The Supreme Court of Western Australia has restated the principles governing competing equitable charges, confirming that priority is generally determined by time of creation rather than the lodgement of caveats (42–44), while also demonstrating how both the scope of the secured property and the breadth of the secured obligations can materially affect recovery (118–121).
The proceedings concerned the distribution of proceeds from the sale of land owned by Armstrong Way Investments (WA) Pty Ltd following enforcement of multiple loan agreements. Each lender claimed an equitable charge over the same property, and as the sale proceeds were insufficient to satisfy all claims, the Court was required to determine competing priorities.
The Court reaffirmed that, as between competing equitable interests, priority is generally determined by the order of creation, provided the equities are otherwise equal. The relevant date is when the agreement giving rise to the charge is executed (45).
Consistent with established authority, the Court confirmed that lodgement of a caveat does not determine priority but merely protects an existing interest. A party cannot improve its position by earlier caveat lodgement, nor is a prior interest postponed merely by delay in lodging one (42–46).
A central issue was that the loan agreements defined the secured “Property” differently, despite the land being held under a single certificate of title comprising multiple dwellings (2, 119).
Some lenders nevertheless asserted an equitable charge over the whole of the property, even though their underlying loan agreements confined the secured interest to only one of the three dwellings. The Court rejected that approach, holding that the contractual definition of the secured property governs the extent of the equitable charge, and it would be inappropriate (and unconscionable) to extend the charge beyond what was agreed (119–120).
To reflect this, the Court apportioned the sale proceeds between the dwellings, and only allowed certain lenders to recover from the property specified in their agreements (121).
This aspect of the decision highlights the importance of clear and precise drafting to identify the security interest.
The Court rejected the contention that equitable charges secured only the principal advanced. Instead, it held that the charging clauses, securing the lender’s “interest under the loan documents”, extended to all amounts due under the loan agreements, including interest and contractual costs. Accordingly, the equitable charges were treated as securing the full bundle of obligations owed by the borrowers, not merely the initial advance (118).
The Court determined priority strictly by reference to the dates of creation of each equitable charge (105, 117), before making adjustments to reflect differences in the scope of the secured property (120–121). It permitted recovery of principal, interest and costs in accordance with the loan agreements (118).
The decision underscores the central importance of timing in the creation of equitable securities, as well as the need for careful drafting to identify the secured interest with precision and to ensure that an equitable charge extends to all obligations under a loan agreement, including interest and costs.
Practically, a lender cannot rely on a title search to confirm its priority standing. It must look to alternative methods of obtaining relevant information and verifying its standing and risk before agreeing to advance funds or to enforce its rights as lender.
This article was written by Emma Cohen, Associate Jackson McDonald.