Mr Nicola Finamore and Ms Wiesen Zhou owned a boarding house and needed $130,000 to make outstanding payments due to the NAB and other creditors. They borrowed this money from Mr Salvatore Bonanno. The deed provided that in consideration of Mr Bonanno advancing the money, Mr Finnamore and Ms Zhou would transfer one third of the property to Mr Bonanno. In addition, the deed provided that if the property was sold Mr Bonanno would receive the $130,000 plus one third of the remaining net proceeds.
In the court proceedings Mr Bonanno sought an order that one third of the property was held on trust for him. Mr Finamore and Ms Zhou sought orders that the entire deed should be set aside on the ground of unconscionability.
Mr Bonanno was unsuccessful before a single judge and appealed the decision that he was not entitled to a one third interest in the property. His appeal was dismissed.
Before the deed was entered into the parties discussed the arrangement and it was agreed that Mr Bonanno would contribute equally with Mr Finamore and Ms Zhou to the operation of the boarding house; this agreement was not incorporated into the deed between the parties. Mr Bonanno in written submissions to the trial judge said:
“The entitlement to request the one third interest is not predicated on any failure by the Defendants (Mr Finamore and Ms Zhou) to perform obligations, but is effectively nothing more than an option exercisable by the Plaintiff (Mr Bonanno) to request it, which may have never been exercised.”
The deed created a collateral entitlement which was in the nature of an option that could be exercised for no additional consideration other than the making of the advance of $130,000.
The trial judge and the Court of Appeal quoted Lord Parker in Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company [1914] AC 25 at 61:
“…[T]here is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such advantage is not either (1) unfair and unconscionable, or (2) in the nature of a penalty clogging the equity of redemption, or (3) inconsistent with or repugnant to the contractual and equitable right to redeem.”
The trial judge refused to order that the whole deed was unconscionable but did order that the part of the deed that provided that Mr Bonanno was entitled to a one third interest in the boarding house was unconscionable and should be set aside.
The Court of Appeal dismissed the appeal of Mr Bonanno who was entitled to the repayment of the advance of $130,000.
