Reported Decision : (2003) NSW ConvR 56-055 New South Wales Supreme Court CITATION : Myross (NSW) v Kahlefeldt Securities [2003] NSWSC 138 HEARING DATE(S) : 06/03/03 JUDGMENT DATE : 13 March 2003 JURISDICTION: Equity Division JUDGMENT OF : Barrett J DECISION : Declaration that mortgagor entitled to redeem early with interest to redemption only CATCHWORDS : MORTGAGES - rights of mortgagor - principal sum payable on fixed date - whether mortgagor may redeem early with interest to date of redemption only - effect of notice given by mortgagee under Farm Debt Mediation Act - effect of agreement reached by mediation under the Act - co-existence of statutory right of early redemption with contractual right arising from implied term of such agreement LEGISLATION CITED : Conveyancing Act 1919, s.93 Farm Debt Mediation Act 1994, ss.3, 4, 8, 9, 10,11 Australian Cherry Exports Ltd v Commonwealth Bank of Australia (1996) 39 NSWLR 337 Bovill v Endle [1896] 1 Ch 648 Branwood Pastoral Co Pty Ltd v Willing & Sons Pty Ltd [1976] 2 NSWLR 149 CASES CITED : Hyde Management Services Pty Ltd v FAI Insurances Ltd (1979) 144 CLR 541 Narni v National Australia Bank Ltd [2001] VSCA 31 Steindlberger v Mistroni (1992) 29 NSWLR 351 Stocks & Enterprises Pty Ltd v McBurney (1977) 1 BPR 9521 Van Kempen v Finance & Investments Pty Ltd (1984) 6 NSWLR 293 PARTIES : Myross (NSW) Pty Limited - Plaintiff Kahlefeldt Securities Pty Limited - Defendant FILE NUMBER(S) : SC 1435/03 COUNSEL : Mr J T Johnson - Plaintiff Mr M R J Ellicott - Defendant SOLICITORS : Doyle Wilson - Plaintiff Friedlieb Byrne Solicitors - Defendant - 13 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BARRETT J THURSDAY, 13 MARCH 2003 1435/03 – MYROSS (NSW) PTY LIMITED v KAHLEFELDT SECURITIES PTY LIMITED JUDGMENT 1 The plaintiff and the defendant were respectively mortgagor and mortgagee under a registered mortgage of land held under the provisions of the Real Property Act 1900. The mortgage was created as security for a fixed term loan of $650,000 together with interest. The provisions in that respect were as follows: "1. The Mortgagor will pay to the Mortgagee free of exchange the said principal sum of SIX HUNDRED AND FIFTY THOUSAND DOLLARS ($650,000.00) on the 12th July 2004. 2. The Mortgagor agrees to pay interest on the principal sum of SIX HUNDRED AND FIFTY THOUSAND DOLLARS ($650,000.00) or on so much thereof as for the time being shall remain unpaid, and upon any judgment or order in which this or the preceding covenant may become merged at the rate of fifteen dollars ($15.00) per centum per annum reducible to twelve dollars ($12.00) per centum per annum if paid on time with such interest to be payable monthly in arrears with each payment due on the [sic] day of each month with the first payment due on 12th [sic] 2002." 2 It is common ground that the mortgage was a "farm mortgage" as defined by s.4(1) of the Farm Debt Mediation Act 1994 and that the plaintiff is a "farmer" as defined by that section. It is also common ground that a notice under s.8(1) of that Act was given by the defendant to the plaintiff, that a mediation of the kind envisaged by the Act occurred, that the mediation resulted in the making of an agreement in writing between the plaintiff and the defendant on 8 November 2002 and that a certificate was on 20 December 2002 issued by the Rural Assistance Authority pursuant to s.11(1) of the Act in respect of the mortgage. The certificate is in evidence. It is expressed to expire on 8 November 2005. 3 The agreement resulting from the mediation is also in evidence. Its first two provisions are as follows: "1. The Borrower will: 1.1 by 31 March 2003, either have entered into a contract for sale of 'Berrica' located near Boomi ('Property') on an arm's length basis or 1.2 have listed the Property for public auction to be conducted by 15 May 2003, or 1.3 paid up all arrears with the loan by 15 May 2003. 2. If the Borrower complies with clause 1 and in the case of clause 1.2 sells the Property as a consequence of the auction, the Lender will take no action to enforce the security but reserves the right to take all legal action, short of application to the Court, to be in a position to enter into possession of the Property in the event of the Borrower not complying with this Agreement or the Loan Agreement after 15 May 2003." 4 On 23 December 2002, the plaintiff, as vendor, entered into a contract for the sale of the property for a price of $1,093,800. There is no suggestion that the sale was not on an arm's length basis. Completion took place on 28 February 2003. Upon completion, the defendant gave a discharge of the mortgage in return for payment of the principal sum of $650,000 together with interest up to 28 February 2003 and certain fees and charges. The discharge was given in the context of an arrangement between plaintiff and defendant that a particular sum should be retained in the defendant's solicitor's trust account pending determination by the court of a question upon which the plaintiff and the defendant had been unable to agree. 5 That question is whether the plaintiff was entitled to redeem upon payment of the principal sum and interest up to the date of payment (together with the fees and charges secured) or whether, in order to redeem, the plaintiff was obliged to pay interest up to 12 July 2004, being the date specified in clause 1 of the mortgage. The question comes before the court in the form of a claim by the plaintiff, in its summons filed on 17 February 2003 (as amended by leave granted on 6 March 2003), for the following relief: "A declaration that upon the true construction of the mortgage entered into between the plaintiff and the defendant dated 12 July 2002 registered number 8835112 when read with the agreement under the Farm Debt Mediation Act between the plaintiff and the defendant dated 8 November 2002, the plaintiff is only required to pay interest up to and including the date of repayment of the principal sum secured under the mortgage." 6 I heard the plaintiff's application on 6 March 2003. Submissions were made on a basis making it plain that, as one would expect in light of the facts to which I have referred, the declaration sought has in contemplation only a situation where the date of repayment of the principal sum is before 12 July 2004. I approach the matter on that basis. 7 In considering this question, it is necessary to begin with the position at general law. Where a loan is made at interest for a fixed term, the borrower has no right to repay principal before the end of the term unless the contract gives that right. That is the position at law and in equity: see Hyde Management Services Pty Ltd v FAI Insurances Ltd (1979) 144 CLR 541 per Mason J at 543, 544. In this State, the general law position is modified by statute in relation to moneys owing upon any "mortgage" as defined by s.7(1) of the Conveyancing Act 1919. Section 93(1) of that Act is in the following terms: "A mortgagor is entitled to redeem the mortgaged property although the time appointed for redemption has not arrived; but in such case the mortgagor shall pay to the mortgagee, in addition to any other moneys then owing under the mortgage, interest on the principal sum secured thereby for the unexpired portion of the term of the mortgage: Provided that redemption under this subsection shall not prejudice the right of the mortgagee to any collateral benefit, or to enforce any burden or restriction to the extent to which the mortgagee would be entitled under the mortgage or otherwise if the mortgage were paid off at the due date." 8 It is provided by s.93(3) that s.93 has effect "notwithstanding any stipulation to the contrary". This does not mean, in my opinion, that mortgagor and mortgagee may not, by contract, stipulate for some right of early redemption by the mortgagor differing from that made available by s.93. Mortgages commonly allow early redemption provided that interest is paid up to the time of such redemption and a certain period of notice has been given. The effect of s.93(3) is that the right of early redemption conferred upon a mortgagor by s.93(1) may not be excluded or denied by contract and subsists even if the parties purport to contract for some exclusion or denial. An alternative right of early redemption created by contract may co-exist with the statutory right. That is the construction that was preferred by Needham AJ in Steindlberger v Mistroni (1992) 29 NSWLR 351. Where the contractual right is, for the mortgagor, more attractive than the statutory right, the latter, clearly enough, will remain in abeyance in a practical sense. 9 In the present case, there is no suggestion that the plaintiff as mortgagor enjoys any express contractual right of early redemption. The central issue is whether the defendant as mortgagee has lost the ability to confine the mortgagor to the statutory right of redemption conferred by s.93(1). In Branwood Park Pastoral Co Pty Ltd v Willing & Sons Pty Ltd [1976] 2 NSWLR 149, Helsham J identified three circumstances in which the general law disentitlement of a mortgagor to redeem before the due date for payment of principal is qualified. The first is where there is some "express provision in the contract of mortgage"; the second where "the mortgagee himself demands payment"; and the third where the mortgagee "takes steps to realise his security, by entering into possession or otherwise". In the first case, the express provision will govern the matter. In the second and third, the mortgagee "cannot refuse a tender of the mortgage money and interest to the date of payment". Helsham J continued (at 153): "But I do not believe that such a tender can be validly made, and redemption enforced, merely because a default by the mortgagor has brought into an operative stage a right of the mortgagee to have immediate payment of the principal, if he should demand it. If he were to make a demand, that is one thing; it has not happened here, as I have said; but short of making a demand, the mere fact that the mortgage money has become payable does not mean that a valid tender can be made." 10 Helsham J then quoted the following passage from the judgment of Kekewich J in Bovill v Endle [1896] 1 Ch 648 at 650, 651: "It appears from the cases that if the mortgagee takes proceedings in court to recover his mortgage money from the mortgagor, or, if he is dead, from his estate, then he, the mortgagee, cannot refuse a tender of his principal, interest and costs on the ground that he is entitled to six months' notice. It is said, 'You have demanded payment by your proceedings, and here is payment: you cannot decline what you have demanded'. This was decided by Wickens V-C in Letts v. Hutchins (1871) LR 13 Eq 176 which was cited in Smith v. Smith [1891] 3 Ch 550 where Romer J considered that the ground of Wickens V-C's judgment was that the mortgagee had taken steps to compel payment of the debt, and was therefore not entitled to six months' interest in lieu of notice. He lays down the rule shortly thus: 'If the mortgagee has himself demanded payment of the debt, or has taken any steps to compel payment of it, no notice by the mortgagor, and no payment of interest in lieu of notice, is required.'" Dealing with entry into possession by a mortgagee, Kekewich J said: "In my opinion, by entering into possession the mortgagee says he requires payment." 11 The rationale for not allowing the mortgagee to insist on the payment of interest up to the agreed date for repayment of principal is some overt act of the mortgagee amounting to a requirement that the mortgagor pay the principal at an earlier time. Steps by the mortgagee clearly and unequivocally directed towards obtaining payment of the principal before the stipulated date carry with them acceptance by the mortgagee of a position inconsistent with insistence upon interest up to that date. This rationale is recognised in the judgment of Holland J in Van Kempen v Finance & Investments Pty Ltd (1984) 6 NSWLR 293 and the judgments of Street CJ and Samuels JA in Stocks & Enterprises Pty Ltd v McBurney (1977) 1 BPR 9521. 12 Demand for payment by the mortgagee and the taking of steps to enforce the security are examples of overt acts of the mortgagee amounting to a requirement for early repayment of principal. They are not, as I see it, necessarily the only examples of actions that cause a mortgagee to become bound to accept repayment of principal before the stipulated payment date with interest to the date of payment only. 13 Mr Johnson of counsel who appeared for the plaintiff submitted that, in the present case, the defendant has incurred a disentitlement to insist on payment of interest to 12 July 2004 because of a manifested willingness to accept early repayment of principal in a particular event, being an event that has happened. That manifestation of willingness is, Mr Johnson submits, to be found in the parties' agreement of 8 November 2002. Clause 1 of that agreement contains a promise by the plaintiff to do one of three things, it being clear (or, at least, not disputed) that the plaintiff itself may choose which of the three things it will do. In the events that have happened, the plaintiff has done the first of the three things, that is, the thing specified in clause 1.1, by making on a date not later than 31 March 2003 a contact for the sale of the property to an arm's length purchaser. The ability of the mortgagor, as vendor, to perform that contract by conveying to the purchaser an unencumbered estate in fee simple in possession depended, clearly enough, on the defendant's discharging its mortgage upon completion. It must follow, according to the submission, that there was implicit in the agreement of 8 November 2002 an acknowledgement by the mortgagee that it would provide the discharge of mortgage the mortgagor requires in order to complete a contract for sale entered into by 31 March 2003; and since it could not have been contemplated that the discharge of mortgage would be forthcoming except upon payment of the whole of the secured moneys, that implied acknowledgement entailed a manifestation of willingness to accept payment of the principal sum before 12 July 2004. The acquiescence of the defendant in the proposal evidenced by clause 1.1 that there be a sale of the property (being a sale attended, of necessity, by discharge of the mortgage and therefore early repayment of the principal sum) was, in Mr Johnson's submission, sufficient to preclude the defendant's insisting on interest up to 12 July 2004. 14 Mr Johnson also submitted that the notice given by the defendant under s.8(1) of the Farm Debt Mediation Act represented, in reality, a step towards enforcing the mortgage and that that action of itself was enough to disentitle the defendant to insist upon payment of interest to 12 July 2004. 15 Mr Ellicott of counsel, who appeared for the defendant, submitted that the agreement of 8 November 2002 does not evidence any acknowledgement by the defendant of the kind asserted by the mortgagor. By clause 2, the defendant agreed to desist from enforcement action in the certain events, being events which have happened. It also reserved the right to enter into possession if there was a failure of the plaintiff to comply with the agreement of 8 November 2002 or the mortgage itself after 15 May 2003, but since such a state of non-compliance now cannot arise, that reservation of right is merely academic – besides which mere reservation of an existing right cannot be regarded as an expression of intention to resort to or exercise the right. The whole tenor of the agreement was therefore against enforcement or realisation of the security, so that there was no manifestation by the defendant of a willingness to accept early repayment of principal. 16 I deal first with the question arising in relation to the Farm Debt Mediation Act, namely, whether the giving by the defendant to the plaintiff of notice under s.8(1) of that Act may be said to have been a step towards enforcement evidencing the imposition by the defendant of a requirement for payment of principal. In approaching the Farm Debt Mediation Act question, I put to one side the amendments made by the Farm Debt Mediation Amendment Act 2002. Those amendments became effective on 3 January 2003. All the statutory procedures relevant in the present case were completed before that date. 17 Section 8 of the Farm Debt Mediation Act should be quoted in full: "No enforcement action until notice of availability of mediation given (1) A creditor to whom money under a farm mortgage is owed by a farmer must not take enforcement action against the farmer in respect of the farm mortgage until at least 21 days have elapsed after the creditor has given a notice to the farmer under this section. (2) Notice to the farmer is to be in writing in a form approved by the Authority (informing the farmer of the creditor's intention to take enforcement action in respect of the farm mortgage and of the availability of mediation under this Act in respect of farm debts). (3) This section does not apply if a certificate is in force under section 11 in respect of the farm mortgage concerned." 18 The s.8(1) notice given by the defendant to the plaintiff is not in evidence. The certificate issued by the Rural Assistance Authority under s.11 of the Act is in evidence. It contains an item "BALANCE O/S as at date of issue of Section 8 Notice". Against that item appears "As at date of issue of Section 8 Notice $8,125". It is thus made clear that the basis upon which the s.8 notice was issued was default in the payment of $8,1250.00, presumably being interest only. 19 The Farm Debt Mediation Act contains, in s.4(1), a definition of "enforcement action" the scope of which was the subject of observations by member of the Court of Appeal in Australian Cherry Exports Ltd v Commonwealth Bank of Australia (1996) 39 NSWLR 337. The definition is as follows: "'enforcement action' , in relation to a farm mortgage, means taking possession of property under the mortgage or any other action to enforce the mortgage, including the giving of any statutory enforcement notice, or the continuation of any action to that end already commenced, but does not include: (a) the completion of the sale of property held under the mortgage in respect of which contracts were exchanged before the commencement of this Act, or (b) the enforcement of a judgment that was obtained before the commencement of this Act. " 20 A central feature of a notice under s.8(1) is a statement of the mortgagee's intention to take possession of the mortgaged property or to take action to enforce the mortgage. The question in the present case is whether that statement made by the defendant by means of the s.8(1) notice which apparently referred to an outstanding balance of $8,125 represented a step by the defendant, as mortgagee, showing a requirement that the mortgagor make early payment of the principal of $650,000. That question must, of course, be approached in the whole of the context created by the Act. 21 The object of the Farm Debt Mediation Act is stated in s.3: "The object of this Act is to provide for the efficient and equitable resolution of farm debt disputes. Mediation is required before a creditor can take possession of property or other enforcement action under a farm mortgage." 22 In furtherance of that object, the Act precludes enforcement action by a mortgagee under a farm mortgage unless the mortgagor has had a period of 21 days in which to decide whether to request mediation. If the mortgagor does request mediation, enforcement action by the mortgagee is precluded until a s.11 certificate comes into force in relation to the farm mortgage. The Rural Assistance Authority must issue such a certificate on the application of the mortgagee if it is satisfied that satisfactory mediation has occurred, or that the mortgagor has declined to mediate, or that three months have elapsed during which the mortgagee has attempted to mediate in good faith. These matters emerge from ss.8, 9, 10 and 11. 23 The Act's purpose is thus to require a mortgagee to hold his hand on enforcement of the farm mortgage until there has been an opportunity for resolution of differences with respect to the mortgage by mediation and either an arrangement acceptable to mortgagor and mortgagee has been reached or the possibility of resolution is seen to be exhausted. Only at that point is the mortgagee free to resort to enforcement action. 24 A mortgagee's statement of "intention to take enforcement action in respect of the farm mortgage" conveyed by a s.8(1) notice cannot be regarded as an unconditional threat to enter into possession or to resort to other mortgagee remedies. Nor can it be regarded as conveying any express or implied demand. On the contrary, it is no more than a statement that the mortgagee wishes to proceed to enforcement if any mediation under the Act does not produce some other solution or, in the absence of such a solution, the issue of a certificate under s.11 removes the embargo placed upon enforcement action by s.8(1). It would be inconsistent with the moratorium objective of the Act for the giving of a s.8(1) notice to be recognised as of itself affecting the parties' rights and obligations in relation to the moneys secured by the mortgage concerned. 25 In the present case, the defendant as mortgagee gave a s.8(1) notice apparently referring to a balance outstanding of $8,125. On the basis that I have just described, that notice stated, at most, a conditional intention to resort to enforcement action. In the events that happened, there was a mediation which gave rise to a new agreement between the parties. Nothing said or implied by the defendant in giving the s.8(1) notice can, in my opinion, be said to have involved overt action by the mortgagee amounting to a requirement that the principal sum be paid before 12 July 2004 or acquiescing in any such early payment. 26 I turn now to the effect of the agreement made on 8 November 2002. It is true, as Mr Ellicott submitted, that the agreement does not contain any express requirement that the principal sum be paid early or any express acknowledgment by the defendant that it will be accepted before 14 July 2004. Nor is there anything amounting to any express resort to mortgagee rights of enforcement. But, as Mr Johnson submitted, early payment is a necessary corollary of one of the three courses of action clause 1.1 placed at the disposal of the plaintiff, with a requirement that the plaintiff take one of those courses. 27 By acknowledging, through clause 1.1(a), that the plaintiff might, if it so chose, sell the property on an arm's length basis by 31 March 2003, the defendant must be taken to have accepted that it would discharge the mortgage upon completion of such a sale; and it cannot have been envisaged that the defendant would discharge the mortgage except upon payment to it of the whole of the secured moneys. No one would have contemplated that the defendant would forego its mortgage and remain a creditor without security for a principal sum of $650,000 to be paid on 12 July 2004. 28 A useful summary of the principles as to the implication of terms is to be found in the judgment of Tadgell JA (with whom Buchanan JA and Chernov JA agreed) in Narni v National Australia Bank Ltd [2001] VSCA 31: "It is trite but nevertheless useful to recall that, as Mason J noted (with the concurrence of Stephen and Wilson JJ) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [(1982) 149 CLR 337], the implication of a term in a contract is designed to give effect to the parties' presumed intention. What his Honour there called "the conditions necessary to ground the implication of a term" were summarized by the majority in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [(1977) 180 CLR 266 at 283] thus '... (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract'. Although Codelfa and various other earlier and later decisions of the High Court indicate that the above-quoted formulation of principle may be regarded as authoritative, it is fair to say that some of the five conditions are sometimes seen to be difficult to apply and not always to serve as practical criteria. For example, Aickin J in Codelfa suggested that, in approaching 'the question whether there is to be a term implied into the contract', a consideration of the remark of the 'officious bystander' postulated by MacKinnon LJ, from which the condition numbered (3) evidently draws inspiration, is not always helpful or useful; and that 'it seems no longer the exclusive means of approaching the question'. The five conditions, although evidently expressed to operate cumulatively, may nevertheless overlap; and in some cases, I think this is one of them, a more simplified approach may be appropriate and permissible. Thus, in Marcan Shipping (London) Ltd v Polish Steamship Co (The Manigest Lipkowy) [(1989) 2 Lloyd's Rep 138 at 142] May LJ remarked - 'For my part, I think that reference to the officious bystander frequently does not assist in deciding whether or not a term is to be implied. Officious bystanders may well take different views depending on which side they happen to be standing. In my judgment it is quite clear from such cases as Liverpool City Council v Irwin [1997] AC 239, that the real basis upon which a term can be implied in contracts such as this is that they are necessary in order to make the contract work.' In the same case Bingham LJ expressed this succinct dictum on the point, 'I take it to be well-established law that a term will be implied only where it is necessary in a business sense to give efficacy to the contract or where the term is one which the parties must obviously have intended.'" 29 It was necessary in a business sense that the plaintiff should be able to convey an unencumbered estate upon completion of a sale in accordance with clause 1.1. It was necessary, in order to make that clause work, that the defendant's mortgage should be discharged upon completion. The defendant must therefore be taken to have agreed to provide a discharge in return for payment of the mortgage moneys in full on completion, even though that would entail receipt by it of the principal sum of $650,000 before 12 July 2004. 30 I find that it was an implied term of the agreement of 8 November 2002 that, upon completion of any sale made by the plaintiff in conformity with clause 1.1, the defendant would accept early repayment of the principal sum of $650,000 and discharge the mortgage. That being so, the contractual arrangement between the parties was such that there was a right to redeem in accordance with the implied term, being a contractual right that co-existed with the plaintiff's statutory right of early redemption under s.93(1) of the Conveyancing Act. Because of the implied term, the defendant could not refuse early tender of the principal sum and interest to the date of payment. It was accordingly bound to accept, upon completion of the sale on 28 February 2003, the principal sum of $650,000 together with interest up to that date only, plus any fees and charges required by the mortgage to be paid. 31 The plaintiff's summons was filed before completion of the sale on 28 February 2003. Subsequent events make it possible to frame a declaration in terms more specific than those sought in the summons. The court: (a) declares that, upon discharge on 28 February 2003 of the mortgage registered number 8835112 dated 12 July 2002 and satisfaction in full on 28 February 2003 of the principal sum of $650,000 thereby secured, the plaintiff as mortgagor was required to pay to the defendant as mortgagee interest upon that principal sum up to and including 28 February 2003 only, this being the true construction and effect of the terms of that mortgage and the agreement under the Farm Debt Mediation Act between the plaintiff and the defendant dated 8 November 2002; and (b) orders that the plaintiff's costs of the proceedings be paid by the defendant. ****************** Last Modified: 03/17/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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