Peters v Lithgow Forge [2010] NSWSC 283

A solicitor and client fell out over unpaid fees and, after assessment, the solicitor entered judgment against his client in the sum of $180,000. The client was associated with a company called Lithgow Forge and after some negotiation between the solicitor and the client a caveat was placed on the title, a property owned by Lithgow Forge.

This came about because the client wrote to the solicitor:

We do want to cooperate and get you paid… if that doesn’t work out then we will give your firm a first mortgage on the property.

To which the solicitor replied:

That is encouraging news from you. Can you let me know by Tuesday whether you agree to giving us a caveatable interest – we would of course release the caveat on the earlier of payment and it will not interfere with your attempts to refinance the property to enable you to pay us. If you are not willing please let me know why not. You might let me know who your lawyer is so that I can liaise with him regarding the caveat.

The client emailed:

We received the email with Caveat. We will return all to you via PDF and hard copy via FEDEX on Monday.

The solicitor emailed:

OK I take it that is an acceptance of the terms of the caveat. I will go ahead and register it in anticipation of receiving the signed document.

The caveat described the estate protected as:

An express agreement that the registered proprietor shall not register any dealing in respect of the Land unless and until it has the written consent of the Caveator, which consent may be withheld until payment to the Caveator of the amount due under New South Wales Supreme Court Judgment dated 25 August 2008 (14330/2008).

Lithgow Forge sought to remove the caveat on the following grounds:

  1. that there was no consideration given for the granting of the caveat or for any agreement to charge the Lithgow property;
  2. that the caveat instrument does not constitute a valid agreement to charge the Lithgow property;
  3. that on their proper construction the form of the charge and the email correspondence preceding it, merely express an agreement to lodge a caveat rather than an agreement to create an interest by way of equitable charge;
  4. that even if the caveat is to be construed as arguably creating an equitable charge over the Lithgow property, the interest so created is not enforceable as it does not meet the requirements of s 54A of the Conveyancing Act.

The judge noted that it was not for him (at an interlocutory stage) to finally determine these questions but rather only to decide whether or not there is a serious question to be tried.

1. Lack of Consideration
The argument that the agreement to create an equitable interest in the property was not supported by any consideration and was disposed of by the court noting that a promise not to enforce a valid claim, is good consideration, for a promise given in return.

2. Was an Equitable Charge Created?
The court noted:

An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter upon the mortgagee, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so.

Then applying this test found there was arguably a charge created:

No words of mortgage are used. Typically equity looks to the substance of the underlying transaction. It is possible to argue here that the form of words in the caveat are a specific appropriation of the Lithgow property to the discharge of the debt. There is at least arguably here an appropriation through the linkage of control of the Lithgow property to the payment of the judgment sum. Although a little diffuse, the intention is relatively clear.

His Honour also quoted the following circular argument to further bolster his reasoning:

A caveat cannot be entered against land unless the caveator has the relevant proprietary interest in the land. Therefore, unless there be evident an intention to the contrary, the grant to the creditors of an authority to lodge a caveat on the relevant property carried with it by implication such an estate or interest in land as was necessary to enable that authority to be exercised. There was, in the present case, no intention to the contrary. Indeed, it might be thought to involve deception or worse to authorise the lodgment of a caveat but to withhold the creation of the interest in the land necessary for that to be done.

3. Mere Agreement to Lodge a Caveat?
The argument was made that the agreement to lodge a caveat was merely goodwill. His Honour noted that although expressions of “goodwill” do appear in the correspondence:

In my view there is more than just that in the correspondence, the email correspondence contains requests for action, stipulations and the intimation of consequences that will follow if agreement to lodge a caveat does not occur that are inconsistent with mere expressions of goodwill.

4. Section 54A of the Conveyancing Act
s 54A Conveyancing Act requires “some memorandum or note” of the agreement “in writing and signed by the party to be charged.” The Lithgow Forge argued that the actual form of the caveat was not signed on its behalf. His Honour dismissed this argument noting:

Compliance with s 54A may be achieved by documents which are created not at the time of the transaction in question but which were nevertheless created before the commencement of proceedings. The memorandum may be made at any time before the relevant proceedings are instituted. There is in this case a signed document evidencing the agreement the firm relies upon. What Mr Wieland signed in this case was Schedule 1 of the caveat, which is the very source of the argument that an equitable charge is created in this case.

His Honour then concluded there was a serious question to be tried in relation to the existence of an enforceable equitable charge in the property and extended the caveat until further order.

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