Competing equities and caveats – who gets priority

The land titles register confers priority in respect of legal interests in the order of registration.

However, that is not the rule in the case of equitable interests protected by caveats.  Priority is not necessarily determined by the order of registration of caveats.

A recent case is a timely reminder of this position.

Supply contracts or credit agreements often include a clause granting the supplier an equitable charge over a customer’s land as security for payment and allowing the supplier to register a caveat as notice to the rest of the world of the supplier’s interest.

Customers usually have supply agreements with a number of different suppliers for the different stock, equipment, materials etc required to run their business which can cause issues around which supplier’s interest has priority in the event the customer cannot pay their debts.

The recent WA Supreme Court case of Bunnings Group Ltd -V- Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132 considers who has priority between two different suppliers who each hold an equitable charge (the competing equitable interests) and are both owed money by the same customer when one supplier’s interest was created first but their caveat was registered second.

Relevant Facts

Bunnings Group Ltd (Bunnings) and Hanson Construction Materials Pty Ltd (Hanson) each supplied building materials to Capital Works Constructions Pty Ltd (Capital Works) under credit agreements.  

Both credit agreements contained charging clauses granting each of Bunnings and Hanson a charge over any land then or subsequently held by Capital Works to secure repayment of monies owing by Capital Works for the supply of building materials under the respective credit agreements.

On 16 June 2010, Capital Works applied for credit with Hanson.  The date Hanson accepted the credit application was not shown on the credit agreement but Hanson supplied Capital Works with building materials on 10 July 2010. As a result the Court inferred that Hanson accepted Capital Works' credit application sometime prior to 10 July 2010 (Hanson Charge).

On 30 August 2010, Capital Works applied to Bunnings for credit and the application was accepted by Bunnings on the same date (Bunnings Charge).

At the time the Hanson Charge and the Bunnings Charge were each created, Capital Works did not own any land.  However, Capital Works subsequently acquired three properties in August and September 2013 (Properties).

On 22 April 2014, after Capital Works had failed to meet its trading terms on several occasions, and following various alterations in the credit limit extended by Bunnings to Capital Works, Bunnings put the Capital Works trading account on hold.

On 23 April 2014, Bunnings lodged a caveat over the Properties.

Prior to lodging the Bunnings’ caveat, Bunnings searched the title to the Properties which revealed that no other suppliers of goods had lodged any caveats against the Properties. 

At the time the Bunnings’ caveat was lodged each of the Properties was the subject of a mortgage to National Australia Bank (NAB).  However Bunnings did not make any enquiry as to what was owed to the bank and to the extent there was any equity able to satisfy Capital Works’ debt owing to Bunnings.

In July 2014, Capital Works asked Bunnings to reopen the transaction account that was put on hold and Bunnings agreed on the condition that their caveat remained registered on the Properties. 

Bunnings mistakenly believed that they were the first in time business creditor with security against the Properties and claimed in the proceedings that had they known that was not the case (the Hanson Charge having been granted before the Bunnings Charge) they would not have agreed to reopen the account. 

On 2 April 2015, Hanson lodged a caveat over the Properties pursuant to the Hanson Charge.

It was not common practice for Hanson to lodge caveats over a customer’s property when they first enter into a credit agreement or when goods were supplied. Hanson’s practice was to only lodge a caveat pursuant to a charge if the customer goes into default or if they had specific concerns about a customer which they argued was common practice in the industry.

On 7 May 2015, administrators were appointed to Capital Works and on 12 June 2015 Capital Works went into liquidation.

The Properties were eventually sold by the liquidator and, after repayment of NAB’s mortgage and the liquidator's expenses, the proceeds of sale were insufficient to repay Capital Works' liabilities to either of Bunnings or Hanson.

Bunnings and Hanson commenced proceedings asking the Court to determine whose equitable interest (the charge) had priority and, as a result, who would receive the benefit of the balance of the proceeds of sale.

Who has priority?

The Hanson Charge was created first however Bunnings registered its caveat before Hanson.

Bunnings submitted that there was a perception in Western Australia that priority is based upon the date of lodgement of a caveat. 

A party’s equity (i.e. the right to have the property available to satisfy debts) arises when the charge is granted.  It then follows that any subsequent grant of the same right to another party must be subject to the first grant, as the chargor cannot pass an interest greater than the interest they possess at the time.

Accordingly, the general rule is that where there are competing unregistered equitable interests in land, if the equities are in all other respects equal, priority in time of creation is considered to give the better equity.1

The Court found that any perception that priority is determined by reference to the date a caveat is registered is misconceived and, if we assume the equities are otherwise equal, the equity granted first in time wins regardless of whether or when a caveat is lodged to protect that interest (unless, on the facts of each particular case, a delay in registering a caveat is relevant to the question of disentitling conduct).

Are the dates the respective debts were incurred an issue?

The Court found that the dates that Capital Works incurred the respective debts to Bunnings and Hanson did not have a bearing on the issue of whose equity had priority.

The charges became operative when some debt was owed by Capital Works to Bunnings or Hanson respectively. 

When the debt falls to zero from time to time  the charge may cease to be operative but that does not mean that Bunnings or Hanson did not continue to have a right as against the Capital Works' property in relation to future indebtedness. 

When further credit is then incurred, the charge becomes operative again. It is not a new charge.2

Disentitling conduct

Although an equity created first in time may have priority, the subsequent conduct of the party may defeat that priority.  As a result the court considered whether there was any disentitling conduct or any of the facts had the impact of postponing the priority of the Hanson charge.

Bunnings had made enquiries as to whether there were any other interests registered on the Properties prior to the lodgement of the Bunnings’ caveat, and the lack of registered interests formed a basis for Bunnings’ decision to re-establish the trading account.

Justice Chaney took the view that there was no postponing conduct as a causal nexus between Hanson’s failure to lodge the caveat and an assumption by Bunnings as to the non-existence of the prior equity was not in itself sufficient to postpone the Hanson equity. 

Hanson’s interest in the Properties was created when the Hanson Charge was created and the lodgement of a caveat was not necessary to create or enhance Hanson's interest in the Properties. 

The failure to lodge a caveat created a risk for Hanson that there might be a transaction which had the effect of defeating Hanson's interest without notice to Hanson.  However it was a matter for Hanson to determine whether, and at what time, it chose to take steps to avoid that risk.

There was also no evidence that prior to the creation of the charge in favour of Bunnings in August 2010, that Bunnings made any inquiry of Capital Works as to the existence of other credit arrangements or other charges granted by Capital Works over existing or future land holdings. 

It could not be said that Hanson in any way led Bunnings to acquire its interest, which it did by accepting Capital Works' credit application in 2010. 

Bunnings’ belief that the absence of any other caveats lodged by other suppliers of Capital Works, of itself, had the effect of giving Bunnings priority over any other unregistered charge was misconceived. That misconceived view cannot have the effect of depriving a prior interest holder of its priority.

Lavan comment

Whilst a caveat operates to give notice to the world of your interest, it does not in itself create the equitable interest nor enable the enhancement of an equitable interest even if it is registered first in time. 

A Court, in considering whether the prior equity holder’s  conduct justifies a postponement in priority, will look to issues of negligence of the prior equity holder, if any, estoppel, fairness and justice rather than just the date that prior equity holder lodges notice of the equity.  The mere causal nexus between a failure to lodge a caveat and an assumption by any subsequent equity holder that the lack of registered interest means they are first in time is not enough.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.