Supreme Court New South Wales Medium Neutral Citation: Rhodes Bay Apartments Pty Ltd v Gay [2011] NSWSC 532 Hearing dates: 1-2 June 2011 Decision date: 06 June 2011 Jurisdiction: Equity Division Before: Biscoe AJ Decision: Judgment for the plaintiff for $335,464. Catchwords: GUARANTEE:-of an advance to a named person - whether advance made at all or to that person - whether lender's costs concerning the guarantor's lapsing notice relating to the lender's caveat are costs "relating to and in connection with...any variation or discharge" of a security within the meaning of those words in the loan agreement. Cases Cited: Burnes v Trade Credits Ltd (1981) 1 NSWLR 93 Lincolnshire Sugar Co Ltd v Smart [1937] AC 697 AJS Bank v Costello (1889) 6 WN (NSW) 94 Category: Principal judgment Parties: Rhodes Bay Apartments Pty Ltd (Plaintiff) Neil James Gay (Defendant) Representation: J Hyde (Plaintiff) M Klooster (Defendant) Mills Oakley Lawyers (Plaintiff) Cordato Partners (Defendant) File Number(s): 2008/00281704 Judgment 1The plaintiff, Rhodes Bay Apartments Pty Ltd, sues Neil James Gay as the guarantor of an advance of $200,000 by the plaintiff to Dimitrios Lazanis under a Deed of Loan dated 21 December 2007. The defence is that no advance was made or it was not made to Mr Lazanis but to a company of which he was a director, Zapman Investments Pty Ltd ( Zapman ). Zapman is not a party to these proceedings. 2The plaintiff also claims certain costs and expenses totalling $46,819.45 said to be owing under cl 9 of the Deed of Loan. The defence is that they do not fall within that clause and, in any case, there is insufficient evidence of those costs and expenses. 3Mr Lazanis was the second defendant. However, he is deceased and during the hearing the proceedings were discontinued against him. THE ADVANCE ISSUE 4At all material times the plaintiff and Statewide Developments Pty Ltd ( Statewide ) were members of the Salvo Property Group associated with a Mr Mario Salvo. Mr Joe Touma, who gave evidence, was a director of Statewide and is a shareholder of the plaintiff company. 5In or about November or December 2007 Statewide decided that the plaintiff should offer to purchase property at Balmain owned by Zapman for $5,350,00 with a deposit of $140,000. Mr Touma put the offer to Mr Lazanis, a director of Zapman. Mr Lazanis indicated that the offered amount would not be sufficient to pay out the liabilities owed on the Balmain property. He proposed that the plaintiff make a secured loan. To that end he provided financial information concerning himself and a company called West Sydney Maintenance Pty Ltd, which appears to have been associated with Mr Lazanis. Mr Lazanis also provided a valuation. Mr Touma and Mr Salvo decided that insufficient security was being offered. 6In about early December 2007 Mr Touma informed Mr Lazanis that they could not lend the money that he wanted on the basis of the security offered. Mr Lazanis proposed that he add as security one of the residential units he was buying from Statewide at Rhodes, unit D205, as part of the security. Mr Touma told him that, if they were to agree, then they would need a registered interest in the properties being offered as security including unit D205. Mr Lazanis agreed. 7On 8 December 2007 Mr Touma sent an email to Mr Salvo which set out some details of a proposal including reference to a loan of $200,000 to Mr Lazanis from AVS. AVS was a related entity to the plaintiff. The transaction did not proceed in that form. However, the email indicates that a loan to Mr Lazanis was contemplated. 8On 13 December 2007 Zapman entered into four contracts to purchase four units at Rhodes from Statewide. One was unit D205. The purchase price for unit D205 was $600,000 and the deposit was $60,000. 9Shortly before settlement of the purchase of the Balmain property, Mr Touma became aware that unit D205 was to be registered in the name of a third party. He told Mr Lazanis that the third party would need to sign an agreement acknowledging that they were aware that the unit was being used to secure a loan, and that the third party would have to provide a registrable interest in the unit and guarantee the loan. Mr Lazanis said that that was not a problem, that was fine with the third party. Mr Touma told him that that was not good enough, they would need to have it documented and have a written agreement in place signed by Mr Lazanis and the third party before they settled on the Balmain land and giving Mr Lazanis a loan effectively at settlement. 10It turned out that the third party was the defendant Mr Gay. He later became the registered proprietor of unit D205. 11On 19 December 2007 Zapman's solicitor sent an email to the plaintiff's solicitor stating it was imperative that they have the $200,000 loan available on settlement. It did not identify the borrower. She also asked if there was any evidence of the value of unit D205 being $600,000. 12In fact, Statewide was in possession of valuations indicating that units at Rhodes such as unit D205 had a price range of $499,000 to $650,000. 13Arrangements were made for the payment of stamp duty on unit D205 with a purchase price of $600,000. 14On 21 December 2007 a Deed of Loan was executed between Mr Lazanis and West Sydney Maintenance Pty Ltd as borrowers, Mr Gay as guarantor, and the plaintiff as lender. It includes the following provisions: " 2. LOAN AGREEMENT 2.1 Subject to the Borrowers and the Guarantors performing their obligations under this Deed, the Lender agrees to make available to the Borrowers a short term loan facility on the following terms: 2.1.1 Principal Sum: $400,000.00 2.1.2 Interest: 9% per annum compounded daily in arrears calculated from the date of the advance. ... First Advance: $200,000.00 - 2.1.3 Draw Down Date: 21 December 2007. Further Advance: $200,000.00 -To be determined by Lender following provision of further security. 2.1.4 Amounts Secured: The Principal Sum advanced, any interest payable under this Deed, any amount due under this Deed including, without limitation, the costs and expenses identified in clauses 6.1 and clause 9.1. 2.1.5 Maximum Term: The Principal Sum and any interest payable and any other monies payable under this Deed must be repaid by the Borrowers to the Lender not later than 21 December 2008 (the Due Date) and in accordance with clause 9.1 and without the need for any prior demand. First Advance : Real property mortgage supported by caveat over the following land: 293/882481 (Erina Property) given by Dimitrios Lazanis 2.1.6 Security: 21/1091020 (Green Point Property) given by Dimitrios Lazanis B/392739 (Gosford Property) given by West Sydney Maintenance Pty Ltd 14/SP77656 (Rhodes unit D205) given by Neil James Gay Fixed and floating charge given over West Sydney Maintenance Pty Ltd. ... 3.2 In consideration of the Lender entering into this Deed and providing the financial accommodation to the Borrowers hereunder, the Guarantor agrees to provide the Lender with the following additional security: (a) registrable real property mortgage supported by caveat over the following property: (i) Lot 14 in SP 77656, commonly known as Apartment 205, Building D, Sol Rio Apartments, 10-16 Marquet Street, Rhodes NSW 2138. Mortgage to be given by Neil James Gay. ... 13. GUARANTEE 13.1 In consideration of the Lender entering into this Deed and making the initial advance to the Borrowers: (a) the Guarantor unconditionally and irrevocably guarantees the due and punctual performance of each of the Borrowers' obligations under this Deed of Loan. (b) The guarantee under clause 13.1(a): (i) is a principal obligation of the Guarantor; (ii) may be enforced upon demand by the Lender against the Guarantor without the Lender first taking action against a Borrower; and (iii) is a continuing guarantee until all obligations of the Borrowers have been satisfied in full. " 15Prior to settlement of the Balmain property purchase on 21 December 2007, a settlement adjustment sheet was prepared by the plaintiff's solicitors. It refers to the purchase price of $5,350,000 less a deposit of $140,000 giving a balance of $5,210,000. It then lists various adjustments including, as an allowance by the vendor, the following amount payable by the vendor: Vendor allows $400,000 net purchase price for Unit D205 ($ 200K loan to DL ). (emphasis added) 16The reference to "DL" is to Mr Dimitrios Lazanis. 17After allowing for the adjustments, the amount due on settlement is stated to be $4,810,857.44. Beneath this figure appears the following: Plus $300,000 secured over Unit D205 (net available after costs and 12 months prepaid interest - borrowed $380K against a valuation of $450K) by independent lender. Available funds - $5,110,857.44. 18There follows cheque details for the disbursement of the last-mentioned sum. One of those cheques was to be in favour of Perpetual Trustees Victoria Limited in the sum of $974,267.37. However, there is a note at the end of the settlement adjustment sheet to the effect that that cheque would be $300,000 short and that this would be provided by the vendor's solicitor "with the independent mortgagee". 19A balance sheet of the plaintiff as at June 2008 lists as an asset under "Receivables" the sum of $209,694.98 owed by Mr Lazanis. 20A business record of the plaintiff expressly relating to the Deed of Loan records the first advance of $200,000 being made on 21 December 2007 and the interest calculations thereon. 21The plaintiff submits that parts of an unread affidavit of Mr Gay, which the plaintiff tendered, constitute an admission of a loan of $200,000 to Mr Lazanis. I am unable to construe them as an admission. 22On 4 June 2008 the plaintiff lodged a caveat over unit D205, as contemplated by cl 3.2 of the Deed of Loan. 23In July 2008 Mr Gay lodged a Notice to Caveator of Proposed Lapsing of Caveat. Correspondence ensued between solicitors for the plaintiff and solicitors for Mr Gay. The latter alleged that Mr Gay entered into the Deed of Loan "under duress" - an allegation not pressed in these proceedings. Later an arrangement was entered into whereby unit D205 was sold, the caveat withdrawn and the balance of the proceeds of sale paid into a solicitor's trust account. 24In summary, the defendant submits that: (a)any advance was illusory and evidenced by a mere book-keeping transaction, or was not an advance to Mr Lazanis. (b)the guarantee in cl 13.1 of the Deed of Loan was relevantly in consideration of the lender making the initial advance to the borrower (it was not an all monies guarantee). Normally, "advance" means a furnishing of money for some specified purpose, although the furnishing need not be by way of loan: Burnes v Trade Credits Ltd (1981) 1 NSWLR 93 (PC); Lincolnshire Sugar Co Ltd v Smart [1937] AC 697. "Advance" excludes mere book-keeping transactions: AJS Bank v Costello (1889) 6 WN (NSW) 94; (c)the word "advance" in the Deed of Loan can only mean the provision of $200,000 to either one of the borrowers; (d)the plaintiff has been unable to demonstrate how Mr Lazanis received any benefit from the purported advance. Only Zapman received a benefit; (e)it makes no sense commercially for Mr Gay to have paid $600,000 for a unit which was mortgaged to an independent mortgagee for $380,000 and secured for a further $200,000 to the plaintiff when its true value, as the plaintiff must have known, was only $450,000. This value was noted at the end of the settlement adjustment sheet. This explains why only $400,000 was allowed for in the settlement adjustment sheet in relation to the unit; and (f)Mr Salvo did not give evidence and an inference should be drawn that he could not have said anything to assist the plaintiff's case. 25The plaintiff's submissions appear sufficiently from the reasoning below. 26In my opinion, the evidence establishes that the plaintiff advanced Mr Lazanis $200,000 on 21 December 2007 and that it has not been repaid. 27In the early discussions with Mr Touma for the purchase of the Balmain property, Mr Lazanis sought a loan from the plaintiff because the purchase price offered was insufficient to pay out the liabilities on that property. Unit D205 was utilised as security for borrowings to fund the shortfall. These borrowings came from two sources. One was an advance of $200,000 by the plaintiff to Mr Lazanis secured by (inter alia) unit D205. That advance is evidenced by the email of 8 December 2007 from Mr Touma to Mr Salvo, the email of 19 December 2007 from Zapman's solicitor to the plaintiff's solicitor, the Deed of Loan of 21 December 2007, and the settlement adjustment sheet of 21 December 2002. That evidence is fortified by the plaintiff's balance sheet at December 2007 and its business record in relation to the Deed of Loan recording the first advance and the interest calculations thereon. The other source of funding the shortfall was $300,000 (net available from a loan of $380,000) from an independent mortgagee against the security of unit D205. That is evidenced by the notes at the end of the settlement adjustment sheet. 28Against the background to which I have referred, I construe the settlement adjustment sheet as reflecting four transactions: (a)the purchase of the Balmain property by the plaintiff from Zapman for $5,350,000; (b)the purchase of unit D205 at Rhodes by Mr Gay from Statewide for $600,000; (c)an advance by the plaintiff to Mr Lazanis of $200,000; (d)a loan of $380,000 by an independent mortgagee secured over unit D205, of which $300,000 was the net amount available to be applied towards settlement of Zapman liabilities on settlement of the Balmain property purchase. 29This construction is consistent with evidence given by Mr Maitland, the chief operating officer of the plaintiff and an accountant, in relation to the first three transactions. 30The arrangements between Zapman, Mr Lazanis and Mr Gay which brought about these circumstances are not disclosed by the evidence. Mr Gay did not give evidence and Mr Lazanis is deceased. 31The defendant's submission at [ REF _Ref295133337 \r \h REF _Ref295119059 \r \h it makes no sense commercially for Mr Gay to have paid $600,000 for a unit which was mortgaged to an independent mortgagee for $380,000 and secured for a further $200,000 to the plaintiff when its true value, as the plaintiff must have known, was only $450,000. This value was noted at the end of the settlement adjustment sheet. This explains why only $400,000 was allowed for in the settlement adjustment sheet in relation to the unit; and ] above is countered by a number of matters. A valuation of $450,000 for unit D205 referred to in the settlement adjustment sheet was obtained by the independent mortgagee. That appears to explain why the independent mortgagee was only prepared to lend $380,000 against that security, of which a net amount of $300,000 was available to pay Zapman liabilities, and why a further $200,000 was required to pay Zapman liabilities. That further $200,000 was structured as an advance by the plaintiff to Mr Lazanis. The plaintiff itself had valuation evidence which could be regarded as supporting a value of $600,000. In any event, Mr Gay agreed to pay $600,000 and stamp duty was paid on a consideration of $600,000. 32Mr Gay did not give evidence and I infer that he could have said nothing which would have assisted his case. 33The principal of $200,000 plus interest at the rate of 9 per cent claimed by the plaintiff under the Deed of Loan totals $335,464 as at the date of this judgment. There will be judgment for the plaintiff in that sum. THE COSTS ISSUE UNDER THE DEED OF LOAN 34The plaintiff also claims that it is entitled to recover costs of $46,819.45 from the defendant under cl 9.1(b) of the Deed of Loan which provides as follows: 9.1 The Borrowers must pay within 30 days of demand by the Lender, or the Due Date (whichever is earlier) all costs and expenses of the Lender relating to and in connection with: ... (b) any variation or discharge of this document or any of the securities given hereunder. 35One of the securities under cl 2.1.6 of the Deed of Loan was unit D205.. 36The plaintiff alleges that the claimed costs are legal costs incurred by the plaintiff in respect of the lapsing notice issued by Mr Gay in respect of the caveat lodged by the plaintiff, in accordance with cl 3.2 of the Deed of Loan, over unit D205: see [ REF _Ref295116511 \r \h In July 2008 Mr Gay lodged a Notice to Caveator of Proposed Lapsing of Caveat. Correspondence ensued between solicitors for the plaintiff and solicitors for Mr Gay. The latter alleged that Mr Gay entered into the Deed of Loan "under duress" - an allegation not pressed in these proceedings. Later an arrangement was entered into whereby unit D205 was sold, the caveat withdrawn and the balance of the proceeds of sale paid into a solicitor's trust account. ] above. 37In my view, such costs are not costs "relating to or in connection with...any variation or discharge...of the securities given" under the Deed of Loan, in particular the security over unit D205. In fact, the plaintiff eventually withdrew the caveat. Even if the caveat had lapsed as a result of the lapsing notice that would not have varied or discharged the mortgage over unit D205 that the plaintiff held. 38Accordingly, I dismiss this aspect of the plaintiff's claim. 39As I have decided the construction point against the plaintiff, it is unnecessary to decide whether the claimed costs are in any case proved. However, I would note that at the conclusion of the hearing the only evidence comprised an extract from the plaintiff's debtors ledger. I cannot decipher whether the cryptic entries in that ledger are referable to the alleged costs. After the conclusion of the hearing I gave leave, by consent, to the plaintiff to tender invoices from lawyers said to evidence the claimed costs. In the absence of any analysis by the plaintiff, I have had to attempt to analyse the invoices by myself. There are certainly many items referable to the lapsing notice. However, some items appear to relate to other matters. COSTS OF THE PROCEEDINGS 40The defendant should pay the plaintiff's costs of the proceedings subject to an apportionment in relation to the cl 9 costs issue on which the plaintiff was unsuccessful. It took up relatively little time at the hearing and relatively little evidence. A reasonable apportionment will be reflected in an order that the defendant pay 90 per cent of the plaintiff's costs of the proceedings. CONCLUSION 41The orders of the Court are as follows: (1)Judgment for the plaintiff against the first defendant for $335,464. (2)The first defendant is to pay 90 per cent of the plaintiff's costs of the proceedings. (3)The exhibits may be returned. 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: 07 June 2011