C2 PROPERTY INVESTMENTS PTY LTD AS TRUSTEE FOR THE C2 PROPERTY TRUST NO 1 -v- RATIONAL ENTERPRISES PTY LTD AS TRUSTEE FOR THE WELLINGTON TRUST [2011] WASC 280 (7 October 2011)

4 The caveat was lodged against the title to Lot 4 on 25 May 2011. The estate or interest claimed is an equitable mortgage by virtue of an agreement made between Rational Enterprises Pty Ltd (Rational) and C2, dated 30 December 2010 as amended by a deed of variation dated 12 April 2011.

5 Lot 4 is also subject to a mortgage to Sandhurst Trustee Nominees Ltd, registered on 5 May 2011. Neither party addressed the effect of the prior registration of that mortgage on the plaintiff's claim for an equitable mortgage over Lot 4: see s 68 of the Transfer of Land Act, and Leros Pty Ltd v Terara Pty Ltd [1992] HCA 22; (1992) 174 CLR 407, 419.

6 Counsel for Rational was unable to advise me whether there will in fact be surplus funds following the sale of Lot 4, should it proceed.

7 In November 2006, C2 and Rational entered into a joint venture to develop and sell land at 363 Wellington Street West Perth. The development is a block of apartments. The parties executed a joint venture agreement dated 9 November 2006.

8 Under the agreement, the land at Wellington Street was Rational's initial contribution to the venture and Rational retained ownership of it. C2's initial contribution was $400,000.

9 The joint venturers held interests in the joint venture, including any improvements constructed or carried out on the property, in the proportion of 5/6 to Rational and 1/6 to C2. Rational agreed that C2 was entitled to lodge an absolute caveat against the title of the property for the purpose of securing Rational's obligations under the joint venture, and to prevent the property being dealt with contrary to the joint venture agreement. C2 was to withdraw its caveat on the happening of defined events: cl 3.3.

10 On 9 November 2006, Suncorp Metway Ltd, as lender, offered finance to Rational and C2 as borrowers. The facility was secured by (among other securities):

(1) a registered first mortgage over the Wellington Street property (then described as lots 18 and 19); and

(2) guarantees and indemnities given by the sole director of Rational and the two directors of C2.

11 The facility was for a term of 24 months. I assume there were variations by extension of term. On 13 December 2010, Suncorp offered to vary the facility by extending it to 31 March 2011. The principal and all outstanding interest were payable on the expiry of the term. In the extension, Suncorp agreed to release its security over 12 of the apartments. It also agreed (subject to conditions) that the borrowers may retain $400,000 from the sale of six of the apartments.

12 On 19 April 2011, Suncorp again extended the term to 15 July 2011. The total facility limit was then $1,270,073. I was told at the hearing that about $1 million is still owed.

13 As a condition subsequent to the extension, the bank required 100% of net sale proceeds from all future sales to be applied to permanent debt reduction.

14 In his affidavit in support of the application, Mr Daniel Fogarty, a director of C2, says that he has been advised by an employee of Suncorp that the facility has not been further extended. The defendant led no evidence on that question.

15 On 30 December 2011, C2 and Rational made two agreements, both executed as deeds. I will deal with the Deed of Release of Property first.

(1) Rational is the registered proprietor of the apartments which the Joint venture has not yet sold (recital B);

(2) C2 has an interest in the apartments pursuant to the joint venture (recital C); and

(3) C2 has registered the C2 caveat to 'record and secure' its interests (recital D).

17 The Recitals further state that the joint venture obtained project finance from Suncorp (recital E), and that in consideration of Rational paying the discharge amount ($3.9 million) to Suncorp, the joint venture shall release the Rational Apartments to Rational (recital F). The Rational Apartments are 12 specified apartments, not including Lot 4.

18 The other agreement is called the Deed of Agreement. It recites the arrangements under the Deed of Release of Property and further, in Recital D, that the parties have agreed that:

(1) Rational shall acquire the C2 Interest for the C2 Payment (I note that although C2 Interest is capitalised, it is not a defined term in any of the agreements);

(2) The joint venture shall request the Facility Extension (that is, the extension of the Suncorp facility to 31 March 2011 'strictly in accordance with the terms of the variation of existing offer' in the letter of Suncorp of 13 December 2010); and

(3) Rational shall be responsible for and shall indemnify C2 against all and any costs, expenses or liabilities of the joint venture (including monies owing under the Facility Extension) whether past present or future.

19 By cl 2, C2 transfers all its right, title and interest in the joint venture and the joint venture assets to Rational in consideration of the C2 Payment.

20 The terms of the C2 Payment are set out at cl 3: a total of $700,000, payable in two instalments by 31 March and 30 June 2011. It is common ground that the total has been paid.

21 Clause 5 is central to this application, both to the existence of a caveatable interest and to the balance of convenience on the application to extend the caveat. It is in these terms:

(a) On the Commencement Date, with the exception of Lots 1, 4, 16, 24, 35 and 44 of the Remaining Apartments, C2 shall withdraw the C2 Caveat from all Apartments.

(b) C2 shall withdraw the C2 Caveat over Lots 1, 4, 16, 24, 35 and 44 immediately upon:

(i) (for all lots) receipt by C2 of the C2 Payment in full and any other monies then owing to C2 under this Deed inclusive of monies owed pursuant to the guarantee and indemnity obligations as detailed in clause 8.1 and the release of C2 from any guarantee obligation to Suncorp detailed in Clause 8.2 (with the discharge of caveat to be exchanged for such payment and release), or

(ii) (for any particular lot) that lot being sold to a bona fide third party, provided that the net proceeds of sale are used to discharge the Suncorp Facility and, to the extent that they are not required to discharge the Suncorp Facility, are immediately applied towards payment of the C2 Payment.

(c) For the absence of doubt Lots 1, 4, 16, 24, 35 and 44 shall remain secured by caveat in favour of C2 for the sole purpose of securing the obligations of Rational and the Guarantor as detailed in this agreement.

(d) In the event Rational refinances the Remaining Apartments, C2 agrees to do all things reasonably necessary and execute such documentation including the withdrawal of the C2 Caveats to give effect to Rational's refinance facility PROVIDED THAT, C2's security is not compromised at any time.

(e) For the absence of doubt, the agreement to withdraw by C2 as detailed in the preceding subclause shall not prevent the immediate relodgement of the C2 Caveats to maintain C2's security, however immediately subordinate to the financier of the newly contemplated security.

(f) It is acknowledged by Rational that any equity funds created as a result of any refinance contemplated by the preceding subclause 5(d) or from the proceeds of sale of the Remaining Apartments shall be exclusively available in priority for the benefit and satisfaction of the C2 Payment.

22 Under cl 6, Rational became solely responsible for all costs and expenses and liabilities of the joint venture. Under cl 7, the parties agreed to enter into the Facilities Extension. At least to that extent, the parties remained in a joint venture following the execution of the Deed of Agreement, although a substantially modified one. Rational and Mr Ehrenfeld agreed to guarantee payments, and to indemnify C2 against all loss, liability, costs or expense of the joint venture.

23 On 12 April 2011, the parties executed a deed of variation to include an additional lot in cl 5(a) and (c), but not in cl 5(b). The variation does not refer to the further extension of the Suncorp Facility in March.

24 In April 2011, the builder of the apartments brought an action in the District Court against C2 and Rational. C2 claims an indemnity from Rational with regard to this liability, and further claims that Rational's obligation to indemnify it is secured by the Lots still subject to caveat. I do not need to decide that issue for the present application.

25 Lot 4 is the subject of a contract for sale made in July 2011. Settlement was scheduled for 31 August, but did not then proceed, presumably because of the caveat. The purchasers have not been joined in this application. They should have been given notice of it - see McCourt v National Australia Bank Ltd [No 2] [2010] WASC 151. In the circumstances, because of the result I have reached, their interests are not prejudiced.

26 On 26 August 2011, the Registrar of Titles, on the application of Rational, sent notice to C2 under s 138B of the Transfer of Land Act that the caveat over Lot 4 will lapse at midnight on 19 September 2011 (that is today) unless extended by the court.

27 The principles applicable to an application of this kind are conveniently summarised by Beech J in Bashford v Bashford [2008] WASC 138 and Murphy J in Gangemi v Gangemi [2009] WASC 195, and I will not repeat them now. The application raises essentially these questions:

(1) Has C2 demonstrated that its claim that it has an equitable mortgage over Lot 4 'has or may have substance'? The question is often expressed as whether the caveator can establish that there is a serious issue to be tried in respect of the estate or interest claimed in relation to the land, although that formulation cannot displace the words of the section.

(2) If C2 has an interest, but it is misdescribed, should I permit C2 to lodge a further caveat to protect its security?

(3) Alternatively, should I restrain Rational with regard to disposal of the net proceeds (if any) of the sale?

28 While I have set these out as separate questions, they are interrelated in the same way as similar issues are in an application for an interlocutory injunction. The court must balance the injustice which might be suffered by Rational if the application to extend the caveat is granted and C2 later fails at trial, and the interests of the third party purchasers, against the injustice which might be suffered by C2 if the application is not granted and it later succeeds. How strong the plaintiff's prospects of ultimate success must be depends upon the nature of the rights it asserts and the practical consequences likely to flow from the interlocutory order sought: Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 [19], [65], [71].

29 An absolute caveat operates as an injunction against registration of an inconsistent dealing otherwise than in accordance with the caveat, so as to enable determination of conflicting claims. The 18th Schedule to the Transfer of Land Act used to require an applicant for a caveat to specify the estate or interest claimed (see Leros (415)). The schedule has since been repealed. But the Registrar of Titles may still require the person lodging the caveat to support it by statutory declaration 'stating the nature of the estate or interest claimed': s 138(1B). In my opinion, the Act still requires the plaintiff to demonstrate that its claim to the estate or interest specified in the caveat has or may have substance.

30 C2 claims an equitable mortgage by virtue of the agreement of 30 December 2010. It submits that, on a proper construction of the Deed of Agreement, Rational agreed to grant an equitable mortgage over property, including Lot 4, to secure Rational's present and future indebtedness arising from its obligations under the Deed of Agreement. C2 refers, in particular, to these matters:

(1) before entry into the Deed of Agreement, it was beneficial owner of the joint venture assets under the joint venture agreement;

(2) clause 5 of the Deed of Agreement, and in particular cl 5(c), has an express acknowledgement of its right to secure Rational's obligations by caveat;

(3) under the terms of the Deed of Release of Property, it released its rights and interests in relation to the Rational Apartments only;

(4) the parties acknowledge in the recitals to the Deed of Variation that C2 had continuing security over a number of lots.

31 Further, the plaintiff refers to the decision of the NSW Court of Appeal in Troncone v Aliperti (1994) 6 BPR 13,291 in support of the proposition that the grant of authority to lodge a caveat in these circumstances carried by implication 'such an estate or interest in land as was necessary to enable the authority to be exercised' (13,292). See also Coleman v Bone (1996) 9 BPR 16,235, 16239; Iaconis v Lazar [2007] NSWSC 1103. I note, however, that the court in Troncone found that the circumstances supported the implication of an equitable charge enforceable by the appointment of a judicial receiver: (12,293 (Mahoney JA); 12,293 (Meagher JA)).

32 The defendant submits, correctly, that the question posed by s 138(c) is whether the caveator's claim for an equitable mortgage has or may have substance, and it is that interest which C2 must demonstrate: see for example, Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129, 131; Martorella v Innovision Developments Pty Ltd [2011] VSC 282 [51] [57]. Otherwise, the application to extend must be dismissed. Counsel for Rational submitted with some cogency that the agreement of 30 December 2010 does not, properly construed, give rise to an equitable mortgage. I will mention only two of the arguments advanced. First, there is no specifically enforceable agreement to grant a mortgage. In particular, the terms of the Deed of Agreement are not sufficiently certain to be specifically enforceable. Second, the powers conferred on C2 are not consistent only with the intention to create a mortgage.

33 The term equitable mortgage has been said not to have any single denotation: Theodore v Mistford Pty Ltd [2005] HCA 45; (2005) 221 CLR 612 [25]. Further, under the Transfer of Land Act, a mortgage does not operate as a transfer of land, but has effect only as a security: s 106. And the term equitable charge may cover both a charge by way of mortgage and a charge where there is no mortgage: see for example, Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, 594 596. Nevertheless, the authorities distinguish between an equitable mortgage and an equitable charge, and the distinction should not be ignored.

34 In my opinion, on the consideration I have been able to give this matter:

(1) The Deed of Agreement transfers C2's interest in the joint venture and the joint venture assets to Rational. There is some question whether, reading the Deed of Agreement with the Deed of Release of Property, C2 has transferred all of its interest in the apartments, other than those defined as the Rational Apartments. I do not need to determine that question.

(2) The Deed of Arrangement creates fresh obligations on Rational to pay the C2 Payment, to guarantee other payments and obligations, and to indemnify C2.

(3) Those obligations are secured against the Lots specified in cl 5(c).

35 The court can identify an intention in the instrument to create a security, and property that is specifically charged as security for Rational's obligations. In my opinion, the Deed of Agreement, in the context of the Deed of Release of Property, is consistent with the creation of an equitable charge.

36 I doubt that the instrument would give rise to an equitable mortgage over the specified lots. Further, the effect on an equitable mortgage of the registration of the mortgage to Sandhurst Trustee Nominees Ltd, before the caveat was lodged, was not the subject of argument and may require careful consideration. It is not necessary, however, to reach a conclusion on these questions to dispose of the application.

37 C2 recognised the distinction between a mortgage and a charge, and while pressing its claim that the Deed gave rise to a mortgage, sought as an alternative that it should have leave to lodge a further caveat under s 138D(1)(e): see Eades v Reilly (Unreported, WASC, Library No 980675, 20 November 1998), where Heenan J gave leave to lodge a further caveat where a caveat was defective for misstatement of the nature of the interest claimed. If C2 has misdescribed the interest arising under the Deed of Agreement, does that error warrant the loss of the plaintiff's security? In effect, C2 submits that I should grant leave to lodge a further caveat to preserve its security, even if the application to extend the caveat should be dismissed.

38 I would not, however, either extend the caveat or give leave to lodge a further caveat.

39 Where a caveat is lodged in support of a security interest only, the balance of convenience may be decisive: Navarac Pty Ltd v Moondancer Holdings Pty Ltd [2009] WASCA 95; (2009) 40 WAR 150 [22].

40 The most important factor in the present circumstances is the contractual arrangement between the parties set out in cl 5(b)(ii) of the Deed of Agreement. That clause weighs against extending the caveat, or permitting the plaintiff to lodge a fresh one. C2 agreed to withdraw a caveat on the sale of an individual apartment, provided that the net proceeds of sale are used to discharge the Suncorp facility, and to the extent that they are not so required, are immediately applied towards payment of the C2 Payment. Rational has discharged its obligation to make the C2 Payment; the interest C2 has in the disposition of the sale proceeds is in relation to the discharge of the Suncorp facility.

41 I understand that there is a dispute regarding cl 5 of the Deed of Agreement, and Rational contends that the obligation to discharge the Suncorp Facility applies only to those lots still secured by mortgage to Suncorp. At least as a preliminary view, I do not agree with that construction. But it is not necessary to make any finding at this stage, save to the extent it may bear on costs.

42 From C2's perspective, if the caveat is not extended it has lost part of its security for the enforcement of Rational's obligations. If Rational does not apply the net proceeds in accordance with the Deed of Agreement, C2's loss would be compensable by damages, and it retains security over the other lots specified in cl 5(c).

43 On the other hand, to extend the caveat, despite cl 5(b)(ii):

(3) exposes Rational to continuing penalties under the contract for sale.

44 The application to extend the caveat, in my opinion, should fail.

45 Similar considerations apply to C2's alternative applications for leave to lodge a fresh caveat and for an injunction.

(2) refuse the application for leave to lodge a further caveat; and

(3) refuse the application for injunction restraining the defendant from disposing with the net proceeds of sale.