When can a mortgage be varied or set aside?

In Permanent Mortgages Pty Limited v Van Den Bergh [2010] WASC 10, the Supreme Court of Western Australia made many useful comments on the factors which may lead a court or tribunal to vary or set aside a mortgage.

The case related to a loan made on the security of a home in a senior's village occupied by 'the mother'.  Most of the money was used by 'the son' to pay creditors and settle divorce proceedings with approximately  $43,000 used to discharge an existing mortgage to a bank.

The mother was 86 years when the loan was taken out and she had little business experience.  The mother and son were joint registered proprietors of the property.  The son was required by the bank to be put on the title to demonstrate serviceability of the loan.

The broker introduced loans through an aggregator to the lender.

The loan was a low doc loan.  The lender provided some sensible guidelines in relation to making low doc loans, and one of the requirements was a letter from an accountant certifying serviceability.  In this case, the accountant's letter provided did not suggest that the borrower could repay the loan.

The court considered the application for relief under a number of headings, some of which are set out below.

Undue influence

Undue influence arises if somebody uses a special capacity or opportunity to affect somebody else's will or freedom of judgment. 

Actual undue influence requires proof that the transaction was the outcome of such an actual influence over the mind of the person that it cannot be considered to be the free act of the person.  Similarly to Perpetual Trustees Australia Limited v Schmidt, the court held that the relationship of aged parent/child is not, in itself, synonymous with undue influence. 

Asset lending

The court noted that:

• if a lender ignores its own lending guidelines in making of the loan, that fact may, depending on all the circumstances, provide some basis for the inference that the lender is lending only on the value of the security;
• even where there is pure asset lending, the totality of all the circumstances must be examined in assessing the alleged unconscionability of the loan transaction;
• unconscionable conduct needs to be considered separately from the concept of undue influence.

Unconscionable conduct focuses more on the conduct of a person dealing with the person under special disadvantage whereas undue influence looks more to the quality of the independence or consent of the person.  The two concepts are not mutually exclusive and, on occasion, both may apply in the same case.

Equity's jurisdiction to set aside a transaction for unconscionable dealing is invoked when one party to a transaction is under a special disadvantage or disability dealing with the other party, and that special disadvantage or disability was sufficiently evident to the other party to make it prima facie unfair or unconscionable for that other party to accept or retain the benefit of the transaction.

Where circumstances involving a special disadvantage or disability are shown to exist, the onus is on the lender to establish that the transaction was fair, just and reasonable.

Advanced age of itself does not constitute a special disadvantage but combined with other factors, may contribute to the condition of being under a special disadvantage.  It is, however, by no means inevitable that elderly parents who guarantee and mortgage their home to secure the debts of their children will simply because  of that fact be found to have suffered special disadvantage.

In most cases where equity has granted relief against unconscionable dealing, there has been no consideration, or inadequate consideration moving from the lender to the borrower.  Examples include relief provided to guarantors and borrowers who do not receive use of the loan money.

Agency

In considering whether the aggregator acted as agent for the lender:

• the parties must have  consented to create the relationship (even if they did not recognise it themselves)
• you must look at the substance of a relationship as a whole
• it is important to distinguish between a general agent and an agent who has authority to so some specific act
• describing a person as an independent contractor does not necessarily deny their role or function as an agent for particular purposes
• a principal is liable for the fraud of its agent that is committed within the scope of the agent's authority, irrespective of whether the fraud is committed for the benefit of the principal or the agent.

The court held that the lender agreement uses the language of agency.  The lender agreement said that the aggregator was 'appointed to act on the lender's behalf for the purpose of negotiating or for the purpose of being an intermediary to obtain loans'.  Although these words may be indicative of agency, the court held that the balance of the lender agreement was inconsistent with the aggregator having any autonomy to represent the borrower's interests.

The court held that the aggregator was the agent of the lender.  As a result, the law imputes to the principal (ie the lender) the knowledge gained by its agent (ie the aggregator) in the course of acting as the agent.

The court went further and held that the broker sub-contracted to the aggregator acted as agent for the lender.  This conclusion was reached because the broker provided the borrower with documents provided by the lender to complete.  The broker exercised all the rights that the aggregator had under the agreement.

Accordingly, the broker's knowledge as the aggregator's representative was attributed to the lender.  The court held that the broker knew that the transaction was unconscionable because:

• the major purpose of the transaction was to provide money for the son
• the mother was rendering herself liable for the son's borrowing
• the mother was a quiescent party in the transaction
• the mother was unaware of the true nature of the transaction
• the son had not contributed any equity to the original purchase of the property
• on the face of it, the loan was an improvident transaction for the mother
• the mother's interests were not coincident with the son's and hence there was a need for her to obtain independent advice which did not occur
• the mother entered into the transaction on the basis of having imposed trust and confidence in the son
• the broker knew that the property was the mother's principal place of residence.

Accordingly, the lender should have known that the mother was at a special disadvantage.

Indefeasibility of title

Normally once the lender is registered on a mortgage, indefeasibility of title will protect not only the mortgage but the mortgage debt.  However, indefeasibility will not assist where the lender is on notice of fraud, dishonesty, or 'moral turpitude'.  The lender was not entitled to rely on indefeasibility in this case because it was on notice of the moral turpitude.

The final result

As a result, the court held that the mortgage is only enforceable for $43,000 being the amount refinanced to the bank, although final orders would have been made later.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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