Caveats and unregistered interests

1. Caveats and unregistered interests Assoc Prof Cameron Stewart (Thanks to Shae McCrystal – errors are Cameron’s) (c) Cameron Stewart 2009

2. Caveats • Protection of unregistered interests • Section 74F - System of lodging a “caveat” by a person who claims to have a legal or equitable interest in the property – any further dealing with the property cannot be recorded unless with the caveator’s approval – freezes any dealing with the land that would impact on the subject of the caveat (c) Cameron Stewart 2009

3. Caveats • The caveat must specify the ‘prescribed particulars’ of the interest claimed (s 74F(5)). This means that the caveator must state explicitly the claim that the RP must meet. Historically the Act required caveats to be extremely precise and particular and a lot of law developed around what a ‘valid caveat’ looked like. • Sec 74L requires the court to disregard a caveator’sfailure to comply strictly with the requirements. This allows the court to overlook deficiencies in drafting if the omissions are not gross. At least the caveat should identify the caveatable interest claimed. • The Register General has a duty to ensure that the caveat complies with the caveat requirements, but the Register General does not investigate whether the claimed interest is genuine. (c) Cameron Stewart 2009

4. Caveats • The registrar General will then enter the particulars on the Folio (not the CT) and will notify the registered proprietor of the lodgement of the caveat. • The effect of the lodgement of the caveat is that the Registrar General is prohibited from recording any dealing which would affect the estate or interest claimed by the caveator, unless the dealing was lodged before the caveat was lodged. (c) Cameron Stewart 2009

5. Caveats • You can only stop dealings lodged before the caveat from being registered by an injunction in the Supreme Court: Re Rush and Hazell and the Real Property Act [1963] NSWR 78 (c) Cameron Stewart 2009

6. Caveats Different types of caveats: 1. caveat against dealings 2. caveat against improper dealing where CT has been lost 3. caveat against improper exercise of power of sale 4. caveat lodged by RG to protect interest of a person under a legal disability or on behalf of the Queen (c) Cameron Stewart 2009

7. Caveats RPA s 74F(1) – Any person who, by virtue of any unregistered dealing or by a devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land... What is a ”caveatable interest”? Must be an interest in land!!! Not just a contractual right or personal right – the interest must exist at the time of lodgment – no future interests Eg Interest of a purchaser under a contract for sale Interest of an equitable mortgagee Option to purchase land And many many more (c) Cameron Stewart 2009

8. Caveats How can they be removed? Lapsing notice with dealing – serve a notice of lodging a dealing and then 21 days for the caveator to go to SC for extension of time – otherwise the caveat lapses Lapsing notice without dealing – 21 days to obtain SC order extending caveat - otherwise the caveat lapses SC order – no notice, no dealing - s 74MA(1). (c) Cameron Stewart 2009

9. Caveats • After lapsing further caveat by same person based on same interest will be of no effect unless court leave has been obtained • Wrongful lodgment – if a caveator is found to have wrongfully lodged a caveat they are liable to compensate the person sustaining a pecuniary loss – “wrongfully” means in infringement of the rights of the person against whom the caveat is lodged (c) Cameron Stewart 2009

10. Caveats • What is wrongful? The section refers to lodgement of a caveat without reasonable cause, not lodgement without a caveatable interest. So if a caveat is lodged and there is no interest to protect, this section only comes into play of the lodger had no reasonable cause to think that they had a caveatable interest. Therefore the test is whether the caveator had an honest belief at the time the caveat was lodged on reasonable grounds that a caveatable interest existed: Bedford Properties v Surgo Pty Ltd [1981] 1 NSWLR 106. (c) Cameron Stewart 2009

11. Caveats • Butt examples p 751 • Additional interest payments on a mortgage • Lost profits from a business to be run on acquired land • Damages paid to a purchaser if a sale falls through • Delay of sale resulting in increased capital gains tax • Loss recoverable is the loss that can realistically be shown to be attributable to the lodging of the caveat (Lee v Ross (No 2) (2003) 11 BPR 20,991) (c) Cameron Stewart 2009

12. What are unregistered interests? • Barry v Heider(1914) 19 CLR 197 – The facts of Barry v Heider are a little convoluted and we don’t need to get into them. Mr Barry was the RP of a fee simple in Torrens land. Barry was defrauded by Schmidt who tricked him into signing a transfer form saying that he would sell the property for much less than it was worth. Schmidt then used the transfer form/CT to raise a couple of loans with Mrs Heider, using the property as security. • Nothing had been registered. So, the transfer form has not been registered and neither have the mortgages – so you have a group of unregistered interests. Barry tried to argue that as all the mortgagees had were unregistered mortgage instruments, those instruments could not create any interests in the land itself – because of s 41. So he’s saying that they have contractual rights against Schmidt but that they cannot have any proprietary equitable rights in the land because s 42 says you can’t have such rights without registration. (c) Cameron Stewart 2009

13. What are unregistered interests? • Decision of Griffiths CJ – Griffith reviews the provisions of the legislation; Notes that Parts of the legislation clearly envisage the operation of unregistered interests: Part nine of the act deals with trusts; the caveat provisions; and provisions allowing suits of specific performance. • Griffiths CJ concludes that Torrens legislation does recognise unregistered interests in land. • Isaacs finds that s 41 denies effect to an instrument until registration, it does not deny effect to the rights arising out of the transaction that gave rise to the dealing. • No legal interest can be created because no legal interest can arise in land without registration but if equity would enforce the agreement then an equitable interest can arise before registration. (c) Cameron Stewart 2009

14. What are unregistered interests? • Isaacs J at 216: Does not touch the form of contracts. A proprietor may contract as he pleases, and his obligations to fulfill the contract will depend on ordinary principles and rules of law and equity … consequently, section 41, in denying effect to an instrument until registration, does not touch whatever rights are behind it. Parties may have a right to have such an instrument executed and registered; and that right according to accepted rules of equity, is an estate or interest in the land. (c) Cameron Stewart 2009

15. What are unregistered interests? Chan v Cresdon (1989) 168 CLR 242 - per Mason, Brennan, Deane and McHugh JJ at 257: Though the unregistered instrument is itself ineffective to create a legal or equitable estate or interest in the land, before registration, the section does not avoid contracts or render them inoperative. So …an agreement will be effective, in accordance with the principles of equity, to bring into existence an equitable estate or interest in the land. But it is that agreement, evidenced by the unregistered instrument, not the instrument itself, which creates the equitable estate or interest. In this way no violence is done to the statutory command [in s 41]. (c) Cameron Stewart 2009

16. Competing unregistered interests Breskvarv Wall (1971) 126 CLR 376 - Mr and Mrs Breskvar executed a transfer to Petrie as security for a loan. Petrie fraudulently used the transfer and sold to his grandson Wall, who became registered owner. Wall sold to Alban Pty Ltd but before they could register their interest the Breskvars lodged a caveat which injuncted the sale. The conflict was therefore between the interest of Breskvars and the interests of Alban Pty Ltd Barwick : 'title by registration'. What sort of interest did Wall have? What sort of interest does Alban have? What interest do the Breskvars have? (c) Cameron Stewart 2009

17. Competing unregistered interests Heidv Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326, Heid agree to sell land to Connell Investments. Connell was owned by Newman McKay & Co. Heid accepted advice from Newman to use their employee (Gibby) as a solicitor. The solicitor was unqualified. Heidleft for overseas and left Gibby to complete the sale and put part of the proceeds into an investment. The remainder of the proceeds were not to be paid by Connell but to be secured by way of a mortgage in favour of Heid. In fact Connell mortgaged the property to Reliance before it registered the sale from Heid to Connell. After registering the sale but before Reliance's or Heid's mortgage could be registered, Heiddiscovered the fraud. Whose mortgage took priority? (c) Cameron Stewart 2009

18. Competing unregistered interests • Gibbs CJ focused first on priority based upon the time of creation of the relevant equitable interests, with such priority being displaced only if the equities favoured the holder of the interest created second in point of time. His Honour, at 333, said: • In the present case the interest of the appellant was first in time. The question therefore is whether his conduct … has the consequence that [the holder of the second equitable interest] has the better equity, and the appellant's interest should be postponed to that of [the holder of the second equitable interest]. (c) Cameron Stewart 2009

19. Competing unregistered interests At 341, Mason, Deane JJ observed: It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest. (c) Cameron Stewart 2009

20. Competing unregistered interests • By signing the transfer form which states that the purchase price had been received (see ACT form) Heid had enabled CI to create R's later interest, ie to present itself as holding the unencumbered fee simple, but Heid argued that he had not acted imprudently. It was normal practice to hand over a signed transfer form and CT to a solicitor - the solicitor attends settlement on behalf of the vendor. If vendors have to take precautions against the possibility of their own solicitor being fraudulent, then conveyancing practice would become very cumbersome and expensive. (c) Cameron Stewart 2009

21. Competing unregistered interests • The flaw in his argument was that he had not followed normal conveyancing practice because he had not engaged his own solicitor. In fact Heid ought to have been suspicious of Gibby because he was an employee of the purchaser. Furthermore, he wasn't a qualified solicitor. So H Ct held the equities were unequal and Reliance had priority. • Implicitly the H Ct acknowledged that it would have been acceptable for Heid to give the executed transfer form and the CT to his own solicitor, so that if that solicitor then acted fraudulently to create a later unregistered interest, H would not lose priority.  (c) Cameron Stewart 2009

22. Failure to lodge a caveat • Butler v Fairclough (1917) 23 CLR 78 • Mr Good was the registered proprietor of a property. The title to that property was encumbered by one registered mortgage. Mr Good was then involved in the following transactions: • 30th of June - a contract of mortgage with Mr Butler (a second mortgage). This mortgage was not registered on the title. • 2nd of July - a contract of sale with Mr Fairclough. Mr Fairclough searched the title and discovered the first mortgage only. • 7th of July - Mr Butler caveated to protect his interest. (c) Cameron Stewart 2009

23. Failure to Lodge a Caveat • Subsequent to the lodgement of the caveat Mr Fairclough lodged his transfer of title documents. The transfer of title documents could not be processed on the title because of the existence of the caveat. There were then some additional complications which we won’t go into here. For our purposes we can simply note that when the matter came to court, the court had to decide between the competing priorities of Mr Butler’s unregistered mortgage and Mr Fairclough’s unregistered transfer of title.  • Who takes priority? If Mr Butler takes priority then Fairclough’s fee simple will be subject to the mortgage. If Mr Fairclough takes priority then he will take the fee simple free from the mortgage. • The rule of course is that where the equities are equal first in time will prevail. Mr Butler was the first in time. The question for the court was whether the equities were equal. Was there any postponing conduct on the part of Mr Butler? The court said yes. The court said that Butler's delay in caveating by seven days made the equities unequal. In this case the court placed emphasis on the fact that Mr Fairclough had searched title and was induced to acquire his interest by the absence of any existing adverse interests. (c) Cameron Stewart 2009

24. Failure to lodge a caveat and postponing conduct • Abigail v Lapin [1934] AC 491 • Lapins executed a transfer to Mrs Heavener (as security for a loan) on the understanding that they could redeem it on repayment. Mrs Heavener became registered and mortgaged it to Abigail. The mortgage was unregistered but Abigail had not notice of the earlier interest. He searched the register and found nothing. Lapins sought to rectify the register (c) Cameron Stewart 2009

25. Failure to lodge a caveat and postponing conduct • Lapins' interest should be postponed - they armed Heavener with the means to deal with the estates. The failure to caveat was one factor to consider in the question of who had the better equity. The question of whether a caveat should be lodged is a question of conveyancing practice or whether it was reasonable. Abigails search of the register was not relevant as it had not been caused by an representation by the Lapins (c) Cameron Stewart 2009

26. Failure to lodge a caveat and postponing conduct • In J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546, the bank loaned money to Josephson. The bank obtained a mortgage in registrable form as well as the certificate of title but did not register the mortgage. J & H Just advanced further money to Josephson on the security of the land. They asked Josephson about the certificate of title and accepted his statement that it was with the bank for safekeeping. J & H Just lodged a caveat. The issue before the High Court was whether the bank maintained its priority according to time. The High Court ruled in favour of the bank. By receiving the title documents the bank had taken adequate precautions to protect themselves. (c) Cameron Stewart 2009

27. Failure to lodge a caveat and postponing conduct • Chief Justice Barwick at 554: To hold the failure by a person entitled to an equitable estate or interest in land under the Real Property Act to lodge a caveat against dealings with the land must necessarily involve the loss of priority which the time of the creation of the equitable interest would otherwise give, is not merely in my opinion unwarranted by general principles or by any statutory provision but would in my opinion be subversive of the well-recognised ability of parties to create or to maintain equitable interests in such lands …. Of course, there may be situations in which such a failure may combine with other circumstances to justify the conclusion that the act or omission proved against the possessor of the prior equity ‘has conduced or contributed to a belief on the part of the holder of the subsequent equity, at the time when he acquired it that the prior equity was not in existence’ … this is the relevant principle to apply if it is claimed that the priority of a prior equitable interest has been lost in competition with the subsequent equitable interest. (c) Cameron Stewart 2009

28. Failure to lodge a caveat and postponing conduct • In Osmanoski v Rose [1974] VR 523, A contracted to sell land to B and then again to C. When C contracted he searched the register and saw that A was the registered proprietor. B had not lodged a caveat in relation to his unregistered interest at that time but did lodge one before C lodged a transfer for registration. The court held that B’s failure to lodge a caveat before C contracted with A was postponing conduct as it led to C contracting in the belief that there was no other interest such as B’s in existence. (c) Cameron Stewart 2009

29. Failure to lodge a caveat and postponing conduct • In Avco Financial Services v Fishman [1993] 1 VR 90, Fishman mortgaged land to the State Bank. The mortgage was registered. A second mortgage between the bank and Fishman was entered into. It was not registered. Nor was a caveat lodged by the bank. Fishman entered into a third mortgage with Avco. Avco had no notice of the second unregistered mortgage to the bank. They wrote to the bank seeking details of the amount owing under the first (registered) mortgage. The bank responded, but said nothing about having an unregistered second mortgage. The issue was whether Avco had priority over the bank’s second mortgage due to the bank’s failure to lodge a caveat. (c) Cameron Stewart 2009

30. Failure to lodge a caveat and postponing conduct • Tadgell J ruled in favour of the bank, finding that it had not done anything justifying postponement of its priority according to time. He re-affirmed that the purpose of a caveat was protective and not to give notice. Having the title documents the bank did not need the protection gained by lodgment of a caveat. Citing J & H Just (Holdings) Pty Ltd v Bank of New South Wales, Tadgell J, at 95 said: The Bank was not to be expected to lodge a caveat to give notice of its second mortgage to persons who might be induced to lend to the mortgagors by their false statements or representations that no second mortgage had been taken by them. (c) Cameron Stewart 2009

31. Failure to lodge a caveat and postponing conduct • Person-to-Person Finances Pty Ltd v Sharari [1984] 1 NSWLR 745 Tredgolde had a registered mortgage over Torrens title land. As a registered mortgagee he also held the certificate of title. Sharari took a subsequent mortgage over the property, but his solicitor failed to have that mortgage registered. Sharari did not lodge a caveat to protect his unregistered mortgage. Subsequently Person-to-Person took a mortgage over the property after being told by the owner of the land that Tredgolde had the only other mortgage over the property. (c) Cameron Stewart 2009

32. Failure to lodge a caveat and postponing conduct • Person-to-Person’s search of the register revealed only Treadgolde’s mortgage. Person-to-Person lodged a caveat in respect of its unregistered mortgage. The issue before the Court was whether Sharari’s failure to lodge a caveat amounted to postponing conduct. • McLelland J ruled that Sharari was guilty of postponing conduct and that, therefore, Person-to Person had priority over Sharari. (c) Cameron Stewart 2009

33. Failure to lodge a caveat and postponing conduct • His Honour, at 738, said: • [I]t is the settled practice of competent solicitors ... acting for second or subsequent mortgagees, to ensure either the prompt registration of the mortgage or lodgment of a caveat. The failure by [Sharari] through his solicitor to conform to this practice would lead naturally to those who searched, such as [Person-to-Person], to believe that there was no such outstanding second mortgage, and it is my opinion that the failure of [Sharari], in the absence of registration of his mortgage, to lodge a caveat led [Person-to-Person] to acquire its mortgage on the supposition that no unregistered second mortgage already existed, in circumstances which make it inequitable as between the parties that [Sharari’s] mortgage should have priority over that of [Person-to-Person]. (c) Cameron Stewart 2009

34. Failure to lodge a caveat and postponing conduct • Jacob v Platt Nominees [1990] VR 146 – Full Court of Vic Supreme Court – The Platts were the directors of a company – Platt Nominees which owned a motel. The Platts entered into a contract with their daughter, Mrs Jacobs, in which she had an option to purchase the motel. This gave Mrs Jacobs an equitable caveatable interest. Mrs Jacobs did not lodge a caveat because she thought that the creation of any subsequent interests would have to be approved by her mother, who would not allow it. Also, she did not want to antagonise her father. (c) Cameron Stewart 2009

35. Failure to lodge a caveat and postponing conduct • Platt Nominees entered into a contract of sale with Perpetual Trustee to sell the land. The father did this by using his son, who had a signed authority from his mum to authorise transactions. It happened without the knowledge of Mrs Jacobs or her mum. Mrs Jacobs found out about the contract after exchange but before settlement and lodged a caveat. (c) Cameron Stewart 2009

36. Failure to lodge a caveat and postponing conduct Crockett, King and Gobbo JJ • Mere failure to lodge a caveat will not result automatically in postponement although it could do in the circumstances; • Primary purpose of caveat is to protect the interest holder not to give notice of the interest to all the world. No duty to lodge a caveat; • Taking possession of the CT is one way to protect oneself but even it will not prevent the creation of subsequent interests (although it will prevent their registration); • It was not demonstrated that it was settled conveyance practice to always caveat after the creation of an equitable interest – such that a failure would induce a person to believe that no other interest could exist; (c) Cameron Stewart 2009

37. Failure to lodge a caveat and postponing conduct • In this case, the failure to caveat in the circumstances was not postponing conduct – because of the relationship between Mrs Jacobs and her parents. The court held that Mrs Jacobs it was inconceivable that her parents would both agree to sell the motel and defeat her interest: The appellant had secured the option from her parents in such a way that it was inconceivable that her mother and father would join together to sell the motel in breach of the option. It was, in short, not reasonably foreseeable that her failure to lodge caveat exposed herself or others to a risk of a later sale (per Crockett, King and Gobbo JJ at 160). (c) Cameron Stewart 2009

38. Failure to lodge a caveat and postponing conduct • Mimi v Millenium Developments Pty Ltd [2004] V ConvR 54-687 - two competing equitable interests and a failure to caveat • Jacob v Platt distinguished because there was no close personal relationship between the earlier interest holder and the RP on which to base an assumption that further interests would not be created. (c) Cameron Stewart 2009