Darke J has handed down his decision in First Mortgage Capital Pty Ltd v Westpac Banking Corporation Ltd [2021] NSWSC 1143, where he considered the actions of a second-tier lender in redeeming prior mortgages and set out the appropriate procedures for mortgagees to charge interest on the redeemed mortgage.


Background

On 23 April 2018, Glocal Villager International Pty Ltd (Glocal) entered into a loan agreement with First Mortgage Capital Pty Ltd (First Mortgage) for $289,915. In support of the loan agreement, Ms Zufaidah Binte Juri (Ms Juri) and Sheik Taleb Bin Sheik Husain (Mr Husain) provided a personal guarantee and mortgages to First Mortgage over properties located in:

  1. Point Cook; and
  2. Belmont.

On 10 May 2018, First Mortgage advanced the net amount of $250,000 to Ms Juri and Mr Husain, with the remaining funds being used for payment of three months interest and various fees.

It was a term of the mortgage that (clause 18.3 of the memorandum) [at 19]:

“If an Event of Default occurs, or is deemed to have occurred:

(h) the Lender may pay to any mortgagee of any other Encumbrance the whole or any part of the amount owing to that mortgagee and nay money so paid by the Lender will form part of the Secured Money and will be secured by this Mortgage;”

The loan was to be repaid by 30 October 2018, which Glocal failed to do.

On 28 May 2019, First Mortgage lodged caveats over properties owned by Ms Juri and Mr Husain pursuant to the terms of its loan agreement, which had pre-existing mortgages:

  1. Darley (mortgaged to CBA);
  2. Albion Park Rail (mortgaged to Westpac);
  3. Fairy Meadow (mortgaged to Westpac);
  4. Point Cook (mortgage to Westpac); and
  5. Belmont (mortgage to Westpac).

On 29 January 2020, First Mortgage redeemed the mortgage held by CBA over Darley and subsequently sold the property.  Following this, First Mortgage redeemed Westpac’s mortgage over Albion Park Rail and sold the property.

On 25 May 2020, the solicitors for First Mortgage sent a letter to Westpac in relation to Albion Park Rail properties and stated [at 46]:

“… The Second Mortgagee’s mortgage is in default as the Mortgagor failed to repay the mortgage by the term date.

Pursuant to section 94 of the Conveyancing Act 1919 (NSW) we are instructed that the Second Mortgage intends to redeem the First Mortgagee’s mortgage.”

Around this time, Ms Juri and Mr Husain wrote to Westpac noting that the power of attorney (included in the loan agreement) granted to First Mortgage was rescinded. Westpac withdrew from the PEXA workspace with First Mortgage and was sought to “hold off” until receipt of further information prior to allowing redemption of their mortgages over Albion Park Rail properties.

On 23 October 2020, First Mortgage filed a Summons that sought orders that Westpac transfers its two registered mortgages over, respectively owned by Ms Juri and Mr Husain, over Albion Park Rail properties.

Ms Juri and Mr Husain filed a cross-claim that sought [at 5]:

(a) the rate of interest stipulated, namely, 60% p.a. as the Higher rate and 30% p.a. as the Lower Rate; and

(b) the exercise of a power by First Mortgage under its mortgages to pay-out other mortgagees, and add the amounts so paid to the Secured Money such that interest henceforth run on those amounts as well.”


Decision

Darke J did not agree with the submissions made by Ms Juri and Mr Husain that First Mortgage’s interest rates were exorbitated for short term commercial loans. Especially when Ms Juri and Mr Husain entered the transaction with the knowledge of the interest rates and obtained legal advice prior to singing of the loan agreement.

The cross-claim alleged that First Mortgage had exercised and was intending on exercising its power under cl. 18.3(h) in order to [at 58]: “charge interest at the rate of 60% rather than the commercial rates charged by Westpac and CBA and therefore effectively acquire all of the cross-claimants’ equity in their property portfolio (on a $289,915 loan)”. Further, Ms Juri and Mr Husain stated that this conduct was contrary to the implied terms of the mortgagee’s obligations and was unsociable conduct.

The Court concluded that:

  1. clause 18.3(h) did grant the ability for First Mortgage to charge interest at the rate of 60% p.a. on the portion of the amount involved in paying out a major bank (like CBA or Westpac) and it was a collateral advantage for First Mortgage. However, even though the provision is a collateral advance, it is still unfair and unconscionable. There was no commercial justification for charging interest on the redeemed amount and instead allowed First Mortgage to [at 74]: “extract an unjustifiable high return in respect of a portion of debt that remains by a first ranking mortgagee”;
  2. it is acceptable that in the ‘event of default’, First Mortgage was allowed to pursue the redemption of higher ranked securities in order to assist it in realisation of its debts;
  3. the unfairness and unconscionable arose from charging the higher rate of interest (60% p.a.) on the amount that was paid to the first ranking mortgagee or used to redeem the mortgage of the mainstream bank and incorporated into the ‘secured money’ (meaning, the total money owing); and
  4. the overall conduct was deemed to fall below accepted community standard. Justice Darke ordered that First Mortgage was not allowed to charge higher rate of interest on the amounts it had paid to CBA and Westpac over Darley and Albion Park Rail properties. Instead, First Mortgage was required to charge interest as per the terms in the respective first mortgagee’s loan agreement.

Pursuant to the Summons, the Court granted First Mortgage the right to redeem the mortgages held by Westpac over Fairy Meadow, however they were not permitted to charge the mortgagors interest at the rate of 60% p.a., rather it was to charge interest as per the terms of Westpac’s loan agreement over Fairy Meadow.


Implications

The Supreme Court of New South Wales set out clearly what a mortgagees rights are in relation to redemption of earlier mortgages and their rights in relation to charging of interest. Any lender considering redeeming any earlier mortgage should consider the implications of this case and their rights to charge interest on the redeemed mortgage(s). This decision will significantly affect the enforcement options and play into the strategy undertaken by lenders.