Category: Priorities between equitable interests

Blog 53. Priorities between equitable interests – whether earlier interest postponed for failure to lodge caveat.

The main case in this Blog is UDP Holdings Pty Ltd v Esposito Holdings Pty Ltd (in liq) (No 2) [2021] VSC 711 (29 October 2021), Richards J which concerns priorities.  See also Blog posts 13 and 45.

For completeness I first mention Antonie v Leith [2021] VSC 662 (15 October 2021), Matthews AsJ, which simply concerned whether a loan had been repaid.  An agreement, the terms of which were disputed, was made for the plaintiff to lend money to her sister the defendant or their mother, with provision for the plaintiff to lodge a caveat in respect of the loan.  The loan was made, the caveat was lodged, and money equalling the loan amount was paid to the plaintiff by their mother in November 2018, leading to the defendant seeking removal of the caveat.  The plaintiff characterized the repayment not as being of the loan but as an advancement of the defendant’s entitlement under their mother’s Will which would be eventually be repaid to the mother’s estate by deduction from the defendant’s share of the estate.   Matthews AsJ held that the November 2018 payment was of the loan and removed the caveat.

The case the subject of this Blog is a sequel to AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688 and [2020] VSCA 235, the subject of Blogs 32 and 40.  Those cases had upheld UDP’s caveat over AE Brighton’s land grounded on a constructive trust arising from AE Brighton’s use of the moneys to which UDP was entitled.  Further, in UDP Holdings Pty Ltd v Esposito Holdings Pty Ltd (in liq) [2021] VSC 528 (26 August 2021) Richards J. held that UDP could trace the proceeds of the constructive trust into the land.  The land was sold and the net proceeds of sale, after payment out of UDP’s interest, which interest had priority over all other unregistered interests, remained in court.

The case the subject of this Blog was a dispute about entitlement to the funds in court between two of the holders of later unregistered interests, Temelkovski and Hagit Pty Ltd (Hagit).  The relevant facts were –

  • In 2013 AE Brighton entered a contract to purchase the land.
  • Before settlement of the contract of sale Temelkovski and AE Brighton entered an agreement on 5 November 2013 under which he agreed to make available a cash advance facility secured by a mortgage over the land and other security. The mortgage was executed on this date, with AE Brighton’s sole director Mr Esposito executing it on the company’s behalf.  Temelkovski did not register it or lodge a caveat.
  • The contract of sale was settled on 21 November 2013 and AE Brighton became registered proprietor on 2 December 2013. It drew down on the facility between 4 December 2015 and 25 September 2018.
  • In early March 2018 Hagit offered to lend money to Mr Esposito’s wife Violeta Esposito, who by then was the sole director of AE Brighton. Mr Esposito represented to Hagit that the security would include a second unregistered mortgage over the land.  Hagit’s solicitors conducted a title search which revealed two registered mortgages and two caveats by holders of unregistered interests other than that of Temelkovski.  Mr Esposito represented to Hagit that neither the caveats nor any other security interests would affect Hagit’s proposed security.
  • Ms Esposito signed the relevant documents on 5 March 2018. The security included a caveat and unregistered mortgage over the land.  The mortgage identified the mortgagor as ‘Violeta Stojcevski’ (by which name she was also known).
  • On 5 March 2018 Hagit advanced the funds to Ms Esposito. On 6 March 2018 it caveated over the land.
  • On 2 October 2019 Temelkovski caveated over the land based on the 2013 mortgage.
  • Between 8 and 12 October 2021, relying on an authority given, Hagit ‘amended’ the mortgage by replacing the mortgagor’s name of ‘Violeta Stojcevski’ with AE Brighton’s name.

Her Honour held that Temelkovski had priority –

  1. AE Brighton’s mortgage to Temelkovski remained an equitable mortgage notwithstanding that predated AE Brighton becoming registered proprietor of the land. A valid charge could be granted over future property. [15]
  2. The general rule for resolving competing equitable interests in land was, where the merits were equal, that the first interest in time had priority. However, the earlier interest could be postponed to the later by disentitling conduct by owner of the earlier interest.  The better equity was determined having regard to the conduct of each party in relation to their respective interests, a comparison of that conduct in all the relevant circumstances, and general considerations of fairness and justice.  The mere failure of the holder of the earlier interest to caveat did not dictate its postponement to the holder of a later interest who had searched the Register: it was but one circumstance to be considered. [33]
  3. Temelkovski had the better equity. Assuming, notwithstanding its subsequent amendment of the mortgage, that Hagit’s equitable interest dated from 5 March 2018, it postdated Temelkovski’s interest.  Temelkovski’s interest was not postponed because:

the mortgage was critical to Temelkovski’s decision to lend as it was the primary security; his failure to caveat was by itself insufficient to postpone;

no other conduct of Temelkovski had led Hagit to accept the land as security in the belief that Temelkovski’s interest did not exist – there were no dealings directly between them;

the land was not the primary security for Hagit’s loan;

the title search gave Hagit notice that the land was substantially encumbered, demonstrating that it was prepared to take a significant risk in accepting the property as security. [35]-[40], [43].

   Philip H. Barton

   Owen Dixon Chambers West

   Tuesday, April 5, 2022

Blog 45. Getting your priorities straight.

This Blog deals with two recent caveat cases also involving priorities between interests in land, one simple, one complex. 

In Capital One Securities Pty Ltd v Lesic & Anor [2020] VSC 781, Ginnane J, 13 November 2020, the facts were –

  • Vongsa and Suzana Soch were registered proprietors of a property subject to a first mortgage to a bank and a second mortgage to the plaintiff securing a claimed debt of about $149,000.
  • A mortgagee’s auction had occurred.  The sale was not yet completed.
  • On 27 March 2020 the first defendant lodged a caveat claiming an implied resulting or resulting trust.  On 29 October 2020 he obtained a County Court judgment for $349,163.62 against Vongsa Soch for default in making discovery and in not attending a mediation, including a declaration that he had an equitable interest in the property and was entitled to maintain a caveat over the title. 

The plaintiff applied under the Transfer of Land Act s. 90(3) to remove the caveat.  Its director deposed to loan advances and that it would suffer a shortfall at settlement of the sale.   Ginnane J. removed the caveat and ordered the first defendant to pay costs on a standard basis.  Although there was a prima facie case that the first defendant had an equitable interest in the land, the plaintiff’s interest as second mortgagee had priority and the balance of convenience favoured removal of the caveat because it was impeding settlement of the mortgagee’s sale.

Roberts Gray Pty Ltd v Brunner & Ors [2021] VSC 76, Daly AsJ, 9 March 2021.

The facts were –

  • The first defendant (Brunner) owned a disused mining site at Yandoit Creek Road Franklinford worth about $320,000 (‘the land’). 
  • In 2016 a company (‘Vesterdix’) entered a rental agreement with TL Rentals Pty Ltd (‘TL Rentals’).   Brunner guaranteed Vesterdix’s obligations and as security agreed to mortgage the land to TL Rentals.  On 30 March 2017 TL Rentals caveated over the land based on this mortgage.  Vesterdix subsequently defaulted and TL Rentals eventually claimed a debt of about $96,000. 
  • On 11 April 2017 the fourth defendant (‘PG Walton’) registered a mortgage over the land to secure a short term advance. 
  • On 23 June 2017 it was agreed between the third defendant (Kellam) and Brunne that Kellam lend Brunner $30,000 and Brunner charge any freehold land he owned in favour of Kellam (‘June 2017 agreement’).  A copy of this document was in evidence but there was no direct or documentary evidence of the actual advance of monies.
  • Kellam also alleged that in August 2017 he acquired the debt (then standing at $188,065.50) and first mortgage held by PG Walton and made a further advance to Brunner.  There was, however, no direct or documentary evidence of payment to PG Walton.   However, PG Walton’s solicitors subsequently sent to Kellam’s solicitors the certificate of title and a discharge of its mortgage.  Kellam did not lodge these documents for registration. 
  • On 26 September 2017 Brunner executed a mortgage in favour of Kellam (‘Kellam mortgage’) under which Brunner promised to pay the mortgagee on demand all moneys owing by the mortgagor to the mortgagee including the moneys under a loan agreement between the parties executed that day.  However, no loan agreement was in evidence other than the June 2017 agreement.   There was no direct evidence of the sums secured and conflicting evidence about the size of the mortgage debt. 
  • From 2016 to 2018 the plaintiff (Roberts Gray), whose principal was Roberts, acted for Brunner including in a Family Court proceeding fixed for trial on 6 July 2018.  Brunner was non-compliant with financial disclosure orders and had not put Roberts Gray in funds.    
  • On 11 May 2018 Brunner emailed a draft financial statement to Roberts, prepared with the assistance of an accountant (‘the accountant’), which included: under the heading ‘Other mortgage payments’ that Kellam was the lender, that the address of the property was Yandoit Creek Road Franklinford and that the average weekly amount was $360; under the heading ‘Other mortgages’ that Brunner was the borrower, that ‘your share’ was 100% and ‘amount of your share’ was $200,000 (without specifying any security property).  However, the section headed ‘Liabilities’ did not list Kellam as a creditor.
  • On 5 July 2018 Brunner executed a document charging in favour of Roberts Gray ‘all land owned by me … now or in future as security for the payment of all professional fees and disbursements now owing or at any time may be owing by me to Roberts Gray Pty Ltd for legal services provided to me’.  (Roberts Gray subsequently conceded that the charge was ineffective to the extent that it sought an equitable interest in properties not legally and beneficially owned by Brunner, ie any property other than the land).
  • The Family Court trial date of 6 July was vacated.  On 20 July Brunner’s financial statement, in substantially similar form to the draft, was filed.  The reference to the payment of $360 per week to Mr Kellam remained.  However, under the heading ‘other mortgages’, appeared: ‘Jon Brunner borrowed against Yandoit and 308/6 Victoria Street the sum of $600,000’.
  • The plaintiff ceased acting for Brunner, claimed a debt of about $85,000 with interest, and on 30 August 2018 caveated over the land claiming an interest as chargee pursuant to an agreement with Brunner, J. B. & F. Investments Pty Ltd, and Vesterdix.  Brunner was the sole director of both companies and deposed that there was no agreement between Roberts Gray and either company.
  • On 10 December 2018 the Kellam mortgage was lodged for registration.
  • Following notice of this lodgment Roberts Gray commenced a proceeding seeking relief, including: an order under s. 90(2) that the Registrar of Titles delay registering the Kellam mortgage; an order that it have leave to amend the grounds of claim in its caveat by deleting all parties to the agreement with Brunner except itself; a declaration that it held an equitable charge; and an order for sale of the land.
  • Registration of Kellam’s mortgage was ordered to be delayed, eventually until the trial and determination of the proceeding.    
  • On 20 February 2020 Brunner was declared bankrupt.
  • Roberts deposed or gave evidence:
    • that on 25 August 2017 the solicitors for the other party in the Family Court proceeding, Lander & Rogers, sent a copy of the June 2017 agreement to his firm;
    • that on 2 November 2017 Lander & Rogers wrote referring to the June 2017 agreement and to a loan from PG Walton to Vesterdix of $165,000 secured by a mortgage over the land and another property.
    • that on receipt of the draft financial statement on 11 May 2018 he knew of the $30,000 loan by Kellam to Brunner;
    • that when the charge was executed (on 5 July 2018) he believed that this loan had been paid off or (he also deposed) significantly reduced but had not contacted Kellam about this;
    • denying that before execution of the charge he was aware that Kellam had an interest in the land or that Brunner (who deposed to the contrary) had so instructed him, or that the Kellam mortgage existed, and stating that before taking the charge he did not do a title search or attempt to ascertain what interest if any PG Walton or TL Rentals had in the land;
    • denying that Brunner told him, immediately before filing the financial statement on 20 July, of the Kellam mortgage;
    • stating that on 20 July 2018 the accountant told him that the loan of $30,000 had been repaid and had not told him of a mortgage securing $250,000 plus interest.  He denied (contrary to evidence of the accountant) that the accountant had told him that the ‘private client mortgage’ over Yandoit secured $250,000 plus interest and denied that the accountant had met him before 20 July;
    • that he had never seen any document evidencing a loan by Kellam in any amount other than $30,000;
    • that he believed that the sworn financial statement “loaded up” the land to defeat the interests of the other party.
  • Brunner gave evidence that: Roberts did not ask him how much equity he had in the land; and he did not tell Roberts that he had no equity in the land, as there was no need because, having prepared Brunner’s financial statements, Roberts knew this.

Kellam submitted that he held two distinct security interests over the land: a subrogated right to the PG Walton mortgage; and an equitable interest by reason of his possession of the unregistered Kellam mortgage, the discharge of PG Walton mortgage and the certificate of title.  It was common ground that the interest in the land of TL Rentals had priority over any interest of Roberts Gray’s.  TL Rentals abided the outcome of the proceeding.

Daly AsJ held –

  1. On the balance of probabilities Kellam paid out the PG Walton mortgage.  While there was no evidence of the time and amount of funds transferred, the PG Walton loan was by inference discharged before October 2017, when the certificate of title and discharge of mortgage were delivered to Kellam’s solicitors.  The timing of the execution of the epitome of the Kellam mortgage was also consistent with this. [125]-[127]  
  2. Ordinarily, absent evidence that the epitome of mortgage was either a forgery or a sham, its very existence was compelling evidence of the evidence and validity of an equitable mortgage. [129], [133]
  3. The authorities were divided on whether a party claiming to be subrogated to the rights of a prior mortgagee was entitled to the benefit of the terms of the underlying loan contract.  The better view was that the subrogated party did not automatically acquire identical contractual rights to the original interest holder, such as, for example the interest rate payable by the mortgagor to the original lender. [123]
  4. Kellam had discharged the onus of establishing his entitlement to be subrogated to the rights of PG Walton under the PG Walton mortgage to the extent of the sum paid by him to it to discharge its loan to Brunner secured by the mortgage, plus interest. [83], [118], [131] 
  5. As Kellam was entitled to be subrogated to the rights of PG Walton under its mortgage, and this mortgage was registered, Kellam had priority over TL Rentals and Roberts Gray with respect to the amounts paid by him or on his behalf to PG Walton. [131]
  6. Any sums secured by the Kellam mortgage which were not referable to the PG Walton mortgage were thus secured only by an equitable mortgage, which ranked behind the interest of TL Rentals. [131]
  7. As to whether Kellam’s interest as the holder of an equitable mortgage should prevail over Roberts Gray’s later interest as chargee –

    (a)    Where merits were equal, the general principle applying to competing equi­table interests was that priority in time of creation gave the better equity. [118], [141], [160]

    (b)   Where merits were unequal and favoured the later interest, as for instance where the owner of the later interest was led by conduct of the owner of the earlier interest to acquire the later interest in the belief or on the supposition that the earlier interest did not then exist, the later interest would have priority.   It was always necessary to characterise the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct was such that in fairness and in justice the earlier interest should be postponed to the later. [141], [143], [144]

    (c)   The mere failure of the holder of a prior equitable interest in land to lodge a caveat did not in itself involve the loss of priority which the time of the creation would otherwise give. [144] (d)    A person taking an interest with actual, imputed, or constructive notice of an earlier interest took subject to that interest, unless the earlier interest holder had engaged in conduct to induce the belief in the later interest holder that the earlier interest no longer existed. [156], [157], [161]

    (d)     A person taking an interest with actual, imputed, or constructive notice of an earlier interest took subject to that interest, unless the earlier interest holder had engaged in conduct to induce the belief in the later interest holder that the earlier interest no longer existed. [156], [157], [161]

    (e)    The onus rested on the holder of a later interest to show that the earlier should be postponed. [84]

    (f)    The evidence was inconclusive on whether Roberts Gray had actual notice of the Kellam mortgage.  However, it would have been open to Roberts Gray (and prudent) to conduct a title search before taking the charge.  This was inexcusable in the context of a priority dispute.  Although a title search at the time the charge was taken would not have disclosed Kellam’s interest in the land the PG Walton mortgage and the TL Rentals caveat would have been revealed.  Upon such a discovery, Roberts Gray would have been in a position to make more fulsome inquiries of PG Walton and/or TL Rentals and Brunner.  Accordingly Roberts Gray had at least constructive notice of Kellam’s interest. [118], [162], [165], [167]-[169]

    (g)     However, even if this finding of constructive interest was incorrect, there was no basis for postponing Kellam’s equitable interest to Roberts Gray’s interest.  Kellam had not so conducted himself as to induce a party in the position of Roberts Gray into believing there was no prior interest holder.  The agreement by Brunner and Kellam to keep their arrangements private did not misrepresent the position to third parties. [118], [170], [171] 

  8. The application to amend the caveat by deleting J. B & F Investments Pty Ltd and Vesterdix would be granted because:

    (a)    it would not alter the estate or interest claimed in the caveat, but amend the grounds of the claim, with no prejudice to anyone; [178]

    (b)    Roberts Gray undoubtedly had an interest in the land as chargee.  The ques­tion of the validity of the charge has fallen away and the only dispute was over priority, which should be determined on the merits; [179]

    (c)    although less latitude was affordable to a caveat lodged by a solicitor, as op­posed to one prepared by a lay person, the prejudice to Roberts Gray of not being able to amend the caveat outweighed this consideration. [118], [180]

  9. Given that Kellam stood in the shoes of the holder of a registered mortgage, he had a prima facie entitlement to take possession of and sell the land, provided the requirements of s. 77 of the TLA had been fulfilled, and subject to his obligations to account to TL Rentals and Roberts Gray.  However, there was no evidence that the threshold requirements of s. 77 had been met, and given that the parties all agreed on sale, the court would appoint the trustee in bankruptcy to do this and account to the interest holders. [118], [183]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, 29 June 2021

13. 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]