Can the forgiveness of debt on the death of the lender that is documented in transactional documents such as a mortgage subsequently be revoked by the lender’s will? That question was decided by a Queensland court this month.

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In 2006, the now-deceased Phyllis Power-Nemeth lent $1 million to her niece Angelique Collins by means of two advances secured by a mortgage over Angelique’s Loganholme property.

Under the terms of this mortgage, the lender purported not charge the plaintiff any interest, but Angelique’s installment payments not reduce the debt.

“It is reasonable to infer that Ms Power-Nemeth was seeking to avoid paying tax on ‘income’ generated by the mortgage,” noted the judge when deciding the dispute as to the construction of the document.

The heart of that dispute would be the term of the mortgage that the debt would last for Phyllis’s “natural life”  but was to be forgiven upon her death so as to leave Angelique with “an inheritance”.

The parties subsequently had a falling out and by 2010, the lender wanted the full amount repaid forthwith.

In August that year – asserting the repayments were in arrears – Phyllis notified her niece of her intention to exercise her power of sale over the property.

In response, Angelique filed an application seeking both a declaration that she was not in default and an injunction preventing the sale of the property. An interim order restraining the sale was made with the consent of both parties.

Angelique – who ended her emails to Phyliss “with love and without prejudice” – attempted a re-negotiation of the loan with repayment in full after 4 years but because the “agreed” terms were expressed to be subject to the (never obtained) approval of Phyliss’s solicitor, that agreement was not binding.

Phyllis in November 2015 arranged an Amendment to Mortgage to be prepared that had the effect of removing the forgiveness of debt on her death. She signed it and send it to Angelique to do likewise and to then return it to her.

Angelique did not sign that document. The agreement between the two thus remained as documented in the original mortgage.

By her last will signed in September 2016, Phyllis left left “the full benefit and burden” of her interest as mortgagee to friend Christine Walker.

She died the following month.

Angelique’s solicitors promptly requested the executors of Phyllis’s estate to release the Loganholme property from the mortgage, asserting the mortgage debt was now forgiven.

She eventually filed a further application in the Supreme Court at Brisbane seeking a declaration that her debt had been forgiven upon the lender’s death. She also sought an order that Ms Walker – who was an executor and to whom the mortgage had been formally transferred – sign and deliver a discharge of the mortgage to her solicitors.

In making this application, Angelique argued that the terms of the original mortgage remained in effect, and that Phyllis could not unilaterally vary those terms in her will.

The matter came before Justice Soraya Ryan in March 2021.

Ms Walker contended clause 6 of the mortgage (which purported to end the mortgage debt upon the lender’s death), and the related clause 7 were “testamentary” dispositions that were “severable” from the mortgage, revocable as they were testamentary in nature, and had in fact been “overridden by the will”.

Justice Ryan held that  clauses 6 and 7 were neither in form nor substance, testamentary in nature but rather, as they were part of the mortgage and registered with it, they took effect and provided benefits to both parties immediately and were not divisible from the rest of the mortgage.

Thus the clauses could not be unilaterally revoked by Phyllis in her will.

The Court declared that the Angelique’s mortgage debt was forgiven as a result of the lender’s death. It also declared that this forgiveness took effect irrespective of the terms of the lender’s last will.

Collins v Marinovich & Ors [2021] QSC 141 Ryan J 14 June 2021