On 7 November 2012, His Honour, Justice Davies, handed down a decision in Australia and New Zealand Banking Group Limited v Mishra 1 which confirmed and expanded upon the principle that a mortgagee may decline to discharge a mortgage, even if the mortgagor has obtained refinance, if:
- the mortgagor is threatening proceedings against the mortgagee, and
- the mortgage contains terms which require the mortgagor to pay the mortgagee's legal costs of enforcing the mortgage.
Kemp Strang acted on behalf of Australia and New Zealand Banking Group Limited (ANZ) in these proceedings.
In July 2008, ANZ made available a facility (first facility) to Mr and Mrs Mishra. In November 2008, ANZ made available three further facilities to these borrowers, which were secured by two mortgages over properties in Northbridge (Northbridge facilities) .
Relevantly, the mortgages contained the following terms:
"This mortgage secures all [of the Borrowers'] obligations in relation to all Unregulated [facilities]. To the extent that it does so, Secured Money means all money owing to ANZ for any reason:
(c) actually or contingently (money is 'contingently' owed where I have an obligation to pay ANZ if something happens or is discovered).
The first facility was an unregulated facility for the purposes of the mortgages.
The mortgages also contained terms which required the borrowers to pay ANZ's legal costs on a full indemnity basis which it incurred in defending or prosecuting its rights under the mortgages.
By November 2011, the borrowers were in default of their obligations owed to ANZ under the Northbridge facilities and ANZ commenced proceedings against them seeking, amongst other things, possession of the Northbridge properties. ANZ made no claim against the borrowers in respect of the first facility in the proceedings.
The borrowers defended the proceedings and in their defences made serious allegations against ANZ in relation to the first facility. The borrowers also obtained, on four occasions, directions that they be permitted to file and serve a cross claim against ANZ. Despite the orders the borrowers obtained, they did not file a cross claim against ANZ.
Negotiations to discharge the mortgages
On 24 July 2012, the borrowers approached ANZ and advised they had obtained refinance and that the refinance was to repay the debit balances of the Northbridge facilities in full (the first facility having been earlier repaid) and was not, in any way, to be seen as a settlement of the borrowers' alleged claims against ANZ.
On 26 July 2012, ANZ advised the borrowers that in order for ANZ to discharge the mortgages it required the borrowers to pay to it the sum of $1,475,260.12 (the aggregate debit balances of the Northbridge facilities) plus a further amount of $50,000 as security for ANZ's expected costs of defending the borrowers' threatened claims (contingent liabilities).
The borrowers argued ANZ was not entitled to demand any security for the contingent liabilities and that ANZ should discharge the mortgages upon receipt of the sum of $1,475,260.12.
Between 26 July 2012 and 12 October 2012, ANZ and the borrowers negotiated the terms on which the mortgages could be discharged. During this time, ANZ maintained its position and the borrowers repeated their threats to file a cross claim against ANZ.
Discharge of the mortgages
On 12 October 2012, ANZ attended a property settlement at which it discharged the mortgages in return for the sum of $514,457.12 (being the then debit balance of the Northbridge facilities and the legal costs incurred by ANZ to that date).
At settlement, the borrowers advised ANZ they would seek orders in the proceedings that ANZ pay the legal costs they incurred from 27 July 2012 (the date from which the borrowers alleged they were ready, willing and able to settle) and would also be seeking that ANZ reimburse them for those parts of ANZ's costs which were incurred by ANZ after 31 July 2012 and paid by them at settlement.
Shortly after the settlement, the borrowers' made their threatened application for costs in the Supreme Court of New South Wales.
The Court's determination of the borrowers' application
In dismissing the borrowers' application and determining ANZ's actions were reasonable, the Court relied upon the line of authority referred to in Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd 2. Relevantly, the Court noted Hodgson JA's comments in Overton that:
"Where a dispute has arisen or is reasonably anticipated, a mortgagee is entitled to require not merely payment of the amount secured by the mortgage but also payment or security for the probable costs of any contest..."
The borrowers sought to distinguish the decisions in the Overton line of authority on the basis that in those cases, the mortgagor had already commenced proceedings against the mortgagee. In the present case, the borrowers' had only threatened to file a cross claim against ANZ.
However, the Court found that the continued, serious threats made by the borrowers to ANZ that they were going to file a cross claim against ANZ was sufficient to justify ANZ's approach and it was not necessary for the borrowers to have actually commenced proceedings or to have filed a cross claim for ANZ to take the position it did.
This case confirms and highlights the steps a mortgagee may take before discharging a mortgage where a mortgagor has threatened to take or has taken steps which challenge the right of the mortgagee to enforce the mortgage.
1Australia and New Zealand Banking Group Limited v Mishra  NSWSC 1333
2Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd  NSWCA 2
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