Westpac Banking Corporation (Bank) funded Bronte Properties Pty Ltd’s (Developer) purchase and development of a property into a block of units. The terms of the funding agreement provided that the Developer was required to seek the Bank’s consent prior to entering into any pre-sale contracts for the units. The Bank took a mortgage over the property as security.
The Developer engaged ZH International Pty Ltd (Builder) as its builder. During the course of construction, the Developer experienced cash flow difficulties and was unable to make initial progress payments of approximately $750k to the Builder. In response to this, an arrangement was reached between the Developer and the Builder whereby the construction would continue on the basis that Builder would be sold one of the units for $1.3m less any amounts owing under the construction contract. The sale price of $1.3m was substantially below market value. That sale arrangement was documented in a sale of land contract.
The Developer did not seek the Bank’s consent to the sale of land contract, but the Bank subsequently became aware of it. The Bank advised the Developer that it reserved its rights in relation to the sale of land contract. The Bank did not say anything to the Builder (with whom it was in contact generally in relation to the development) at that time.
After the development had been completed, the Builder was owed approximately $1m by the Developer. A director of the Builder moved into the unit that was the subject of the sale of land contract, but no payment was made by the Builder to the Developer for the balance owing of around $300k. The Developer and the Builder subsequently fell into dispute and the Developer attempted to retake possession of the unit.
At around this time, the Developer defaulted under its funding agreement with the Bank. The Bank commenced proceedings against the Builder and its director to obtain possession of the unit under its mortgage.
The Builder and its director defended the Bank’s claim on the basis that the Bank was bound by the sale of land contract, and unable to rely upon its rights under the mortgage, as it had failed to notify the Builder that it was unlikely that it would have allowed the sale of land contract to ever complete in circumstances where it knew that the Builder was continuing with construction in reliance upon that contract. The Builder and its director argued that the Bank’s conduct was unconscionable and misleading and deceptive.
In rejecting the arguments of the Builder and its director, the court held that:
- The Bank had not consented to the sale of land contract and was entitled to simply reserve its rights as mortgagee without saying anything more.
- The Bank did not owe any ‘duty to speak’ which would have required it to inform the Builder of its position at the time of becoming aware of the sale of land contract.
- If the Builder continued the construction on the assumption that the Bank would discharge its mortgage to enable the sale of land contract to complete, that assumption was not caused by anything done by the Bank.
This decision demonstrates that secured creditors are ordinarily entitled to simply reserve their rights in respect of transactions that may impact upon their securities and are not required to explain their position to the parties to those transactions.