What happens if I lodge a caveat over the title to real estate in Victoria when I do not have a caveatable interest?

A caveat is an instrument that protects an unregistrable legal or equitable interest in real property. 

The caveat is a notice to the public that the person lodging the caveat (the caveator) holds an unregistered interest in the property, and provides details of the interest claimed. 

The caveat prevents the registration of any dealings a person has with the property until the caveat is removed or the caveator consents.

Lodging a caveat is a very serious matter, and as a result a caveat should not be lodged ‘without reasonable cause’. 

Section 118 of the Transfer of Land Act 1958 (Vic) provides: 

Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders.

What does ‘without reasonable cause’ mean?

In 2019, the High Court of Australia explained what it means to lodge a caveat ‘without reasonable cause’ for the purposes of claiming compensation under the NSW provision that is equivalent to section 118. 

The case dealt with the question of what property vests in a trustee in bankruptcy. However, in determining that issue, the High Court has provided some useful insight into the issue of whether a person has lodged a caveat without reasonable cause.

In Boensch v Pascoe [2019] HCA 49; 94 ALJR 112; 375 ALR 15, the High Court (Kiefel CJ, Gageler and Keane JJ and separately Bell, Nettle, Gordon and Edelman JJ) endorsed the two-step ‘reasonable cause’ test that had been applied in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) and other cases.

Background

Mr Boensch was a trustee holding real property on trust for the benefit of his children (Trust Property). Mr Pascoe was appointed as Mr Boensch's trustee in bankruptcy upon Mr Boensch being declared bankrupt. Whilst acting as Mr Boensch’s trustee in bankruptcy, Mr Pascoe lodged a caveat over the Trust Property.

Ultimately, the caveat was removed by a lapsing notice issued by the NSW Registrar General. Mr Pascoe chose not to issue litigation to establish that he had a caveatable interest in the real property (mainly due to the limited equity that appeared to be available in the property). 

Mr Boensch then commenced proceedings against Mr Pascoe seeking compensation under the Act on the grounds that Mr Pascoe had lodged and maintained a caveat over the Trust Property ‘without reasonable cause’.

In determining whether Mr Pascoe had lodged and maintained the caveat over the Trust Property ‘without reasonable cause’, the trial judge applied a two-step test, namely that a caveat is lodged ‘without reasonable cause’ if the lodging party:

1. does not have a caveatable interest; and
2. does not have an honest belief based on reasonable grounds that they have a caveatable interest.

As a result, in order to claim compensation under the equivalent of section 118 successfully, Mr Boensch was required not only to establish that Mr Pascoe did not have a caveatable interest in the Trust Property but also that Mr Pascoe did not have an honest belief on reasonable grounds that he had a caveatable interest over the Trust Property.

The High Court concluded that Mr Pascoe had a caveatable interest in the Trust Property for the purposes of lodging and maintaining the caveat. This was on the basis that the caveatable interest arose from Mr Boensch’s entitlement to be indemnified out of the Trust Property for liabilities he incurred while he was trustee. This entitlement to be indemnified created an equitable interest which vested in Mr Pascoe upon his appointment as Mr Boensch’s trustee in bankruptcy.

The majority (Bell, Nettle, Gordon and Edelman JJ) noted (at ALR page 46, paragraph 116):

For the reasons earlier stated, there is no reason to doubt that, upon the making of the sequestration order, the ... property vested in equity in Mr Pascoe by reason of Mr Boensch’s right of indemnity and, therefore, that Mr Pascoe had a caveatable interest in the property. Nor is there any reason to doubt that Mr Pascoe honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of Mr Boensch’s right of indemnity. On the facts as found, Mr Pascoe did not lodge or refuse to withdraw the caveat without reasonable cause.

The minority (Keifel CJ, Gageler and Keane JJ) noted (at ALR page 20, paragraph 12) that:

The existence of a caveatable interest, without more, supplies “reasonable cause” for lodging and maintaining the caveat.

In the circumstances, the High Court concluded that Mr Pascoe did not lodge the caveat ‘without reasonable cause’ and therefore Mr Boensch was not entitled to compensation under the New South Wales provision equivalent to section 118 of the Transfer of Land Act 1958.

Conclusion 

This High Court decision highlights the importance of ensuring that caveats are lodged and maintained with ‘reasonable cause’. 

It also provides guidance on how a Court will approach the issue of whether a caveat has been lodged ‘without reasonable cause’ under the Act, and thus whether an applicant is entitled to compensation under section 118 of the Transfer of Land Act 1958.

Legal practitioners will be aware that if they lodge a caveat without reasonable cause, they may be engaging in unsatisfactory professional conduct, or even professional misconduct. If that happened, the legal practitioner is likely to find themselves the subject of a disciplinary matter initiated by the Legal Services Commissioner, and having their right to engage in legal practice put at risk. 

WG Stark

Hayden Starke Chambers

The effect of COVID-19 on residential tenancies

On Friday, 17 April 2020 I presented an online seminar to Leo Cussen Centre for Law about the impact of COVID-19 on residential tenancies to approximately 60 online attendees.

The talk looked at some of the relevant measures that are being implemented in so far as they relate to residential tenancies in Victoria in April 2020. The topics covered in the presentation included:   

• Eviction Notices  
• Inspections and Open Homes  
• Loss of Income  
• Insurance  
• Government Protection Measures  
• Landlord’s and Tenant’s rights and responsibilities 

A copy of my paper is available to anyone who is interested. 

After the talk, the attendees posed a large number of questions about the way the proposed legislative changes will affect both landlords and tenants, confirming that this is an area causing considerable concern in the community. 

The Victorian government is proposing to introduce legislation into the Parliament on 23 April 2020. 

It is expected that the legislation will: 

1. introduce a temporary ban on evictions (for 6 months from 29 March 2020), 
2. pause rental increases for the same six month period, 
3. provide land tax relief for landlords, and 
4. provide rent relief for tenants experiencing financial hardship. 

Tenants and landlords who struggle to strike a deal over rent reductions will be given access to a fast-tracked dispute resolution service, with Consumer Affairs Victoria or the Victorian Small Business Commission mediating to ensure fair agreements are reached. 

If a landlord provides tenants impacted by coronavirus with rent relief, they will be eligible for a 25 per cent discount on their land tax, while any remaining land tax can be deferred until March 2021. 

Evictions will be banned for residential tenancies for six months, except in some limited circumstances.  

The Government will also create an $80 million rental assistance fund for renters facing hardship due to coronavirus. To be eligible for up to $2,000 in rent relief, renters will need to have registered their revised agreement with Consumer Affairs Victoria or gone through mediation, have less than $5,000 in savings and still be paying at least 30 per cent of their income in rent. 

I will provide a further post, if the legislation provides any surprises. 

WG Stark

Hayden Starke Chambers

Property Law - Dealing with COVID-19 Impact on Residential Leases

This Friday from 1pm to 2pm, I will be presenting a Live Stream seminar for the Leo Cussen Institute about "Dealing with COVID-19 Impact on Residential Leases". 

This one hour CPD seminar is designed to help you identify and guide you through the essential issues to focus on and how to manage your clients and risks.

During this session I will focus on the following issues:

1. Eviction Notices
2. Inspections and Open Homes
3. Loss of Income
4. Insurance
5. Government Protection Measures
6. Landlord’s and Tenant’s rights and responsibilities

Bookings and further information can be obtained at:

https://store.leocussen.edu.au/products/property-law-dealing-with-covid-19-impact-on-residential-leases 

WG Stark

Hayden Starke Chambers

Who is responsible when external cladding fails in an apartment tower during a fire?

In early 2019, in a judgment that ran to 647 paragraphs, County Court Judge Woodward, sitting as a Vice President at VCAT, had to deal with a claim following a fire at a residential tower in Melbourne that occurred due to faulty cladding (see: Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd (Building and Property) [2019] VCAT 286). 

This was the first major decision in Australia in relation to the respective liability of parties involved in the design and construction of a building which included combustible cladding.

Facts

The case concerned the well-publicised fire at the 21 storey Lacrosse Apartment Tower in La Trobe Street, Docklands (near Marvel Stadium) on 24 November 2014. 

That fire (as well as the Grenfell Tower fire in England and the Sydney Opal Tower cracks) prompted widespread critical analysis of the adequacy of building regulation by governments across Australia.

The commencement of the fire was quite simple – the tenant at the apartment returned from a working holiday in France, dropped his backpack, and decided to smoke a cigarette on the apartment balcony. He left his cigarette butt in a plastic food container that served as an ashtray.

At 2.23am, the smoke detector in the hallway outside his apartment activated and notified the Metropolitan Fire Brigade. A fire crew arrived minutes later, by which time the fire had travelled rapidly up the external wall cladding to the fourteenth floor and spread to the balcony on each level. Six minutes later the fire had reached the roof of the Tower.

The fire lead to losses exceeding $12 million.

The unextinguished cigarette butt was held to be the ignition source but the rapid spread of fire up the side of the building was facilitated by the aluminium composite panels (Cladding) used on the southern wall. The Cladding had a 100% polyethylene core.

In late 2018, the builder of the Tower, L U Simon Pty Ltd (L U Simon) agreed to replace the Cladding. 

The claim in VCAT focused on the allocation of responsibility between the remaining respondents.

The proceeding

The owners corporations and apartment owners brought a claim in VCAT against the following:

• L U Simon;
• the building surveyor and his employer (Gardner Group);
• the architect, Elenberg Fraser Pty Ltd (Elenberg Fraser);
• the fire engineer Tanah Merah Pty Ltd, trading as Thomas Nicolas (Thomas Nicolas);
• the occupier of apartment 805, Gyeyoung Kim (Mr Kim);
• the resident who lit the cigarette, Jean-Francois Gubitta (Mr Gubitta); and
• the Superintendent, Property Development Solutions Pty Ltd (PDS).

None of the Respondents had a direct contractual relationship with the Owners.

The case was heard over 22 sitting days, with 91 volumes of tribunal books and 10 barristers and 5 firms of lawyers representing the parties. Evidence was given by seven lay witnesses and 13 expert witnesses. Mr Kim (the apartment occupier) and Mr Gubitta (the tenant who lit the cigarette that caused the fire) did not participate in the proceeding. 

PDS reached a settlement and withdrew their involvement before the hearing.

Judge Woodward’s findings

His Honour found that:

1. The external cladding specified in the original design, namely Alucobond, failed to comply with the Building Code of Australia (BCA). The substitute aluminium composite cladding (ACP) ultimately installed also failed to comply with the BCA and accordingly, the Building Regulations 2006 (Vic).
2. In installing the cladding, L U Simon breached the implied warranties of suitability of materials, fitness for purpose and compliance with the law set out in section 8 of the Domestic Building Contracts Act 1995 (Vic) (the DBC Act) and is therefore liable to pay damages to the Owners. However, his Honour found that L U Simon did not fail to exercise reasonable care in the construction of the Tower.
3. Each of the consultants (Gardner Group, Elenberg Fraser and Thomas Nicolas) breached their obligations to L U Simon under their respective consultant agreements (which were novated to L U Simon by the developer) by failing to exercise due care and skill in that:
   • Gardner Group issued a Building Permit for the relevant stage of the building approving the specification by Elenberg Fraser of the ACP. Gardner Group also failed to notice and query the incomplete description of the cladding system in a report produced by the Thomas Nicolas.
   • Elenberg Fraser failed to remedy defects in its design (namely the specification of ACP and design drawings providing for extensive use of ACPs at the Tower) which caused the design to be non-compliant with the BCA and not fit for purpose. Elenberg Fraser also failed as head consultant to ensure the ACP sample provided by L U Simon was compliant with Elenberg Fraser’s design intent as articulated by its specification and the BCA.
   • Thomas Nicolas failed to conduct a full engineering assessment of the Tower in accordance with the International Fire Engineering Guidelines and failed to include the results of that assessment in its fire engineering report. Thomas Nicolas also failed to recognise that the ACP used at the Tower did not comply with the BCA and did not warn L U Simon (or Gardner Group, Elenberg Fraser or PDS) accordingly.
   • The resident, Mr Gubitta, had breached a duty of care owed to the Owners by failing to take care in the disposal of his smouldering cigarette, but concluded that his responsibility for the loss and damage was minimal.

The Result

While his Honour concluded that L U Simon was liable to pay damages to the Owners, he then determined that the damages payable by L U Simon were to be reimbursed by the other Respondents as ‘concurrent wrongdoers’ pursuant to Part IVAA of the Wrongs Act 1958, in the following proportions:

• Gardner Group: 33 percent
• Elenberg Fraser: 25 percent
• Thomas Nicolas: 39 percent
• Mr Gubitta: three percent

Because Mr Gubitta had taken no part in the proceeding and no party had sought judgment against him, no order was made against Mr Gubitta and L U Simon was not reimbursed the three percent damages it is liable to pay to the Owners that was apportioned to Mr Gubitta.

The Owners originally claimed at least $12,765,812.94 in damages; of that amount, $4,851,937.19 was agreed as payable between the parties.

Including the agreed sum, his Honour awarded damages in the sum of $5,748,233, finding that damages in the sum of $194,414.01 were not proven by the Owners and were disallowed. The remainder of at least $6,823,165 are to be the subject of further submissions and remained unresolved at the date of the decision.

In his reasons, his Honour takes care to note that his comments ‘should not be read as commentary generally on the safety or otherwise of ACPs and their uses’. His Honour notes that there may be circumstances (such as signage or decorative use) where the use of ACP can be compliant, including where made subject to a performance-based solution under the BCA, or where types of ACP with a lower polyethylene content is used. His Honour notes that his findings relate only to the particular use of ACP at the Tower and are informed by the particular contracts between the parties in the case.

The judgment focuses on the selection, approval and installation of the ACPs that enabled the fire spread. Critically, his Honour found that the ACP did not satisfy the Deemed-to-Satisfy provisions of the Building Code of Australia (BCA).

As noted, His Honour also found that the builder breached the warranties implied into the design and construct contract under section 8 of the DBC Act. Those are the warranties as to:

• suitability of materials (section 8(b) of the DBC Act);
• compliance with the law (which includes the BCA) (section 8(c) of the DBC Act); and
• fitness for purpose (section 8(f) of the DBC Act).

His Honour confirmed the well established position that the builder’s liability for design and construction was not merely an obligation to use reasonable care and, in particular, the warranty for fitness for purpose was “absolute”. Further, the obligation of the builder must be measured by reference to the purpose for which the building was required under the conditions likely to be encountered (i.e., Lacrosse was a multi-storey residential apartment building).

The builder was found to have breached the warranties and, therefore, held primarily liable to the owners.

However, his Honour found that the builder did not fail to exercise reasonable care in the construction of Lacrosse by installing the ACP's.

Instead, his Honour found there was no evidence that the builder failed to take reasonable care and no evidence adduced from any party to the effect that the builder did not act reasonably or in accordance with what would be expected of a reasonably competent builder in the circumstances of the case. The critical point here (at paragraph 307):

... for a large and complex project, [the builder] has sought to cover acknowledged shortcomings in its own expertise by engaging highly skilled professionals to (in a variety of different ways) direct and supervise its work.

Implications 

The Victorian State Government has undertaken an audit of buildings with Cladding issues. 

According to "The Age" on 26 November 2019: 

More than 1200 buildings with risky levels of flammable cladding are included on the state government's list – which is not publicly available – but the [Master Builders's] Association believes there are potentially many more buildings around Victoria that could be dangerous.

Cladding is clearly an issue that will have ramifications for a long time to come, and that needs a concerted effort by all parties concerned (Builders, Architects, Engineers, Building Surveyors, Owners Corporations, Residents, Owners, Regulators and Insurers) to resolve. 

The Andrews government has committed $600 million to remove the combustible material used on hundreds of high-risk buildings. However, it seems that money has all been allocated and it is most likely to be used for extremely high-risk buildings housing the frail, elderly and very young (such as hospitals, child care centres and nursing homes). 

The State government has also stated that it will 'crack down' on dodgy builders and building products. 

The solution to this major problem seems to be that existing buildings with dangerous Cladding will need to be rectified, and as soon as possible. 

The problem of who will pay for the cost of doing this remains to be resolved. However, Judge Woodward's decision points to the direction that is likely to be followed. 

In other words, the professionals involved in the choice of Cladding, and its installation, will be held responsible if negligence against them can be established. 

Primarily, the DBC Act obliges builders to meet certain minimum standards (among others) as to the suitability of materials and fitness for purpose. 

As this case has shown, builders can defray that responsibility if they employ suitable professional advisors who in turn fail to meet their professional obligations. 

WG Stark

Hayden Starke Chambers

New Contract of Sale of Real Estate now in use in Victoria (from August 2019)

As all Victorian property lawyers and conveyancers will know, from August 2019 there is a new standard form of Contract of Sale of Real Estate by the Law Institute of Victoria and the Real Estate of Victoria. 

You should now discard all of your old forms of contract and commence using the new form of the Contract. 

The updates incorporate a number of the previously drafted special conditions into the Contract as General Conditions, as well as other minor changes. 

The changes have resulted in the renumbering of a number of the previous General Conditions. However, the substance of the General Conditions remains the same.  

WG Stark
Hayden Starke Chambers

What is necessary to make an equitable charge over real estate in Victoria valid?

I have appeared in a number of cases in which caveats lodged on the basis of an equitable charge have been upheld as creating a caveatable interest. 

The authorities make it clear that the wording required to create an equitable charge is minimal. An agreement to lodge a caveat is sufficient to grant an equitable interest in the Property. 

Gillard J held in Avco Financial Services Ltd v White [1977] VR 561, at p. 567

Having regard to the width of language contained in s. 89 it is difficult to understand how it can be said that a grantee of an equitable mortgage or charge did not have sufficient estate or interest in land to protect to protect by lodging a caveat.

At page 564, His honour adopted what was said by Romer J in Craddock v Scottish Provident Institution (1893) 69 LT 380 at p. 382:

To constitute a charge in equity by deed or writing it is not necessary that any    general words of charge of charge should be used. It is sufficient if the court   can fairly gather from the instrument an intention by the parties that the property therein referred to should constitute a security.

In King v AGC (Advances) Ltd and anor [1983] VR 682, the full court of the Supreme Court of Victoria (Marks J, with whom Young CJ and Murray J agreed) stated (at page 686):

It is, I think, clear enough that A.G.C. as grantee of an equitable charge, had sufficient estate within the meaning of s. 89 of the Transfer of Land Act to obtain protection of it by lodging a caveat. I agree in the reasons of Gillard, J. when he held that was so in Avco Financial Services Ltd v White, [1977] VR  561, at p. 567. In that case Gillard, J. was concerned with a charge of a similar kind, even similarly expressed … 

In Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499, Robson J of the Supreme Court of Victoria had to determine whether the terms of a guarantee and indemnity were enforceable to give an equitable charge of the guarantor/chargee’s property, or whether the terms were ambiguous so as to make the charging clause vague for uncertainty. 

The clause in question included the phrase: ‘will charge’. The question for the Court to determine was whether that wording was sufficient to demonstrate an immediate intention to create a charge? The Court in that case also considered whether future acquired property can be subject to a charging clause and whether an equitable charge gives  a chargee a right to vacant possession of real property? 

The chargee was the registered proprietor of several real properties located in Victoria. 

The validity of the charge referred to in clause 2.6A of the guarantee was disputed in three separate, but related, proceedings.

The preliminary question to be determined was: is the charge valid and enforceable?

The charging clause in issue was clause 2.6A, which under the heading ‘Property as Security’ stated:

The Guarantor will charge in favour of [the creditor] all estates and interest in any land and any other assets whether tangible in [sic] intangible in which they now have any legal or beneficial interest or in which they later acquire any such interest, with payment of all monies owed by the customer and agree upon request, to execute a registrable instrument transferring to [the creditor] the Guarantor's estate and interest by way of security. 

At paragraph 40 of the judgment, Robson J noted that the creation of a charge does not require any specific wording.  It is sufficient if the grantor of the charge manifests an immediate intention to create a charge by using words that create a present intention to charge land specified as security. The property specified need not be in existence at the time the charge was granted but must be so when the charge is sought to be enforced. Accordingly, the existence of a present intention to create a charge does not require relevant property over which the charge is to be created to be owned by the person granting the charge. 

At paragraph 41, the Honourable Justice Robson noted there are additional requirements, such as the requirement that where the charge is over land, there is the presence of writing, and that where consideration is necessary, it must be valuable, executed consideration.

Further, at paragraph 43, Robson J noted that in Cradock, Romer J concluded that it was not necessary for certain formalities to be present in the creation of a charge in equity if the Court can ascertain an intention on the part of the parties that the relevant property should constitute security.

At paragraph 59, Robson J concluded that ‘will charge’ conveys the manifestation by the person granting the charge of an immediate intention to charge and does not involve a promise to charge in the future. The fact that the charge may not be enlivened until credit was extended to the person granting the charge by the lender does not mean that the person granting the charge did not manifest the present intention to create a charge.

At paragraph 63, Robson J concluded that the promise to execute a registrable instrument of transfer is a separate and distinct promise made under the clause from the person granting the charge creating a charge.

At paragraph 94, Robson J noted that an equitable charge does not give the holder an automatic remedy.  The person obtaining the charge must seek a court order.  Clearly, if the debtor was not in default, the Court would not allow the person obtaining the charge to realise the security.

The person granting the charge argued that the provision permitting the creditor to request the execution of a registerable interest of transfer was vague and uncertain as the circumstances in which it could be requested were not set out.  At paragraph 85, Robson J rejected this submission; he noted that it may be requested at the election of the creditor. The system or registration depends on the interest sought to be registered.  So far as Torrens registered land is concerned, the registrable instrument must be a legal mortgage. 

At paragraph 93, Robson J found that the charging clause was valid and enforceable and enlivened the Court’s power to make appropriate orders in the realisation of the security.

The creditor sought to enforce its rights by lodging caveats over the titles of the properties, registering its security interests and requesting the person granting the charge execute mortgages.  While the creditor did not contend that it had priority over the prior registered mortgagees, it did assert priority over all other creditors of the person granting the charge. 

At paragraph 99, the Court noted that the creditor's claim, as an equitable chargee and mortgagee, are proprietary in nature.  The creditor’s equitable interest created by its charge and mortgage were created in 2003, prior to the events alleged to give rise to a Trust in 2008 to 2010, as alleged in the defence of the person granting the charge. 

Robson quoted from the decision of Kitto J in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 (at CLR 276): 

... if the merits [of equitable interests] are equal, priority in time of creation is considered to give the better equity.

The Honourable Justice Robson noted that in such a case, ‘the onus rests on the holder of the later equitable interest to demonstrate why the ordinary rule should be displaced and why that interest should prevail over the earlier one.’

The creditor submitted (and the Court accepted) that this was not a case which comes within any of the recognised exceptions to the general rules about priority between competing equitable interests, and that there is nothing in its conduct to cause its prior equitable interest to be postponed to those other equitable interests claimed.

In the circumstances, it is clear that a caveatable interest  in real estate in Victoria can be readily created by a debtor agreeing (in writing) to charge their real property with repayment of a debt. 

WG Stark

Hayden Starke Chambers

What is the doctrine of marshalling?

In my post dated 12 April 2013 (see: https://melbournepropertylaw.blogspot.com/2013/04/are-there-any-recent-decisions-about_12.html), I discussed the doctrine of marshalling and its potential impact in modern lending law. 

Another example of the relevance of the doctrine of marshalling arose in the May 2019 Court of Appeal decision in Burness (in their capacity as trustees of the bankrupt estate of Love) v Hill [2019] VSCA 94. 

A lawyer, Hill, was engaged by Mr Love to conduct extensive litigation against VicRoads relating to the compulsory acquisition of land owned by Love in Epping, Victoria.

The litigation conducted by Hill on Love’s behalf was lengthy, costly and complex. Although Love was land-rich, it appears that he needed to borrow in order to fund the litigation. Accordingly, Love borrowed about $12 million from the Commonwealth Bank of Australia (‘CBA’) and gave a first mortgage over each of the Epping properties to CBA to secure the loans.

Hill held a second mortgage over Property A, belonging to his client, Love, in respect of unpaid legal fees. Love had become bankrupt, and as a result was not in a position to pay Hill's fees.  

The CBA held a first mortgage over Property A. It also held mortgages over other properties owned by Love, over which Hill did not hold a mortgage. 

The CBA sold Property A, and no proceeds were left to satisfy Hill’s debt. As a result, Hill's second mortgage was discharged automatically at the settlement of the sale (see section 77(4) of the Transfer of Land Act, 1958).

Hill had previously sued Love in the County Court, and obtained judgment for $2.2 million in fees. 

CBA sold Property B. Following payment of all secured indebtedness due to CBA, there were surplus sale proceeds which were paid into Court by CBA. 

Hill then brought proceedings in the Supreme Court to marshal the CBA’s securities to discharge his judgment debt.  

Justice Sifris in the Supreme Court of Victoria confirmed that Hill was entitled to be subrogated to the CBA’s first mortgage over Property B, to the extent of the debt previously secured by Hill’s second mortgage over property A (see (2018) 53 VR 459). The Trial Judge ordered that Hill's claim (and his costs on an indemnity basis in accordance with the terms of Hill's mortgage) be paid from the surplus sale proceeds.

Love’s trustees in bankruptcy appealed against the orders made by Sifris J. 

The Court of Appeal dismissed the trustees' appeal. Justices of Appeal Kaye, McLeish and Hargrave quoted (at paragraph 33 of their judgment) from Lord Neuberger’s speech in National Crime Agency v Szepietowski [2014] AC 338: 

Marshalling [is] allowed to a creditor, in a case where (i) his debt is secured by a second mortgage over property (‘the common property’), (ii) the first mortgagee of the common property is also a creditor of the debtor, (iii) the first mortgagee also has security for his debt in the form of another property (‘the other property’) (iv) the first mortgagee has been repaid from the proceeds of sale of the common property, (v) the second mortgagee’s debt remains unpaid, and (vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee’s debt. In such a case, the second mortgagee can look to the other property to satisfy the debt owed to him.

The Court of Appeal also noted that when dealing with the reason for the doctrine later in Szepietowski, Lord Neuberger quoted from a broad statement by Joseph Story in his text, Commentaries on Equity Jurisprudence:

The reason is obvious… [By] compelling [the first creditor with the two securities] to take satisfaction out of one of the funds no injustice is done to him … But it is the only way by which [the second creditor with one security] can receive payment. And natural justice requires, that one man should not be permitted from wantonness, caprice, or rashness, to do injury to another.

At paragraph 49 of their judgment, the Court of Appeal further quoted Lord Neuberger in National Crime Agency v Szepietowski [2014] AC 338, where he stated:    

... The right to marshal is based on a simple principle, and there is no reason to dilute it in the way contended for ... After all, the right to marshal is not based on the proposition that the first mortgagee is under an obligation to sell the other property first ... Further, if [the] contention were accepted, one can readily imagine all sorts of arguments as to whether one property is more difficult to sell than another, and whether the extent or nature of the difficulty is such as qualifies for the purposes of the contention.

At paragraph [54], the Court of Appeal noted that the only bases to avoid the marshalling doctrine is a contractually enforceable arrangement, binding estoppel, or a legislative obligation.  

While the Trial Judge and the Court of Appeal dealt with a unique set of facts, the Court of Appeal’s reasons contain a number of relevant principles that will apply generally.

First, the requirements to invoke the doctrine of marshalling are those quoted above in Szepietowski.  The Court of Appeal specifically found that there is no independent requirement that the first mortgagee’s conduct be arbitrary or capricious.  

Secondly, securities can be marshalled to discharge the whole of a fluctuating debt even if the debt increases after the sale of the principal security property.

Thirdly, the County Court consent judgment [relating to the quantum of Mr Hill's legal fees] in this case did not extinguish the secured debt.  A debt merges in a judgment and continues its existence in that merged form – it is not retrospectively extinguished. The debt remained secured, and able to support a marshalling claim.

Solicitors acting for subordinate security holders should keep marshalling in mind. If it is available, it can significantly improve a second (or even later) mortgagee’s prospects of recovery. 

The doctrine is particularly attractive where a debtor is insolvent (as with Mr Love here) as it should give a second mortgagee priority over unsecured creditors. 

WG Stark 
Hayden Starke Chambers