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The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676 (29 June 2007)

File number: 2618/06
This case may be viewed at:
http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2007/676.html

Until the 4th July, 2001, Scots Church on the corner of York and Margaret Streets in Sydney was owned by the Presbyterian Church of New South Wales ("The Church"). At that time, following previous negotiations with Westpoint Corporation Pty Ltd ("Westpoint") concerning the redevelopment of the site, the Church sold its interest to Scots Church Development Ltd, a subsidiary of Westpoint. In addition to receiving payment for the land, the Church was to retain strata title to "the Church Lot", an area on which a refurbished Scots Church would be situated. Despite this agreement, the entire property was mortgaged to Capital Finance Australia Ltd, with a second mortgage being granted to York Street Mezzanine Pty Ltd, another subsidiary of Westpoint.

Subsequently, Scots Church Development Ltd was placed in receivership. The Church, Scots Church Development Ltd and the first mortgagee, Capital Finance Australia Ltd, entered into a tripartite agreement on the 18th August, 2004, formally recognizing their remaining obligations to the Church. A further "Supplemental Deed" was drawn up on the 2nd November, 2005, setting out amongst other matters, the retransfer of the Church Lot. When a formal request for the unencumbered transfer of the Church Lot and the payment of the balance owing was made on the 12 December, 2005, Scots Church Development Ltd failed to comply. Soon after, on the 20th December, 2005, the second mortgagee went into liquidation. Alarmingly for the Church, the second mortgagee asserted the supremacy of its mortgage through its refusal to acknowledge the Church's prior interest in the Church Lot. As a result, the Church sought Court assistance to effect the transfer of the disputed land as well as to resolve the matter of the outstanding debt.

Chief Justice Young addressed the various concerns raised. He found since there was no evidence of actual fraud, the second mortgagee was entitled to rely on the principle of indefeasibility as laid down in section 42 of the Real Property Act 1900 (NSW). In addition, he failed to find that there was a personal equity involving the Church Lot which the second mortgagee as the registered proprietor was subject to. The only arguable cause of action was a conventional estoppel. However, His Honour believed that the second mortgagee's awareness of the Church's entitlement to the Lot was purely speculative in nature. Even if this element of estoppel could be proved, there was no evidence of the Church's reliance on this assumption to its eventual detriment. The fact that no caveat was lodged by the Church to protect its interest was not regarded as evidence of the existence of a shared assumption with the second mortgagee that the Church Lot was sacrosanct.

After some discussion of the magnitude of the debt owed to the Church, His Honour then reflected on the law underlying the decision in Ex Parte James (1874) 9 Ch App 609. In this case, money previously paid to a creditor was mistakenly repaid to the debtor's trustee in bankruptcy. On appeal in the English Court of Chancery, it was decided that the error should be rectified as this was the only honest course of action. Applying this logic to the fate of the Church Lot, Chief Justice Young expressed the view that, if they were honest, the liquidators of the second mortgagee, although personally blameless, would question the fairness of retaining a mortgage over the Church Lot. Therefore, His Honour determined that the liquidators should be instructed to discharge that part of the registered mortgage relating to the Church Lot as the second mortgagee had been unfairly enriched at the Church's expense.