Many are familiar with the concept of restitution.

At its simplest restitution involves restoring something to its rightful owner.

Often lenders have to rely on restitution when either fraud or mistake means that they are unable to enforce a loan contract or mortgage.

A caveat lender (Southage Pty Limited) was forced to rely on restitution in the recent NSW Court of Appeal case of Southage Pty Limited v Lisa Vescovi.

The marriage

Lisa Vescovi and Robert Kalivoda were married. 

At the time of their marriage, Mr Kalivoda exchanged contracts to purchase their matrimonial home. Lacking sufficient funds to pay the deposit, Mr Kalivoda borrowed money for the deposit from Southage.

Southage secured the loan by a mortgage over an investment property owned by Ms Vescovi. 

Ms Vescovi’s signature on the mortgage was forged, by you guessed it……Mr Kalivoda.

Before Mr Kalivoda completed the purchase of the matrimonial home, Ms Vescovi was substituted as the purchaser.  Ms Vescovi obtained a loan from NAB to assist her complete the purchase.

At completion, Ms Vescovi believed that the deposit had been financed from Mr Kalivoda’s business and was unaware of Southage’s loan and mortgage. 

Not surprisingly the marriage did not last long and the matrimonial home was sold.  There was no equity remaining after the repayment of the loan to NAB.

Southage was unable to enforce its mortgage without resorting to equitable principles because it had not registered its mortgage.  (For example Southage could not rely on the principles of indefeasibility of title).

Restitution

Southage argued that it was entitled to recover money from Ms Vescovi, because she had benefited from its advance given that she used the funds to acquire her former matrimonial home.

Ms Vescovi countered arguing that it would be unjust to require her to repay the advance because she received nothing from the sale of the property.

The Court sided with Ms Vescovi.

The Court applied the following 2 stage test.

  1. Did Ms Vescovi act in good faith on the assumption that she was entitled to deal with the payment which she received?  
  2. By reason of having so acted, would Ms Vescovi be placed in a worse position if ordered to make restitution of the payment than if she had not received the payment at all?

The Court found that were it not for Ms Vescovi’s belief that the deposit had been paid by her husband, she would not have entered into the transaction. 

Further, by the time Southage brought its claim in restitution, Ms Vescovi no longer held the benefit of the funds and if required to repay the Southage loan, Ms Vescovi would have been in a worse position than if  she had not received the Southage loan in the first place. 

The case also serves as a reminder of the risks associated with not registering a mortgage in a timely manner.