Performance Capital Mortgage v Motive Finance & Leasing [2010] NSWSC 429

The security property was sold by the first registered mortgagee. There was sufficient funds to pay out the 1st registered mortgage and the 2nd registered mortgages and to create a surplus which was paid into court pursuant to s 95 Trustee Act 1925. This case was a priority fight over who was entitled to that surplus between two unregistered mortgagees.

There were two issues: Was Performance Capital Mortgage owed money under its equitable mortgage? Was the withdrawal of its caveat postponing conduct causing it to lose priority?

Was Performance Capital Mortgage owed money under its equitable mortgage?

The court noted that to be valid, an equitable mortgage must be in writing, signed by the mortgagor (Conveyancing Act 1919 s 54A). Accordingly an unregistered mortgage is not effective and is not enforceable unless it is created or evidenced by a written instrument that sets out its terms. The writing must identify the essential terms of the mortgage. The term establishing what debt or obligation is to be charged on the land is an essential element of any mortgage.

In this case, the mortgage form simply incorporated Memorandum Q860000 but the Memorandum does not refer to any document or transaction. On its face the memorandum clearly contemplated repayment obligations being detailed in the mortgage form or an annexure. However, no reference was made to the Loan Contract, nor any other documents, nor any reference to any debt. Accordingly the  mortgage by itself did not identify an essential term of the mortgage.

However an extraneous document (a misnomer in fact as the mortgage was not registered so all the documents were extraneous) stated that the borrower was giving a  mortgage to Performance Capital Mortgage over the Property as security for all the obligations of the borrower to Performance Capital Mortgage and expressly refers to the Loan Contract, Offer Letter and the “security documents” mentioned in the Offer Letter. The Offer Letter itself referred to the “Unregistered mortgage” over the security.

The court noted the terms of the contract need not be contained in one document and that reading the four documents together would provide all the relevant terms of the Performance Capital mortgage, sufficient for the purposes of s 54A Conveyancing Act 1919.

The priority dispute

The equitable mortgage of Performance Capital was prior in time to that of the other equitable mortgage. Accordingly the court had to consider, whether or not Performance Capital’s action in withdrawing the caveat is postponing conduct so as to reverse the priority it obtained be being first in time.

The court noted that the general principles for determining priority between competing equitable interests, is to discern where the ‘better equity’ lies. In searching for the better equity, a court is free to consider all relevant factors and resorts to the maxim ‘qui prior est tempore potior est jure’ – the first in time has the better right, only where the parties’ respective merits are equal and there exists no other sufficient ground for preferring one over the other.
 
The court noted that in considering the merits of the two competing equitable interests, an important factor is whether the conduct of the earlier interest holder ought to be regarded as ‘postponing’. Failure to caveat to protect an earlier interest results in postponement only where the failure, considered in the light of all the circumstances, allows another person to acquire a later unregistered interest in the land on the mistaken assumption that the earlier interest does not exist. This is because by failing to lodge a caveat, the holder of the earlier interest may have lulled the holder of the later interest into thinking that the earlier interest did not exist, and in such circumstances the later interest may prevail. 

In obiter dictum the court noted that, being first in time but failing to lodge a caveat does always mean that postponement will ensue. In the famous High Court case of J & H Just Holdings) Pty Ltd v Bank of NSW [1971] HCA 57, the bank did not register the mortgage it took, but instead took the certificate of title into custody. When another unregistered interest came into existence and a priority dispute arose, the court held that the bank’s interest would not be postponed, although it had failed to lodge a caveat. The court considered that prudent conduct on the part of a person acquiring an interest, in circumstances when the title disclosed no prior mortgages, would have been to require the certificate of title to be produced or its absence explained and to check up on the explanation.

The court decided against Performance Capital following the authority of Elderly Citizens Home of SA Inc v Balnaves (1998) 72 SASR 210 it was held that the act of withdrawing the caveat gave notice that the caveator no longer sought to sustain the interest which the caveat had sought to protect. In this instance the subsequent in time caveator demanded the borrower procure a withdrawal of the caveat before lending, which was provided. The subsequent in time lender was entitled to, and gave accepted evidence that he did, assume that Performance Capital no longer sought to protect its interest, or that it no longer had an interest to protect.

A later unregistered interest holder cannot prevail over an earlier interest where at the time of acquiring its later interest, it had notice of the earlier, for notice affects the later holder’s. However in this case there was no evidence that at the time the later lender had actual notice that Performance Capital Mortgage’s interest was still in place.

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