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In the recent decision The Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2022] NSWSC 1081, Macpherson Kelley acted for the liquidator of C88 Project Pty Ltd (in liquidation) (controller appointed) (C88”), the fourth defendant in the proceedings, in successfully defending a claim made by a real estate agent, The Property Investors Alliance Pty Ltd (“PIA”), in which PIA alleged it had an equitable charge over various unsold lots in a property development in Sydney’s west, by which it alleged it had security for $18 million in unpaid commission.

C88 developed a residential apartment complex in Carlingford, New South Wales, known as the “Somerset”. PIA was retained by C88 to sell the residential apartments in the development and ultimately sold over 300 apartments. Over the course of the dealings between PIA and C88, the parties entered into various agency agreements. One of those agreements contained a clause that entitled PIA to lodge caveats over properties in the development to “protect” PIA’s interest to commission earned from the date of the agreement.

As a result of C88’s failure to meet substantial amounts of commission owing to PIA under the agency agreements, in January 2021, PIA commenced proceedings against C88. In the proceedings, PIA sought, among other things, orders that it had an equitable charge over all units in the development in the name of C88 and that the agency agreement be rectified to amend the definition of “Commission”. The amendment to the definition of “Commission” was proposed to ensure that, if an equitable charge was found, that equitable charge would also be security for commissions that PIA was entitled to before entering into the agency agreement, not just the new commissions from the date of the agency agreement.

Following the commencement of the proceedings, in April 2022, C88 was placed into voluntary administration and subsequently went into liquidation on 31 May 2022. The matter was listed for hearing on 23 June 2022. C88 opposed the relief sought by PIA.

Rectification of the agency agreement

PIA’s right to lodge a caveat was to “protect” its interest to commission. The definition of “Commission” in the agency agreement, as drafted, referred to commission earned as a result of the sale of properties that PIA was entitled to sell under the agency agreement. However, at the time that PIA entered into the agency agreement with C88, it had already sold a significant number of properties under earlier agency agreements and, as a result, was entitled to a substantial amount of commission.

As the definition of commission in the agency agreement did not cover commission earned before the agreement was entered into, the clauses in the agreement that entitled PIA to lodge caveats, did not entitle it to lodge caveats to protect its entitlement to the commission that was already owing. As a result, PIA sought an order rectifying the definition of commission to include reference to commissions that were earned before the date of the agreement.

In the case of Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85, it was held that the purpose of rectification is to “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”. In order to obtain an order for rectification, a party needs to demonstrate that, at the time the agreement was executed, there was an agreement between the parties and they had a common intention which was not recorded in the written document as a result of a common mistake. In order to obtain an order for rectification, a party must establish by “clear and convincing proof” that the parties had the alleged common intention.

PIA submitted to the Court that the parties had a common intention that the right to caveat was intended to protect PIA’s right to commission to which it was already entitled. In support of that argument, PIA led evidence of conversations between the director of PIA and the directors of C88 in which it was suggested the parties had agreed that PIA’s right to lodge caveats was also to protect the outstanding commission.

In reply, the liquidator of C88 submitted that there was no common intention and that any rectification of the agreement would produce an outcome that was not what either party intended.

In declining to grant rectification of the agency agreement, Rees J found that she was not persuaded that there was “clear and convincing proof” that the parties intended for the definition of commission to read as suggested by PIA, as it was not clear that the director of C88 that was involved in the negotiation of the agency agreement shared the same intention as the director of PIA.

The equitable charge

In accordance with PIA’s right to caveat under the agency agreement, PIA lodged numerous caveats over properties in the development. The caveatable interest on the caveats lodged by PIA was described as an express or implied equitable charge by virtue of the agency agreement.

In her judgment, Rees J referred to decision in Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513, which provided an explanation for an equitable charge:

“A charge involves a proprietary interest held by way of security. It may arise in consequence of contractual rights, as in an equitable charge, but the objectively ascertained contractual intention must be to confer a proprietary interest as security for a present or future debt.”

For an equitable charge to exist, there must be an intention between the parties to create an immediate proprietary interest or immediate right of recourse to identifiable present or future property. An agreement to create a charge in favour of a creditor “on request” does not create an equitable charge.

In the proceedings, PIA contended that a right to lodge caveats to “protect” its interest to commission created either an express or implied equitable charge. Whether or not a right to caveat creates an equitable charge has not been a question that has been easily resolved in New South Wales courts. Early decisions, such as Murphy v Wright [1992] NSWCA 168 and Troncone v Aliperti (1994) 6 BPR 97,455, took the view that by granting the right to caveat, it was deemed that a caveatable interest was also granted in the form of an equitable charge. However, more recent decisions in Taleb v National Australia Bank Ltd (2011) 82 NSWLR 489 and Ta Lee Investments Pty Ltd v Antonios [2019] NSWCA 24 have found that an intention to create an equitable charge must appear clearly from a document and that a right to caveat does not, by necessary implication, also automatically create an equitable charge.

Ultimately, in the proceedings, Rees J found that the relevant clauses of the agency agreement did not confer an implied or express equitable charge. Alternatively, her Honour found that the purpose of the right to caveat was to allow the agent to interrupt or prevent the sale of properties in the development until outstanding commissions had been paid by C88. Those rights did not go so far as to extend to a right for PIA to bring about the sale of any properties to meet the debt owing to it. As a result, PIA did not have an equitable charge over the properties over which it had lodged caveats.

Conclusion

This decision reinforces the principle that a contractual right to lodge a caveat does not, without nothing more, grant a security interest in a property.

Where parties intend to obtain an interest in property, any agreement between the parties should include carefully drafted clauses that clearly establish what interest is being granted and are, preferably, reviewed by an experienced solicitor.

If an agreement does not reflect the common intention between the parties, the party seeking rectification must ensure that it is able to produce clear and convincing evidence to establish that common intention in order to jump the high bar that is set to obtain an order for rectification.

If this article brought up anything for you and your business, contact our Sydney Litigation team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.