Vikram Misra, Barrister at Clarence Chambers continues his series into caveats as he examines the intersection between caveats and the Duties Act 1997 (NSW), in particular, the application of the act on the validity of a caveat. To hear more from Vikram, follow his series here.
An often overlooked issue is the application of the Duties Act 1997 (NSW) (‘the Act’) on the validity of a caveat supported by virtue of an equitable interest in the form of a mortgage or charge. Although mortgage duty has been abolished from 1 July 2016, duty still applies to those mortgages/instruments of security executed or affecting land before this date and therefore it is still a relevant consideration for practitioners. The non-payment of duty under the Act is a potential ground to invalidate a caveat. Normally these arguments present themselves on applications for an extension of a caveat after a lapsing notice has been served or on applications for the withdrawal of a caveat.
There is a line of authority in the Duty List of the Equity Division of the Supreme Court of NSW for the proposition that the later stamping of an instrument giving rise to the equitable mortgage or charge cannot retrospectively validate a caveat lodged when the instrument was unenforceable. However, the same does not apply to the existence and priority of the underlying equitable interest, as the authorities recognise the retrospective effect of late stamping to achieve this. It should be noted from the outset that the analysis in this article is confined to the situation where mortgage duty still applies.
The Act is triggered in situations where, to use the most basic of examples, a clause in a loan agreement creates a caveatable interest by virtue of an equitable mortgage or charge which does not fall within the exemptions contained in Parts 3A and 4 of Chapter 7 of the Act. Further, duty is also payable on a caveat lodged to protect an unregistered mortgage: see s 227 of the Act.
If the Act is triggered and duty is not paid, then section 211 of the Act provides:
A mortgage on which duty is required by this Chapter to be paid is, while any duty remains unpaid on it, enforceable only to the extent of the amount secured by the mortgage on which duty has been paid under this Act.
On applications to extend or remove a caveat, it has been held that the relevant date for assessing enforceability is the date the caveat was lodged. Where no duty has been paid on the underlying instrument by such date, then it follows that the mortgage/charge is entirely unenforceable, which in turn invalidates the caveat. If this situation occurs, the court is unlikely to grant an adjournment for the payment of duty to take place. For example, an offer to pay late mortgage duty in order to secure the extension of a caveat, in respect of which the required mortgage duty had not been paid at the time the caveat was lodged, was not sufficient to justify an order extending the caveat: see Complex Scaffolding Solutions Pty Limited v Abraham Doueihi  NSWSC 230.
Similar situations arose in the cases of Boral Recycling Pty Ltd v Wake  NSWSC 712 (‘Boral’) and Bellissimo v JCL Investments Pty Ltd  NSWSC 1260 (‘Bellissimo’). In Boral  NSWSC 712, McDougall J held:
… In this case, no duty having been paid, the relevant amount, for the purposes of s 211(1) is zero.
 A failure to stamp attracts the operation of s 211. There is no point in standing the matter down to enable the mortgage to be stamped because that would operate to make it enforceable from the date of stamping. Even if this were incorrect, it appears that late stamping may have validated an instrument ab initio – see McKensey v Hewitt  NSWSC 636 at  the question is to be assessed today in respect of the particular caveat lodged.
 In circumstances where the matter was brought on urgently at the plaintiff’s request, I do not see the interests of justice as requiring that the proceedings be adjourned, presumably with an order extending the operation of the caveat, so that the plaintiff can attend to its obligations under the Duties Act. Plaintiffs who wish to avail themselves of the caveat provisions of the Real Property Act 1900 (NSW), through mechanisms such as clause 9 of the agreement presently under consideration, should attend to their legal obligations expeditiously, and well in advance of any hearing to vindicate their rights.
 In the circumstances, I hold that the provisions of clause 9, insofar as they constitute a mortgage or charge, are unenforceable. Being unenforceable (and there being no other source of any caveatable interest) it follows that the caveat is bad and that there is no point in ordering its extension.
In Beechworth Land Estates Pty Ltd and Griffith Estates Pty Ltd  NSWSC 336 (‘Beechworth’), Robb J held, with respect to this line of authority:
 [I]t does not follow that the caveat cases were wrongly decided. There is authority in those cases for the proposition that, for a caveat to be sustainable, the mortgage interest in the land claimed by the caveator must exist at the date the caveat is lodged. If the mortgage is unenforceable at that time, then the caveat will have been lodged to support an interest in the land that did not exist. The question whether the late payment of the mortgage duty will cure this deficiency is a matter for the proper interpretation of the statutory provisions in the Real Property Act 1900 (NSW) that govern the validity of caveats, rather than the effect of s 211 of the Duties Act. While s 74F of the Real Property Act, permits a person who claims to be entitled to a legal or equitable estate or interest in land to lodge a caveat, there must, at the time of lodgement, be a basis for the conclusion that there is a serious question to be tried regarding the existence of the estate or interest claimed: see Circuit Finance Australia Ltd v Bessounian  NSWSC 1190 at . There can be no such serious question if the claim is unenforceable by statute. The concept of the caveat subsequently springing into life upon payment of the mortgage duty is unsatisfactory (or not if the duty is never paid). Although usually (albeit not in the Almaty case) the dispute as to whether or not the caveat should be extended is between the party claiming to be a mortgagee and the registered proprietor, it must not be forgotten that the purpose of lodging a caveat is to affect the rights of third parties who may deal with the registered proprietor. There is good reason to interpret the provisions of the Real Property Act in a way that requires the mortgage to be enforceable as a matter of law at the time the caveat is lodged, because any retrospectivity of legal effect as between the mortgagee and the registered proprietor should not put the interests of third parties at risk. This is a question that should be left for consideration when it arises in a case that concerns the extension of a caveat. (The High Court’s ruling in Shepherd v Felt and Textiles of Australia Ltd that late payment of stamp duty has the general effect of making the instrument retrospectively valid, even against third parties, will not be decisive of this issue, as the question does not arise under the Duties Act, but depends upon the proper interpretation of the relevant provisions of the Real Property Act).
It should be noted that it is not clear in Boral  NSWSC 712 and Bellissimo  NSWSC 1260 if mortgage duty had been paid on the document said to create the charge/mortgage, neither is it clear whether mortgage duty was paid on the caveat. As to situations where mortgage duty was paid on the caveat in accordance with s 227(2)(a) of the Act (i.e. where mortgage duty is not paid on the document said to create the charge/mortgage, but paid on the caveat), Robb J opined in Beechworth  NSWSC 336:
 In this respect, in Almaty Barrett J made the observations that have been set out above concerning the relationship between payment of mortgage duty imposed on caveats, and the payment of the duty on the mortgage itself. That is a subject that was not considered by the parties in this matter, and is beyond the proper scope of these reasons for judgment. However, it is clear that the purpose of s 227 of the Duties Act is to provide some protection to the revenue against the possibility that mortgagees may fail to pay the required mortgage duty in respect of the mortgages, and then seek to protect themselves by lodging a caveat to support the unregistered mortgages. The section requires that, if the mortgage itself is not duly stamped, a caveat lodged in its support must be stamped with the same amount of mortgage duty. In my view it is an available basis for the Court to refuse to extend the caveat that the mortgagee has neither paid the mortgage duty payable on the mortgage, nor the equivalent duty payable on the caveat. The Court would be entitled, in the exercise of its discretion, to decline to lend its aid to a mortgagee in these circumstances, which would have the effect of permitting the mortgagee to avoid the consequences of an explicit statutory attempt to prevent mortgagees lodging caveats to protect unstamped mortgages. On the other hand, if the caveat has been stamped to the full amount of the mortgage duty payable on the mortgage, the Court may look differently upon an application to enable any necessary mortgage duty to be paid on the mortgage itself.
While it appears that there is authority to support the proposition that late stamping cannot retrospectively validate a caveat lodged when the underlying instrument was unenforceable, it does not have the same effect on the existence of a security interest. This is because the existence of a security interest depends on the instrument that creates it, not on the caveat. In the matter of MINMXT Holdings Pty Limited  NSWSC 1678, (which did not concern an application for an extension or withdrawal of a caveat, rather concerned priorities of unregistered interests in real property) Brereton J held:
 Prospa claims an equitable interest as chargee pursuant a loan agreement and guarantee dated 15 May 2015 whereby the company charged the land as security for a loan of $324,474.77, the balance as at 10 February 2017 being $517,327.46. Allowing that it increases at $9,713.45 per month, it would now be $587,035.06. Prospa’s caveat was lodged on or about 20 July 2015, and appears to be the first registered caveat; in any event it well predates the liquidation so that no question of postponement to the liquidator arises. However, the loan agreement appears to be unstamped, though the caveat appears to be stamped. Existence of the security interest depends on the loan agreement which creates it, not on the caveat. If the loan agreement has not been stamped, it is unenforceable, although if it were now stamped, albeit belatedly, it would become enforceable, retrospectively. Although, as things stand, I am not satisfied that Prospa has an enforceable security interest; I am satisfied that it may be able to establish an interest to the extent of $587,035.06 by stamping.
- Although mortgage duty has been abolished, it does still apply to mortgages/instruments of security executed or affecting land before 1 July 2016.
- The non-payment of duty can be wielded as a tool to invalidate a caveat if the underlying instrument was unenforceable as at the date of lodging the caveat, although this line of authority has been questioned.
- Late stamping of an instrument of security can validate the existence of a security interest.
 See section 203A of the Act.
 Section 74K of the Real Property Act 1900 (NSW).
 Section 74MA of the Real Property Act 1900 (NSW).
 This line of authority has been questioned, see: Arnautovic & Sutherland t/as Jirsch Sutherland & Co v Civitanovic (as trustee of the bankrupt estate of Adrian Lawrence Rosee)  FCA 809; (2011) 199 FCR 1; Pham v Enterprise ICT Pty Ltd and Others; Pham v Sebie (No. 3)  NSWSC 381,  and the authorities cited therein. It is outside the scope of this article to consider the debate, however see In the matters of Beechworth Land Estates Pty Ltd (Admin Apt) and Griffith Estates Pty Ltd (Admin Apt) No 2)  NSWSC 336,  – (‘Beechworth’) for an analysis of the relevant cases.
 Section 205 of the Act.
 Sections 221A to 225 of the Act. These exemptions will not be canvassed in this article, however the author advises that practitioners familiarise themselves with them to confirm whether duty applies.
 However note the exceptions in s 222 to 225 of the Act.
 Within 3 months of the liability to pay the duty arising, see section 209 of the Act.
 Noting the authority that the general provisions (s 304 of the Act) give way to the specific provisions (s 211 of the Act), see Boral Recycling Pty Ltd v Wake  NSWSC 712,  (‘Boral’). See also the usual undertaking provision in The Uniform Civil Procedure Rules 2005 (NSW), r 31.13.
 Neoform Developments & Interiors Pty Ltd v Town & Country Marketing Pty Ltd  NSWSC 344,  (‘Neoform’); Boral  NSWSC 712, .
 See also; Neoform  NSWSC 344, -; McKensey v Hewitt (2004) 61 NSWLR 54; Beechworth  NSWSC 336, -.
 See Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359, 382 to 386; Beechworth  NSWSC 336,  – . GR Capital Group Pty Ltd (Receivers and Managers Appointed) (subject to Deed of Company Arrangement) v Yan  NSWSC 911, .
Vikram Misra was admitted as a solicitor in 2012 and called to the NSW Bar in 2015. He maintains a broad commercial practice and is regularly briefed in matters relating to taxation law, property law, construction law and equity. Vikram has completed a Graduate Diploma in Taxation Law at the University of Sydney in 2015 and a Master of Laws majoring in construction law and contract law at the University of Melbourne in 2016. You may connect with Vikram via email [email protected] or LinkedIn
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