Plaintiff v First defendant

(a) Whether Caveat AJ192736W, lodged by the defendant on the plaintiff's property contained in Certificate of Title Volume 10643 Folio 020 ('the property'), is defective.

(b) If the caveat is defective, whether the Court, in the exercise of its discretion, should allow the defendant to amend the caveat.

(c) If the Court exercises its discretion to allow the amendment of the caveat, or if the caveat was properly lodged over the property, whether the Court should exercise its discretion under s 90(3) of the Transfer of Land Act 1958 ('the Act') to remove the caveat.

2 The first defendant claims an estate in fee simple in the property on the grounds that he has an '[e]quitable interest as a 50% shareholder of the property pursuant to a trust Deed'.[1]

3 The background to the claim revolves around an agreement made on 23 August 2007 between the plaintiff and the first defendant ('the August agreement'). The August agreement has been the subject of a proceeding in the New South Wales Supreme Court, namely, Schwartz v Hadid[2] ('the NSW proceeding'). In that proceeding, the first defendant was represented by solicitors and counsel.

4 In the NSW proceeding, the first defendant claimed damages against the plaintiff for breach of an alleged agreement. The August agreement formed a significant part of that proceeding.

5 The general facts found in the NSW proceeding were that the first defendant presented an 'investment proposal' to the plaintiff. The proposal as alleged was that the plaintiff would purchase property referred to as site B (being the property the subject of this proceeding) and then purchase or take options on two other pieces of land known as site C and site D and that the properties would be sold together. The proposal did not include any building works to be performed on the properties before they were sold. The first defendant did not contribute any money to the purchase of the property[3] but merely presented the investment proposal to the plaintiff.[4]

6 The Honourable Justice McDougall found that cl 2 of the August agreement entitled the plaintiff to buy land either in his own name or in the name of a company.[5] The plaintiff purchased site B but did not purchase or take up options on site C or site D.[6] McDougall J found that, by failing to purchase or take options on site C and site D, the plaintiff had breached the alleged agreement and was liable to the first defendant for damages.

7 Judgment was delivered in the NSW proceeding on 6 September 2011. The NSW proceeding is now the subject of an appeal.

8 The first defendant lodged the caveat one week after the decision in the NSW proceeding.

9 On 19 November 2011, the plaintiff sold the property for the sum of $900 000 with settlement of the sale scheduled for 25 January 2013. The settlement date has been extended by mutual agreement to 15 February 2013. The plaintiff states that, if the sale is settled, there will be no profit from the sale.

10 In late January 2013, the plaintiff's solicitors informed Mr Hadid that settlement was scheduled for 15 February 2013, and he was asked to confirm that he would withdraw the caveat at or prior to settlement. Further correspondence took place with the first defendant and his solicitors in New South Wales, which resulted in the plaintiff's issuing the application to remove the caveat on 13 February 2013.

11 Counsel for the plaintiff submitted that the caveat is defective because the first defendant has claimed '[a]n estate in fee simple' when the grounds of claim, namely an '[e]quitable interest as a 50% shareholder of the property pursuant to a trust Deed', do not support such an interest, do not make any sense and do not reflect the terms of the August agreement.

12 The first defendant submitted that any 'wrong wording [in the caveat] should not detract from [his] rights to lift the Caveat and resubmit a Caveat with appropriate wording'.[7]

13 The 'trust Deed' referred to in the caveat is a reference to the August agreement, which provides:

1.1 Jerry [the plaintiff] and Albert [the first defendant] are friends and wish to enter into this business arrangement.

1.2 Jerry has agreed at his discretion to buy one or more properties at Junction Village Cranbourne Victoria 'Properties'

1.3 Albert has introduced Jerry to the properties and will negotiate the purchase and sale of the properties at Jerry's discretion.

1. All the terms in this deed are strictly confidential between the parties and may only be discussed with the parties and their lawyers and accountants.

2. Jerry will purchase the properties in entities he is comfortable with.

3. Jerry agrees whilst he is the sole Director and shareholder, he is holding 50% of the shares in the entities that own the properties in trust for Albert pursuant to this Deed.

4. On sale of the properties Jerry will first as a priority deduct the following:

2. All reasonable money or interest costs relating to the capital

3. All costs relating to the properties including but not limited to interest, accounting costs, Stamp duty costs, Land tax costs (if any), legal costs, DA costs and any other direct costs incurred by the properties.

5. After deduction of the amounts mentioned in clause 4 above Jerry will pay as directed by Albert 50% of all the net profit.

14 Clause 4 of the August agreement provides that, on sale of the properties being sites B, C and D, the plaintiff was first 'as a priority' to deduct all capital contributions he made; all reasonable money or interest costs relating to the capital contributed by the plaintiff; and all other costs relating to the properties.

15 Clause 5 of the August agreement provides that, after deduction of the amounts referred to in cl 4, the first defendant would be entitled to 50 per cent of the net profits following the sale of the properties.

16 In my view, it is clear that the August agreement does not give the first defendant a 50 per cent interest in any land the subject of the August agreement; it gives an entitlement to 50 per cent of the net profits on sale of a relevant property.

17 Accordingly, the first defendant is not entitled to an estate or interest in fee simple in the property pursuant to the August agreement. Nor is the first defendant entitled under the August agreement to a 50 per cent share of the property or to an estate in fee simple. In my view, the grounds of claim in the caveat do not reflect the terms of the August agreement at all and the caveat is defective.

18 The Court may only amend the 'estate or interest claimed' in a caveat in special or exceptional circumstances.[8] In Percy & Michele Pty Ltd v Gangemi,[9] Macaulay J identified the following factors as relevant to the exercise of the discretionary power to amend contained in s 90(3) of the Act:

(a) whether the amendment is to the estate or interest claimed and not just the grounds of claim;

(b) the circumstances in which the error was made, including whether the caveator was represented by lawyers at the time;

(c) 'the court should not readily act in a way which might encourage the belief that caveats can be imprecisely formulated and then "fixed up later"'; and

(d) the overall merits of the claim.[10]

19 In my view, the defective caveat is incapable of amendment for the following reasons:

(a) First, an amendment to the caveat under s 90(3) of the Act may be permitted provided that the amendment does not result in the Court's substituting an entirely different estate or interest claimed.[11] It is not clear how the first defendant would seek to amend the caveat, but it would require an amendment to the estate or interest claimed as well as the grounds of claim. This would result in the substitution of an entirely different estate or interest claimed.

(b) Secondly, the first defendant provided no explanation for the basis of the claim or for the errors in it. This is telling, since the first defendant was represented by solicitors in the NSW proceeding and the caveat was lodged at a time when the first defendant was represented by them.

(c) Finally, for the reasons set out below, the overall merits of the claim are hopeless and no amount of 'fixing it up' could cure the defects in the caveat.

20 Although my findings make it unnecessary to consider the plaintiff's application for the removal of the caveat, it is appropriate to address the submissions made on this aspect of the proceeding, as the first defendant may lodge a further caveat on the title to the property in the future and the plaintiff's application for the removal of the caveat is relevant to the question of costs.[12]

21 Section 90(3) of the Act provides:

Any person who is adversely affected by any such caveat may bring proceedings in a court against the caveator for the removal of the caveat and the court may make such order as the court thinks fit.

22 The relevant principles with respect to an application under s 90(3) of the Act were summarised by Warren CJ in Piroshenko v Grojsman:

Caveats under the Torrens system are treated by the courts as analogous to applications for interlocutory injunctive relief. In so far as their registration is an administrative act, it is when application is made for their removal that the onus falls on the caveator to satisfy the two-stage test used by the court when deciding whether to exercise its discretion to grant interlocutory injunctive relief. ... This two-stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question, and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial.

...

Therefore, consistently, in order for a caveator to satisfy the first limb of the test applied by the courts when deciding applications under s 90(3) of the Act, he or she must satisfy the court that:

1. there is a probability on the evidence before the court that he or she will be found to have the asserted equitable rights or interest; and
2. that probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in question in accordance with their normal proprietary rights.[13]

23 In order to establish that there is a serious question to be tried, the caveator must establish a 'prima facie case with sufficient likelihood of success to justify the maintenance of the caveat'.[14]

24 The onus falls on the first defendant as the caveator to establish that he has an interest in the property by reason of the August agreement. As stated by Warren CJ:

Caveats are not 'bargaining chips'. It is not sufficient for the caveator to establish a prima facie case that they have contractual, equitable or statutory rights against the caveatee; their interest or rights must attach to the property with respect to which the caveat has been lodged.[15]

25 In support of establishing a prima facie case, the first defendant submitted:

(a) Clause 3 of the August agreement provides that the plaintiff hold the property on trust for the first defendant as to one half. The first defendant relied on the decision in Hooke v Holland,[16] which he said involved similar facts to this case.

(b) Clause 1.3 of the August agreement provides for the first defendant to sell the property on trust with the effect that the property can not be sold unless there is mutual consent and the sale is in accordance with the provisions of the August agreement. Because the property has been sold by the plaintiff and without the consent of the first defendant, the plaintiff was in breach of the August agreement.

26 Turning to the first submission of the first defendant, in my view, cl 3 of the August agreement does not require the plaintiff to hold land on trust for the first defendant. Rather, it provides that the plaintiff hold 50 per cent of the shares of a company on trust for the first defendant. The property the subject of the caveat is not owned by a company.[17] Therefore, in my view, cl 3 has no application to the property and the clause does not have the effect contended for by the first defendant.

27 In any event, even if the property were owned by a company, it is settled law that shares in a company are personal property and, therefore, the interest of a share holder in the share capital of a company does not extend to the property or assets that the company owns. A share in a company does not confer upon the holder a legal or equitable interest in the assets of the company; a share is a separate piece of property.[18]

28 A shareholder has no proprietary interest whether legal or equitable in the assets of a corporation in which shares are held.[19] As stated by Lord Wrenbury:

the corporator even if he holds all the shares is not the corporation, and ... neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.[20]

29 A corporation may acquire an estate or interest in land that will support a caveat, but shareholders of corporate land holders cannot claim an interest in land. They merely have an interest in the shares from which benefits may flow.

30 The first defendant's reliance on Hooke v Holland is misconceived because the facts in that case are different from the facts in this case.[21] In Hooke v Holland, the parties entered into an agreement that specifically provided for the owner of the land in question to hold a share of the land on trust for another person pursuant to an agreement whereby the other person was to pay for the building of a cottage on the land. The owner sold the property against the wishes of the other person. The owner then sought removal of the caveat to enable settlement of the sale to be effected. Orders were made by consent that the caveat be removed.

31 To the extent that the first defendant claims he is entitled to a share of the net profits from the sale of the property, it is settled law that such an entitlement does not give rise to a caveatable interest where there is no agreement or provision for the conferring of an interest in land.[22] The plaintiff referred to the decision of Luxury Homes Pty Ltd v Danieli, where White J stated the principle as follows:

In Epple v Wilson [1972] VicRp 50; [1972] VR 440, it was held that an interest in the proceeds of the sale of land does not necessarily involve an interest in the land itself, even where there is a trust for sale. In Simons v David Benge Motors Pty Ltd [1974] VicRp 69; [1974] VR 585, it was held, following Epple v Wilson, that an agreement to share the profits of resale of land, did not confer on the lender of the moneys an interest sufficient to support a caveat. The position may be different if the plaintiff has a right to have the land sold and to have the proceeds divided, being a right which the plaintiff could enforce by an order for specific performance.[23]

32 In this case, the August agreement does not confer an interest in the land to the first defendant and he has no entitlement to specific performance. Further, the first defendant has pursued a damages claim in the NSW proceeding.

33 In relation to the first defendant's submission concerning cl 1.3 of the August agreement, that clause forms part of the agreed recitals in the August agreement. It does not provide for the first defendant to sell the property on trust. Clause 1.3 is not clearly stated, but the purchase and sale of the properties are agreed to be at the plaintiff's discretion. This clause, in my view, does not mean that the property cannot not be sold unless there is mutual consent and the sale is in accordance with the provisions of the August agreement. Even if it were found that the plaintiff was in breach of the August agreement, any claim the first defendant might have would not attach to the property and would not sustain a caveatable interest. At most, any alleged breach of the August agreement would sound in damages.

34 Although not addressed by the first defendant in his oral submissions, in his affidavit filed in opposition to the application and served late in the evening before the hearing, he asserted that the following exchange took place between the plaintiff and himself, on or about 23 August 2007:

Jerry said: 'I am paying; I hold the properties in trust for me and you on a 50:50 basis'

I said: 'I agree, but I negotiate both the purchase and sale of the properties, seeing I have expertise in real estate sale and development, and particularly in the Cranbourne area'.[24]

35 I have assumed that the first defendant intended to rely on this statement to support his submission that the plaintiff was to hold the property on trust for the first defendant as to one half.

36 The plaintiff responded to the alleged conversation by affidavit, stating that he had 'never said to [the first defendant] that I would hold the Cranbourne properties on trust for him and me on a 50:50 basis'.[25] Counsel for the plaintiff noted that the first defendant did not refer to or rely on such a conversation in the NSW proceeding.

37 Bearing in mind the context of the litigation in the NSW proceeding, which included the August agreement between the plaintiff and the first defendant, it would be reasonable to conclude that the alleged conversation would have been raised by the first defendant in the NSW proceeding had it occurred.

38 Although I make no such finding, I note that, in the NSW proceeding, McDougall J referred to 'some matters of concern in [the first defendant's] evidence'.[26] As regards the litigation concerning a loan between the first defendant and the plaintiff, he said he formed a 'very strong impression that [the first defendant] would say whatever is expedient in relation to the loan'.[27]

39 Given the circumstances surrounding the alleged conversation, I place no weight on it and have disregarded it in coming to a decision whether the first defendant has made out a prima facie case.

40 For the reasons set out in paragraphs [26] to [33] above, the first defendant does not have a prima facie case with a sufficient probability of success. The caveat ought to be removed.

41 As I have concluded that there is there is no interest sufficient to justify the caveat remaining on the property, it is unnecessary to consider the balance of convenience.

42 If it were necessary to do so, I consider that the balance of convenience favours the plaintiff and granting the application to remove the caveat carries the lower risk of injustice.[28]

43 The property is vacant and has been sold. It is not being developed and, with the settlement impeded by the first defendant's caveat, the plaintiff continues to pay holding costs.[29]

44 Settlement was scheduled to take place on 15 February 2013. Although the first defendant obtained a statutory declaration from the purchaser that he was willing to extend the settlement date,[30] this situation may not be the case in the future.

45 If the caveat remains on the title until trial, it is not known how much time will elapse before the sale can be completed. If the current purchaser is unwilling to keep extending the settlement date, or extends it for some time and then changes his mind, it is unknown whether the property could be sold and what price it would bring on a resale in the future. The potential damages of the plaintiff are uncertain but could be significant.

46 Accordingly, pursuant to s 90(3) of the Transfer of Land Act 1958, I order that the Registrar of Titles remove Caveat AJ192736W from the land described in Certificate of Title Volume 10643 Folio 020.

47 I will hear the parties as to the form of final order and costs.

[1] Exhibit SLB-2 to the affidavit of Stephanie Louise Borg sworn 13 February 2013.

[2] [2011] NSWSC 1041 (6 September 2011).

[6] The plaintiff became the registered proprietor on 17 February 2009.

[7] Outline of Submissions for the First Defendant dated 25 February 2013, [9].

[8] Martorella v Innovision Developments Pty Ltd [2011] VSC 282 (24 June 2011) [66].

[9] [2010] VSC 530 (24 November 2010).

[11] Martorella v Innovision Developments Pty Ltd [2011] VSC 282 (24 June 2011) [58]-[60]; Percy & Michele Pty Ltd v Gangemi [2010] VSC 530 (24 November 2010) [96]; Multi-Span v Portland [2001] NSWSC 696 (22 August 2001) [132].

[12] See above [12].

[13] (2010) 27 VR 489, 491, 493 (citations omitted).

[16] [1984] WAR 16.

[17] Exhibit SLB-1 to the affidavit of Stephanie Louise Borg sworn 13 February 2013.

[18] Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598, 609 (Dixon CJ, Kitto and Taylor JJ).

[19] Macaura v Northern Assurance Co Ltd [1925] AC 619, 626; Ten Pin Properties Ltd v Bowlarama (NZ) Ltd (Unreported, High Court of New Zealand, Tipping J, 18 December 1989) 3; Helm Corporation Ltd v Latestar Pty Ltd (Unreported, Supreme Court of Victoria, Hayne J, 16 June 1994) 25.

[20] Macaura v Northern Assurance Co Ltd [1925] AC 619, 633.

[21] [1984] WAR 16.

[22] Luxury Homes Pty Ltd v Danieli (2005) 12 BPR 23 105, 23 108; Polidoro Developments Pty Ltd v Hayek [2012] VSC 20 (2 February 2012) [17]-[20]; Pearl Lingerie Australia Pty Ltd v TGY Pty Ltd; Pearl Lingerie Australia Pty Ltd v John Giarratana [2012] VSC 451 (28 September 2012) [9].

[23] Luxury Homes Pty Ltd v Danieli (2005) 12 BPR 23 105, 23 108-9.

[24] Affidavit of Albert Hadid sworn 25 February 2013, [15].

[25] Affidavit of Jerry Leslie Schwartz sworn 25 February 2013, [4].

[26] Schwartz v Hadid [2011] NSWSC 1041 (6 September 2011) [12].

[28] Bradto Pty Ltd v State of Victoria [2006] VSCA 89; (2006) 15 VR 65, 73.

[29] See Pakenham Valley Pty Ltd v Firstline Homes Pty Ltd [2010] VSC 482 (15 October 2010) [15].

[30] Annexure E to the affidavit of Albert Hadid sworn 25 February 2013.