The two parties to this litigation were cheated by a dead fraudster into lending money to his company on the basis that they would receive a mortgage or charge over the same property. The fraudster was in the pawn broking business. The first lender, an electrician, was granted a contractual right to register a caveat over the property. A caveat was signed in January 2010 and the first lender understood that the fraudster’s solicitors would lodge the caveat but it was not lodged. The solicitors deny these instructions and are not parties to the litigation. Subsequently, the first lender was alerted by an ex-employee of the fraudster who had resigned that the fraudster was arranging to get secured bank finance over all the company assets. At that time, the first lender found out that the caveat had not been registered and engaged a solicitor to lodge one on 26 November, 2010.
Meanwhile NAB, the second lender, loaned money to the fraudster on the basis of credit investigations which did not reveal any money owed or security granted by the fraudster. NAB’s $1.5m loan was made on 15 October, 2010 after a search of the title which did not show any caveat and was secured by a first mortgage to NAB which was intended to be registered. When the mortgage was lodged for registration on 7 December, 2010, NAB was made aware of the first lender’s caveat. The fraudster told NAB that the caveat would be removed but it was not. NAB lodged their own caveat. The fraudster defaulted on the NAB loan and NAB sought possession but it was to no effect because NAB was not a registered mortgagee. NAB delivered a lapsing notice to the first lender and the first lender sought a declaration that he was entitled to an equitable charge, which prevailed over any interest of NAB.
The court believed the testimony of the first lender and found that he was not sophisticated in the investment business. The court found that the first lender acted honestly but not prudently because he relied upon the fraudster’s solicitors to lodge the caveat and took 7 weeks to lodge a caveat after having been warned by the fraudster’s employee that the fraudster was seeking refinance. If he had acted promptly, the conflict with NAB would not exist. He had over eight months to lodge a caveat and a week after the fraudster’s employee raised the alarm.
The court also found that NAB had not acted prudently after advancing the loan in allowing over 7 weeks to pass before lodging the mortgage for registration. If they had acted prudently, their mortgage would have been registered before the caveat.
In a competition of priorities between equitable interests, the enquiry is to establish which is the better equity, and usually the earlier in time prevails unless the circumstances make it inequitable. Such circumstances may be found where some act or omission of the earlier interest (eg. the failure to lodge a caveat) had led the other to acquire his interest on the basis that the earlier did not exist. But failing to lodge a caveat does not necessarily mean that priority is lost.
The court found here that each party did not act prudently to protect its own interests but found that NAB had the better equity. The absence of the caveat caused NAB to lend. The court also noted that the NAB loan refinanced the Westpac loan and NAB was intended to become a first registered mortgagee in its place. So the electrician’s interest at all times was postponed to the interest of the first registered mortgagee. NAB’s claim succeeded on this ground.
Although it did not affect the court’s decision, the court found that section 43A of the Real Property Act did not protect NAB as a purchaser for value without notice with a dealing in registrable form because the mortgage was not registrable until it was stamped and the caveator consented to it.
The court noted that the first lender’s contractual right to register a caveat was not a grant of an equitable charge, which was to exist regardless of whether a caveat was lodged.
The court noted that NAB also had the benefit of subrogation in relation to part of its claim, as it had paid out the Westpac mortgage which was registered and had priority over the caveator’s interest. To the extent of the monies paid to Westpac, NAB was entitled to be placed in the position it would have been in had it taken an assignment of the Westpac mortgage and that mortgage had not been discharged.