this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

On shaky ground

Feature Articles

Cite as: (2007) 81(12) LIJ, p. 46

Buying from the sheriff has been described as a lottery and a recent High Court decision has confirmed the uncertainty of sheriff sales.

By Russell Cocks and Justin Tevelein

Buying from the sheriff has been described as a lottery and a recent High Court decision has confirmed the uncertainty of sheriff sales.
By Russell Cocks and Justin Tevelein

In Black v Garnock[1] in a 3/2 split, the High Court overturned a decision of the NSW Court of Appeal which granted injunctive relief to unregistered purchasers under a contract with the registered proprietor, restraining a sheriff sale from taking place, even though the writ of execution was recorded in the register.

In allowing the appeal, the majority held that the rights of the unregistered purchasers must give way to the indefeasible title a prospective purchaser at a sheriff sale would obtain, notwithstanding that in this case no such prospective purchaser existed as the sheriff sale process was in its earliest stages. Consequently, the unregistered purchasers from the registered proprietor were prevented from registering their transfer.

The case surprisingly elevates the status of a judgment creditor to that of a registered interest holder by conferring a similar level of protection, despite the fact that such creditors obtain no interest in land. [2]

The case further reinforces the importance of lodging caveats immediately after signing a contract of sale, as a caveat will provide an unregistered interest holder with notice of a writ. Further, Callinan J suggested that a caveat also serves as notice to the world and emphasised the importance of purchasers conducting timely final searches before completing a contract of sale.

Sheriff sales generally

A creditor may apply to the Supreme Court to have the sheriff conduct a sale of the debtor’s real estate where the creditor has obtained a judgment against the debtor. If the judgment creditor’s application is successful, the Court will issue a warrant of seizure and sale which must then be recorded on the title before a sale by the sheriff can take place. Once the sale is complete, the proceeds are used to satisfy the judgment debt, with any excess going to the judgment debtor/registered proprietor.

In reality, sheriff sales are reasonably rare. Typically the registered proprietor in such circumstances is in a financially stressed situation and a secured creditor will have taken action to sell the property before the rather cumbersome sheriff sale process is played out. In those circumstances, a judgment creditor is likely to be throwing good money after bad in pursing the sheriff sale process.

The recording of the writ on title does not give the judgment creditor any interest in the land, either legal or equitable.[3] It merely prevents any dealing from being lodged during the protected period, other than a transfer by the sheriff. The title is “frozen” for as long as the writ remains recorded on the title.

The intention is that the sheriff is able to sell the property and give an indefeasible title to any buyer at the sheriff’s sale in the same way that a purchaser at a regular sale receives an indefeasible title on the registration of a transfer of land. However, the purchaser’s interest remains subject to any prior registered interests, such as mortgages. The purchaser will only offer to pay to the sheriff an amount calculated to equal the registered proprietor’s equity in the land, taking into account those other registered interests.

The decision in Black v Garnock

The appellants obtained a judgment for about $228,000 against two of the respondents (judgment debtors), one of whom was the registered proprietor of the subject property. The appellants began bankruptcy proceedings to recover the amount but adjourned at the request of the registered proprietor, who assured the appellants that she would sell the property in order to satisfy the debt. Consistent with this, the registered proprietor entered into a contract of sale with the other four respondents (the purchasers from the registered proprietor) for a price of $1 million.

There was evidence at the trial that this was a fair market price, but also a suggestion that the purchasers from the registered proprietor were related to the judgment debtors, which may explain why the purchasers did not lodge a caveat. As settlement approached, the solicitors for the judgment debtors informed the appellants that there would not be sufficient funds to satisfy the judgment debt after settlement. The appellants then obtained a writ of execution from the Court one day before settlement was to take place.

Early on the morning of settlement the solicitor for the purchasers from the registered proprietor searched the certificate of title, which revealed that there had been no dealings with the property. Later that morning the solicitor was advised that the appellants claimed an interest in the property, although the solicitor was not advised that the writ had been lodged on the title.

The writ was recorded on the title at 11.53am and settlement took place at 2pm, without another search of the title being undertaken. It seems unusual that settlement proceeded in light of the claim made by the appellants and it must be presumed that the solicitor formed the view that the pre-existing contractual interest would prevail against a writ, as indeed it did before the Court of Appeal. The recording of a writ would have entitled the purchasers from the registered proprietor to delay settlement to seek clarification of the rights of the competing interests. That the writ was not recorded early in the morning of settlement was no guarantee that it would not be recorded later that day (as it was) or within the next few days. Given the inevitable delay between settlement and registration, the analogy with Russian Roulette appears apt.

The recording of the writ of execution prevented the purchasers from the registered proprietor from registering their transfer of land and they sought injunctive relief to restrain the appellants from executing the writ and to cancel the recording of the writ. The issue to be determined was whether the purchasers’ prior unregistered interest arising from the contract took priority over the appellants’ rights to require the sheriff to proceed with the enforcement procedure.

The law

It has long been the law in Victoria and NSW that the sheriff sells only the interest of the judgment debtor/registered proprietor. If that interest had been alienated prior to the recording of the writ, then the purchaser from the sheriff took subject to any unregistered interests arising from that previous transaction.[4] While registration confers indefeasibility on such a purchaser,[5] a prior interest would prevail if asserted before registration. This was described as making a purchase from the sheriff something of a lottery as, contrary to the aims of the Torrens system, a purchaser from the sheriff had no way of being aware of these competing interests. This situation was remedied in 1976 in NSW when the Real Property Act 1900 (NSW) (the Act) was amended to give the writ priority over any dealing lodged for registration after recording of the writ.[6]

The outcome of Black v Garnock depended on the interpretation of these provisions.

The appellant argued that this protected the writ. The purchasers from the registered proprietor argued that it only protected a purchaser from the sheriff under the writ.

The Court of Appeal decision

The NSW Court of Appeal approached the dispute as a priority dispute between two unregistered interests and concluded that the first in time should prevail. This reasoning was criticised in the High Court because a judgment creditor acquires no interest in the land and therefore the dispute could not be categorised as a dispute between two unregistered interest holders.

With respect, this appears to be a valid criticism as while it may be appropriate to call on concepts established by cases that have considered priority disputes to describe the relevant general principles, this dispute involved the unique circumstance of a dispute between an interest and a non-interest.

The judgment debtor at best has a statutory right to require the sheriff to perform its duty and the sheriff has a corresponding obligation to perform those duties. While it might be argued that a transfer from the sheriff, before registration, creates an interest analogous to a purchaser’s equitable interest, this case arose earlier in the process, before a purchaser from the sheriff came on the scene.

The High Court decision

Majority

Writing together, Gummow and Hayne JJ (who, with Callinan J constituted the majority) emphasised that the starting point for resolution of this dispute was the concept of indefeasibility. In this way they concentrated on the process, rather than the interests.

They held that the plain words of s105A(2) of the Act prohibit the Registrar-General from registering any dealings during the protected period after a writ is lodged and that it was irrelevant when the transaction that led to that dealing took place. The only requirement to trigger the prohibition is that a dealing be submitted after the writ was recorded. Once triggered, the prohibition applied to prevent any dealing from taking effect, including the transfer to the purchaser from the registered proprietor. The majority was not convinced that the purpose of the section was only to protect purchasers from the sheriff. Indeed, the section makes no reference to such purchasers and is couched in the negative (as a prohibition) rather than in the positive (as a protection).

Their Honours, however, did support their opinion by reference to the indefeasible title that a transferee from a sheriff would obtain on registration. They said that such a “transferee obtains a title that is not limited to whatever interest the judgment debtor would have been understood to have had in the land if account were to be taken of rights and interests not recorded in the Register and not preserved by the” Act.[7]

Since the interest of the purchasers from the registered proprietor was not preserved by the Act, they were unprotected. It was of no consequence to the reasoning of the majority that no purchaser from the sheriff actually existed in this case.

The judgment of the majority is certainly attractive to those who subscribe to the “tough love” version of indefeasibility – those motivated by an insistence that the underlying principle of the Torrens system is security and certainty of title. Vulnerability is anathema to such a view and an outcome that penalises a participant who holds neither a registered interest nor has availed itself of the protective measures available within the system draws applause from such true believers. According to the majority, the purchasers from the registered proprietor were the authors of their own misery.

Writing alone, Callinan J began his judgment with reference to the time honoured practice of lodging caveats and settling at the Titles Office – the conveyancer’s “white picket fence”. He too focused on the process and adopted a passage from Sir Robert Torrens to the effect that registration alone confers title under the Torrens system. He was particularly concerned that the purchasers had failed to lodge a caveat to protect their interest and had not undertaken a check search contemporaneously with settlement and concluded that by failing to do so, the purchasers would be bound by the face of the register.

As a parting shot, Callinan J expressly disagreed with Barwick CJ’s well-known proposition that a caveat acts only as an injunction to the Registrar, not as notice to the world.[8] The implication was that if the purchasers from the registered proprietor had caveated, they would have been in a stronger position, even though a caveat would not have prevented the lodging of the writ.

Minority

Crennan J (with whom Gleeson CJ agreed) accepted that s105A(2) of the Act would protect a purchaser from the sheriff from a claim by the purchasers from the registered proprietor, but argued that such protection only arose when a purchaser from the sheriff actually existed. Her judgment concentrated on a comparison of the interests of the parties and while acknowledging that the interest of a sheriff’s purchaser is protected against prior unregistered interests, she rejected the proposition that the statutory provisions in any way enhanced the position of a judgment creditor.

Her Honour relied on the second reading speech for the amending legislation to conclude that despite s105A(2) being couched in general prohibitive terms, its purpose is to protect a purchaser from the sheriff and that the principle of indefeasibility does not require protection of a judgment creditor, who has no interest in the land.

Crennan J was not concerned that the purchasers had failed to caveat. She correctly pointed out that a caveat would not have prevented registration of the writ. It would have simply held it up to allow the purchasers to seek an injunction and declaration in relation to the enforceability of their interest – precisely what the purchasers were seeking from these proceedings. Equally, a check search would only have resulted (presumably) in settlement being postponed while a court determined the rights of the parties.

Gleeson CJ agreed with the reasons given by Crennan J in dismissing the appeal. He agreed that the NSW provisions protect an unregistered purchaser from the sheriff from prior unregistered dealings. But neither principle nor the Act requires that this protection be applied to protect judgment creditors. The registered proprietor had sold her interest to the purchasers. She had nothing left (apart from the bare legal interest) against which the judgment creditors could require execution of the writ.

Outcome

The majority characterised the rights of the appellant judgment creditors by reference to the interest which a prospective purchaser would obtain from a sheriff. They retrospectively conferred indefeasibility on the judgment creditor in anticipation of the indefeasible title conferred on a purchaser from the sheriff.

While this approach might at first glance appear analogous to the victory of immediate indefeasibility over deferred indefeasibility, it must be remembered that the beneficiary in this case was a party who had no interest in the land, merely a statutory right in the proceeds of sale.

The alternative would have been for the judgment creditors to lose their money, but that is exactly the commercial risk facing unsecured creditors. As Gleeson CJ noted, the majority’s reasoning gives an unsecured creditor security which it would not otherwise have and provides such a creditor with an opportunity to obtain blood from a stone.

Implications for Victorian practitioners

The comments about the virtue of lodging caveats and conducting timely final searches seem to have come as something of a shock to our colleagues north of the Murray[9] but ought not to be of concern to Victorian solicitors who (nominally) follow those steps as standard practice.

It is unlikely that a Victorian solicitor would have proceeded to settlement in light of the information available on settlement day, but rather would have sought to have the competing interests clarified. Certainly the lodging of the writ (which was at least intimated to the solicitor) would have justified a delay in settlement.

Perhaps more worrying is the reminder that sheriff sales are a lottery. Victoria does not confer indefeasibility on a purchaser from the sheriff until registration[10] and the nature of those sales means that there can be a considerable delay between sale and registration.

If sheriff sales are to be made a truly effective way of enforcing judgment debts, steps need to be taken to protect purchasers from the sheriff from susceptibility to prior unregistered interests. This need not extend to protection of all judgment creditors, but it should protect purchasers from the sheriff from that point in time when the writ is lodged on the title.


RUSSELL COCKS is the author of 1001 Conveyancing Answers and a former lecturer at Deakin University. JUSTIN TEVELEIN is an articled clerk at Maddocks Lawyers. The views expressed in this article are those of the authors only.


[1] [2007] HCA 31 (1 August 2007).

[2] Hall v Richards (1961) 108 CLR 84.

[3] Note 2 above.

[4] Coleman v DeLissa (1885) 6 NSWLR (E) 104, Bruce v Woods [1951] VLR 49 and see Voumard, The Sale of Land (5th edn) at 11.100.

[5] Transfer of Land Act (Vic), s52(4).

[6] Real Property Act (NSW), s105A(2).

[7] Note 1 above, at [29].

[8] Note 1 above, at [76].

[9] NSW Law Society Journal, September 2007, p51.

[10] Note 5 above.

Comments




Leave message



 
 Security code
 
LIV Social
Footer