Ley v Scarff [1981] HCA 5; (1981) 146 CLR 56 (10 February 1981)

HIGH COURT OF AUSTRALIA

LEY v. SCARFF [1981] HCA 5; (1981) 146 CLR 56

Mortgage

High Court of Australia
Barwick C.J.(1), Stephen(2), Mason(3), Murphy(4) and Aickin(5) JJ.

CATCHWORDS

Mortgage - Redemption - Power of mortgagor to require assignment in lieu of discharge - Whether power to require assignment to mortgagor or someone on his behalf - Conveyancing Act, 1919 (N.S.W.), ss. 93, 94.

HEARING

Sydney, 1979, November 22;
Canberra, 1981, February 10. 10:2:1981
APPEAL from the Supreme Court of New South Wales.

DECISION

1981, February 10.
The following written judgments were delivered: -
BARWICK C.J. The appellant, Rex Ley, conducted in person his appeal to this Appeal Division, dismissing his appeal to that Court from a judgment of the Equity Division of that Court (Waddell J.) in a suit brought by the appellant against Claude Francis O'Hagan and Rona Mary O'Hagan (the O'Hagans), Frank McCarthy and Winifred Joan Scarff. (at p57)

2. The appellant in this suit sought an order that the O'Hagans assign to him the first mortgage held by them over land in the western suburbs of Sydney on which is erected a residence known as No. 2 Toothill Street, Lewisham, and to deliver up to the appellant the certificate of title to that land. The basis of the appellant's claim to this order was, as he claimed, an agreement between Mr. McCarthy, as solicitor for the O'Hagans, and the appellant to assign that mortgage to him. The appellant claimed he had paid the agreed consideration for this assignment and that the amount paid represented the balance due to the O'Hagans under that mortgage. The primary judge found that such an agreement was conditional upon there being no legal objection to the assignment and that there was such a legal impediment: and the Court of Appeal held that, in any event, any such agreement had been mutually abandoned. (at p57)

3. To understand the appellant's submission that both primary judge and Court of Appeal were in error, it is necessary to state the basic facts as they appear to me to have emerged in the proceedings in the Supreme Court. (at p57)

4. To begin with, the appellant's wife, Neva Jean Ley, was the registered proprietor of the land at Lewisham. She and the appellant resided in the house as their matrimonial home. In July 1961, Mrs. Ley mortgaged that property to the O'Hagans to secure the sum of $7,500 lent to Rex Ley Pty. Ltd. ("the company") by the mortgagees. Subsequently, in April 1962, Mrs. Ley executed a second mortgage to R. de W. Kennedy Finance Ltd. ("Kennedy") to secure the sum of $5,000. Both sums were also secured by mortgage over lands of the company. I am prepared to assume for present purposes that this second mortgage, as well as the first mortgage, was given as a security for a debt owed by the company. Thus, it may be taken for present purposes that Mrs. Ley was a surety for the company's debt at least to the extent of the amount secured by the first and second mortgages. The appellant was not a party to these mortgages. In November 1966, Mrs. Ley transferred her equity of redemption in the Lewisham land to the appellant. The second mortgagee was in no sense privy to this transaction. (at p58)

5. Proceedings, other than the present suit, were brought by the appellant in the Supreme Court of New South Wales against Kennedy, along with the O'Hagans, amongst others. These proceedings were in substance a suit for redemption of the mortgages to both the O'Hagans and Kennedy over the Lewisham property, notwithstanding that that proceeding had as its genesis a claim by the appellant that Kennedy had failed to "take all reasonable steps to enforce its security over" the Gymea property - a property over which the company had given Kennedy a first mortgage to secure the abovementioned sum of $5,000. At a time when an appeal was pending in these proceedings, Mr. McCarthy as solicitor for the O'Hagans negotiated with the appellant to have the O'Hagans dismissed from that suit. After discussion between Mr. McCarthy and Mr. P.J. Freestone, a solicitor friend of the appellant, a document was drawn up and signed by Mr. McCarthy and the appellant. It was in the following terms:

"Terms of Settlement
1. Payment of $3000.00 plus $46.00 costs to Claude Francis O'Hagan and

Rona Mary O'Hagan.
2. Amount accepted and paid in full settlement of all amounts owing under Mortgage No. 967 Book 2758 including all costs of Claude Francis O'Hagan and Rona Mary O'Hagan and Winifred Joan Scarff.
3. Amount accepted and paid in full discharge of any costs owing by Claude Francis O'Hagan and Rona Mary O'Hagan and Winifred Joan Scarff to Rex Ley, Rex Ley Pty. Limited or Neva Jean Ley.
4. Mortgage No. 967 Book 2758 to be assigned by Claude Francis O'Hagan and Rona Mary O'Hagan to Rex Ley or his Nominee.
5. Claude Francis O'Hagan and Rona Mary O'Hagan to be dismissed as Respondents in suit No. CA 40 of 1974 and Eq. 1291 of 1967." (at p58)

6. Prior to the drawing up and signing of this document, Mr. Freestone, acting on behalf of the appellant, had sent to Mr. McCarthy a bank cheque for the sum of $3,046, being the amount mentioned in the abovementioned document under cover of a letter in the following terms:
"We refer to your letter of the 24th April and now forward herewith bank cheque from Mrs. Ley for the sum of $3,046.00.
We confirm our telephone conversation that our clients require a Memorandum of Transfer of Mortgage from the mortgagees to Reginald Irwin Ley of 2 Toothill Street, Lewisham. They also require that the previous documents of title be handed over on completion together with the transfer of the relevant Mortgage.
We confirm that you will hold the bank cheque and not account for proceeds pending completion of the matter and your obtaining instruction in relation to the matter in which the mortgagors require settlement." (at p59)

7. Subsequent to the signature of the document, Mr. McCarthy obtained counsel's opinion to the effect that there was a risk to the first mortgagee in transferring the first mortgage to the mortgagor without the concurrence of the second mortgagee. The opinion was based on the judgment of Neville J. in In re Magneta Time Co. Ltd.; Molden v. The Company (1915) 84 LJ (Ch) 814 . There are, as well, textbook statements to a like effect in Fisher's Law of Mortgage, 6th ed. (1910), par. 1978; Fisher and Lightwood's Law of Mortgage, 9th ed. (1977), p. 547 and, also Stuckey's Conveyancing Act, 2nd ed. (1970), par. 486. (at p59)

8. After Mr. McCarthy had obtained counsel's opinion, he informed the appellant of it and told him that there was no agreement to assign the mortgage. The appellant then asked for the return of the $3,046 which his solicitor had paid to Mr. McCarthy as, in substance, he needed it to pay counsel to appear for him in the appeal in the case which was to proceed. Mr. McCarthy indicated that he should return the money to Mr. Freestone as he had sent it: and in due course did so. I might add that the money was subsequently returned by Mr. Freestone to Mr. McCarthy and is presently held by him in trust for the appellant. Incidentally, before the court in that appeal, no reliance was placed by the appellant on the proposed settlement. (at p59)

9. According to the primary judge who saw and heard the witnesses, including the appellant and Mr. McCarthy, the agreement evidenced in this writing was subject to an express oral condition precedent that there should be no legal objection to the proposed assignment of the first mortgage to the appellant who, by reason of the transfer from his wife, had become the mortgagor. (at p59)

10. The primary judge accepted the view expressed in the case cited and the statements in the textbooks and, in consequence, decided that the oral condition precedent was not satisfied, that there was a legal objection to the assignment and that therefore there was no effective agreement to assign the mortgage. He dismissed the appellant's suit. (at p60)

11. The Court of Appeal took the view that any agreement to assign which might have been made was abandoned by the parties when the legal difficulties had emerged and had been communicated to the appellant. (at p60)

12. The appellant's principal submission on the hearing of this appeal was that he was not merely a mortgagor but was in fact a guarantor or surety. He thus claimed that, upon the payment of the balance due under the mortgage to the O'Hagans, he was entitled to an assignment of their security. The statements in the textbooks and in In re Magneta Time Co. Ltd. (1915) 84 LJ (Ch) 814 were therefore inapplicable. (at p60)

13. The appellant also submitted that this Court should set aside the finding of the primary judge as to the existence of a condition precedent to the effectiveness of the document signed by the appellant and Mr. McCarthy and of the Court of Appeal as to the mutual abandonment of the agreement. (at p60)

14. I can shortly deal with this submission by pointing out that the primary judge's finding of fact was based on his estimation of the oral evidence given before him and of the credit accorded to the appellant on the one hand and Mr. McCarthy on the other. There was clearly no basis on which this Court could interfere with that finding. Consequently, there is no need to discuss the view expressed by the Court of Appeal. The primary judge's finding of the existence of a condition precedent to the effectiveness of any agreement in the signed document must stand. (at p60)

15. Prior to the enactment of ss. 93 and 94 of the Conveyancing Act, 1919 (N.S.W.), if a mortgagor found need to discharge a mortgage and to replace it with another to secure a like amount, it would be necessary to redeem the existing mortgage by payment, accept a discharge of the mortgage and then execute a new mortgage to a new lender. Apart from the expense of such a procedure, a particular problem presented itself where the mortgagor had executed a second mortgage. In this instance, to be in a position to give the new lender a first charge on the land, it would be necessary to negotiate with the second mortgagee to postpone his security to the first mortgage to be given to the second lender, because otherwise on the discharge of the first mortgage the second mortgage would become the first charge on the land. Failing successful negotiation with the second mortgagee, it might prove necessary to discharge that security by payment. (at p61)

16. Sections 93 and 94, which I set out hereunder, were enacted to better the position of the mortgagor in each of these situations:
"93. (1) A mortgagor is entitled to redeem the mortgaged property although the time appointed for redemption has not arrived; but in such case he shall pay to the mortgagee, in addition to any other moneys then owing under the mortgage, interest on the principal sum secured thereby for the unexpired portion of the term of the mortgage: Provided that redemption under this subsection shall not prejudice the right of the mortgagee to any collateral benefit, or to enforce any burden or restriction to the extent to which he would be entitled under the mortgage or otherwise if the mortgage were paid off at the due date.
(2) For the purposes of this section 'moneys owing under a mortgage' includes all costs, charges, and expenses reasonably and properly incurred by the mortgagee -
(a) for the protection and preservation of the mortgaged land or the title thereto, or otherwise in accordance with the provisions of the mortgage; and

(b) with a view to the realisation of his security;
and in either case includes interest on the sums so expended after the

rate expressed in the mortgage.
(3) This section applies to mortgages made either before or after the commencement of this Act, and shall have effect notwithstanding any stipulation to the contrary.
(4) This section applies to mortgages under the Real Property Act, 1900.
94. (1) Where a mortgagor is entitled to redeem he shall by virtue of this Act have power to require the mortgagee instead of discharging, and on the terms on which he would be bound to discharge, to transfer the mortgage to any third person as the mortgagor directs; and the mortgagee shall by virtue of this Act be bound to transfer accordingly.
(2) This section does not apply in the case of a mortgagee being or having been in possession.
(3) This section applies to mortgages made either before or after the commencement of this Act, and shall have effect notwithstanding any stipulation to the contrary.
(4) This section applies to mortgages under the Real Property Act, 1900."
The law now gives the mortgagor the ability to maintain the position of the first mortgage at no greater expense than the cost of the assignment of the existing security to the new lender. This maintains the priority of that security and obviates any negotiation in dealing with the subsequent mortgage. (at p61)

17. The legislation in terms provides for the assignment of the security to "any third person as the mortgagor directs". Such a third person, in this context, does not include a person who is no more than the alter ego of the mortgagor. It refers to the new lender who, of course, must be nominated by the mortgagor, who has arranged the loan to pay out the existing mortgagee. The sections, in my opinion, have no relevant function where the mortgagor is providing the funds to pay out the first mortgagee. (at p62)

18. Where there is a second mortgage, there is an equity of redemption of the first mortgage in the second mortgagee. That means that that mortgagee has a distinct interest in what is done as between the mortgagor and the first mortgagee about and in relation to the first mortgagee's security. Naturally, if no more is to occur than the discharge of that security, his interest is minimal. But a transfer of that security to the mortgagor is a matter of some moment for the second mortgagee. In the present case, the avowed aim of the appellant is to obtain possession of the title deeds to the Lewisham property. He sees in their possession some advantage for himself in his dealings with the second mortgagee. Perhaps he is right: it might be some disadvantage to the second mortgagee for the appellant to have possession of the certificate of title, freed as it might be of the encumbrance of the first mortgage. I agree with the view expressed by Neville J. in In re Magneta Time Co. Ltd. (1915) 84 LJ (Ch) 814 and with the statements in the textbooks to which I have referred. The first mortgagee is not obliged to assign his security to the mortgagor when payment in discharge of his debt is made by or on behalf of the mortgagor. To do so without the concurrence of subsequent encumbrances does involve risks to the first mortgagee which he ought not in general to take. I therefore agree with the primary judge that the terms of settlement did not become effective. (at p62)

19. The appellant seeks to avoid the consequences of such a conclusion by asserting that he is not a mere mortgagor but that he is a surety, as he said, a guarantor-mortgagor, who on payment of the debt of the principal creditor is entitled to an assignment of the securities held by that creditor. If the appellant were such a surety and if the mortgage of the O'Hagans were a security of the debt of the company, the appellant might be correct in his assertion. But he is not, in my opinion, a surety. (at p62)

20. Quite clearly, the appellant did not become a surety of the O'Hagans by reason of the transfer to him of the equity of redemption in the Lewisham property. There is no operation of law which would render the appellant liable for the company's debt to the O'Hagans because of his purchase of that equity of redemption. Mrs. Ley, if she were a surety, would remain liable for that debt notwithstanding the assignment of the equity of redemption. (at p63)

21. Thus, the reiterated assertion of the appellant that he was a surety entitled as such to a transfer of the O'Hagans' mortgage is without legal or factual foundation. (at p63)

22. In the course of argument, the appellant sought to challenge the validity of the second mortgage as having been executed in breach of s. 23A (1) of the Moneylending Act, 1941 (N.S.W.) as amended. But, as was pointed out by the Court, the second mortgagee is not a party to the instant proceedings: the Court could not deal with this submission which, incidentally, does not appear formally to have been raised in proceedings brought by the appellant. (at p63)

23. I would dismiss the appeal with costs. (at p63)

STEPHEN J. I have had the advantage of reading the judgment of the Chief Justice and agree that this appeal should be dismissed with costs. (at p63)

MASON J. I agree. (at p63)

MURPHY J. The appellant's arguments have no legal merit. The appeal should be dismissed. (at p63)

AICKIN J. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and agree that this appeal should be dismissed with costs. (at p63)

ORDER

Appeal dismissed with costs.