Court takes business-like approach to deed of priority

The recent Western Australia Supreme Court case of Terranova v Secure Funding Pty Ltd [2014] WASC 208 reaffirmed that commercial context, and a business-like interpretation will be applied by the Court, in this instance, in relation to a deed of priority.

The facts

The plaintiffs, Salvatore and Angelina Terranova (Salvatore and Angelina), advanced sums of money in excess of $2,750,000 to the second defendant, Patrizia Terranova (Patrizia).  Patrizia is the daughter in law of Salvatore and Angelina.  To secure the sum advanced, Salvatore and Angelina were provided with two registered mortgages over the property located at 23 Harris Road, Malaga in Western Australia (Malaga Property).  The plaintiffs’ mortgages were each registered on 20 July 2007.

In February 2008, Patrizia and her husband entered into a commercial loan agreement with Secure Funding Pty Ltd (Secure Funding), whereby Secure Funding advanced the amount of $2,600,000 to Patrizia (Secure Funding Loan Agreement).  In support of the Secure Funding Loan Agreement, Patrizia provided (among other things) a mortgage over the Malaga Property.  Secure Funding registered its mortgage over the Malaga Property on 2 April 2008.

Importantly, it was a special condition of the Secure Funding Loan Agreement that a deed of priority be given in favour of Secure Funding.

On 26 March 2008, Secure Funding, Salvatore and Angelina, Boral Resources (Boral) and OneSteel (each of which held mortgages over Patrizia’s property) executed a deed of priority (Deed) with regard to their securities. 

Clause 3 of the Deed provided that the securities would rank and operate at law and equity so far as to confer:

  • first priority to Secure Funding’s securities up to $2,600,000 (plus interest, fees and costs);
  • second priority to Boral’s securities up to a specified amount;
  • third priority to OneSteel’s securities up to a specified amount;
  • fourth priority to Salvatore and Angelina’s securities up to $2,750,000; and
  • thereafter, absolute priority to Secure Funding for the balance of any remaining amounts.
  • Patrizia and her husband defaulted under the Secure Funding Loan Agreement.  On 10 September 2012 Secure Funding gave notice to Salvatore and Angelina, Boral and OneSteel of Patrizia’s default.  Subsequently, Secure Funding commenced Supreme Court proceedings against Patrizia and her husband. 
  • Secure Funding obtained orders that (among other things) it be given vacant possession of the Malaga Property and that judgment be entered in favour of it against Patrizia for the amount of $2,977,488.46.

Default and subsequent proceedings

On 21 May 2014, Salvatore and Angelina became aware that the sheriff would be taking possession of the Malaga Property the following day.  On 22 May 2014, Salvatore and Angelina appointed agents to exercise their rights under the mortgages and instructed the agents to take possession of the Malaga Property.  The agents were in possession of the Malaga Property when an officer from the sheriff’s office attended.  As a result, on 27 May 2014 Salvatore and Angelina commenced proceedings seeking a declaration that they were entitled to possession of the Malaga Property pursuant to their mortgages.

Issues

The Court was asked to consider:

  • whether the Deed gave priority to Secure Funding only in respect of proceeds from any sale of the mortgaged land; or
  • whether Secure Funding was entitled to a priority in respect of all of the mortgagee’s powers, including the entitlement to possession of the property so as to exercise the power of sale.

Salvatore and Angelina’s claims

Salvatore and Angelina argued that clause 3 of the Deed was not ambiguous and that its plain meaning was to modify the priority of the parties only in respect of entitlement to proceeds from the sale of the land.  Salvatore and Angelina claimed that in effect, they, as subordinate mortgages, could go into possession of the land so as to hinder the exercise by Secured Funding of its powers under its mortgage.

Secure Funding’s arguments

Conversely, Secure Funding’s arguments were based on the comments of French CJ, Hayne, Crennan and Kiefel JJ in the decision of Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 where the High Court held that:

The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean.  As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.  Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”.

In particular, Secure Funding emphasised the importance of the need for a “businesslike” interpretation.  It argued that the construction of clause 3 was based on the language used by the parties and to confine Secure Funding’s priority under the Deed to the amount which the first defendant may recover in priority to the other lenders would fetter the operation of the mortgages ranking first under the Deed.

Decision

Allanson J held that given the Secure Funding Loan Agreement contained, as a special condition, the requirement of a deed of priority.  The Deed was made in the commercial context of Secure Funding, as a new lender providing finance on security of property already encumbered to Patrizia’s family.  A reasonable business person would understand that the intention of the parties in agreeing to a provision, such as clause 3 of the Deed, was to give priority to the securities held by Secure Funding that included the rights and powers conferred to enable their securities to be enforced.

Lavan Legal comment

The dispute could have been avoided if the Deed has used clearer language, specifying the nature of the benefit of the priority: that is, to include the right to take possession as well as the first right to the sale proceeds.  However, Allanson J was clearly prepared to take a commercial, business orientated approach to constructing the Deed, to take a broad view of the overall “deal”.