E & P Developers v D J Capital Solutions [2005] NSWSC 1110

The developer mortgaged land to the defendants as security for a loan to carry out the development. The developer applied to the Court ‘at the eleventh hour’ seeking to restrain the lenders from selling the land. 

The developer said the injunction was justified for three reasons:

  1. Non-service of a s 52(2)(b) notice
  2. Estoppel by conduct and/ or representation made to a director of the developer where an offer of re-finance had been procured by the developer at the last minute
  3. It would be unconscionable, or misleading and deceptive, for the mortgagee to exercise its power of sale: ss 51AB and 52 of the Trade Practices Act 1974 (Cth), respectively.

Justice Brereton stated the test for an interim injunction:

On an application such as the present for an interim injunction, the question is whether the plaintiff has established a sufficiently seriously arguable case for final relief to justify the grant of interlocutory relief having regard to the balance of convenience.

I so state the test to emphasise three matters: first, that the plaintiff bears the onus of making out a case for interlocutory relief; secondly, that before one comes to the balance of convenience, there must be a serious question to be tried; and thirdly, that the strength of the serious question to be tried may be relevant to what is required to tip the balance of convenience one way or the other. 

His Honour decided (at [10]) that there was no a sufficiently clear representation that the lender would not proceed with the sale in the event of an offer of refinance to found an equitable estoppel: see Legione v Hateley (1983) 152 CLR 406, 436-437 (Mason and Deane JJ); Woodhouse A C Israel Cocoa Limited SA v Nigerian Produce Manufacturing Co Limited [1971] 2 QB 23, 60 (Lord Denning MR); Australian Crime Commission v Gray [2003] NSWCA 318, [184] (Ipp JA; Mason P and Tobias JA agreeing on this point); Low v Bouverie [1891] 3 Ch 82, 106 (Bowen LJ), 113 (Kay LJ); Flinn v Flinn [1999] 3 VR 712, 738 (Booking JA).  

The offer of refinance was for an amount of $3 million, whereas the amount owing under the first mortgage was $3.165 million.

There was no explanation of how the refinance could proceed while the land remained encumbered by a second and third mortgage, as well as a caveat by another company.

As a result, his Honour found that there was no serious question to be tried of estoppel by conduct or representation, nor any serious question of unconscionability or misleading and deceptive conduct.

There was evidence given by a process server of serving the s 57(2)(b) notice on an employee of the developer. His Honour considered that although the developer’s evidence may be accepted (of not being served) at final hearing, the developer’s case was weak on this point.

The strength of the developer’s case was a factor to take into account when weighing the balance of convenience for an injunction.

His Honour considered whether to restrain the sale the mortgagor was first required to pay into Court the sum owing under the mortgage. The developer argued that it was not required to pay into Court, since the power of sale had not arisen for failure to serve a s 57(2)(b) notice. His Honour stated:

Time does not permit an exhaustive review of the authorities on this question.   Suffice it to say that, for present purposes, I accept that a case in which the issue is whether the power for sale has arisen at all is one which falls outside what Sugerman J described as the “ordinary type of case” in Harvey v McWatters (1948) 49 SR(NSW) 173.   The ordinary type of case to which his Honour referred is one in which it is sought to restrain a mortgagee sale, either on the basis that the amount due is in dispute, or on the basis that there is some impropriety in the manner of exercise of the power of sale – typically, an impropriety which is liable to result in the sale being at an undervalue. 

Sugerman J recognised that different principles apply when the issue is whether the power of sale has arisen at all.  The same exception to the general rule was recognised by Powell J in Allfox Building Pty Ltd v Bank of Melbourne Limited (1992) NSW Conv R 55-734, in which his Honour said that if the challenge to the mortgagee sale were based upon the non existence or lack of present availability of the power of sale, either because the alleged breach of covenant relied on by the mortgagee was challenged, or because the occurrence of some other pre-condition, whether statutory or otherwise (which I take to include non service of a s 57(2)(b) notice) to the arising of the power of sale was in issue, then what was invoked was the auxiliary jurisdiction in equity to grant an injunction to prevent interference with one’s legal rights, in which case the plaintiff was not to be required, as a condition of obtaining relief, to do equity by bringing into court the mortgage money, or offering to redeem. 

His Honour accepted that the case fell within the exception to the ordinary rule requiring payment into Court, since it was the power of sale that was contested not the amount due or the manner of sale.

There was a possibility the land would be sold at an undervalue due to a forced sale. However, if the sale was restrained the lenders would have wasted funds and there was a risk that the market would decline anyway.

Where there is a potential loss on both sides, the amount to be paid into Court can be moulded to protect the mortgagee (even in cases within the category of exception set out by Justice Sugerman)

The developer did not offer to pay any amount into Court to protect the lender, tipping the balance of convenience in favour of the lender.

Given the state of the developer’s finances and the encumbrances on the land, his Honour could not accept  that the undertaking as to damages offered by developer was a valuable one.

The late timing of the application for an injunction also weighed against the developer.

The result was that the application for an injunction was dismissed with costs.

The lender made an application for indemnity costs. His Honour stated the test as follows

…although the class of case in which it is appropriate to make an order for indemnity costs is not closed, generally speaking, some impropriety or unreasonableness in the conduct of the case by the party liable is required.
 
An application to restrain sale is not unreasonable only because it is made at the last minute.

The lender also relied on a term of the loan agreement that included in the definition of “debt”:

All moneys paid or payable on account of the costs, charges, expenses and outlays, all on a solicitor and own client basis involved with the exercise, or enforcement, or attempted exercise or enforcement, of rights of the lender, or in consequence of default in payment of the debt, or the breach of any covenant, condition or stipulation contained in this agreement or a security. 

Even assuming that the costs of defending the injunction to restrain the power of sale fell within that clause, his Honour was not persuaded that the parties by their agreement could bind the Court to making an indemnity costs order, stating (at [43]):

It may be that costs on a solicitor and own client basis can properly be added by the mortgagee to the amount to be paid on discharge, but that does not mean that the Court will lend its authority by way of a costs order to that exercise.  In short, the agreement of the parties as to what is included in the debt does not bind the Court in determining on what basis its authority and processes should be used to determine questions of costs.

His Honour declined to make an indemnity costs order.
       
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