New South Wales Court of Appeal CITATION : Walton v Blann [2004] NSWCA 316 HEARING DATE(S) : 26 July 2004 JUDGMENT DATE : 13 September 2004 JUDGMENT OF : Sheller JA at 1; Hodgson JA at 5; Ipp JA at 27 DECISION : Appeal dismissed with costs. CATCHWORDS : MORTGAGES - Term of mortgage that it be registered as a second mortgage - No first mortgage at time mortgage registered - Whether mortgagee obliged to afford priority to a later mortgage. CASES CITED : Codelfa Construction Pty. Ltd. v. State Rail Authority of NSW (1982) 149 CLR 337 PARTIES : Gillian Mary Walton - appellant Robert Frederick Blann - respondent FILE NUMBER(S) : CA 40958/03 COUNSEL : Mr. V. Gray for appellant Mr. B. Coles QC with Mr. M. Ashhurst for respondent SOLICITORS : Abbott Tout, Sydney for appellant Kosmin & Associates, Double Bay for respondent LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED4869/03 FILE NUMBER(S) : LOWER COURT Windeyer J JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40958/03 ED 4869/03 SHELLER JA HODGSON JA IPP JA Monday 13 September 2004 WALTON V. BLANN Judgment 1 SHELLER JA: I have had the benefit of reading the judgment prepared by Hodgson JA. It is not necessary that I re-state the relevant terms of the contract and the mortgage attached to the contract, which was amended and executed and registered as a first mortgage. 2 In my opinion, cl 50 of the contract enabled the purchaser to secure an amount of up to $7 million by first mortgage in priority to the mortgage given to the vendor to secure the loan of $5.225 million. Clearly enough if that opportunity was taken up by the purchaser, it had to be taken up in a way which enabled the second mortgage to be registered on completion. That was a sensible and obvious requirement. Inevitably if this was not done, the mortgage securing the money lent by the vendor would be registered as a first mortgage. 3 The first sentence of cl 13 of the mortgage evidenced an acknowledgment by the parties of this arrangement. In fact by completion the purchaser had not borrowed money to be secured in accordance with the arrangement. Once completion had taken place, cl 50.2 and cl 50.3 of the contract and cl 13 of the mortgage had no more work to do. They do not speak in the event that on completion there was no other mortgage than that to the vendor which could only be registered as a first mortgage. 4 I agree that the appeal should be dismissed with costs. 5 HODGSON JA: On 16 September 2003, the appellant Mrs. Walton commenced proceedings by summons seeking a declaration to the effect that she was entitled to register a first mortgage in priority to a mortgage granted by her to the respondent Mr. Blann, and consequential relief. On 2 October 2003, Windeyer J dismissed this summons with costs. The appellant appeals from that decision. CIRCUMSTANCES 6 On 16 August 2002, the appellant as purchaser entered into a contract with the respondent as vendor to purchase the property 9 Coolong Road, Vaucluse for $14,725,000.00. 7 Printed clauses 20.12 of the contract was as follows: 20.12 Each party must do whatever is necessary after completion to carry out the party's obligations under this contract. 8 Special Condition 50 of the contract was as follows: 50.1 On completion the Vendor shall lend to the Purchaser the sum of $5,225,000.00 on the terms and conditions set out in the copy of the Mortgage attached hereto. 50.2 The Mortgage granted by the Purchaser to the Vendor shall be a second Mortgage on the title of the subject property and the first Mortgage may secure a sum not exceeding $7,000,000.00. 50.3 The Mortgage shall be registered as a second Mortgage and the Purchaser shall obtain the consent of the first Mortgagee and the production of the Certificate of Title at the Land and Property Information office to permit registration of the second Mortgage on completion, at the Purchaser's cost. 50.4 The Purchaser shall pay the Vendor's Solicitor their professional costs of acting on behalf of the Vendor in respect of the Mortgage including all stamp duty, registration fees and other disbursements. 50.5 The Purchaser: (i) undertakes to comply with all requisitions made by the Land and Property Information office in connection with the Mortgage; (ii) authorises the Solicitors for the Vendor to complete any blanks in the Mortgage; (iii) shall sign all documents and do all such things as may be reasonably required to perfect the Mortgage and if the Purchaser does not comply with this sub-paragraph the Purchaser hereby irrevocably appoints the Vendor as his attorney for such purpose. 50.6 The Purchaser shall deliver to the Vendor's Solicitors the Mortgage duly executed by the Purchaser (in duplicate) and stamped together with all other documents as may be reasonably required by the Vendor's Solicitor pursuant to this Clause not less than twenty one (21) days prior to the date for completion. 9 The draft mortgage attached to the contract was for the sum of $5,225,000.00 repayable on 15 January 2007, and it included in following clauses 3 and 13: 3. The Mortgagor will pay interest on the Principal Sum or so much thereof as for the time being shall remain unpaid, and upon any judgement or order in which this or the preceding covenant may become merged, at the rate of twelve dollars ($12.00) per centum per annum HOWEVER should the Mortgagor repay the Principal Sum in full on or before the Due Date the Mortgagee shall waive the requirement for payment of interest. 13. The parties acknowledge that the within Mortgage shall be registered as a second Mortgage security and it is noted that the first Mortgage security is to be registered to the National Australia Bank Limited to secure a Principal Sum not exceeding $7,000,000.00 (herein after called "the First Mortgage"). The Mortgagor that a default in the observance or performance by the Mortgagor under the First Mortgage shall be deemed to constitute a default under the within Mortgage and shall entitle the Mortgagee to exercise its rights, powers and remedies herein provided for in the event of a default hereunder. The Mortgagor covenants to provide to the Mortgagee, from time to time, upon request, evidence satisfactory to the Mortgagee that the Mortgagor is not in default under the First Mortgage. The Mortgagor covenants with the Mortgagee that the Mortgagor shall not increase the Principal Sum secured by the First Mortgage without the written consent of the Mortgagee hereunder which consent may be granted or refused in the absolute discretion of the Mortgagee. 10 The purchase was settled on 15 January 2003. The solicitor who acted for the vendor was away for the week commencing 13 January 2003. On 8 January 2003, he had been told by the purchaser's solicitor that he may want to change the mortgage to say "any approved lender" (referring to cl.13). Shortly before settlement, the purchaser's solicitor advised the clerk attending to the matter on behalf of the vendor that there would be no mortgage other than the mortgage back to the vendor. 11 At settlement, the vendor's solicitors obtained the mortgage and the certificate of title. In the executed mortgage, cl.13 was altered from the draft attached to the contract by the substitution of "a" for "the", where that word appears second in the clause, and by deleting the words "to the National Australia Bank Limited". 12 The mortgage was stamped on 17 January 2003, and lodged for registration on 5 February 2003. Because there was no prior mortgage, the mortgage back to the vendor was registered as a first mortgage. 13 After settlement, the appellant wished to grant a first mortgage to the National Australia Bank to secure an advance of $2.5 million. The respondent refused to do what was necessary to give priority to such a mortgage, giving rise to the proceedings. DECISION OF PRIMARY JUDGE 14 The primary judge set out ss.(1), (3) and (4) of s.56A of the Real Property Act, which are in the following terms: 56A Postponement of mortgages (1) If two or more mortgages registered under this Act affect the same land, the mortgage which for the time being has priority over the other or others may, by a memorandum in the approved form registered under this Act, be postponed to the other or others in so far as the whole or a disposable part of that same land is concerned. … (3) The Registrar-General shall register a memorandum under this section by making such recording in the Register with respect to the memorandum as the Registrar-General thinks fit. (4) After registration of a memorandum under this section, the mortgages affected by the postponement shall be entitled in priority the one over the other as if they had been registered in the order in which by the memorandum they are expressed to have priority. 15 He noted the appellant's argument that the contract envisaged that the vendor's mortgage would be a second mortgage, that cl.13 of the mortgage acknowledged that the mortgage would be registered as a second mortgage, and that the vendor was bound to do what was necessary to bring this into effect. However, he concluded as follows: I conclude that the words "is to be registered" do not give rise to some continuing obligation. The clause in the contract and in the mortgage are predicated on the expected circumstances on completion. Had a mortgage been granted and registered in priority to that of the defendant and had that mortgage been discharged it could not be thought that the defendant would be bound to let another mortgage take priority over his mortgage. The whole arrangement concerned the means by which payment of the purchase price would be effected. Once that price was paid the need for clause 13 disappeared. The mortgage, if it was to be registered could not be registered as a second mortgage. The words "it is noted that a first mortgage security is to be registered" can only reasonably refer to one lodged prior to the intended second mortgage. Mr Gray, for the plaintiff, submitted that this was not consistent with that intention because the defendant had settled knowing that no first mortgage was to be given on settlement, but nevertheless took a mortgage including clause 13. When the contract and mortgage are read together I do not think the construction put forward by Mr Gray is available, that construction requiring agreement to postponement at any time up to 2007 irrespective of circumstances at the time. GROUNDS OF APPEAL 16 The appellant appeals on the following grounds: 1. His Honour was wrong to construe the words in clause 13 of the mortgage as not giving rise to a continuing obligation. 2. His Honour was wrong to construe the words in clause 13 of the mortgage as being predicated on the expected circumstances on completion. 3. His Honour was wrong to disregard or alternatively to fail to give correct significance to the fact that the respondent had accepted the mortgage containing clause 13 and completed the transaction knowing of the terms of that clause and of the fact that, at completion, there would be no other mortgage given by the appellant. 4. His Honour was wrong to construe clause 13 of the mortgage disregarding clause 20.12 of the contract of sale. 5. His Honour was wrong to construe clause 13 of the mortgage disregarding the significance of section 94 of the Conveyancing Act 1919. 6. His Honour was wrong to construe clause 13 of the mortgage disregarding the commercial objective which the clause was intended to achieve, i.e. to postpone the respondent's mortgage throughout the term of that mortgage to any other mortgage falling within the description in clause 13 of the respondent's mortgage of mortgages to which the respondent is obliged to give priority which the appellant may wish at any time during the term of the respondent's mortgage to give and thereby enable the appellant to obtain access to her equity in the security property. 17 No submission was advanced in reliance on s.94 of the Conveyancing Act. SUBMISSIONS 18 In written submissions, Mr. Gray for the appellant submitted that, although the primary judge correctly considered that the words of cl.13 were ambiguous, he did not resolve the ambiguity by reference to surrounding circumstances: see Codelfa Construction Pty. Ltd. v. State Rail Authority of NSW (1982) 149 CLR 337 at 347-52. He relied particularly on the circumstance that, even though another mortgage was not entered on settlement, the mortgage to the respondent given on settlement still provided that it was to be a second mortgage. 19 In oral submissions, Mr. Gray submitted that, accordingly, the primary judge was in error when he said: "The whole arrangement concerned the means by which payment of the purchase price would be affected". That may possibly have been correct at the time of contract, but it was not so at the time of completion, when the mortgage containing cl.13 was given. 20 Mr. Gray submitted that the parties manifested an intention to give cl.13 some operation, even though no other mortgage was given at the time of completion. Although the word "acknowledged" was used, rather than the word "agree" or "promise", the clause did not concern the acknowledgement of something in the past, but rather concerned future events in which the acknowledging parties would play a role, and accordingly it was appropriate to read the word "acknowledge" as in substance meaning "agree". The terms of cl.13 could then be given effect to either as applying until registration of the mortgage in question, or alternatively as involving an obligation not to register unless and until a first mortgage is registered, or alternatively as involving an obligation to provide an appropriate instrument to give priority to a mortgage to be registered as a first mortgage. 21 Mr. Gray submitted that the first of these alternatives should be rejected, because it could not have been the intention of the parties that the rights of the mortgagor should depend upon the whim of the mortgagee as to when to register the mortgage. 22 Mr. Gray submitted that the provisions of Special Condition 50 of the contract, and particularly Special Condition 50.3, did not count against the construction being put forward, and in fact went no further than expressing the right of a mortgagee to assistance in perfecting the mortgagee's title. In circumstances where the relevant mortgage was not to be registered except as a second mortgage, the mortgagee's title was adequately perfected and protected by caveat and possession of the certificate of title. DECISION 23 In my opinion, there is force in Mr. Gray's submission that, if possible, cl.13 should be given some operative effect in a mortgage granted on completion, at a time when both parties knew that there was no other first mortgage to be entered into on completion. However, in my opinion the words of Special Condition 50 of the contract must also be given effect, and those provisions clearly contemplate that registration, albeit as a second mortgage, will take place "on completion". The purchaser's obligations under Special Condition 50 relating to the registration of the mortgage and perfection of the mortgage would not sit comfortably with a construction of cl.13 of the mortgage that would oblige the vendor to refrain from registration, if necessary until 2007, until a first mortgage had been registered. 24 In my opinion, cl.13 should not be interpreted as involving a promise by the mortgagee not to register the mortgage otherwise than as a second mortgage; that is, a promise not to register the mortgage at all unless and until an appropriate first mortgage has been registered. The clause can be given some operation after completion, if it is understood as having effect until such time as this mortgage is registered; so that, if prior to that time as first mortgage is entered into and submitted for registration, then the vendor must in those circumstances accept registration as a second mortgage. That approach does have the disadvantage pointed out by Mr. Gray that the rights of the mortgagor are to some extent dependent on the decision of the mortgagee when to register the mortgage, and the expedition with which the mortgagee acts in doing so. However, on the whole I think this is the preferable interpretation. 25 If it be the case that cl.13 does not involve a promise by the mortgagee not to register the mortgage unless and until a first mortgage has been registered, then the appellant could succeed only if the clause is taken to imply a promise by the mortgagee that if the mortgage had been registered as a first mortgage, and if the mortgagor then proposed a first mortgage within the parameters contemplated by cl.13, the mortgagee would execute an appropriate instrument to give that mortgage priority. In my opinion, that would require the implication of a term, and I do not think the grounds are made out for the implication of such a term. 26 For those reasons, in my opinion the conclusion of the primary judge was correct, and the appeal should be dismissed with costs. 27 IPP JA: I agree with Sheller JA. ********** Last Modified: 09/20/2004 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.