Aged Care Services v Kanning Services [2013] NSWCA 393

This case concerned a priority dispute between an unpaid supplier to the owner of land and a subsequent joint venturer with the owner to develop certain land for the building of a retirement village. The owner acknowledged the supplier’s debt and agreed that the supplier would be entitled to lodge caveats over the property until a mortgage was executed. Pursuant to the later joint venture agreement, the joint venturer was to provide funds to facilitate the purchase of a further lot and to discharge the bank mortgage on the existing lot in return for an equitable charge over both lots. The joint venturer made a part payment to discharge the mortgage and agreed to accept caveatable interests over that property and the director’s property. The joint venturer claimed that it was entitled to be subrogated to the security right of the bank, and thus to be treated in equity as if it had that security in which case its interest would prevail over the supplier’s earlier equitable interest arising under the owner’s promise to execute a mortgage. The court rejected the joint venturer’s claim for subrogation, finding that the contrary had been shown and held that the earlier equitable interest prevailed over the later interest, which was assumed to be equitable. The joint venturer appealed.

Subrogation
Where a third party has paid off a mortgage, he or she is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit.

The Court of Appeal agreed with the lower court that payment was pursuant to the joint venture agreement. The Court of Appeal rejected the argument that payment could not be regarded as being made “under or pursuant” to the joint venture agreement, because there was no express term requiring payment of any particular sum to discharge the mortgage, nor was there any provision requiring part payment. The character of the payment was undoubtedly in part payment of the whole sum owing under the joint venture agreement.

The Court of Appeal also noted that the joint venture agreement did not provide for security to be provided upon the mortgage being paid out but only upon payment of the whole sum. There was simply no intention under the joint venture agreement that the joint venturer would receive security upon the mortgage being paid out. The Court of Appeal said:

The present case is not one of failed security intended to be provided upon the discharge of the mortgage. Whatever equitable rights may have arisen upon failure of the joint venture, they do not include a claim of subrogation to the mortgage.

The Court of Appeal found no error in the lower court’s finding that the presumption in favour of subrogation had been rebutted. The authority given to lodge a caveat in discussions between the joint venturers carried with it by implication the grant of an equitable charge. The joint venturer received what it bargained for when it paid out the mortgage. It obtained an equitable charge. There was no inequitable discharge of the owner’s obligations to the bank.

Priorities
The general rule of priorities between competing equitable interests is that the first in time prevails.

The Court of Appeal found the priority issue to be a straightforward issue of competition between an earlier equitable interest and a later assumed equitable interest under the joint venture agreement and held that the earlier in time prevailed. The Court of Appeal found no postponing conduct by the supplier, either by failing to perfect its security, or its failure to maintain a caveat because the joint venturer did not discharge the mortgage on the faith of the register, or in reliance on the absence of any caveat and the supplier had no choice but to let his caveat lapse because its interest could not have prevailed over the bank’s interests as first registered mortgagee.

The appeal was dismissed.

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