Cui v Salas-Photiadis

1. [1]

   The circumstances giving rise to this dispute are very unfortunate.

2. [2]

   On 12 April 2024, the plaintiff entered into a contract to purchase a home on Wentworth Avenue, Blakehurst (the Property) from the second defendant, Simpo Property Services Pty Ltd (Simpo), for the sum of $4,350,000. The plaintiff paid a deposit of 10% over several transactions between 12 and 30 April. The initial settlement period was 12 weeks, but this was brought forward to 28 June.

3. [3]

   In order to complete the purchase, the plaintiff borrowed funds from Westpac who, in the usual course, agreed to lend against the plaintiff’s promise to grant a mortgage over the Property.

4. [4]

   Each of the vendor and purchaser was represented by solicitors. On 1 May, a PEXA workspace was created to facilitate settlement. On that day, the solicitors for the purchaser, as well as Westpac as incoming mortgagee, joined the workspace. The solicitors for the vendor joined the workspace on 13 May, and the outgoing mortgagee joined on 25 June.

5. [5]

   On 20 May, the first defendant lodged a caveat against the Property. That caveat identified the first defendant’s interest in the Property as a “charge” granted under a loan agreement to which I will refer in due course.

6. [6]

   Bafflingly, no participant in the PEXA workspace noticed that the first defendant’s caveat had been lodged. If they did, they did not appreciate the significance of it. Instead, the parties blindly proceeded towards settlement in the usual way.

7. [7]

   The PEXA exchange history records that on the day of settlement, being 28 June, all of the usual settlement steps occurred, including the following:

   1. (1)

      The outgoing mortgagee signed a discharge for the second defendant’s existing mortgage.

   2. (2)

      Solicitors for both vendor and purchaser signed the transfer.

   3. (3)

      The solicitor for the purchaser signed a “Notice of Sale Document”.

   4. (4)

      Westpac, as incoming mortgagee, together with the outgoing mortgagee, and solicitors for both the purchaser and vendor, signed the financial settlement schedule.

   5. (5)

      Documents, including the executed transfer, were lodged with Land Registry Services.

   6. (6)

      Funds representing the remainder of the purchase price (plus stamp duty, registration fees and electronic settlement fees) were disbursed in accordance with the financial settlement schedule.

8. [8]

   The following day, Westpac received a requisition from Land Registry Services informing them that the transfer and mortgage could not be registered because of the first defendant’s caveat.

9. [9]

   By summons filed in Court on 10 September, the plaintiff seeks an order under s 74MA of the Real Property Act 1900 (NSW) that the caveat be withdrawn by the first defendant. The order sought in prayer 7 of the summons is as follows:

10. [10]

    The plaintiff also seeks a variety of other orders, including orders for compensation under s 74P and orders against Simpo for specific performance of the contract.

11. [11]

    On 12 September, on application by the plaintiff, the Court ordered that his entitlement to the relief sought in prayer 7 be determined separately from the other issues in dispute.

The Loan Agreement

1. [12]

   Before addressing the parties’ arguments as to the validity of the caveat, it is necessary first to say something about the circumstances in which the first defendant’s caveatable interest is said to have arisen.

2. [13]

   On 27 February 2024, the first defendant entered into a loan agreement with Simpo (Loan Agreement). Under the Loan Agreement, the first defendant was the lender and Simpo was the borrower. The first defendant accepted for the purposes of argument before me that the Loan Agreement is in the form of a deed.

3. [14]

   The terms of the Loan Agreement state that the “Facility Limit” amount of $2 million is due and payable six months from the date of the deed.

4. [15]

   Key terms in the Loan Agreement are set out in the “Finance Offer Schedule”, at the back of the deed. The schedule notes for “Drawdown” that:

5. [16]

   Clause 17 of the Loan Agreement deals with security. Clause 17.1(a) provides as follows:

6. [17]

   The Finance Offer Schedule states that the security includes a “Mortgage by [Simpo] over the land detailed below”. Underneath is a description of the Property and the words “2nd Registered Mortgage”.

7. [18]

   The parties also executed a form of mortgage on 27 February 2024 to give effect to the security arrangement (Mortgage). However, for reasons that have not been explained, the Mortgage was not registered on title.

8. [19]

   Simpo’s obligations under the Loan Agreement were guaranteed by Mr Ivica Simonovic, who was the sole director and sole secretary of Simpo.

9. [20]

   The reference in the Loan Agreement to building work requires more explanation. Documents produced under subpoena show that NSP Quality Builders Pty Ltd (NSP), a company associated with the first defendant, entered into two construction contracts with Simpo on 19 February 2022 and 24 April 2022. Pursuant to those construction contracts, NSP agreed to provide labour and materials for all the required construction work for the Property. Invoices produced on subpoena show that NSP invoiced Simpo a total of about $815,000 for work, presumably under the construction contracts.

10. [21]

    There was no dispute that the amounts for “construction works” referred to in the Finance Offer Schedule and in the recitals to the Loan Agreement include this amount.

Section 74MA of the Real Property Act

1. [22]

   Before addressing the question of whether an order under s 74MA should now be made, it is first appropriate to say something about the nature of the question which I am required to determine and the procedural circumstances in which it arises.

2. [23]

   Section 74MA of the Real Property Act is as follows:

3. [24]

   As I have already noted, on 12 September the Court ordered that the question of whether an order under s 74MA should be made was to be determined separately from the other issues in the proceedings. In both written and oral submissions, the parties treated the determination of that question as involving the same issues that arise on an application under s 74K (the power of this Court to extend the operation of a caveat lodged under s 74F). So far as that matter is concerned, it is relevant to note what Brereton J said in Sutherland v Vale [2008] NSWSC 759 at [11]; (2008) 14 BPR 26,255:

4. [25]

   Both parties approached the matter before me on that same footing. Both accepted that the first defendant had the onus of demonstrating an arguable case that the caveat had substance (or, perhaps, that it was not defective) and, if so, that the balance of convenience favoured the maintenance of the caveat. Consistently with this approach, the first defendant proffered the usual undertaking as to damages. In the light of authority such as Harvie v Stevens [2004] NSWSC 1217; (2004) 12 BPR 22,751, the parties were correct to approach the matter in this way.

5. [26]

   The first defendant also stated, as it had done previously, that if the s 74MA application were to be resolved favourably to him at the interlocutory stage, then he would file and serve a cross-summons seeking a declaration as to the priority of the parties’ respective equitable interests in the Property, and relief in relation to its claimed equitable interest in the same.

Does the caveat have substance?

1. [27]

   The plaintiff submitted that the caveat had no substance because it was invalid for one or both of two reasons. The first reason was said to be the failure to sufficiently specify the nature of the equitable estate or interest claimed by the first defendant. The second concerned the effect of the Home Building Act 1989 (NSW). I will deal with each in turn.

2. [28]

   Section 74F(5)(b)(v) of the Real Property Act requires that a caveat must, relevantly, specify: “the prescribed particulars of the legal or equitable estate or interest, or the right arising out of a restrictive covenant, to which the caveator claims to be entitled.”

3. [29]

   Clause 7 of the Real Property Regulation 2019 (NSW) provides that a caveat lodged under s 74F of the Real Property Act “must specify the particulars set out in Schedule 2 in relation to the estate or interest to which a caveator claims to be entitled”. Item 1 in Schedule 2, in turn, relevantly includes this requirement:

4. [30]

   It is relevant to note two other items in Schedule 2. Item 4 requires a caveator who claims as “mortgagee, chargee or covenant chargee” to include a statement of the amount of the debt charged on the land if readily ascertainable. Item 10 states that a caveat need not specify whether the estate claimed is legal or equitable, nor how the estate ranks in priority to other claims.

5. [31]

   The plaintiff submitted that the description of the first defendant’s interest as a “charge” was inaccurate and amounted to a failure to comply with the statutory requirements set out above. He pointed to the well-recognised distinction between an equitable charge and an equitable mortgage. He also pointed out that the Real Property Act itself draws a distinction between a charge and a mortgage. He placed particular reliance in this respect on the opening language of s 3(1):

6. [32]

   He submitted that the caveat, as an instrument executed under the Real Property Act, was therefore required to be construed as if the word “charge” had its defined statutory meaning. That being so, the plaintiff argued that the expression “charge” in the caveat did not describe the first defendant’s real interest, which as the plaintiff accepts, is an equitable mortgage and, as such, not within the expression “Charge” as defined in the Act.

7. [33]

   I am unable to accept these submissions. The distinction between an equitable mortgage and an equitable charge was explained by Bathurst CJ (Beazley JA and Tobias AJA agreeing) in Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; (2012) 88 ACSR 689 (Roberts v Investwell). However, as set out at [27], the distinction with which the Chief Justice was concerned was between an equitable mortgage, on the one hand, and “an equitable charge which is not in the nature of a mortgage”, on the other. His Honour referred, in that connection, to Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 at 594 (Swiss Bank) where it was said:

8. [34]

   I take these references to acknowledge that an equitable charge may or may not take the form of an equitable mortgage. The distinction with which the courts in both Roberts v Investwell and Swiss Bank were concerned was as between those equitable charges which take the form of an equitable mortgage, and those which do not. Their Honours were not saying that the expression “equitable charge” is always inaccurate to describe an equitable mortgage, since an equitable charge may, as they explained, sometimes take the form of an equitable mortgage.

9. [35]

   The plaintiff relied on Circuit Finance Pty Ltd v Crown & Gleeson Securities Pty Ltd [2005] NSWSC 997; (2006) NSW ConvR 56-143 (Circuit Finance) on the general question of whether the caveat sufficiently described the first defendant’s interest. That decision (among others) explains why the description of the caveator’s interest as no more than an “equitable interest” is insufficient to comply with the statutory requirement to specify the nature of the estate claimed. To the same effect is the decision of Campbell J in Hanson Construction Materials Pty Ltd v Vimwise Civil Engineering Pty Ltd [2005] NSWSC 880; (2006) NSW ConvR 56-137 (Hanson). So much can be accepted. However, as Brereton J said at [16] of Circuit Finance, by reference to the reasons of Campbell J in Hanson:

10. [36]

    Although I do not place decisive weight on this passage, it seems that neither Campbell J nor Brereton J drew any particular distinction between an equitable mortgage and an equitable charge for relevant purposes. Rather, their Honours explained that a caveat that related to “an equitable mortgage or charge” was materially different to one that related to other kinds of interest.

11. [37]

    I am also unable to accept the plaintiff’s submission as to the effect of the opening language of s 3(1) of the Real Property Act. It is true that the defined expression “Charge” in that Act does not include any charge to secure a debt and that the first defendant’s interest in the property is therefore not a “Charge” as defined. However, at the same time, the expression “Mortgage” is defined as “any charge on land (other than a covenant charge) created merely for the payment of a debt” This language acknowledges (as Bathurst CJ did in Roberts v Investwell) that a mortgage is a particular form of charge (although as just explained, not a “Charge”).

12. [38]

    Moreover, I would not construe the caveator’s reference to a “charge” in the caveat itself as necessarily invoking the definition of “Charge” as per the Real Property Act. The definitions contained in s 3(1)(a) yield to context. They do not apply if inconsistent with the subject matter of the instrument in question. The particular instrument in question here is a caveat which refers specifically to the Loan Agreement, being a document which creates and refers to a mortgage. In this context, I take the reference to a “charge” to be a reference to the security interest created under the Loan Agreement which is a charge in the conventional sense, not in the specific sense of “Charge” as statutorily defined.

13. [39]

    Section 7D of the Home Building Act provides as follows:

14. [40]

    The plaintiff argued that the Loan Agreement attracted the operation of s 7D because it was an agreement which, in substance, purported to give a person a legal estate in land to secure the performance of (ie payments under) a residential building contract.

15. [41]

    The plaintiff further argued that the Home Building Act is beneficial consumer legislation, such that its provisions should be construed broadly and generally in the interests of consumers, to give effect to that statutory purpose.

16. [42]

    The plaintiff drew my attention to s 6, which provides:

17. [43]

    However, he submitted that, in context, the reference in s 7D to a contract “or other agreement” was sufficiently broad to capture an agreement (or deed) which governed a party’s obligations to make payments under a construction contract. I am inclined to agree with this submission. If it were otherwise, the provisions of s 7D could be sidestepped by the simple device of entering into a separate contract or deed for the payment of unpaid fees, which obligation could then be secured by a charge over the residential premises that were the subject of the construction contract. That, in essence, is what the plaintiff says has occurred here.

18. [44]

    The first defendant submits that such a construction is not even arguable, because the Loan Agreement here is on no view one under which any residential building work was to be performed and that by the time the Loan Agreement was entered into, the debt which it purported to secure had already arisen. He particularly relied on s 6(1)(a) of the Home Building Act, which provides that s 7D applies, relevantly, to contracts under which the holder of a licence “undertakes…to do, in person or by others, residential building work.” The Loan Agreement, he argues, is not such a contract. He also relies on the reasons of Hammerschlag J (as the Chief Judge in Equity then was) in Southern Cross Constructions (NSW) Pty Ltd v Salfa Pty Ltd (in liq) (recs and mgrs apptd) [2009] NSWSC 634 (Southern Cross) where his Honour rejected a similar argument in obiter.

19. [45]

    The first defendant pointed out that the person who took the security interest under the Loan Agreement was the first defendant, not the builder, NSP. The first defendant also submitted that because the Loan Agreement was in the form of a deed (a proposition accepted by the plaintiff for the purposes of the hearing before me), there was no occasion to “peer behind” the terms of the document, the parties having bound themselves to certain acknowledgements.

20. [46]

    I accept the plaintiff’s submissions on this point. It is necessary to approach the construction of s 7D in the light of its overall statutory purpose, as explained by Brereton J in Kell & Rigby Pty Ltd v Flurrie Pty Ltd (2006) 67 NSWLR 113; [2006] NSWSC 906 (Kell & Rigby v Flurrie) at [7]-[15]. As his Honour explained, the provision is one of a number of sections that may appropriately be described as pursuing a consumer protection purpose.

21. [47]

    When s 7D is read with s 6 as a whole and in the light of the overall statutory purpose as revealed by the language of the Home Building Act as a whole, it is in my view clear that an agreement which purports to grant security for the payment of the consideration payable under a contract to do residential building work is an “other agreement” within the meaning of that provision. It may equally be said that such an agreement is one which varies the builder’s undertaking to do that work in the first place, in that it modifies the terms on which the builder expects to be paid for that same work. That being so, such an agreement would itself be a “contract” to which the provisions of ss 7 to 7E of the Act apply.

22. [48]

    The fact that the Loan Agreement grants security to the first defendant as opposed to NSP is also of no particular consequence. By its terms, s 7D prohibits both the builder and “any other person” from taking a security interest in land under a contract or other agreement to which the provision applies. I consider the Loan Agreement in the present case to be within the scope of the prohibition notwithstanding that it purports to grant security to the first defendant. I particularly note that it does so on terms that treat the outstanding payment for residential building work done by NSP as being, at the same time, an advance under the “facility”.

23. [49]

    Nor does the fact that the Loan Agreement is in the form of a deed make any difference to my conclusion. The plaintiff’s point is not simply that there was no consideration for the agreement. It was, rather, that the agreement (whether in the form of a deed or otherwise) was unenforceable by reason of s 7D to the extent it purported to secure the payment for residential building work. I agree.

24. [50]

    Finally, I am disinclined to treat what Hammerschlag J said in Southern Cross as governing the outcome here. At [14] to [16], his Honour referred to a similar controversy but in circumstances where the point was not pressed and where the caveator had, by the time of the hearing, entered a submitting appearance. At [16] his Honour said:

25. [51]

    It is appropriate that his Honour’s reasons be accorded great weight and respect. However, in circumstances where there was no longer any controversy about the point (because the submission had at that point been abandoned) and where there was no contradictor, I am disinclined to treat what his Honour said as binding on me. In fairness, neither party submitted that I should do so.

26. [52]

    The plaintiff accepts that the Loan Agreement and Mortgage create a valid and enforceable equitable mortgage in favour of the defendant to secure the repayment of loans other than the amounts due and payable under the construction contracts. He argued, however, that because the caveats did not distinguish between those interests, the caveat as a whole was invalid.

27. [53]

    I am unable to accept that that is the consequence of s 7D applying. As Brereton J pointed out in Kell & Rigby v Flurrie at [15], s 7D invalidates a contract or agreement “to the extent” it purports to grant a security interest contrary to the provision. It therefore leaves intact the balance of the Loan Agreement and Mortgage over the Property, which (the plaintiff accepts) continue to secure the balance of the moneys payable. The plaintiff did not submit that the mere failure of the caveat to specify the amount secured was a sufficient reason to set the caveat aside.

28. [54]

    The consequence of s 7D applying here is that the equitable mortgage (or charge) secures only part of the indebtedness under the Loan Agreement. But the description in the caveat of the first defendant’s purported equitable estate or interest in the Property remains correct (or sufficiently correct). In circumstances where the plaintiff accepts that the first defendant appears to have an equitable mortgage to secure the balance of the secured moneys, I would not be prepared to make an order under s 74MA of the Real Property Act simply on the basis that a part of the claimed indebtedness was not secured.

Conclusion

1. [55]

   The first defendant has demonstrated that it has a good arguable case that the caveat has substance. The balance of convenience favours the continuation of the caveat until such time as the rights of the parties can be dealt with on a final basis, which will inevitably include a contest as to the parties’ competing priorities. I accept that there remains at least a theoretical risk that the vendor might seek to deal with the Property in a way that further disadvantages the plaintiff, however in circumstances where the plaintiff acknowledges that the first defendant has an equitable mortgage and where a contest as to the priority of the parties’ interests has been flagged but not yet determined, it is appropriate for the matter to proceed as efficiently as possible to a final hearing.

2. [56]

   I therefore decline to make an order under s 74MA of the Real Property Act at this stage. I will stand the matter over for directions in the Real Property List on Friday 18 October 2024. The costs of the hearing before me on 2 October 2024 are reserved.

3. [57]

   I make the following order:

   1. (1)

      List the matter for directions in the Real Property List on Friday 18 October 2024.