Barlin Investments Pty Ltd v Westpac Banking Corporation

Supreme Court of NSW|2012-06-05|Before: Ball J

Judgment 1These proceedings raise the question of which of a number of unregistered dealings in respect of a strata unit situated in Fairfield has priority. With one exception, which I will come to, the facts are not substantially in dispute.

Factual background 2The plaintiff, Barlin, is a property investor. On 28 February 2003, it entered into a put and call option with Equipped Constructions Pty Ltd in respect of premises Barlin owned at Fairfield. Equipped Constructions proposed to redevelop the site as residential and one or more commercial strata units. Barlin exercised the put option and, on 13 October 2004, the resulting contract of sale settled. The purchase price of the property was funded in part by Capital Finance Australia Limited, which took a first registered mortgage over the property as security. In addition, Barlin provided vendor's finance of $400,000. That loan was secured by an unregistered mortgage over the property. Under the terms of that mortgage, the loan was repayable on 14 October 2005. On 19 November 2004, Barlin lodged a caveat to protect its interest under the mortgage. 3In connection with the sale, Equipped Constructions also agreed to sell to Mr Barill and Mr Cattalini, the two directors of Barlin, or entities associated with them, two of the residential units on completion of the redevelopment for a combined price of $625,000. Those units were lots 34 and 36 in the proposed strata plan. 4Although Equipped Constructions had not paid the debt of $400,000, on 28 November 2005, for reasons which are not clear, Barlin withdrew its caveat. However, at that time, it did not press for payment of its loan, expecting to be able to set off the purchase price of the two units against the amount owed to it. 5On 7 August 2008, the strata plan in respect of the development was registered and the existing folio identifiers for the property were cancelled and replaced by a new folio identifier. 6Following registration of the strata plan, the directors of Barlin sought to complete the acquisition of lots 34 and 36 and to setoff the purchase price against the amount owed. Settlement, however, did not occur and there were further meetings between representatives of Barlin and representatives of Equipped Constructions relating to the arrangements between them. Following those meetings, on 19 May 2009, Barlin's solicitors wrote to the solicitors for Equipped Constructions referring to the meetings and saying: In an effort to further assist your client, our client and yours have agreed as follows:-

The issues 21Westpac advances five reasons for why its interest should take priority over that of Barlin. First, it says that Barlin gave up its security in lot 33 as a consequence of the agreement recorded in the letter dated 19 May 2009 from Barlin's solicitors to the solicitors for Equipped Constructions. Second, it says that, by virtue of s 74H(4) of the RPA, the caveat did not prevent the registration of the Chiha Dealings and that, as soon as the transfer to Mr Chiha is registered, it will, by virtue of ss 42 and 43 of the RPA, extinguish the interest claimed by Barlin. Third, it submits its equitable interest takes priority over the equitable interest claimed by Barlin. Fourth, it claims that its interest is given priority over the interest claimed by Barlin by s 43A(1) of the RPA. Lastly, it claims that it is subrogated to the rights of Capital Finance under its registered mortgage. With some variations, which I will explain, Mr and Mrs Mitchell rely on the same or similar arguments.

Did Barlin agree to give up its interest in lot 33?

22In my opinion, it did not. Although the letter dated 19 May 2009 purports to record the terms of an agreement reached between Barlin and Equipped Constructions under which it appears Barlin was to give up its unregistered mortgage in exchange for, among other things, a mortgage over lot 75, there is no evidence that that agreement was ever accepted by Equipped Constructions. On the contrary, the evidence suggests that Equipped Constructions either did not regard itself as bound by the agreement or alternatively repudiated it when it sold lots 34 and 36 to third parties, despite the fact that the terms of the agreement contemplated that those units would be leased out for a period and would ultimately be sold to Balesgrow Pty Ltd (a company associated with Mr Barill) and Mr and Mrs Cattalini. In addition, there is no evidence that Equipped Constructions paid Barlin's solicitors' reasonable fees as contemplated by para 6 of the letter dated 19 May 2009. The letter does not specifically record that Barlin would release the unregistered mortgage it held over the property. If the letter did record the terms of a binding agreement by which Barlin agreed to release its unregistered mortgage, it seems to me that that release was conditional on Equipped Constructions performing its obligations under the agreement, which it did not. 23Mr Newton, who appeared for Westpac, pointed to the fact that the letter contemplated that Barlin would lodge a caveat over lot 75, which is what it did. Mr Newton submitted that that conduct provided some evidence that the agreement had been performed. There are, however, two difficulties with that submission. First, the evidence is at best equivocal. The caveat was lodged by Ms Wilson, a secretary employed by the solicitor for Barlin. She explained that she lodged caveats over lots 75 and 33 because they were the only two lots still owned by Equipped Constructions. The lodgment of those caveats is consistent with Barlin's claim that it still had the benefit of the original unregistered mortgage. Second, the evidence does not provide an answer to the point that there is no evidence that Equipped Constructions complied with the terms of the agreement.

Did s 74H(4) of the RPA permit registration of the Chiha Dealings notwithstanding the caveat?

24Section 74H(4) of the RPA provides: Where, at the time when a caveat is lodged under section 74F to protect a particular legal or equitable estate or interest in land, a dealing which relates to the same land has been lodged for recording in the Register and is in registrable form, the caveat does not prohibit the recording in the Register of that dealing. Section 74F relevantly provides: (1) Any person who, by virtue of any unregistered dealing or by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land under the provisions of this 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. 25Sections 74F(1) and 74H(4) must be read together with ss 36(1A) and (1B), which provide: (1A) When the Registrar-General accepts a dealing, memorandum or caveat presented for lodgment, the Registrar-General shall allot thereto a distinctive reference. (1B) A dealing, memorandum or caveat is lodged, within the meaning of this Act, only when the Registrar-General has, under subsection (1A), allotted thereto a distinctive reference. 26Mr Newton submitted that there is a distinction between the expression "is lodged" used in s 36(1B) (and its grammatical equivalents) and the expression "may lodge" used in s 74F(1). The latter expression is in the active voice. It refers to the act of someone physically presenting a caveat to LPI for the purpose of that document being recorded in the Register. On the other hand, the expression "is lodged" is in the passive voice and derives its meaning from s 36(1B). A dealing, memorandum or caveat "is lodged" when it is allotted a distinctive reference by the Registrar-General. Or, to put the point another way, s 74F(1) focuses on the acts of the caveator, whereas section 36(1B) is concerned with the acts of the Registrar-General. Section 74H(4) applies when a caveat is lodged in accordance with s 74F(1) - that is, when the caveator presents the caveat for lodgment. Therefore, that section says that, provided a dealing has been presented for registration, a caveat that is lodged subsequently cannot prevent the registration of that dealing. 27In my opinion, there is no merit in this argument. That is so for three reasons. 28First, there is no merit in the proposition that s 74F(1) is concerned with the presentation of a document for registration by the caveator whereas s 36(1B) is concerned with acceptance by the Registrar-General. Both sections are concerned with lodgment. Necessarily, lodgment involves both presentation and acceptance of the thing being lodged. The purpose of s 36(1B) is to identify with precision when the series of acts which constitute lodgment is complete. Section 74F(1) confers on certain persons a right to lodge a caveat. It does not purport to identify the time when the exercise of that right is to be treated as being effective. That is determined by s 36(1B), which expressly applies to caveats as well as dealings and memoranda. Section 74H(4) simply says that a caveat that is lodged in accordance with s 74F - that is, a caveat which meets the requirements of s 74F, such as the requirement in subs (1) that the person lodging the caveat "claims to be entitled to a legal or equitable estate or interest in land under the provisions of this Act", and that is lodged within the meaning of s 36(1B) - does not prevent the registration of a document that was lodged before the caveat. 29Second, the argument depends on a confusion. It depends on construing s 74H(4) by reference to s 74F and has as its premise the proposition that implicit in s 74F is a special meaning of "lodge" because that section uses the active tense and is, therefore, concerned with the conduct of the caveator, not the conduct of the Registrar-General. However, the conclusion of the argument is that the term "lodged" in the expression "has been lodged" in s 74H(4) also has a special meaning in relation to the lodgment of a dealing. That special meaning is that the dealing should be regarded as having been lodged as soon as it is presented for lodgment so that such a dealing takes "priority" over a caveat that is presented for lodgment after the dealing, but is "lodged" within the meaning of s 36(1B) before the dealing. That is, the argument starts with the proposition that a special meaning should be given to the notion of lodging a caveat because of the wording of s 74F(1) but ends with the conclusion that a special meaning should be given to the notion of lodging a dealing for the purpose of s 74H(4). Moreover, that special meaning is said to attach to the expression "has been lodged for recording in the Register". Like the term ("is lodged") defined in s 36(1B), that expression is in the passive tense. The only difference is that it is in the past tense and has appended to it the words "for recording in the Register". The past tense cannot make a difference. Nor can the additional words. Those words add nothing to the notion of lodgment. By using the words "has been lodged" the draftsperson must have intended to pick up the definition of the expression "is lodged" in s 36(1B). 30Third, there can be no reason for treating the lodgment of a dealing for the purpose of s 74H(4) differently from the lodgment of a dealing for other purposes. Indeed, doing so would only lead to confusion.

Does Westpac's equitable interest take priority over that of Barlin's?

31The traditional principle employed to determine priority between competing equitable interests is that, where the merits are equal, the earlier in time prevails over the later: Rice v Rice (1853) 61 ER 646 at 648. However, later cases have emphasised that that principle should not be applied mechanically and that the real task of the court "is to determine where the better equity lies": Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liquidation) (1964-1965) 113 CLR 265 at 276 per Kitto J; approved in Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 333 per Gibbs CJ (Wilson J agreeing), 339 per Mason and Deane JJ. 32One circumstance in which the later interest holder will be held to have a "better equity" than the earlier is where the earlier interest holder is guilty of an act or omission which had or might have had the effect of inducing the later interest holder to act to his or her prejudice: Butler v Fairclough (1917) 23 CLR 78 at 91 per Griffith CJ. In the case of Torrens Title land, one omission which has been held to be of particular relevance is the failure to lodge a caveat. Where that failure has led a subsequent interest holder to assume that there are no interests in the land besides those recorded on the Register, the prior interest may be postponed by the failure of the interest holder to lodge a caveat promptly to protect his or her interest: Butler v Fairclough at 91-92. Similarly, a person may be guilty of postponing conduct if the person withdraws a caveat in circumstances where the withdrawal has led a subsequent interest holder to believe that the person no longer seeks to protect his or her interest or no longer has an interest to protect: Perpetual Trustee Company Ltd (original plaintiff), Performance Capital Mortgage Pty Ltd v Motive Finance & Leasing Pty Ltd [2010] NSWSC 429 at [35] per Windeyer AJ, referring to Elderly Citizens Home of SA Inc v Balnaves (1998) 72 SASR 210. However, the mere failure to lodge a caveat is not itself enough to postpone an earlier interest if some other action has been taken to protect the unregistered interest, such as retention of the certificate of title: J & H Just (Holdings) Pty Ltd v Bank of NSW (1971) 125 CLR 546. 33In the present case, Westpac took a first mortgage over lot 33 on the faith of the Register and in circumstances where it did not have any reason to believe that the property was subject to a mortgage other than to Capital Finance, which was to be discharged on settlement. Mr Chiha, who had acquired the property from Equipped Constructions, was in a position to grant that mortgage. Barlin had lodged a caveat but had subsequently withdrawn it, with the result that anyone conducting a search of the Register would have been left with the clear impression that, whatever interest Barlin had, that interest did not exist at the time that Westpac advanced Mr Chiha the sum of $342,000 and took its mortgage. It is also relevant that Westpac was simply replacing Capital Finance as first mortgagee with the result that Barlin was not in any worse position as a result of Westpac's mortgage: see Taleb v National Australia Bank Ltd [2011] NSWSC 1562 at [39] per Bryson AJ. For those reasons, in my opinion, Westpac had the better equity when compared to that of Barlin's. 34In my opinion, Mr Chiha was in the same position as Westpac. Mr Chiha did not give evidence. However, there is no reason to believe that he was any more aware of Barlin's equitable interest than Westpac. Like Westpac, he was entitled to rely on the Register; and the Register did not reveal the existence of Barlin's interest because Barlin had chosen to withdraw its caveat. Mr Chiha took a transfer of the property and became liable to repay Westpac the amount he had borrowed from it. It is difficult to believe that he would have done so if he had been aware of the mortgage to Barlin. In those circumstances, in my opinion, Barlin's interest was also postponed to his. 35The position is different in the case of Mr and Mrs Mitchell. At the time they acquired their interest, Barlin had lodged a caveat in respect of its interest. If Mr and Mrs Mitchell were not aware of that caveat that could only be the result of their failure to search the Register. That failure cannot give them the better equity. 36Mr Van Der Vlag, who appeared for Mr and Mrs Mitchell, submitted that they had the better equity because they took their interest from someone - that is, Mr Chiha - who had a better equity. I do not accept that submission. The question is whether Mr and Mrs Mitchell's equitable interest was superior to that of Barlin's. That involves a consideration of the circumstances surrounding the creation of the two competing equitable interests, not other equitable interests. One circumstance that is relevant to that examination is the fact that Mr and Mrs Mitchell acquired their interest from someone whose interest did have priority. However, that cannot outweigh the fact that the lodgment by Barlin of its caveat put Mr and Mrs Mitchell on notice of Barlin's interest. The same, of course, is true of Westpac insofar as it claims an interest based on the mortgage it took from Mr and Mrs Mitchell.

Does s 43A of the RPA give Westpac and Mr and Mrs Mitchell priority.

37Section 43A(1) of the RPA provides: For the purpose only of protection against notice, the estate or interest in land under the provisions of this Act, taken by a person under a dealing registrable, or which when appropriately signed by or on behalf of that person would be registrable under this Act shall, before registration of that dealing, be deemed to be a legal estate. It is now accepted that this section "confers upon a purchaser who has received a registrable instrument and paid the purchase money the same protection against notice as that achieved by a purchaser who acquires the legal estate at common law": Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671 at 676 per Barwick CJ, Mason and Jacobs JJ, approving the decision of Taylor J in IAC (Finance) Pty Ltd v Courtenay (1963) 110 CLR 550 at 583-5. Consequently, the interest of a purchaser who receives a registrable instrument without notice of a prior unregistered interest takes priority over the earlier interest. However, the protection of s 43A(1) is not available to a purchaser who, at or before completion of the transaction, receives notice of a prior unregistered interest: United Starr-Bowkett Co-operative Building Society (No 11) Ltd v Clyne (1967) SR (NSW) 331. 38The protection afforded by s 43A is also only available to a person who takes his or her interest from the registered proprietor. As Taylor J explained in IAC (Finance) Pty Ltd v Courtenay (1993) 110 CLR 550 at 591: [The] section clearly contemplates the position of a person dealing with a registered proprietor for it speaks of "the estate of interest in land under the provisions of this Act, taken by a person under an instrument registrable ... under this Act" and an instrument would only be so registrable if executed by the registered proprietor. 39However, at common law, a person who claims an interest through a person who is a bona fide purchaser for value and without notice is entitled to the same protection as the protection afforded to the person through whom the interest is claimed, even if the person making the claim acquired his or her interest with notice: Wilkes v Spooner [1911] 2 KB 473. Section 43A operates in the same way. As the Court of Appeal said in Jonray (Sydney) Pty Ltd v Partridge Bros Pty Ltd (1969) 89 WN (Pt 1) (NSW) 568 at 477: ... s 43A operates not only to protect against notice the mortgagor who takes the discharge of mortgage, but also any person claiming under the mortgagor, i.e. the purchaser. It gives what has been described before us as a "successive" effect to s 43A, but such an effect seems to us to accord with the general law. If A has the benefit of a defence of purchaser for value without notice, all persons claiming under A have the same benefit, whether or not they had notice and whether or not they were purchasers for value, provided they did not participate in an original breach of trust (In re Stapelford Colliery Co. (Barrow's Case) [(1880) 14 Ch D 432 at 445]). The decision in Jonray has since been approved by the High Court in Meriton Apartments at 674-677. 40In the present case, on the findings I have made, Mr Chiha was entitled to the protection of s 43A because he took his interest from the registered proprietor for value and without notice of Barlin's interest. Westpac and Mr and Mrs Mitchell were entitled to the same protection because they took their interests from him. In any event, on registration of Mr Chiha's interest, Barlin's interest would be extinguished under ss 42 and 43 of the RPA. In those circumstances, there is nothing to prevent registration of the subsequent dealings: Weller v Williams [2010] NSWSC 716. 41Mr Raphael sought to resist the conclusion of the previous paragraph on two grounds. First, he submitted that the successive effect of s 43A could not be stretched as far as Mr and Mrs Mitchell, who were clearly on notice of Barlin's interest. Secondly, he submitted that there was no evidence that any of the relevant dealings were in registrable form. I do not accept either of those submissions. The first is inconsistent with Jonray. As to the second, the relevant dealing is the transfer from Equipped Constructions to Mr Chiha. On the face of it, that dealing appears to be in registrable form. Mr Raphael does not point to any aspect of it to suggest otherwise. Following examination of the Chiha Dealings, the only requisition raised in respect of them by LPI was Barlin's caveat. In those circumstances, I am satisfied that the dealing is in registrable form. The result is that Westpac's and Mr and Mrs Mitchell's interests have priority over that of Barlin.

Is Westpac subrogated to the rights of Capital Finance?

42Having regard to the conclusions I have reached, it is not necessary to determine this question. However, had it be necessary for me to do so, I would have applied the approach taken by Bryson AJ in Taleb v National Australia Bank Ltd [2011] NSWSC 1562 at [69]-[70] and concluded that Westpac was subrogated to the rights of Capital Finance up to the amount it paid to discharge the mortgage owed to Capital Finance - that is, up to the amount of $335,360.

43In my opinion, there is no reason to make any of the declarations sought by Mr and Mrs Mitchell. It is sufficient to order that Barlin withdraw its caveat over lot 33 so that the relevant dealings can be registered. 44Consequently, the orders of the court are: (1)Within 7 days of the date of this judgment the plaintiff withdraw caveat AF184665. (2)The parties have liberty to apply for further orders to give effect to order (1). (3)The proceedings, including the first cross-claim, otherwise be dismissed. (4)The plaintiff pay the defendants' costs of the proceedings (including the cross-claim).

Amendments 02 August 2012 - Typographical error. The word "lender's" replaced with "vendor's". Amended paragraphs: 2 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 August 2012

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