Category: Charge (Equitable)

Blog 61. Caveator narrowly escapes blizzard.

Reindel & Ors v Confreight Pty Ltd & Ors (No 1) [2022] VSC 163, Daly AsJ (4 April 2022).

This case is interesting for several reasons.  First, Daly AsJ discusses the subtle difference between the competing tests of ‘prima facie case’ or ‘serious question to be tried’ for a caveator to hold a sufficient interest in land in proceedings under the Transfer of Land Act s. 90(3).  Her Honour comes down on the side of the former.  (However it is difficult to think of any case in which a court held that a caveator satisfied one and not the other test).    Second, her Honour conducts a long survey of the authorities on creation of equitable charges.  Third, her Honour summarises principles of contractual interpretation.  The facts were –

  • A company developed land including for 69 residential units.  Reindel and a company of which he was director (Blizzard Winds) were the registered proprietors of one and four units respectively.  Another company (ABPC) was controlled by Baker.
  • Reindel and Baker had a long, complicated and contentious financial association culminating in a written agreement alleged by Baker and denied by Reindel to have been made between ABPC and Reindel on 11 September 2020 (2020 facility agreement).  Although Reindel’s electronic signature appeared on this document he denied signing it, alleging that Baker had affixed it without his authority.  The agreement recited that the Lender (ABPC) had agreed to provide the Borrower (Reindel) with a “secured term loan facility” of $498,956.  It defined: “Finance Document” as “this agreement, the Security Document and any other document designated as such by the Lender and the Borrower”; “Security” as “any mortgage, charge (whether fixed or floating, legal or equitable) … or other security interest securing any obligation of any person or any other agreement or arrangement having a similar effect”; and “Security Document” as ”the right to take an assignment or a legal charge in the agreed form, executed or to be executed by the Borrower or by (sic)”.  It included –

“8.1 The Borrower confirms the Security outlined in schedule A (or once entered into, will create): (a) valid, legally binding and enforceable Security for the obligations expressed to be secured by it; and (b) subject to registration, perfected Security over the assets expressed to be subject to security in it.

8.2 The security will be held by the appointed representative in favour of the Lender, until the loan has been repaid in full

8.3 It is agreed the Lender has the priority and ranking expressed to be created in the Security Document and ranking ahead of all (if any) Security and rights of third parties except those preferred by law”

Schedule A provided under the heading “Security”:

“The apartments listed below are registered in the name of the Borrower and/or Blizzard Winds Pty Ltd … It is therefore agreed that in the event of default, the Lender can immediately register a secured charge against each or any of the following apartments.  To the maximum value of the capitalized loan amount plus accrued interest Lot 203, 204, and 205 James Street Windsor 3181 Lot 502 and G12 White Stret (sic) Windsor 3181”

  • Baker alleged that Reindel owed $563,966.77 under this agreement. A proceeding was on foot in which each claimed that the other person, or a company controlled by the other person, owed the claimant money.  Reindel admitted receiving $498,956 from ABPC, but said that this was in reduction of a previous debt owed by Baker.
  • ABPC had not registered any charge. It caveated over the above five units as chargee under the 2020 facility agreement.  Reindel applied under the Transfer of Land Act s. 90(3) to remove those caveats.

Daly AsJ upheld the caveat over Reindel’s unit and removed the caveats over those of Blizzard Winds –

  1. The caveator must demonstrate a prima facie case, ie a probability of being found to have the asserted legal or equitable rights or interest in the land. There must be a sufficient likelihood of success to justify the maintenance of the caveat and the preservation of the status quo pending trial.  The ‘prima facie case’ test was preferable to the ‘serious question to be tried’ test.  The difference between the tests was one of degree, yet material, recognising the potentially adverse consequences to a registered proprietor of constraint from dealing with the property in circumstances where a caveator was generally not required to provide an undertaking for damages. [20]-[22]
  2. The question whether Reindel signed or authorised the signing of the agreement and the characterisation of the payments to him were matters for trial. [24], [75]
  3. The 2020 facility agreement was to be construed: with reference to what a reasonable business person with knowledge of the context and purpose of the transaction would have understood those terms to mean (Reindel and Baker were experienced businessmen); and avoiding commercial absurdity and commercial inconvenience as far as the language of the agreement allowed. Further, a court would endeavour to enforce rather than destroy a bargain, unless the agreement’s terms were so vague and confusing as to render ascertainment of the parties’ common intention impossible. [46]-[48]
  4. Courts would, consistent with the principles governing the construction of commercial contracts, adopt a liberal approach to the construction of instruments such as the 2020 facility agreement, and would generally strive to give effect to a clause purporting to confer a security interest in property, even if ambiguously or inelegantly expressed. [49]
  5. The 2020 facility agreement evidenced a common intention by Reindel and ABPC that any sums advanced pursuant to it were secured on the units referred to in Schedule A upon default by Reindel, and that upon default ABPC would be entitled to register a “charge” over the units. There was at least a prima facie case of an immediate intention to create an equitable charge because –
    1. The reference in the recitals to the provision of a “secured term loan facility” evidenced the purpose of the transaction and guided its construction.
    2. “Security” was defined expansively and consistently with what someone engaged in property development would understand a security to be.
    3. The definition of “Security Document” referred to an instrument to give effect to the agreement between the parties, rather than of itself creating a proprietary interest.
    4. Although the language of cl. 8.1 was clumsy, there was a prima facie case that, when read with Schedule A, the parties intended the “Security” referred to in Schedule A to be the borrower’s then unencumbered interest in the units enumerated in Schedule A. The reference to a “secured charge” being registrable upon default was merely a machinery provision in aid of enforcement in the event of default, and not an agreement to provide future security requiring further consideration.
    5. The creation of any charge over the units was not dependent on execution of a further document capable of registration. Because Part IV of the Transfer of Land Act only provided for registration of a charge securing payment of an annuity nothing further (notwithstanding what the agreement appeared to contemplate) could be done to register the charge.
    6. The entitlement to an equitable charge arose on default, not at the time of entry into the agreement. The relevant clause was “apt to create an equitable charge”.
    7. The units were sufficiently identified without reference to particulars of title.
    8. The definitions of “Security Document” and “Finance Document” did not detract from the conclusion that the agreement conferred an immediate equitable interest in the units on ABPC, because: the definition of “Security Document” was incomplete and unintelligible in attempting to equate a document with a proprietary interest; the term “Security Document” was not referred to in Schedule A; while the term “Security Document” was referred to in cl. 8.3, that clause was not concerned with the existence or creation of ABPC’s security interest but with its priority; and the term “Finance Document” was not referred to in cl. 8.1 or Schedule A, but only in other not presently relevant clauses. [59]-[63], [67], [68], [71]-[73]
  6. Accordingly the caveator had a caveatable interest in Reindel’s unit. However, notwithstanding that Blizzard Winds’ units were enumerated in Schedule A, even if Reindel entered the agreement he did not do so on behalf of Blizzard Winds. Accordingly the caveator had no caveatable interest in its units. [26], [59], [74], [75]
  7. The balance of convenience favoured maintenance of the caveat over Reindel’s unit. On the one hand there was evidence of an executed agreement and of funds advanced without repayment, a counterclaim advancing ABPC’s claims was well underway, and the caveat assisted ABPC in giving notice of its claim to other claimants.  On the other hand there was no evidence that Reindel needed to sell or encumber his unit. [75]

Philip H. Barton
Owen Dixon Chambers West
Friday, October 28, 2022

15. Caveat removed because nothing remaining after discharge of prior registered mortgage

Glenis & Anor v Ikosedikas & Ors [2018] VSC 278 (30 May 2018) T Forrest J.

The defendants alleged that in 2011 the first plaintiff entered into a loan agreement consolidating previous loans with a then balance of about $250,000.  The agreement gave the lender had the right to caveat over certain residential land owned by the plaintiffs if the loan was not repaid that year.  The first plaintiff said that his signature on the agreement was forged but did not dispute a debt which by April 2018 had with compound interest risen to between $450,000 and $690,000.

In March 2018 the plaintiffs entered into a contract to sell that land for $1.995 m.  It was subject to a registered mortgage securing loans with current balances of over $2 m. though apparently another property owned by the second plaintiff was linked to this

mortgage.

In April 2018 the defendants caveated on the grounds of “part-performed oral agreement with the registered proprietors”, the estate or interest claimed being “interest as charge”. 

The plaintiffs applied to remove the caveat.   Counsel for the plaintiffs was prepared to assume for the purposes of argument on this application that the loan agreement was genuine.  He also argued that the caveat was defective: in its reference to oral agreement; because it was over the whole property; and when the charge was allegedly created the plaintiffs did not have legal estate in the land.

His Honour held –

1.      The existence of the loan agreement sufficed to establish a serious question to be tried.  Assuming the authenticity of the agreement, the first plaintiff intended to grant the defendants a charge over the property as security for a loan already advanced.  The fact that the first plaintiff possessed no proprietary rights as at the date of the agreement was not fatal as the parties understood that the charge related to future property which at the time of enforcement could be identified.  Questions of a carve out of the second plaintiff’s interest and whether the caveat ought be struck down as defective or amended to reflect the assertedly misleading ‘oral agreement’ grounds of claim were unsuitable for determination in an interlocutory proceeding. [13]

2.      Where a caveator establishes a serious question to be tried, the balance of convenience tilts in favour of that caveator. [14]

3.      However notwithstanding the substantial debt intended by the first plaintiff to be secured over the property the balance of convenience favoured the registered proprietors because of delay in lodging the caveat until after the contract of sale and the fact that the registered mortgage rendered the caveat worthless.  To allow the caveat to remain in place would frustrate the sale without benefit to the caveator. [14]-[15]

Comment: The statement by his Honour that the balance of convenience tilted in favour of the caveator was supported by him with citation of interstate authority.  This is more commonly expressed in Victoria in other authority cited by his Honour, namely that the caveator must establish that the balance of convenience favours maintenance of the caveat until trial and the stronger the case is in the evaluation of the serious question issue, the more readily the balance of convenience might be satisfied.