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PROPERTY LECTURE 8

Dr Glen Anderson

Torrens Title II: Unregistered Interests, Caveats and Priorities Topics 1. Conceptual Introduction 2. Competing Registered Interests 3. Unregistered Interests 4. Unregistered Interests and Priorities 5. Registered Interest and Later Unregistered Interest 6. Competing Unregistered Interests 7. Earlier Mere Equity and Later Unregistered Interest Of these sections, competing unregistered interests is the most complex. 1. CONCEPTUAL INTRODUCTION The previous lecture examined the fundamentals of the Torrens system, with emphasis on the indefeasibility of title and its various exceptions such as fraud, in personam actions, overriding legislation and short term tenancies not exceeding three years. Today’s lecture continues with the analysis of the Torrens system by focusing on unregistered interests, the operation of caveats and priorities. The Torrens system is often understood as synonymous with registered interests in land. This stems from the centrality of the Torrens Register and judicial remarks alluding to this fact such as those rendered by Barwick CJ in Breskvar v Wall (1971) 126 CLR 376 at 385-386, namely, that the Torrens system is not one of, “registration of title but a system of title by registration.” However, unregistered interests are also accommodated within the Torrens construct. Where a property interest is unable to be registered within the Torrens system, it will be classified as an unregistered interest and will be subject to the potential protection of caveat. Before shifting to this primary focus, however, it is first necessary to briefly discuss the resolution of priority disputes between competing registered interests. 2. COMPETING REGISTERD INTERESTS

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Rules for Priority Section 36(9) of the Real Property Act 1900 (NSW) provides that where two interests in Torrens land are registered, their priority will be determined by the date of registration – not execution. 36 Lodgment and registration of documents […] 9) Dealings registered with respect to, or affecting the same estate or interest shall, notwithstanding any notice (whether express, implied or constructive), be entitled in priority the one over the other according to the order of registration thereof and not according to the dates of the dealings Section 36(5) of the Real Property Act provides that the order of registration is determined by order of lodgement in “registerable form”. A document will be in “registerable form” if it is completed and executed in accordance with the Real Property Act. It is irrelevant that a caveat on the title may prevent its registration at the date of lodgement: Re Rush [1963] NSWLR 78; 80 WN (NSW) 58 at NSWLR 80 per McLelland J. 3. UNREGISTERED INTERESTS Introduction Before examining the resolution of priority disputes involving unregistered interests in Torrens land, it is first necessary to ask: What is an unregistered interest? If one were to read section 41 of the Real Property Act in isolation it might seem that unregistered interests were precluded under the Torrens system: 41 Dealings not effectual until recorded in Register (1) No dealing, until registered in the manner provided by this Act, shall be effectual to pass any estate or interest in any land under the provisions of this Act.... This was the view taken by very early Torrens decisions. In Lange v Ruwoldt (1872) 7 SALR 1 Koop had died with the registered title to Torrens land in Mount Gambier. Under his will, Koop devised all his real and personal property to his widow for the benefit of their two children until they should come of age, when, if she had not remarried, it was to be divided between her and the children; if she had remarried, however, the whole was to go to the children. Three days before his death, Koop entered into an agreement with Lange to sell half the land at Mount Gambier for £528, of which £215 10s “was to be paid within seven weeks from the signing of the agreement, and the remainder within five years from the same date, bearing interest in the meantime at the rate of ten per cent per annum.” Lange had complied with these conditions by paying the sums stipulated to Koop’s executors. Meanwhile Koop’s widow had married Ruwoldt. Lange sought a declaration from the court that he was entitled to take the registered title to the property. The infant beneficiaries under Koop’s will expressed no objection to this course. The court ruled that Lange did not have the ability to take the registered title. It based this decision upon analogical reasoning between the Imperial Shipping Acts and Torrens legislation, finding that the dicta of Woods V-C in Liverpool Borough Bank v Turner (1860) 1 J & H 159; 70 ER 703 at 711-712, in which the Vice Chancellor indicated that equitable interests could not be created in ships, was applicable to the

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resolution of the problem at hand. This meant that as the contract for the sale of land with Lange was executory and not in the form prescribed by the Real Property Act, it passed no legal or equitable estate in the land. However, the argument that the Torrens system precluded the existence of unregistered interests was rejected in Barry v Heider (1914) 19 CLR 197. The case facts are, to say the least, convoluted. Barry had executed a transfer of his land in favour of Schmidt for £1200. As the land transferred to Schmidt was a subdivision of existing land, a new certificate of title had to be issued by the Titles Office. At the time of execution, Schmidt was unable to immediately register his interest as the new title had not been issued. Schmidt subsequently obtained a mortgage from Heider for £800, using the land transferred from Barry as security. Schmidt also obtained from Barry an authority addressed to the Registrar General asking that the newly issued certificate of title should be delivered directly to Heider. Schmidt also managed to obtain a second mortgage from Gale to the value of £400. Barry, however, subsequently contended that he had the right to have the transfer to Schmidt set aside on the grounds of fraud. The fraud claim centred on the fact that Barry had offered to sell the land for £4000 and that his signature had been forged to a final price of £1200. Barry further claimed that he had not been paid any of the purchase money by Schmidt. In effect then a number of interests were in contention with respect to the one parcel of Torrens land: Barry’s registered title to be reinstated on the fraud exception to indefeasibility; Heider’s yet to be registered equitable mortgage based upon a forged transfer to Schmidt and accompanying letter of authority; and Gale’s equitable mortgage. Barry claimed an injunction against Schmidt from registering his interest in the land and further argued that his registered title should not be subject to Heider’s and Gale’s equitable mortgages. The dispute was somewhat resolved in Barry’s favour; Schmidt was found to have committed fraud and his interest in the property was cancelled. Heider’s equitable mortgage, however, was left afoot and Barry was held to his representations to Heider. Issacs J summed up his reasoning thus: Mrs Heider lent her money believing and trusting to the accuracy of Barry’s own statements in the transfer, and Barry must be held to the truth of those statements as to her, or, as Lord Selborne said in the Citizens’ Bank of Louisiana v First National Bank of New Orleans [5 C. Rob., 155], he “shall be compelled to make them good.” The result was different with respect to Gale’s equitable mortgage. In what can only be described as a strange turn of events, Barry’s solicitor withdrew a caveat which had been lodged soon after Heider’s equitable mortgage was granted to Schmidt indicating that Barry held an equitable lien over the property for the unpaid purchase price against Schmidt. Griffith CJ (with whom Barton J agreed) held that Barry’s solicitor was authorized to withdraw (uplift) the caveat, particularly given that the land had not yet been noted on the register due to a delay in issuing a new title. Their Honours further reasoned, however, that in light of all the circumstances, Gale, after learning of the caveat and its withdrawal, should have made further enquiries as to whether Barry had in fact been paid the purchase price. Isaacs J reasoned slightly differently on this point finding that as Barry had not authorized the withdrawal (uplifting) of the caveat, he could not be estopped from denying Gale’s equitable mortgage. The Court held that Gale’s equitable mortgage was postponed to Barry’s equitable lien for the unpaid purchase money. In the course of argumentation, Barry’s counsel attempted to negate the two equitable mortgages by arguing that equitable interests stood outside the Torrens land system which was predicated upon a statutory scheme of registration.

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Two divergent (but mutually complimentary) views were put forth by Griffith CJ (with whom Barton J agreed) and Isaacs J to justify the operation of unregistered interests within the Torrens system. Griffith CJ at 206-207 preferred to argue for the operation of unregistered interests with reference to various provisions of the Real Property Act, namely, ss 86 and 72 (the latter of which is now repealed): Section 86 [of the Real Property Act] provides that whenever any person “interested in land” under the Act appears to be a trustee within the meaning of any Trustee Act, then in force, and a vesting order is made by the Court, the Registrar-General shall enter the vesting order in the register book and on the instrument evidencing the registered title to the land, and that upon such entry being made the person in whom the order purports to vest the land shall be deemed to be the registered proprietor. No restriction is made as to the cases in which the Court can make a vesting order under the Trustee Acts. That jurisdiction has always included case in which specific performance of a contract to sell land has been decreed by the Court. This, again, in an express recognition of an equitable claim or title to land as existing before and irrespective of registration. The provisions of the Acts relating to caveats embody a scheme expressly devised for the protection of equitable rights. The caveat required by sec. 82 [of the Real Property Act] to be entered by the RegistrarGeneral is one instance of the application of that scheme. Section 72 provides that any person “claiming an estate or interest” in land under the Act “under any registered instrument” may by caveat forbid the registration of any interest affecting such land, estate or interest. This provision expressly recognises that an unregistered instrument may create a “claim” cognisable by a Court of Justice, and the caveat is the means devised for the protection of the right of the claimant pending proceedings in a competent Court to enforce it. […] In my opinion equitable claims and interest in land are recognized by the Real Property Acts. Thus, because the Real Property Act contained statutory provisions which necessarily related to unregistered interests, the Act must incorporate unregistered interests. Isaacs J at 216 dealt also with the existence or otherwise of unregistered interests but focused specifically on s 41 of the Real Property Act, and contractual rights which may operate behind that statutory provision: The [Real Property Act] does not touch the form of contracts. A proprietor may contract as he pleases, and his obligation to fulfil the contract will depend on ordinary principles and rules of law and equity, except as expressly or by necessary implication modified by the Act…. [S]ection 41 [of the Real Property Act], in denying effect to an instrument until registration, does not touch whatever rights are behind it. Parties may have a right to have such an instrument executed and registered; and that right, according to accepted rules of equity, is an estate or interest in the land. Until that instrument is executed s 41 cannot affect the matter, and it the instrument is executed it is plain its inefficacy until registered – that is, until statutory completion as an instrument of title – cannot cut down or merge the pre-existing right which led to its execution. Isaacs J thus preferred to focus not on specific statutory provisions to ascertain the incorporation of unregistered interests in Torrens land, but instead looked to the capacity to contract prior to obtaining registration. Permeating Isaacs J’s reasoning is that a registered interest in Torrens land is, in contractual terms, an executed one, and that prior to execution of a memorandum of transfer an equitable (or unregistered) executory interest is typically created. As the right to create an executory interest in land derives from contract, and is not interfered with by the Real Property Act in any way, unregistered executory interests do not stand outside the Torrens

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system. The more theoretically orientated views of Isaacs J in Barry v Heider (1914) 19 CLR 197 at 216 have been reinforced in subsequent cases: Currey v Federal Building Society (1929) 42 CLR 421 at 448-449 per Isaacs J; Brunker v Perpetual Trustee Co Ltd (1937) 57 CLR 555 at 580, 581 per Latham CJ, 599 per Dixon J; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 256-257 per Mason CJ, Brennan, Deane and McHugh JJ. In addition to this reasoning, we might observe that other provisions of the Real Property Act, such as s 74F(1), implicitly suggest that unregistered interests in land are not precluded: 74F Lodgment of caveats against dealings, possessory applications, plans and applications for cancellation of easements or extinguishment of restrictive covenants (1) Any person who, by virtue of any unregistered dealing or by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land under the provisions of this Act may lodge with the Registrar-General a caveat prohibiting the recording of any dealing affecting the estate or interest to which the person claims to be entitled. It is clear, therefore, that s 74F(1) of the Real Property Act allows a person to lodge a caveat “by virtue of any unregistered dealing or by devolution of law or otherwise.” Are Unregistered Interests Analogous to Equitable Interests? Unregistered interests have been characterized as analogous to equitable interests. Exactly how analogous unregistered interests are to equitable interests is a matter of academic and judicial debate. As Moore, Grattan and Griggs have noted, for example: Over the years there has been considerable debate as to the precise nature of these “interests”. In early times there was support for the notion that rights created before, or outside, the Register were simply contractual or personal rights and did not give rise to any proprietary interest in the land. This view has received coherent support more recently. It places considerable reliance on the provisions referred to above [s 41 of the Real Property Act] which state that no estate or interest in the land can pass until registration. The far more widely accepted view, however, is that these unregistered interests are to be regarded as equitable estates or interests in the land. Moore, Grattan and Griggs, Australian Real Property Law, sixth edition, p. 290. (emphasis added). In Orr v Smith [1919] NZLR 818 at 827 Hoskins J remarked in relation to the New Zealand equivalent of s 41(1) of the Real Property Act that: [T]he contractual rights which an unregistered instrument relating to land creates cannot in strictness be called equitable estates or interests, although such a designation may be conveniently used so long as the effect of [s 41] is not lost sight of. A similar cautionary statement was recently rendered in Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545 at 559-560 by Gleeson CJ, Gummow, Kirby and Hayne JJ: With respect to the land registered under the provisions of [the Real Property] Act, references to vesting at law and vesting in equity are apt to mislead. The Torrens system is one of title by registration, not of registered title [Breskvar v Wall (1971) 126 CLR 376 at 385; Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245 at 264 [27]]. The assimilation of the registered title to a legal title may be convenient so long as it is appreciated what is involved. It is likewise with respect to the use of the term

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‘equitable’ to describe interests recognised in accordance with the principles of equity but not found on the Register [Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 256-257, 261]. Considerations of this type have led Butt to conclude that unregistered interests, although termed equitable interests for convenience, are perhaps better termed “an interest in the nature of an equitable interest.” This view is reinforced when it is considered that an unregistered legal interest may exist in the context of Torrens legislation. The most common situation where such an anomalous interest will arise is a lease not exceeding three years pursuant to s 23D(2) of the Conveyancing Act: such a lease is legal in nature but it may be unregistered and constitute an exception to indefeasibility of title under s 42(1)(d) of the Real Property Act. A priori, to simply equate unregistered interests with equitable interests can, at times, be a complete misnomer. Butt, Land Law, sixth edition, p. 761, footnote 165; See also Barry v Heider (1914) 19 CLR 197 at 208, 216 & 219. 4. UNREGISTERED INTERESTS AND PRIORITIES Priority Dispute Typology The following sections examine the three priority dispute types which involve unregistered interests, namely: • An earlier registered interest and later unregistered interest; • Competing unregistered interests; and • An earlier mere equity and later unregistered interest. Priority Disputes in the Torrens Context must be Approached with Caution Although many of the relevant principles applicable to these priority dispute types are sourced from cases applicable to the old system title context, we must always bear in mind that the Torrens system is distinct and the operation of caveats and certain legislative provisions, such as s 43A(1) of the Real Property Act, may ensure results which are unique. 5. REGISTERED INTEREST AND LATER UNREGISTERED INTEREST Introduction Registered interests will almost always take priority over later unregistered interests. The High Court reflected on this issue with regard to the underlying object of Torrens legislation in Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407 at 418-419 per Mason CJ, Dawson and McHugh JJ. Thus, registered interests will generally gain priority over unregistered interests: Re Davies [1989] 1 Qd R 48 at 54 per McPherson J (with whom Andrews CJ and Macrossan J agreed); Tzekas v Citibank Savings Ltd (unreported) WASC FC 10 February 1993. Butt, Land Law , sixth edition, p. 761. Exceptions Some exceptions to the rule that registered interests take priority over later unregistered interests include the following:

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• Where the earlier registered interest has fraudulently assisted the creation of the later unregistered interest – mortgages. • Where a later unregistered interest holder wins an in personam claim against the earlier registered interest holder, such as under circumstances of equitable estoppel. Exceptions thus arise on the basis of exceptions to Torrens indefeasibility. 6. COMPETING UNREGISTERED INTERESTS Introduction We have seen above that unregistered interests are generally regarded as analogous to equitable interests, or in the words of Butt, “interest[s] in the nature of equitable interest[s].” Therefore, in order to determine a priority dispute between two unregistered interests, prima facie it would seem that it is sufficient to apply the rules pertaining to competing equitable interests, which a...