Mango Media Pty Ltd v Mertes & anor [2006] NSWSC 1460

New South Wales Supreme Court

CITATION : Mango Media Pty Ltd v Mertes & anor [2006] NSWSC 1460

HEARING DATE(S) : 13 October 2006 JURISDICTION : Equity Division

JUDGMENT OF : Brereton J

EX TEMPORE JUDGMENT DATE : 10/13/2006

DECISION : Orders made for judicial sale

CATCHWORDS : CONTRACT – GENERAL CONTRACTUAL PRINCIPLES – Intention to form legal relations – preliminary or "in principle" agreement – where further formal documentation contemplated – Consideration – promise to perform existing obligation – whether constitutes consideration. MORTGAGES – Remedies of mortgagee – judicial sale

LEGISLATION CITED : (NSW) Conveyancing Act 1919, s 103

Griffiths v Knight (1959) 60 SR NSW 353 Guardian Mortgages v Miller [2004] NSWSC 1237 CASES CITED : King Investment Solutions v Hussain [2005] NSWSC 1076 Wigan v Edwards (1973) 47 ALJR 586 Yarrangah Pty Limited v National Australia Bank Limited [1999] NSWSC 97 J W Carter and D J Harland, Contract Law in Australia, Sydney: Butterworths, 4th Edition, 2002

Mango Media Pty Ltd (plaintiff) PARTIES : Gerd Rolf Mertes (first defendant) Westpac Banking Corporation (second defendant)

FILE NUMBER(S) : SC 4522/05

COUNSEL : M Young (plaintiff) G Carolan (first defendant)

SOLICITORS : WKA Legal Pty Ltd (plaintiff) North Shore Lawyers (first defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRERETON J

Friday 13 October 2006

4522/05 Mango Media Pty Limited v Gerd Rolf Mertes & Anor JUDGMENT (ex tempore) 1 HIS HONOUR: The plaintiff Mango Media Pty Limited and the first defendant Gerd Rolf Mertes are both engaged in what one euphemistically called the financial services industry, but elsewhere in evidence was perhaps more accurately described as "bottom line lending". These proceedings arise out of a transaction between them in which Mango lent Mr Mertes a sum of $138,500, and Mr Mertes gave Mango a mortgage over his property at Hill Top securing repayment of that sum. The second defendant Westpac Banking Corporation is the registered first mortgagee of another property, of which Mr Mertes is also the registered proprietor, located at Pennant Hills, the relevance of which will become apparent. Westpac neither consents to nor opposes the relief sought by Mango and has not taken an active part in these proceedings. 2 Mango claims orders for judicial sale of the Pennant Hills property. Its claim to that property arises in this way. The mortgage over the Hill Top property was executed with the benefit of independent legal advice, a certificate of which was given by Mr Adrian Holmes, the solicitor then and now acting for Mr Mertes, on 24 September 2004. It was expressed to secure a principal amount of $138,500, which Mr Mertes as mortgagor covenanted to pay to Mango as mortgagee on December 2004 (the precise date having been left blank) (clause 3), and to pay interest on the principal sum at the rate of 7.5% per month (the higher rate), in arrears by equal monthly payments each and every month, the actual day again being left blank (clause 5). The mortgage further provided that the mortgagor would be entitled to a lower rate of interest, being 4% per month, provided that payment at that rate was made within seven days of the due date of the monthly payment and all other covenants of the mortgage were observed by the mortgagor. (It may be that the blank date in clauses 3 and 5 of Annexure A to the mortgage can be resolved by deeming it to be the last date of each month, or it may be that it should be regarded as being that date of the month - the 24th - on which the mortgage itself was executed, but that does not need to be resolved in the circumstances which have arisen). 3 Clause 27 of Annexure A to the mortgage provided as follows:- In the event the mortgagor defaults under this mortgage that event shall create a caveatable interest by the Mortgagee in any real property owned now or in the future by the Mortgagor ("other property"). The Mortgagee shall have the right to take possession of that other property and exercise power of sale and/or foreclosure to recover monies owing under this mortgage and the Mortgagor shall yield and surrender possession of the other property to the Mortgagee in the event of a default. 4 It is by way of specific performance of that provision of the mortgage that these proceedings are brought for orders for sale and possession of the Pennant Hills property which, being real property owned by Mr Mertes, falls within the definition of "other property" in that clause. 5 It seems that Mr Mertes made a payment of interest on 23 October 2004, but thereafter went into default. On 2 December 2004, Mango served a notice under Real Property Act, s 57(2)(b), in respect of that default; it claimed the principal and arrears of interest calculated at the higher rate. 6 Accordingly, there was a default under the mortgage within clause 27 of Annexure A, and Mango thereupon became entitled to a caveatable interest in and possession of the Pennant Hills property and to exercise power of sale and/or foreclosure over it. However, Mr Mertes contends that, by reason of two subsequent transactions, Mango is not entitled to exercise those powers. The two issues which fall for determination in these proceedings are: · First, whether in or about February 2005 Mango and Mr Mertes agreed to vary the mortgage, such that principal and interest at the lower rate were to be repaid at a date subsequently to be agreed by the parties or, as I think the argument ultimately proceeded, on demand; and · Secondly, whether Mango and Mr Mertes agreed on or about 6 September 2005 that Mango would terminate the proceedings which it had by then instituted for the sale of the Pennant Hills property, to recalculate the balance of the mortgage debt at an interest rate of 4% (excluding the higher rate), and upon written confirmation that the demand for the Pennant Hills property was withdrawn and the revised account issued, Mr Mertes would pay $20,000 per month in reduction of the debt or some other instalments. 7 I turn then to the first issue, which concerns whether an agreement was struck in February 2005 extending the loan and providing that for the extended term the lower rate of interest would apply. 8 Some time after service of the s 57(2)(b) notice on 2 December 2004, Mr Mertes telephoned Mango's principal Mr Derums, and expressed objection to service of the notice. Mr Mertes says that he objected that service of such a notice was not in accordance with their agreement, but there is nothing in the evidence before me to show why it would not have been in accordance with the parties' agreement, since Mr Mertes was by then in default for two months of interest, and the principal was very soon to become payable. Mr Mertes says that he did not agree that the loan was in default. Mr Derums, on the other hand, says that his recollection is that Mr Mertes did agree or concede that the loan was then in default. As it seems to me that the loan was plainly then in default, Mr Derums' version is, I think the more probable one. It is common ground, however, that Mr Mertes said in this telephone conversation something to the effect that, so far as he was concerned, the loan would be repaid in due course at the interest rate as agreed. That, however, is entirely equivocal as to what was the interest rate agreed, and does not support any contention that there was an agreed departure from the higher rate in circumstances where interest was not paid within seven days of the due date of each monthly instalment. 9 A further conversation took place between the two gentlemen in February 2005. According to Mr Mertes, he said to Mr Derums, "We can pay you now, but if you want to I can lend on to someone else and we can continue", to which Mr Derums is said to have replied, "That's all right, I've got the land, what about interest?" Mr Mertes says he responded, "I will pay that at the end when I repay the loan." According to Mr Mertes, over the next three months there were two further conversations between the two gentlemen in both of which Mr Derums said words to the effect, "How is it going, are you sure that we are properly secured?" and, while saying that he was not in a hurry for the money, indicated that it would have to come back eventually. 10 Subsequently, Mr Mertes added to his version of the February conversation that Mr Derums said words to the effect, "We don't need the money at the moment. We have plenty of funds sitting in the bank." Mr Derums' version of the conversation is somewhat different. He says that he did not agree to the proposition that Mr Mertes could retain the moneys and lend them to someone else but that he said words to the effect, "We need to get the money back eventually." On this conversation, although not a great deal turns on which version is accepted, I am inclined to the view that Mr Mertes' version is more consistent with the overall conduct of the parties and more likely to reflect what happened. In reaching this conclusion I also take into account Mr Derums' apparent uncertainty about that particular conversation. So I accept that the conversation was substantially as Mr Mertes has deposed. 11 The essential question is, what effect does that conversation have. Mr Mertes did not suggest that its effect was to give him a discretion as to when the principal of the loan would be repaid; nor was it ultimately submitted that the effect of the conversation was to extend the loan indefinitely until a date to be agreed by the parties in the future. Indeed, such a variation would almost certainly be void for uncertainty or incompleteness. Ultimately, Mr Mertes in his evidence, and his counsel in submissions, accepted that the effect was to convert the loan, which had originally been for a fixed term of about three months until December 2004, into one which was repayable on demand. I agree that that was its effect. 12 The more important aspect of the question is what if any effect it had on the applicable interest rate. Absent further agreement, the mortgage provided that unless interest instalments were paid within seven days of the due date each month the higher rate applied. I can see absolutely nothing in the conversation in February 2005, accepting Mr Mertes' version of it, which affected that. Nor do I see anything in Mr Derums' willingness apparently to wait some months before taking any recovery action that is inconsistent with that. All is entirely consistent with Mr Derums being quite content to have the money earning interest at 7.5% per month, comfortable that the bottom line had been amply secured. It was submitted on behalf of Mr Mertes that the effect of the agreement was to roll over the loan at the lower rate of interest, rather than at the default rate, but the difficulty with that submission is that there is absolutely nothing in the evidence to support the view that the parties addressed and agreed to vary the mortgage in respect of the applicable interest rate in any way. 13 Accordingly, while I accept that in February 2005 Mango and Mr Mertes agreed to vary the terms so as to convert the fixed three-month term into a loan repayable on demand, I am unable to accept that there was any variation so far as the applicable interest rate was concerned, with the result that unless instalments of interest were paid within seven days of the due date, the higher 7.5% rate remained applicable. 14 I turn then to the second question, which concerns the agreement said to have been reached on 6 September 2005. After the enquiries between March and May 2005 as to the sufficiency of security and otherwise directed as to the money "coming back eventually", on 4 August 2005 Mr Derums caused to be sent by facsimile to Mr Mertes a note in the following terms:- Rolf, we intend to commence recovery of your loan. Please call to discuss. Yanis. 15 Mr Mertes says that upon receipt of that note he telephoned Mr Derums and said, "What is the matter with you, we have already talked about this? Before you were not in a hurry and suddenly you are in a hurry," to which Mr Derums is said to have responded, "My father wanted me to send it to you." Mr Mertes says he responded, "The money is still out but if you want it I will pay it from my money. The ball is in your court, it's up to you to get it removed." Mr Derums is said to have rejoined, "Fine, we will have a meeting and sort it out." Mr Derums denies that there was any written or oral response to his facsimile communication of 4 August 2005. 16 In the course of his oral evidence, Mr Mertes said that the reference in his version to "It's up to you to get it removed," was a reference to the claim for possession of the Pennant Hills property. The difficulty - which, it seems to me, Mr Mertes ultimately came to recognise in his evidence - is that no claim for the Pennant Hills property was made until the statement of claim was issued on 16 August and subsequently served. If any such conversation as Mr Mertes deposed to took place, it must have been after service of the statement of claim, rather than after the facsimile letter on 4 August, and accordingly I prefer Mr Derums' version on that issue. 17 The statement of claim issued on 16 August 2005 and was presumably served shortly afterwards. Following service of the statement of claim, Mr Mertes telephoned Mr Derums and they had a conversation about the situation. It is unnecessary for the purposes of these proceedings to resolve the competing versions of that conversation, because it culminated in a meeting at Mr Derums' office at Balmain on 6 September 2005. 18 The essence of Mr Mertes' version of what took place at that meeting is that he said he did not want any default fees and that the demand should be withdrawn from his house, to which Mr Derums responded, "I will have to check this out but I will withdraw the notice from your house and send you a revised statement but I want you to systematically pay off the principal." Mr Mertes says that he then said, "If you send me the revised statement and a written withdrawal of the notice I will start paying $20,000 per month but I won't start paying until you withdraw the notice", and he attributes to Mr Derums the words, "Fine, I will get on to it", to which he responded, "If you do that then we will be able to get everything finished in February or March next year for a final balloon payment." I accept that Mr Mertes had with him his diary and that he had made entries at least for Friday, October 14, "Yanis $20,000"; November 11, "Yanis 40K" and Thursday, December 15, "Yanis rest payment." In oral evidence Mr Mertes said that the reference to "rest payment" was only to the rest of the principal, and not to the payment of outstanding interest. 19 Mr Derums denies that Mr Mertes said that he did not want any default fees; denies that he agreed to withdraw the so-called "notice" referred to by Mr Mertes or that he was served any revised statement, and denies that Mr Mertes said that upon receipt of the revised statement and withdrawal of the notice he would start paying $20,000 per month. In oral evidence Mr Mertes suggested that the reference to a revised statement was not to a statement of account, but to a payment schedule, and it was common ground that there was some reference to a payment schedule. Mr Derums prepared a payment schedule, which he sent to his solicitor Mr Keay by facsimile on 13 September. On 13 September Mr Keay sent a letter to Mr Mertes setting out that proposed schedule, relevantly as follows:- We confirm that we act for Mango Media Pty Limited and understand that you have reached the agreement set out below directly with our client. Our client agrees not to take any further action in relation to the above proceedings on the basis that the following list of payments (time being of the essence in respect to each of the payments) are made by way of cash or bank cash (cleared funds) are made by: