Lenders beware! - The importance of stamping mortgages and charges - Traps in the Duties Act 1997 (NSW)

Boral Recycling v Wake [2009] NSWSC 712

In a recent case in the Supreme Court of New South Wales, a plaintiff sought orders to extend the operation of a caveat it had registered against the title of a property owned by the defendant (Caveat). The defendant opposed the orders.

In this case, the defendant was a guarantor of the performance of certain obligations in favour of the plaintiff. The terms of the guarantee (and an indemnity) were contained in a Deed of Guarantee and Indemnity (Deed of Guarantee). Relevantly, the Deed of Guarantee included a provision (Charging Clause) in favour of the plaintiff that provided as follows: -

"The Guarantor hereby agrees to charge all their equitable interest in freehold or leasehold property. The Guarantor agrees to deliver to [the plaintiff] within seven (7) days of demand, a properly executed Memorandum of Mortgage."

The Caveat was registered on the basis of a claim that the plaintiff had a caveatable interest in the land pursuant to its rights as a chargee, which arose from the Charging Clause contained in the Deed of Guarantee.

The question before the Court was whether the plaintiff had the right to obtain an order to extend the operation of the Caveat, in a case where the Deed of Guarantee which purported to create a caveatable interest (being the Charging Clause) was not stamped for payment of duty. Specifically, the Court had to consider if the Duties Act 1997 (NSW) (Duties Act) would prevent the extension of the Caveat.

Section 304 of the Duties Act concerns the admissibility of instruments effecting dutiable transactions or instruments chargeable with duty when the relevant instrument is not duly stamped. In particular,

"an instrument that effects a dutiable transaction or is chargeable with duty under this Act is not available for use in law or equity for any purpose and may not be presented in evidence in a court or tribunal exercising civil jurisdiction unless … it is duly stamped."

The plaintiff submitted that the matter should be stood down to allow sufficient time for the Deed of Guarantee to be stamped, so that the obstacle of section 304 could be cured. However, the Supreme Court, although accepting that having the Deed of Guarantee stamped would cure section 304, was not prepared to stand the matter down to allow the Caveat to be stamped, by reason of section 211 of the Duties Act.

Section 211 of the Duties Act provides that "a mortgage on which duty is required by this Chapter to be paid is unenforceable to the extent of any amount secured by the mortgage on which duty has not been paid." The definition of a "mortgage" for the purposes of that Chapter of the Duties Act is contained in section 205, the relevant part of the section providing that an instrument is a "mortgage" if it is a "security by way of mortgage or charge over property wholly or partly in New South Wales at the liability date…" There was no dispute as to the Charging Clause constituting a "mortgage" for the purposes of section 205 of the Duties Act, and the subsequent application of section 211.

The defendant argued that as the Deed of Guarantee was not stamped, and the Deed of Guarantee constituted a "mortgage" for the purposes of section 205 of the Duties Act, section 211 rendered the Deed of Guarantee unenforceable, and thus, the Charging Clause in the Deed of Guarantee was incapable of sustaining the Caveat. In particular, the defendant argued that the question of enforceability of the Deed of Guarantee should be determined at the date the Caveat was lodged, on the basis that if the Caveat should not have been registered at the relevant date, then the same Caveat should not be capable of being extended. The defendant also argued that standing the matter down to allow the plaintiff sufficient time to cure section 211, would not be of assistance to the plaintiff, as stamping the Deed of Guarantee would make the Deed of Guarantee enforceable from the date of stamping, and not the date of registration of the Caveat. The Court accepted these arguments.

The Court concluded that if the Charging Clause is to create a caveatable interest, it must be so because it operated as a mortgage or charge. Accordingly, section 205 of the Duties Act attracts the obligation to stamp, and a failure to stamp attracts the operation of section 211. Therefore, the Caveat could not be extended.

It would follow from this decision that any lender relying upon a mortgage or charge (including a charging clause contained in an instrument) as security for a loan and other moneys, should ensure that the relevant mortgage or charge is stamped at the time of the making of the advance. Of course, if a mortgage or charge is exempt from stamp duty (for instance, as a mortgage over residential property given by a natural person), or at the very least, stamped prior to registration of the caveat, then the lender would avoid the arguments of the defendant in this case.

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