Caveats Series Part 4: But my Caveat is First! The Impact of Caveats on Priority of Unregistered Interests
Vikram Misra, Barrister at Clarence Chambers continues his series into caveats as he provides a comprehensive look into the impact of caveats on priority of unregistered interests. To hear more from Vikram, follow his series here.
While there is no obligation on an unregistered interest holder to lodge a caveat to preserve that interest’s priority, failing to caveat can, in some circumstances, result in the loss of priority. To understand the role that a caveat plays in priority disputes, one must understand its purpose and effect.
The purpose of a caveat is not to serve as notice to the world that the caveator claims an interest in the property, although it may have that effect. In J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 (‘J & H Just), the High Court of Australia held at 552:
“Its purpose is to act as an injunction to the Registrar-General to prevent registration of dealings with the land until notice has been given to the caveator. This enables the caveator to pursue such remedies as he may have against the person lodging the dealing for registration. The purpose of the caveat is not to give notice to the world or to persons who may consider dealing with the registered proprietor of the caveator’s estate or interest though if noted on the certificate of title, it may operate to give such notice.”
Relevantly, it must also be understood that lodging a caveat does not improve the priority that a holder of an unregistered (equitable) interest would otherwise enjoy[1]. In other words, the mere fact that one’s caveat ranks higher on the certificate of title does not necessarily mean that one’s unregistered interest takes priority. The search is for who holds the ‘better equity’.
As stated by Mason and Deane JJ in Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 339 (‘Reliance Finance’), the general principle applicable to competing equitable interests is that where the merits are equal, priority in time of creation gives the better equity – qui prior est tempore potior est jure.
In searching for the better equity, “the inquiry is upon all of the circumstances of the case, including the circumstances in which the respective equitable interests were acquired”[2]. What is commonly referred to as ‘postponing conduct’ of the earlier interest holder is relevant to this inquiry and can have the effect of displacing the first in time rule, favouring the owner of the later equitable interest. One such example of postponing conduct is a failure to lodge a caveat, which, in some circumstances, can deprive an unregistered interest of priority.
Their Honours in Reliance Finance held at 341 – 342:
“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. Thus in Latec Investments Kitto J said that the case where the conduct of the prior owner leads the later owner to acquire his interest on the supposition that the earlier interest does not exist – the test stated by Dixon J in Lapin v Abigail – was just one “instance” of a case when the merits are unequal.
It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or admission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind – those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest.
Thus, the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give, notwithstanding that the person acquiring the later interest had, before acquiring that interest, searched the register book and ascertained that no caveat had been lodged. It is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority.”
What can be distilled from this analysis is that the mere failure to lodge a caveat does not, of itself, result in a loss of priority. Rather, the effect of the failure to caveat must be considered in light of the particular circumstances of the case at hand[3]:
“Of course, there may be situations in which such a failure [to caveat] may combine with other circumstances to justify the conclusion that “the act or omission proved against” the possessor of the prior equity “has conduced or contributed to a belief on the part of the holder of the subsequent equity, at the time when he acquired it that the prior equity was not in existence” cf. per Knox C.J. in Lapin v. Abigail. This is the relevant principle to apply if it is claimed that the priority of a prior equitable interest has been lost in competition with a subsequent equitable interest.”[4]
As such, where the holder of an earlier unregistered interest fails to caveat, postponement of that interest will not occur unless, the failure to caveat, considered in respect of all the circumstances of the case, allows another person to acquire a later interest in the property on the mistaken assumption that the earlier interest does not exist.
Examples of ‘other circumstances’ which, when coupled with the failure to caveat, can contribute to the displacement of the earlier interest can include the situation “where the holder of a later interest searched the register[5], found no such information as lodgement of a caveat would have put there and acted in reliance on the apparent absence of any such interest”: see Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409 at 423. Also, the circumstance where it is reasonably foreseeable that a later interest will be created and that the holder of that later interest will assume the non-existence of an earlier interest.[6]
We will look at two examples to illustrate the above legal principles.
Case Example – No Postponing Conduct
An example where no postponing conduct was found in circumstances of a failure to caveat is Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132.
Bunnings and Hanson were in the business of supplying building materials. Each of them supplied materials to Capital Works, prior to Capital Works’ liquidation in June 2015. The supply of goods by both Bunnings and Hanson was made pursuant to terms set out in credit applications, which, in each case, contained a charge granted by Capital Works over any land then or subsequently held by Capital Works to secure repayment of monies owing by Capital Works in respect of the supply of building materials.
Capital Works applied for credit with Hanson by credit application dated 16 June 2010, which was accepted by Hanson sometime prior 10 July 2010.
On 30 August 2010, an application by Capital Works to Bunnings for credit was made by Capital Works and accepted by Bunnings.
After Capital Works failed to meet its trading terms on several occasions, and after various alterations in the credit limit extended by Bunnings to Capital Works, Bunnings lodged a caveat over three properties owned by Capital Works on 23 April 2014.
Hanson lodged a caveat pursuant to the charge contained in the credit application over the same three properties owned by Capital Works on 2 April 2015.
On the assumption that the equities were otherwise equal, Chaney J made the following remarks:
[31] It follows that the priority as between the interests of Bunnings and Hanson are not determined by the date of registration of their respective caveats. Unless there are circumstances which displace the general rule that priority in time of creation gives the better equity, then that rule applies.
[45] What circumstances will be ‘relevant’ to the assessment of merits in equities will depend upon the particular facts of any case, and I do not propose to specifically address the relevance of the six matters identified in issue 3. The critical question, in order to resolve the dispute between the present parties, is whether there was any postponing conduct on the part of Hanson which would have the effect of defeating its temporal priority. In my view, there was not.
[46] The lodgement of a caveat is not necessary to create or enhance Hanson’s interest in the properties. Hanson could not have lodged the caveats in respect to any of the three properties at the time the charge was created, since none of the properties were owned by Capital Works at that time. The same applied for Bunnings. The failure to lodge a caveat created a risk that in respect to the properties the subject of the caveat, there might be a transaction which had the effect of defeating Hanson’s interest without notice to Hanson. It was a matter for Hanson, and by the same token for Bunnings, as to whether, and at what time, it chose to take steps to avoid that risk. It is apparent that, in choosing when to lodge a caveat, both Hanson and Bunnings adopted a usual industry practice.
[50] There is no evidence, that prior to the creation of the charge in favour of Bunnings in August 2010, Bunnings made any inquiry of Capital Works as to the existence of other credit arrangements or other charges granted by Capital Works over existing or future land holdings. It cannot be said that Hanson in any way led Bunnings to acquire its interest, which it did by accepting Capital Works’ credit application in 2010. Bunnings carried out no title searches at that time, but in any event Capital Works did not own the three properties the subject of the caveat until 2013. Mr Godden’s belief that the absence of any other caveats lodged by other suppliers of Capital Works, of itself, had the effect of giving Bunnings priority over any other unregistered charge was misconceived. That misconceived view cannot have the effect of depriving a prior interest holder of its priority.
Case Example – Postponing Conduct
An example where postponing conduct was found in circumstances of a failure to caveat is LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd [2019] NSWSC 150.
The proceedings concerned a priority dispute between two lenders who obtained unregistered interests in certain land in Chipping Norton, NSW. The defendant’s interest in the land was acquired before the plaintiff acquired its interest. However, the defendant did not lodge a caveat in respect of its interest until after the plaintiff acquired its interest. The central issue was whether in the circumstances the failure of the defendant to lodge a caveat had the consequence that the plaintiff had the “better equity”.
His Honour’s reasoning provides a good example of how one is to analyse all the circumstances of the case (including the impact of the failure to caveat) to ascertain if postponing conduct is present.
[64] Having considered all of the circumstances of the case, I have come to the conclusion that the plaintiff has the better equity. The failure of the defendant to promptly lodge a caveat on the title to the Chipping Norton property left the owners of the property in a position to represent that the property was not subject to a charge in favour of the defendant. That is what effectively occurred when the finance broker approached the plaintiff seeking finance. The broker put to the plaintiff that a loan could be secured over the Chipping Norton property, which was valued at about $1 million and had “$600,000 owing against it”. That figure was plainly a reference to the first mortgage. There was no mention of a charge in favour of the defendant. There is no suggestion that the existence of that charge was otherwise disclosed to the plaintiff. In this regard, I note further that cl 3A.2 of the mortgage granted to the plaintiff contains a confirmation that the property was “unencumbered other than as disclosed on the title search”.
[65] The evidence is clear that the plaintiff proceeded in reliance upon the results of the two title searches which relevantly showed only the registered first mortgage. In my opinion, it was reasonable in this case for the plaintiff to assume, based on those results, that no equitable mortgage or charge existed. That is to say, it was reasonably safe to make that assumption in the circumstances. A lender in the position of the plaintiff would not expect that an earlier lender would take the trouble to obtain second ranking security over the Chipping Norton property, yet not take steps to either have the relevant dealing registered or lodge a caveat claiming the interest. It was not put to Mr Foster that he (or anyone else associated with the plaintiff), was aware of any general practice amongst lenders to the contrary. Whilst the existence of an earlier interest could not be entirely discounted, I think it was reasonably safe for the plaintiff to proceed on the basis that no such interest existed.
[66] It is clear that the defendant’s failure to lodge a caveat contributed to the assumption upon which the plaintiff proceeded. The failure was deliberate conduct undertaken by the defendant in its perceived commercial interests, even if it also accorded with a standard practice in the invoice financing industry. The conduct is explicable to a large extent by the fact that the plaintiff placed little or no reliance upon its security over the Chipping Norton property when it proceeded to provide finance to Madebra. The defendant knew that the failure to caveat might lead to the creation of later interests on the assumption that the defendant’s interest did not exist. There was in a sense a deliberate courting by the defendant of that risk. Lodging a caveat would, of course, have been a relatively simple and inexpensive step for the defendant to take.
[67] I consider that in all the circumstances the conduct of the defendant, in failing to lodge a caveat prior to the plaintiff acquiring its mortgage over the Chipping Norton property, was such that in fairness and justice the defendant’s earlier interest should be postponed to the plaintiff’s later interest; it would in my view be inequitable as between the parties for the defendant to retain the priority it would otherwise enjoy.
Key Takeaways
Remember that priority is not determined by reference to the date that a caveat is lodged, rather the date of creation of the interest.
While a caveat does not improve priority, it is one factor that, when considered in relation to all of the circumstances of the particular case, goes to displacing the first in time rule.
Always conduct thorough searches (i.e. Torrens register for real property) and make relevant inquiries with the party giving the interest before taking a property as security. You may find that the property is encumbered to a level that will not satisfy your interest.
Where you can, consider lodging a caveat at the earliest opportunity – don’t rely on standard industry practices on delayed lodgement.
[1] Butler v Fairclough (1917) 23 CLR 78, 84. Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132, [48].
[2] LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd [2019] NSWSC 150, [46].
[3] Elderly Citizens Homes of SA v Balnaves (1998) 72 SASR 210, 220 – 227.
[4] J & H Just (1971) 125 CLR 546, 554-555.
[5] One need only search the Torrens register, see the effect of s 43A(2) of the Real Property Act 1900 (NSW).
[6] FAI Insurance Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 522, 554 – 555.
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 counsel@vikrammisra.com or LinkedIn
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