This week’s TGIF considers the decision in RHG Mortgage Corporation Ltd v Summerfield [2019] NSWCA 44, where a finding was made that there was no default by borrowers which entitled the lender to possession of the security property.

In RHG Mortgage Corporation Ltd v Summerfield [2019] NSWCA 44, the Court of Appeal in NSW considered an appeal by RHG Mortgage Corporation Ltd (Lender) against a finding that there was no default by Mr and Mrs Summerfield (Borrowers), entitling it to possession of a security property or a monetary judgment.

BACKGROUND

In September 2002, the Borrowers entered into a loan agreement with the Lender for the purchase of a property, secured by a first ranking registered mortgage over that property. In June 2012, the Lender issued a notice of default to the Borrowers claiming arrears of $19,720.88. The sum was not paid and the Lenders commenced proceedings for possession of the security property.

In July 2013, no defence having been filed, the Lender obtained default judgment for possession and a writ of possession was issued. The Borrowers avoided eviction by making a lump sum payment, but failed to make future instalment payments resulting in the writ being executed and possession being taken by the Lender.

Subsequently, the Lender agreed to return possession of the property to the Borrowers on the basis that the arrears would be brought up to date prior to possession being granted, payment of fees and charges of $24,978.53 would then be made by December 2014 and the Borrowers would continue to meet all ongoing repayment obligations (Agreement).

The Borrowers paid the loan arrears and resumed possession of the security property, but did not make the December payment until November 2016 (after the commencement of this proceeding).

In January 2015, a further default notice was issued pursuant to section 88 of the National Credit Code claiming arrears of unpaid fortnightly instalments totalling $7,491 for the period from November 2014 to January 2015.

This proceeding was filed seeking possession and monetary judgment on the basis of failure to comply with this default notice. Default judgment was obtained and then set aside by the Court on payment of the December payment. Two scheduled evictions were stayed and, in April 2017, the Lenders filed an amended statement of claim seeking to rely on the failure to make the December payment (which had by then been paid).

PROCEEDINGS

At the trial, the Lender’s own records showed that payments were made on or about the due dates and that the arrears were in fact referable to an unexplained debit to the loan account in September 2014. This debit most likely related to default interest for the period prior to the date of the Agreement. The Lender contended that the effect of this was that the Borrowers were in arrears at each of the instalment due dates, despite the correct payments having been made and this entitled it to possession of the security property.

The trial judge held that the failure to make the December payment under the Agreement did not confer on the Lender the right to immediate possession and no arrears had been established so as to found the default notice. In these circumstances, no default entitling the Lender to possession or to accelerate repayment of the principal sum had been established.

DECISION ON APPEAL

In dismissing the appeal, the Court:

  • Made a distinction between the obligations that were “conditions” and those that were “contractual obligations”. The conditions upon which the Lender agreed to return possession to the Borrowers in the Agreement were those to be satisfied prior to returning possession, whilst all others were contractual obligations, including the December payment.
  • Observed that if the Lender had intended that any default under the 2014 Agreement would entitle it to immediate possession, clear words should have been used to express this.
  • Held that not including the unexplained amount in the 2014 Agreement (despite the entitlement having been incurred prior to that time) precluded the Lender from claiming it later.
  • Stated that section 88 of the National Credit Code clearly sets out the notice requirements prior to any enforcement action being taken by a lender (where that legislation applies). Here, no notice had been issued in respect of the failure to make the December payment and the Lender was not entitled to rely on that default in its application for possession.

Interestingly, it was also noted that a requirement in the loan documents that the Lender provide a ‘certificate or formal statement’ as evidence of amounts owing, was not met by the provision of bank statements.

As the market begins to show signs that recovery action may begin to increase, this case serves as a timely reminder that compliance is key.

Care should be taken in preparing routine documents, such as notices of default. Forbearance or settlement arrangements can also create a trap for later enforcement, meaning it is important that the consequences of further default are properly considered as part of the negotiation of these arrangements.