In this case the lender obtained default judgement, took possession and sold the mortgaged property. On the day the sale was due to settle the borrower approached the Duty Judge seeking to set aside a default judgment so she could defend the matter and to obtain an injunction preventing the settlement of the sale. The urgency arose because settlement of the sale was due to take place that very day.
The borrower claimed she “came under the influence” of a Tim Magnus. He apparently persuaded her to invest in a company called Profit Runner Pty Ltd – which was based on the Gold Coast and which marketed a horse racing software product. He persuaded her to mortgage the property, invest the proceeds with Profit Runner, explaining that she could pay off the mortgage debt with the profits she would earn from the investment.
At the time of the loan the borrower was unemployed and receiving social security benefits and had debts of $28,000. With the assistance of Mr Magnus, she obtained the loan of $55,000 at an annualised interest rate of 180 percent, reducing to 96 percent if interest were paid on time.
The borrower completed a declaration that the loan was required for business purposes and she received independent legal advice from a solicitor. The solicitor pointed out the risks associated with the loan agreement. The borrower intended that the loan would be for a short period only, during which time she would refinance at a lower rate of interest. The lender knew that the defendant had no income.
After the loan went into default the borrower contacted Profit Runner and learned that Mr Magnus had not invested the moneys with that company and had no association with the company.
The agent of the lender entered into possession of the property exercising self help. The lender’s agent explained his actions in these terms:
“I am aware that in my mortgage I have the right to enter the property and take possession if the mortgagor is in default. It is a registered first mortgage. I decided I should do this in order to have the property sold as soon as possible and ensure that there was no delay in realising the property given that interest was accruing under the mortgage and the market value of the property was so low.”
The judge stated “There was no proper basis for this action”, and commented that “this explanation is surprising considering he practiced as a solicitor”. Unfortunately the judge did not give any legal reasoning for his views. He did however hold them very strongly, even going so far as to say:
The extra curial conduct on the part of the plaintiff in entering the defendant’s property without permission … and removing her property… appears to have been further exacerbated by a complete absence of any warning to the borrower …such conduct is to be deplored and should not in any fashion be rewarded. My firm inclination in this matter is to award costs against the plaintiff because of this conduct.
With respect to His Honour, a judge must not punish litigants for their conduct outside the court with costs orders. Cost follow the event or are occasionally used to punish a successful litigant for improper conduct of litigation. If the borrower has any rights against the lender for entering into possession by way of self help then they should be addressed as part of a claim for damages.
On the substantive question of whether a lender can enter into possession by way of self help, the opinion of the learned authors in The Essential Guide to Mortgage Law in NSW is that it can. At the 9.42 they wrote:
[9.42] Given that such a covenant represents the written consent of the occupier to enter the land following default, an equitable mortgagee also has a good defence to a trespass or possession claim brought by the former occupier.
While an owner of land may revoke his consent (or licence) for another person to enter onto land, in Cowell v Rosehill Racehorse Co Ltd (1936) 56 CLR 605, the High Court made an exception to this general doctrine, in the case of a licence allied to a proprietary right in land. Latham CJ stated at 615:
If a man creates a proprietary right in another and gives him a licence to go on certain land in order that he may use or enjoy that right, the grantor cannot divest the grantee of his proprietary right and revest it in the grantor, or simply determine it, by breaking the agreement under which the licence was given. The grantee owns the property to which the licence is incident, and this ownership, with its incidental licence, is unaffected by what purports to be a revocation of the licence. The revocation of the licence is ineffectual.
In the case of a contractual term in a mortgage for possession, the licence to take possession is an incident to the mortgagee’s proprietary right in security. It follows, then, that the contractual licence in such a case could not be revoked.
This view is bolstered by various authorities that give support to the proposition that the holder of an equitable interest, including an equitable mortgagee, who takes possession with the consent of the owner of land may maintain that possession, notwithstanding the original absence of a legal proprietary right to take possession of the land, and notwithstanding a subsequent change of heart by the owner or his successors in title. In Re Postle: Ex Parte Bignold (1834) 4 Deac & Ch 259, the English Court of Review (as it then was) had to consider whether the equitable mortgagee (with a mortgage effected by deposit of title deeds) who had gone into possession had the right to receive profits from his possession of the land. The Court determined that profits could only be received if the mortgagee had taken possession rightfully. One judge found that the deposit of deeds gave implied authority to the mortgagee to take and retain possession. Another judge found there was no such implied authority, but that possession was rightfully taken as the mortgagor abandoned the premises and his successors in title had previously not objected to the mortgagee’s taking possession. The third judge found that there was either implied authority or consent by the mortgagor.
In Spencer v Mason (1931) 75 Sol Jo 295, an equitable mortgagee of Old System land had been paid out by the mortgagor’s mother, who in exchange took an assignment of the equitable mortgage. The mother then took possession of the property with the mortgagor’s consent, although another occupier of the premises did not consent and sought to contest the mother’s possession. The judge decided in favour of the mother, stating:
It has never been held inequitable for an equitable mortgagee to take possession as against a person whose title is subsequent to his security.
His Honour noted that the mortgagor was a person whose title was subsequent to that of the mortgagee, and that the other occupier took through the mortgagor, so that the mortgagee’s title had priority.
As Justice Hoeben gave no legal reasoning for his obiter dictum there is no reason for thinking this decision changes the law.
In the course of argument it was accepted by the borrower that the purchase price, which had been negotiated for the sale of the property, was a good one and she withdrew her application to injunct the sale. It was agreed between the parties that the sale proceeds would be placed into an interest bearing deposit pending the outcome of the primary dispute between them.
Thus the only matter that remained to be decided was the borrower’s application to set aside the default judgment. His Honour quoted the principles applicable for setting aside a default judgment laid down in Hamafam Pty Limited & Ors v Saadullah & Anor  NSWSC 818 as follows:
- Whether the defendant has shown a satisfactory explanation for the delay in filing a defence or moving to set aside the judgment.
- Whether the default judgment was obtained without notice to the defendant.
- Whether the proposed defence is asserted bona fide.
- Whether, if the judgment were set aside, prejudice would be occasioned to the plaintiffs.
- Whether the proposed defence presents an arguable or triable issue.
- Whether it would be futile to set aside the judgment.
The Court found for the borrower on each issue with His Honour noting:
There is sufficient material available to satisfy me that there is a genuine issue to be litigated under the Contracts Review Act 1980 and/or the Fair Trading Act 1987. There is also the application of the equitable doctrine of unconscionable conduct to be considered. The matters I have particularly had regard to in reaching that conclusion are the patently excessive interest rate, the difference in bargaining positions between the plaintiff and the defendant, the difference in commercial acuity between the plaintiff and the defendant, the defendant’s patent inability to meet the repayment obligations under the mortgage and the indicia that this was in reality an asset lending exercise.
Despite his “firm inclination … to award costs against the lender because of his conduct”. His Honour restrained himself properly noting that the application before the Court was an interlocutory one and that “there may be some explanation for the lender’s conduct”. Accordingly costs of the application were reserved to be determined with the hearing of the substantial dispute.