BELMAN HOLDINGS LIMITED v EDGEWATER MOTEL LIMITED & HEBE FINANCE LIMITED & EDGAR EDWARD DAGLEY [2000] NZCA 300 (25 October 2000)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca143/00

	between	belman holdings limited
		Appellant

	and	EDGEWATER MOTEL LIMITED & HEBE FINANCE LIMITED & EDGAR EDWARD DAGLEY
		Respondents

Hearing:	18 October 2000
Coram:	McGrath J McGechan J Salmon J
Appearances:	G M Illingworth for Appellant M M B Van Ryn and C W Gambrill for Respondents
Judgment:	25 October 2000

judgment of the court delivered by salmon j

Introduction

[1] This appeal concerns the effect of a provision in a mortgage referring to s.80A(2) Property Law Act 1952.The mortgage purports to create a priority "for the purposes of s.80A(2) of the Property Law Act 1952" of the principal sum plus 12 months interest and costs and expenses of enforcement.

[2] Both parties agree that in fact the advance was not one to which the provision applied.The appellant argues that the condition is otiose and should be ignored, thus entitling the first mortgagee to priority for the whole of the interest owing.The respondent second mortgagee submits that just the reference to s.80A(2) should be ignored leaving the balance of the provision to create a priority.

[3] In the High Court Master Gambrill found in favour of the arguments of the respondent.

Background

[4] Westwood Meadows Developments Ltd ("Westwood") owned a property near Whangarei which it was seeking to develop.At the time of purchase in 1993 the property Westwood obtained first and second mortgages.In 1996 those mortgages were replaced.On 28 February 1996 an interest only first mortgage security for $600,000 was granted to W H Luff Ltd ("Luff").The principal sum was to be repaid on 28 February 1997.On 5 March 1996 Westwood granted a second mortgage to Edgewater Motel and others ("Edgewater") to secure $632,750 to be repaid on 6 March 1997.Both mortgages were registered on 13 March.

[5] It was a condition of the first mortgage that the sum of $108,000 being part of the proceeds raised by the second mortgage, would be held in trust for the purposes of payment of interest on the first mortgage.That sum was sufficient to pay the interest for the one year term of the mortgage at the then rate.The condition also recorded the intention to sell the property for a minimum sum of $1.4 million.

[6] The priority provision in the mortgage was as follows:

1.21 It is hereby agreed and specified for the purposes of Section 80A(2) of the Property Law Act 1952 that the maximum amount of priority which this mortgage shall be afforded over any subsequent mortgage shall be the principal sum of Six Hundred Thousand Dollars ($600,000.00), together with 12 months' interest thereon (whether capitalised or not) at the then applicable rate of interest, costs, charges and expenses payable under this mortgage.

[7] Another special condition of the mortgage was paragraph 1.18 which provided:

1.18 The Mortgagor acknowledges that the Mortgagee stands ready to provide the principal sum on the interest commencement date specified in Schedule A hereof subject only to the Mortgagor first satisfying all security and other requirements of the Mortgagee and interest will commence from the interest commencement date whether or not the Mortgagor then uplifts the principal sum.

[8] On 10 April 1996 Luff and Edgewater entered into a mortgage contributors' participation agreement.The purpose of that document as set out in preamble C was:

... to record the Agreement between them as to their respective rights and expectations variously as first and second mortgagee and as contributors to the mortgage.

[9] Paragraph 7 of that agreement is relevant to these proceedings and it provides:

a) W H Luff Limited will hold a registerable first mortgage over the property such mortgage to secure the sum of $600,000.00 securing a priority sum for the purposes of Section 80A(2) of the Property Law Act 1952 of the principal sum plus 12 months' interest and costs and expenses of enforcement.

b) W H Luff Limited in its capacity as first mortgagee and in consideration of the contributors agreeing to such priority sum hereby grants to the contributors (both jointly as to any two or more of them and severally) the right at any time after the date for repayment of the principal sum under the first mortgage the right to take a transfer of the mortgagee's interest under such mortgage for the redemption sum then properly due and payable by the mortgagor and the transferee shall be liable for the costs and disbursements of such transfer.

c) For the consideration above W H Luff Limited hereby covenants and agrees that it will not transfer or otherwise assign its interest under the first mortgage without first ensuring that any prospective transferee or assignee has first entered into a Deed of Covenant pursuant to which such transferee or assignee agrees to be bound by the option granted by the first mortgagee pursuant to sub-clause b) hereof.

[10] On 9 April 1997 Luff agreed to transfer the first mortgage to Bellman Holdings Ltd ("Bellman"), the appellant, and Bellman agreed with Westwood to extend the term of the first mortgage to 28 March 1998.On 11 April 1997Bellman and Westwood executed a variation of the first mortgage which extended the term, but which otherwise continued the mortgage on its original conditions.Contemporaneously, Bellman and Edgewater entered into an "Agreement to vary mortgage contributors' participation agreement".Preamble C provided:

C. The contributors as between themselves and the parties as between each of them now wish to record the agreement between them as to their respective rights and entitlements variously as first and second mortgagee and as contributors to the mortgage.

[11] Clause 7 provided:

a) The first mortgage to BHL over the property securing the sum of $600,000.00 and a priority sum for the purposes of Section 80A(2) of the Property Law Act 1952 of the principal sum plus 12 months' interest and costs and expenses of enforcement has with the agreement of the contributors been varied amongst other things to provide that the principal sum repayment date is now 28 March 1998.

b) BHL in its capacity as first mortgagee and in consideration of the contributors agreeing to such priority sum hereby grants to the contributors (both jointly as to any two or more of them and severally) the right at any time after the date for repayment of the principal sum under the first mortgage the right to take a transfer of the mortgagee's interest under such mortgage for the redemption sum then properly due and payable by the mortgagor and the transferee shall be liable for the costs and disbursements of such transfer provided that the right conferred upon the contributors by this sub-clause shall not arise in circumstances where the mortgagor is not in breach of any of its covenants and obligations under the first mortgage (other than the covenant to repay the principal sum on due date) and BHL has agreed to extend the term of the first mortgage otherwise upon the same terms and conditions as those applying at the date hereof.

c) For the consideration above BHL hereby covenants and agrees that it will not transfer or otherwise assign its interest under the first mortgage without first ensuring that any prospective transferee or assignee has first entered into a Deed of Covenant pursuant to which such transferee or assignee agrees to be bound by the option granted by the first mortgagee pursuant to sub-clause b) hereof.

[12] In October 1997 and again in January 1998, Westwood defaulted in payment of interest under the first mortgage.In December 1998 Bellman issued a Property Law Act Notice, but did not proceed to a mortgagee sale.In July 1999 Bellman issued a second Property Law Act Notice and on 17 November last year sold the property as mortgagee through the Registrar of the High Court.

[13] The sale price was $940,000 plus GST.As at the date of sale the appellant was owed the sum of $952,666 approximately, made up of principal sum $600,000, interest $282,049 and costs $70,617.

[14] The respondent was owed in excess of $1 million.

[15] The respondent claimed that the effect of the priority provision was that the appellant's right to claim interest was limited to 12 months comprising a total sum of $138,000.Pending the outcome of the proceedings the parties agreed that the defendant would receive the sum of $808,617 comprising the principal sum, 12 months' interest referred to above, and costs of $70,617. The balance of $132,451 has been held in the appellant's solicitor's trust account pending resolution of the proceedings.The respondent applied for summary judgment for this amount.

The Judgment in the High Court

[16] After setting out the facts Master Gambrill recorded the arguments of the parties which are briefly referred to in the introduction to this judgment. Counsel for the respondent (plaintiff in the High Court) argued that whatever the terms of the Property Law Act, it was clear that the parties intended to regulate their position by deed and to limit the appellant's interest priority to one year's interest.

[17] The appellant (defendant in the High Court) on the other hand, argued that its mortgage was not one which secured advances to be made from time to time, that subs.(2) of s.80A was therefore of no effect, and that the whole of the priority clause should be severed from the mortgage, thus entitling the appellant first mortgagee to recover the whole of the interest owing to it in priority to the second mortgage.Master Gambrill held that there was a contract between the parties whereby the first mortgagee had a priority for $600,000 plus 12 months' interest and that even if the reference to s.80A(2) was wrongly included, the parties had made their own bargain as to the interest recoverable in priority.Thus, she gave judgment for the respondent.

The Statutory Provisions

[18] Subsections (1) and (2) of s.80A Property Law Act provide:

80A. SECURITY FOR FURTHER ADVANCES -

(1) Where a mortgage purports to secure a principal sum the amount of which is specified therein (whether or not the mortgage also purports to secure further advances), the mortgagee shall have the right to advance from time to time to the mortgagor the whole or any part of the principal sum the amount of which is so specified so as to rank in priority to any subsequent mortgage, notwithstanding that the advance is made after the execution or registration of the subsequent mortgage, and whether or not the mortgagee has actual or constructive notice of the subsequent mortgage at the time of making the advance:

Provided that any part of the principal sum which has been repaid to the mortgagee and readvanced to the mortgagor shall be deemed for the purposes of this section not to form part of the principal sum specified in the mortgage:

Provided also that nothing in this section shall derogate from the provisions of subsection (4) of section 102 of the Land Transfer Act 1952.

(2) Where a mortgage granted after the commencement of this subsection purports to secure advances to be made from time to time, whether upon current account or otherwise, it shall be lawful to specify in the mortgage a maximum amount up to which the sum for the time being owing under the mortgage shall rank in priority to any subsequent mortgage; and, where a maximum amount is so specified, the mortgage shall take effect accordingly notwithstanding anything in any rule of law to the contrary, and notwithstanding that the sum for the time being owing under the mortgage may include money that has been repaid to the mortgagee and readvanced to or otherwise applied for the benefit of the mortgagor. Where a maximum amount is so specified, that amount may from time to time be varied, but no increase of that amount shall be binding on the mortgagee under any subsequent mortgage existing at the time of such variation unless consented to by him.

The Arguments in this Court

[19] In this Court the parties have essentially repeated the arguments presented in the High Court.Mr Illingworth observed that s.80A relates to priority problems which may arise where a mortgagee relies on the principle of "tacking".However, he said that no question of tacking arose and s.80A did not apply to the present case.Section 80A(1) did not apply because no part of the agreed principal sum was advanced after the execution or registration of the second mortgage.Section 80A(2) did not apply because the first mortgage was for a specified sum, all of which was to be advanced in one tranche on a single occasion.

[20] Mr Illingworth submitted that the parties to the mortgage were purporting to deal with a situation which in fact did not exist and could never exist: that is to say, a mortgage securing advances to be made from time to time.He submitted that it was wrong to take the view that there must have been an intention anyway to confer a priority.He argued that the insertion in the first mortgage, and in the participation agreements, of clauses referring to s.80A(2) was plainly a mistake, and that the priority provision as a whole should be ignored as erroneous and inapplicable.

[21] He submitted that in any case clause 7(a) of the second participation agreement did not create an agreement between the first and second mortgagees as to the application of the priority provision rather, it just recorded the historical situation.It seems to us that the problem with that argument is that it ignores the obligation which the first mortgagee has assumed as a result of becoming bound by the provisions of the first mortgage: (s.97(3) Land Transfer Act 1952).Thus, paragraph 1.21 of that mortgage applies to Bellman, as transferee of the mortgage.Clause 7(a) of the second participation agreement to which Bellman is a party, constitutes at least an acknowledgement to the second mortgagee that it is so bound.

[22] Mr Illingworth noted that clause 7(b) of both participation agreements, which granted Edgewater an option to take a transfer of the first mortgage, recorded as consideration for the grant of that option, Edgewater's agreement to the priority clause, and argued that the parties therefore, regarded the priority clause as a benefit being conferred upon the first mortgagee not as a burden being undertaken by that party.He submitted that the result of the Master's analysis was exactly the opposite.He submitted that it was nonsensical to conclude that the parties intended to benefit the first mortgagee by imposing a limitation on it.He submitted, therefore, that the priority clauses should be regarded as misconceived and incapable of being applied in the circumstances of the case.

[23] Miss Van Ryn, for Edgewater, submitted that it was relevant that at the time the mortgage was executed Luff was protected for 12 months' interest payments, and it was anticipated that the property would be sold within the 12 month term of the mortgage.When the mortgage was varied and transferred to Bellman, it was contemplated that there would be the sale of another property which would result in repayment of the first mortgage within a period of 12 months.She argued, therefore, that neither mortgagee contemplated an exposure for interest beyond 12 months.

[24] She submitted that any reference to s.80A was irrelevant because the first mortgage was a fixed sum to be drawn in full for a fixed term, that there was no need to refer to s.80A at all and that interest does not form part of a priority sum for the purposes of s.80A.She submitted that priority provisions were only necessary in relation to principal sums and that once the priority of that principal sum was fixed the right to interest and costs followed as a result of the covenants in the mortgage.Miss Van Ryn said that what makes this case distinctive is the fact that a specific limitation is placed upon the amount of interest which will be subject to priority so far as the first mortgagee is concerned.Accordingly, Miss Van Ryn submitted that the reference to the interest priority must be regarded as being independent of s.80A.

[25] We do not accept that interest cannot form part of a priority sum for the purposes of s.80A(2).Although the position is not entirely free from doubt the reference to specification of "a maximum amount" is capable of incorporating interest and costs either by reference to a specific sum or, as in this case, to a formula enabling the amount to be calculated.

Consideration

[26] This Court's task is to interpret clause 1.21 of the mortgage.Counsel referred to the well known principles of interpretation set out by the House of Lords in Prenn v Simmonds [1971] 3 All ER 237 at 240-242 and in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114-115 and by this Court in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74.Very little reference was made to a matrix of facts as an assistance to interpretation.Indeed, it was just the contemporaneous documents that were relied upon, including the first participation agreement.

[27] We think that the common intention of the parties expressed in the words they used is sufficiently clear from the provisions of the mortgage itself. First it is abundantly clear that it was the intention of the parties to the first mortgage and the intention of the second mortgagee as evidenced by the participation agreement, that the first mortgagee's priority should be limited to the principal sum of the mortgage together with 12 months' interest and costs, charges and expenses payable under the mortgage.

[28] Clause 1.20 refers to the whole of the interest for the 12 months' term of the mortgage being secured by means of a portion of the moneys raised by the contemporaneous second mortgage being held in the mortgagor's solicitor's trust account.As indicated, the mortgage was for a term of a year and clause 1.20 suggests that it was anticipated that the property would be sold within that time.It is clear that the fact of the second mortgage advance was an important consideration to the first mortgagee in that it provided funds to secure the payment of interest and that would provide reason on its own for the first mortgagee to agree to the interest priority provision.

[29] Next it seems that Luff, the original first mortgagee, had a concern that it might lose priority due to money being advanced pursuant to the contemporaneous second mortgage, prior to the advance of the first mortgage moneys.There can be no other logical reason for the inclusion of the priority clause.Despite the submission of both parties that the reference to s.80A(2) was a mistake, the point just made could be a reason for the inclusion of the reference to that provision.It is important that the relevant clause uses the words "for the purposes of".The purpose of s.80A(2) is to provide for the specification of a maximum amount which will rank in priority to any subsequent mortgage.That is precisely what the clause does, so that even though the mortgage was not one which secured advances to be made from time to time and so was not within the terms of s.80A(2), nevertheless it is not straining language to describe the purpose of that section as having been achieved by clause 1.21 read in its context.Paragraph 1.18 might reflect that concern.Its wording suggests a possibility that the mortgagor might not uplift the principal sum immediately it was available.

[30] As noted above, Mr Illingworth made reference to the apparent peculiarity of the first mortgagee accepting the priority sum as consideration for the grant to the second mortgagee of the right to take a transfer of the mortgagee's interest when it seems that the first mortgagee was receiving no benefit from that priority sum.An alternative view is that as suggested above, the first mortgagee did indeed see a real benefit in providing for that priority as protection against the possibility of second mortgage moneys having been advanced prior to the first mortgage.

[31] In a situation where first and second mortgagees were in negotiation it is not surprising that the second mortgagee should seek a limitation on the amount of interest in respect of which the first mortgagee could claim priority.The interest rates were high - ordinary rate 18 per cent, penalty rate 23 per cent - and one would expect the second mortgagee to be concerned that lengthy periods of non payment could quickly erode the second mortgagee's security.

[32] We think that the natural meaning of the words used in paragraph 1.21 read in their context is to provide the limitation on interest for which the respondent contends.

[33] Accordingly, the appeal is dismissed.The appellant must pay to the respondent costs of $3,000 together with travelling and accommodation expenses to be fixed, if necessary, by the Registrar.

Solicitors

Neumegen & Neumegen, Auckland, for appellant

Simpson Grierson, Auckland for respondents