FEDERAL COURT OF AUSTRALIA

Danthanarayana v GR8 Constructions Pty Ltd [2012] FCA 231

THE COURT ORDERS THAT:

1.    The Interlocutory Application filed by the applicants on 6 March 2012 be dismissed.

2.    The applicants pay the first, second and third respondents’ costs of and incidental to that Application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The applicants (the proprietors) are the registered proprietors of the whole of the land comprised in Block 5, Section 58, Kingston, A.C.T. (Vol 1830 Folio 25) known as “8 Waygoose Street, Kingston, A.C.T.” (the property).

2    By Building Contract dated 14 March 2008 (the building contract), entered into between the proprietors and the first respondent (the builder), the builder agreed to construct a three-storey residence on the property for the total price of $862,500 payable by way of progress payments, the quantum and timing of which were specified in the contract.

3    The second and third respondents are directors of the builder. The fourth respondent was the person who certified work under the building contract from time to time.

4    Building work commenced in April 2008.

5    By May 2009, the parties were in dispute. The proprietors alleged at that time that the building work under the building contract had not been completed and that the work which had been carried out up to that point in time was defective in a number of material respects.

6    On or about 3 June 2009, the proprietors purported to terminate the building contract on the ground that the builder had repudiated that contract by refusing to make good the allegedly defective works and by otherwise refusing to complete the work required under the building contract. For present purposes, I need not investigate the circumstances in which the building contract was terminated. The parties accept that that contract was validly terminated in early June 2009.

7    As at early June 2009, when the building contract came to an end, the builder contended that it was owed approximately $250,000 in unpaid progress payments due under the building contract. The proprietors, on the other hand, argued that they owed nothing to the builder because the cost of completing the incomplete work required to be carried out under the building contract and the cost of remedying the defective work carried out by the builder under that contract exceeded $250,000 by a substantial amount. The proprietors now contend that their damages claim is well in excess of $1,000,000.

8    On 8 December 2009, the proprietors commenced proceedings against the builder in the Supreme Court of the Australian Capital Territory (the Supreme Court) for damages for breach of the building contract. In those proceedings, they also alleged that the second and third respondents were liable for those damages. The fourth respondent was subsequently joined to those proceedings as an additional defendant party. Subsequently, the builder cross-claimed for the amount said to be due to it under the building contract.

9    On 17 June 2011, the Supreme Court proceedings were transferred to this Court.

10    On 3 June 2011, the Supreme Court ordered, by consent that:

UPON THE UNDERTAKING of the [applicants] by their Counsel not to sell or transfer or encumber their interest in Block 5, Section 58, Kingston Volume 1830 folio 25 until the determination of this proceeding or earlier leave of the Court, save pursuant to the existing registered mortgage.

1.    The application be dismissed.

2.    Costs be reserved.

3.    This order be without prejudice to the [first respondent] making an application for leave to lodge a further caveat.

4.    The [applicants] be directed to provide to the [first respondent] by 17 June 2011:

(a)    Evidence as to the position of their bank in relation to a caveat on the title;

(b)    Evidence of draw downs and payments to Solve Projects Pty Ltd.

11    In circumstances which I shall shortly explain, on 6 March 2012, the proprietors applied to this Court to be released from the undertaking given to the Supreme Court on 3 June 2011 (the proprietors’ undertaking). In the alternative, the proprietors sought an order that they have “… leave to refinance including the execution and registration of a mortgage over [the property]”. At the hearing, the proprietors did not press their claim for that alternative order. The proprietors’ application does not concern the fourth respondent and he did not appear at the hearing of that application.

12    The builder and the second and third respondents opposed the relief sought by the proprietors.

13    These Reasons for Judgment determine the proprietors’ application to be released from their undertaking.

The Context in which the Proprietors’ Undertaking was Given

14    Clause 31 of the building contract provides:

31.    CHARGE ON LAND

The Owner charges the Site with the payment to the Builder of all money payable to the Builder under this Contract or otherwise from the carrying out of the Works.

15    On or about 2 March 2011, after the building contract had been terminated, the builder lodged a caveat dated 2 March 2011 against the title to the property. By the caveat, the builder sought to prevent the registration of all dealings with the property. The nature of the estate or interest in the property claimed by the builder in the caveat was specified as:

Equitable interest pursuant to the ACT Home Building Contract dated 14 March 2008 between the Registered Proprietor and the Caveator whereby the Registered Proprietor charged the land with payment of all money payable under the Contract.

16    At the request of the proprietors, the Deputy Registrar-General for the A.C.T. issued a lapsing notice dated 28 April 2011 in respect of the builder’s caveat pursuant to s 107(2)(a) of the Land Titles Act 1925 (A.C.T.) (the Land Titles Act). That notice provided that the Registrar-General intended to remove the caveat from the register unless, within 14 days after service of the notice upon the builder, the Court otherwise ordered.

17    On 25 May 2011, which was within that 14 day period, the builder applied to the Supreme Court for an order that the caveat be extended until further order and for ancillary relief. In that application, the builder asserted that the proprietors owed to it “… more than $250,000 …” and that it had a claim for damages which, as at 25 May 2011, had not been quantified.

18    The builder’s application was returned before the Supreme Court on 26 May 2011. On that day, by consent, the Court ordered that the builder’s caveat be extended pursuant to s 107(2)(b) of the Land Titles Act until close of business on 3 June 2011.

19    On 3 June 2011, the Supreme Court made the orders and noted the undertaking which I have extracted at [10] above.

20    On 6 June 2011, the applicants applied to the A.C.T. Registrar-General to have their undertaking and the orders made on 3 June 2011 “registered” on the title to the property. The orders made on 3 June 2011 were noted on the title on the same day (6 June 2011). Similar steps were taken in respect of the orders made by the Supreme Court on 26 May 2011.

Some Additional Relevant Facts

21    The proprietors read and relied upon affidavits sworn by the second applicant on 1 June 2011, 6 March 2012 and 13 March 2012. The builder relied upon an affidavit sworn by its solicitor yesterday (14 March 2012). The proprietors also tendered a Deed Poll dated 14 March 2012 executed by each of them which I shall mark as Exhibit “A” in the proprietors’ application to be released from their undertaking.

22    The second applicant’s first affidavit established that:

(a)    The cost of the building works to be carried out under the building contract was to be financed in substantial part by loan funds provided by Westpac Banking Corporation (Westpac). This was so despite the fact that, in the building contract, the proprietors had stated that the cost of the works was to be paid from their own funds without the assistance of a lender.

(b)    As at June 2011, Westpac had a first registered mortgage over the property.

(c)    Between 28 March 2008 and 27 April 2009, progress payments totalling $661,000 were made by or on behalf of the proprietors to the builders. Of that sum, $631,000 had been advanced by Westpac.

(d)    On 4 September 2008, Westpac advanced to the applicants the amount of $353,898.51. (That advance was made in the same loan account as the account in which the advances totalling $631,000 were made. Presumably, all of the advances in that account are secured by the registered first mortgage granted over the property by the proprietors to Westpac.)

(e)    By 1 May 2009, the debit balance of the proprietors’ loan account with Westpac was $982,125. The second applicant did not suggest that, by early June 2011, that balance had been reduced. I infer that it had not. It seems, therefore, that as at 3 June 2011, the applicants’ debt to Westpac was of the order of $1 million.

(f)    In April and May 2011, difficulties had arisen between the proprietors and the replacement builder retained by them to complete and remedy the works on the property, Solve Projects Pty Limited (Solve Projects). In particular, Solve Projects was pressing for payment of certain outstanding invoices which the proprietors alleged that they could not pay without obtaining further advances from Westpac.

(g)    As at 26 May 2011, Westpac’s position was that no further advances would be made by it unless and until the builder’s caveat was removed and the title to the property cleared (save for its mortgage).

23    The first of the two affidavits sworn recently by the second applicant proved that:

(a)    According to the second applicant, the proprietors need to refinance their loan and current mortgage to Westpac “… in order to complete the building works …” on the property.

(b)    The proprietors wish to obtain a further advance of $304,000 which will be used to complete all outstanding works at the property.

(c)    The proprietors’ current debt to Westpac stands at $1,997,000.

(d)    The security for that debt is the mortgage over the property as well as a mortgage over the property next door (No 10 Waygoose Street, Kingston, A.C.T.). This latter property is vacant land.

(e)    By valuations dated 18 January 2012 and 16 January 2012 respectively, Herron Todd White valued the property at $2,100,000 and No 10 Waygoose Street, Kingston, at $780,000.

(f)    The notation of the undertaking given by the proprietors to the Supreme Court on 3 June 2011 on the title to the property was preventing the proprietors from obtaining further finance.

24    The proprietors tendered a letter dated 21 February 2012 from Australia and New Zealand Banking Group Ltd to the first applicant. Omitting formal parts, that letter is in the following terms:

Proposed Refinance Application – Westpac Banking Corporation

Further to our telephone conversation of today I wish to advise that the proposed security for your refinance application must be standard residential security and same must not be subject to a registered caveat or undertaking.

Should you have any queries please do not hesitate in contacting me.

25    The proprietors also tendered a letter from Westpac to them dated 22 February 2012. Omitting formal parts, that letter is in the following terms:

Re: Application for finance

This letter is to confirm that your current loan application for $250,000 partially secured by your property at 8 Waygoose St, Kingston ACT 2604 will not progress until the title search is free of Caveat or Undertaking listings. Upon confirmation your application will be assessed and is subject to Westpac Credit Policy guidelines.

26    In her affidavit sworn on 13 March 2012, the second applicant provided more detail of the work already carried out and to be carried out by Solve Projects at the property. She suggested that approximately $375,000 was required in order to complete and rectify the works on the property. She also said that approximately $961,000 had already been paid to Solve Projects in respect of completion and rectification works carried out by it at the property.

27    I was told from the Bar table that the property had been leased (that is, that a lease had been signed which will commence on 16 March 2012) but that the tenant had not yet taken up occupation. Neither party tendered the lease. There was no evidence from the tenant. The respondents tendered a printout from the all homes website which suggested that, by 8 March 2012, the property had been leased. That printout also suggested that the property had first been advertised for lease on 17 January 2012. The fact that the property was advertised for lease in January 2012 in very glowing terms tends to suggest that, as matters stood in January 2012, little or nothing needed to be done to complete the works or to rectify any defects. The fact that the property has subsequently been leased adds further support to that conclusion.

The Deed of Priority

28    The Deed of Priority is a Deed Poll executed by the proprietors on 14 March 2012. It is in the following terms:

WHEREAS:

A    The Owners are engaged in litigation in proceedings ACD35 of 2011 in the Federal Court of Australia (“the Proceeding”) with Gr* [sic] Constructions Pty Ltd (“the Builder”) such proceeding having commenced in the Supreme Court of the Australian Capital Territory.

B    The Builder lodged a caveat over Block 5, Section 58, Kingston, being Volume 1830, folio 25, known as 8 Waygoose Street, Kingston, ACT (“the Lot”).

C    The parties consented to the lapsing of such caveat upon the Owners making undertakings to the Supreme Court in respect of the Lot.

D    The Owners wish to refinance, which will require the registration of a new mortgage over the Lot by their bank.

E    The Owners cannot refinance without the undertakings being released, so that there is no longer a notation on the titles register for the Lot.

F    The Owners make this deed poll for provide undertakings with a view to the same being accepted in lieu of the undertakings to the Court.

THIS DEED WITNESSETH AS FOLLOWS:

1    Interpretation

1.1    No contra proferentem rule

    No rule of construction applies to the disadvantage of the Lender by reason that Hardings Gulhane Solicitors prepared this deed, or any clause is for the benefit of the Lender.

1.2    Governing Law and Jurisdiction

This deed is governed by the law in force in the Australian Capital Territory. The parties agree that any dispute in relation this deed may be determined in the Proceeding in the Federal Court of Australia.

2    Covenants by owners

2.1    No sale or disposal of the Lot

    The Owners covenant that they will not sell or dispose of their interest in the Lot until the determination of the Proceeding, except:

(a)    with the written consent of the Builder, by its solicitors; or

(b)    by leave of the Court.

2.2    No registration of further mortgages or charges

The Owners covenant that they will not permit the registration of any mortgage or charge over the Lot in priority to the charge claimed by the Builder until the determination of the Proceeding, except:

(a)    with the written consent of the Builder, by its solicitors; or

(b)    by leave of the Court.

2.3    Refinancing permitted

This covenant does not apply to the registration of a mortgage for the purposes of the proposed refinancing by the Owners.

The Applicants’ Submissions

29    Counsel for the proprietors submitted that the existence of the proprietors’ undertaking and its notation on the title to the property was an impediment to the proprietors’ being able to refinance their current loan from Westpac, whether with Westpac or with any other bank or financial institution. He submitted that the proprietors need to be released from their undertaking and that for so long as the undertaking was in place, the proprietors had no prospect of refinancing with anyone. He said that a refinancing of the proprietors’ Westpac loan would be in the builder’s interest as well as in the proprietors’ interest because the refinancing would enable the proprietors to complete the building works at the property and to avoid further disputation with Solve Projects.

30    It was further submitted on behalf of the proprietors that the builder would not be prejudiced if the proprietors were released from their undertaking because the proprietors would still have equity of approximately $580,000 in the two properties, if looked at as a package, which was more than adequate to protect the builder.

31    Counsel for the proprietors accepted that there was a triable issue on the builder’s claim to have an equitable charge over the property in respect of unpaid amounts under the building contract totalling $267,394.96.

32    Counsel went on to submit that the Deed Poll (Exhibit “A”) provided “deed-based undertakings” which were almost as worthy as the proprietors’ undertaking and that the builder would not suffer any real prejudice if the proprietors were released from their undertaking.

Consideration

33    The proprietors’ undertaking does not prevent the proprietors from further encumbering the property “… pursuant to the existing registered mortgage …”. It is quite clear that “… the existing mortgage …” referred to in the proprietors’ undertaking is Mortgage No 1598455 in favour of Westpac which is registered on the title to the property. It was and is the only mortgage registered on that title. The proprietors’ undertaking does prevent the proprietors from granting any further mortgage or charge over the property. I think that the language chosen by the parties should be interpreted as permitting some further drawdowns under the Westpac mortgage although the quantum of the likely drawdowns was not known to the builder nor agreed between the parties at the time when the undertaking was given on 3 June 2011.

34    The builder must have understood that it would be very difficult for it to secure any priority over Westpac, given that Westpac held the registered first mortgage over the property and given that the only security which the builder had at that time for its claimed debt was the equitable charge which it held over the property under the building contract. The builder’s charge ranks below the Westpac mortgage including, most probably, in respect of advances made after the charge was created and in respect of future advances.

35    These considerations, no doubt, exercised the minds of the directors of the builder and its legal advisers. These considerations no doubt led to the making of Orders 3 and 4 on 3 June 2011 which preserved the builder’s entitlement to protect its equitable charge by the lodgement of a further caveat against the title to the property and which required the proprietors to provide information as to Westpac’s attitude to the lodgement of a further caveat and as to the state of play vis-à-vis Solve Projects.

36    Included in Exhibit MD-19 to the second applicant’s affidavit sworn on 1 June 2011 is a claim by the proprietors that, as at 3 June 2011, the likely total cost to complete all allegedly incomplete works and to rectify all alleged defects was of the order of $772,556.

37    If the figure of $772,556 were to be accepted and if that amount were to be entirely financed by Westpac, the total debt to Westpac at the end of the project (assuming interest commitments were met regularly during the construction period and not capitalised) was likely to be of the order of $1.7 million.

38    As at 3 June 2011, the builder had not been given details of the proprietors’ funding arrangements with Westpac nor did it know the quantum of payments already paid to Solve Projects as at that date and likely to be paid to Solve Projects in the future.

39    From the builder’s perspective, the form of the proprietors’ undertaking was no doubt acceptable as a substitute pro tem for the caveat which it had lodged and as an additional protection in respect of further encumbrances. In the event that the builder wished to lodge a further caveat to protect its equitable charge, it was free to do so subject to the possible requirement that it first obtain the leave of the Supreme Court. From the proprietors’ perspective, the undertaking did not prevent further drawdowns pursuant to the existing loan arrangements with Westpac, provided always, of course, that Westpac was either obliged or prepared to allow such further drawdowns under those arrangements. Indeed, it seems that substantial additional funds (approximately $668,000) were advanced by Westpac to the applicants pursuant to the existing loan arrangements between 3 June 2011 and 10 January 2012.

40    The present difficulty confronting the proprietors is that, as a practical matter, Westpac and at least one potential lender (ANZ bank) have apparently told the proprietors that they are not prepared to consider lending further funds to them or refinancing their existing loans until the title is cleared of the present notations of Court orders and also free of any caveats. However, the evidence does not go so far as to establish that, once the title to the property is cleared of such encumbrances, it is likely that further funds will be made available by Westpac or that a refinancing of the current debt plus further funds will be made available by the ANZ bank or any other lender.

41    The proprietors’ undertaking is an interlocutory undertaking offered by them and accepted by the Court and by the builder in order to preserve the status quo pending the final determination of the proceedings. It was put in place as an agreed mechanism for settling the builder’s claim for an order extending beyond 3 June 2011 the caveat which it had lodged and as a compromise method of affording due recognition of the fact that the builder has an equitable charge over the property which secures liquidated and other sums due to it under the building contract and in respect of the works carried out by it on the property. As at 3 June 2011, and indeed at the present time, the builder had a prima facie case that it was owed at least $250,000 by the proprietors with the consequence that the equitable charge had been engaged to secure at least that amount.

42    The Court has jurisdiction to vary or set aside any interlocutory order. The overriding principle is that the Court should do whatever the interests of justice require in the particular circumstances of the case. The interests of justice should be assessed having regard to the nature of the interlocutory order in question. Interlocutory orders which are merely procedural or made by consent are perhaps in a different category from those made after a contested hearing and intended to operate until the final hearing. In the latter case, the general rule is that there must be a material charge in circumstances or the discovery of new material which could not reasonably have been before the Court on the earlier application (see Pivotel Satellite Pty Ltd v Optus Mobile Pty Ltd [2011] FCA 121 at [26] and the authorities referred to therein).

43    The proprietors’ undertaking is not an order of the Court—it is an undertaking to the Court. It was not given after a contest. However, it was part of a consensual compromise regime arrived at in a setting which cried out for an immediate solution, whether imposed by the Court or arrived at by consent. The undertaking was and is intended to operate until the final determination of the proceeding, although there is scope within the terms of the undertaking for the proprietors to apply to the Court to vary or be released from the undertaking. The undertaking is not merely procedural. It offers substantial protection to the builder. It operates to put those who are considering dealing with the proprietors on notice of the fact that the proprietors have undertaken to the Court not to further encumber or deal with the property and also on notice of the fact that there is litigation on foot between the proprietors and the builder in respect of the property. In practical terms, by the undertaking, the builder obtained all the benefits of having a caveat on the title with the additional protection of a promise not to further encumber the property.

44    I think that I should approach the proprietors’ current application by considering the interests of justice in the particular circumstances of the present case without requiring the proprietors to demonstrate a material change in circumstances between 3 June 2011 and the present time. However, in adopting that approach, I must also pay due regard to the fact that the undertaking provides a significant level of protection to the builder which was accepted by it in exchange for the protection offered by the caveat which it had lodged in circumstances where the builder had and continues to have a prima facie claim to a liquidated sum under the contract of the order of $267,000.

45    The interest in the land claimed by the builder is as chargee under the equitable charge granted to it under the building contract. There is no doubt that, upon the true construction of the building contract, the builder was granted such a charge. In my view, cl 31 is not an agreement to grant such a charge but constitutes an immediate grant of such a charge. (As to the principles governing the creation of an equitable charge see Sykes and Walker, The Law of Securities (5th ed, 1993) at pp 193–197; and see also Fisher and Lightwood’s Law of Mortgage, (2nd Australian ed, 2005) at [1.36] (pp 37–38) and at [2.7] (pp 52–53)). At p 196, the authors of Sykes and Walker, The Law of Securities, said:

The only actual requirements of the equitable charge seem to be, first, intention; secondly, if over land, the presence of writing; thirdly, the existence of definite ascertainable property, even though future, over which it is contemplated that the charge shall exist; and lastly, in a few exceptional cases the presence of consideration; consideration would not save a purely oral agreement.

All of these requirements are satisfied in the present case.

46    It is now well accepted that the registered proprietor of Torrens title land may create an equitable charge over that land.

47    An equitable charge does not carry with it a foreclosure right. Should the chargee wish to realise the benefit of his charge, he must obtain an appropriate remedy from the Court, which typically would be an order for sale or an order for the appointment of a receiver.

48    The nature of an equitable charge was explained by Buckley LJ (with whom Brandon LJ agreed) in the English Court of Appeal in Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 594–596 as follows:

An equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage. 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: see Fisher and Lightwood’s Law of Mortgage, 9th ed. (1977), p. 13. An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale: see Fisher and Lightwood, p. 14. It is not, I think, necessary to determine in the present case in what circumstances there is a true distinction between these two types of charge or precisely where it lies. From the way in which the judge dealt with the matter in his judgment it is, I think, clear that he was applying his mind to the question whether the circumstances of the case gave rise to an equitable charge by way of mortgage. The argument in this court has also proceeded upon the same lines, but I must not overlook the possibility of the existence of an equitable charge which is not of the nature of a mortgage.

The essence of any transaction by way of mortgage is that a debtor confers upon his creditor a proprietary interest in property of the debtor, or undertakes in a binding manner to do so, by the realisation or appropriation of which the creditor can procure the discharge of the debtor’s liability to him, and that the proprietary interest is redeemable, or the obligation to create it is defeasible, in the event of the debtor discharging his liability. If there has been no legal transfer of a proprietary interest but merely a binding undertaking to confer such an interest, that obligation, if specifically enforceable, will confer a proprietary interest in the subject matter in equity. The obligation will be specifically enforceable if it is an obligation for the breach of which damages would be an inadequate remedy. A contract to mortgage property, real or personal, will, normally at least, be specifically enforceable, for a mere claim to damages or repayment is obviously less valuable than a security in the event of the debtor's insolvency. If it is specifically enforceable, the obligation to confer the proprietary interest will give rise to an equitable charge upon the subject matter by way of mortgage.

It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties’ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd. [1955] 1 W.L.R. 1080 and contrast Moseley v. Cressey’s Co. (1865) L.R. 1 Eq. 405 where there was no obligation to segregate the deposits. But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts.

49    The House of Lords dismissed an appeal from the decision of the Court of Appeal in Swiss Bank Corporation v Lloyds Bank Ltd.

50    To similar effect is the decision of Young J in Cadorange Pty Ltd (In Liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 at 35–36.

51    In McCosker v Lovett (1995) 12 BCL 146, Young J rejected an argument advanced by a land owner to the effect that, once a building contract had been terminated, an equitable charge created under that contract in terms similar to the charge in the present case ceased to exist. At p 148, his Honour said:

However, it seems to me that the general line of authority is that despite termination either party may enforce rights which have been acquired prior to the discharge, so that when a builder becomes entitled to the progress payments, and then the builder repudiates the contract and the owner terminates it, the builder may still be entitled to recover the progress payments; see McLachlan v Nourse [1928] SASR 230 and also Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129.

…

Although the drafter of cl 10 has not specifically dealt with the problem, the whole tone of that clause is that the builder has a right to payment of the instalments as a payment on account and questions as to satisfactory work are to be dealt with later. Hence the proviso that payment of an instalment is not to prevent the owner from later contending the work was unsatisfactory. The drafter has not dealt with what is to happen if the contract is terminated after a progress payment is due but not made. In my view, cll 10 and 26 show it is due and payable as at termination and is thus an accrued right of the builder.

I agree with Mr McKeand when he put the proposition that the similar result follows where not only is there a right to receive a progress payment, but there is also a right to have security for that progress payment by way of equitable charge.

Although I have not, despite researching the textbooks, found any case exactly on the point, it seems to me that the equitable charge is a right existing as at the date of termination, which survives the termination.

52    I agree with his Honour’s reasoning. The fact that the building contract has been terminated does not cause the builder’s equitable charge to cease to have effect.

53    In the same case, his Honour held that, under legislation similar to Pt 10 Div 10.4 of the Land Titles Act, once the Court has made an order pursuant to a provision in terms similar to s 107(2)(b) of the Land Titles Act at any stage, then the lapsing procedure embodied in that provision comes to an end and the only way of getting rid of the caveat is to either put in process again the statutory lapsing procedure, by having a fresh lapsing notice issued, or, alternatively, applying to the Court for an order removing the caveat.

54    In the present case, the caveat was removed from the title to the property after 3 June 2011, presumably by administrative act of the Registrar-General.

55    The reasoning of Young J, if correct, would lead to the conclusion that, for the purposes of s 107C of the Land Titles Act, the builder’s caveat was not removed by the Registrar-General “… in accordance with s 107(2) …” because it was not removed by the operation of the lapsing process specified in s 107(2) but rather by a separate and distinct decision on the part of the Registrar-General to remove the caveat in circumstances where, on 26 May 2011, it had been extended by the Supreme Court.

56    It would then follow that s 107C would not be engaged in the present case should the builder wish to lodge a further caveat and, therefore, the leave of the Supreme Court would not be required before it could lodge a further caveat. I think that the reasoning of Young J in McCosker v Lovett is correct and that, therefore, the consequences of that reasoning, as explained above, flow in the present case. In my view, therefore, the builder does not require the leave of the Supreme Court before it can lodge a further caveat to protect its equitable charge.

57    As matters presently stand, the builder has an equitable charge over the property which has prima facie been engaged to the extent of approximately $267,000; an entitlement to lodge a further caveat against the title to the property to protect its rights under the equitable charge; and the benefit of an undertaking given to the Court by the proprietors not to further encumber or deal with the property. None of these rights, entitlements and benefits trumps Westpac’s rights under its registered mortgage but they are all nonetheless valuable benefits.

58    Were the Court to release the proprietors from their undertaking, the promise not to further encumber the property would fall away and the builder would lose the benefit of that promise. In addition, the proprietors’ equity in the property would be further diluted. The proprietors’ equity in No 10 Waygoose Street, Kingston, is not available to the builder under its charge.

59    In support of their application, the proprietors point to their need for further funding in order to complete the works on the property and contend that:

(a)    They need that funding;

(b)    No lender will provide funding whilstever the undertaking is in place;

(c)    The release of the undertaking will be to the benefit of both the builder and the proprietors; and

(d)    In any event, the Deed of Priority provides adequate protection for the builder.

60    The proprietors did not place before the Court on the present application full details of their financial position. I do not know what other assets and liabilities they have. In particular, I do not know whether they would be able to raise the additional funds which they say that they need by offering other assets as security for additional advances.

61    There is no evidence of attempts to obtain funding from sources other than Westpac and the ANZ bank if, indeed, any such attempts have been made. There is no evidence of the negotiations for funding undertaken by the proprietors with Westpac and the ANZ bank.

62    There is no evidence that funding is likely to be forthcoming even if the undertaking is released.

63    The Deed of Priority is a very strange document. The language of cl 2.3 is vague (“… the proposed refinancing …”) and the value of promises made, as they are, to no-one in particular, is problematic. There is no doubt that the promises made in the Deed fall well short of the protection given to the builder by the proprietors’ undertaking.

64    In the end, the Court is being asked to release the proprietors from their undertaking so that they can pursue refinancing when there is no specific refinancing plan in place and none in prospect. The fundamental reason advanced by the proprietors for the indulgence which they seek is that, having incurred far more costs in completing the works than was anticipated in June 2011, they should now be relieved of the burden of the undertaking which they freely gave in June 2011 because, from their point of view, it imposes inconvenient restrictions on their freedom to borrow further funds. I am not persuaded that I should deprive the builder of the important benefits which the proprietors’ undertaking provides to it in the present circumstances.

65    For these reasons, I propose to dismiss the proprietors’ application with costs.

66    There will be orders accordingly.

Associate:

Dated:    15 March 2012