Lender’s discharge can be conditional

A recent decision of the New South Wales Court in Australia and New Zealand Banking Group v Mishra [2012] NSWSC 1333 delivered by Justice Davies on 7 November, 2012 puts it beyond doubt that a lender can require as a condition of discharge of its mortgage, payment or security for probably costs for any threatened litigation without actual proceedings having been commenced, provided the mortgage is drafted to make it clear that it is security for contingent liabilities and requires the borrower to pay the lender’s actual, contemplated or attempted enforcement costs.

In that case, the lender sought possession of secured properties and the borrowers filed defences alleging misleading and deceptive conduct, unconscionable conduct and estoppel and indicated they would file a cross-claim but never did. The borrowers arranged refinancing but reserved their rights to bring the anticipated cross-claim after the discharge of the mortgage. The lender sought security for the probable costs of the threatened cross-claim in addition to the payout figure, as a contingent liability secured by the mortgages. To settle, borrowers had to pay the bank’s costs up until settlement to obtain a discharge of the mortgages. The borrowers sought to recover those costs and order that the lender was not entitled to demand a deed of release as a condition of the discharge of the mortgages or any security for costs of defending any claim brought by them after discharge.

The court found for the lender and held the lender entitled to require payment of extra money as security for costs and found it was not necessary that proceedings had already commenced against the lender. The court followed an earlier NSW Court of Appeal decision in Overton Investments v Cuzeno RVM [2003] NSWCA 27 which that held that:

Where a dispute has arisen or is reasonably anticipated, a mortgagee is entitled to require not merely payment of the amount secured by the mortgage but also payment or security for the probably costs of any contest. If the mortgagee does not specify a payout figure which bears some reasonable relationship to the amount truly owing and anticipated costs, then this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs subsequently incurred in determining the rights of the parties. Furthermore, where the mortgagee does not require payment or security for the probable costs of any contest, and a question later arises as to whether the mortgagor’s tender was sufficient to entitle the mortgagor to redemption, the mortgagee cannot then claim that the tender was insufficient because it did not include provision for those costs.

The court noted that if the lender had simply demanded a release on its own, without the option of providing security for costs to reserve such rights, that would likely be inconsistent with contractual and equitable rights to redeem.

The court endorsed an earlier South Australian Supreme Court decision in Perpertual Trustees Australia v Barker [2004] SASC 58 approved by Palmer J in Liberty Funding v Steele-Smith [2004] NSWSC 1100 which held that:

Enforcement of a mortgagee’s rights is not confined to the taking of steps to exercise a power of sale or other right conferred by the mortgage: it encompasses whatever is necessary to protect and preserve the mortgagee’s rights when their validity is challenged or their exercise is sought to be prevented or impeded.

The court found that the threatened claim by reason of the matters alleged in the borrowers’ defence would likely involve a challenge to the rights of the lender to enforce the mortgage and the lender did not act unreasonably in incurring those legal costs, which were payable pursuant to the terms of the mortgage.

The borrowers’ application was dismissed and they were ordered to pay the lender’s costs.

This case is important for lenders because if a lender does not require payment or security for probable costs as a condition to discharge where litigation is threatened or commenced, that right is lost forever more and the lender cannot later complain that the payout figure obtained was insufficient to cover its enforcement costs.

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