Kitanovski v Ibrahim

Ms Kitanovski's claim for the removal of caveats

These claims are made pursuant to s 74MA of the Real Property Act. Section 74MA relevantly provides: (1) Any person who is or claims to be entitled to an estate or interest in the land described in a caveat lodged under section 74B or 74F may apply to the Supreme Court for an order that the caveat be withdrawn by the caveator or another person who by virtue of section 74M is authorised to withdraw the caveat. (2) After being satisfied that a copy of the application has been served on the person who would be required to withdraw the caveat if the order sought were made or after having made an order dispensing with service, the Supreme Court may - (a) order the caveator or another person, who by virtue of section 74M is authorised to withdraw the caveat to which the proceedings relate, to withdraw the caveat within a specified time, and (b) make such other or further orders as it thinks fit.
I should state at the outset that in my view Ms Kitanovski has standing to make the applications. She is a person who is or claims to be entitled to an estate or interest in the Yowie Bay property, which is land described in the caveats that have been lodged by Mr Ibrahim and the Commissioner of Taxation pursuant to s 74F of the Real Property Act. The estate or interest claimed by Ms Kitanovski is that of a purchaser under a subsisting contract for sale of the land.
The principles that apply on applications under s 74MA of the Real Property Act are well established. They were authoritatively stated by the Court of Appeal in Hanson Construction Materials Pty Ltd v Roberts (2016) 93 NSWLR 1; [2016] NSWCA 240 in the judgment of Sackville AJA (with whom Beazley P and Payne JA agreed). In that case, Sackville AJA stated at [58]-[62] and [77]-[79] (footnotes omitted): [58] Section 74MA of the Real Property Act operates within a legislative framework in which the principal, if not necessarily the only, purpose of lodging a caveat is to prevent the registration of a dealing inconsistent with the caveator's interest. The legislation recognises that the lodgment of a caveat may create difficulties for others who hold or claim interests in the land, including the registered proprietor. Section 74J(1) accommodates this difficulty by allowing the registered proprietor to obtain the issue of a lapsing notice. Such a notice forces the caveator to demonstrate to the court that he or she has at least an arguable claim to the interest protected by the caveat. Section 74MA provides an alternative mechanism by permitting the registered proprietor (among others) to seek an order from the court that the caveator withdraw the caveat. [59] The only express statutory precondition to the exercise of the Court's power under s 74MA to order the withdrawal of a caveat is that the Court must be satisfied that a copy of the application has been served (relevantly) on the caveator. If the precondition is satisfied, the Court: (a) may order the caveator to withdraw the caveat; and (b) make such order or further orders as it thinks fit. [60] The language of s 74MA of the Real Property Act is very broad. Once the precondition is satisfied the Court's power to order the withdrawal of a caveat is not subject to any express constraints. As was said of a legislative predecessor to s 74MA(2)(b), the legislative text gives the Court the widest powers in the making of orders. [61] The generality of the statutory language accommodates the great variety of circumstances in which an application to remove a caveat may be made. For example, the application may be made on the ground that the caveator's claimed interest is spurious. Alternatively, the applicant may accept that the caveator has a caveatable interest, but dispute the extent of the caveator's interest, for example, the amount claimed to be due under an unregistered mortgage. In some cases, of which the present case is an example, there is real doubt as to whether the caveator has an interest in the land but the doubt cannot be resolved until a hearing on the merits of the caveator's substantive claim takes place. Even where there is no doubt as to the nature and extent of the caveator's interest, the registered proprietor may have strong reasons for seeking an order for the withdrawal of the caveat, perhaps subject to the conditions designed to minimise prejudice to the caveator. [62] The breadth of the statutory language does not mean that the Court has an untrammelled power to require a caveator to withdraw a caveat. The language of s 74MA of the Real Property Act must be construed having regard to the other provisions of Part 7A and to the subject matter, scope and purpose of the legislation as a whole. The Court clearly must pay close attention to such matters as the nature of the interest claimed by the caveator, whether there is any dispute as to the existence or extent of the interest and the likely consequences of ordering the caveat to be withdrawn. But the text of s 74MA gives little support to Hanson's contention that the Court's power to order the withdrawal of a caveat cannot be enlivened unless an unstated precondition is satisfied. … [77] Courts have approached applications for the removal of caveats pursuant to s 74MA of the Real Property Act by applying principles analogous to those appropriate to applications for interlocutory injunctions. Since the caveator is seeking to maintain a statutory injunction preventing registration of inconsistent dealings pending resolution of any dispute, he or she bears the onus of showing that there is a serious issue to be tried as to the existence of the interest claimed in the caveat. Once the caveator discharges that onus, the continuation or removal of the caveat depends on the court's assessment of the balance of convenience. Without attempting to be exhaustive, I have identified some matters the court must take into account in making that assessment. [78] In some circumstances, an application by a registered proprietor for the removal of a caveat is unlikely to succeed. If the nature and extent of the caveator's interest is undisputed and removal of the caveat will clearly destroy the caveator's interest, it is fair to say that it would be very unusual for the application to be granted. An example of such a case is where the caveator has an equitable charge to secure repayment of a loan and the practical effect of removing the caveat would be to render the charge worthless. But as the court in Moondancer observed, to say that in these circumstances it would be unusual - perhaps extremely unusual - to order the withdrawal of the caveat, is not to elevate "unusual" into a legal test that must be satisfied before an order can be made. To do so imposes unwarranted constraints on the discretion conferred on the Court by s 74MA of the Real Property Act. [79] The authorities also recognise that the strength of the caveator's claim to an interest in land may be significant in assessing the balance of convenience. This is consistent with the well-established principle that the apparent strength of each party's case is a material factor in assessing the balance of convenience on an application for an interim injunction. It follows that a registered proprietor seeking an order for the removal of a caveat to permit the refinancing of a mortgage loan, may have a stronger case if there is real doubt as to whether the interest claimed by the caveator is valid and enforceable. (See also Bayblu Holdings Pty Ltd v Capital Finance Australia Ltd (2011) 15 BPR 29,055; [2011] NSWCA 39 at [20] per Campbell JA, with whom Tobias and Macfarlan JJA agreed.)
An onus is thus cast upon the caveator to satisfy the Court that there is a serious question to be tried as to the existence of the interest claimed in the caveat, and that the balance of convenience favours the continuation of the caveat.
Ms Kitanovski accepts that there is a serious question to be tried as to the existence of the interest claimed by the Commissioner of Taxation in its caveat. That concession was properly made. The evidence is clear that in February 2016 Ms Lahood entered into the Deed with, and executed a mortgage in favour of, the Commissioner of Taxation. Moreover, the evidence suggests that Ms Lahood is presently indebted to the Commissioner in an amount that approaches $25,000,000.
Ms Kitanovski submitted that there was no serious question to be tried as to the interest claimed by Mr Ibrahim in his caveat. It was submitted that the caveat was defective insofar as it merely claimed an "equitable interest". It was also put that the proceedings commenced by Mr Ibrahim in 2019 were subsequently discontinued by him, and that he has not explained his position in that regard.
It is true that the description of the claimed interest is problematic and could justify the making of an order for the removal of the caveat (see, for example, Sutherland v Vale (2008) 14 BPR 26,255; [2008] NSWSC 759 at [12]-[14]). However, the references in the caveat to a Loan Agreement suggest (on an admittedly generous reading) that the equitable interest claimed is an interest in the nature of a charge. Further, the operation of the caveat has been extended until further order by an order made in the 2017 proceedings commenced by Mr Ibrahim, and it seems that that order remains in place. When regard is also had to the documentary evidence of the Loan Agreement, which plainly provides for a charge, including over the Yowie Bay property, I am satisfied that there is a serious question to be tried as to the existence of a charge in favour of Mr Ibrahim.
Being satisfied as to the existence of a serious question to be tried in relation to both caveats, it is necessary to move to consider the balance of convenience.
On that question, the Commissioner of Taxation submitted that it has a legitimate interest in maximising the amount of surplus funds that would be available upon a proper sale of the Yowie Bay property, but the evidence establishes that the sale price under the November 2019 contract is well below the market value. It was submitted that in light of the conclusion expressed in the Joint Report, the Court should accept that when the contract was entered into, the market value of the property was $3,500,000, a figure almost $700,000 higher than the contract price. Mr Ibrahim made a submission to the same effect. The Commissioner of Taxation further submitted that were it ordered to remove the caveat to enable the sale to complete, it would suffer irremediable prejudice to that extent. It was pointed out that under the terms of the Deed, Ms Lahood was only permitted to sell the property with the prior written consent of the Commissioner. There is no suggestion that such consent, or indeed any consent, was given by the Commissioner of Taxation to the sale to Ms Kitanovski.
Ms Kitanovski submitted that the sale is a proper sale to a bona fide purchaser and that the Court should not accept that the property is being sold for "below market consideration". Ms Kitanovski submitted that: 1. the price of $2,805,000 was the highest offer made in early 2017 when the property was placed on the open market; 2. the evidence suggests that the value of the property would not have increased significantly between April 2017 and November 2019; 3. Mr Sanidas valued the property in December 2019, almost contemporaneously with the contract date, at $3,000,000; 4. the condition of the property made it difficult to market for sale, and may explain why no offers higher than $2,805,000 were received; and 5. the opinion as to value contained in the Joint Report should be given limited weight having regard to when the opinion was formed, and the qualifications and limitations that are expressed in the report. Ms Kitanovski submitted that, in any event, the sale price was only $695,000 less than the value stated in the inherently uncertain Joint Report.
I accept that Ms Kitanovski is a bona fide purchaser and that she herself has not acted in any improper manner in connection with the contract for sale she entered into with Ms Lahood. However, having considered the valuation evidence, together with other relevant evidence (including the circumstances surrounding the making of the April 2017 contract), I do not accept that the November 2019 sale was not for "below market consideration". In my opinion, and notwithstanding the evident difficulties involved in assessing the market value of the property in the condition it is in, the market value of the property in November 2019 was about $3,500,000.
I do not think that much weight can be placed upon the sale price of $2,805,000 that was agreed in April 2017. I accept that the property had been listed with an agent, but there is no cogent evidence of the nature and extent of any marketing campaign, nor the extent of apparent interest (including offers to purchase) from other potential purchasers. To paraphrase Mr Waterhouse's evidence, it was not established that there had been a good marketing campaign, with a "decent number" of people through the property. Whether the condition of the property may have deterred the making of offers seems to me to be largely speculative.
Nor do I think that much weight can be placed upon Mr Sanidas' valuation report of December 2019, in circumstances where he has later agreed with Mr Waterhouse that the market value was $3,500,000 and, further, seems to have moved away from a summation approach. It is true that the condition of the property, and the uncertainty concerning the likely cost of necessary remedial works, renders the task of valuation less certain, to the point that the valuers considered their assessments to be "provisional". In that regard, I note that Mr Waterhouse was prepared to countenance a valuation range of $3,000,000 to $4,000,000. Nevertheless, the Joint Report is the result of considerable discussion between the experts, and it reveals that there was ultimately a large area of common ground in relation to valuation approach and as to the most useful comparable sales. Despite the uncertainty inherent in the task, the agreed figure of $3,500,000 (at the mid-point of the range) ought be accepted as the approximate market value of the property in November 2019.
It follows that the November 2019 contract for sale was not only entered into without the prior written consent of the Commissioner of Taxation, it was entered into for a price approximately $700,000 below the prevailing market value. That is a significant difference.
The removal of the caveats of Mr Ibrahim and the Commissioner of Taxation to facilitate completion of that sale would thus cause substantial prejudice to be suffered by whichever of them could assert priority next after payment of land tax, Council rates and Westpac as the registered mortgagee. It is of course not necessary to determine any such question of priority on these applications. I think it is sufficient to state that the question of priority as between Mr Ibrahim and the Commissioner of Taxation appears to be reasonably arguable either way. Even though Mr Ibrahim's interest was apparently created in April 2015, he failed to lodge his caveat until July 2016, well after the Commissioner of Taxation entered into the Deed and took a mortgage over the property. Moreover, the terms of the Deed suggest that the Commissioner, in entering into it, may have placed some reliance upon the state of the Register.
In these circumstances, it seems to me that the balance of convenience would be in favour of continuation of the caveats, as that would avoid the prejudice that would be suffered by either Mr Ibrahim or the Commissioner of Taxation if their caveats were ordered to be withdrawn to facilitate completion of a sale at a price substantially below market value.
If that is where matters had been left I would have declined to order that the caveats be withdrawn. In accordance with the principles cited earlier, each caveator would have not only established that there was a serious question to be tried as to the existence of the claimed interest, but also that the balance of convenience favoured continuation of the caveat.
However, towards the end of his closing submissions in reply, counsel for Ms Kitanovski indicated that if the Court found against her on the question of whether the sale was at an undervalue, Ms Kitanovski would be willing to submit to a condition of relief under s 74MA that she pay into Court the difference between the market value of the property (at the date of the contract) as found by the Court, and the contract price. It was submitted that such a payment would effectively operate as a form of alternative security, and put the caveators in the position they would have been in had the property been sold in November 2019 for its true value.
The Commissioner of Taxation expressed opposition to the grant of relief on such a condition. It was submitted that the Deed entered into with Ms Lahood was intended to ensure that any surplus proceeds of sale be paid to the Commissioner, but allowing the sale to complete as suggested would leave the Commissioner in a priority dispute over the surplus funds. It was further submitted that the market value of the property had increased since November 2019.
It does appear that the Deed was entered into on the basis that Ms Lahood held the entire legal and equitable title and interest in the property apart from interests then discoverable by a title search (see cl 5.11.2). Accordingly, it was envisaged that the Commissioner's interest as a mortgagee would rank next in priority after those discoverable interests. It is also correct that Ms Lahood's dealings with Mr Ibrahim put him into a position to compete with the Commissioner in relation to any surplus proceeds of sale. However, those dealings occurred in 2015, prior to entry into the Deed, and independently of the sale in November 2019 that Ms Kitanovski seeks to enforce. In other words, the potential for a priority dispute with Mr Ibrahim exists whether the property is sold pursuant to the November 2019 contract or otherwise (such as by Westpac as mortgagee). I therefore do not think that the Commissioner's objection that it would be confronted with a priority dispute has force.
Where there is a seriously arguable or even undisputable caveatable interest, the Court nonetheless retains a discretion, based on the balance of convenience, as to whether to maintain the caveat or require its removal (see Buchanan v Crown & Gleeson Business Finance Pty Ltd (2006) 13 BPR 24,513; [2006] NSWSC 1465 at [8] per Brereton J - in a passage expressly approved in Hanson Construction Materials Pty Ltd v Roberts (supra) at [72]). Such a question arises in this case, in the context of an application for the removal of caveats that claim security interests, so as to allow completion of a contract for sale. I have found that the contract price was about $700,000 below the prevailing market value, but Ms Kitanovski has indicated that she would be prepared to pay that difference into Court as a condition of obtaining relief for the removal of the caveats. The position of the caveators would be the same in substance as if the sale had been made at market value. Whilst Ms Lahood was required (but failed) to obtain the prior written consent of the Commissioner of Taxation to the sale, and it may have been open to the Commissioner to withhold consent, any prejudice to the Commissioner (or to Mr Ibrahim) that would arise from the sale is effectively removed by the imposition of a condition as proposed by Ms Kitanovski. On the basis that any surplus proceeds remaining after payment of land tax, Council rates and Westpac are also required to be paid into Court, the caveators would be in the same position they would have been in had the property been sold in November 2019 for its market value. That is to say, the caveators would not suffer practical detriment if their caveats were removed, subject to that condition, to allow the sale to complete (see Hanson Construction Materials Pty Ltd v Roberts (supra) at [82]).
I have not overlooked the evidence of Mr Waterhouse to the effect that the property has increased in value since November 2019. However, this evidence was adduced only days before the hearing and Mr Sanidas did not have an adequate opportunity to respond to it. I note that Mr Sanidas did not accept that the present value was well in excess of $3,500,000. I note further that the evidence, so far as it goes, suggests that the value has been falling in recent times. In any event, the Court is dealing with an application under s 74MA in the context of a subsisting contract for sale, not a potential sale that might occur at some time in the future.
In all the circumstances, I consider that the imposition of a condition upon relief, as suggested by Ms Kitanovski, alters the assessment of the balance of convenience so that the balance is no longer in favour of continuation of the caveats. I think that if (in addition to any surplus proceeds remaining after payment of land tax, Council rates and Westpac) the sum of $700,000 were to be paid into Court to stand as a form of alternative security available to be claimed by Mr Ibrahim or the Commissioner of Taxation, the balance of convenience would be in favour of removal of the caveats.

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