When is it too late? The equitable right to discharge a mortgage right before the fall of the auctioneer’s hammer

In Six Bruce Pty Ltd v Jadig Finance Pty Ltd [2018] VSC 552, the Supreme Court of Victoria considered whether the Court should grant an urgent interlocutory injunction to stop an auction the very next day on the basis that the defaulting mortgagor had secured an unconditional offer to refinance.

What happened?

Six Bruce Pty Ltd (the Company) was the registered proprietor of land on which it proposed to develop an apartment complex. The acquisition of the property had been refinanced with a loan from Jadig Finance Pty Ltd (Jadig) to the Company which was secured by a first registered mortgage over the property. The Company subsequently defaulted under the loan, and Jadig took possession of the property to exercise its power of sale as mortgagee.

Jadig’s auction of the property was scheduled for 8 September 2018. The night before, the Company sought an urgent interlocutory injunction to stop Jadig’s auction on the basis that it had secured an unconditional offer to refinance.

The equitable right of redemption was explained by Henry J in Sun North Investments Pty Ltd (as trustee) v Dale & Anor[1] as follows:

It is an essential feature of every mortgage that the mortgagor has a right to discharge the mortgage in payment of the debt or performance of the obligation for which security was given. That right, the “right of redemption” or the “right to redeem”, can arise contractually so long as the mortgagor is not in default. But even if the mortgagor does not repay a loan in time and thus loses the contractual right to redeem, there exists an equitable right to redeem. The equity of redemption may be enforced, notwithstanding a failure to redeem by the repayment date, until the point in time when the mortgagee’s power of sale has been exercised or a court has made an order for foreclosure.

What did the Court consider?

As in any case where a party seeks injunctive relief, the central issue for the Court’s determination was whether:

• the Company had established a prima facie case; and

• there was a serious question to be tried which justified preserving the Company’s equitable right of redemption.

The Company contended that an interlocutory injunction was justified to preserve its equitable right of redemption and to avoid irreparable harm.

Jadig accepted that the Company had a right of redemption, but argued that the Company had no inherent right to preserve its equitable right of redemption by delaying the execution of Jadig’s statutory rights through the sale of the property.

The Court’s decision

Ultimately, the Court was satisfied that the Company had established a prima facie case and granted the Company an interlocutory injunction restraining Jadig for a period of 30 days from proceeding with the auction of the property.

The Court considered that:

• the Company had adduced sufficient evidence to show that it had secured unconditional approval to refinance; and

• as a result, there is a serious question to be tried as to whether Jadig, by proceeding with the auction, would be acting unconscionably so as to warrant the grant of equitable relief.

The Court did not accept Jadig’s arguments that various factors weighed the balance against the granting of an injunction to stop the auction. Even though the Company made no offer to pay into Court an amount equal to the mortgage, the Court’s view was that:

• the very late time at which the injunction was sought simply reflected the point in time when unconditional finance approval was obtained;

• there was insufficient evidence to support Jadig’s claim that there was a ‘lack of value’ in the Company’s undertaking as to damages.  In coming to this conclusion, the Court noted that:

• • although the Company had not made any repayments on the loan, it was 3 months in advance of its repayments at that point in time; and

• • there was equity in the property of approximately $2 million;

• there was insufficient evidence to demonstrate that there was a real risk of a negative impact on the property’s future sale price if the auction was delayed for 30 days;

• the Company would be in a position to provide clear title to the property as the unconditional approval extended to paying out all the encumbrances on the property;

• the destruction of the equity of redemption which would occur upon the sale of the property would result in a situation where damages would not be an adequate remedy to the Company in the event it succeeded at trial; and

• it was relevant that the Company, in addition to giving the usual undertaking, was willing to submit to an order that it pay Jadig’s costs of the application.

Key takeaway

This case reminds us that even if there is a default by a mortgagor, a mortgagor may be granted an interlocutory injunction to protect the equitable right of redemption.  As demonstrated in this case, an injunction may be granted where there is sufficient equity in the property and an unconditional offer to refinance prior to sale.

*** After the writing of this article, enquiries show that despite the above events, the property was sold by Jadig at auction on 9 October 2018. ***

[1] [2013] QSC 44 at [74].

Authored by: 
Barbara-Ann Sim, Partner
Lisa Harden-Parnell, Associate