Caveat lodged to protect priority of equitable mortgage but badly expressed – Caveat not amended but interlocutory injunction granted to protect priority

TL Rentals Pty Ltd v Youth on Call Pty Ltd and Ors [2018] VSC 105 (8 March 2018) Derham AsJ.

This interesting case demonstrates that a badly drawn caveat can be rescued
– not under the TLA caveat provisions but by an interlocutory injunction.
The case is also a good discussion of general caveat principles and priorities
between equitable interests

Katherine and Damian Shannon were the joint proprietors in equal shares of land mortgaged to a bank.

The chronology was –

12 October 2016  Plaintiff (TL) leases equipment to first defendant whose obligations are guaranteed by Katherine.  Guarantee provides that she mortgaged her interest in the land and would on request execute a registerable mortgage. 

12 December 2017 Lessee in default.  TL serves notices on it and Katherine seeking payment. 

21 December 2017 TL lodges caveat claiming a “freehold estate” pursuant to an agreement with the “registered proprietor(s)” dated 12 October 2016.

7 January 2018   Permanent Custodians Limited (PCL) enters loan agreement with the Shannons. 

22 January 2018  Relying on an old title search predating the caveat, PCL advances the funds due by paying out the existing mortgage with the balance to the Shannons.  Mortgage lodged for registration. 

23 January 2018  Pursuant to the Transfer of Land Act (TLA) s. 90(1) Registrar gives notice to TL of lodgment of an inconsistent dealing and that its caveat would expire in 30 days.

20 February 2018 TL commences proceeding claiming a declaration that it had an equitable mortgage or charge over Katherine’s interest in the land securing payment of the sum owed. 

21 February 2018 TL applies the court pursuant to TLA s. 90(2) for an injunction directing the Registrar to maintain the caveat until registration of a mortgage in favour of the plaintiff or further order.

22 February 2018 Interim court order directing the Registrar to delay registration of any dealing.  TL foreshadows application to amend caveat to limit it to a claim for an equitable mortgage over Katherine’s interest in the land.  

2 March 2018      Hearing.  TL abandons argument for amendment and maintenance of caveat but seeks amendment of summons to claim an interlocutory injunction to protect the priority of its mortgage against defeat by registration of PCL’s mortgage.

The TLA s. 90(2) in substance provided, a notice under s. 90(1) having been given, that if within a particular period the caveator appeared before a court, the court may direct the Registrar to delay registering any dealing with the land or make such other order as was just.  Section 90(3) provided that any person adversely affected by a caveat may bring proceedings for the removal of the caveat and the court may make such order as it thought fit.

Derham AsJ  held –

1.     An application under s. 90(3) was in the nature of a summary procedure and analogous to the determination of an interlocutory injunction.  The caveator had the burden of establishing a serious question to be tried that it had the estate or interest in land as claimed and that the balance of convenience favoured maintenance of the caveat until trial.  In an application under s. 90(2) the same burden rested on the caveator. [29]-[30]

2.     The interest or estate claimed in a caveat could probably be amended but only in special or exceptional circumstances, as it effectively substituted a different caveatable interest.  In this case it would have been substitution of a claim to a freehold estate in respect of the registered interests of both proprietors with a claim to an interest under an equitable mortgage granted by one proprietor. Although TL’s mortgage was not in registerable form it was entitled to an unregistered (equitable) proprietary interest over Katherine’s share of the land that was capable of supporting a caveat.  Whilst remaining unregistered it was an agreement to mortgage.  [9]-[10], [20], [31]

3.     TL was granted leave to amend its summons to claim an interlocutory injunction.  The caveat procedure was essentially a statutory injunction granted upon consideration of the same factors applied when granting interlocutory injunctions in equity. [34]-[36] 

4.     PCL was entitled by subrogation to the rights of the mortgagee (NAB) whose mortgage it had paid out.  This gave PCL priority over TL for this part of its loan.  Otherwise approximately $130,000 was secured by TL’s equitable mortgage and $271,000 by PCL’s equitable mortgage. The interest first in time would prevail but that may change where the prior equitable interest holder had so acted that it would be unconscionable if its interest were to prevail. However, mere failure by the prior holder to caveat was insufficient to postpone that interest, even where the subsequent interest has been acquired bona fide and for value without notice and on faith of the title.  The latter interest holder must show a change of position and prove detriment as a necessary element of any claim for postponement. [21]-[22], [44]

5.     It was not unconscionable for TL’s equitable mortgage to be afforded its usual priority.  PCL should have conducted title searches later than six weeks before advance of funds.  Further, having regard to evidence that the market value  of the property sufficed to cover all monies secured against it, PCL had not proved detriment if postponed. [23]-[25]

6.     There was accordingly at least a prima facie case that TL’s mortgage had priority.  Whether this prima facie priority would justify the restraint sought depended on: (a) the practical consequences likely to flow from the interlocutory order sought; (b) whether if the injunction was not granted the plaintiff would be likely to suffer injury for which damages would not be an adequate remedy; (c) whether the balance of convenience favoured the granting of an injunction, as to which the strength of the case on serious question to be tried was relevant; (d) whether other discretionary considerations militate against the grant of the injunction.  TL met these tests.  The grant of an injunction until trial carried the lower risk of injustice if it should turn out to have been wrong. [26], [33], [37]-[38], [46]-[48]

7.     Due to doubt whether TL could satisfy the undertaking as to damages required for an interlocutory injunction, it would be made a condition of the grant of the injunction that the ultimate holding company or another company in the same group join in giving the usual undertaking as to damages. [53]-[54]

 

 

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