barry was an actuary who worked in the life insurance and superannuation industry. The evidence also disclosed that he bought companies in financial difficulty and “turned them around”. The plaintiff had been an accounts clerk, an electorate officer, and had assisted Barry with a computing business. The impression I had of the defendant was that she was not very sophisticated in relation to financial matters.

6. [90]

   The plaintiff and Barry had purchased the Bateau Bay property for the defendant and her husband in the circumstances of her first pregnancy. Although an arrangement was put in place for her to pay $200 per week rent, such rent was never paid. There was no attempt by the parents to enforce that arrangement. After the defendant and her husband separated she told her parents that she did not wish to live in the Bateau Bay property because of the bad memories. It was in those circumstances that the offer was made to purchase a property in her name.

7. [91]

   Even on the plaintiff’s evidence, however, no conversation is recorded between the plaintiff and/or Barry on the one hand and the defendant on the other that, although the parents were buying the property, there would be a mortgage back over a 30 year period. The plaintiff’s evidence, which I accept, was that she did not have any intention of gifting a property to the defendant and she did not have any discussions with her husband where he indicated he wanted to provide the house as a gift. There was a conversation between the plaintiff and her husband where one of them said:

8. [92]

   The plaintiff then records a discussion with her husband at about the time of exchange of contracts where Barry said to her:

9. [93]

   The next thing that happened as far as the defendant was concerned is that she went with her parents to the solicitor’s office where, in their company, she was asked to sign the Deed of Loan and the mortgage without any explanation being given to her about what the signing of the documents would mean.

10. [94]

    Not only is there no evidence of any discussion with the defendant about the mortgage before they were at the solicitor’s office, it is apparent that the matter seems to have been presented to the defendant by Barry and the plaintiff on a “take it or leave it” basis. There was no evidence of any negotiation of the basis for the purchase and the terms of the Deed of Loan or mortgage. That is a relevant matter under s 9(2) of the Contracts Review Act.

11. [95]

    Further, it was quite inappropriate that the same solicitor acted for the plaintiff and the defendant. Although, in one sense, this was a family matter, the interests of the plaintiff and the defendant diverged considerably. The defendant ought to have been advised to get independent legal advice. Competent independent legal advice would have resulted in the defendant being told that, under the terms of the Deed of Loan and the mortgage, she was obliged to start paying principal and interest within a month of settlement, that she was thereafter obliged to repay the monthly instalment, that failure in that regard would entitle the plaintiff to issue a notice under s 57(2)(b) of the Real Property Act and thereafter, if that notice was not complied with, to take proceedings seeking possession of the property so that it could be sold to repay the entirety of the amount loaned. The solicitor should probably have asked the defendant how she was going to make the instalment payments. A solicitor’s obligation is not simply to explain the legal effect of documents but to advise of the obvious practical implications of the client’s entry into the transaction the subject of the advice: Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36 at [80], [120]-[122].

12. [96]

    The plaintiff said that at the time of settlement of the conveyance she expected that there would be a grace period during which the defendant would not be making mortgage repayments because she had limited employment. She expected that once the defendant and her children had moved into the property she would be in a position to find full-time work with the plaintiff assisting with the children. The defendant would then begin to repay the mortgage.

13. [97]

    In all of those circumstances, the plaintiff must have known that the defendant would be likely to default under the terms of the Deed of Loan and the mortgage almost immediately. In those circumstances, there was not at the time the mortgage was entered into, to the knowledge of the plaintiff, any reasonable expectation that the repayments required under the Deed of Loan would be able to be made. That would mean that the only way the loan could be repaid would be by a sale of the property. That is what is classically described as “asset lending” in cases like Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41; (2006) 14 BPR 26,639 at [128]; Spina v Permanent Custodians Limited [2009] NSWCA 206; (2009) 14 BPR 26,923 at [69]-[70] and Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; [2008] NSWCA 343 at [96]; and see Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260 at [43].

14. [98]

    Contrary to the plaintiff’s submissions, the matter of the unjustness of the contract cannot be tested by pointing to the fact that the defendant was receiving a property pursuant to this arrangement that she would not have been able to obtain in any other way. What must be examined is not the underlying transaction but the contract itself.

15. [99]

    Moreover, although the evidence discloses that the defendant knew that the documents she was executing were a Deed of Loan and a mortgage, and she also knew what a mortgage was, in all of the circumstances that knowledge is not determinative.

16. [100]

    In my opinion, the financial and emotional dependence of the defendant on her parents, the lack of any explanation, the lack of negotiation, the failure to ensure the defendant obtained independent legal advice, and the knowledge of the plaintiff and Barry that the defendant had no ability at least in the short term of complying with the provisions of the Deed of Loan and mortgage, all combine to make the contract unjust in the circumstances it was made.

17. [101]

    The plaintiff submitted that any relief under the Act should take into account that she should at least receive the principal amount loaned of $450,000. She submitted that the Deed of Loan should be varied so that interest is first payable from the date of the demand by the s 57 Notice on 17 October 2016.

18. [102]

    The defendant submitted, first, that I should set aside the mortgage and Deed of Loan entirely, although the only basis for that submission was that I should find the house was a gift to the defendant. This appeared to be confusing the case that the arrangement was a sham with the alternative case that there was a valid loan and mortgage but that they constituted an unjust contract. The defendant’s alternative submission was that interest should only run from the date of the first demand, and that the principal owing should be reduced by some unspecified amount for no specified reason.

19. [103]

    In the circumstances of my acceptance of the plaintiff’s evidence that the house was never intended to be a gift to the defendant, no basis is shown for any order varying the principal sum to relieve the defendant of her liability to repay the amount of $450,000. Both parties appear to agree that it would be reasonable not to require interest to be payable prior to 17 October 2016. The only further matters for consideration are whether interest should not start to run until a date later than 17 October 2016, perhaps the date of this judgment, and whether there should be a variation of any other term of the Deed of Loan.

20. [104]

    A factor of some significance is that the defendant has been residing, or has been able to reside, in the property since 22 June 2006, paying nothing under the Deed of Loan and mortgage. That must also be viewed in the context of the financial and family arrangements between the plaintiff and the defendant.

21. [105]

    After the purchase of the property the Plaintiff and Barry, on the defendant’s own evidence, paid her mobile phone bills, house insurance, car insurance, and provided money for electricity bills and rates. In addition, in 2012 the plaintiff purchased a car for the defendant at a cost of $34,000. In 2013 the defendant and her two children moved into the plaintiff’s house where they were looked after by the plaintiff. After the defendant was required to move out of the plaintiff’s house in 2015 her two children remained living with the plaintiff who continues to maintain and support them.

22. [106]

    Despite the apparent agreement of the parties that interest should not run from a date prior to the demand in October 2016, and despite the matters in [103] and [104] above, there is a further consideration in relation to when interest should commence.

23. [107]

    The defendant said in evidence that she is unemployed at the moment. The impression I have from her evidence and that of the plaintiff is that her employment record has been patchy. If the Deed of Loan was varied to commence interest running in October 2016 and to require the defendant to pay the arrears of principal and interest from that day, the strong likelihood would be that she would immediately default on the loan. The effect would be a variation of the contract that still amounted to asset-lending in that the only way her obligations could be met would be immediate sale of the property. It scarcely seems appropriate to vary a contract that I have held to be unjust, at least partly because it amounted to asset-lending, by creating a new contract that would put her into immediate default.

24. [108]

    On the other hand, the defendant has had the benefit of the contract for almost 12 years without any payments being made by her. In my opinion, it is appropriate to commence interest running from 17 October 2016 but not to require her to pay the first instalment of principal and interest due under the varied contract until one month after the date of judgment. In other words, the interest would be capitalised from 17 October 2016 to the date of judgment. Whilst I accept that the defendant may not be able to comply with those varied terms, any other variation more favourable to her would not avoid an unjust consequence to the plaintiff (s 7(1) of the Act).

25. [109]

    The parties will be ordered to execute an amended deed of loan which varies the time interest commences to be charged on the principal sum and provides for the first instalment of principal and interest to be payable one month after the date final orders are made to give effect to this judgment. There should be no variation to the principal sum owing under the existing Deed nor to the term of the loan. Taking into account the terms of s 19 of the Act, the parties will be ordered to execute and register a variation of the mortgage which will incorporate the amended deed of loan. The costs of these documents should be equally borne by the parties.

Unconscionablity and undue influence

1. [110]

   In the light of my determination that the contract was unjust, it is not necessary to consider these matters.

Conclusion

1. [111]

   I will hear the parties on costs. My prima facie view is that each party should pay her own costs on the basis that the plaintiff was successful on the issue of the sham arrangement, but the defendant was successful in varying an unjust contract.

2. [112]

   The order I will make is that the parties are directed to bring in Short Minutes to reflect my reasons in this judgment and, if agreement is reached, to deal with the question of costs.