In a lesson to all agents, developers and lawyers about how things can go wrong under pressure, Gold Coast merchant bank Equititrust survived a three day courtroom struggle in August to preserve its $8 million loan security after a controversial last-minute alteration to a signed developer mortgage.
Settlement of the loan occurred on 23 September 2008, as the financial world was beginning to absorb the enormity of the Lehman Brothers collapse one week earlier.
When the settlement clerk returned with the documents, the lender signed with the substantial change made by the borrower going unnoticed until nearly two years after.
The mortgagor’s solicitor – identified in the judgment only as “Davis (Davis Lawyers)” – had added an additional sheet to the paperwork, which restricted the lender’s rights to only the proceeds of sale of the secured properties in Nerang and Southport.
The undetected bombshell was finally discovered when the financier began action on default, which ultimately led to a three day Supreme Court hearing.
At contest was whether the lender was taken to have accepted – according to the ordinary contractual rules of offer & acceptance – the change in transactional terms that the mortgagor’s solicitor had, by the amendment, proposed.
Or should the terms of the un-altered document prevail and the lender be entitled to “rectification” of the “inconsistent” mortgage it had signed?
True, there had been pre-settlement toing and froing about the terms of the recourse limit at least in relation to one of the properties was accepted but its extent and resolution, was in dispute.
Against the mortgagor’s contention, the court concluded that the document had been signed in its original form several days before the alteration was made. And it was unaccepting that changing an already signed document – even if it was yet to be delivered by the solicitor to the opposite party – was a legitimate method of negotiation.
Of particular concern – and the issue that allowed the lender its reprieve – was that the change had not been brought to its attention. It was “merely” contained in an email attachment sent a few hours before the settlement meeting with no cover message comment.
The court found that “the lender completed the transaction and executed the mortgage by the mistake which was induced by the conduct of the mortgagor and/or its solicitor” and “nothing was said or written on behalf of the lender to accept the addition of the third page” as proposed by the mortgagor’s solicitor.
In a contest of recall, it was Mark McIvor – the embattled finance firm’s founder – who was prefered over solicitor Davis who “could not explain satisfactorily why …. he had advised McIvor of the execution [of the mortgage] without making any amendment to the draft. He suggested that it was convenient to have the mortgage signed at that point, although it required amendment. This is very unlikely.”
“Upon any objective view the parties intended that their relationship be defined by all the documents they signed. The documents must be read together. Objectively the parties did not agree that the specific provision of the third page of the mortgage should give way to the general terms contained in the loan agreement.”
Thus, regardless of its signature on the document with the amendment plain to see, the lender was able to enforce the mortgage contract as if no changes had been made.