Property Law Topic 13

1. Property Law Topic 13 Priorities :Review role of caveats High Court priorities cases Victorian cases

2. Review from last handout • Butler v Fairclough • failure to caveat – a reason in itself to postpone the interest • Abigail v Lapin • Failure to caveat part of general query as to conduct of first in time interest holder • J & H Just Holdings v Bank of NSW • Failure to caveat not of itself as basis for postponement. • Caveat = not notice – failure to caveat does not mean that no interest is claimed.

3. J & H Just • Absence of a caveat is not notice to all the world that there is no prior equitable interest: • “To say that would … be to equate the noting of a caveat in the register book with the registration of a dealing: it would make competing equitable interests depend not upon priority of creation in time, but upon priority of the lodgement of caveats.”

4. Cont. Held: • Failure to caveat did not necessarily mean priority is lost. • There may be situations in which failure to caveat may combine with other circs to justify view that act or omission on part of earlier interest holder contributed to belief of subsequent holder when acquiring interest that no earlier equitable interest existed. • Bank’s failure to caveat did not make it inequitable that bank retain priority.May be situations in which such a failure may combine to justify loss of priority. • Note bank held Duplicate C. Title – common conveyancing practice – thus had another means of protection other than caveat.

5. “Reasonable forseeability” and caveats • Cases – High Court • IAC Finance v Courtney • Heid v Reliance Finance Corporation Pty Ltd • Test for priority incorporates concept of whether it is reasonably foreseeable, ie a natural consequence, that the conduct of first in time interest holder, ie by ‘arming’ 3 party will allow creation of later equitable interest

6. IAC Finance v Courtenay Review facts to this point. Before the instruments were registered, the purchasers [Courtney] commenced proceedings claiming that they were entitled to have the transfer to them registered ahead of the transfer to Denton Subdivisions. • What was the basis of this claim? • Characterise the nature of interests of the various parties at this point. • Are they legal or equitable? • Ignoring any questions of postponement, which interest prevails? • Which parties, if any, could caveat their interests?

7. IAC Finance v Courtenay • The crucial question- whether Courtenay’s prior equitable interest under a contract of sale should be postponed and what was the significance of the failure to caveat. Kitto J • Relied on Abigail – the practice of giving the documents to the vendor’s solicitor in these circs was normal conveyancing practice. • Test is whether the conduct of the party holding the first in time interest was such that the creation of a subsequent interest was a natural consequence of the party’s action. Kitto J. • The test is a reasonable forseeability test, ie first in time should only lose priority if it is reasonably forseeable that a competing later interest might be created.

8. Cont. Applied Abigail v Lapin [1934] AC 491: • “the possessor of the prior equity is not to be postponed to the possessor of a subsequent equity unless the act or omission proved against him 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” . (Kitto J at 576) • The question was not whether anything the purchasers could possibly have done would have prevented Denton Subdivisions and IAC being deceived by Austin’s solicitors (for example, lodge a caveat)

9. Cont. • Rather, it was not reasonably to be foreseen by the purchasers that a third party (Denton Subdivisions and IAC) might, without inquiring of them (the purchasers), part with money on an assumption that, contrary to all ordinary experience, their transferor’s solicitor (Austin’s solicitor) had their (the purchasers’) authority to withdraw from registration the transfer which to all appearances they were absolutely entitled to have registered. • The mere lodging of the transfer gave clear notice that the purchasers’ interest had come into existence, and put persons in the position of Denton Subdivisions and IAC upon inquiry as to whether the interest had ceased.

10. Applying IAC ‘test’ to facts Questions you would need to consider: • What’s normal conveyancing practice – are there other means of ‘protection’ beyond a caveat? • What does natural consequence mean? • Reasonable forseeability might be difficult to determine but related to particular facts and accepted practices. • Summary - failure to caveat not =loss of priority as not reasonable to assume that conduct will allow later equitable interest.

11. Reasonable forseeability of conduct • Note: Compare IAC v Courtenay and Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326. • How can you distinguish the conduct of the parties there?

12. Heid v Reliance Finance Corporation Pty Ltd Held Heid’s priority as the earlier claimant was lost: • by employing and relying upon a person who was not a solicitor and who was also employed by the purchaser; and • by handing over a transfer acknowledging payment of the full purchase price and the certificate of title, Heid had armed the purchaser with the capacity to represent itself as the true owner and to engage in fraudulent conduct. • The risk of this occurring was reasonably foreseeable (Mason and Deane JJ).

13. Different approaches Gibbs and Wilson JJ • Regarded the issue as one of estoppel • If ‘the owner of property clothes a third person with the apparent ownership’ ie giving Gibby [false solicitor] the C of T, or the principle that a person who hands over title deeds to an agent with authority to deal with the property in a restricted manner cannot rely on the restrictions.

14. Cont. • ie the transfer was the representation allowing later interest to be created- armed Connell Investments ‘with the power of going into the world under false colours’. • Reliance Finance acted to its detriment on the assumption, to which the Heid’s conduct had contributed, that no adverse equitable interest existed, Heid was estopped from setting up his equitable interest. • As a result, Heid’s failure to caveat his interest was not itself fatal to his claim – it was other factors that led to his interest being postponed.

15. Heid cont. Mason and Deane JJ • Estoppel or general principle of preference to the better equity in the circs, especially the behaviour of the first in time. (ie broader theory) • Can’t accommodate all of the cases of postponement of an equity under the estoppel umbrella. • Concerned with those acts during the carrying out of which it is reasonably forseeable 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. • Mere failure to caveat does not in itself lead to loss of priority

16. Cont. • [T]he holder of the first equity is bound by the natural consequences of his positive acts. • “ It[no caveat lodged] is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority. In deciding whose is the better equity in this case it is necessary to ask whether there has been an act, neglect or default of the kind mentioned on the part of the appellant.” Here – two actions of the appellant: • Transfer containing acknowledgement of receipt and leaving transfer and authority to collect title with Gibby • Knowing that Gibby was an employee of purchasing company, Heid should have reasonably apprehended that there was a risk.

17. Theoretical bases for granting priority to the later interest Mason and Deane JJ – • traditional analysis is that postponement depends on estoppel: that some conduct of the holder of the earlier claimant is regarded as a representation inducing detrimental reliance by the later claimant. They concluded that it was not possible to accommodate postponement cases within the estoppel rubric. • Instead they adopted a broader approach that takes into account all reasonably foreseeable consequences of the earlier claimant’s conduct: that is, the claimant’s conduct is relevant if 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’.

18. Caveats as ‘Notice’ • Should the lodging of a caveat be treated definitive of priority ie as notice. This would therefore suggest routine caveating where equitable interests arise and an associated conveyancing practice of searching the register for caveated equitable interests. • Is there anything (apart from consistent authority since Butler v Fairclough) that would make such a change in the priority rule an undesirable thing? • Would such a change be consistent with the objectives of Torrens legislation?

19. High Court - the effect of caveats Summary • Butler v Fairclough takes the view that failure to caveat of itself results in postponement whereas Abigail v Lapin, J & H Just states that failure to caveat is just one of the circumstances that must be considered. • IAC, Heid – broad test of better equity; failure to caveat one factor in consideration of conduct and whether reasonably forseeable conduct would allow creation of later interest w/o awareness of earlier equitable interest. • On balance, the cases suggest that failure to caveat will not of itself result in a loss of priority for an earlier equitable interest

20. Victorian courts • Osmanoski v Rose[not starred in RG] • Butler type approach – failure to caveat leads to loss of priority • Jacobs v Platt Nominees Pty Ltd • AVCO Financial Services v Fishman

21. Osmanoski v Rose • On the facts a purchaser who did not lodge a caveat to protect her interest was postponed to the interest of a later purchaser. Osmanoski’s interest was postposed because she had not lodged a caveat. Her inaction armed the registered proprietors with the capacity to defeat her equitable interest. • Rose had done nothing that could be said to be imprudent but had relied upon search of register. In the circumstances, Rose was entitled to expect to find a caveat if there were any prior equitable interest. • Contrast J& H Just and Heid per Mason and Deane JJ.

22. Cont. • Osmanoski - A person who has an equitable interest must lodge a caveat in order to retain his or her priority. • See earlier discussion re role of caveats , registration and priority.

23. Jacobs v Platt Nominees Pty Ltd • Failure to lodge a caveat in relation to an option to purchase did not lead to postponement of that interest to the interest of a purchaser under a later contract of sale. • However note rather special facts of this case as to why daughter [Jacobs] did not lodge a caveat to protect option to purchase parent’s property. • Competing interests – option to purchase and later equitable interest arising under a contract of sale.

24. Jacobs cont. Estoppel analysis: • The purpose of a caveat was not to give notice to the world and therefore a failure to lodge a caveat could not be seen as a representation to the world by the holder of the prior interest that there was no such interest. • Although the normal practice would be for an option-holder to lodge a caveat when the option was granted and/or exercised, this was not invariably done. • It was not invariably the practice for a purchaser to search the title prior to entering into a contract to purchase land.

25. Cont. • The effect of the statements required by section 32 of the Sale of Land Act 1962 was that a purchaser would expect to discover restrictions on the registered proprietor’s title from the statement rather than from a caveat. • As a result, there was no relevant representation that was relied on. • Even if there was a representation, there was no detriment: Country Comfort could rescind the contract to purchase the motel.

26. Jacobs – analysis of broader approach Based on analysis of Mason and Deane JJ from Heid: • In cases of competing equitable interests primary consideration must be given to the conduct of the first equitable interest holder. Estoppel and negligence are both relevant. • In this case Jacobs’ failure to caveat was reasonable and she retained her priority. • The Court regarded the special circumstances in this case as relevant to identifying what were the reasonably foreseeable consequences of Jacobs’ conduct. She was entitled to assume that Platt Nominees would not enter a contract to sell the property while her option was on foot. As a result, ‘it was not reasonably foreseeable that her failure to lodge a caveat exposed herself … to a risk of later sale’ to Country Comfort.

27. AVCO Financial Services v Fishman • Where a registered first mortgagee who held the certificate of title did not register or lodge a caveat to protect a subsequent mortgage, it was not postponed to a later unregistered mortgage. An earlier equity will have priority unless some action or neglect by the holder means it would be inequitable for the later equity to be denied priority. • The Bank’s failure to lodge a caveat was not such a neglect. • The current view seems to be that the essential purpose of a caveat is protective; it is not to give notice

28. cont • AVCO took the risk by proceeding without all the relevant information. In the case of Torrens Title land, a registered first mortgagee would usually be expected to hold or control the duplicate certificate of title. Moreover, it is notorious that registration of a second or subsequent mortgage cannot ordinarily be procured without production of the duplicate certificate of title. • AVCO was not entitled to rely at all on the absence of any caveat to indicate that there had been no unregistered second mortgage given to the bank.

29. IGA Distribution v King & Taylor • Priority issues re agreement for lease and interest under a contract of sale. • Effect of failure to lodge a caveat – should first in time interest be postponed? – No. • Notice – constructive /imputed notice • Did the second in time interest holder have actual or imputed notice of earlier interest – yes imputed.

30. Summary of Cases • General rule in a competition between two unregistered (and therefore equitable) interests is that the earlier interest will prevail unless there is some act, neglect or default by the holder of the earlier interest as a result 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: Heid per Mason and Deane JJ.

31. Summary Cont. • Failure by the holder of the earlier interest to lodge a caveat will not necessarily result in postponement of earlier interest: Heid, Jacobs; contra Butler. • A caveat is protective rather than a means of giving notice: Just, AVCO; contra Osmanoski. However, such a failure may combine with other factors to postpone the earlier interest: Just. It is necessary to look at all the circumstances: Jacobs, Just, Heid.

32. Cont. • It is relevant to ask whether creation of the second interest was a reasonably foreseeable result of some act or neglect by the holder of the first interest: Heid per Mason and Deane JJ, Jacobs. • The first claimant may be estopped from denying the later interest: Heid per Gibbs CJ and Wilson J.

33. Cont. • The first claimant will not be postponed where he or she was entitled to rely on other protection of his or her interest. For example, a registered first mortgagee who holds the certificate of title will be entitled to rely on that so that his or her second unregistered mortgage will not be postponed to a later equitable interest: AVCO. • Whether lodging a caveat is or is not common practice will depend on the nature of the transaction and the evidence led by the parties about the general practices of prudent conveyancers. See Jacobs.

34. Caveats and notice by subsequent equitable interest holder • The earlier claimant will not be postponed if the later claimant did in fact know about the earlier claimant’s interest or there is constructive/imputed notice IGA Distribution • - So the earlier claimant will not be postponed if the later claimant did search the register and saw the caveat.