Toothless tigers and restraining the LPI when caveats are threatening your mortgagee sale
A mortgagee in its exercise of a power of sale over a security property could be forgiven for thinking that a caveat lodged over the property will be no impediment to the sale. This belief could be understandably drawn from section 74H(5) of the Real Property Act, 1900 (“the Act”) which provides as follows:
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Except in so far as it otherwise specifies, a caveat lodged under section 74F to protect a particular legal or equitable estate or interest in land, or a particular right arising out of a restrictive covenant, does not prohibit the Registrar-General from recording in the Register with respect to the same land:
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in relation to a mortgage, charge or covenant charge recorded or lodged in registrable form before the lodgement of the caveat - a dealing effected by the mortgagee, chargee or covenant chargee in the exercise of a power of sale or other power or a right conferred by the mortgage, charge or covenant charge or by or under law.
Unfortunately, the reality in practice is not so beneficial for the mortgagee. Both the Land and Property Information office (“LPI”), vitally important given their responsibility for recording transfers in the Register, and the Courts have taken an interpretation of section 74H(5)(g) that appears to be significantly narrower than that which naturally flows from its terms.
The LPI’s policy is that the only caveats it will remove under section 74H(5)(g) to allow a mortgagee sale to proceed are:
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caveats by unregistered mortgagees, provided they post-date the registered mortgage and that they do not expressly prohibit the exercise of the mortgagee’s rights under the registered mortgage;
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caveats of a prior unregistered mortgagee who has partially lapsed the caveat to allow registration of the mortgage under which the power of sale is being exercised; and
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caveats relating to a statutory charge, where the transfer will be registered but the caveat will remain on title and continue to be effective against any other dealing coming within its prohibition, including any dealings accompanying the transfer under power of sale (such as a mortgage).
(see ‘Mortgagee sale of land affected by caveat’, November 2007, published by the Department of Lands).
The rationale for (1) and (2) above would seem to be simple enough. Under section 58(3) of the Act, when exercising its power of sale, a mortgagee is required to apply the purchase money received firstly in payment of its expenses occasioned by the sale, secondly in payment of money due to the mortgagee and thirdly in payment of subsequent mortgages and charges in the order of their priority, with the surplus then paid to the mortgagor. Section 59 of the Act then authorises the LPI to register the mortgagee’s transfer of land so that the land passes to the transferee free from all liability on account of the registered mortgage or of any other mortgage or charge registered subsequent to the mortgage of the mortgagee exercising its power of sale.
The effect of sections 58(3) and 59 is that the mortgagee exercising its power of sale must pay out surplus proceeds from the sale to subsequent mortgagees and chargees, following which the LPI registers the transfer of land free from those mortgages and charges. Accordingly, as the selling mortgagee is obliged to pay subsequent mortgagees and chargees from the surplus sale proceeds, their mortgages or caveats over the land become meaningless after the sale and are, therefore, rightfully removed on registration of the transfer.
What is not apparent is why the LPI, in its interpretation of section 74H(5)(g), limits itself to only removing the caveats of unregistered mortgagees or chargees. It is arguable that those caveats are already dealt with by the effect of sections 58(3) and 59. Accordingly, the limitation the LPI imposes upon itself in its interpretation of section 74H(5)(g) could be argued to, in practice, render the section merely procedural, in that it limits the section to simply facilitating the effect created by other provisions of the Act.
Case law can be considered to provide some justification for the LPI’s policy. His Honour Justice Young has observed in National Australia Bank Limited v Bridge Wholesale Acceptance Corporation (Australia) Limited (1990) NSW Conv. R. 55-555:
“the vendor has the duty not only to remove good caveats, but also bad ones. I do not consider that the terms of s 74(H)(5) really affect this right of the purchaser… a purchaser is entitled to have a title that is not only clear but abundantly seen to be clear.”
It is arguable that the effect of His Honour’s comment, relied upon by the LPI, is to render section 74(H)(5) a toothless tiger.
Since National Australia Bank and Bridge Wholesale, mortgagees have ensured that the first course of action they take when preparing to sell a property encumbered by caveats is to issue lapsing notices in respect of those caveats. However, in the context of mortgagee sales, particularly on troublesome matters where mortgagors have not been inclined to facilitate the mortgagee exercising its power of sale, it is not uncommon for multiple caveats to be lodged on title, often just prior to the date of anticipated settlement. On such matters it will cause excessive delay, and potentially the loss of the sale, if the mortgagee proceeds down the lapsing notice path (with its 21 day notice period to the caveator).
Accordingly, mortgagees can be left with little choice but to make urgent applications to the Supreme Court for orders that caveats be removed. In matters where the caveats are lodged on title faster than they can be removed, it can even become necessary to seek injunctive relief to prevent the LPI from accepting any further caveats for lodgement. This is a powerful order, but one that can be obtained in the right circumstances.
The power of the Supreme Court to make a restraining order preventing the LPI from lodging any further caveats over a property the mortgagee is attempting to sell derives from the cases of Williams & Ors v Marac Australia Ltd & Ors (1985) 5 NSWLR 529 and Halaga Developments Pty Ltd v Grime (1986) 5 NSWLR 740. These cases make it clear that by virtue of both the ordinary jurisdiction of the Court to protect rights of property and under the Supreme Court Act 1970, section 23, the Court has jurisdiction to grant an injunction to restrain a party from acting lawfully where such restraint is necessary to protect the rights of another party.
The mortgagee in these circumstances must firstly join the LPI Registrar General to the proceedings. On doing so the mortgagee may obtain an injunction against the Registrar General where it is in the interests of justice to do so, even though the plaintiff has no cause of action against the Registrar General. In the judgment of His Honour Justice Nicholas in Perpetual Limited v Cristian (unreported) 12 June 2007 (a case in which this firm acted), three factors appeared relevant in His Honour making orders restraining the LPI’s Registrar General from lodging any further caveat’s over the mortgagee’s property. Firstly, the caveat in question was found to provide inadequate particulars to enable the nature and extent of the claimed caveatable interest to be defined, and accordingly it failed to comply with the requirements of section 74F(5)(v) of the Act. Secondly, the caveat in question appeared to record a claim, apparently acquired after the date of registration of the mortgage. Citing the case of Dunecar Pty Limited (In Liquidation) v Colbran (2001) NSWSC 1181 it was held that this could not hold up the interests of the first mortgagee. Thirdly, His Honour considered that upon completion of the sale a shortfall would exist between the proceeds of sale and the debt owed to the mortgagee. On this basis His Honour considered that any opposition to the plaintiff’s application would be futile. The caveat was ordered to be removed and the LPI restrained from accepting for lodgement or entering on the register any caveat over the security property pending completion of the mortgagee sale.
In light of section 74H(5)(g) of the Act, it is somewhat curious that such measures are required by a mortgagee exercising its power of sale, however, it is heartening to know that in the right circumstances appropriate relief can be obtained from the Court.
The new Possession List Practice Note
On 2 November 2007, the Supreme Court issued a new Practice Note for users of the Possession List.
The new Practice Note has been influenced by feedback from the Supreme Court’s Possession List Users Group. Several practitioners from this firm who regularly use the Possession List are members of this group. The changes of note are as follows:
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Short form Statement of Claim
The Supreme Court will now allow mortgagees to commence proceedings by filing a short form Statement of Claim. A precedent short form Statement of Claim is annexed to the Practice Note. The mortgagee may elect to commence proceedings by way of short form Statement of Claim, although use of this form is not compulsory.
The purpose of the short form is to simplify the pleading and to assist the borrower to understand the nature of the claim and its practical consequences. The short form is not applicable to more complex claims, but may assist in streamlining the more basic possession list actions.
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Cover sheet
The Supreme Court has produced a cover sheet to the new short form Statement of Claim that it has deemed appropriate for use with all initiating process in the Possession List. The cover sheet warns the borrower in simple terms that it may be evicted from its property if it doesn’t respond to the Statement of Claim. The cover sheet provides this warning in 16 languages commonly spoken in Australia. The intention is to ensure that borrowers understand the serious nature of the claim against them, regardless of whether English is their first language.
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Urgent stay applications
Urgent applications for a stay of a writ of possession have been described in the new Practice Note as applications where a time has been fixed for the Sheriff to take possession of the property and that time is less than four working days from the time of the stay application.
In the past, borrowers have often been granted an urgent stay of a writ of possession even though they have failed to prepare the required documentation in support and have failed to inform the mortgagee’s solicitors of the application. The Practice Note now directs that a Duty Registrar determining an urgent stay application ex parte may order that execution of the writ be stayed for a period not exceeding 7 working days and the applicant directed to file and serve a motion and affidavit in support. The Practice Note also states that where a stay is granted, the Registrar should record short reasons for doing so. The Practice Note then provides for an officer of the Court to inform the mortgagee’s solicitor by email or fax if an order is granted, with copies of the Court order and any affidavit relied upon in support.
This amended procedure will assist the mortgagee’s solicitor to prepare an informed response to the stay application, with the mortgagee having the opportunity to then provide that response to the Court in short, but reasonable, time frame after the borrower’s initial application (within 7 working days).
The new Practice Note also provides that, in the case of a borrower who has already been granted a stay, unless there is good reason not to do so, the Duty Registrar should stand down an urgent application and require the borrower to notify the mortgagee that an application has been made, giving the mortgagee the opportunity to appear on the application.
These changes should improve the ability of mortgagees to respond quickly and appropriately to stay applications.
We are hopeful that the new Practice Note as a whole will provide useful guidance to mortgagees and borrowers and ultimately improve the efficiency of the process.
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