Pelenoy v Donovan Oates Hannaford Mortgage Corp [2004] NSWSC 4

These proceedings concerned competing claims to a sum of $385k paid into court by the first defendant. Those moneys were the balance of the proceeds of the sale of a property effected by the first defendant as lender. The property was held under the provisions of the Real Property Act 1900. The first defendant held the only registered mortgage and, as its debt was satisfied in full out of the proceeds of sale, it had no further interest.

The plaintiff was a building contractor. It undertook building works on land under a written contract with Sunfix. Pelenoy asserts an equitable interest in the land by virtue of a provision of the building contract purporting to create an equitable charge. By summons filed on 23 October 2002, Pelenoy claimed a declaration to that effect, acknowledging that the charge ranked in priority after the first defendant’s registered mortgage. On 11 December 2002, Sunfix, as second defendant, filed a cross-claim against twenty cross-defendants, being persons who had paid money to Sunfix as part of the financing of the building and development works in relation to the Silverwater property. The cross-claim sought a order against each cross-defendant that that cross-defendant not bring any action against the first defendant in respect of the balance of the proceeds of the sale made by the first defendant as lender, the object being to ensure that the net proceeds were freed from claims of right on the part of the cross-defendants.

The Court heared the claims of Pelenoy, the Watsons and the Smiths (the only 2 cross defendants who remained) to be recognised as the holders of equitable interests in the Silverwater property and as to the priorities of any such interests among themselves.

The form of mortgage given by Sunfix to the Watsons and the form of caveat executed by them did not identify the property in a way that would have enabled the Registrar General to register the mortgage or record the caveat upon presentation at the Land Titles Office. Under s.36(1D) of the Real Property Act, the Registrar General may refuse to accept a dealing or caveat unless it recites the distinctive reference allotted to the folio of the register or to the registered dealing which it intends to affect.

 This was not a matter of any particular significance in relation to the caveat. The Watsons could at any time have executed and lodged a new caveat document referring to the correct title reference. But it was a matter of significance in relation to the mortgage document dated 26 March 2001 given by Sunfix to the Watsons. It meant that that mortgage was never a mortgage in registrable form. Nor did it attain that status when the mortgagor became registered proprietor, as it did on 21 August 2001.
 
Assessment of Pelenoy’s claim

Pelenoy’s claim depended on Clause 28, which is a standard clause in such contracts. Clause 28 stated:

“The Proprietor hereby charges the parcel of land on which or on part of which the Works are to be erected with the due payment to the Builder of all moneys that may become payable to the Builder by virtue of this Contract or otherwise arising from the carrying out of the Works.”

This type of clause was effective to confer upon the builder “a valid equitable charge on the land” capable of supporting a caveat. In Gibson v Co-ordinated Building Services Pty Ltd (1989) 4 BPR 9639, Young J was able to say:

“The authorities clearly show that where a building contract has in it a clause such as the present cl. 28, the builder has an interest in the land which will support a caveat, see eg Griffith v Hodge (1979) 2 BPR 9474.”
The building contract was effective to create an equitable charge in favour of Pelenoy as security for the moneys referred to in the clause.

Assessment of the Watsons’ claim
 
The executed mortgage included in the documents received by the Watsons was not in registrable form. The Watsons were thus not armed with the means of creating a legal mortgage (by registration) at will and without assistance. The intentions of the parties were nevertheless clear. When the documents between Sunfix and the Watsons were executed on 26 March 2001, Sunfix was in the process of acquiring the Silverwater property. Contracts had been exchanged on 22 November 2000. Clause 7F of the deed of equity participation said that, pending completion of the purchase of the property, security for the Watsons was to be an unregistered second mortgage of the Asquith property; and that upon such completion Sunfix would grant to the Watsons “a registered joint second mortgage over the said development” .

Given clause 7F of the deed of equity participation, the “Security” definition therein and the intention manifested by the inclusion of the executed form of mortgage in the package of documents given to them on 26 March 2001, the Watsons could have obtained from the court, immediately Sunfix completed the purchase, an order compelling Sunfix to execute a new form of mortgage in a form identical with that executed on 26 March 2001, save for correction of the property description to refer to folio identifier 129/1019075 so that the mortgage was in registrable form.

The situation is thus one in which an equitable mortgage was created in favour of the Watsons. The documents executed on 26 March 2001, coupled with the giving of valuable consideration by the Watsons (who made the loan contemplated by those documents) and the subsequent but originally specified event of completion by Sunfix of its purchase of the land, caused the Watsons to be regarded in equity as mortgagees on the basis discussed by Mason CJ, Brennan J, Deane J and McHugh J in Chan v Cresdon (1989) 168 CLR 242 at 256-257 by reference to observations of Isaacs J in Barry v Heider (1914) 19 CLR 197 at 216 to the effect that a right to have a registrable instrument executed and registered is itself an estate or interest in the land. Equity regards as done that which ought to have been done in fulfilment of Sunfix’s promise that the Watsons were to have a registered second mortgage of the Silverwater property upon completion of Sunfix’s purchase of that property.

The Watsons must accordingly be regarded as having become equitable mortgagees of the Silverwater property when, on 10 August 2001, completion took place under the contract between Silverwater Estate Pty Ltd as vendor and Sunfix as purchaser.

Assessment of the Smiths’ claim

The Smiths, like the Watsons, were the recipients of a promise by Sunfix to create in their favour a registered second mortgage of the Silverwater property upon completion of Sunfix’s purchase of that property. The Smiths advanced the contracted sum upon the faith of that contractual promise and, although they did not receive an executed mortgage document of the kind given to the Watsons, the promise itself, coupled with their giving valuable consideration, means that the Smiths also became equitable mortgagees of the property.
In the Smiths’ case, however, there was a difference. Although the contractual promise was that the mortgage would be given upon completion of Sunfix’s purchase, the reality was that such completion had already occurred. The agreement between Sunfix and the Smiths was made on 2 November 2001. Completion of the purchase occurred on 10 August 2001 and Sunfix became the registered proprietor of the land on 21 August 2001. It follows that the Smiths’ equitable mortgage arose immediately upon the giving by Sunfix of the relevant contractual promise by means of the agreement of 2 November 2001.

The competing interests

Each of Pelenoy, the Watsons and the Smiths thus attained an equitable interest in the Silverwater land, in the first case by way of equitable charge and in the second and third cases by way of equitable mortgage. The distinction between the two was described by Harper J in Crampton v French [1996] ANZ ConvR 156 as follows:

“An equitable charge over land is a creature with which the law of securities has a long familiarity. Where the land in question is under the Transfer of Land Act, an equitable charge is distinguished from an equitable mortgage in that the latter does, but the former does not, carry with it an entitlement to foreclose on default and (at lease if that were the intention of the parties) to registration on the appropriate Certificate of Title: where the relevant intention is present, and perhaps in other circumstance as well, an equitable mortgagee may compel the mortgagor to execute a legal mortgage which may then be registered pursuant to Division 9 of Pt 4 of the Act. An equitable charge, however, “is a security which does not create a legal estate, but only confers an equitable interest in the land upon the creditor”: Halsbury’s Laws of England (4th ed) volume 32, para406. It is not capable of giving rise to a registrable instrument. The legislation does not make provision for such registration.”

For present purposes, however, this distinction is unimportant. The significant point is that each of Pelenoy, the Watsons and the Smiths had an equitable interest. It therefore becomes necessary to determine the priorities of the respectable equitable interests.

Two potentially complicating factors were recognised as irrelevant. First, the finding that the form of mortgage in favour of the Watsons was not in registrable form meant that questions arising under s.43A of the Real Property Act (and, more particularly, the question whether the Watsons’ interest is to be regarded as a legal interest) were left to one side. Second, Pelenoy was the only one of the three parties to lodge a caveat. But its caveat was lodged some time after that day, having been duly stamped on 21 May 2002. That caveat was accordingly not recorded on the title when the Watsons and the Smiths entered into relevant contracts with Sunfix or when their equitable interests arose. Any potential that the existence of a caveat may have to represent a source of notice relevant to assessment of competing priorities therefore need not be considered.

There is no suggestion that any of Pelenoy, the Watsons and the Smiths acted otherwise than in good faith in acquiring the relevant equitable interest. Nor has it been shown that any of them had, at any time before acquiring an interest, either actual or constructive notice of the interest of any of the others of them. That being so and the competing interests being unregistered interests which are equitable only, the equitable interests accordingly take priority according to the dates of respective creation. The Watsons’ interest was earliest in time. That interest arose on 10 August 2001 when Sunfix’s purchase of the Silverwater property was completed, the source of the interest being the documents of 26 March 2001. Pelenoy’s interest arose next. It was created by the building contract of 1 November 2001. Sunfix was the registered proprietor of the land at that point. Pelenoy’s equitable interest arose immediately the building contract was made. The Smiths’ interest was the last to arise, having been created by the agreement with Sunfix dated 2 November 2001. It follows that the equitable interest of the Watsons ranks in priority to the interest of Pelenoy and the interest of the Smiths; and that the interest of Pelenoy ranks in priority to the interest of the Smiths.

What is secured by the Watsons’ equitable mortgage?

If the executed but unregistrable form of mortgage dated 26 April 2001 is accepted as a comprehensive statement of the terms of the Watsons’ equitable mortgage, one further question needed to be addressed. The form itself does not say what the mortgage secures.
 
Campbell J began his search for the annexure A by quoting the observation of Gleeson CJ, Gummow J and Hayne J in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 that interpretation of a written contract involves:

“… the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”….“A contact is read in a way which will result in a sensible and businesslike meaning”

If a contract is open to two constructions it will receive that construction which will avoid consequences which are capricious, unreasonable, unjust or inconvenient. A fundamental principle is that the intention of the parties is to be ascertained from the instrument as a whole and that this intention when ascertained will govern its construction.

The form of mortgage given to the Watsons in respect of the Silverwater property formed part of the bound booklet that also contained the deed of equity participation carrying the same date as the form of mortgage. The two were obviously intended to be read together. Here, as in the case before Campbell J, application of the relevant principles concerning interpretation of contracts lead to the result that the deed of equity participation was intended by the parties to be annexure A to the form of mortgage.The executed but unregistrable form of mortgage dated 26 April 2001 in respect of the Silverwater property must be taken to have been intended to operate as a security for payment of the moneys owing by Sunfix to the Watsons under the deed of equity participation.

The liquidator’s position

The liquidator of Sunfix contended that he was entitled to a lien on the funds in court to recoup some of his costs and expenses in relation to the property and of the proceedings. None of the other parties who appeared took issue with the notion that the liquidator should have an appropriate sum for costs and expenses in priority to the claims of those parties upon the funds. There is, however, the question of quantification. The parties were asked to agree an amount or if not, be referred to a registrar.

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