Supreme Court New South Wales Medium Neutral Citation: Zhong v Lanbo Constructions Pty Ltd; Lanbo Constructions Pty Ltd v Zhong [2023] NSWSC 440 Hearing dates: 30 March 2023 Date of orders: 28 April 2023 Decision date: 28 April 2023 Jurisdiction: Equity Before: Robb J Decision: The orders of the Court are: (1) Order that Sanchun Zhong and Lingwan Jin (the Applicants), be joined as parties to these proceedings. (2) Order that Lanbo Constructions Pty Ltd be joined as a party to these proceedings. (3) Order that the notice of motion filed by Lanbo Constructions Pty Ltd on 8 November 2022 otherwise be dismissed. (4) Order pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 55.11(1) that the sum of $208,591.25 which was paid into court by the plaintiff on or about 8 September 2022, together with any interest accumulated on that sum, be paid out of court to the Applicants. (5) Order Lanbo Constructions Pty Ltd to pay the costs of the Applicants in relation to the applications for the money to be paid out of court. Catchwords: MORTGAGES AND SECURITIES — priorities — where first-ranking mortgagee exercised power of sale and paid balance of funds into court — where second and third-ranking mortgagees each applied for payment out of court pursuant to r 55.11(1), Uniform Civil Procedure Rules (NSW) — where second-ranked mortgagees also judgment creditors, and question of merger raised — whether obligation to repay loan granted by second-ranked mortgagee to mortgagor extinguished by exercise of option to purchase real property under collateral deed of guarantee and indemnity Legislation Cited: Civil Procedure Act 2005 (NSW), s 98 Trustee Act 1925 (NSW), s 95 Uniform Civil Procedure Rules 2005 (NSW), rr 55.9, 55.11(1) Cases Cited: Elders Trustees & Executor Co Ltd v Eagle Star Nominees Ltd (1984) 4 BPR 9205 Texts Cited: ELG Tyler, PW Young and CE Croft, Fisher and Lightwood's Law of Mortgage (3rd Aust ed, 2013, LexisNexis Butterworths) Category: Principal judgment Parties: Proceedings 2022/268709-002 Sanchun Zhong (First Applicant) Lingwan Jin (Second Applicant) Overseas Union Finance (Aust) Pty Ltd (First Respondent) Lanbo Constructions Pty Ltd (Second Respondent) Proceedings 2022/268709-003 Lanbo Constructions Pty Ltd (Applicant) Sanchun Zhong (First Respondent) Lingwan Jin (Second Respondent) Representation: Counsel: Proceedings 2022/268709-002 D Robertson (Applicants) N Seow (Second Respondent) Proceedings 2022/268709-003 N Seow (Applicant) D Robertson (Respondents) Solicitors: Proceedings 2022/268709-002 Lin Tang & Co Lawyers (Applicants) Bartier Perry (First Respondent) Longton Legal (Second Respondent) Proceedings 2022/268709-003 Longton Legal (Applicants) Lin Tang & Co Lawyers (Respondents) File Number(s): 2022/268709 Publication restriction: Nil JUDGMENT 1. The issue before the Court is whether registered second mortgagees have or a registered third mortgagee has priority in respect of money paid into court by the registered first mortgagee, after it conducted a mortgagee sale of the property that was the subject of the three mortgages. 2. The plaintiff in the proceedings is Overseas Union Finance (Aust) Pty Ltd, whose first mortgage over certain property at Merrylands New South Wales was registered on about 23 April 2019. The plaintiff exercised its power of sale as mortgagee to sell the property for a price of $1,320,000. The contract for sale settled on about 29 August 2022. On 8 September 2022, the plaintiff paid into court the sum of $208,591.25. That sum was the balance of the proceeds of sale of the property, after the plaintiff had deducted the amounts owed to it under its mortgage and the costs that it incurred in selling the property and in paying the net proceeds into court. The money was paid into court pursuant to s 95 of the Trustee Act 1925 (NSW) and Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 55.9. 3. A second mortgage in favour of Sanchun Zhong and Lingwan Jin (collectively, the "second mortgagees") was registered on about 18 January 2022. I will call the debt that was secured by the second mortgage the "first loan" and will call the debtor, who is named Hong Zhai, the "mortgagor". 4. A third mortgage was registered in favour of Lanbo Constructions Pty Ltd (the "third mortgagee") on about 17 March 2022. The third mortgage secured a debt owed by the mortgagor to the third mortgagee. 5. The second mortgagees and the third mortgagee filed notices of motion on 20 September 2022 and 9 November 2022 respectively, in which they seek orders pursuant to UCPR r 55.11(1), that the sum in court be paid out to them pursuant to their respective rights under their mortgages over the Merrylands property. Under its notice of motion, the third mortgagee also seeks a declaration that it is entitled to receive all of the monies paid into court. 6. The third mortgagee accepts the general principle that the entitlement to the balance of the proceeds of sale paid into court by a first mortgagee, as between later mortgagees, depends upon the order in time of registration of the mortgages. Hence, ordinarily, the second mortgagees would be entitled to receive the money that has been paid into court. 7. However, the third mortgagee submits that the present case is exceptional because, in the events which have happened, the second mortgage, though registered before its own mortgage, does not secure any loan. That is, so the third mortgagee argues, because events have occurred that extinguished the debt secured by the second mortgage. 8. The competing claimants to the money that has been paid into court provided a statement of agreed facts to the Court which, in addition to facts related above, stated: … 3. On 22 April 2020, the [second mortgagees] commenced Supreme Court proceeding 2020/00120309 against the Mortgagor and other parties (2020 Proceeding). The Mortgagor was the first defendant in the 2020 Proceedings. 4. The 2020 Proceeding sought, among other things, to recover amounts pursuant to the [first loan by which the second mortgagees lent $600,000 to the mortgagor]. … 6. On 7 February 2022, by consent, Stevenson J made the following orders in the 2020 Proceeding: Order 1: Judgment for the Plaintiffs against the [mortgagor and guarantor] in the sum of $784,684.93. Order 2: Judgment for the Plaintiffs against the [mortgagor, and other defendants in respect of a different loan, which I will call the "second loan"] in the sum of $391,306.85. Order 3: No order as to costs to the intent that each party pay their own costs. Order 4: The Plaintiff's summons and the proceedings are otherwise dismissed. 7. Order 2 has been satisfied. 8. Order 1 has not been satisfied. … 1. It is necessary to provide the following elaboration of the facts that have been agreed between the claimants. 2. The second mortgage contained the following term: The mortgagor mortgages the estate and/or interest in land specified in this mortgage to the mortgagee as security for the debt or liability described in the terms and conditions set out or referred to in this mortgage and covenants with the mortgagee to comply with those terms and conditions. 1. This standard provision has the consequence that the second mortgage was granted to secure the first debt, with the legal effect that the mortgage will secure nothing if the debt is legally extinguished before it has been repaid. 2. The additional terms in Annexure A to the second mortgage contained the following relevant provisions: For the purpose of securing to the Mortgagee the payment of the Principal Sum and other associated costs incurred, to be incurred or will be incurred and owed to the Mortgagee, the Mortgagor and the Mortgagee covenant as follows: 1. That on the date of the Mortgage the amount of $600,00.00 (the Principal Sum) is to be provided to the Mortgagor. 2. That, the Mortgagor shall repay to the Mortgagee the Principal Sum over the term under Item 2 of the Schedule ("Repayment Term"), together with interest under Item 3 of the Schedule, at the end of the Repayment Term. … 7. Neither the taking of this Mortgage nor any other matter or thing shall merge, discharge, extinguish, postpone or prejudice any other security at any time, which may be held by the Mortgagee or any right or remedy which the Mortgagee has at any time against the Mortgagor and no such other security or thing shall effect this Mortgage. … 12. This Mortgage is a continuing security and will not be discharged as long as any of the debt owed by the Mortgagor contingently or otherwise, may become owing or payable. … 14. Any right in favour of the Mortgagee under this Mortgage or otherwise, can only be waived by an instrument duly executed by the Mortgagee. No other act, omission, non-performance or delay of the Mortgagee constitutes a waiver. … 1. Under Item 2 of the Schedule, the date for repayment of the $600,000 was 23 December 2018. Item 3 provided for an interest rate of 18% per annum. 2. The mortgagor did not repay the debt owed to the second mortgagees by the due date of 23 December 2018 or at all. Subject to the validity of the third mortgagee's argument that the debt owed to the second mortgagees has been extinguished, it is accepted by the third mortgagee that the debt owed by the mortgagor to the second mortgagees remains substantially in excess of the amount that has been paid into court. 3. By a deed of guarantee and indemnity dated 24 May 2018 (the day after the second mortgage was executed by the mortgagor) made between the second mortgagees, the mortgagor, and a company called TYZ Development Pty Ltd (the "guarantor") of which the mortgagor was the sole director and shareholder, the parties to the deed agreed as follows: … 8. In consideration of the [second mortgagees] entering into the Mortgage with the [mortgagor] and the fact that [the mortgagor] and the Guarantor are related parties, the Guarantor unconditionally and irrevocably confers a right to the [second mortgagees] (either jointly or severally) to acquire Lot 14 and Lot 26 of its development site situated at [address at Wentworthville] for a price of $450,000.00 for each of Lot 14 and Lot 26, with terms and conditions substantially similar to the attached Contract under Annexure B ("Wentworthville Properties"). Such right is exercisable at the discretion of the [second mortgagees] and shall continue until the later of, (a) 23 December 2018; or (b) 7 days prior to the date that [the mortgagor] gives written notice to the [second mortgagees] that it is in a position to repay the funds advanced to her (including principal and applicable interest). 9. The [second mortgagees] covenants with the Guarantor and [the mortgagor] that if they exercise the right to purchase the Wentworthville Properties above, then they unconditionally release and forever hold harmless [the mortgagor] and the Guarantor from any claim in relation to the Mortgage and this Deed, including seeking repayment of the funds advanced and any associated interest. Any interests received by the [second mortgagees] in advance shall be returned to [the mortgagor] without deduction or set-off. Operation of this clause is explicitly agreed to be pursuant to an instrument duly executed in writing by the Mortgagee for the purposes of clause 14 of the Mortgage. 1. The background evidence does not explain the genesis of these terms of the deed of guarantee and indemnity. It is evident that the guarantor was engaged in a development project that would lead to the construction of what were called Lot 14 and Lot 26. Clause 8 created an option in the second mortgagees to acquire the two lots for prices of $450,000 each. Upon the exercise of the option, the consequence would be under clause 9 that the first loan would be extinguished. It may be assumed that it was understood by the second mortgagees that the right to exercise the option to acquire the two lots for a total price of $900,000 may be more advantageous to them than their right to insist upon repayment of the first loan plus interest by the mortgagor. The evidence does not permit or require the Court to speculate on the commercial relationship between the second mortgage and the deed of guarantee and indemnity. 2. Subject to what may be the legal effect of clause 14 of Annexure A to the second mortgage, the parties to the second mortgage and to the deed of guarantee and indemnity do not appear to have agreed to a written form to be completed by the second mortgagees if they wished to exercise the option. 3. The copy of the deed and guarantee in Exhibit SY1 tendered by the third mortgagee at the hearing contains as Annexure B to the deed and guarantee a draft contract of sale for Lot 14. 4. Exhibit SY1 contains an additional deed made on 31 May 2018 between the second mortgagees, the guarantors and a different borrower (the "second deed"). The guarantor parties to the second deed are the guarantor, the mortgagor and Shui Yui (in their personal capacities). The borrower party to the second deed is Shui Yu atf ZHYA Family Investment Trust. Shui Yu is the husband of the mortgagor. It is sufficient to note that this deed relates to a further loan of $300,000 (the "second loan") made by the second mortgagees to Mr Yu, secured by a mortgage over a property in South Wentworthville. The second deed contains terms that are materially the same as clauses 8 and 9 of the deed of guarantee and indemnity relating to the first loan, save that clause 8 confers on the borrower party the option to acquire Lot 25 and Lot 26 in the Wentworthville development. As I understand it, the second loan was the subject of order 2 made by Stevenson J. 5. On 31 May 2018, the deed of guarantee and indemnity that is relevant to the present dispute was amended to substitute Lot 25 for Lot 14. This variation is not material to the outcome of the dispute, but had the effect that the option to acquire in clause 8 of each of the deeds referred to the same lots. 6. It is the third mortgagee's claim that the debt the subject of the second mortgage was extinguished because the second mortgagees exercised the option to purchase the two lots in clause 8 of the deed of guarantee and indemnity, so that the debt was extinguished by operation of clause 9. 7. The third mortgagee relied upon an affidavit affirmed on 10 March 2023 by Mr Yu. It is evident from the affidavit that, notwithstanding that Mr Yu did not claim any formal authority to act as agent for the mortgagor or the guarantor, he had in fact acted for both in the course of communications with the second mortgagees. The second mortgagees did not suggest that Mr Yu did not have authority in the circumstances. 8. Relevantly, Mr Yu's evidence was as follows (omitting references to pages in the exhibit to the affidavit where the content of the documents exhibited are set out in the affidavit): … 20. As at 23 December 2018, construction works at the Wentworthville Development were not completed and no occupation certificate had been issued. 21. In late December 2018 and early January 2019, I said to Mr Zhong, either by telephone or in person, words to the following effect: Me: "There are some delays to complete the construction works for [a] few months. Do you want to have the loan amount and interest repaid or you want the properties? If the properties, you will have to wait." 22. On or about 13 January 2019, Mr Zhong and I exchanged text messages via WeChat using words to the following effect: Zhong: "We have decided that we still want the properties, we need to ask Solicitor Wong how to go about it. Please look after us." Me: "Then please discuss with him, I will consult with my lawyer as well." Zhong: "OK." 23. Between January 2019 and early August 2019, Mr Zhong asked me about the progress of the Wentworthville Development about ten times. He also attended the Wentworthville Development site on many occasions. I met Zhong at least five times on the development site. 24. Between 22 June 2019 and 26 July 2019, Zhong and I exchanged text messages via WeChat in which Zhong enquired about the progress of the occupation certificate for the Wentworthville Development. [The third mortgagee did not suggest that these additional WeChat exchanges were relevant to the issue of whether the option had been exercised by the second mortgagees. In outline, Mr Zhong made enquiries about the completion of the development and the issue of the occupation certificate]. 25. On or about 8 August 2019, the interim occupation certificate was issued for the Wentworthville Development. 26. On or about 8 August 2019, Mr Zhong and I had a conversation, either by telephone or in person, using words to the following effect: Me: "The occupation certificate has been obtained. What do you want to do with the loan? Do you want me to repay the money, or you want to have Lot 25 and Lot 26 in the development?" Zhong: "My wife and I have made it clear that we want the properties, and I told you that already. I will speak to Mr Wong about it and make the necessary arrangements for the transfer. But we will also want some additional compensation from you for the delay in the matter. I will speak to Mr Wong and work out what to do." 27. Between 8 August 2019 and 23 August 2019, Mr Zhong and I had conversations on different occasions, which I cannot recall the exact number, in person. During the conversations, Mr Zhong said to me words to the following effect: Zhong: "We do not want to have the properties transferred to us in the original agreement, as we will have to pay stamp duty and possibly capital gain[s] tax when we sell them." Zhong: "We want you to sell Lot 25 under your name and give us the sale proceeds. For Lot 26, we want you to keep it under your name and then transfer it to a nominee of ours in the future. At the same time, we want you to lease Lot 26 out and give us all rent received." Zhong: "In addition, we want some additional cash payment made to us as the development was delayed. My wife and I believe that $180,000 in cash will be a fair amount. You must pay that amount in cash to us so that we do not need to pay tax on it." 28. Among other things, I replied to Mr Zhong using words to the following effect: Me: "How you wish to dispose of Lot 25 and Lot 26 is fine and I am willing to cooperate with you." Me: "I disagree that I need to pay you $180,000, as that was never part of our agreement." 29. At some time in August 2019, Mr Zhong and I had a conversation using words to the following effect: Zhong: "Let's discuss the cash payment later but carry out the Lot 25 and Lot 26 Plan first." 30. On or about 15 October 2019, Lot 25 was sold. [The exhibited first part of the contract sale shows that the contract price was $573,000]. 31. On or about 17 January 2020, my solicitor received a draft deed of settlement and release from Mr Wong…The draft deed was never executed. 1. The document that was exhibited to Mr Yu's affidavit was called "Deed of Settlement and Release". The second mortgagees were described as "the Lender" in the draft deed. The mortgagor and Mr Yu (the latter ats ZHYA Family Investment Trust) were described as the "Borrower" on the cover page and the "Guaranteed Party" in the list of parties to the draft deed. The guarantor, Mr Yu and the mortgagor were described jointly as the "Guarantor". The draft deed dealt with both the first loan and the second loan. Those loans are recited in Recitals A and B. 2. The Recitals to the draft deed also include: … D. On or about 24 May 2018 and 31 May 2018, a Deed of Guarantee and Indemnity for both the First Loan and the Second Loan was entered in which [the guarantor] confers a right to the Lender to purchase two Lots at an agreed price of $450,000. … F. The Borrower default in the repayment terms of the First Loan and Second Loan. G. The Lender sought to enforce its right to purchase the two lots in addition to default interest. H. There are disputes on the interpretation of the terms of the First and Second Loan and the enforceability of the default provisions. I. The Parties agree to resolve the dispute amicably. J. The Parties agree to be bound by the terms of this Deed to reflect the aforesaid understanding. 1. Clauses 1 and 2 of the operative provisions of the draft deed contained mutual releases of the parties. Clause 4 obliged the guarantor to transfer the proceeds of the sale of Lot 25 to the second mortgagees and also obliged the guarantor to transfer the title to Lot 26 to the second mortgagees. The parties described as the Borrower and the Guarantors were also required, by clause 3(a) to pay the second mortgagees $93,000. 2. There is no explanation in the evidence as to why the draft deed provided by Mr Wong to Mr Yu was not executed. 3. I infer from the evidence that the guarantor retained the proceeds of sale of Lot 25. The evidence does not establish what has happened to Lot 26. 4. Although Recital G of the draft deed stated that the second mortgagees had sought to enforce their right to purchase the two lots in addition to default interest, that statement is equivocal, and is not an assertion that the second mortgagees had formally exercised options to purchase the two lots, so that they had a right to the transfer of the proceeds of sale of the lot that had been sold and the transfer of the lot that had not been sold. 5. As stated in the statement of agreed facts, on 22 April 2020 the second mortgagees commenced proceedings in this Court's Commercial List against the mortgagor (as the first defendant), Mr Yu, and the guarantor (as the second defendant). Mr Yu was sued as trustee for the ZHYA Family Investment Trust (as the third defendant), and in his personal capacity (as the fourth defendant). The final relief sought in the summons was relevantly as follows: 4. Judgment for the plaintiffs against the first and second defendants in the sum of $600,000 together with interest at 18% in the sum of $188,531.51 (as at 21 April 2020). 5. Judgment for the plaintiffs against the first, second, third and fourth defendants in the sum of $300,000 together with interest at 18% in the sum of $93,230.14 (as at 21 April 2020). 6. Specific performance of the agreement contained in Annexure A to the Mortgage dated 24 May 2018. 7. Specific performance of the agreement contained in Annexure A to the Mortgage dated 31 May 2018. 8. Leave to enter a writ for possession of the property at [Merrylands] 9. Further, or in the alternative, a declaration that the First plaintiff is entitled to sell the [Merrylands property and South Wentworthville property] as attorney for the registered proprietors. 10. Leave to enter a writ of possession for the South Wentworthville Property. … 1. The second mortgagees filed an amended commercial list statement on 10 February 2021. It appears from the statement of the "nature of the dispute" and "the issues which the plaintiffs believe are likely to arise" that the plaintiffs sought to enforce the two loans, and for that purpose to exercise the powers of attorney granted to them in the two mortgages to sell the mortgaged properties. 2. The statement of the "plaintiffs' contentions" (in their original and amended commercial list statement) contained the following allegations concerning the options that were granted to the second mortgagees in the first deed and the second deed: … 22. The Deed of Guarantee and Indemnity in support of the First Loan gave the Plaintiffs a right to purchase certain properties in the Wentworthville development. The plaintiffs do not presently seek to exercise such right. … 31. The Deed of Guarantee and Indemnity in support of the Second Loan also gave the Plaintiffs a right to purchase certain properties in the Wentworthville development. The Plaintiffs do not presently seek to exercise such right. 1. The defendants' commercial list response to the amended commercial list statement, filed on 23 February 2021, pleaded in par 22: 22. In response to paragraph 22, the Defendants say: a. it was an express term of the Deed of Guarantee and Indemnity in support of the First Loan dated 24 May 2018 (First Guarantee) that the Plaintiffs had a right to acquire Lot 14 and Lot 26 in the Wentworthville Development for $450,000 each (First Option); … c. on 31 May 2018, the First Guarantee was amended so that instead of having a right to acquire Lot 14 and Lot 26 under the First Option, the Plaintiffs had a right to acquire Lot 25 and Lot 26 in the Wentworthville Development (collectively, the 'Sale Lots'). … d. it was an express term of the First Guarantee that if the Plaintiffs exercised the First Option, then they unconditionally release and forever hold harmless the First Defendant and the Second Defendant from any claim in relation to the First Mortgage and the Deed of Guarantee and Indemnity, including the repayment of the funds advanced and any associated interest. … The Defendants otherwise admit paragraph 22. … 35. In response to paragraph 35, the Defendants: a. admit that the First Defendant has not repaid the $600,000, any part thereof, or interest thereon; b. say that the Plaintiffs exercised the First Option; Particulars i. WeChat message from the First Plaintiff to the Fourth Defendant dated 13 January 2019; ii. Conversation between the First Plaintiff and the Fourth Defendant on or about 8 August 2019 c. Say that the First and Second Defendants were released from their obligations to pay the principal and interest under the First Loan. Particulars i. Clause 9 the First Guarantee. The Defendants otherwise deny paragraph 35. … 1. The defendants made the following allegations in their commercial list response concerning alleged representations made by the plaintiffs: … 48. In or about August 2019, the Plaintiffs made the following representations (August Representations) to the Third Defendant [being Mr Yu]: a. The Plaintiffs do not wish for the Defendants to discharge the First Loan and Second Loan by repaying the principal and interest on the First Loan and the Second Loan; b. The Plaintiffs do not wish to exercise the First and Second Options so as to have both the Sale Lots transferred to them, because: i. Jeffrey Wong, the Plaintiffs' solicitor, has made mistakes in drafting the First Loan and the Second Loan; and ii. the Plaintiffs wish to structure an alternative arrangement to manage their taxation liability; c. The Plaintiffs wish to negotiate a new agreement (Alternative Arrangement) under which: i. one of the Sale Lots would be transferred, for no additional consideration, to an entity to be nominated by the Plaintiffs; ii. the other of the Sale Lots would be sold; iii. the proceeds of the sale of the Second Sale Lot pursuant to subparagraph (ii) above would be paid to the Plaintiffs; iv. The Defendants would pay the Plaintiffs an additional amount in cash to compensate the Plaintiffs for the delay in completing the project (the precise amount to be subject to further negotiation); and v. the Plaintiffs would waive repayment of any principal and interest for the First Loan and the Second Loan. d. The Plaintiffs require further time to obtain taxation advice regarding the Alternative Arrangements; e. If the Defendants do not insist on the immediate discharge of the First Loan and the Second Loan, and if the Defendants do not give notices under clause 8(b) of the First Guarantee and the Second Guarantee (collectively, Guarantees), then no interest would be payable from 8 August 2019 until such time as the terms of the Alternative Arrangement have been finalised. Particulars f. The August Representations were made in a series of conversations between 8 and 23 August 2019. g. The conversations were conducted orally in person. 1. The defendants alleged in pars 55 to 60 of their commercial list response that the so-called "Alternative Arrangement" became the subject of a contractual variation of the terms of the first and second loans. The defendants also pleaded an estoppel defence based upon the alleged representations in pars 61 to 71. 2. The result of the commercial list proceedings instituted by the second mortgagees is recorded in the orders made by Stevenson J by consent contained in the statement of agreed facts and set out above. It is implicit in those orders that the mortgagor ultimately accepted that a judgment be entered against her on the basis that the first loan was contractually enforceable. 3. In legal theory, as this Court entered judgment against the mortgagor to enforce the first loan, a question arose as to whether, because the contractual obligation to repay the first loan merged in the judgment, the second mortgage ceased to be enforceable against the Wentworthville property. The second mortgagees made submissions on this issue, based substantially upon the principles stated in Fisher and Lightwood's Law of Mortgage (3rd Aust ed, 2013, LexisNexis Butterworths) at [36.13] and the judgment of McLelland J (as his Honour then was) in Elders Trustees & Executor Co Ltd v Eagle Star Nominees Ltd (1984) 4 BPR 9205 at 9207, where his Honour said: The principles relating to merger in relation to a mortgage were clarified by the House of Lords in Economic Life Assurance Society v Usborne [1902] AC 147, and what may have appeared to be the consequences of earlier decisions must yield to what was there stated. It is clear from that decision that when one is considering the rights of a mortgagee against the mortgaged property, the critical question is whether the mortgage secures payment of money on the one hand, or performance of a personal obligation on the other. If the former, termination by merger or otherwise of the personal obligation is irrelevant. If the latter, then termination of the personal obligation terminates the security. It is in all cases a question of construction of the mortgage document. 1. The second mortgagees also relied upon clauses 7 and 12 of Annexure A to the mortgage, which have been set out above, to support their submission that, even if the contractual obligation on the mortgagor to repay the first loan merged in the judgment, as the judgment was not satisfied, the second mortgagees remain entitled to exercise their security rights under the second mortgage to recover the amount of the debt, so that they have priority over the amount that has been paid into court by the first mortgagee. 2. As I understand the submissions that were made on behalf of the third mortgagee, it did not submit that the second mortgage had ceased to be effective by reason of the fact that the contractual obligation on the mortgagor to repay the first loan had merged in the judgment. Its submission was that, in fact, the option granted to the second mortgagees by clause 8 of the deed of guarantee and indemnity had been exercised, so that the first loan was extinguished by operation of clause 9. It is implicit in this submission that, as the third mortgagee was not a party to the Commercial List proceedings, it is not bound by the res judicata that arose as between the parties to those proceedings by reason of a judgment being entered by consent, on the basis that the first loan continued to be payable. 3. Ultimately, the priority dispute between the second mortgagees and the third mortgagee turns upon the issue of whether, as a matter of fact, the second mortgagees exercised the option in clause 8 of the deed of guarantee and indemnity. If they did, the first loan was extinguished. 4. It is material in this case that the issue has arisen in the context of a relatively summary dispute that has been raised by the notices of motion filed by each of the claimants for orders under UCPR r 55.11(1) that the money paid into court by the first mortgagee be paid out to them. The hearing of the notices of motion took place on the basis of the documents that were available to be tendered, the affidavits sworn by or on behalf of the parties and the affidavit of Mr Yu. Mr Zhong did not give evidence, and none of the witnesses who did give written evidence was cross-examined. 5. If the option in clause 8 of the first or second deed of guarantee and indemnity was exercised by the second mortgagees, that exercise was informal in the sense that it was made in oral discussions or in short, WeChat messages, rather than by the formal execution by the second mortgagees of a written exercise of option. It is of some forensic significance that, in the circumstances in which the question has arisen, there has been no cross-examination of the persons who participated in the alleged exercise of the option. The Court must therefore determine the issue on the balance of probabilities, having regard to the limited evidence before the Court, and the fact that the third mortgagee has the burden of proving that the debt the subject of the second mortgage was extinguished. 6. I am satisfied that the third mortgagee has not established on the available evidence on the balance of probabilities that the option in clause 8 of the deed of guarantee and indemnity was effectively exercised by the second mortgagees, so that the debt secured by the second mortgage was extinguished. 7. First, I consider that, in cases where a party with the benefit of an option to purchase property is not required to exercise the option in a formal way by the execution of an exercise document, there must be reasonably clear evidence of an absolute and unequivocal exercise of the option. In this case, I consider that the wording of the WeChat texts and the oral statements by Mr Zhong were too equivocal to be a valid exercise of the option. It may not be necessary for the party entitled to exercise the option to use the expression "exercise the option," but it must be objectively clear that the exercise of the option is intended. In the present case, the statements made by Mr Zhong do not rise higher than statements of present preference as to an intended choice between two alternatives, subject to the qualification that the second mortgagees needed advice from their solicitor as to how to proceed. 8. Mr Yu's evidence that, on 8 August 2019, Mr Zhong said: "My wife and I have made it clear that we want the properties, and I told you that already", should be understood as a statement of the second mortgagees' preference and not an unequivocal election to exercise the option, so that the second mortgagees were bound to purchase the two lots. Mr Zhong retained the right to talk to Mr Wong about how to "make the necessary arrangements for the transfer", and, at the same time, Mr Zhong claimed an unspecified amount of additional compensation for delay. Mr Zhong's statements were therefore not an unequivocal exercise of the option. 9. The evidence given by Mr Yu concerning the negotiations with Mr Zhong between 8 and 23 August 2019 satisfies me that the second mortgagees engaged in a renegotiation process with Mr Yu that was inconsistent with an unequivocal exercise of the option. 10. The fact that Lot 25 was sold on 15 October 2019 militates against a finding that Mr Yu understood, at that time, that the second mortgagees had exercised their option to purchase Lot 25. 11. Paragraph 22 of the second mortgagees' contentions in their commercial list statement is also consistent with the second mortgagees having an understanding at the time the document was filed that they had not already exercised the option. 12. Although the defendants alleged in par 35(b) of their commercial list response that the second mortgagees had exercised the first option on the basis of the facts relied upon by the third mortgagee in these proceedings, the defendants also alleged in par 59 of their commercial list response that they had accepted the alleged offer made by the second mortgagees in what they called the Alternative Arrangement. 13. The final matter that requires the Court's attention is the effect of that part of clause 9 of the deed of guarantee and indemnity that provided: "Operation of this clause is explicitly agreed to be pursuant to an instrument duly executed in writing by the Mortgagee for the purposes of clause 14 of the Mortgage". The third mortgagee submitted that the effect of this clause was that an informal, oral exercise of the option could be effective notwithstanding that clause 14 of Annexure A to the mortgage provided that the second mortgagees' rights could only be "waived by an instrument duly executed by the Mortgagee". 14. The second mortgagees responded to this argument with the contrary submission that the true meaning of the relevant part of clause 9 was that there was an explicit agreement that the option could only be exercised pursuant to an instrument duly executed in writing by the second mortgagees. 15. It is not necessary for the Court to resolve this argument, as I have found that the third mortgagee has not established as a matter of fact that the second mortgagees exercised the option informally. 16. However, while the issue is finely balanced, I prefer the second mortgagees' construction of the relevant part of clause 9, so that the clause required that the option be exercised by an instrument duly executed in writing by the second mortgagees. The wording of this part of the provision is not entirely clear, but the clause would have a more sensible and effective commercial operation if it required that any exercise of the option be evidenced by a written instrument, so that there would not be scope for dispute as to whether or not the option had been exercised based upon inexact evidence. 17. Having said this, I note that in the second mortgagees' reply to the defendants commercial list response filed on 10 February 2021, the second mortgagees did not allege that the option could only be exercised by them by instrument in writing. The second mortgagees pleaded in par 2 that the words and conduct claimed by the defendants to constitute the exercise of the option "lacked any formality, were not unequivocal and were not consistent with an election to exercise the First Option as is alleged." 18. In all of these circumstances, I find that the second mortgagees are entitled to an order that the money that has been paid into court by the first mortgagee be paid out to them. 19. They are also entitled to an order that the third mortgagee pay their costs of the application. 20. The final issue that requires determination by the Court is a claim by the second mortgagees for an order that the third mortgagee pay to them $3,752.76, which is the amount of the costs incurred by the plaintiff as a result of having to respond to the third mortgagee's claim for priority and the payment of the balance of the proceeds of sale into court: see Exhibit A. 21. When asked what the legal basis was for the power of the Court to order the third mortgagee to pay to the second mortgagees an amount deducted by the first mortgagee before it paid the balance of the proceeds of sale of the property into court, counsel for the second mortgagees submitted that the power could be found in s 98 of the Civil Procedure Act 2005 (NSW). 22. I reject the second mortgagees' application. Although the amount deducted by the first mortgagee included professional costs of $3,550.31 and disbursements (including filing fees) of $202.45, I do not accept that it would be correct for the Court to characterise this amount as falling within the meaning of "costs" as it appears in s 98 of the Civil Procedure Act. The first mortgagee's professional costs are costs incurred by it, which I infer it was entitled to retain out of the sale proceeds under a term of the first mortgage. Those costs are not costs of these proceedings in any direct sense. 23. Although the third mortgagee has failed in this priority contest, I accept that it was reasonable in all of the circumstances for the third mortgagee to have contested the issue, given that it was initially a stranger to the arrangements between the second mortgagees and the other parties to the deed of guarantee and indemnity. The third mortgagee took the risk that it would be ordered to pay the costs of the application, but those costs should not include any costs that the first mortgagee was entitled to deduct from the proceeds of sale of the property under the terms of the first mortgage. 24. The orders of the Court are: 1. Order that Sanchun Zhong and Lingwan Jin (the Applicants), be joined as parties to these proceedings. 2. Order that Lanbo Constructions Pty Ltd be joined as a party to these proceedings. 3. Order that the notice of motion filed by Lanbo Constructions Pty Ltd on 8 November 2022 otherwise be dismissed. 4. Order pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 55.11(1) that the sum of $208,591.25 which was paid into court by the plaintiff on or about 8 September 2022, together with any interest accumulated on that sum, be paid out of court to the Applicants. 5. Order Lanbo Constructions Pty Ltd to pay the costs of the Applicants in relation to the applications for the money to be paid out of court. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 April 2023