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

Retail Leasing Seminar on 25 March 2015

Today, I am presenting a talk to a Retail Leasing Seminar about "Special Conditions".
The paper will be available from www.legalwiseseminars.com.au in due course.

W G Stark
Hayden Starke Chambers

When is electronic conveyancing going to happen in Victoria?

Electronic (or e)-conveyancing is the process for settling, stamping and lodging property transactions electronically.

In effect, the parties are no longer required to attend a settlement physically; they will just attend electronically! They no longer have to hand over cheques, and receive Certificates of Title. Payment is made electronically, and the electronic title is transferred with the press of a button. 

 The Property Exchange Australia (PEXA) e-conveyancing system commenced in February 2015 in Victoria. 

PEXA is owned by government agencies and a number of financial institutions. 

It will eventually enable its subscribers (lawyers, licenced conveyancers, regulated financiers and government authorities) to lodge data with the Titles Offices in each Australian state and territory electronically, replacing paper documents. Participants will need to sign a Participation Agreement to participate.

The four parties usually involved in a conveyancing transaction (the vendor, the vendor's financier, the purchaser and the purchaser's lender) will need to participate and be authorised to use the system before a transaction can be completed electronically. 

There are now national e-conveyancing laws and "model participation rules". 

The rules set out protocols for:

• creating electronic documents
• settling transactions in real time and for value
• arranging payment of the stamp duty
• lodging and registering documents at the Titles Office
• notification to various authorities, including the municipal council, water authority and state land tax

Within the PEXA system there are three ways of providing source funding to effect an e-conveyancing transaction (inclusive of financial settlement):

subscriber financial institutions;
a solicitor’s trust account; or
a PEXA source account.

The Legal Services Commissioner has recently notified practitioners that:

It is important to note that the PEXA Source Account is not a trust account within the meaning of the Legal Profession Act 2004, and therefore the protection offered by the Fidelity Fund may not exist if a default occurs in the PEXA Source Account. It is also important to understand that the interest earned on PEXA Source Accounts funds will accrue to PEXA, and not the Public Purpose Fund.

As mentioned in previous blogs (25 Aug 2014; 1 Oct 2014; 6 Nov 2014; and 17 Dec 2014), new verification of identity requirements are being introduced progressively in each state. These requirements include production of appropriate forms of identification of potential borrowers, as a means of avoiding fraud.   

As a concession to Luddites, it should be noted that the paper conveyancing system will continue to be available for the time being. It will continue to be used where the representative of one or other party is not a PEXA subscriber.

In other words, PEXA is not (yet) compulsory. 

However, as the various banks are now pushing forward with it, this may change!

 

W G Stark 

Hayden Starke Chambers

Are there any recent cases about whether a builder is liable to an owner's corporation for defective building works?

In October 2014, the High Court handed down a decision about the duty of care owed by builders to third parties (purchasers, including owners corporations) (see Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36).

Background 

The owners corporation of serviced apartments (OC) found some latent defects (which could not have reasonably been discovered before the purchase of the property) in the common property of the serviced apartment complex.

The OC incurred costs rectifying those defects, and commenced legal proceedings in the Supreme Court of NSW in 2008 against the builder to recover the costs.

The High Court of Australia unanimously allowed (in 4 separate judgments) the appeal by the builder. The court concluded that the builder had no duty to avoid causing the OC economic loss, resulting from latent defects in the common property which had remained undiscovered for nearly nine years.

In Bryan v Maloney [1995] HCA 17 (1995) 182 CLR 609, the High Court had previously held that builders have a potential duty of care to subsequent purchasers for latent defects which may arise in a dwelling house. This decision has caused a lot of uncertainty about the extent of a builder's duty and potential liability.

Brookfield was engaged by a developer under a design and construct contract to build strata-titled apartments in Chatswood in suburban Sydney. The developer was the registered proprietor of the land.

The OC commenced its existence when the strata plan was registered. At the same time, it became the registered proprietor of the common property. It had no contractual relationship with Brookfield or the developer. The OC did, however, hold the common property as agent for the developer and was effectively subject to the developer's control.

The design and construct contract contained detailed provisions with respect to the quality of the work to be performed by Brookfield and required Brookfield to remedy defects or omissions in the work within a defined defects liability period.  The standard form contract of sale to purchasers of the serviced apartments, annexed to the design and construct contract, conferred on each purchaser specific contractual rights in relation to defects in the property, including the common property.

The decisions 

The Supreme Court of New South Wales (McDougall J) held that Brookfield did not owe the duty suggested by the OC. That duty was to take reasonable care to avoid a reasonably foreseeable economic loss to the OC in having to make good the consequences of latent defects caused by the building's defective design and/or construction.  McDougall J held that the duty alleged was novel and that it was not appropriate for a Judge at first instance to identify and impose a novel duty.

On appeal, the NSW Court of Appeal unanimously held that Brookfield did owe the OC a duty of care. However, the actual duty found to be owed was a narrower duty to avoid causing loss resulting from latent defects which were structural or dangerous or which made the serviced apartments uninhabitable.

The Court of Appeal also decided:

• there will generally be concurrent liability for defects in both contract and tort, and
• the requirement of "vulnerability" for pure economic loss was present for the developer, the OC and, probably, subsequent purchasers.

The Court of Appeal stated that Brookfield's liability in tort to the OC as subsequent purchaser only extended to defects that are "dangerous" and which therefore reasonably require rectification to protect the bodily integrity and property interests of the inhabitants of the building.

The High Court unanimously held that Brookfield did not owe a duty of care to the OC to avoid causing it economic loss resulting from latent defects in the common property.

Chief Justice French held that:

• the nature and content of the contractual arrangements, including detailed provisions for dealing with and limiting defects liability
• the sophistication of the parties, and
• the relationship of the developer to the OC,

all weighed against a finding of vulnerability (and as a consequence the existence of a duty of care) to either the developer or the OC.

The High Court also stated that:

"To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence..."

Conclusion

The High Court recognised the importance of the terms of the bargain struck between the parties and recognised that the contract here meant that a concurrent duty of care did not arise.

W G Stark
Hayden Starke Chambers

Will NSW also adopt the Verification of identity requirements by mortgagees?

Following on from Victoria and other states, in New South Wales, new requirements for verification of the identity of mortgagors will apply from 1 January 2015.


The NSW amendments (like the Victorian provisions) require a mortgagee of land to take reasonable steps to ensure that the person who executed the mortgage, or on whose behalf the mortgage was executed, as mortgagor, is the same person who is, or is to become, the registered proprietor of the land that is security for the payment of the debt to which the mortgage relates.

These provisions are being enacted in anticipation of electronic conveyancing commencing nationally in the near future. 

Once all states have the appropriate legislative regime in place, there will be no further impediments to the commencement of  electronic conveyancing.

The major banks have now decided to accept electronic conveyancing as inevitable and have taken the necessary steps for it to become the standard form of a conveyancing transaction.  

Those of us who like paper titles and mortgages will soon no longer be able to conduct conveyancing business in the 'old-fashioned' way! I don't believe I am the only person who is nervous about this process! However, we all have to move with the times.

W G Stark
Hayden Starke Chambers 

Victorian lenders required to take 'reasonable steps' to verify the identity of borrowers from September 2014

Further to my post of 25 August 2014, the Transfer of Land Amendment Act 2014 (Vic) came into effect on 24 September 2014. 

As previously noted, the amendments require lenders to take 'reasonable steps' to verify the identity of borrowers before executing a mortgage or variation of mortgage. 

The amendments are a part of the legislative package brought in to allow for the full introduction of e-conveyancing.

 
W G Stark
Hayden Starke Chambers

Can I obtain leave to defend an application for summary judgment for possession (part 2)?

Further to my post about summary judgment for possession, the Honourable Justice Ginnane (of the Supreme Court of Victoria) in ANZ Banking Group Ltd v Loftus [2014] VSC 342 was called upon to decide an appeal from an order for summary judgment granted by an Associate Justice in a claim by a mortgagee for possession of a security property.

ANZ sued Mr Loftus ("the defendant") among other things for possession of a property given as security for the loans.  

The defendant denied signing the mortgage in his defence.  

On 2 April 2014, an Associate Justice granted summary judgment in favour of ANZ.  A solicitor appeared for the defendant at the hearing of the summary judgment application. However, no affidavit in opposition was filed on his behalf.  

Ginnane J notes (at paragraph 13) that in her reasons, the learned Associate Justice observed:

In the course of the hearing I directly asked Mr Loftus’ solicitor why an affidavit had not been filed on behalf of Mr Loftus. The Court was informed that Mr Loftus’ solicitor had some concerns about Mr Loftus in that she thought he may have an acquired brain injury and that this presented difficulties in terms of Mr Loftus being able to attend to give instructions and to prepare such an affidavit. This is an extremely serious matter that was put before the Court. Mr Loftus is legally represented and yet no material has been put before the Court. There was no application for an adjournment for more time so that an affidavit could be filed by Mr Loftus.

At paragraph 17, Justice Ginnane also notes: 
    The Associate Justice in reaching her decision stated:

Having considered the evidence and heard submissions, I do not consider Mr Loftus has any real prospect of success. It was open to Mr Loftus to put some material before the Court and he failed to do so. In circumstances where he makes an allegation of fraud, it is incumbent on Mr Loftus to put some evidence to substantiate the allegation or that demonstrates there is at least a question to be tried.

The defendant terminated the solicitor's retainer and appealed to a Judge of the Trial Division against the order granting ANZ summary judgment. 

At the hearing of the appeal, the defendant was represented by duty counsel under the Victorian Bar scheme. He sought to rely upon an affidavit prepared and sworn by him which was not before the Associate Justice.  

In his affidavit, the defendant:

1. explained why there was no affidavit before the Associate Justice.  He alleged that he met with his solicitor to give instructions for an affidavit and it was agreed that the solicitor would send a draft to him.  However, he swore that he did not receive a draft affidavit from his solicitor and he did not do anything further because he thought his solicitor had everything under control;
2. swore that he did not have a brain injury; and
3. set out his version of events concerning the ANZ loans and denied ever signing a mortgage.

In respect of comments regarding a brain injury, the two counsel appearing on the appeal for the defendant informed Ginnane J that they had not seen evidence of a brain injury in their contact with him.  

One of the grounds of appeal from the decision of the Associate Justice was that the amended defence and particulars disclosed a triable issue and should be taken to have been filed and served on a “proper basis”, having regard to s 18 of the Civil Procedure Act 2010 and the obligations that it imposed on persons to whom the overarching obligations applied in responding to allegations that were made in a proceeding. 

Justice Ginnane rejected those submissions. At paragraph 28, he went on to find:

Mr Loftus was in essence making an allegation of fraud against the ANZ.  Whatever may be the position in respect of other defences,[1] in my opinion, a defence of fraud must usually be supported by an affidavit setting out details of the defence.[2]  This is a case in which that was required.

The question of whether to allow the new evidence In considering whether to allow the new affidavit, Ginnane J referred to rule 77.06.9(3) which gives the court power to receive further evidence on appeal on questions of fact by affidavit.  Justice Ginnane also referred to Clark v Stingel [2007] VSCA 292 in which the Court of Appeal set out the principles upon which the Court will grant leave to introduce fresh evidence upon an appeal.  In that case, it was held that leave should be given only if:

• by the exercise of reasonable diligence such evidence could not have been discovered in time to be used in the original trial;
• it is reasonably clear that if the evidence had been available at the trial, and had been adduced, an opposite result would have been produced; and
• the evidence proposed to be adduced is reasonably credible.

The defendant's affidavit and the affidavits of ANZ concerning the relevant facts were in conflict. 

Justice Ginnane decided that where there are disputed questions of fact, those disputes are best resolved at trial after hearing oral evidence of witnesses.  

When applying s 63 of the Civil Procedure Act 2010, the Honourable Ginnane J was of the view that the defendant had real prospects of defending ANZ’s claim because his version of events may be accepted.

Justice Ginnane concluded that it was reasonably clear that if Mr Loftus’ evidence had been before the Associate Justice, summary judgment would not have been granted.

Justice Ginnane also relied on the fact that the judgment was not obtained after a full hearing at trial; it was obtained on a summary judgment application which is made on affidavit.  

The case was therefore distinguished from Clark v Stingel where further evidence was sought to be introduced at an appeal after a full trial.  The principle of finality of litigation was stronger after the completion of a trial than at an application for summary judgment.

The interests of justice were also viewed by the Honourable Ginnane J as an important factor when considering the admission of new evidence on appeal.  Relying on the defendant's account of his dealings with his solicitor and the solicitor's failure to file an affidavit or seek an adjournment to enable an affidavit to be filed, Ginnane J allowed the defendant to use his affidavit.

In the result, the appeal was allowed on the basis of the new evidence filed, because the defendant had established that he had real prospects of defending ANZ’s claim; it was therefore a proceeding that should go to trial.

The case is a good example of the circumstances where leave to defend will be granted to a defendant where a mortgagee is seeking possession of a security property.

There were credible allegations of fraud: the defendant swore that he had not signed the mortgage in question, the mortgage was witnessed by an employee of the bank and the defendant's lawyer had asked the bank to produce the original mortgage for examination. The bank only provided a copy. 

Counsel and solicitors in Victoria will be aware that the making of a false allegation of fraud amounts to professional misconduct. Therefore, making such an allegation will be rare and will only be made by lawyers on proper instructions. As a result, if such an allegation is made by a lawyer, the court will take it seriously. In this case, the allegation was made by the defendant himself after he terminated the services of his lawyer.

W G Stark

Hayden Starke Chambers