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

The Sale of Land Amendment Act 2019 has been passed by the Victorian Parliament

Further to my post about this issue on 16 April 2019 (see: https://melbournepropertylaw.blogspot.com/2019/04/the-sale-of-land-amendment-bill-has.html), the Sale of Land Amendment Bill 2019 was passed by the Victorian Parliament on 28 May 2019 and it received Royal Assent on 4 June 2019.

WG Stark

Hayden Starke Chambers

The Sale of Land Amendment Bill has been reintroduced into the Victorian Parliament

Further to my post about this issue on 30 January 2019 (see: https://melbournepropertylaw.blogspot.com/2019/01/what-amendments-are-proposed-to-sale-of.html), the Sale of Land Amendment Bill 2019 was reintroduced into the Victorian Parliament on 20 March 2019 and had it second reading in the  lower house (the Legislative Assembly) on 21 March 2019.

It is expected to be passed when the state Parliament resumes sittings later in April 2019. 

WG Stark
Hayden Starke Chambers 

What is the effect of the GST withholding regime relating to new residential land in Australia?

1.     The Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 received royal assent on 29 March 2018. The new law significantly changes the way that GST is dealt with and will impact all residential property transactions.

2.     From 1 July 2018 (subject to transitional arrangements) purchasers of newly constructed residential properties or land in new subdivisions will be required to pay the goods and services tax under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST) (presently set at 10%) directly to the ATO as part of the settlement.

3.     When announced in the federal budget, it was asserted that the amendments would “strengthen GST law, maintain the integrity of the Australian taxation system and ensure property developers comply with their GST obligations and remit GST on their residential sales”.

Former practice

4.     Formerly, purchasers paid the GST to the vendor as part of the price; the vendor was then supposed to remit it to the ATO with their post-settlement Business Activity Statement (BAS).

5.     GST has always been payable on sales of new residential premises and potential residential land. The change means that instead of asking the developer/seller to make sure the GST is paid to the ATO upon the sale of the property, the buyer is now obliged to do this.

Phoenixing

6.     There has been a lot of publicity about ‘phoenixing’, a practice by some property developers where they claimed and received the benefit of input tax credits for GST incurred on their construction costs, then wound up the purpose-created development corporation, and ultimately failed to remit the GST that they collected on sales to the ATO. Then, they would allegedly start the process over again for their next development, with a new purpose-created development corporation.

7.     According to the Explanatory Memorandum of the Bill that introduced the change, the GST debt in respect of insolvent entities was almost $2 billion as of November 2017.

Withholding notice

8.     The legislation now requires all vendors of residential premises or potential residential land to provide the purchaser with a specific notice before the supply is made. The notice needs to advise the purchaser of whether it needs to withhold GST, and if so, the amount and means of payment.

9.     If the purchaser is required to withhold an amount, the vendor must also provide its name and ABN, the amount to be withheld, and when the purchaser is required to pay the amount.

10.  This notification requirement applies to vendors in respect of sales of all residential premises (not just new premises) or potential residential land with limited exceptions.

11.  There are penalties for both the vendor and purchaser in failing to comply with their obligations under the new regime.

12.  Apart from the withholding notice that is to be provided to the buyer, in most cases the administration of GST in respect of the sale of second-hand residential property has not changed (it is still GST exempt as an input-taxed supply).

Timing

13.  The purchaser’s obligation to withhold and remit will usually arise at settlement. However, where the price is payable in instalments (for example, under a terms contract), the purchaser will be required to remit the GST to the ATO on the day the first instalment (other than the deposit) is paid.

14.  The amount to be withheld varies depending upon whether the margin scheme applies. If the margin scheme does not apply, the purchaser must withhold 1/11^th of the contract price. If the margin scheme applies, the purchaser must withhold 7% of the contract price (regardless of the actual liability). Any reconciliation is to be made in the vendor’s next BAS. The contract price is, effectively, the price set for the supply in the contract. It does not take into account any potential adjustments such as amounts for land tax, council rates and water rates.

15.  The new regime takes effect in respect of:

a.    All contracts entered into after 1 July 2018; and

b.    Contracts entered into prior to 1 July 2018 if they settle after 1 July 2020 (therefore, the new regime will apply to some prior existing off-the-plan contracts).

16.  The purchaser may satisfy its obligations to remit the GST by:

a.    Payment direct to the ATO;

b.    Providing a bank cheque made out to ATO to the vendor at settlement or at the time the first instalment is paid; or

c.     If parties are using PEXA (as is increasingly likely), both parties can authorise PEXA to distribute the amount for GST to the ATO as part of directions for settlement funds.

17.  If the purchaser fails to withhold and pay the required amount to the ATO, the purchaser will be liable to a penalty equal to the amount of the GST payable (unless it has reasonably relied on notification by the vendor). What is reasonable will depend upon all of the circumstances of the case. 

18.  The requirement to notify the purchaser is a strict liability offence and a court may impose a maximum penalty of 100 penalty units for individuals ($21,000) or 500 penalty units ($105,000) for corporations.

19.  The Standard Form LIV Contract of Sale of Real Estate now has a specific Special Condition (SC15B) to take into account these legislative changes.

WG Stark 

Hayden Starke Chambers