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What happened

Heggies Bulkhaul Ltd (HBL) had been operating the Penrose Quarry under a registered lease granted by Australian Machinery Equipment Sales Pty Ltd (AMES). That lease (registered lease No 691505) ran for five years from November 1995 and contained three 11‑year options to renew (para 1). In September 1999 a short series of letters between AMES (through its officer Mr Kekatos) and HBL (through Mr Breeze) produced departures from the option clause: AMES purported to permit early exercise, agreed that the first year’s royalty would not be increased, and accepted replacement of the 12.5% royalty fraction in the rent‑review formula with 11% “effective from this date forth” (paras 16-22, 190-193). HBL wrote at various points as if it had exercised the option; AMES wrote as if it accepted. On 8 December 1999 AMES executed transfers of the freehold/reversion to Global; the transfer was registered on 2 May 2000 (para 38).

HBL asserted that the September correspondence produced an enforceable agreement for a new 11‑year lease commencing 10 November 2000, and sought declarations and specific performance against Global. Global argued the correspondence did not validly exercise the option and, in any event, as registered proprietor it was not bound by an unregistered agreement; Global also cross-claimed alleging numerous breaches by HBL (royalty shortfalls, unauthorised works, failure to insure, failure to provide statements, weighbridge irregularities, etc.) and claimed rights to re‑enter and damages (paras 2‑6, 5).

After protracted hearings, including an appointment of a court expert under Part 39 to resolve tonnage/royalty questions, Austin J concluded that the correspondence of 20 September 1999 produced a new agreement for a lease (not a valid exercise of the option), and that HBL’s equitable interest under that agreement was enforceable against Global. The judge reached that result by holding (1) s 118 of the Conveyancing Act could operate to bind successors in title in many cases; (2) s 42 of the Real Property Act sets the Torrens priority rules and overrides s 118 where inconsistent (Leros); and (3) crucially, on the facts Global either authorised or acquiesced in assurances (especially the letter of 16 December 1999) and repeatedly acted as if the AMES/HBL arrangements applied post-transfer. That conduct supplied the equitable foundation – express/constructive trust or fraud/acknowledgement, proprietary estoppel and estoppel by convention – to permit specific performance of the agreement for lease against Global (paras 23-36, 50-69, 75-116, 139-157). Global’s cross-claim largely failed, and HBL was entitled to recover overpayments properly attributable to Global (paras 201-208).

Why the court decided this way

There are three linked legal threads in Austin J’s reasoning.

1. Contractual characterization of the September correspondence (paras 23-33).
   The court analysed whether the Sept 1999 exchange was (a) a valid exercise of the option as drafted in the registered lease, or (b) a conditional exercise which in legal effect was a counter‑offer producing a new agreement. The judge applied established contract principles (including the notion that an option prescribes the manner and conditions of acceptance) and concluded that where HBL required an amendment to the option terms (notably the royalty percentage) the transaction was better characterised as a new agreement for a lease resulting from offer and acceptance, not exercise of the original option (paras 23-33). Key legal point: a purported exercise which changes the option’s prescribed terms is a counter‑offer (paras 24-27).

2. Whether a successor registered proprietor (Global) can be bound by obligations made by the original lessor (s 118 v s 42) (paras 41-83, 75-83).
   Section 118 annexes certain lessor obligations to the reversion and can permit enforcement by a lessee against successors in title. But the Torrens system (Real Property Act s 42) contains an express priority regime and indefeasibility that can override s 118 (High Court in Leros). Austin J read the authorities to mean that s 118 can bind successors where it does not conflict with the priority rules; where it would produce inconsistency with s 42, s 42 prevails (paras 75-83). Thus, HBL’s 11‑year equitable interest would ordinarily be defeated by registration, because s 42 protects registered proprietors against unregistered interests for terms exceeding three years, absent fraud or an applicable exception (paras 78-89).

3. Equity: acknowledgements, estoppel and the fraud/repudiation exception (paras 94-116, 139-157).
   Because the facts showed Global (or its controllers) authorised or acquiesced in representations (the 16 December 1999 letter) and thereafter acted in ways that repeatedly treated the AMES/HBL arrangements as operative (letters, demands, acceptance of royalties, consent to assignment on the basis of an existing lease, notices premised on a renewed lease), the judge concluded that Global was either bound by an express/constructive trust or had engaged in conduct amounting to fraud for the purposes of s 42 should it attempt to deny the unregistered interest. Independently, proprietary estoppel and estoppel by convention were made out because HBL acted to its detriment on a reasonable expectation created/encouraged by Global, and the parties had operated on a common assumed state of affairs which it would be unconscionable for Global to repudiate (paras 110-116, 139-157). Those equitable doctrines provided independent bases to enforce the agreement for lease against Global.

On those combined statutory and equitable bases the court ordered specific performance and declarations, restrained Global from terminating HBL's occupation pending grant of the lease, dismissed Global’s cross-claim, and required quantification of royalty overpayments recoverable from Global (paras 201-210, 206-207).

Before and after state of the law

Before this decision the legal landscape contained three competing strands:

• the medieval statute lineage embodied in s 118 which, in general, permitted certain lessor covenants to run with the reversion;
• the Torrens principles of indefeasibility and statutory priority under s 42 of the Real Property Act as interpreted by the High Court (Leros) which limit the capacity of unregistered interests to bind registered proprietors; and
• equitable doctrines which have long mitigated strict legal results (fraud exception to indefeasibility, proprietary estoppel, constructive trusts arising from undertakings).

Austin J’s judgment performs two calibrations. First, he confirms that s 118 remains operative and can attach to obligations arising by agreement under hand (drawing on Weg Motors and Walsh v Lonsdale) and to arrangements varying payment terms; but he affirms that s 42 overrides s 118 where they would produce inconsistent priorities (para 75). Second, he emphasises that the equitable armoury (fraud/acknowledgement, proprietary estoppel, estoppel by convention) continues to produce exceptions to indefeasibility where a registered proprietor’s conduct creates or acknowledges rights which the registered proprietor later seeks to defeat (paras 94-116, 139-157). In practical terms the decision underlines that a registered proprietor cannot simply rely on the register where its own antecedent undertakings or subsequent conduct generated equities that induced the tenant’s reliance.

The decision also criticises Chaisumdet (which had allowed s 118 to displace s 42 in a closely-related factual setting) and aligns with the High Court’s Leros analysis (paras 90-94, 75).

Key passages with plain-English translation

• Para 26: "…a lessee purports to exercise an option subject to a condition… the lessee's notice… must in reality be a counter-offer…"
  Plain English: If the tenant says 'I accept, but only if you change this term', that is not acceptance, it's a new offer to be accepted or rejected.

• Para 50: "Section 118… annexes the lessor's obligation to 'the reversionary estate immediately expectant on the term granted by the lease'."
  Plain English: The statutory covenant can attach to the estate that becomes owner of the land when the lease ends, not just to the lessor's temporary interest during the lease.

• Para 75: "…the High Court has held… the indefeasibility provisions of the Torrens system… set up special rules for priority…and override the general rule created by s 118."
  Plain English: The Torrens register's rules about who has priority beat the older s 118 rule where they conflict.

• Para 112-114: discussion of the 16 December 1999 letter and ensuing inference of an undertaking/express trust and that repudiation could be fraudulent for s 42.
  Plain English: AMES' written assurances about the transfer and HBL's consent meant the new owner (Global) could not later pretend those assurances never mattered; if it tried, equity would treat that as dishonest and impose obligations.

• Para 146: "I am persuaded that HBL has made out the ingredients of proprietary estoppel… HBL therefore has an equity against Global…"
  Plain English: Because HBL acted on Global's assurances to its detriment, equity requires Global to honour the promise and the court can order the new lease.

What fact patterns trigger this precedent

The judgment is most directly engaged by fact patterns with these features:

• A lessee in possession of Torrens land under an existing registered lease, where negotiations during the term produce a written agreement for a later lease on amended terms (i.e. a new agreement for lease rather than strict exercise of an option) (paras 23-33).
• A transfer of the freehold/reversion after such an agreement but prior to formal registration of the new lease, where a transferee either authorises pre-transfer assurances or thereafter repeatedly acknowledges/treats the existing arrangement as operative (paras 109-116, 120-131).
• Conduct by the registered proprietor (or its agents/controllers) that induced the tenant to remain in possession and expend money, and that would be unconscionable to resile from (e.g. explicit letters of assurance, acceptance of payments, demands premised on treating the arrangement as a lease) (paras 109-116, 120-131, 139-146).
• Situations where s 118 might be invoked to bind successors to varying payment arrangements or to undertake to grant a future lease, but s 42 would normally defeat an unregistered long-term interest unless equitable exceptions apply (paras 63-76, 82-89).

If those facts are present, Austin J’s analysis supports an application of s 118 in combination with equitable doctrines (estoppel, fraud/acknowledgement, constructive trust) to bind a registered proprietor to an unregistered agreement for lease.

How later courts have treated it

Because the judgment synthesises statutory interpretation and equitable doctrine, later courts will typically do two things when facing similar disputes:

• Revisit the Leros/Law of Property Act interaction: courts are likely to follow the High Court’s approach that Torrens priority rules in s 42 defeat inconsistent outcomes that would otherwise follow from s 118 (Austin J follows this line at para 75), so plaintiffs must show an equitable exception (fraud/acknowledgement/estoppel) to succeed where the unregistered interest exceeds the s 42(1)(d) three‑year exception.
• Apply equitable doctrines carefully: subsequent decisions will examine the factual matrix for (a) an explicit acknowledgement/undertaking at or before transfer which induced registration (Bahr v Nicolay line), or (b) consistent conduct after registration giving rise to proprietary estoppel or estoppel by convention. Austin J’s use of express/constructive trust reasoning (paras 112-115) and of estoppel doctrines (paras 139-157) will be a useful model, but later courts will scrutinise the evidence of knowledge, authorisation, reliance and detriment.

Practitioners should therefore expect that where a transferee is a genuine purchaser with no relevant undertakings and genuinely takes with notice only, Austin J’s path will not be available: the register will usually prevail unless stronger equitable facts exist.

Still-open questions

1. Limits of s 118 post-Leros: Austin J reads s 118 broadly but accepts s 42 overrides where inconsistent. The precise outer boundaries of obligations that s 118 will bind (personal covenants v those creating equitable proprietary interests) remain fact-sensitive and may require further appellate refinement (paras 70-76).

2. Degree of conduct needed for the fraud exception: Austin J applied Bahr v Nicolay reasoning to infer fraud/constructive trust from the 16 December 1999 letter and later repudiation (paras 112-116). The extent to which lesser forms of post‑registration acquiescence suffice to create constructive trusts or to satisfy the fraud exception to s 42 will continue to be litigated.

3. Interplay between estoppel species and conventional registration mechanics: The judgment applies estoppel by convention and proprietary estoppel to similar effect. Future cases will need to refine when estoppel by convention (usually weaker, injunctive) supports an order for specific performance of a lease, and when proprietary estoppel (stronger) does.

4. Quantification of restitutionary claims post-transfer: Austin J directed quantification of royalties recoverable from Global and provisionally selected 16 December 1999 as the cut-off for Global liability (para 207). Courts will need to articulate precise tests for allocating pre‑ and post-transfer payments when both AMES and Global received sums and the arrangements were informal/unregistered.

5. Application to more arm's-length transfers: This case involved overlapping control and familial relationships between AMES and Global. How the decision applies where the transferee is genuinely independent, even if it receives assurances from the transferor, may turn on whether the transferee authorised or properly acquiesced in undertakings at the time of transfer.

Practical lesson for lawyers and compliance officers: where an owner seeks to transfer Torrens land while having made undertakings to tenants, ensure undertakings are documented, recorded or the transferee expressly assumes them; conversely, tenants should secure their rights by registration or clear contemporaneous deeds or insist on recorded caveats and written undertakings at transfer to avoid the hard evidential task of proving equitable exceptions after the event.

1. Did HBL validly exercise the first option to renew the old lease?
2. Did HBL enter into a valid and enforceable agreement for a new lease of the quarry on about 20 September 1999?
3. Did HBL fail to pay royalties due under the old lease or (if there is one) the agreement for a new lease?
4. Did HBL fail to carry out restoration and rehabilitation works to the site, as required by the old lease or the agreement for a new lease?
5. Did HBL fail to comply with Council requirements either by mining in unauthorised areas or by carrying out mining works in a manner not authorised by the Council and in breach of the relevant development consents, contrary to the requirements of the old lease or the agreement for a new lease?
6. Did HBL fail to comply with other miscellaneous requirements of the old lease or the agreement for a new lease?
7. Assuming there is an agreement for a new lease, is Global entitled to re-enter the land and determine HBL's interest in the agreement, and to claim damages?
8. If so, is HBL entitled to relief against forfeiture?
9. Is HBL entitled to recover from Global the sum of $295,778.73 [as revised in June 2003]? 7 The case has had an unfortunate history. It first came before me in the Expedition List in June 2001, and after various directions hearings, I set it down for final hearing before me for a period of five days in December 2001, relying on the estimate of counsel. As the case developed at the hearing in December 2001, the estimate of counsel proved substantially inaccurate, and it was necessary to adjourn the case, part heard, to April 2002. 8 In April and May 2002 there were developments more fully described in my judgment published on 10 May 2002 (Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2002] NSWSC 410). Although more may have to be said later, when I come to deal with the question of costs, for present purposes it is enough to say that Global claimed to have discovered, in the days before the hearing resumed in April 2002, that HBL had given it inaccurate information pertaining to the calculation of royalties, pursuant to orders made by the Court in October 2001. It appeared that substantial quantities of clay may have been removed from the quarry and supplied to Wingecarribee Shire Council, without payment of royalties. 9 Eventually, after hearing evidence about the "clay issue", and evidence about some other discrepancies relating to weighbridge dockets, I granted Global's application to vacate the remaining hearing dates, and I made orders for the appointment of a court expert under Part 39 of the Supreme Court Rules to report on stated questions. The expert reported in December 2002, and after further directions hearings, the case returned to me, for resumption of the part-heard final hearing, on 25, 26 and 27 June and 1 July 2003. 10 Final submissions were presented under the nine headings that I had set out in December 2001. However, it emerged from Global's final submissions that the only issues remaining in contention were numbers (1), (2), (3) (but only in limited respects), (7) (but only in the sense that, according to Global's final submissions, HBL is in occupation under a tenancy at will determinable upon one month's notice, and in those circumstances a right of re-entry does not arise), and (9). Global contended in its final submissions that issue (8) did not arise, and it conceded that no breach by HBL had been established in respect of its restoration and rehabilitation obligations, in respect of unauthorised activities, and in respect of the other miscellaneous matters raised in the cross-claim. The concessions are very significant, because a great deal of the evidence at the various components of the final hearing had been directed towards Global's allegations of breaches of those kinds. 11 Consequently the issues that I must now determine are within a relatively narrow focus. I shall do so, following the headings articulated in December 2001. However, at the hearing the submissions under heading (2) identified two separate questions, namely whether HBL entered into a valid agreement for a new lease with AMES in 1999, and whether, if it did, it can now enforce that agreement against Global. I have altered the heading to reflect those two questions. Ownership and control of AMES and Global 12 The directors of AMES at all relevant times were Wayne Stafford, his brother Garry Stafford, and George Kekatos. The shareholders were Wayne and Garry Stafford, Wayne's wife Rhonda Stafford, Wayne's father, and Mr Kekatos. The directors of Global were, until recently, Susan Stafford (Garry's wife), Rhonda Stafford and Voula Kekatos (George's wife), although George Kekatos has recently replaced Susan Stafford as a director. Wayne Stafford had the day-to-day management of Global until very recently, when Global was placed in receivership and voluntary administration. Mr Kekatos was the chief financial officer of Global. 13 Wayne Stafford has had a close and long-standing involvement in the operation of the quarry. With his brother and his father he commenced operations at the quarry in the 1980s. After the land was leased to HBL in 1995, Wayne Stafford assisted HBL in its operations by developing new products, increasing the customer base and also assisting with the Eagle Classifying Plant. Such was Mr Stafford's involvement that it is appropriate to infer, and I do infer, that any knowledge that came to him at any time relevant to this proceeding was knowledge of AMES; and in the period commencing on 8 December 1999 when the land was transferred to Global, any knowledge of Mr Stafford was knowledge of Global. Did HBL validly exercise the first option to renew the old lease? 14 By Clause 2 of the old lease, the Lessor devised the Land to the Lessee for the Term in consideration of the payment of the Royalties by the Lessee payable pursuant to the Lease, and granted the Lessee various rights and privileges for working the land as a quarry. Clause 3 of the old lease required HBL to pay the Lessor Royalties calculated in the manner set out in the clause. Clause 3.03 prescribed an annual Minimum Royalty for each of the five years of the Term of the Lease. Clause 3.04 provided for a New Rate to be determined by a review conducted on each of the Review Dates during the Term of the Lease, to be the greater of the Basic Royalty and an amount representing 12.5% of the average sale price of Minerals. Each of the words beginning with a capital letter is a defined term, but it is unnecessary to explore the definitions for present purposes. 15 Clause 8 of the old lease, dealing with the first option to renew the old lease, was in the following terms: "8. FIRST OPTION 8.01 If the Lessee shall desire to take a renewed lease of the Land for a term of Eleven (11) years and shall give to the Lessor previous notice of such desire not less than three months and no more than six months prior to the expiration of the term of this Lease and provided the Lessee is not then in default under the provisions of this Lease whether express or implied the Lessor will at the cost and expense of the Lessee grant to the Lessee a renewal of this Lease for a further term of Eleven (11) years upon the same terms and conditions as are contained in this current Lease with the exception of this Clause and provided however that the Prevailing Rate for determining the Royalties payable pursuant to Clause 3 of this Lease for the first year of the renewed lease shall be determined as set out in Clause 8.02 of this Lease as at and effective on the date of commencement of the first option period as if such date were a date of review under this lease PROVIDED THAT Clause 3.03 shall not apply during the first option period. 8.02 The Prevailing Rate for determination of the Royalties payable for the first year of the commencement of the first option period shall be the New Rate determined pursuant to Clause 3.04 of this Lease as at and effective on the date of commencement of the first option period multiplied by the Standard Quantity as if such date were a review date under this Lease. Rent reviews shall thereafter take place in accordance with Clause 3.04 of the Lease on the Review Dates." 16 On 7 September 1999 Mr Kekatos wrote on behalf of AMES to Phillip Breeze, as managing director of HBL. The letter was headed "Exercise of Option Lease No 691505 Penrose Quarry". Mr Kekatos referred in the letter to clause 8.01, and proceeded: "However the Lessor hereby confirms and agrees that it hereby waives the restriction on the early exercise of the Option of Renewal contained in Clause 8.01 of the Lease and hereby consents to the said earlier exercise of the Option for Renewal." 17 The letter also referred to the rent review provisions of clause 8.02 of the lease, and confirmed that there would be no increase in the current rate of royalty payment upon the exercise of the option of renewal, for the first year of the term of the renewed lease. The letter invited HBL to forward a formal notice of exercise. Wayne Stafford, who was a director of AMES, gave evidence that AMES requested the early exercise of the option, so that it could tell its bank that it had a further long-term lease of the property. 18 On 17 September 1999 Mr Breeze on behalf of HBL wrote to Mr Kekatos of AMES, saying: "Following your agreement to waive Clause 8.01 and allow the Option to be exercised at today's date, HBL hereby gives notice of exercise of the first option to renew." 19 The letter did not specifically refer to the proposal regarding clause 8.02, but since Mr Breeze's letter was in reply to AMES' letter of 7 September and purported to take up the offer to exercise the option early, it is appropriate to infer (and I do infer) that the letter of 17 September accepted AMES' offer regarding clause 8.02. 20 Mr Breeze wrote to Mr Kekatos again on 20 September 1999, referring to his letter of 17 September and confirming "full details of our discussions and subsequent agreement". The letter asserted that (1) agreement had been reached to waive clause 8.01, allowing HBL to give notice of exercise of the first option at 17 September, and (2) in clause 3.04(b) the reference to 12.5% was to be replaced with 11%. The letter then said: "Subject to your written confirmation of the second point, HBL gives notice of exercise of the first option to renew effective from November 2000." 21 On 20 September 1999 Mr Kekatos wrote to Mr Breeze referring to Mr Breeze's letters of 17 and 20 September (incorrectly designated "June") and confirmed "the Company's acceptance of the that exercise" [sic]. The letter said that AMES would instruct its solicitors to prepare and submit the renewal lease in due course. The letter continued: "Further the Company hereby confirms that in consideration of the above early exercise of the Option of Renewal [and provided that your company continues to observe all the terms and conditions of the lease from the date hereof including the continuing obligation to pay the royalty reserved in accordance with the lease] then the Company agrees to the amendment of Clause 3.04(b) of the lease by the removal of '12.5%' in that clause and replacement with '11%' effective from this date forth." 22 It will be seen that in this correspondence, the parties to the old lease departed from the provisions of clause 8.01 concerning the exercise of the option to renew. They did so in three respects: (a) in relation to the time for exercise of the option (clause 8.01), which was brought forward; (b) in relation to the rate of royalty payment for the first year of the term of the renewed lease (clause 8.02), which was not to be increased above the current rate; (c) in relation to the terms of the lease to be granted, in that Clause 3.04 (b) would be amended so that the percentage rate to be used in calculating royalties was to be varied from 12.5% to 11%. 23 Global submitted that in light of these departures, the arrangement the parties reached was not exercise of the option contained in the old lease; rather, it was an arrangement under which the parties, by a process of counter-offer and acceptance, reached a new agreement for lease. I agree with this submission. 24 In Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) 59 SR 122, an option to renew a lease was expressed to be conditional upon punctual payment of rent during the term. The lessee had frequently failed to pay rent punctually, but nevertheless purported to exercise the option for renewal. The Full Court of the Supreme Court of New South Wales held that the option had not been validly exercised. Their Honours said (at 123-4): "In the present case the lessor irrevocably offered to grant a lease. Its offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted and result in an agreement for lease. A purported acceptance without performance of the prescribed conditions would not and could not be an acceptance of the offer. It would in reality be a counter offer by the original offeree requiring acceptance by the original offeror if an agreement were to result." 25 (These observations assumed the "irrevocable offer" theory of options, but it seems to me that the outcome would be the same if the "conditional agreement" theory were applied.) 26 In my opinion a similar analysis applies where a lessee purports to exercise an option subject to a condition to the effect that the terms of the new lease be different from what is prescribed in the option clause. The lessee's notice cannot be acceptance of the lessor's offer to grant a new lease (or satisfaction of the conditions of the agreement to do so), and must in reality be a counter-offer which the lessor is free to accept or reject. 27 For present purposes a distinction between two situations must be borne in mind. In the first situation, the parties to a lease validly amend the terms of the lease and then the lessee exercises the option to renew the amended lease. There has been a valid exercise of the option to renew the lease, although the lease which is renewed has been amended. In the second situation, the lessee purports to exercise an option to renew the lease conditionally upon the lessor agreeing to an amendment that will apply in the renewed term. The lessor agrees to the amendment and to the renewed term. In the second situation, the correct analysis is that there has been no renewal of the lease, but instead, the lessee has offered to take a new lease on terms not identical with the lease that would arise upon exercise of the option. The lessor has accepted the lessee's offer to take a new lease on those different terms, and so an agreement to grant a new lease has arisen. 28 In my opinion the present facts contain elements of, and variations to, those two situations. The offer to allow early exercise of the option and keep to the current royalty rate for the first year of the renewed term came from AMES, by its letter of 7 September 1999. HBL was given the opportunity to agree to the variation of clause 8.01 prior to exercising the option under the varied clause. By its letter of 17 September, HBL purported to accept the variation of clause 8.01 to allow early exercise, and then forthwith to give notice of exercise of the option pursuant to the amended clause. By implication, it accepted the offer to vary clause 8.02 to maintain the current royalty rate for the first year of the renewed term. 29 Thus, it appears from these two letters that the parties agreed to vary the terms of the existing lease prior to the exercise of the option, and immediately thereafter the option was exercised. If there were nothing more to the facts, this would be an example of the first situation, and there would have been a valid exercise of the first option to renew the old lease (as varied prior to exercise). 30 However, it appears that there were some additional discussions, confirmed in HBL's letter of 20 September but not appearing in its letter of 17 September. The additional discussions led to an agreement between HBL and AMES to vary clause 3.04(b) for the renewed term, by replacing 12.5% with 11%. 31 It is not clear from the evidence whether the arrangements to alter the percentage royalty rate in clause 3.04(b) were reached, in discussions, before or after HBL's letter of 17 September, though clearly enough to discussions reached their conclusion before HBL's letter of 20 September. If the discussions were concluded before 17 September, then HBL's letter of that date did not completely reflect the arrangements between the parties and may not have amounted to a valid exercise of the option to renew at the unamended royalty rate. If the discussions about the royalty rate were not concluded until after 17 September, then the letter of 17 September would appear to have been a valid exercise of the option to renew the lease at the old royalty rate. 32 It seems to me, however, that it does not matter whether the discussions about the revised royalty rate were concluded before or after the letter of 17 September. If the letter of 17 September gave rise to a valid exercise of the option to renew at the old percentage royalty rate, that renewal was revoked by the correspondence of 20 September. HBL's letter of 20 September, properly construed, was an offer to exercise the option upon a new basis, namely the basis that the percentage royalty rate in clause 3.04(b) be amended from 12.5% to 11%. That letter was not an offer to amend the agreement for a renewed lease that had arisen out of the prior exercise of the option, because in its terms, the letter offered a fresh exercise of the option to renew, subject to AMES' agreement to the amended percentage royalty rate as well as to early exercise. It was that new offer that AMES accepted by its letter of the same date. 33 Thus, on 20 September 1999 there was an offer of a new lease on certain terms by HBL to AMES, and acceptance of that offer, creating an agreement for a new lease. Notwithstanding some of the language of HBL's letter and later correspondence, there was no exercise of the existing option for renewal. Did HBL enter into a valid agreement for a new lease of the quarry on about 20 September 1999, and if so, is the agreement now enforceable against Global? 34 Global conceded that the correspondence summarised above gave rise to a new agreement for lease, though it was not an exercise of the option contained in the old lease. So much is clear from the terms of the correspondence itself. 35 The new agreement for lease was between HBL and AMES. It was an agreement for a lease for 11 years, commencing 10 November 2000, on the same terms and conditions as if HBL had exercised the option, subject to replacing 12.5% with 11% in clause 3.04(b). It was in writing, and there is no reason to suggest that it would not have been enforceable by HBL against AMES, assuming there was no breach by HBL entitling AMES to terminate. The more difficult question is whether the new agreement is now enforceable by HBL against Global, as the present registered proprietor of the land. 36 Later in these reasons for judgment I shall consider some evidence to the effect that HBL and AMES agreed to vary the payment terms of the old lease during its currency. These agreements were to the effect that: · the lessor would not be entitled to any royalty is in respect of "clay" sold by HBL to Wingecarribee Shire Council; · the Standard Quantity of Minerals, after which the Further Royalty was payable, would be increased from 250,000 tonnes to 350,000 tonnes (referred to in some evidence as the "holiday tonnes" arrangement); and · the reduction in the percentage royalty rate payable under clause 3.04(b) from 12.5% to 11%, agreed in connection with the new lease, would take effect during the term of the old lease. 37 The agreement for a new lease incorporated the variations to payment obligations that had been agreed between AMES and HBL. As with the obligation to grant a new lease, there is a difficult question whether any of these variations agreed between HBL and AMES are enforceable against Global. 38 AMES transferred its reversionary interest in the property to Global on 8 December 1999. The transfers were registered on 2 May 2000. Wayne Stafford gave evidence explaining that the transfers were made after the National Australia Bank had called up a loan to AMES which had been guaranteed by the directors and shareholders. 39 There are analytically two grounds of upon which HBL contends that the agreement for a new lease, incorporating variations of the payment terms, is enforceable against Global. First, HBL says that s 118(1) of the Conveyancing Act 1919 (NSW) permits it to enforce AMES' contractual obligation to grant a new lease against Global, notwithstanding the law of privy of contract. Secondly, HBL submits that Global holds its interest in the land subject to HBL's unregistered equitable interest under the agreement, having regard to principles of priority between competing interests and proprietary estoppel, or that it is prevented from denying HBL's claim to a new lease by an estoppel by convention. I shall consider these two grounds in turn. 40 The two grounds are not entirely unrelated, although their connection is difficult. Problems arise because s 118 stems from 16th century English legislation operating in a system of common law title, upon which the more modern concept of title by registration under the Real Property Act has been superimposed, and subsequently the old provision has been substantially re-enacted without clarification of its role in the registered title system. Section 118 41 Section 118(1) is in the following terms: "The obligation of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by the lease, be annexed and incident to, and shall go with that reversionary estate, or the several parts thereof, notwithstanding severance of that reversionary estate, and may be taken advantage of and enforced by the person in whom the term is from time to time vested by conveyance, devolution in law, or otherwise, and if and as far as the lessor has power to bind the person from time to time entitled to that reversionary estate, the obligation aforesaid may be taken advantage of and enforced against any person so entitled." 42 Subsection (2) makes it clear that the section applies to leases made after the commencement of the Act. 43 Section 6(1) of the Conveyancing Act states that "except as hereinafter provided, this Act, so far as inconsistent with the Real Property Act 1900, shall not apply to lands, whether freehold or leasehold, which are under the provisions of that Act." However, there is a more specific provision in s 116, which overrides s 6(1) for present purposes. Section 116 states that "the provisions of this Part [Part 8, which includes s 118] shall apply to leases and sub-leases of land under the provisions of the Real Property Act 1900, notwithstanding anything in that Act contained." 44 The implications of s 116 will be explored later. At this stage it should be noted, however, that s 40(3) of the Real Property Act replicates s 118 to a certain extent. It provides, inter alia, that the registered proprietor is to be regarded as being seized of the reversion expectant upon any registered lease, and is subject to the covenants and conditions expressed to be performed on the part of the lessor. Section 118 seems to have a wider operation in two respects, as regards Real Property Act land: first, it is not ex facie confined to registered leases; and secondly, it extends the right of enforcement to an assignee or other person in whom the term is vested. 45 Section 118 derives from the statute 32 Hen VIII c 34, s 2 (the Grantees of Reversions Act 1540). The common law did not allow a covenant to run with the reversion, except to the extent that the assignee of the reversion was permitted to sue upon those implied covenants that resulted from the fact of demise: Wedd v Porter [1916] 2 KB 91. The statute of 1540 altered the common law, giving lessees and their assigns the same rights and remedies against grantees of the reversion, for breach of any covenant or condition of the lease, as they might have had against the lessor: see GP Stuckey, The Conveyancing Act 1919-1969 with Annotations (2nd ed, 1970), p 248. But the section gave rise to a number of difficulties. It was held to apply only where the original lease was by deed, on the principle that agreements by parol are not covenants and cannot run with the land: Standen v Christmas (1847) 10 QB 135; Bickford v Parson (1848) 5 CB 920. This problem has been held to be overcome by the wording of the successor provisions to the 1540 Act, as noted below. Another difficulty with the old statute was that upon severance of the reversion, covenants could not be enforced by the assignee of part of the reversion. This problem has been overcome by the introduction in the modern statute of the words "or the several parts thereof, notwithstanding severance of that reversionary estate": see Woodfall's Law of Landlord and Tenant (28th ed, 1978 by VG Wellings), Volume 1, p 455. 46 The most important limitation on the scope of the 1540 Act was that it applied only to covenants that "touched and concerned" the land: see Davies v Town Properties Investment Corpn Ltd [1903] 1 Ch 797; Barnes v City of London Real Property Co [1918] 2 Ch 18. The modern provision refers to an obligation "with reference to the subject-matter of the lease", a phrase that is, at least potentially, less restricting. In Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1, at 7, Scott LJ (with whom Bucknill and Asquith LJJ agreed) said: "The phrase 'subject-matter of the lease' was, as we know, substituted for the ancient expression 'touching and concerning the land.' Professor Cheshire's elucidation of its meaning on pp.214-5 of the 5th ed. of his book on 'Modern Real Property,' in my respectful opinion, supplies the true test. 'If a simple test,' he says, 'is desired for ascertaining into which category a covenant falls, it is suggested that the proper inquiry should be whether the covenant affects either the landlord qua landlord or the tenant qua tenant. A covenant may very well have reference to the land, but, unless it is reasonably incidental to the relation of landlord and tenant, it cannot be said to touch and concern the land so as to be capable of running therewith or with the reversion.'" 47 Their Lordships held that a provision in an agreement between landlord and tenant restricting the landlord's right to give a notice to quit satisfied Professor Cheshire's test and ran with the land, and was therefore enforceable against a transferee from the landlord. 48 Global has made an impressive submission as the scope of s 118(1), that deserves to be set out in full: "Section 118 of the Conveyancing Act 1919 does not have the effect of causing an agreement to lease for a renewed term to bind the person to whom the lessor transfers the reversion, when the lessor and lessee enter into the agreement to lease outside the terms of their existing lease, because: (a) Section 118 annexes the obligation of covenants to the reversionary estate. (b) The nature of a reversionary estate is: "A reversion is such part of a grantor's interest as is not disposed of by his grant … Thus if a tenant in fee simple grants a life interest, the fee simple which he retains is a reversion. His estate in fee simple in possession has become a fee simple in reversion. … On the grant of a lease, the lessor retains a reversion.' [RE Megarry & HWR Wade, The Law of Real Property , (3rd ed, 1966), pp 185 and 622]. (c) A reversionary estate is necessarily concurrent with the lesser interest or interests carved out of it. It can have no existence before those interests come into being and must end when they do. In relation to a lease, the reversionary estate exists only until the lease expires by effluxion of time or is otherwise determined. (d) If a reversionary estate ceases to exist, covenants that run with it cease to be enforceable. This position has been modified by statute where intermediate reversionary estates in a hierarchy of estates or interests come to an end by surrender or merger [Conveyancing Act 1919, s 122, reproducing the English Law of Property Act 1925, s 139] but there is no equivalent statutory provision extending the binding effect of covenants beyond the end of the reversionary estate to which they are annexed. (e) It follows that s 118 of the Conveyancing Act does not support the enforcement of covenants after the relevant lease (and hence the reversionary estate) comes to an end. (f) If a lease contains a covenant granting the lessee an option to renew, s 118, if it applies, has the effect that: (i) the covenant granting the option binds the landlord; and accordingly, (ii) if the tenant exercises the option, an agreement for the grant of a lease comes into existence, enforceable as a contract by and against both the landlord and the tenant, each of whom is a party to it. (g) On the other hand, if the landlord transfers the reversion at this point, s 118 does not allow the enforcement of the agreement to lease against the new landlord. It cannot be enforced as a covenant running with the reversion, because at the time when the tenant is entitled to performance, the lease will necessarily have come to an end, and with it the reversionary estate to which the obligation is annexed. (h) So, an agreement for lease is enforceable at law against a landlord only as a contract; that is, it is enforceable only against the person who was the landlord at the time the option was exercised." 49 [The submission then addresses the question of priority between the equitable interest of a tenant under an agreement for lease and the legal or equitable interest of a transferee from the lessor. I consider that point below.] 50 Interesting though this submission is, my view is that it misconceives the operation and effect of s 118. It is undoubtedly correct that, where the holder of an estate in fee simple grants a lease, the reversionary estate during the term of the lease is that part of the estate in fee simple that the lessor has not disposed of by granting the lease. However, s 118 does not purport to annex the lessor's covenant obligation solely to the lessor's reversionary estate during the term of the lease. It annexes the lessor's obligation to "the reversionary estate immediately expectant on the term granted by the lease" [emphasis supplied]. In a simple case where the lessor is the holder of the fee simple not subject to any other intermediate interests, the reversionary estate to which the section applies includes both the lessor's reversionary estate during the term of the lease, and the full fee simple upon the expiration of the term of the lease. Upon the expiration of the term, the fee simple becomes the estate immediately expectant on the term granted by the lease. The lessor's obligations then run with the fee simple, although (being obligations by covenant of the lessor qua lessor to the lessee qua lessee) they remain obligations connected to the former lease. Section 122 of the Conveyancing Act, which was referred to by counsel for Global in oral argument, is not of assistance, being equally open to the construction urged by Global and the construction preferred by me. 51 If Global's submission were correct, the original lessor would have no obligation to an assignee of the original lessee once the lease had been terminated, even in respect of breaches of covenant that occurred prior to termination. Indeed, it would be in the lessor's interests, once the lease had been assigned by the original lessee (to whom, alone, the lessor's obligations were owed in contract) to achieve early termination. If the termination itself involved a breach of obligation, the assignee of the lease would be unable to enforce the obligation or take advantage of it against the lessor. A similar analysis would apply in a case where the original lessee remained in possession, but the lessor assigned the freehold. Those undesirable conclusions should be reached only if the statutory language demands that outcome. It does not do so, in my view, because the reversionary estate identified in the section is not only the lessor's reversionary interest during the term of the lease, but also its reversionary interest expectant on the lease upon its termination. 52 Global did not cite any cases which specifically support its construction of the section. Moreover, its construction of the section is inconsistent with the outcomes in decided cases, although the cases to which I have been referred do not expressly consider the meaning of the words "reversionary estate immediately expectant on the term granted by the lease". It has been held that a covenant to renew a lease runs with the reversion under the section and is therefore enforceable against a successor in title of the lessor - a rule that became firmly established by judicial decisions early this century: see Alcova Holdings Ltd v Pandarlo Pty Ltd (1988) 15 NSWLR 53, at 61 per Bryson J; note also Re Hunter's Lease [1942] Ch 124. In Weg Motors Ltd v Hales [1961] Ch 76 (cited with approval in Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326) the English Court of Appeal held that the UK section applies to permit a lessee to obtain specific performance, against a successor in title of the lessor, of an agreement for lease arising out of the exercise of an option agreement that had been entered into contemporaneously with the lease. Although the lessee's writ was filed before the expiration of the term of the original lease, the hearings at first instance and on appeal occurred, and relief was granted, after the term had expired. Chaisumdet v Ming On Trading Pty Ltd (1990) NSW ConvR para 55-518, if correctly decided (see the discussion below), would also be contrary to Global's submission. 53 To assess the application of s 118 in the present circumstances, it is useful to begin with its application to a simple case of option to renew. The following propositions may be stated: (a) If the registered proprietor of Real Property Act land, being the lessor of a registered lease of the land containing an option to renew, transfers the reversionary estate after the lessee has validly exercised the option, s 118 has the effect that the transferee is bound to grant a new lease to the lessee pursuant to the exercise of the option. The lessor is obliged by covenant, prior to transfer of the reversionary estate, to honour the exercise of the option by granting a new lease in accordance with the option provisions of the old lease. In undertaking that obligation, the lessor had the power to bind the reversionary estate. The obligation of that covenant therefore is annexed and incident to, and goes with the reversionary estate. The lessor had the power to bind subsequent registered proprietors of the land by registered lease. Consequently the lessee may enforce the obligation against the transferee. (b) The same analysis applies where the reversionary estate is transferred before the option to renew has been exercised. The lessor's obligation by covenant to grant a new lease if, at some future time, the option is validly exercised goes with the reversionary estate, and is enforceable by the lessee against the transferee if, after the transfer, the option is validly exercised. 54 Here, however, there has been no exercise of an option but instead, the parties to an existing lease have, during the term of the lease, varied the payment obligations in certain ways, and they have also entered into an agreement by correspondence for the grant of a new lease. Does s 118 apply so as to bind the transferee to the obligations that have arisen under the variations of the existing lease and the agreement for a new lease, to which it was not party, so that the lessee can enforce these obligations against the transferee? This question raises three issues of construction of s 118: · first, whether the words "the obligation of a covenant" apply where the obligation arises out of an agreement under hand but not under seal; · secondly, whether the wording of s 118, which literally applies to any "obligation … entered into by a lessor with reference to the subject-matter of the lease", should be held to apply to agreements to vary payment obligations in an existing lease, and to an agreement between lessor and lessee during the term of the lease, but not forming part of the lease, with respect to the creation of a new lease on partially different terms; · thirdly, given that the land in the present case is held under the Real Property Act, and the transferee has become the registered proprietor of the land, whether the operation of the section is subject to the statutory rules of priority under the Real Property Act. 55 As to the first issue, the Conveyancing Act of New South Wales does not assist us by offering an extended definition of "lease" (compare Thomson v Cross [1954] VLR 635, where Sholl J relied (at 644) on definitional provisions to hold that the Victorian equivalent of s 118 extended to any tenancy in writing, though not to a parol tenancy; and as to the definitions relevant to the present English provisions, see Woodfall's Law of Landlord and Tenant, op cit, p 455-6. The position in this State is, in my opinion, governed by some English cases, which have decided that the words "the obligation of a covenant" should be construed so as to take into account the rule in Walsh v Lonsdale (1982) 21 Ch D 9, under which equity will treat a lessee in occupation under a written lease or written agreement for lease as equivalent to a legal lessee, where specific performance is available. Thus, in Weg Motors Ltd v Hales, where an option to renew was granted under an agreement in writing but not under seal, Lord Evershed MR and Harman LJ said ([1961] Ch at 73): "It is next objected that the option contract is under hand only. We have been unable to see the force of this. The lease itself would have taken effect in equity if under hand only, and we do not think that the word 'covenant' in section 142 [of the Law of Property Act 1925, not materially different from s 118] is limited to covenants under seal." 56 Donovan LJ reached the same conclusion (at 76). 57 There were earlier decisions to the same effect, dealing with the predecessor to s 142 of the Law of Property Act, namely s 10 of the Conveyancing Act 1881. While it was held in Blane v Francis [1920] 2 KB 1 6 that the section did not apply where the agreement was merely verbal, in Rickett v Green [1910] 1 KB 253, at 259, Darling J said that although a lease for a term exceeding three years, not under seal, was void at law, "still in equity it is looked upon as a lease, and in my judgment must be treated, as between the parties, as if it were a lease under seal." Then in Cole v Kelly [1917] 1 KB 252 it was held that the section applied where both parties signed letters embodying a bargain for the continuation of a tendency. In Rye v Purcell [1926] 1KB 446, at 452, McCardie J extended the latter decision to a case of a verbal agreement confirmed by letter signed on behalf of lessor only. 58 I see no reason for declining to follow the English cases in the construction of s 118 of the New South Wales Act. The principles reflected in the cases were established before the enactment of the Conveyancing Act, and may be taken to have been before the draughtsman of the New South Wales legislation. 59 As to the second issue (whether s 118 applies to the lessor's obligation to accept reduced payments under agreements to vary payment obligations in an existing lease) and its obligation to grant a new lease under an agreement between lessor and lessee for a new lease, there are some relevant observations in Weg Motors Ltd v Hales. The full facts of the case were complicated, but the only facts relevant to the present case may be stated briefly. Two parties entered into an agreement under hand that in consideration of one of them (the lessee) taking a lease from the other (the lessor), "executed after these presents", the lessee would have an option to renew on specified terms. The lease was executed immediately after that agreement, on the same day, and the lessee went into possession under it. One of the questions was whether the option to renew could be exercised and enforced by the lessee against a transferee of the reversion, having regard to s 142 of the Law of Property Act 1925 (UK). 60 The application of the section to the instant facts raised an issue that does not arise in the present case. There the option agreement was entered into before the lease. The English Court of Appeal held that the relationship of lessor and lessee came into existence when the option agreement came into force, because the option agreement did not commence until, in consideration of lessor's promise to grant an option, the lessee executed the lease (at 69 and 73 per Lord Evershed MR and Harman LJ, and at 76 per Donovan LJ). Consequently the lessor's obligation to grant a renewed term on exercise of the option was properly described as an obligation of a covenant entered into by the lessor with respect to the subject matter of the lease. 61 On the question whether the section applies to a covenant not contained in the lease itself, Lord Evershed MR and Harman LJ said (at 73): "Next, it is said that this covenant, like the covenants referred to in the preceding section 141 which deals with the benefits of a lessee's covenants, only applies to covenants contained in the lease. That is so in the case of section 141 but in this section 142 the language is different. It is 'entered into by a lessor with reference to the subject matter of a lease.' We take 'subject matter' to mean the demised property. This contract satisfies those words and we see no reason why, provided the relationship of lessor and lessee exists, a covenant to renew should not be included in an independent document." 62 Donovan LJ said (at 76): "The section does not in terms require a covenant for renewal to be in the lease itself. In this respect it differs from the Statute of Henry VIII and section 141 of the Act, and the difference seems to me to tell as much in favour of the plaintiffs [the lessees, who were seeking to enforce the promise to renew] as the defendants. The argument would be stronger if it were true that when the option agreement was signed the relationship of lessor and lessee of the premises affected had not been brought into being, but I think it had." 63 It appears to me that the agreements to vary payment obligations in the old lease fall within the wording of s 118, on the authority of the Weg Motors case. They were entered into by the lessor, AMES, with reference to the subject matter of the lease They satisfy Professor Cheshire's exposition of the meaning of s 118, adopted by the English Court of Appeal in Breams Property Investment Co Ltd v Stroulger. They are arrangements entered into by the lessor and lessee at the time, qua landlord and qua tenant respectively. 64 However, the position regarding the agreement for a new lease is not so straightforward. The agreement is not an agreement to grant an option, but it is nevertheless (being an agreement to grant a new lease on partially different terms from the existing lease) capable of being regarded as an agreement creating an "obligation … entered into by an existing lessor with reference to the subject-matter of the lease" in favour of the lessee. 65 The difficulty is that an agreement between lessor and lessee for a new lease upon the expiration of the existing term does not appear to fit within Professor Cheshire's exposition of the meaning of s 118. When a lessor agrees to grant a new lease in circumstances where there is no question of exercise of an option to renew, it is not doing so qua landlord but qua holder of the fee simple (or any other estate capable of supporting the intended lease). The agreement is not made with the tenant qua tenant, but with a person whose existing capacity as tenant is not a prerequisite to the agreement. 66 In my opinion, however, Professor Cheshire's test is satisfied in the special circumstances of the present case. One starts with the proposition that the test is satisfied where the lessor is obliged to grant a new lease because an option for renewal contained in the existing lease has been exercised. In such a case the covenant to grant a new lease is found in the option clause in the original lease, and is therefore a covenant affecting the landlord qua landlord and the tenant qua tenant. Next, the Weg Motors case is authority for the proposition that the test is satisfied where the option for renewal is not in the lease, but is found in an agreement which is expressed to operate upon commencement of the lease and is between the lessor and lessee as parties. The mere fact that the option agreement is separate from the lease does not, in those circumstances, prevent it from being said that the lessor's obligation under the option agreement is an obligation undertaken by the lessor qua landlord in favour of the lessee qua tenant. 67 Now, the present case is not so very different from that situation. This is not a case where a lessor and a lessee have commenced their negotiation for a new lease by turning to a blank page. Here, there was an option for renewal in the lease instrument itself. The negotiations were not conducted in isolation from the option clause. Rather, they were specifically directed to the exercise of the option, subject to three amendments. Although in law the agreement that emerged was not an agreement arising out of exercise of the option, it was an agreement based on the existing option clause, modifying its effect only to a limited degree. I have no difficulty in concluding, on the special facts of this case, that the lessor's obligation to grant a new lease under this agreement is as much an obligation of the lessor qua landlord to the lessee qua tenant as was the obligation in the Weg Motors case. 68 As to the remaining ingredients of s 118, it is not disputed that in the present case, the lessor had the power to bind the reversionary estate to the obligation to vary the payment obligations. Nor can be disputed that the lessor had the power to bind the reversionary estate to the obligation to grant a new lease, because it was at the time the registered proprietor of the estate in the simple, seeking to extract a commitment from the lessee to a new lease in order to satisfy its mortgagee's requirements. 69 Section 118 allows the lessee or its assigns to enforce the obligation against a subsequent holder of the reversionary estate only "if and as far as the lessor has the power to bind" that person. It seems to me that a lessor who negotiates a variation to the lessee's payment obligations during the term of the lease has the power to do so in a manner that binds any subsequent taker of the reversionary estate. It would be irrational for s 118 to apply so as to restore the original unvaried lease terms upon every change in the identity of the holder of the reversionary estate. The position is more difficult where the lessor's obligation creates an equitable interest in the lessee, because at general law the equitable interest will be defeated by a bona fide purchaser of the residuary estate for value without notice, and so it is arguable that the lessor has no power to bind every subsequent holder of the residuary estate. That raises the general question of priority between the person seeking to enforce the obligation, and the present holder of the residuary estate. Section 118 and priority between competing equitable proprietary interests 70 Section 118 operates to create a statutory exception to the doctrine of privity of contract, in two ways. First, it allows an assignee of a lease from the original lessee to enforce the lessor's obligation. Second, it allows the lessor's obligation to be enforced against a subsequent holder of the residuary estate. The section does not, in terms, confer upon the person entitled to enforce the lessor's obligation any proprietary interest in the residuary estate or the land. The question whether the lessor's obligation creates any proprietary interest in the person entitled to enforce it depends upon proper analysis and characterisation of the lessor's covenant. 71 There is a distinction, important in the present case, between an obligation of the lessor that is merely personal although running with the residuary estate under s 118, and an obligation of the lessor that gives the lessee a proprietary interest. 72 One can envisage many examples of an obligation of former kind - for instance, an obligation by the lessor to reimburse the lessee for certain specified kinds of expenditure made in respect of the demised premises. The right to enforce the obligation is not a proprietary right, and so (for example) if the person owing the obligation becomes bankrupt or goes into liquidation, the person entitled to enforce the obligation ranks as an unsecured creditor. And yet an assignee from the lessee may enforce such an obligation under the section; and the statutory right may, according to s 118, be enforced against the person who takes the residuary estate from the original lessor, because the obligation is annexed to the estate. 73 In the present case, the lessor's obligation to accept reduced payments in consequence of agreements to vary payment obligations under the old lease falls within this category. The payment reduction arrangements are annexed by s 118 to the residuary estate. They are as binding on the lessor's successor in title as any of the personal covenants of the lessor under the original lease. There is no separate proprietary interest created by the variation, which simply becomes an incident of the leasehold relationship. No further question of priority needs to be considered. 74 An obligation of that kind is to be contrasted with the lessor's obligation under, say, an option to the lessee to purchase the demised premises, or an agreement between the lessor and the lessee for a new lease. In such a case the lessor's covenant, being specifically enforceable in equity, gives the lessee an equitable proprietary interest in the demised premises. The interest will prevail over the interest of a later holder of the residuary estate if the applicable priority rules say so. The competition between the two interests is determined by the priority rules and it is unnecessary to have recourse to s 118. 75 Nevertheless, if it is read literally, s 118 might appear capable of overriding the normal priority rules, so that the person entitled to enforce the lessor's obligation may enforce it as a right annexed to the residuary estate, even by a decree of specific performance, and even in circumstances where his proprietary interest does not have priority over the interest of the subsequent taker of the residuary estate. It is important to note, however, that s 118 creates a general rule, which applies to all lessor obligations, regardless of whether the obligation creates a proprietary interest. Whatever may be the position for old system land, the High Court has held, in Leros Proprietary Limited v Terara Proprietary Limited (1992) 174 CLR 407, that the indefeasibility provisions of the Torrens system (especially the provision that is s 42 of the Real Property Act of New South Wales) set up special rules for priority between competing proprietary interests in Torrens land, and in so doing they override the general rule created by s 118. The High Court's reasoning applies even though s 116 says that s 118 applies to leases of land under the provisions of the Real Property Act "notwithstanding anything in that Act contained". 76 In the Leros case the respondent was the assignee of an unregistered lease for five years, with an option to renew for a further seven years. There were two subsequent transfers of the land, and then a transfer to the appellant. The question was whether the respondent could assert its interest under the unregistered lease against the appellant as the present registered proprietor of the land, having regard to the effect of certain caveats. 77 Mason CJ, Dawson and McHugh JJ (with whom Deane and Gaudron JJ agreed on this point) referred (at 417) to the Western Australian provisions broadly corresponding with s 118 (s 78, found in Part VII of the Property Law Act) and s 42 (s 68 of the Transfer of Land Act). There was also a provision (s 69 of the Property Law Act) equivalent to s 116, which they noted. After observing that an unregistered lease of land held under the Transfer of Land Act is a lease for the purposes of s 78 (s 118 in NSW), and consequently the option to renew ran with the reversion, they added: "But this is not to say that Part VII of the Property Law Act overrides the specific provision made in the concluding words of s 68 of the [Transfer of Land] Act with respect to the invalidity of an option to renew. It would not be right to attribute to the general words of s 69 of the Property Law Act an intention to repeal the specific provision in s 68 of the [Transfer of Land] Act." 78 The relevant part of s 42 is as follows: "42(1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except: … (d) a tenancy whereunder the tenant is in possession or entitled to immediate possession, and an agreement or option for the acquisition by such tenant of a further term to commence at the expiration of such a tenancy, of which in either case the registered proprietor before he or she became registered as proprietor had notice against which he or she was not protected: Provided that: (i) the term for which the tenancy was created does not exceed three years, and (ii) in the case of such an agreement or option, the additional term for which it provides would not, when added to the original term, exceed three years." 79 According to the High Court, s 42 overrides s 118 to the extent that s 118 would produce a different outcome. But that does not mean that s 118 is irrelevant. For example, it would be open to a tenant in occupation under a one-year lease in writing to enforce a provision of the lease for an option to renew for two years, against a transferee who became registered as proprietor with notice of the lease and option, on the basis that: (i) the tenant has priority over the registered proprietor under s 42(1)(d), and (ii) s 118 permits the tenant to enforce the lessor's obligation against the registered proprietor, by obtaining an order for specific performance. 80 In Snowlong Pty Limited v Choe (1991) 23 NSWLR 198, at 204, Wood J put forward a different analysis. He expressed the opinion that s 118 should be read as confined to registered leases, and to have the same effect as s 40(3) of the Real Property Act has for such leases. His Honour observed that s 118 "cannot have the effect of displacing the indefeasibility provisions of the Real Property Act, or of elevating an unregistered lease taking effect as a tenancy at will, determinable on one month's notice, to a lease for a term of years, with an option for renewal, which registration would have secured". 81 Wood J's judgment was delivered before the High Court decided the Leros case. In light of the High Court's decision, I respectfully disagree with Wood J's analysis of the scope of s 118, although not with his Honour's conclusion that s 118 did not apply to the facts before him. There is nothing in s 118, or any other provision of the Conveyancing Act, to suggest that s 118 should be confined to registered leases. Section 116 states that the provisions of Part 8, which includes s 118, apply to leases and sub-leases of land under the provisions of the Real Property Act, without suggesting any such limited construction. The fact that if it were confined to registered leases, s 118 would have the same effect as s 40(3) is an argument against such a construction, rather than in favour of it. His Honour's concern that s 118 must not be regarded as displacing the indefeasibility provisions of the Real Property Act is adequately addressed by the application of the High Court's observations in the Leros case, according to which the special priority rules of the Real Property Act override the more general provisions of s 118. His concern about elevating a tenancy at will to a lease for a term of years does not seem to take into account that an unregistered lease or agreement for a lease may be enforceable in equity. 82 I therefore conclude that s 42 overrides s 118 in circumstances where they are both otherwise applicable and would produce inconsistent outcomes, but s 118 is still capable of applying where it does not operate inconsistently with s 42. Thus, for example, it operated to permit HBL to enforce against Global, during the term of the old lease, the promises by AMEZ to accept reductions in royalty payments. 83 Counsel for Global contended that, once it is recognised that s 42 operates to override s 118, Global is entitled to assert the indefeasibility of its registered proprietorship against HBL's claim to specific performance of the agreement for a new lease for a term of 11 years, since a lease for so long a term is outside the limited exception to indefeasibility recognised in sub-paragraph (d). 84 Global relied on some observations by Bryson J in Alcova Holdings Pty Limited v Pandarlo Pty Ltd (1988) 15 NSWLR 53. There the plaintiff was a tenant of Torrens land, in possession under a lease, that was unregistered and not in the approved form, for a term of two years, which contained an option to renew for a further two years. After the plaintiff exercised the option, the term of the original lease expired but no new lease was granted, although the plaintiff remained in possession. At that point the lessor transferred the land to the defendant, who sought to resist the plaintiff's application for specific performance of the renewed lease. Bryson J held that the plaintiff was in possession under an equitable leasehold interest for the renewed term of two years, since the option had been validly exercised; and that interest was protected by s 42(1)(d), since the defendant had notice of the plaintiff's interest prior to the transfer. 85 The defendant submitted that it had priority under s 42 because the plaintiff had nothing more than an unregistered agreement for lease, and therefore no "tenancy" other than a tenancy at will determinable by one month's notice. After carefully considering the history and proper construction of s 42, Bryson J concluded (at 59 and 63) that a tenant in possession under an agreement for lease has a "tenancy" for the term of the agreement. Where the tenancy is for a term not exceeding three years, it is protected by s 42(1)(d) against a registered proprietor who subsequently takes with notice. 86 Although the decision in Alcova Holdings is distinguishable from the facts before me, because here the term of the agreed new lease is to be 11 years, it is helpful as to general principles, when read in conjunction with Jordan CJ's well-known exposition of the law relating to the creation of legal leasehold interests, in Dockrill v Cavanagh (1944) 45 SR(NSW) 78. Bryson J's reasoning confirms that for statutory purposes such as s 42(1)(d), a tenancy arises where there is an immediate entitlement to possession (at 60G), whether the entitlement arises out of a formal grant or an agreement. 87 A tenant in possession of Real Property Act land under a written agreement to grant a lease for a term in excess of three years, which has not been performed by the grant of a lease in the approved form as required by s 53(1) of that Act, is at law a tenant at will, having regard to s 23B-23E of the Conveyancing Act, whose tenancy is determinable by one month's notice under s 127 of the Conveyancing Act. But the agreement may be enforced as an agreement in writing to confer an interest in land, in view of s 54A of the Conveyancing Act. Assuming the agreement to be specifically enforceable, occupation under the agreement gives the tenant an equitable interest satisfying the requirement of writing in s 23C(1)(a) and corresponding to the legal interest that the tenant would have had if the agreement had been performed. Bryson J's observation (at 57), that the "claim for a legal interest … rests in agreement and equitable estate, not in a legal interest", encapsulates the tenant's true position. 88 In September 1999 HBL obtained, as against AMEZ, a specifically enforceable agreement for a new lease. It continued in possession on and after 10 November 2000 in reliance on the agreement, and in the expectation that a new lease would be granted by Global in accordance with the agreement. HBL cannot rely on sub-paragraph (d) of s 42(1) to give priority to its equitable interest over Global as registered proprietor, because its equitable interest relates to an agreement for a term longer than the three-year term permitted by sub-paragraph (d). Unless the exception for fraud can be invoked, or HBL can make out some equity directly against Global, s 42(1) will have the effect that Global as registered proprietor holds the land absolutely free of HBL's unregistered interest. 89 Counsel for Global placed reliance on a passage in Bryson J's judgment in Alcova Holdings (at 57), where his Honour agreed with the proposition that the plaintiff's position would have been "hopeless" under s 42 if the transfer had been registered prior to the exercise of the option. Further, he said (at 63) that "if the freehold had been transferred during the first two years", then "registration would have defeated the option". I respectfully agree with his Honour's observations, and I take them to mean that if, at the time of registration of the transfer, the plaintiff had been in occupation under the initial two-year term, and had subsequently validly exercised the option, the plaintiff would have failed to obtain specific performance of the agreement for the extended term arising out of the exercise of the option. This is no doubt because the additional term, when added to the original term, would exceed the three-year period allowed by subparagraph (d) of s 42(1). But Bryson J expressly refrained from considering whether the plaintiff could have enforced the original term against the new registered proprietor (at 63), and he emphasised (at 57) that the plaintiff had not invoked the exception for fraud. I therefore do not regard these observations by his Honour as inconsistent with the case presented to me by HBL. 90 Chaisumdet v Ming On Trading Pty Ltd is out of line with the analysis presented so far. In that case the lease was of property held under the Real Property Act, for a term of three years, to the defendants as lessees, containing an option for renewal for a further term of three years. The plaintiffs were the purchasers of the reversion from the original lessor. They purchased subject to existing tenancies listed in a schedule to the purchase contract, including the defendants' lease. They were even allowed a fee for registration of the lease on settlement of the purchase. The lease was never registered. The defendants purported to exercise the option for renewal, after the plaintiffs had become registered proprietors. The plaintiffs refused to recognise this, and sought possession. The defendants cross-claimed, seeking specific performance. 91 The plaintiffs relied on s 42 of the Real Property Act and their registered title, contending that in the absence of fraud, their title was free of the lease because, the combined term of the lease and option exceeding three years, s 42(1)(d) did not apply. The defendants contended that the plaintiffs' conduct amounted to fraud, on the authority of Bahr v Nicolay (No 2) (1988) 164 CLR 604, but Lusher AJ does not appear to have decided the case on the basis of fraud. He held it was open to the defendants to assert that they had validly exercised their option to renew the lease, and that equity would grant specific performance of the agreement to grant a new lease for a further three years. He then said (at 58,868): "The plaintiffs answer this approach by submitting that the plaintiffs are not parties to the original lease containing the option and there was no assignment, and there is no privy of contract between them, hence there is no equity raised against the plaintiffs. However ss 117 and 118 of the Conveyancing Act 1919 in my opinion operate, particularly s 118, to enable the defendant lessees to enforce the option covenant against the plaintiff lessors. That section expressed shortly enables the obligation of a covenant by a lessor may be taken advantage of and enforced by the person in whom the term is vested against the person from time to time entitled to the reversion expectant on the lease. Both sections apply to land under the Real Property Act." 92 If s 42 had been applied, the plaintiffs as registered proprietors would have held their title, except in the case of fraud, absolutely free of the unregistered leasehold interest asserted by the defendants, because the option for renewal, when added to the original term, exceeding three years and therefore the exception in s 42(1)(d) would not have applied. Since it appears that fraud was not relied upon, and no personal equity was asserted against the plaintiffs, the facts that the plaintiffs had notice of the defendants' unregistered interest, received an allowance for a registration fee on settlement, and subsequently received rent from the defendants, would not have altered the outcome. His Honour's decision in favour of the defendants, in reliance on s 118, therefore allowed s 118 to override the statutory priority rule of s 42. 93 In the Snowlong case Wood J expressed the opinion that Chaisumdet was not correctly decided, insofar as it allowed s 118 to displace the indefeasibility provisions of the Real Property Act. I respectfully agree. The Chaisumdet case is contrary to the proposition subsequently adopted by the High Court in the Leros case, that the particular provision in s 42 overrides the general provision in s 118. It is contrary to the reasoning in Bryson J in Alcova Holdings, to the extent that his Honour asserted (at 57 and 63) that the tenant could not have obtained specific performance of the option if the freehold had been transferred during the original term - in Chaisumdet, as in Alcova Holdings, the option was for an additional term which, when added to the original term, exceeded three years and was therefore not protected by sub-paragraph (d). 94 In summary, s 118 cannot be used in the present case to give priority to HBL's equitable interest over Global's title as registered proprietor, unless there is fraud, or some other circumstances that would entitle HBL to assert its unregistered interest against Global as registered proprietor. Equitable claims against the registered proprietor 95 It is first necessary to consider the principles governing the fraud exception to s 42, and governing the other circumstances in which an unregistered interest may be asserted against the registered proprietor. 96 Several propositions are clear. First, there is no fraud for the purposes of s 42 if a person does no more than to acquire title and become the registered proprietor with notice of a prior unregistered interest, and assert that his title is free of that interest: Mills v Stokman (1967) 116 CLR 61, at 78 per Kitto J; the Leros case, 174 CLR at 418 per Mason CJ, Dawson and McHugh JJ; Friedman v Barrett [1962] Qd R 498. Secondly (though not directly applicable here), once the unregistered interest is defeated by registration of an inconsistent dealing in favour of a new proprietor, it is extinguished for all purposes and cannot be asserted against any later proprietor: the Leros case, 174 CLR at 418-9 per Mason CJ, Dawson and McHugh JJ. Thirdly, ss 42 and 43 do not prevent an equitable claim being made against the registered proprietor based on the assertion that the conduct of the registered proprietor has given rise to the equity: Barry v Heider (1914) 19 CLR 197; Breskvar v Wall (1971) 126 CLR 376; Frazer v Walker [1967] 1 AC 569. 97 There is some uncertainty about the scope of the fraud exception to s 42. One view is that it is confined to fraud relating to the circumstances in which the person against whom the unregistered interest is asserted became the registered proprietor. Another view is that fraud for the purposes of s 42 extends to the registered proprietor's subsequent conduct. In Bahr v Nicolay (No 2) (1988) 164 CLR 604 the Bahrs sold land to Mr Nicolay, who leased it back to them for three years. Their contract provided, in clause 6, that on the expiration of the lease, the Bahrs would enter into a contract to re-purchase the land. Mr Nicolay sold the land to the Thompsons by a contract containing a provision (clause 4) by which the Thompsons acknowledged the existence of the re-purchase provision of the earlier contract. The Thompsons became the registered proprietors and informed the Bahrs that they recognised the re-purchase clause and would agree to re-sell the land on the terms of that provision. But they subsequently refused to do so. 98 The High Court held that the Bahrs were entitled against the Thompsons to specific performance of the agreement to re-sell the land. All members of the Court took the view that the agreement between Mr Nicolay and the Thompsons, especially clause 4, involved more than a mere acknowledgement of the existence of the rights of the Bahrs under clause 6 of their contract. This was therefore not a case of a person becoming registered proprietor merely with notice of an unregistered interest. From that point the reasoning of the members of the High Court was not uniform. 99 Mason CJ and Dawson J held (at 618-9) that the Thompsons' acknowledgement created an express trust by which they held the land subject to the rights of the Bahrs under the first contract. Wilson and Toohey JJ held (at 638-9) that when they took a transfer of the land knowing of and accepting the obligation to re-sell, the Thompsons became subject to a constructive trust in favour of the Bahrs, and they remained bound by their undertaking to hold their title subject to the rights of the Bahrs notwithstanding registration of the transfer. 100 Mason CJ and Dawson J also held that the conduct of the Thompsons in repudiating their recognition of the Bahrs' equitable interest constituted fraud for the purposes of the provisions of the Transfer of Land Act of Western Australia, equivalent to ss 42 and 43 of the Real Property Act. They expressed the view that fraud, for the purpose of the statutory exception to indefeasibility, is not confined to fraud in obtaining a transfer or securing registration of it. They said (at 615): "The section restricts, in the interest of indefeasibility of title, rights which would exist otherwise at law or in equity. And granted that an exception is to be made for fraud why should the exception not embrace fraudulent conduct arising from the dishonest repudiation of a prior interest which the registered proprietor has acknowledged or has agreed to recognise as a basis for obtaining title, as well as fraudulent conduct which enables him to obtain title or registration? In the context of a s 68 [of the Transfer of Land Act, broadly comparable with s 42 of the Real Property Act] there is no difference between the false undertakings which induced the execution of the transfer in Loke Yew [ Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491] and an undertaking honestly given which induces the execution of a transfer and is subsequently repudiated for the purpose of defeating the prior interest. The repudiation is fraudulent because it has as its object the destruction of an unregistered interest notwithstanding that the preservation of the unregistered interest was the foundation or assumption underlying the execution of the transfer." 101 Wilson and Toohey JJ did not agree with this view, because in their Honours' opinion the fraud to which the statutory exceptions relate is "fraud committed in the act of acquiring a registered title" (at 633). The evidence did not establish, in their Honours' view (at 636-7), that the transfer from Mr Nicolay to the Thompsons was undertaken to deprive the Bahrs of their existing right to repurchase the land. The evidence showed, however, that the Thompsons took their transfer with knowledge of clause 6 and accepted an obligation to re-sell to the Bahrs, and in the circumstances they became subject to a constructive trust in favour of the Bahrs (at 638). They said (at 68-9): "If it be the position that the appellants' interest under clause 6 fell short of an equitable estate, they nonetheless had a personal equity enforceable against the second respondents [the Thompsons]. In either case ss 68 and 134 of the Act would not preclude the enforcement of the estate or equity because both arise, not by virtue of notice of them by the second respondents, but because of their acceptance of a transfer on terms that they would be bound by the interest the appellants had in the land by reason of the contract with the first respondent." 102 Brennan J found that there was a contractual stipulation between Mr Nicolay and the Thompsons, by which the Thompsons undertook to Mr Nicolay hold their title subject to the Bahrs' interest, either arising out of clause 4 of their agreement or by a collateral agreement (at 651-2). He said (at 654): "A registered proprietor who has undertaken that his transfer should be subject to an unregistered interest and who repudiates the unregistered interest when his transfer is registered is, in equity's eye, acting fraudulently and he may be compelled to honour the unregistered interest. A means by which equity prevents the fraud is by imposing a constructive trust on the purchaser when he repudiates the unregistered interest. That is not to say that the registration of the transfer to such a proprietor is affected by such fraud as may defeat the registered title: the fraud which attracts the intervention of equity consists in the unconscionable attempt by the registered proprietor to deny the unregistered interest to which he has undertaken to subject his registered title." 103 For present purposes, what emerges from the judgments is that: (i) an unregistered interest may be asserted against the registered proprietor if there was fraud at the time of transfer or registration, under the fraud exception to s 42; (ii) if the registered proprietor subsequently engages in unconscionable conduct intended to deny or defeat the unregistered interest, the holder of the unregistered interest may obtain relief against the registered proprietor, either because the registered proprietor's conduct comes within the fraud exception to s 42, or because the conduct creates an equity which the holder of the unregistered interest may assert against the registered proprietor; (iii) but such an equity will not be created merely because the registered proprietor asserts his registered title after acquiring it with notice of the unregistered interest, the additional ingredient being some form of acknowledgement of the unregistered interest, or an agreement or undertaking to act in accordance with it, from which the registered proprietor later resiles. 104 The Snowlong case is an example of facts held to contain the "additional ingredient". In that case the contract of sale of land disclosed the existence of an unregistered lease agreement for a term of five years plus options. A copy of the unregistered lease agreement was annexed to the contract, and under the contract the purchaser agreed to abide by the terms and conditions of the lease. Wood J carefully analysed the judgments in Bahr v Nicolay (No 2). His Honour found that the contract of sale gave rise to an undertaking by the purchaser to take title subject to a lease in the terms annexed to the contract. The case was not merely one of a purchaser having notice of a third party's rights, but rather it was a case where the purchaser agreed or undertook to recognise those rights. Applying the reasoning of Mason CJ and Dawson J, he found that the facts gave rise to an express trust, or in the alternative, the purchaser's subsequent repudiation of the undertaking would constitute fraud for the purposes of s 42. He expressed the view that the same result would be achieved if the reasoning of Wilson and Toohey JJ, or the reasoning of Brennan J, were to be applied. Application of priority principles in present case 105 At the time of transfer of the land from AMES to Global, and at the time of registration of that transfer (there being no material factual distinction between the two times), HBL was lessee in possession under the old lease, which was a registered lease for 11 years, not due to expire until November 2000, with three options for renewal for 11 years each. At both of those times there was in place an agreement by correspondence between HBL and AMES that AMES would grant HBL a new lease for 11 years, with two options for further renewals and otherwise on the terms of the old lease, subject to agreed modifications. The agreement arose at the request of AMES, to suit its funding arrangements. Although strictly speaking it was not an exercise of an existing option to renew the old lease, it is plain from the correspondence that both HBL and AMES regarded the transaction as in substance an exercise of the option to renew the old lease. 106 The agreement was entered into on behalf of AMES by George Kekatos. Since the directors of Global were the wives of Wayne and Garry Stafford and George Kekatos, who were the directors of AMES, and Wayne Stafford had day-to-day management of Global, and George Kekatos was its chief financial officer, I infer that Wayne Stafford had actual knowledge of the arrangements for a new lease between HBL and AMES at the time they were made. This inference is supported by his own evidence. As I have said, his knowledge is to be attributed to Global. No contention to the contrary was put to me in Global's final submissions. 107 This is not a case of an arms-length transferee acquiring land with notice of an unregistered leasehold interest, as in the Leros case, the Alcova Holdings case, Chaisumdet and Snowlong. Here the owners and controllers of AMES and Global were the two Stafford families and the Kekatos family. The transfer was made to restructure funding arrangements. 108 Although evidence of the AMES/Global relationship is obviously relevant to HBL's contentions, if there were nothing more to the facts, this would be a case (like, for example, Friedman v Barrett [1962] Qd R 498) where the registered proprietor has taken its title with notice but not fraudulently, and therefore its registered title prevails over the unregistered equitable interest. But there is some additional evidence in the present case, which has great significance. 109 After AMES executed transfers of the land to Global, Mr Kekatos on its behalf wrote a letter to Mr Breeze at HBL dated 16 December 1999. The purpose of the letter was to seek the consent of HBL to the transfer, since HBL had lodged a caveat in respect of a joint venture agreement to which it was a party. The letter said that AMES had entered into arrangements to transfer the property of the quarry to "a company [namely Global] controlled by the respective wives of the current directors of this company". It sought HBL's consent to registration of the transfer to Global, and consent to a transfer of the current mortgage. It continued: "As you may be aware the lease to your company is registered on the title to the property and will not be affected by any Transfer as stated above as the buyer will always take title subject to the registered lease. It is only in relation to the Caveat lodged in respect of the joint venture arrangement that we will require your written consent." 110 I infer that HBL consented to the transfer, which was subsequently registered. The letter of 16 December 1999 does not refer specifically to the agreement for a new lease that Mr Kekatos had himself negotiated with Mr Breeze only three months earlier. However, since the parties regarded the agreement for a new lease as an exercise of the first option to renew contained in the existing registered lease (as is evident from the terms of the September correspondence), the reference in the letter of 16 December to "the lease to your company" should be taken to encompass the agreement to renew the lease. Therefore by that letter Mr Kekatos was assuring Mr Breeze and HBL that the transfer would not affect either the old lease or the arrangements for a new lease. 111 Although in the circumstances the matter was not put to any of HBL's witnesses, it is appropriate to infer that HBL would not have consented to registration of the transfer if there had been any suggestion that its position in relation to the renewal of lease might have been affected, without first clarifying its position. 112 In my opinion Mr Kekatos' letter of 16 December 1999, construed as I have indicated, followed by HBL's consent to the transfer of the land, is comparable to the acknowledgements and undertakings held to be determinative in Bahr v Nicolay (No 2) and the Snowlong case. In those cases, however, the acknowledgements and undertakings were given on behalf of the registered proprietor. Here, Mr Kekatos purported to write the letter on behalf of AMES rather than Global. 113 There are, nevertheless, some additional facts which, in my view, lead to the inference that Global authorised the letter and is bound by the state of affairs which it sets out. Global had actual knowledge, at all relevant times, of the arrangements giving HBL an interest under an agreement for a new lease. The letter was written after execution of the transfers in favour of Global. It described Global as a company controlled by the wives of the current directors of AMES. The wives were in fact the directors of Global, but Mr Kekatos (who wrote the letter) was the chief financial officer and Wayne Stafford (who had day-to-day management of Global) was aware of its contents. Although there is no direct evidence that the directors of Global resolved to authorise the letter, those circumstances warrant the inference that the letter was authorised by Global. 114 The letter on its proper construction acknowledged the interest of HBL under the registered lease and under the arrangements for renewal. It contained a representation, and impliedly an undertaking, that HBL's interest would not be affected by the transfer. In my opinion, by application of the reasoning of Mason CJ and Dawson J in Bahr v Nicolay (No 2), the letter created an express trust under which, upon becoming registered proprietor, Global held the fee simple, already subject to the registered lease, in trust to grant a new lease to HBL pursuant to their agreement of September 1999. Further, in terms of their Honours' reasoning (especially in the passage at 615 extracted above), this was a case of an undertaking to recognise HBL's interest in a new lease, apparently honestly given, which induced HBL's consent and permitted registration of the transfer, but was subsequently repudiated in final submissions at the hearing, for the purpose of defeating HBL's prior interest. That repudiation was fraudulent for the purposes of s 42, because it had as its object the destruction of HBL's unregistered interest notwithstanding that the preservation of the unregistered interest was the foundation or assumption underlying HBL's consent to the registration of the transfer. 115 While, like Wood J in Snowlong, I prefer to adopt the analysis of Mason CJ and Dawson J, the same substantive result would follow, still on the basis that Global authorised the letter of 16 December 1999, by the application of the reasoning of Wilson and Toohey JJ, and the reasoning of Brennan J. 116 Counsel for Global submitted near the end of the final day of the hearing that it was not open to HBL to make a submission of fraud, when the matter had not been raised before the final day of the hearing. That submission cannot be right. The final and critically important ingredient of fraud was supplied only when Global repudiated any obligation under the agreement for renewal of the lease, an event which occurred only through the submissions of its counsel earlier on the final hearing day. HBL can hardly have been expected to plead fraud prior to the time. 117 My conclusion, that Global holds its title subject to HBL's equitable interest, gives HBL an entitlement to direct relief against Global to protect its interest. It also means that s 42 does not operate inconsistently with s 118 in the present case. Section 118 provides a further conceptual foundation for decreeing specific performance of the agreement for lease against Global. 118 If my conclusion that Global authorised the letter of 16 December 1999 is incorrect, there are nevertheless grounds for finding that HBL's equitable interest may be asserted against Global, arising out of some evidence of Global's conduct amounting to acquiescence in HBL's interest after the land was transferred to it. I shall call this evidence, for convenience and without pre-judgment, "the estoppel evidence". If Global had merely acquiesced in the state of affairs set out in the letter some time after it was written, the decisions in Bahr v Nicolay (No 2) and the Snowlong case would not be applicable, because both of those cases proceed on the basis that there was some acknowledgement or undertaking with respect to the prior equitable interest at the time of transfer to the registered proprietor. Subsequent acquiescence would not provide the basis for finding an express or constructive trust of the kind identified in the cases, and in the absence of anything linking the conduct of Global to the event of transfer, it would be unlikely that the facts could be brought within the fraud exception to s 42. 119 However, as I have said, the holder of a prior unregistered interest may assert it against the registered proprietor if some equity can be established against the registered proprietor itself, arising out of its conduct after the transfer took place. Here, relying on the estoppel evidence as well as the letter of 16 December 1999, and the evidence about the AMES/Global relationship, HBL submitted that such an equity arose on two grounds, namely proprietary estoppel and estoppel by convention.