Can I enforce an unregistered restrictive covenant?

In Paragreen v Lim Group Holdings P/L [2020] VSCA 84, the Court of Appeal (Tate, Kaye and Niall JJA) examined whether the respondent could enforce an unregistered restrictive covenant over a laneway against registered proprietors of land which included part of the laneway. 

Background facts

The applicants were the registered proprietors of a property in West Melbourne. The respondent was the registered proprietor of the neighbouring property. The applicants’ property included a strip of land (‘the laneway’) on its western side, which abutted the property of the respondent, and which was subject to a registered easement of carriageway in favour of the respondent’s land.

The respondent purchased its property with the intention of erecting a multi-unit development on it.

The laneway was immediately to the east of the respondent’s property. 

In the course of the development, the respondent’s contractors made extensive use of the laneway in order to carry out the work.

The respondent commenced proceedings in the County Court against the previous owner of the applicants' property. Those proceedings were resolved by an agreement contained in Terms of Settlement. They provided (among other things) that the previous owner would cease to park vehicles on the laneway.

By a contract made in 2009, the previous owner sold the laneway and the applicant's property to a property developer.  

In due course, the developer applied to redevelop and subdivide the applicants' property and a property next door. The development was to consist of three dwellings. The Plan of Subdivision depicted unit 3 as covering the northern section of both the applicants' property and of the laneway. In effect, it included some 9.68 metres of the northern section of the laneway. The two other units in the vendor's development abutted the laneway, with vehicle garages accessed from the laneway. The Plan of Subdivision depicted the section of the laneway that was adjacent to those two units as ‘common property’. The Plan of Subdivision noted that the laneway was subject to the easement of carriageway in favour of the most easterly of the four lots owned by the respondent.

By a contract of sale made in 2011, the applicants purchased the northern most unit in the subdivision from the developer. The contract of sale included a Vendor’s Statement provided pursuant to s 32 of the Sale of Land Act 1962, which annexed a number of documents including the Terms of Settlement.

When the applicants took possession of their property, the right of way was an open laneway. The applicants were a young married couple, and in the years that followed they had two children. During that time, there were a number of intrusions and attempted break-ins to the applicants’ property. The applicants were concerned about their security, and they erected a gate inset two or three metres from their southern boundary across the right of way. At one stage, they also placed a chicken coop, with some chickens in it, and some children’s play equipment on it.

In response, the respondent commenced the proceedings in the County Court, based first, on its rights under the easement, and, secondly, on rights that it claimed to have against the applicants pursuant to the Terms of Settlement, which it alleged contained an unregistered restrictive covenant in the laneway, which precluded the applicants from parking their motor vehicle on it.

The judge, who heard the trial of the proceeding held that the Terms of Settlement contained a restrictive covenant over the laneway, and that notwithstanding that it was unregistered, the applicants were bound by it because it would be fraud, for the purpose of s 42 and s 43 of the Transfer of Land Act 1958, for them to disregard its terms. 

The respondent claimed (among other things) that the applicants had notice of the Terms of Settlement and the covenants at the time that they purchased their property, and, further or in the alternative, the applicants took title to their property subject to the Terms of Settlement and covenants. 

In response, the applicants raised a number of different defences to the claim based on the Terms of Settlement. They included that at the time at which they took title to the land, the respondent had not lodged any caveat on the title to that land, and accordingly the applicants took a transfer of the land free from any unregistered interests or encumbrances by reason of the operation of s 42 and S 43 of the Transfer of Land Act. 

The evidence

The only relevant evidence given at trial was given by the second applicant. 

The advertisements for the sale of the property stated that it had a car parking space appurtenant to it (the applicants were only considering properties that had a car parking space). When the Applicants purchased the property they believed that they were getting a car parking space on it. The existence of that car parking space was ‘factored into’ the amount of the Applicants' offer to the vendor.

As a result of receiving the Vendor’s Statement, the Applicants knew of the Terms of Settlement between the previous owner and the respondent. However, they believed that the terms were a ‘private agreement’ between the previous owner and the respondent. The vendor never asked the applicants to agree to be bound by the terms. 

Reasons for judgment

The registered easement

The trial judge noted that the easement was only appurtenant to the most eastern lot owned by the respondent, and considered that the activities that the respondent intended to carry out on the right of way were for the benefit of all the four titles, without discrimination between them. Thus, the intended use of the right of way, by the respondent, was excessive. 

The judge further considered that the right of carriageway of the respondent over the easement did not entitle it to use the carriageway for the purpose of carrying out maintenance and construction works on the dominant tenement. His Honour further considered that the gate, installed by the applicants, did not constitute an unreasonable interference with the respondent’s right of way over the easement. Accordingly, he concluded that the present use made by the applicants of the part of their land comprising parts of the laneway did not constitute an unreasonable interference with the respondent’s rights as owner of the dominant tenement. 

The judge further noted the evidence that over a period of time the applicants had parked various vehicles on their portion of the right of way. He accepted the contention, made on behalf of the applicants, that there was no reason for the respondent or its licensees to traverse the area to the north of the gate installed by the applicants. Accordingly, the use of that area by the applicants, to park their vehicle, did not constitute an unreasonable interference with the rights of the respondent under the easement.

The unregistered restrictive covenant

The trial judge held that the Terms of Settlement constituted a restrictive covenant, although not registered under the Transfer of Land Act. 

The judge then held that the Terms of Settlement formed part of the Vendor’s Statement that was received by the applicants before they purchased the property, and the applicants therefore ‘took with notice of this promise not to park’.

The trial judge concluded that the effect of clause 7 of the Terms of Settlement, and of S 79 of the Property law Act 1958, was that the Terms of Settlement should be regarded as promises made by the applicants as successors in title to the previous owner.

s 42 and s 43 of the Transfer of Land Act

In respect of the reliance by the applicants on s 42 and s 43 of the Transfer of Land Act 1958, the trial judge referred to the High Court decision in Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604, and the decision of Vickery J in Body Corporate No 12870 v Aldal Pty Ltd (2010) 29 VR 81. He noted that the applicants did not suggest that they were unaware of the existence of the Terms of Settlement. His Honour concluded that the Terms of Settlement were an ‘assumption’ which ‘underlay’ the contract of sale to the applicants, so that it would be fraud, for the purpose of s 42 and s 43 of the Transfer of Land Act 1958, for the applicants to disregard them. 

Three of the grounds of appeal were directed to the conclusion by the judge that it would be fraud, for the purposes of s 42 and s 43 of the Transfer of Land Act, for the applicants to disregard the Terms of Settlement.

The Court of Appeal 

At paragraph 75 of their joint judgment, the Court of Appeal concluded that three points were clear from an analysis of the judgments in Bahr v Nicolay, as follows:

First, the High Court confirmed the long-standing principle that the exception of fraud, in s 42 and s 43 of the Transfer of Land Act, refers to actual fraud, that is, dishonesty or moral turpitude. A finding of equitable or constructive fraud is of itself insufficient to constitute fraud under the Transfer of Land Act, unless the conduct of the registered proprietor, as such, involves actual dishonesty.

Secondly, the registered proprietors in that case purchased and took title to the property in question with the knowledge and understanding, and having acknowledged, that they were bound by the unregistered interest of the plaintiffs, so that the acquisition by them of their registered interest in the property was subject to the right of the plaintiffs to repurchase the property from them.

Thirdly, in Bahr, each of the five judges held that those facts gave the plaintiffs an in personam right in equity against the registered proprietors, that was justiciable at the suit of the plaintiffs. Only two members of the Court — Mason CJ and Dawson J — went further and found that the conduct of the registered proprietors in denying the right of the plaintiffs to repurchase the property from them, constituted actual fraud within the meaning of the Transfer of Land Act.

The Court of Appeal concluded that plainly, the facts of the present case are not only different, but may be materially distinguished, from those that were before the High Court in Bahr. 

The judge was correct to note that the contract of sale expressly incorporated the Vendor’s Statement, and that General condition 1.1 of the contract provided that the applicants purchased the property subject to ‘any encumbrance shown in the Vendor’s Statement‘. However, it was at that point that his Honour’s analysis broke down. Cl 1 of the Vendor’s Statement, under the heading ‘Restrictions’, provided that information concerning any easement, covenant ‘or other similar restriction’ affecting the property was ‘set out in the attached copies of title document(s)’. Clause 8 of the Vendor’s Statement defined the phrase ‘documents concerning title’ in terms of three specific categories, namely, an authorised reproduction of the folio of the register, the proposed plan of subdivision, and the title plan. Relevantly and importantly, those categories did not include the Terms of Settlement. Axiomatically, as a matter of construction of the relevant contractual documents, the applicants, by signing the contract of sale with Mr Ryan, did not thereby undertake or agree to be bound by the obligations contained in the Terms of Settlement.

Further and importantly, the evidence in the case, on which the judge found the assumption which underlay the contract of sale to the applicants, went no further than the contractual documents. There was no evidence, at all, of the kind adduced in Bahr. Importantly, there was no evidence that the applicants gave an assurance or undertaking to the developer, or to his agent, of the kind that the registered proprietors gave in Bahr.

At paragraph 82, the Court of Appeal noted that the evidence in the case did no more than establish knowledge by the applicants of the Terms of Settlement when they purchased their unit. As s 43 of the Transfer of Land Act, and longstanding authority, including Bahr, make clear, that evidence was insufficient to bind the applicants as registered proprietors of the unit, or to form a basis for a finding of fraud.

The Court of Appeal noted that in the conclusion to his reasons, the judge found that it would be ‘contrary to good conscience’ for the applicants to disregard the Terms of Settlement, which was the foundation of his conclusion that the applicants’ conduct, in disregarding the Terms of Settlement, would be fraud for the purpose of s 42 and s 43 of the Transfer of Land Act. 

At paragraph 84 the Court concluded, three points may be clearly made concerning that conclusion.

First, it would seem that the judge erroneously conflated what might, conceptually, be the basis of an in personam claim in equity, in an appropriate case, with actual fraud under the Transfer of Land Act. As the High Court recognised in Ferguson, not all species of fraud, which attract equitable remedies, will amount to fraud for the purpose of the Transfer of Land Act. The two concepts are materially different and distinct from each other. 

Secondly, in any event, there was no foundation in the evidence for a finding that it would be ‘contrary to good conscience’ for the applicants to not consider themselves bound by the Terms of Settlement, and, in particular, to exercise their legal right, as registered proprietors, to park their vehicle in the section of the laneway owned by them.

Thirdly, the conduct of the applicants, in exercising that right, could not, on any analysis of the facts, be found to constitute actual fraud (that is, dishonesty or moral turpitude) for the purpose of the Transfer of Land Act. Nor, the Court of Appeal added, could it be sufficient to be the foundation of some kind of claim in equity. 

The Court of Appeal concluded that the trial judge erred in holding that the respondent had established fraud, under s42 and s 43 of the Transfer of Land Act, comprising the conduct of the applicants in disregarding the Terms of Settlement. 

Conclusion 

The case is of interest due to the Court of Appeal's analysis of the requirements that need to be established in order to make a successful claim alleging fraud under s 42 and/or s 43 of the Transfer of Land Act. 

They confirmed that knowledge of an unregistered instrument (in this case a restrictive covenant) and choosing to ignore that unregistered instrument does not amount to fraud. As the cases have held for more than a century, fraud under the Transfer of Land Act means actual fraud, that is, dishonesty or moral turpitude. A finding of equitable or constructive fraud is of itself insufficient to constitute fraud under the Transfer of Land Act, unless the conduct of the registered proprietor, as such, involves actual dishonesty.

WG Stark

Hayden Starke Chambers