Case: McMahon v Swan [1924] VLR 397
Outcome: applied
the question of the operation of s 42(2)(e) of the TLA has been considered previously in the context of the Money for Living scheme in Australian Securities &amp; Investments Commission, in the matter of Money for Living (Aust) Pty Ltd (Administrators Appointed) v Money for Living (Aust) Pty Ltd (Administrators Appointed) (No 2) [2006] FCA 1285 , where Finkelstein J made the following comments (at [24] [25]): I base this conclusion on s 42(2)(e) of the Transfer of Land Act 1958 (Vic) and the equivalent provision in the Torrens legislation in other States. The effect of s 42(2)(e) is that the estate of a registered proprietor of land (including the proprietor of a mortgage) is subject to the rights of a tenant in possession. In this area the relevant principles are clearly established. The first is that the possession of a tenant is notice of any right of the tenant affecting the land: McMahon v Swan [1924] VLR 397 , 406. The second is that, as Dixon J confirmed in Burke v Dawes (1938) 59 CLR 1, 17-18, s 72 of the Transfer of Land Act 1928 (Vic) (which is the forerunner of s 42) was not intended to apply merely to a tenancy as commonly understood. See also Downie v Lockwood [1965] VR 257 , 259 where Smith J said "As appears from the cases the exception in s. 42 (2) (e) is to be widely construed; and it is to be treated as producing the result that "any person in actual occupation of the land obtains as against any inconsistent registered dealing protection and priority for any equitable interest to which his occupation is incident, provided that at law his occupation is referable to a tenancy of sort, whether at will or for years". Thus, for the purposes of the section a purchaser under a contract, who is given possession by the vendor and is only a tenant at will, is protected in respect of his equitable ownership: Robertson v Keith (1870) 1 VLR(E) 11. So, too, is a vendor who remains in possession until the purchase price is paid: he is a tenant "whatever might be the legal denomination of the tenancy": The Commercial Bank of Australia Limited v McCaskill (1897) 23 VLR 10 , 12. It has also been held that an equitable life estate will prevail over a subsequent registered interest: Black v Poole (1895) 16 ALT 155. These principles will protect the tenancies granted to the clients (who it must be assumed were always in possession of their homes) over subsequent dealings with the land. Put another way, the clients' life tenancies are secure, that is their tenancies are "guaranteed" to survive any adverse claims made by subsequent registered proprietors and mortgagees, provided they (the clients) continue to pay $1.00 per annum by way of rent and do not vacate their home. Their Honours referred at various times in the judgment to Burke v Dawes , which they approved generally. Gibbs ACJ stated, at 140: In Burke v Dawes (1938) 59 CLR at 17 18; Dixon J discussed as follows the effect of an earlier Victorian statutory provision which corresponded to s 42(2)(e): In Victoria these words have received an interpretation and an application as a result of which any person in actual occupation of the land obtains as against any inconsistent registered dealing protection and priority for any equitable interest to which his occupation is incident, provided that at law his occupation is referable to a tenancy of some sort, whether at will or for years. Thus, a purchaser under a contract of sale, who at law is in possession as tenant at will of the vendor, has been held protected in respect of his equitable ownership as purchaser ( Robertson v Keith (1870) 1 V.R. (E.) 11 ; Sandhurst Mutual Permanent Investment Building Society v Gissing (1889) 15 VLR 329) , a lessee in respect of an option of purchase contained in his lease ( McMahon v Swan [1924] VLR 397) and a wife in respect of an equitable life interest claimed under an unsigned separation agreement made with her husband ( Black v Poole (1895) 16 ALT 155). a'Beckett J. decided the last named case in deference to previous decisions and against his own opinion, which he stated to be that 'those words were intended to refer to a tenancy as ordinarily understood arising out of an agreement under which the person in possession was allowed to occupy in consideration of some kind of rent or service of which the proprietor was to have the benefit'. The cases are collected and criticized by the late Dr Donald Kerr in his work on The Australian Lands Titles (Torrens) System (1927), at pp. 75 et seq. But the interpretation has stood for nearly seventy years, and it would, I think, be most undesirable now to undertake the re-examination of its correctness. Similar views were expressed by Latham C.J.(1938) 59 C.L.R. at p. 8 and by Evatt J. (1938) 59 C.L.R., at p. 24. McTiernan J. agreed with the remarks of Dixon J ((1938) 59 C.L.R., at p.27). The fifth member of the Court, Starke J., was perhaps not so definite in the expression of his opinion but he did not disagree with what the majority of the Court said on this point (1938) 59 C.L.R., at pp. 12-13. This question should therefore be regarded as settled. The interest of the appellants under the contract of sale from Craigie was within the protection given by s. 42(2)(e). However, it was decided in Burke v Dawes (1938) 59 C.L.R., at pp. 17-18 that s. 42(2)(e) does not give to a tenant in possession any greater protection than he would have had if the land were under the general law: see per Dixon J. (1938) 59 C.L.R., at p. 18, and per Starke J. (1938) 59 C.L.R., at p. 13. Evatt J., who dissented in the result, but whose views on this point were not in my opinion different from those accepted by the majority, said (1938) 59 C.L.R., at p. 25: In my opinion the effect of the exception in favour of every tenant of the land is to deprive the proprietor of the registered interest of the paramountcy which registration would normally confer. It follows that, in determining the competition between the tenant and the proprietor of the registered interest, the latter must be regarded as having been stripped of the benefit conferred by the fact of registration and as having been remitted to the position of holding an unregistered interest. In the present case the respondent is deprived by s. 42(2)(e) of the paramountcy which registration would otherwise have conferred. It then becomes necessary to consider whether, apart from registration, the interest of the respondent under the Creation of Easement will prevail over that which vested in the appellants by virtue of the contract of sale. This question depends on the effect of special condition 8 of the contract of sale. When an owner of land contracts to sell it to a purchaser there is no reason in principle why he should not reserve the right to grant an easement over the property sold or why he should not make the sale subject to the easement to be granted. If this is done effectively the easement when created will take priority over the equitable interest which was granted subject to it. Under the general law, apart from registration, the right of the owner of the easement will prevail over that of the purchaser, notwithstanding that he is in possession, and the provisions of s. 42(2)(e) will not give the purchaser any greater right. In Chesterfield v Pitisano [1964] V.R. 709 at p.713 , Smith J. said that a mortgage granted pursuant to a right reserved to the vendor by a contract of sale would take priority over the equitable interest of the purchaser, and that the rights of the mortgagee on registration would not be rendered subject by s. 42(2)(e) to the interest of the purchaser as a tenant in possession. I respectfully agree with his conclusion on this point. The question therefore is whether special condition 8 did make the sale subject to the easement to be granted. In my opinion the condition did have that effect. It is true that it did not in terms reserve the right to grant an easement, nor did it state that the sale was subject to the easement to be granted. However, the clause expressly stated that it was proposed to create an easement, and that the vendor should be entitled to the compensation paid when the easement was granted, and in my opinion these provisions plainly implied that the easement when granted was to be effective. The clause would be meaningless if the rights of the purchasers prevailed over the easement when it was created. In my opinion the effect of special condition 8 was that the Creation of Easement&#8212;not the option, as I have already explained&#8212;prevailed over the rights of the appellants. Section 42(2)(e) did not alter this position. It follows that the respondent became entitled to enter the subject land for the purpose of constructing the pipeline on 17 th December 1975 when the Creation of Easement was signed, but it was not entitled to enter for that purpose before that date. ... In any event, I have come to the view that even if there is to be a comparison of the two competing interests as suggested by Perpetual, the interests of the retirees have priority. Even accepting that Perpetual took the mortgage at arm's length, in the normal course of its business and for valuable consideration, I have formed this view for the following reasons: (i) the earlier equitable interest in the property of the retirees I have generally regarded as a stronger claim than the later interest of Perpetual; (ii) fairness and justice does not require or indicate the earlier equitable interest of the retirees should be postponed (see Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 341 (per Mason and Deane JJ)); (iii) any lack of notice by Perpetual is only one aspect of the circumstances I have taken into account, which does not displace the earlier interest of the retirees; (iv) Perpetual knew by itself, or its agents, that the properties were occupied, or at the very least expected the properties would be tenanted, even if Perpetual did not know the exact terms of the Contract of Sale or Agreement for Sale of Real Estate or of the lease. If I am wrong in this regard as to knowledge or expectation, this would still not alter my view as to the competing position; (v) the retirees were in fact in possession of the property which I regard as significant, although not 'decisive' (cf Burke v Dawes [1938] HCA 6 ; 59 CLR 1 per Evatt J at 26); (vi) Perpetual had constructive notice of the retirees' rights and it took its interest subject to them, and this occurs even if the tenant is in possession pursuant to additional entitlements: Hunt v Luck (1902) 1 Ch 428; Lowe v Clyne [1968] 2 NSWR 292 ; Daniels v Davison (1809) 16 Ves 249; and Allen v Anthony (1816) 35 ER 679, and particularly McMahon v Swan [1924] VLR 397 at 405-406 and Burke v Dawes 59 CLR 1 at 26-27 per Evatt J; (vii) Perpetual in failing to investigate the interest of the retirees did so at its 'peril' (see Evatt J at 27 in Burke v Dawes [1938] HCA 6 ; 59 CLR 1 ; and Lowe v Clyne [1968] 2 NSWR 292) ; (viii) whilst the retirees did not lodge timely caveats, the failure of the retirees to lodge a caveat is explicable. They were in fact still registered proprietors. In any event, 'the exception in s 42(2)(e) makes the failure to lodge a caveat of no moment, because it takes away from the registered proprietor that paramountcy which actual registration confers; and the only purpose of a caveat is to prevent such registration' (see Burke v Dawes [1938] HCA 6 ; 59 CLR 1 at 25-26 per Evatt J); (ix) further, I do not regard the failure to lodge a timely caveat as sufficient to postpone the retirees' interests, particularly as there was no evidence that Perpetual relied on the registration or absence of caveat (see IGA Distribution Pty Ltd v King &amp; Taylor Pty Ltd [2002] VSC 440 at [205] per Nettle J); and (x) no retiree consented to or ratified the mortgage to Perpetual.