Blog 81. Security documents inadequate to create caveatable interest.

Rainford & Ors v SA & RT Tesoriero Pty Ltd [2023] VSC 617, Waller J.

This case is a reminder of the importance of exact drafting of security documents. The facts were –

• The plaintiffs (Philip, Christopher and Pylades Pty Ltd (Pylades)) were registered proprietors of a property (the Property) as tenants in common. Pylades was the trustee of a family trust. Pylades and another company related to the plaintiffs (Drofniar) owned the shares in a third company (Workspace).
• By a Deed of Secured Loan (DSA) dated 1 February 2023 the defendant loaned $2.86 m. to Workspace due for repayment on 30 May 2023. Workspace was required to provide security over its land, which it did. Further, cl. 9.3 of the DSA provided that Philip, Pylades and Drofniar (not Christopher) were obliged to “execute deeds of guarantee and indemnity in such form as the Lender may require”.
• Also on 1 February 2023, Philip (on his own behalf and as director of Workspace) and Christopher (as director of Pylades and Drofniar) executed a General Security Agreement (GSA) and a Guarantee and Indemnity (Guarantee) in favour of the defendant. Although Christopher added his name and signature to each of the DSA, GSA and Guarantee he was not stated to be a party in his own right in any of them.
• Clause 2.1 of the GSA provided –

“Each of the Grantors as beneficial owners charge in favour of the Secured Party, and grants a Security Interest to the Secured Party by way of charge over, the whole of their Collateral and the Proceeds.”

In the GSA “Collateral” was defined to include all real property of the Grantor and “Security Interest” in relation to any Collateral other than personal property was defined to mean:

“… any mortgage, charge, … which is or has the effect of a security for the payment of a debt or other obligation or the compliance with any other obligation, …”.

• Clause 5.4 of the Guarantee provided –
  “Upon request in writing by the Lender, the Guarantor shall:
  1. grant to the Lender a legal mortgage of any property … now or hereafter held by that person containing a covenant:
     1. That Philip … Rainford and Pylades … and Drofniar … shall duly pay all monies now or hereafter due and payable to the Lender by them, the Borrower or by any other person named in the Deed or Collateral Document as a Guarantor.
  2. Where property that the Lender requests be given a [sic] security by the Guarantor is held jointly by the Guarantor and another person (not a party to this Guarantee), the Guarantor shall: … “
     1. take such steps … to effect the registration of a legal mortgage over such jointly held land; or
     2. in the case of a corporation, as beneficial owner charge in favour of the Lender … any property … with the payment of indebtedness pursuant to this Deed …”

The Guarantee defined “Securities” to include a ‘General Security Interest’ over all property granted by Philip, Christopher and Pylades as trustee for the family trust.

• In March 2023, Pylades and Drofniar sold their shares in Workspace to another company. The sale required the consent of the defendant and the defendant thus required execution of a Deed of Variation to the DSA. The Deed of Variation included as parties Workspace, Philip, Christopher (stated to be a party in his own right and described as one of the “Initial Guarantors”), Pylades, Drofniar and other legal and natural persons as “Additional Guarantors”.
• On 4 August 2023 the plaintiffs entered a contract of sale of the Property due for completion on 20 October.  The purchaser paid the deposit.
• Workspace failed to repay the loan and on 21 September 2023, the defendant’s solicitors emailed the plaintiffs’ former solicitor stating:

“Pursuant to clause 5.4 of the deed of guarantee and indemnity legal mortgages of over [sic] real property in the name or names of the guarantors jointly and severally. [sic]
Caveats will be placed on title of all land.

Please provide us with title particulars of all land that the guarantors are the registered proprietors of so that mortgage documents can be prepared.”

No title particulars were supplied.

• Also on 21 September, the defendant caveated over the Property claiming an interest as mortgagee on the grounds of a mortgage with the registered proprietors dated 2 February 2023. The plaintiffs applied under s. 90(3) of the Transfer of Land Act to remove the caveat. On the balance of convenience issue the plaintiffs led evidence that the caveat would prevent settlement of the sale with consequential detriment. The plaintiffs also submitted that the defendant had security and potential security over other properties.

Waller J. ordered removal of the caveat, holding –

1. Clause 2.1 of the GSA created a charge, not a mortgage, by ‘each of the Grantors’ including by Philip and Pylades but not by Christopher. (It was unnecessary to determine whether the reference to Pylades in the various documents was to it in its own right or as trustee of the family trust (and so binding the trust property)). [32]-[34]
2. Clause 5.4 of the Guarantee did not purport to grant the defendant any interest at the time it was entered into. Rather, it gave the defendant the right to request a Guarantor to grant it “a legal mortgage of any property … now or hereafter held by that person” containing the covenant set out in cl. 5.4(a)(i). If a provision such as cl. 5.4 conferred an immediate right of recourse to the property it would amount to an equitable charge or mortgage, but it would not so amount if it was contingent upon further acts of the parties, such as requiring the lender to make a written request for provision of such a security. Clause 5.4 was of this latter character. This contingency had not been satisfied: the email of 21 September 2023 asked only for title details. [36]-[38]
3. Further, a caveat could only in form be commensurate to the interest it was designed to protect. This caveat was not so commensurate because Christopher was not a named party to the Guarantee and so the caveat wrongly purported to rely on a “Mortgage” with “The Registered Proprietor(s)”. This caveat was accordingly not limited in its operation to the interest that could be said to have arisen between the relevant parties. [39]-[41]
4. Although the Deed of Variation named Christopher as a Guarantor and Obligor, and defined “Securities” to include a “General Security Interest” over all property granted by Philip, Christopher and Pylades as trustee, it did not itself create a mortgage over the Property, let alone a mortgage of the kind referred to in the caveat. [42]
5. Thus the defendant had not established a prima facie case of having an interest in the Property. The balance of convenience would also not have favoured the maintenance of the caveat. [43], [55]

Philip H. Barton

          Owen Dixon Chambers West

Tuesday, April 23, 2024