Category: Undertaking as to Damages

Blog 59. Mother and Son.

Fazal v Fazal [2022] VSC 165, Gorton J. (4 April 2022).

Fazal v Madappilly [2022] VSC 227, Gorton J. (9 May 2022).

These cases concern the same piece of land.  The first case deals with the uncommon points of an application under the Transfer of Land Act s. 90(3) being brought by Summons in an existing proceeding, rather than by Originating Motion and Summons, and with abuse of process.  The second case is more routine, there being a dubious caveatable interest but the balance of convenience favouring removal of the caveat, nonetheless raising two interesting points not explicitly touched on by Gorton J.  First, the solicitors lodging the caveat could not decline to accept service: Transfer of Land Act ss. 89(4) and 113(3) (Blog 49).  Second, in weighing the balance of convenience his Honour could have considered whether, as there was also a purchaser, the caveator was able to give the undertaking as to damages (Blog 56).

Fazal v Fazal [2022] VSC 165, Gorton J. (4 April 2022).

The facts were –

  • The plaintiff was the mother of the defendant.
  • In August 2018 the son purchased a property for $650,000 after obtaining a bank loan secured by a mortgage guaranteed by his mother. Work started to construct townhouses on the property.
  • Loan repayments fell into default, the bank took steps to enforce the mortgage, and with its agreement the son in November 2021 entered into a contract for sale for $865,000, with a 10% deposit that was paid, with settlement due on 21 January 2022.
  • On 17 January 2022 the mother lodged a caveat. The son applied for its removal under s. 90(3) of the Transfer of Land Act.  The mother produced a 2018 declaration of trust to the court which she alleged, and he denied, was signed by him.
  • On 17 February after an opposed hearing a judge ordered removal of the caveat.
  • On 21 February the mother commenced a proceeding seeking, inter alia, a declaration that the proceeds of the sale were held on trust for her and equitable compensation.  She made an interlocutory application to restrain the distribution of the proceeds of sale.  The selling agent deposed that the value of the property was $850,000 – $900,000 and that the sale was for market value.   The mother produced a valuation that the underlying unencumbered value of the property was $760,000 but that it was worth $1 m. with the planning permit and settlement of sale of three dwellings before the end of 2022.   She also produced an affidavit in which the deponent swore that he would lend money to her and otherwise assist her completing the development, and lend money to her ‘to repay any outstanding home loans’.
  • The hearing of the interlocutory application on 25 February (the caveat not yet being removed) expanded from one seeking restraint of distribution of the proceeds of sale to one seeking restraint of the sale until trial. The judge however only ordered that the net proceeds of sale to be held in the son’s solicitor’s trust account until trial or further order.
  • On 27 February the mother lodged another caveat asserting the same interest as the previous one. The son made a further application under s. 90(3), by Summons in the proceeding commenced by his mother.

The mother among other things: stated that the property was hers and that she intended to appeal against the decision of 17 February; relied on material which had been before the court on 25 February; and referred to her recent proposal to the bank to repay the arrears, finish the development, and sell the property, not yet eliciting the bank’s substantive response.

Gorton J. held –

  1. Although an application under s. 90(3) was normally made by Originating Motion and Summons it could be made by Summons in an existing proceeding. The filing of the Summons amounted to the bringing of ‘proceedings in a court against the caveator for the removal of the caveat’ as those words in s. 90(3) were to be understood.  This outcome was supported by s. 8(1) of the Civil Procedure Act 2010.  It was significant that the Summons was brought in a proceeding between the two relevant parties relating to their rights. [5]
  2. A second interlocutory application for the same relief was an abuse of process if it would be unjustifiably oppressive to the other party, or would bring the administration of justice into disrepute. Ordinarily, an abuse of process was associated with commencement of a proceeding or application, rather than its defence.  However although an application under s. 90(3) was not commenced by the caveator, the caveator was treated as if the caveator were the moving party seeking an interlocutory injunction.  Accordingly, in substance, it was the caveator who was potentially abusing the process of the court by supporting a second caveat identical to a removed caveat.  The maintenance of this caveat was an abuse of process. [13]-[15]

Fazal v Madappilly [2022] VSC 227, Gorton J. (9 May 2022).

Another caveat was lodged on 13 April 2022, ie nine days after the previous decision, by the first defendant Madappilly claiming a freehold estate based on an agreement with the son dated 5 August 2020.  Further –

  • On lodgment of the caveat Madappilly’s solicitors wrote to the son’s solicitors stating their instructions that the son was attempting to sell the property in breach of the Constructive Trust Agreement and Construction Contract both dated 5 August 2020, under which agreements approximately $300,000 was owed to Madappilly.
  • They provided copies of these documents. The ‘Construction Contract’ was undated and purportedly signed on 5 August 2020.  It was a contract between the son, one of two other alleged joint venturers (see further below), and a company associated with Madappilly, in which the son and one of the other parties declared that they intended to enter a contract to build townhouses on the property and appointed the company as building supervisor.  It provided that the company would be paid a deposit of $300,000 upon execution of the agreement, and that it could charge for services at an hourly rate left blank.  It then stated that the son and the joint venturer would ‘permit’ the company ‘to have equitable and beneficial interest in the land, pending making the deposit of $300,000’ and would when requested transfer the land “to [the company] to [the company’s] interest”.
  • In the ‘Constructive Trust Agreement’, dated and purportedly signed on 5 August 2020, the son declared that he intended to enter into a contract to purchase the property and that he confirmed that he held Madappilly’s interest in the property and/or benefits accrued or to accrue in respect of that interest upon trust for Madappilly absolutely subject to the terms and conditions set out in this deed. Madappilly’s interest was defined to mean ‘full interest in the… Property as tenants-in-common’.
  • The son’s solicitors stated that he denied having signed these documents and that ‘[t]he builder who actually was doing the construction on the property is not aware of your client’.
  • The son sought an order under the s. 90(3) for removal of the caveat. Madappilly’s solicitors advised that they were not instructed to accept service and did not hold instructions to continue to act.
  • Madappilly, who described himself as building supervisor, deposed that –
    • In around mid-2019 he entered into an oral joint venture agreement with the son and two others; and the son undertook and represented to them that the son would pay the mortgage and other outgoings, would provide $150,000 towards the completion of the joint-venture, and that when the development was completed it would be sold;
    • In reliance on those promises, he and the other two people jointly invested ‘around $500,000’ in the joint-venture in work and materials, and implicitly that the four persons were to share the net profits of sale.
  • The son identified the builder he had dealt with, deposed that he did not know who Madappilly was, and denied entering any joint venture agreement.
  • Madappilly produced to the court a valuation that the property was in its current state worth approximately $1 m. and that if $209,500 was spent completing the project the property could be sold for $1.635 m.
  • The net sale proceeds were under $140,000.

Gorton J. held –

  1. The interest asserted by the caveator in his affidavit sat uneasily with any interest based on the agreements purportedly signed on 5 August 2020. The arrangements contained in the Construction Contract were entirely inconsistent with the affidavit evidence and at best gave a caveatable interest to the company not Madappilly.  The Constructive Trust Agreement was unusually worded, and read strictly did not give Madappilly an equitable interest but confirmed that the son held Madappilly’s interest on trust for Madappilly.  It was difficult to reconcile the two documents.  Madappilly could not explain caveating asserting an interest based on an agreement reached on 5 August 2020 but now relying on an oral joint venture arrangement entered into the previous year.  Turning to Madappilly’s evidence: he did not identify to what extent he contributed to the ‘around $500,000’, and so, even if his evidence was accepted did not establish the extent of his beneficial interest; and he produced no documents supporting provision of work and materials.  Because of the inconsistency between what had been advanced by his solicitors and what was now advanced in court there was   reason to doubt his version of events. [8]-[10], [15]-[17]
  2. The court inferred that Madappilly either through his previous solicitors or now advanced arrangements known by him to be incorrect. However, in light of the affidavit material filed there was an issue to be tried that Madappilly had an equitable interest in the property, albeit one difficult to establish. [5], [17]
  3. The balance of convenience favoured removal of the caveat ([25]) –
    1. The alleged sum required to complete the project was said to be pursuant to the unproduced Building Contract and was unclear whether inclusive of landscaping expenses. [18]
    2. It the contract of sale was completed the son could discharge the mortgage and stop interest running. [18], [24]
    3. The contract of sale was on its face unimpeachable (note that his Honour states that the contract price was $850,000, but this seems to be a slip). [19]
    4. The property was not the residence of either party and if the caveat was removed and the sale completed Madappilly would retain a cause of action against the son for damages. [20]
    5. There was no evidence that the purchaser was other than bona fide for value without notice of the caveator’s alleged interest, the contract of sale being apparently specifically enforceable giving the purchaser an equitable interest and giving a claim for damages against the son if the sale did not proceed. Madappilly had not offered to indemnify the purchaser or the son against any liability in damages if the caveat remained.  In one sense, the same issues arose as in a priority dispute between Madappilly and the purchaser, it being relevant that Madappilly had not caveated until after the contract of sale. [19], [22], [23]
    6. There was no evidence that Madappilly or the other alleged joint venturers had the means to complete the development. [21]

       Philip H. Barton

       Owen Dixon Chambers West

       Friday, October 13, 2022

 

Blog 56. No contract of sale, no caveatable interest – Undertaking as to damages?

Wright & Ors v Insert Pty Ltd & Ors [2022] VSC 1, M. Osborne J (11 January 2022)

In this case M. Osborne J. comprehensively dispatched a caveat based on an alleged contract of sale.  His Honour’s thorough reasoning was: no arguable case of a contract (Holdings 1 – 3); non – compliance with s. 126 of the Instruments Act (Holding 4); no part performance (Holding 5); no estoppel (Holding 6); even if there was a prima facie case of an enforceable contract, there was not a prima facie case that a court would grant specific performance of that contract, because the vendors had, after the alleged contract with the caveator, entered a contract with an innocent purchaser, and the caveator arguably would have lost priority to that innocent purchaser (Holdings 7, 8, 10); the caveator would not have been defeated by the doctrine of laches (Holding 9); if the caveator had established a sufficient prima facie case the court would, in assessing the balance of convenience, have required an undertaking as to damages of substance (Holding 11); in any event the caveator failed on the balance of convenience (Holding 12).

This case is interesting for two reasons.  First, where there is no prima facie case of a contract of sale, a court will normally cease its analysis at this point.  M. Osborne J. went further, stating ([87])–

“It is also something of an oversimplification to characterise the critical question as whether the Purchaser has a prima facie case that it has an enforceable contract of sale; in fact, the Purchaser must establish that it has a prima facie case that it has an enforceable contract of sale in respect of which the Court will order specific performance.”

The second interesting point is that, if the balance of convenience had been decisive, his Honour would have required, as part of the caveator attaining a credit balance, an undertaking as to damages.  As part of the exercise of judicial discretion the court can require such an undertaking from a caveator – his Honour notes this in footnote 22 of his judgment.  However, whereas undertakings as to damages are universally required from applicants for interlocutory injunctions, they are uncommon in caveat cases.  In Boensch v Pascoe [2019] HCA 49, the subject of Blog 29, the plurality of the High Court noted that, although a caveat was conceived as “a statutory injunction to keep the property in statu quo until [the caveator’s] title shall have been fully investigated”, unlike an application for interlocutory injunction it did not at least in the first place have to be supported by an undertaking as to damages.

 Footnote 22 to M. Osborne J.’s judgment continues that “invariably such an undertaking is required” citing a 1995 text and Harvey v Emery [2021] VSC 153.  That this statement is limited to where there are third party rights is elucidated by the following passage in Harvey v Emery (the subject of Blog 36) at [48] –

“Thirdly, neither by their affidavit, nor their submissions, did the defendants offer any undertaking as to damages, notwithstanding that such an undertaking is invariably required when a caveator is permitted to maintain a caveat in circumstances where third party rights will be detrimentally affected.”

In the instant case the facts were –

  • The four plaintiffs were the registered proprietors of a residential property.  The sole director of the first defendant (Insert) was Shaw.  In 2020 the plaintiffs entered into a contract of sale with Shaw.  He did not pay the balance of purchase monies, the vendors rescinded in July/August 2021 and the deposit was forfeited.
  • Although the vendors had an estate agent, one vendor, Nicholas Wright (Wright), continued with their authority to negotiate directly with Shaw, generating a proposed sale with settlement on 4 October 2021.  However, between 1 and 4 October Wright requested Shaw to do various things, with little response.
  • On 7 October Wright texted Shaw asking whether he was in or out and that a sale could occur possibly that day.  Shaw replied within 30 minutes ‘In’.  Some hours later Wright texted that he was taking it that Shaw was out “unless I get a commitment today”.  A conversation then occurred in which Shaw assured Wright that he was serious about purchasing and had finance, to which Wright responded that there was no contract until a deposit was paid and a contract signed.
  • At 3:50pm on 7 October a conveyancing clerk (the conveyancer), associated with the solicitors acting for Insert and Shaw, emailed the vendors’ solicitor stating her understanding that the clients had been communicating, that the purchase by Shaw was to proceed, and requesting that the vendors’ solicitor advise his clients’ instructions.
  • On 8 October at 6.51pm the vendors’ solicitor emailed in substance that: no contract existed but his client would enter a new contract if put in the same position as if the previous contract had been substantially performed; a draft contract and vendor statement prepared by him could be downloaded from the internet; ‘Our client is prepared to consider entering into a contract with your client on the following terms’ then setting out a price of $4,838,500 and how it was calculated, the deposit and when payable, settlement date, and that a director’s guarantee was required; and ‘this email is not an offer capable of acceptance’.
  • Between 11 and 22 October the parties communicated, including as to clarification of the email of 8 October and communication between Shaw and his financier (the financier).   On 19 October the financier offered a 6 month loan of $3,881,250 subject to verification by it and due diligence.
  • Shaw deposed that on 25 October he stated to Wright that Insert accepted the terms contained in the 8 October email, that the purchase would proceed on that basis, and that Wright agreed that if the financier accepted those terms the financier would issue a PEXA invitation for settlement on 28 October.
  • Shaw also deposed that later on 25 October the financier informed him that it would fund the purchase on the terms of the 8 October email.  He also deposed that later that day he informed Wright that the financier had confirmed finance, and Wright replied that if a PEXA settlement appointment was not set up that day he would sell to someone else next day, and in consequence he (Shaw) requested the financier to open a PEXA transaction that day for settlement on 28 October.  (In fact a PEXA workspace was established on 26 October by Insert’s lawyers).  Wright deposed that he had one telephone discussion with Shaw that day in which Shaw promised that a PEXA transaction would be set up, but he denied that he agreed to sell the property to Shaw in the event that the financier accepted the terms and he denied that Shaw said that a PEXA workspace would be set up for settlement on 28 October.
  • On 25 October, after emails about the terms of any contract, the conveyancer at 3:33pm advised that Shaw was agreeable to proceed on the terms set out in the 8 October email, and she sought a written contract and vendor statement.  At 4:21pm the vendors’ solicitor replied asking when Shaw proposed to settle, noting that the proposed settlement date in the 8 October email was that very day.  The email also stated the solicitor’s statement of the process to be followed, including that he would provide a contract of sale once the details of Shaw’s proposal were confirmed, and that on receipt of the signed contract and a 5% deposit he would submit the ‘offer’ to his client, and that a contract would be formed when he returned the fully signed contract to the conveyancer by way of exchange.
  • On 27 October Insert executed a mortgage to the financier and a PEXA invitation was given for a settlement proposed for 28 October.  The vendors’ solicitor did not accept the invitation and on 27 October advised that the vendors had signed a contract of sale with a third party.  This contract was due for settlement on 17 January 2022.
  • On 28 October Insert caveated on the ground that it had an interest as purchaser pursuant to a contract dated 25 October.
  • Following an application by the vendors under Transfer of Land Act s. 89A(1) Insert commenced, but did not serve, a County Court proceeding seeking a declaration that it had an equitable interest in the property under a contract of sale.  The vendors commenced a proceeding under s. 90(3).

Although the caveat stated that the contract was made on 25 October counsel for the caveator argued that it was made on 7 October 2021.

The vendors deposed that the extent of authority given by them to Wright was to negotiate on their behalf, not to bind them to sell.  The caveator argued that any non-compliance with the Instruments Act s. 126 was overcome by part performance, namely: it executing the mortgage to the financier; it incurring liability to pay the financier $330,878 for fees and prepaid interest; and the opening of the PEXA transaction workspace.

Shaw deposed that if he did not obtain specific performance he would lose the ability to make a profit of $4.2m. in developing the land.

M. Osborne AsJ held –

  1. No contract was made on 7 October 2021.  At its highest, Shaw’s evidence that he was ‘in’ evidenced that he wanted to purchase.  To determine whether an agreement had been reached it was permissible to have regard to subsequent communications: those post 7 October were all inconsistent with such an agreement – in particular the conveyancer’s emails of 11 and 25 October and the caveat itself. [73]
  2. The email chain did not evidence a contract made on 25 October, and in fact contradicted it, particularly the emails of 8 October at 6:51pm and 25 October at 3:33pm and 4:21pm. [70]
  3. As to Shaw’s evidence that, notwithstanding these emails, by their conversations on 25 October he and Wright agreed on a sale for $4,838,500, with no deposit, and with settlement on 28 October subject to the financier agreeing to finance the purchase on the terms of the 8 October 2021 email:
    1. although on an interlocutory application the court would not definitively reject this evidence yet an assessment of it was relevant to whether there was a prima facie case;
    2. in this regard Shaw’s evidence was: disputed by Wright’s evidence; in disconformity or inconsistent with emails that day; uncorroborated in any significant way by contemporaneous documentary evidence; not adverted to by Insert’s solicitors in their email of 29 October; and entailed (notwithstanding Shaw having defaulted under the 2020 contract) Wright agreeing to sell subject to a condition wholly for Shaw’s benefit, which was then satisfied by establishment of a PEXA settlement appointment three days later with no deposit or signed contract, with the consequence that the property was taken off the market despite negotiations with other purchasers. [71]
  4. Even if there was an agreement, s. 126 of the Instruments Act was not complied with.  Even if (which the court did not decide) the co-vendors had cloaked Wright with ostensible authority to bind them to sell on terms negotiated by him, this was not in writing and so did not comply with s. 126. [75]-[77]
  5. Non – compliance with s. 126 was not in this case overcome by part performance.   The doctrine of part performance permitted enforcement of an oral contract where there were acts undertaken which of their own nature were unequivocally referable to a contract of the kind alleged.  Such acts must be such as to change the relative positions of the parties in relation to the subject matter of the contract.   Each act relied on here, particularly the mortgage and opening of the workspace, was a unilateral act of the supposed purchaser, readily explicable as preparatory to the making of an agreement and not changing the purchaser’s relative position to the property.  It was also difficult, the loan not having been drawn down, to accept that Insert had incurred a liability of $330,878.  The evidence at most suggested possible payment of a non-refundable application fee of $5,000. [78], [79], [81]-[83]
  6. For related reasons the purchaser’s argument that the vendors were estopped from denying the enforceability of the alleged contract was rejected.  Even on the most favourable view of the evidence for the purchaser, there was no clear and unequivocal representation that a legally binding contract of sale existed, no detrimental reliance (unless, of which the court was not satisfied, substantial fees had been incurred to the financier), and no evidence of the vendors knowing that such fees were being incurred on the faith of a representation by them.  Moreover, the period of any detrimental reliance was two days at most, such that the equity said to arise was wholly disproportionate to the minimum equity necessary to ameliorate the detrimental reliance. [84]-[86]
  7. It was an oversimplification to characterise the critical question as whether the purchaser had a prima facie case of an enforceable contract of sale of land: it must establish such a case in respect of which the court would order specific performance.  Ordinarily such a prima facie case sufficed to establish a prima facie case for specific performance, land being of a sufficiently unique character as to make damages an inadequate remedy, even land purchased as part of the business of a property developer. [87], [89]
  8. However, here the basic position (set out in the holding 7) was complicated by the third party contract, rendering this in essence a priority dispute between Insert and that purchaser (there being no evidence of that purchaser having notice of any interest of Insert’s in the land).  As to this –
    1. priority was accorded to the competing equitable interest created first in time, save where conduct by the holder of the prior interest rendered this inequitable;
    2. the failure to lodge a caveat may in certain circumstances constitute postponing conduct;
    3. although Insert alleged that the contract was made on 7 or 25 October, the caveat was not lodged until 28 October, being the day after the third party contract, and from 7 October onwards not only, while knowing that vendor’s agent was negotiating with other parties from at least 4 October, did Insert fail to assert that it had an enforceable agreement, the solicitors’ communications were to the contrary effect.  If Insert had made this assertion there was every reason to believe that the vendors would not have entered into the third party contract.  There might therefore have been considerable force in the proposition that any interest of Insert was postponed to that of the third party, in which case, specific performance would not have been ordered. [90]-[93]
  9. Further, the doctrine of laches required that those seeking equitable remedies, such as specific performance, use due diligence, where on notice or otherwise knowing that prejudice could arise to a defendant or third party if the claim was not pursued.  However, mere delay not occasioning prejudice was insufficient.  Any prejudice here was most likely to have occurred in the periods from 7 October onwards and from 25 October onwards.   Accordingly, the delay in initiating legal proceedings and prosecuting the claim for specific performance was insufficient to establish laches (but was relevant to the balance of convenience). [94]-[96]
  10. For the foregoing reasons, the caveator had not established a prima facie case of the existence of a legally enforceable agreement for sale with sufficient likelihood of specific performance to justify the maintenance of the caveat and the preservation of the status quo pending trial. [97], [105]
  11. In assessing the balance of convenience, had the court been minded to maintain the caveat this would have only been on the basis of an undertaking as to damages of substance, ie by Shaw not Insert. [99]
  12. Even if the caveator had established a prima facie case it would have failed on the balance of convenience because:  Shaw was open to a monetary solution; Insert’s pursuit of the claim for specific performance was marked by lack of urgency; Insert could sue for damages.  This was particularly so when assessed in light of the weakness of Insert’s claim and (as the effect of not removing the caveat would be to equivalent to enjoining the vendors from settling the third party contract) interference with the third party’s rights. [96], [100]-[105]

   Philip H. Barton

          Owen Dixon Chambers West

        Wednesday, May 25, 2022

 

36. Arguable case of constructive trust but caveat removed on balance of convenience due to conflict with pre-existing orders of Family Court – Undertaking as to damages should have been offered – Harvey v Emery & Ors [2020] VSC 153 (2 April 2020), John Dixon J.

 

Comment.  This case is a good example of an arguable, but not strongly so, interest in the land being trumped by the balance of convenience – John Dixon J. engages in a careful balancing exercise against the background of existing Family Court orders.  Several further general principles emerge –

1.     Non-parties to a marriage claiming an interest in land the subject of Family Court proceedings should expeditiously intervene in those proceedings.

2.    An undertaking as to damages is not commonly required as the price of maintenance of a caveat.  Boensch v Pascoe [2019] HCA 49 at [113] (Blog 29) explains how caveats differ from interlocutory injunctions in this respect.  However, John Dixon J. states an exception, being that such an undertaking is invariably required when a caveat was not removed in circumstances where third party rights would be detrimentally affected. 

3.   The case illustrates that a registered proprietor taking the s. 89A procedure can subsequently take the s. 90(3) procedure.

In Harvey v Emery & Ors [2020] VSC 153 the facts were – 

•  The plaintiff was married to Daniel Emery who was the son of the defendants. In about early 2018 the plaintiff and Daniel entered a contract to acquire a property as their family home for $950,000. They agreed that it would be acquired solely in her name to protect it from his creditors. The price comprised: her contribution of $200,000; an advance by the defendants to her of $200,000; the balance by bank finance secured by first mortgage. The plaintiff became sole registered proprietor.

•  As noted by the judge, it could only be determined at a subsequent trial whether this advance (and any subsequent claimed expenditure) by the defendants was: a loan, and whether to the plaintiff or Daniel or both, and for what purpose, or; an equity contribution in the context of a broader joint enterprise to which the defendants were parties, with the ultimate purpose of providing accommodation to the plaintiff, Daniel, their children and the defendants.  Related to this, were the defendants either chargees or beneficiaries of a resulting or constructive trust?

•  After settlement of the sale the plaintiff briefly resided at the property, vacating due to conflict in the relationship with Daniel that led to its breakdown.  Daniel remained in possession of the property for a period before being placed in custody for undisclosed reasons.

•  In proceedings between the plaintiff and Daniel the Family Court made consent orders in March 2019 including to the effect that – 

•  the plaintiff would transfer the title to the property to him on him refinancing the bank loan to discharge her mortgage and release her from the debt obligation, and on payment by him of $200,000 into her solicitors’ trust account;  

•  if Daniel was unable to refinance the property was to be sold with net proceeds broadly being disbursed in varying proportions between the plaintiff and Daniel after payment of costs and discharge of the mortgage;

•  The parties held their respective interests in the property on trust, with Daniel having the sole right of occupancy and sole liability for mortgage payments and outgoings.  

•  Daniel was unable to refinance and so could not comply with this order, leading to further Family Court orders in October 2019 including – 

•  that plaintiff recover possession of the property to effect its sale, in accordance with the March orders, and Daniel was restrained from caveating or from encumbering the land;  

•  directions for the conduct of the sale and for the distribution of the proceeds. The direction in respect of the priority of distribution of the proceeds was in substance: (a) – (d) payment of the costs and expenses of sale and for discharge of the mortgage; (e) payment to the plaintiff in reduction of the amounts due to her pursuant to the March orders with interest; (f) payment of any remainder to Daniel in reduction of the amounts due to him pursuant to the March orders; a further order relating to the balance owing in respect of a truck and other minor orders.   

•  The defendants were not party to the Family Court proceedings and did not seek to intervene. The settlement of the Family Court proceedings assumed that the whole of the beneficial interest in the property was matrimonial property.

•  In November 2019 the defendants caveated claiming a freehold estate absolutely prohibiting all dealings on the grounds of an implied, resulting or constructive trust.

•  The plaintiff applied under s. 89A of the Transfer of Land Act for removal of the caveat.  In response the defendants commenced a Supreme Court proceeding against her seeking a declaration that the property was held on trust for them as to an amount equivalent both to the above advance of $200,000 and to $120,000 expended on renovations (“the trust proceeding”).

The plaintiff applied pursuant to s. 90(3) to remove the caveat.  Daniel was not a party to either proceeding although he appeared to be a necessary party to the trust proceeding.  He apparently expressed a strong interest in retaining ownership of the property.  The defendants alleged that after the plaintiff had vacated the property, but with her acquiescence, they invested labour and expended approximately $120,000 in renovations and improvements and to enhance its value, in furtherance of a joint endeavour to acquire and improve an extended family home.  The plaintiff disputed this.

John Dixon J. held –

1.   If the allegations in the trust proceeding were proved, the defendants’ beneficial interest ought to have been excluded from the matrimonial property available for division in the settlement reached between the plaintiff and Daniel. [15]

2.  If the defendants’ contentions were correct, they had been adversely affected by the Family Court’s orders. They could enliven the Family Court proceedings, either by applying to intervene and seek a rehearing or by appeal. There was potential for conflict between the resolution of the trust proceeding and the execution of the orders of the Family Court. There were compelling reasons to cross-vest the trust proceeding to the Family Court to be dealt with in conjunction with a reopening of the property settlement orders. This application under s. 90(3) was not the appropriate forum for determination of issues between the parties. [25]-[27]

3.  The defendants had demonstrated some probability that they may be found to have an equitable right or interest in the land as asserted in the caveat, ie a freehold estate in the land based on a joint endeavour giving rise to a constructive trust. And if the renovation expenditure was added the defendants’ percentage claim to the beneficial interest would correspondingly increase. However, although there was a serious question for trial of such a constructive trust the claim did not appear to be strong. It was more probable that the defendants would establish an equitable lien or charge limited to the initial $200,000 advanced, this not being the interest claimed in the caveat. [4], [13], [28], [31], [32], [43], [45]

4.  A relationship existed between the strength of the case establishing a serious question to be tried and the extent to which the caveator must establish that the balance of convenience favoured maintenance of the caveat. Because the constructive trust claim was not strong the balance of convenience obligation fell more heavily on the caveators. There were significant negative practical consequences for the plaintiff if the caveat was maintained, being –

(a) Frustration of the sale ordered by the Family Court, in circumstances where none of the material facts affecting that order were, or since had been, placed before that court at the material time;

(b) The plaintiff would breach the contract of sale, affecting the purchaser’s rights in a manner with adverse consequences for the plaintiff, which could culminate in her reopening the Family Court proceedings to adjust the value of the pool of matrimonial assets underlying their resolution;

(c) Other than belatedly, the defendants had not offered any undertaking as to damages, notwithstanding that this undertaking was invariably required when a caveat was not removed in circumstances where third party rights would be detrimentally affected. Having regard to the belatedness of the offer it was not deserving of weight in the absence of evidence of its worth;

    There was insufficient evidence that the plaintiff had sold at an undervalue, and if the property market was falling the sale should proceed. [5], [33], [39], [45]-[52]

5.  The course that carried the lower risk of injustice, if it should turn out that his Honour was wrong, was to order that the caveat be removed on the following conditions –

a) amendment of the trust proceeding and it being transferred to the Family Court;

(b) relief of the plaintiff of the obligation to comply forthwith with the orders of the Family Court, and in lieu order that the proceeds of sale be distributed in accordance with paragraphs 7(a) – 7(f) of the order of October 2019 and that the balance remaining be deposited into an interest bearing account and not be disbursed save by further order of the Family Court. [53]-[59]

 Philip H. Barton

Owen Dixon Chambers West

19 May 2020

 

31 Caveat by bankrupt on ground of “estoppel” removed.

In Official Trustee in Bankruptcy v Shaw & Anor [2019] VSC 681 (14 October 2019) John Dixon J.

The facts were –

·      In 2014 a sequestration order was made against the first defendant who was the sole registered proprietor of a residential unit and an associated car parking space.  In July 2019 the Official Trustee entered into a contract to sell the property with settlement due on 4 October 2019.  In August the bankrupt ceased to be registered proprietor of the land.  In September the Federal Court dismissed an application by the bankrupt for interlocutory injunctive relief directed at the Official Trustee’s decision to sell.

·       On 3 October 2019 the bankrupt lodged caveats over each property on the ground of “estoppel”. 

John Dixon J. ordered removal of the caveats on the following grounds –

1.   There was no serious question to be tried or prima facie case that principles of estoppel could give the bankrupt a claim to an interest in the land enforceable against the Official Trustee because –

(a)   under s. 58(1) of the Bankruptcy Act (Cth) all of his right, title and interest in the land vested in the Official Trustee whether as his property when he became bankrupt or as after-acquired property;

(b)  it was inconceivable that circumstances that would give rise to his estoppel extended before the time the bankrupt ceased to be the registered proprietor, because it was nonsensical to suggest that the registered proprietor had a claim against himself for an estate or interest in land pursuant to an estoppel;

(c)   the caveat was lodged for the improper purpose of preventing sale while he appealed the Federal Court decision.   The only proper purpose of a caveat was to prevent dealings with that property because of a claimed interest in it.

[44]-[48], [53], [55]

2.     The balance of convenience was against the caveator because –

(a)  it was frustrating the settlement of the contract, affecting the interests of a third party purchaser adversely, and if, as would be the consequence of significant delay, the sale was terminated there would be the prospect of prejudice to the caveator’s creditors;

(b)   he could not proffer an undertaking as to damages;

(c)   he had not explained why the caveat had been lodged so close to settlement.  He could still in the context of further Federal Court proceedings seek relief affecting the future conduct of the Official Trustee in relation to the proceeds of sale.

[55]-[58]

Philip H. Barton
Owen Dixon Chambers West
14 April 2020

 

29. A rare High Court foray into caveats – a claim for compensation under the equivalent of the TLA s. 118 – in what circumstances a trustee in bankruptcy has a caveatable interest – whether the interest claimed was correctly stated in the caveat – why maintenance of a caveat does not require an undertaking as to damages.

Boensch v Pascoe [2019] HCA 49 (13 December 2019) concerned the interaction between bankruptcy law and NSW caveats law, materially identical to Victorian law.  The following provisions of the Bankruptcy Act 1966 were relevant:

Upon a person becoming bankrupt, s 58(1) vests in the trustee in bankruptcy property then belonging to the bankrupt that is divisible among the bankrupt’s creditors together with any rights or powers in relation to that property that would have been exercisable by the person had the person not become a bankrupt.  Excluded by s. 116(2)(a) from the divisible property is property held in trust by the bankrupt for another person.  However where the person who becomes bankrupt is a trustee of property who has incurred liabilities in the performance of the trust, such entitlement as the person has in equity to be indemnified out of the property held on trust gives rise to an equitable interest in the property held on trust taking that property outside the exclusion in s 116(2)(a) (on the basis that the exclusion is limited to property held by the bankrupt solely in trust for another person).

Notwithstanding the foregoing, where the property held on trust by the bankrupt out of which the bankrupt had an entitlement in equity to be indemnified comprised legal title to land registered under the Real Property Act 1900 (NSW) (“the NSW Act”) (ie the equivalent of the Transfer of Land Act 1958), what was vested in the trustee in bankruptcy until the trustee could obtain legal title by registration was only the equitable estate (s. 58(2)).

The NSW Act provided:

any person who, “by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land” under the provisions of the Act “may lodge with the Registrar-General a caveat prohibiting the recording of any dealing affecting the estate or interest to which the person claims to be entitled” (s. 74F(1));

a caveat must be in the approved form and specify “the prescribed particulars of the legal or equitable estate or interest … to which the caveator claims to be entitled” (s. 74F(5));

failures strictly to comply with the formal requirements for caveats are to be disregarded by a court in determining the validity of a caveat (s. 74L);

upon application by the registered proprietor the Registrar-General was required to serve a notice on the caveator that it would lapse unless within 21 days from service the caveator obtained and lodged a Supreme Court order extending the caveat (s. 74J(1));

any person who is or claims to be entitled to an estate or interest in the land described in a caveat may apply to the Supreme Court for an order that the caveat be withdrawn by the caveator (s. 74MA(1));

any person who, “without reasonable cause” lodges or after request refuses to withdraw a caveat is liable to pay compensation to any person who sustains pecuniary loss attributable to the lodging of the caveat, or the refusal or failure to withdraw it (s. 74P(1)).

The facts were –

  • Mr and Mrs Boensch were registered proprietors of a property.  He claimed that in 1999 they had reached a matrimonial property settlement under which she agreed for consideration to transfer her interest in the property to him.  He also claimed that in 1999 they had executed a Memorandum of Trust which included that she would cause her share of ownership to be transferred to him to hold the whole of land in trust, in substance for their children, and would arrange for a professionally drafted trust document.
  • In October 2003 he was served with a bankruptcy notice.
  • He claimed that in March 2004 they had executed a deed of trust confirming the settlement upon him as trustee in the 1999 Memorandum of Trust, constituting “the Boensch trust”and creating their children as First Group Beneficiaries.
  • On 23 August 2005 a sequestration order was made against him.  The trustee in bankruptcy was legally advised that there were strong prospects of defeating the trust claim.  Documents produced by the bankrupt did not lead the trustee to a contrary view.  On 25 August 2005 the trustee lodged a caveat claiming a “Legal Interest pursuant to the Bankruptcy Act 1966”.
  • Documents and evidence subsequently produced by the bankrupt were for a long time unconvincing.   However in December 2007 a court held that the Memorandum of Trust was not a sham and that it manifested a sufficient intention to constitute a trust.   Appeals failed.
  • The caveat lapsed on 15 September 2009.
  • The bankrupt took proceedings claiming compensation under s. 74P(1).  The primary judge concluded that, because the bankrupt had not proven that the trustee in bankruptcy lacked a caveatable interest it could not be said that the trustee had lodged or maintained the caveat without “reasonable cause”, but that even if the trustee had not had a caveatable interest he nevertheless had an honest belief based on reasonable grounds that he had a caveatable interest and thus reasonable cause to lodge and maintain the caveat within the meaning of s. 74P(1).
  • An appeal by the bankrupt failed but he obtained special leave to appeal to the High Court.  The appeal was unanimously dismissed.  There were two judgments: by Bell, Nettle, Gordon and Edelman JJ.; by Kiefel CJ, Gageler and Keane JJ.  Unless otherwise stated references below are to the judgment of the plurality.  The following propositions emerge from the judgments –
  1. Provided the bankrupt had a valid beneficial interest in the trust property, the trust property vested in the trustee in bankruptcy subject to the equities to which it was subject in the hands of the bankrupt.  For these purposes, a valid beneficial interest meant a vested or (subject to applicable laws as to remoteness of vesting) contingent right or power to obtain some personal benefit from the trust property. [15]
  2. Notwithstanding s. 58(1), a legal estate or interest in land subject to the Real Property Act could not pass to the bankrupt’s trustee in bankruptcy unless and until the trustee applied and subsequently became registered as proprietor of the land.  After this the trustee still held the estate or interest subject to the equities to which it was subject in the hands of the bankrupt. [94]
  3. The onus was on Mr Boensch to establish that he had lacked any valid beneficial interest in the property.  However, the evidence established that he had a beneficial interest in the property – to the extent of his right to retain the property as security for satisfaction of his right of indemnity as trustee of the Boensch trust.  By reason of that beneficial interest, an estate in the property vested forthwith in equity in the trustee in bankruptcy pursuant to s. 58 of the Bankruptcy Act 1966, subject to a subtrust on the terms of the Boensch Trust but permitting the trustee to exercise the right of indemnity.  On that basis, the trustee in bankruptcy was entitled to be registered as proprietor and that was a sufficient basis to sustain his caveat. [102], [116] (Similarly Kiefel CJ, Gageler and Keane JJ at [2]).
  4. There was a division of opinion on whether the interest claimed in the caveat, ie “Legal Interest pursuant to the Bankruptcy Act 1966”, was adequate.  On the one hand, expressing themselves very cautiously, the plurality stated that ([107]) “Generally speaking” it was to be doubted that this claimed interest was adequate to describe an equitable estate vested in a trustee in bankruptcy pursuant to s. 58(2) by reason of the bankrupt’s right of indemnity.  While noting that NSW statutory provisions did not require the caveat to specify whether the interest claimed was legal or equitable, their Honours gave reasons why this wording was inadequate, stating that ([107]) it “may be accepted that a court would not ordinarily make an order under s. 74K(2) of the NSW Act extending the operation of a caveat which employed that description”; and stating in a footnote that it was unnecessary to determine whether the court would have power to order amendment of the caveat in those circumstances referring to Percy & Michele Pty Ltd v Gangemi [2010] VSC 530 at [92]- [102] per Macaulay J.On the other hand Kiefel CJ, Gageler and Keane JJ held that the equitable estate vested in the bankrupt was adequately described in the caveat [11].
  5. The trustee in bankruptcy also had good reason to believe, as he did, that the Boensch Trust was not validly constituted.  However, the possibility that the trust might have been set aside under the Bankruptcy Act would not have been sufficient to sustain the caveat.  The interest asserted in the caveat must be in existence at the time of its lodgment.  The assertion by a caveator, who at the time of the lodgment did not have an estate or interest in the land, that he had commenced proceedings which may result in such an interest being vested in him did not suffice. [103] – [104]
  6. The test for liability under s. 74P(1) was established in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) 21 NSWLR 459 at which time the statutory words were “wrongfully without reasonable cause”.  This test was that the claimant for compensation must establish that the caveator had neither a caveatable interest nor an honest belief based on reasonable grounds that the caveator had a caveatable interest (and thus “without reasonable cause”), and that the caveator acted deliberately, knowing that he or she had no interest in the land (and thus “wrongfully”).  Notwithstanding the repeal of “wrongfully” this remained the correct test. [110], [111] (Similarly Kiefel CJ, Gageler and Keane JJ at [12]).
  7. The plurality noted that the Beca Developments test had been substantially followed by intermediate courts in other States including in Edmonds v Donovan [2005] VSCA 27;  (2005) 12 VR 513 at 548 per Phillips JA (Winneke P and Charles JA agreeing at 516 [2], [3]).  The High Court however left open whether, if that test is not satisfied, a person may still be liable under s. 74P(1) by reason of acting with an ulterior motive or where the only interest supporting a caveat is de minimis in terms of legal content or economic value. [114]
  8. Accordingly provided the caveat was lodged on the basis of an honest belief on reasonable grounds that the bankrupt had an extant beneficial interest in the property (including a beneficial interest by way of right of indemnity) the trustee in bankruptcy had reasonable cause to do so.  In fact there was a caveatable interest here.  Further the trustee honestly believed on reasonable grounds that the property vested in him either because the trust was void or because of the bankrupt’s right of indemnity [105], [108], [116] (Similarly Kiefel CJ, Gageler and Keane JJ at [12]).
  9. Even if, as the plurality had held, there was a mere technical deficiency in the statement of the interest claimed this did not of itself demonstrate the absence of a “reasonable cause” to lodge and not withdraw the caveat, at least where the caveat did not overstate the interest sought to be protected. [108]
  10. The plurality noted that, although a caveat was “a statutory injunction to keep the property in statu quo until [the caveator’s] title shall have been fully investigated”, unlike an application for interlocutory injunction it did not have to be supported by an undertaking as to damages.  Their Honours justified this on the ground that the holder of an unregistered interest in land under the Torrens system is more vulnerable to inconsistent dealings. [113].

Comment: The equivalent Victorian provision to s. 74P(1) is the TLA s. 118 which provides –

“Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders”.

Accordingly the two provisions are materially the same and the High Court’s decision applies in Victoria.  The test in Victoria has however been the same as in NSW, or virtually so, as illustrated in Blogs 9 and 24.

The case is also instructive on –

  1. whether the interest claimed in the caveat was correct.  The comment in paragraph 4 above that the NSW statutory provisions did not require the caveat to specify whether the interest claimed was legal or equitable applies equally in Victoria – the TLA s. 89 simply requires that caveator be a person “claiming any estate or interest in land”;
  2. the interest claimed in the caveat must be in existence at the time of its lodgment – it is not enough that the caveator has commenced proceedings which may result in such an interest being vested in him – paragraph 5 above;
  3. why an undertaking as to damages is not normally required – paragraph 10 above.