Caveats - Application to extend operation of caveat - Caveat lodged by building contractor claiming balance due for construction of strata titled apartment complex - Caveat lodged against last two apartments to be sold - Whether building contractor holds equitable lien - Priority of any equitable lien over the interest held by purchaser under contract of sale

Transfer of Land Act 1893 (WA), s 137, s 138C

Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78

Eades v Reilly, unreported; SCt of WA; Library No 980675; 20 November 1998

H G & R Nominees Pty Ltd v Caulson Pty Ltd [2000] VSC 126

Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; (1983) 154 CLR 326

Hewett v Court [1983] HCA 7; (1983) 149 CLR 639

Kang v Kwan & Ors [2002] NSWSC 1187

Kirfield Ltd v First Trade Consulting Pty Ltd & Anor [2005] WASC 277

Lavery v R & I Bank of Western Australia Ltd, unreported; FCt SCt of WA; Library No 950468; 7 September 1995

Sanctuary Park Toodyay Pty Ltd v Griffin Plant Hire [2003] WASC 174

KT & T Developments v Tay (1995) 13 WAR 363

Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583

Peyton v Malinis Nominees Pty Ltd [2003] WASC 136

Spunter Pty Ltd v Hall [2006] WASC 6

1 BLAXELL J: This is an application under s 138C of the Transfer of Land Act 1893 (WA) ("the Act") to extend the operation of a caveat lodged by the plaintiff against land of which the first defendant is the registered proprietor. The land comprises two strata titled apartments forming part of a 70 unit apartment complex constructed by the plaintiff under a building contract with the first defendant. The plaintiff claims an equitable lien over the apartments for payment of the sum of $901,853.73 (plus GST) said to be the balance due and owing under the contract.

2 The first defendant acknowledges that the sum of $134,041.60 is due under the contract, but has withheld payment of these moneys by reason of a potential counterclaim for damages. The first defendant denies that any other moneys are owing under the contract, and also denies that there is any basis for the plaintiff to claim an equitable lien.

3 The plaintiff lodged the caveat on 9 March 2006, but prior to then the first defendant had sold the two apartments to a third party under contracts of sale dated 23 February 2006. At the time of agreeing to purchase the apartments the third party was unaware of the interest claimed by the plaintiff. Settlement of the sales has been delayed by the lodgement of the caveat.

4 Before summarising the relevant facts I need to rule on the plaintiff's objections to the admissibility of portions of the affidavit of John Christian Mair sworn 2 May 2006. I have been provided with a schedule of objections, and I rule that par 15 and the third sentence of par 25 of Mr Mair's affidavit should be struck out for the reasons set out in that schedule. I further rule that the last of the objections to par 23 (as set out in the schedule) should be upheld. I rule against all of the remaining objections.

5 The first defendant is the trustee of the Regent Court Unit Trust which was formed for the purpose of developing a nine level 70 unit luxury apartment building on land at 34-36 Kings Park Road, West Perth ("the project"). Part of the project involved the restoration of two heritage-listed buildings on the site and the conversion of those buildings into offices and/or a restaurant.

6 The unit holders in the Trust were a group of five private investors, and one of those (Moselle Holdings Pty Ltd) was associated with and shared a common address with the plaintiff. The total paid up capital of the Trust was the sum of $4,000,000. The purpose of the project was to derive a profit from the sale of the strata titled apartments and heritage buildings after meeting the costs of construction. At all material times apartments were offered for sale "off the plan" and prior to completion of construction.

7 The first defendant engaged the plaintiff as builder for the project, and on 3 April 2003 the parties entered into a building works contract in a standard form ("JCC-D 1994") issued by the Royal Australian Institute of Architects and other bodies. The contract specified that it was a "guaranteed maximum price contract", and the contract sum was $13,037,893. The stipulated date for practical completion was 11 June 2004.

8 The contract provided for an architect to administer the project, and Parry & Rosenthal Pty Ltd was appointed to fulfil that role. The contract did not provide for the plaintiff to acquire a proprietary interest (whether equitable or otherwise) in the land; nor was there provision for any other security in respect of the moneys that would become due under the contract.

9 The plaintiff duly commenced construction but encountered a number of problems including instability in the ground under the heritage-listed buildings as well as inadequate support for roofing steel on the apartment block. These and other problems caused delays in construction and practical completion did not occur until 15 April 2005.

10 There was a dispute between the parties as to the causes of these delays and the architect certified an adjusted date for practical completion of 15 October 2004 (viz. some 123 days late). The architect also certified that the first defendant was entitled to liquidated damages against the plaintiff in the sum of $280,000.

11 The plaintiff does not accept the architect's certifications as to these matters, and claims additional variations under the contract as well as relief from the liquidated damages. In this regard the plaintiff currently claims a total of $901,853.73 (plus GST) of which the first defendant acknowledges $134,041.60 to be due under the contract. (I am informed from the Bar table that the first defendant has not paid this last amount because of a pending counterclaim for damages arising from lodgement of the caveat.)

12 The plaintiff has previously lodged approximately 15 caveats against the titles to various apartments constructed as part of the project. These were later withdrawn "on an understanding that the dispute between the plaintiff and the first defendant would by agreement be progressed to a resolution" (par 15 of affidavit of George Barclay Allingame sworn 5 May 2006). I am not provided with any further details of these caveats or of the "understanding" referred to. However, it is clear from the materials before me that prior to the present caveat being lodged, there was an appreciable period when no caveats were in place.

13 During the course of construction approximately half of the 70 apartments were sold "off the plan". The balance of the apartments were sold after the building works were practically complete, and the last of these were the two apartments the subject of the present caveat. These last two apartments are:

(a) Lot 69 on Strata Plan 43947 and being the whole of the land comprised in Certificate of Title Volume 2589 Folio 769; and

(b) Lot 54 on Strata Plan 43947 and being the whole of the land comprised in Certificate of Title Volume 2589 Folio 754.

14 On 23 February 2006 the first defendant entered into separate contracts for the sale of the subject apartments to Raymond Hunt. The total purchase price agreed was $1,280,000, and Mr Hunt paid deposits totalling $128,000. Under the terms of the contracts settlement of each sale became due on 19 April 2006.

15 At the time of entering into the contracts Mr Hunt was unaware that the plaintiff claimed an interest in the subject apartments by way of an equitable lien. Since 19 April 2006 he has been ready, willing and able to settle, and pursuant to the contracts of sale he is claiming penalty interest from the first defendant at a total rate of $284.06 per day.

16 On 9 March 2006 the plaintiff lodged Caveat No J652636 against the subject apartments. The statutory declaration in support of the caveat referred to the building contract and to the works constructed on the land and claimed that the plaintiff held an "estate or interest of an equitable lien" over the subject apartments by virtue of the following:

"(a) the registered proprietor is indebted to the caveator in the sum of $1,203,360 plus GST;

(b) the works were carried out on the land which improved the land to the benefit of the registered proprietor; and

(c) the registered proprietor would be acting unconscientiously or unfairly if it were to dispose of land or any part thereof to a stranger without the consent of the caveator or without it's actual or potential liability to the caveator having been discharged."

17 Pursuant to the terms of the building contract, the plaintiff served a notice of dispute on the first defendant on 26 May 2005. On 21 April 2006 the plaintiff issued a further notice to the architect referring the dispute to arbitration.

18 The decision of the High Court in Hewett v Court (1982) - [1983] HCA 7; (1983) 149 CLR 639 is authority for the proposition that there is no general principle covering the wide diversity of cases in which an equitable lien has been found to exist. An equitable lien can exist over land or personality or both, and it does not depend upon either contract or possession. It is a right against property which arises "automatically" by implication of equity to secure the discharge of an actual or potential indebtedness (Hewett at 663). Put another way, the particular relationship between parties gives rise to an equitable lien "as part of a scheme of equitable adjustment of mutual rights and obligations" (Hewett at 645, 653). However the implication of an equitable lien can be precluded or qualified by the express or implied agreement of the parties (Hewett at 663).

19 The category of relationships giving rise to a lien by operation of equity is not exhaustive, and the list may not be closed (Hewett at 646, Malcolm CJ in Lavery v R & I Bank of Western Australia Ltd, unreported; FCt SCt of WA; Library No 950468A; 7 September 1995 at 18) but generally speaking, the established examples of equitable lien are between parties in a contractual or quasi-contractual relationship. The basis of equitable lien between parties to a contract lies in an equitable doctrine that the circumstances are such that the subject property is bound by the contract so that a sale may be ordered not in performance of the contract but to secure the payment or repayment of money (Hewett at 665).

20 There is no general principle of equity to the effect that money expended by a person to preserve or benefit the property of another creates a lien in his favour (Lavery v R & I Bank at 18). However, the factors that are "sufficient" for implication of such a lien between parties in a contractual relationship are as follows:

(1) That there is an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it.

(2) That that property (or arguably property including that property) be specifically identified and appropriated to the performance of the contract.

(3) That the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion of it) to a stranger without the consent of the other party or without the actual or potential liability having been discharged.

21 In Lavery v R & I Bank, the Full Court held that:

"The cases in which equity has provided relief by finding that a proprietary interest in land has been created have been cases where the person expending the money has done so in the belief that the property would become his or hers or he or she [would] acquire an interest in it, or in the mistaken belief that it was his or hers, in circumstances where the true owner is estopped from denying the claim. The relevant cases comprise the two lines of authority following Dillwyn v Llewellyn [1862] EngR 908; (1862) 4 De G F & J 517; ER 1285; and Ramsden v Dyson (1865) LR 1 HL 219. These cases have been acknowledged as exceptions to the general rule that if a person spends money on the property of another then prima facie, he or she does not acquire any proprietary interest in or lien over the property: Pettit v Pettit [1969] UKHL 5; [1970] AC 777.

There is a useful summary of the relevant law relating to estoppel by encouragement or acquiescence, sometimes called proprietary estoppel or acquisition by estoppel, in Cameron v Murdoch [1983] WAR 321 at 350 - 352 per Brinsden J."

(Malcolm CJ at 18 - 19.)

22 In Eades v Reilly, unreported; SCt of WA; Library No 980675; 20 November 1998, Heenan J dealt with the question whether a builder, in circumstances very similar to the present, held an equitable lien over a development property on which work had been performed. His Honour found that there was a caveatable interest because the builder had established circumstances sufficient for the implication of an equitable lien. In this regard, there was a serious issue to be tried as to whether it was unconscionable for the defendant to retain the benefit of the construction work when the builder had not been paid.

23 It is interesting to note that there was no reference in Eades to the builder carrying out the construction work in the belief that he was thereby acquiring an interest in the land. Nor was there any mention of the owner encouraging or acquiescing in such a belief. In this regard it may be significant that the prior decision of the Full Court in Lavery v R & I Bank was neither referred to nor cited.

24 There are authorities in other jurisdictions that contradict Eades. In H G & R Nominees Pty Ltd v Caulson Pty Ltd [2000] VSC 126, Beach J of the Supreme Court of Victoria stated as a general proposition at [30] that:

" ... in the absence of an express contract with the building owner that he shall have a lien over a building in respect of work performed by him on the building, a building contractor has no lien over a building or the land on which it is situated in respect of such work, unless the building owner encouraged him to form such a belief or acquiesced in him forming that belief."

25 Similarly in Kang v Kwan & Ors [2002] NSWSC 1187, Santow J of the Supreme Court of New South Wales held at [202]:

" ... I agree with the First Defendant's submission that it is clear that an agreement between a builder and a home-owner for building work could not, without more, create any interest in land, absent an express term in the building contract having such effect. I would also agree that it has never been the law that 'building contracts confer any interest on a builder that can be categorised as a proprietary interest in land'; Graham H Roberts Pty Ltd v Maurbeth Investments Pty Ltd [1974] 1 NSWLR 93 at 104-5. The correct position is that expressed by Beech J in H & G & R Nominees v Caulson Pty Ltd."

26 The decision in Eades (supra) was specifically considered in two other decisions of this Court. In Sanctuary Park Toodyay Pty Ltd v Griffin Plant Hire [2003] WASC 174 Barker J found that in the particular circumstances of that case the defendant earth-moving contractor did not have a caveatable interest in respect of moneys allegedly due for work done on the subject land. At [75] his Honour stated:

"To the extent that an earthmoving contractor in the position of the defendant in this case is able in equity to claim a lien in respect of the land the subject of the earthmoving contract on the basis described by Heenan J in Eades v Reilly (supra), I do not consider the third criterion specified by Deane J in Hewett v Court (supra) is satisfied. ... "

27 It is relevant to note that one of the factors which contributed to that finding was that:

"The defendant has always known it was the intention of the plaintiff to subdivide the land in the manner proposed and from the profits thereof meet the development expenses incurred, including its own." ([67])

28 Kirfield Ltd v First Trade Consulting Pty Ltd & Anor [2005] WASC 277 involved a builder claiming an equitable lien in circumstances very similar to the present matter. After referring to a number of authorities including those of H G & R Nominees and Kang, Master Newnes stated at [55]:

"In the light of the other authority to which I have referred, in my respectful opinion Eades v Reilly cannot be regarded as authority for any general proposition that a builder is entitled to an equitable lien over land on which the builder has carried out construction work. ... "

29 I respectfully concur with this opinion. Furthermore, and in the particular circumstances of the present matter, I consider that I am bound by the authority of Lavery v R & I Bank (supra). Accordingly, the plaintiff will only have an equitable lien if it did the work under a belief that it was thereby acquiring an interest in the land, and if the first defendant in some way encouraged or induced that belief.

Whether there can be an equitable lien in the present circumstances

30 The plaintiff does not assert that it carried out the construction work on the first defendant's apartments, under the belief that it was thereby acquiring an interest in the same. As I understand the plaintiff's case, the claim to an equitable lien is based upon the contention that it would be unconscionable for the first defendant to sell all of the apartments and to distribute the proceeds to unit holders in the Trust, when the plaintiff is still to be paid for the costs of constructing those apartments. In this regard, the plaintiff is concerned that if the proceeds are distributed, it may not be possible to recover the balance of claimed construction costs from the unit holders.

31 If all of the facts alleged by the plaintiff are correct, these concerns are quite understandable. However, in light of the authorities that I have referred to, there can be no basis for the claimed equitable lien over the subject apartments. This is especially so in circumstances where, at all material times, the apartments were available for sale "off the plan".

32 Nevertheless, the parties clearly contemplated that the construction costs would be met out of the proceeds of sale. Accordingly, it is possible that the plaintiff can claim an equitable lien over the proceeds of sale, as distinct from the apartments. However, I make no finding on whether there is an arguable case as to the existence of such an equitable lien, because that is not a matter that is before me.

33 Even if I am wrong in my view that there is no caveatable interest as claimed, the plaintiff faces the hurdle of Mr Hunt's supervening interest as purchaser. If the caveat is extended, it will prevent registration of any transfer of the apartments, and accordingly, the plaintiff's and Mr Hunt's interests cannot co-exist. This being so, the question of priority is to be determined as follows:

"In the case of a contest between two equitable claimants the first in time, all other things being equal, is entitled to priority. But all other things must be equal, and the claimant who is first in time may lose his priority by an act or omission which had or might have had the effect of inducing a claimant later in time to act to his prejudice." (Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78, 97)

34 This same principle was referred to in Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; (1983) 154 CLR 326, where Mason and Deane JJ held (at 339):

" ... priority in time of creation gives the better equity. But where the merits are unequal and favour the later interest, as for instance where the owner of the later equitable interest is led by conduct on the part of the owner of the earlier interest to acquire the later interest in the belief or on the supposition that the earlier interest did not then exist, priority will be accorded to the later interest."

"For our part we consider it preferable to avoid the contortions and convolutions associated with basing the postponement of the first to the second equity exclusively on the doctrine of estoppel and to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest."

35 In the present instance, the plaintiff delayed in lodging a caveat even though it was aware that the apartments were on the market for sale. If the caveat had been lodged prior to the contracts of sale with Mr Hunt, it is my view that he would almost certainly have become aware of the equitable lien claimed by the plaintiff. Thus the delay by the plaintiff has brought about the situation that Mr Hunt has acquired his interest without being aware of the competing claimed interest allegedly prior in time.

36 In these circumstances, if the plaintiff did have an equitable lien as claimed, it would have great difficulty in establishing that that interest has priority over the equitable interest of Mr Hunt. Furthermore, and even if there was a serious issue to be tried as to the plaintiff's claimed interest, the balance of convenience would clearly favour Mr Hunt.

37 For all of the above reasons, I am not satisfied that the caveatable interest claimed by the plaintiff has or may have substance. It follows that the present application must be dismissed.