The Supreme Court of South Australia held in Stone v Leonardis  SASC 153 that a mortgagor may caveat to protect its interest as registered proprietor when a mortgagee wrongfully exercises its power of sale. This is despite the fact that:
- The registered proprietor's interest is the highest interest in the land, and
- Ordinarily, breach of the mortgagee's duty to exercise its power of sale in good faith is addressed through damages.
The plaintiffs advanced $800,000 to the defendants, secured by a registered first mortgage over the defendants' home. The defendants defaulted on repayments and the plaintiffs moved to exercise their power of sale.
Several valuations of the property were made, ranging from $800,000 on forced sale to $950,000. After the first auction did not proceed, the property was presented as a "mortgagee sale". The property was passed in at the second auction, having received only one bid at $360,000. Subsequently, the property was advertised for sale at nominated prices. A further valuation at this stage suggested between $600,000 and $670,000.
On 26 July 2011, the plaintiffs entered into a contract to sell the property for $685,000 with settlement scheduled for 24 August 2011. On 22 August 2011, the defendants lodged a caveat claiming "an interest as registered proprietors and mortgagors pursuant to Memorandum of Mortgage ... and claiming that the said caveatee has improperly purported to exercise the power of sale under the Mortgage." The caveat indicated that the sale was wrongful due to the sale being for far less than market value.The plaintiffs sought orders directing the Registrar-General to remove the caveat to enable settlement of the contract of sale.
Authorities are divided on whether a mortgagee's breach of its duty to exercise the power of sale in good faith1 will give rise to an equitable interest in the land capable of being caveated.
The Supreme Court of Victoria (Appeal Division) held in Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd  VicRp 47 (Swanston) that a mortgagor in such circumstances did not have an equitable interest in the land sufficient to permit a caveat.
Brooking J in Swanston considered that the registered proprietor's interest in having the sale set aside was a mere equity and not a proprietary interest in the land. The decision in Swanston has been followed in a number of further Victorian decisions.2
However, courts in Tasmania3, Western Australia4 and New South Wales5 have declined to follow Swanston. The key criticisms, canvassed by White J in Stone v Leonardis, were that:
- Swanston failed to recognise that until the registration of a transfer by a mortgagee exercising its power of sale, the mortgagor retains the legal interest - an interest which can be protected by caveat.
- Even if the mortgagor only has an equitable interest arising out of the equity of redemption, it is still an interest which can be caveated.
- Brooking J construed the reasoning of the High Court in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) ( 1965) 113 CLR 265 too narrowly. In Latec, in the context of competing interests in land, Kitto J discussed the difference between an equitable interest in the land itself and a "mere equity" to have a sale set aside. Whether such a "mere equity" was capable of being a caveatable interest was not discussed by Kitto J.6
White J of the Supreme Court of South Australia held that:
- Given the protective nature of the caveat, there is no reason in principle to prevent a registered proprietor lodging a caveat to protect its interest. This is particularly so where the registered proprietor has some interest going beyond its status as registered proprietor.
- The decision in Swanston should not be followed; accordingly, the defendants' claim that the plaintiff wrongfully exercised their mortgagee power of sale gave rise to an equitable interest capable of being caveated.
- The defendants had therefore established some interest going beyond their status as registered proprietors, and accordingly had an interest capable of being caveated.
Lessons to learn from this case
- A registered proprietor can lodge a caveat on its own title, particularly where the registered proprietor has some interest going beyond its status as a registered proprietor.
- Purchasers of properties sold by mortgagees should be aware of the possibility that the mortgagor may have lodged a caveat disputing the propriety of the mortgagee's exercise of the power of sale.
The assistance of Alec Bombell, Clerk, of Addisons in the preparation of this article is noted and greatly appreciated.
1 Note that under NSW law, a mortgagee's duty when exercising their power of sale is now one of reasonable care: Conveyancing Act 1919 (NSW), s 111A (1).
2 See e.g. Vasiliou v Westpac Banking Corporation  VSCA 113.
3 Patmore v Upton  TASSC 77.
4 McCourt v National Australia Bank Ltd  WASC 121.
5 Capital Finance Australia Ltd v Bayblu Holdings Pty Ltd  NSWSC 24.
6 Patmore v Upton  TASSC 77 at .
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