In my previous article I considered the impact of caveats on the priority of unregistered interests, specifically in situations of a failure to caveat. It will be recalled that in some circumstances a failure to caveat will contribute to a finding of postponing conduct, displacing the ordinary rule – qui prior est tempore potior est jure. That article can be viewed here.
As with a failure to caveat, the withdrawal of a caveat can also have an impact on the priority of unregistered interests. This article will outline the effect of a withdrawal of caveat on postponing conduct, in circumstances where the caveator played an active role in the procurement of the withdrawal. It will also consider the outcome in circumstances where the cavetor was not involved in the withdrawal (i.e. a withdrawal procured by third party fraud).
The position in circumstances where the caveator played an active role in the procurement of the withdrawal of a caveat is straightforward. It was observed in Elderly Citizens Homes of SA Inc v Balnaves (1998) 72 SASR 210:
[48] The act of withdrawing the caveat gave notice that Mr Burton no longer sought to protect that interest. All that would be apparent to a person who searched at the Lands Titles Office was that the caveat had been lodged and later removed. That person would not know the reason why the caveat had been removed. The person searching the title would be entitled to assume that one reason why Mr Burton had failed to uphold the caveat was that the debt had been repaid. The lodging of the caveat puts a person searching the title on guard. The removal of the caveat indicates to those who subsequently search that the caveator no longer seeks to sustain the interest which the caveat had sought to protect. For these reasons, Mr Burton’s interest as equitable mortgagee was liable to be defeated by the holder of a subsequent interest who had searched and seen the registration of the caveat and its later removal
Similarly, White J held in Stone Leaf Capital Pty Ltd & Anor v Daly & Anor [2014] NSWSC 477:
[42] In any event, even if Ms Zhai is not afforded the protection given to a bona fide purchaser of the legal estate for value without notice through s 43A of the Real Property Act, her equitable interest as purchaser has priority to the plaintiffs’ prior equitable interest as equitable mortgagees. This is because the plaintiffs were guilty of postponing conduct by only belatedly lodging and then withdrawing their caveats. It was their conduct in withdrawing the caveats that induced her to purchase the property. Ms Zhai deposed that she purchased the property in the belief that there were no parties who might make claims against it.
What is clear from the authorities is that the inquiry is focussed on the conduct of the holder of the prior equity (i.e. the caveator) in causing or contributing to a belief on the part of the holder of the subsequent equity, at the time when they acquired it, that the prior equity was no longer in existence. Naturally, the holder of the subsequent equity must show that they relied on the register, evidencing the withdrawal, for postponing conduct to be made out[1].
But what about the situation where the caveat was withdrawn fraudulently, and the caveator had no knowledge of, or involvement in, the withdrawal? To answer this question we must go back to basic principles.
Their Honours in Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 (“Reliance Finance”) at 339 placed emphasis on the conduct of the holder of the earlier equity (i.e. the caveator), concluding 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.[2]
In Taddeo v Catalano (1975) 11 S.A.S.R. 492 the claim of the holder of the subsequent equity to priority was held by Jacobs J to fail by reason of having had notice of the prior equity. Again, the focus is on the conduct of the holder of the prior equity. In Wu v Glaros (1991) 55 SASR 408 at 415 Olsson J said:
… if the holder of the subsequent equity acquired it with notice of the prior equity, his claim for priority necessarily fails in any event, unless it can be shown that the possessor of the prior equity has been guilty of some act or omission which has conducted 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 no longer in existence.
What can be distilled from the above case law is that equity looks to the conduct of the caveator. If a party lodged a caveat, it was withdrawn fraudulently by a third party, and they had no knowledge of, or involvement in, the withdrawal, it would be very unlikely to be considered as postponing conduct. This is because they played no role in contributing to a belief on the part of the subsequent equity that the prior equity was no longer in existence.
This however, places the holder of the subsequent equity in an invidious position, as they may have taken their interest after performing a search of the title of the property and relied on free and clear title (i.e. confirmation that the caveat had been withdrawn by a registered dealing). One may argue that a finding of postponing conduct in these circumstances would not accord with the “fairness and justice” criteria. However, when considering the impact on the holder of the subsequent equity, regard ought be had to what the Court held in Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326, at 341 -342:
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 omission 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.[3]
Further, in Circuit Finance Australia Limited (Receivers and Managers appointed) (in liquidation) v Panella & Anor [2011] NSWSC 311 (“Circuit Finance”), the Court held at [13]:
When courts speak of ‘general considerations of fairness’ in the context of a priority dispute, the search is for conduct which is both blameworthy and causative: Heid v Reliance Finance at 341. Mere unfairness in the outcome is irrelevant unless there is also some tangible conduct by the holder of the first interest which caused the holder of the later interest to act on a false premise. This is why, in such a case, the conduct of the holder of the first interest is often described as ‘postponing’ or ‘disentitling’ conduct. It is not sufficient to point to the eventual outcome and contend that it is unfair. It may well be so by some moral standard. But the unfairness of the outcome is not a reason for departing from well-established legal principle …[4]
As such, it is submitted that mere unfairness in the outcome, without some form of conduct by the holder of the earlier equity (i.e. the caveator), is not enough to support a finding of postponing conduct to displace the ordinary rule – qui prior est tempore potior est jure. As explained in Circuit Finance [2011] NSWSC 311, the search is for conduct which is both “blameworthy and causative” on the part of the caveator, therefore if the caveator did not play an active role in the withdrawal, a finding of postponing conduct would be highly unlikely.
[1] See my previous article “But my Caveat is First! The Impact of Caveats on Priority of Unregistered Interests” for a detailed discussion of this requirement.
[2] See also: IAC (Finance) Pty Ltd v Courtenay [1963] HCA 64; (1963) 110 C.L.R. 550, 575-6.
[3] See generally Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409, 423.
[4] Cited with approval by Darke J in Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952, [90].
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
Disclaimer: The statements, analyses, opinions and conclusions in Legalwise Insights are those of the respective authors and not of Legalwise Seminars Pty Ltd which acts only in the capacity as editorial co-ordinator of the content in Legalwise Insights. No part of any article can be regarded as legal or financial advice. Although all care has been taken in the preparation of all articles, readers must not alter their position or refrain from doing so in reliance on any information contained therein. Neither the respective authors nor Legalwise Seminars Pty Ltd accept or undertake any duty of care relating to any part of Legalwise Insights.
Liability limited by a scheme approved under the Professional Standards Legislation