LAWS 2204
SEMESTER 1 2000
MARKS: 85
QUESTION 2
There are 2 major questions to be considered. The first is the consequence of the mortgage variation for Jane. The second is whether Hashim (H) can keep his lease.
Jane and the Mortgage Variation
The mortgage variation has been registered and so the mortgage is indefeasible (s42 RPA). It does not matter that this interest came about through a void or voidable instrument (s135 RPA). In order to defeat the mortgage, Jane must find an exception to indefeasibility. There are 2 possibilities – fraud and in personam.
1. Fraud (s42 RPA)
There are 3 essential elements for fraud:
1. The registered proprietor (RP) is a party to the fraud (Loke Yew). The fact that John was fraudulent does not make fraud available against the moneylender. Fraud by the moneylender itself must be shown
2. The fraud must occur before or at the point of registration (Bahr v Nicholay). There are 2 possible acts occurring before registration – the issuing of the mortgage variation and the discussion with Jane. These will be discussed later.
3. Actual dishonesty. Negligence or sharp dealing is insufficient (Asset co). There was the N2 case of Efstratsiou which found sharp dealing to be enough, but this has not been adopted in Australia.
The two events – the issuing of the variation and the conversation with Jane – must be examined for actual dishonesty.
(i) Issuing the variation. The moneylender was given a form signed and attested to. This is not in itself dishonest – it is less than Grgic where signing an attestation clause when the signatory was not known was not fraud. However, this conclusion may change depending upon the legal requirements for issuing such a variation. Is the moneylender required to witness the signature? Did John have the legal authority to arrange this with the moneylender? More facts are needed as well as the law and standard practice of lending money in such procedures before a final conclusion can be made.
(ii) The conversation with Jane. When the moneylender spoke to Jane, it was clear she was unsure what was happening. She said she would speak to her accountant about what a variation was – this suggests she was unaware of it. The moneylender still registered. These were grounds sufficient to make a reasonable person suspicious, as Jane would know if she suddenly had another $200k. The moneylender ignored this suspicion. This willful blindness may be sufficient for fraud. However, Grgic was arguably a case where the bank officer should have been suspicious he was witnessing a document for a man he had never met. It is unclear whether willful blindness relates to fraud, but in my opinion it is a logical extension of the principles. It is dishonest to ignore irregularities in such dealings.
2. In Personam
In this case, the moneylender had both a contract and a trust arrangement with Jane in holding her CT. This is based on Mercantile Mutual v Gossper. The moneylender has an in personam obligation to uphold these – this creates an exception to indefeasibility. In Mercantile, to produce the CT to register a mortgage was to hold breach both trust and contract. The fact that the bank thought it was complying with the borrower’s wishes was irrelevant – a breach was still a breach. Similar circumstances apply in this case. Mercantile has come under criticism from some academics, but has not been overruled by the courts. It is likely to apply again in this case.
Conclusion
The moneylender’s mortgage is defeasible, either through fraud or in personam.
Consequences of Defeasibility
The mortgage variation was probably fraudulent and breached in personam obligations. Clearly, this variation must be removed, but how will this affect the original mortgage? The original mortgage was valid – it is unlikely it will also be enforceable because of the problems with the variation. If the original mortgage remains, the question then becomes if it remains as a registered mortgage. In my opinion, the effect of the exception to indefeasibility appears to be to wind back the clock between the two parties. The effect is as if a certain transaction was never registered (eg fraud) or a certain transaction was registered (eg leases less than 3 years). If the clock is wound back, the effect becomes as if the transaction as a whole was never registered – the original mortgage is once again unregistered. The moneylender must re-register.
Power of Sale
Once the mortgage variation is removed, can the moneylender still sell the property? It is unclear whether repayment even went up after the variation, or if Jane just would have defaulted anyway. If repayments increased, they should be seen as the product of a void contract (the interest is defeasible and the contract a fraud), and so void in themselves. The moneylender could not sell the house. If repayments remained the same, they would not be the product of a void contract. Rather, they would be the product of the original, valid mortgage. In such a case, the sale would go ahead.
Hashim’s (H) Lease
The fate of H’s lease depends on whether the mortgage is still registered (see above). If Jane has taken action and the mortgage removed from the CT, there is a contest between 2 unregistered interests (Hs lease is unregistered and, with option, longer than 3 years, so s42(1)(d) does not apply. As the exception to indefeasibility is not present, it should be treated as an ordinary priority dispute. If the mortgage has not been removed, H must find an exception to indefeasibility. Finally, if Jane has not yet taken action, the mortgage and the variation will still be on the CT. H can argue fraud (see Jane) to remove at least the variation, and is then left in the position he would have been in had Jane taken action. If this fails, his position is the same as if the original mortgage was still registered.
If the Mortgage is Unregistered
There is no s43A RPA issue as neither party is a purchaser who has settled. Instead, there is a contest between 2 unregistered interests and 1st in time prevails. H’s lease is first in time. The question is whether H’s failure to register or caveat his lease constitutes postponing conduct. A failure to caveat in itself can be postponing conduct (Osmanski v Rosse). Here, H has a long-term registerable interest. He has taken no action to protect it or notify others it exists. On the other hand, H is in possession. He is occupying these premises. This in itself gives notice to others of his lease. It is probably sufficient not to be postponing conduct.
If the Mortgage is registered
If the moneylender has a registered mortgage, it is indefeasible (s42). The fact it had motive of H’s interest is irrelevant (s43). If the variation remains, the fact it was taken under a void instrument is irrelevant (s135). H must rely on an exception to indefeasibility.
1. Leases. Lease must be less than 3 years for this exception (s42(1)(d) RPA). This includes options. H has a 4-year lease (2 and 2 or option) so this does not apply.
2. Fraud. While fraud is irrelevant if the mortgage variation remains (see above), there is no fraud relating to the original mortgage. This exception does not apply.
3. In Personam. While there is no contract between H and the moneylender, H can argue a constructive trust as in Bahr v Nicholay. This trust is created from the contract between Jane and the moneylender, a clause of which acknowledges H’s interest. This is similar to Bahr, where the clause was only to acknowledge the interest. This in itself may not be enough – it could be interpreted as no more than notice. However, as in Bahr, later conduct affirms this. The offer to buy out H’s lease is positive conduct towards H acknowledging the trust arrangement, as an offer to buy out the interest was in Bahr. This points to a constructive trust. The point on which the facts may be distinguished from Bahr is the fact that the trustee is a mortagee exercising power of sale. In my opinion, this is insufficient. The house could still be sold with a tenant in it. Furthermore, assurances made during negotiations with Jane that the property could just e managed by the bank show that other options were unavailable. The conduct in this case is still unconscionable for a mortgagee, and so a constructive trust exists. The bank’s mortgage is defeasible and so H may keep the lease.
Conclusion
Jane will bring an action against the variation relying on fraud and in personam to get around the moneylender’s indefeasibility. Whether she keeps the land depends on the whether she defaulted on a repayment that was greater because of the variation. It is unclear whether the moneylender will keep the registered mortgage or if it becomes unregistered again. Whether or not the moneylender has a registered mortgage, H is likely to keep the lease, either through being 1st in time if the mortgage is unregistered, or through an in personam obligation of a constructive trust if the mortgage is registered.