Can an equitable interest take priority over a legal interest in Torrens law?

In National Australia Bank Ltd v Waldron & Registrar of Titles [2015] VSC 141, the Supreme Court was called on to determine whether an equitable interest could take priority over a registered mortgage.  

The National Australia Bank held a mortgage over the property in question which was registered on 21 February 2007.

The registered proprietor’s wife claimed an equitable interest as purchaser from her husband pursuant to a written agreement dated 8 October 2008.

The mortgage fell into default and it appears that the Bank wished to sell the property.

At the time of the sale agreement, the proprietor and his wife were living in the property; they were also purchasing a new property and trying to refinance the mortgage.

The registered proprietor’s wife swore that the purpose of her purchasing the property from her husband was so that her parents could live in the property which would be close to her and her husband. Her parents were living in the USA at the time and it was her understanding that the property could not be purchased in their names because they were foreign citizens and it was not a new property. 

It was the intention of the registered proprietor’s wife to purchase the property on her parent’s behalf and it be registered in her name even though her parents would live there. It was the intention of the registered proprietor and his wife that the registered proprietor would use the purchase moneys his wife paid to him for the property to fund the purchase of a new house in Sassafras, where they now live. 

On 4 December 2008, the registered proprietor’s wife registered a caveat claiming an interest over the property ‘as purchaser under a contract note dated 8 October, 2008 made between [the registered proprietor] as vendor and [the registered proprietor’s wife] as purchaser’.

Pursuant to the Contract of Sale, the registered proprietor’s wife paid her husband various sums.

The registered proprietor’s wife swore that the source of the initial payments totalling $185,000 to her husband, were funds from her parents.

In accordance with the Contract of Sale, the registered proprietor’s wife still had to pay $200,000, in addition to the $185,000 already advanced.

The registered proprietor’s wife was aware that her husband had a mortgage and loan with the bank and that the property was security for the loan. The bank had provided to the registered proprietor and their conveyancer a payout statement for approximately $299,000 to pay out the mortgage and loan settlement on 1 December 2008. The Contract of Sale did not proceed, as the registered proprietor raised a dispute with the bank over the amount required to discharge the mortgage. This subsequently became the subject of court proceedings between the registered proprietor and the bank.

In 2012, the bank commenced a County Court proceeding against the registered proprietor seeking an order for possession of the property and the total amount owing under the loan agreement and the mortgage. 

In 2014, judgment for possession of the property and a debt of $440,441.19 plus interest and costs was entered in the County Court proceeding.

The registered proprietor appealed against the County Court judgment; the Court of Appeal dismissed the appeal.

The registered proprietor filed an application for special leave to appeal to the High Court.

On 25 November 2014, the bank took possession of the property.

On 11 December 2014, the High Court of Australia dismissed the special leave application. 

By letter dated 16 December 2014, the bank wrote (again) to the registered proprietor's wife requesting that she withdraw the caveat. No response was received. 

The Bank issued an application under sub-section 90(3) of the Transfer of Land Act 1958 to remove the caveat. 
 

The court noted, among other things, that the proper exercise of the discretion under sub-section 90(3) will involve considering: 

 (a) in which party’s favour the balance of convenience lies;

(b) whether there is a serious question to be tried; and

(c) whether the caveator claims an interest wider than what the caveator may be entitled. 

These questions inform the ultimate consideration, that is, whether the caveator has discharged his or her onus of justifying the maintenance of the caveat. 

The court also stated (following Bradto) as a general rule, when considering the balance and convenience, the Court should take whichever course appears to carry the lower risk of injustice if the Court should turn out to have been ‘wrong’, in the sense of declining to order summary removal of the caveat where the caveator fails to establish its right at trial, or in failing to order summary removal of a caveat where the registered proprietor succeeded at trial.

At paragraph 49, the Court held: 

... accepting that [the registered proprietor's wife] purchased the property under an enforceable contract and that she has an equitable interest in the land which can be supported by the caveat, the Contract of Sale did not proceed. Even if it is accepted that the Contract of Sale remains on foot, which is somewhat questionable, given a period of six years has elapsed, any subsequent equitable caveatable interest which [the registered proprietor's wife] may have in the property is not one which will take priority over the bank’s registered legal interest. The fundamental principle set out in Law Mortgagees Queensland Pty Ltd, that the bank’s interest as registered mortgagee arose before the creation of any equitable interest in the caveat lodged by [the registered proprietor's wife] and the mortgage prevails and, accordingly, the caveat must be removed. The legal principle of priority of interests remains relevant to the present proceeding. (Emphasis added). 

The court noted that the registered proprietor's wife submitted that the caveat lodged by [registered proprietor's wife] predates the plaintiff’s enforcement of its right in obtaining judgment for possession of the property and taking possession. 

The court concluded that this argument is misconceived. The bank’s registered interest, which enjoys the benefit of indefeasibility, in the absence of fraud, was established at the time it registered the mortgage on the property. The fact that enforcement proceedings were subsequently commenced is not relevant to the date at which the bank’s registered interest was created. 

In the circumstances, the Court did not consider that there was a serious question to be tried. 

For completeness, in relation to the balance of convenience the Court noted that it favoured removal of the caveat. 

The Court noted that there is nothing precluding [the registered proprietor's wife] and/or her parents from purchasing the property in due course when it is put on the market. 

The court also considered (at paragraph 57):

... there is prejudice to a mortgagee where the presence of a caveat on its title is detrimental to the proper exercise of the statutory power of sale, due to the reduced marketability of the property and in circumstances where the caveator has no grounds for proceeding to restrain the registration of a transfer by the mortgagee.

Whilst the result in the case is hardly surprising, it is surprising that the caveator did not remove her caveat when requested to so by the Bank. It seems trite law that a party with a registered (legal) interest will take priority over an unregistered (equitable) interest. 

W G Stark 
Hayden Starke Chambers