EUFEMIO JR FRANCISCO RAYO [2024] SASC 3

First Applicant: EUFEMIO JR FRANCISCO RAYO Counsel: MR D RIGGALL - Solicitor: ECKERMANN LAWYERS Second Applicant: MARIA ANA LIZA AREVALO RAYO Counsel: MR D RIGGALL - Solicitor: ECKERMANN LAWYERS First Interested Party: AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION No Attendance Second Interested Party: REGISTRAR-GENERAL Counsel: MR D MACKINTOSH - Solicitor: CROWN SOLICITOR (SA) Hearing Date/s: 18/12/2023 File No/s: CIV-23-011131 B SUPREME COURT OF SOUTH AUSTRALIA (Civil) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. RAYO & ANOR [2024] SASC 3 Judgment of Judge Dart a Master of the Supreme Court 10 January 2024 REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES - COVENANTS Registered proprietors own land on which is registered an encumbrance - encumbrance includes a restrictive covenant which expired in 1983 - encumbrance also includes a rent charge - encumbrance properly registered - restrictive covenant would not bind the applicants even if it had not expired - rent charge exists in perpetuity - is it appropriate to remove the encumbrance from the register - objective law of contract applies - the purpose of the encumbrance was to restrict the use of the land for a period - the purpose has been spent - the contractual intention was not for the encumbrance to remain registered after the expiry of the restrictive covenant - appropriate for the encumbrance to be removed. Held: 1. The encumbrance creates no binding obligation on the applicants. 2. The encumbrance should be removed from the titles. Corporations Act 2001 (Cth) s 601AD; Real Property Act 1886 (SA) s 3, s 64, s 128, s 128B, referred to. Burke v Yurilla SA Pty Ltd (1991) 56 SASR 382; Clem Smith Nominees Pty Ltd v Farrelly & Ors (1978) 20 SASR 227; Jaggumantri v Registrar General [2023] SASC 74; KI Seaport Pty Ltd v Abstraxion Pty Ltd & Anor [2020] SASC 113; Netherby Properties Pty Ltd v Tower Trust Ltd (1999) 76 SASR 9; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Tulk v Moxhay (1848) 41 ER 1143, considered. -- 1 of 10 -- -- 2 of 10 -- RAYO & ANOR [2024] SASC 3 1 The applicants are the registered proprietors of two titles of land at Sturt. On each of the titles there is registered encumbrance number 3196101. In this proceeding the applicants seek orders from the Court for the removal of the encumbrance from the titles. They are entitled to such orders. Background 2 A copy of the encumbrance 3196101 has been produced to the Court. It is registered on a number of titles of land including the applicants’ land. The encumbrance was registered on the various titles on 1 June 1971. The original parties to the encumbrance were Preece’s Building Pty Ltd, which was then the registered proprietor of the subject land, and Arndale (Marion) Pty Ltd. 3 The encumbrance was in what was the standard form at the time. It provided for a rent charge and it also provided for a restriction on the use of the encumbered land. The relevant provisions are as follows: 1. The Encumbrancer will pay to the Encumbrancee the sum of ten cents (10c) (if demanded) on the 30th day of June next and each succeeding 30th day of June. 2. The Encumbrancer will not use or permit or suffer to be used for the purpose of the business of a retailer of goods of any description the said land or any part thereof at the time within the period of fifteen (15) years from the 1st day of April 1968 PROVIDED THAT nothing herein contained shall prevent the use of the said land or any part of parts thereof: (a) For the purposes of a motel or a service station or both; or (b) By any governmental public or municipal authority for public purposes; or (c) For the purposes of a licensed hotel or public house. 4 The restriction on the use of the subject land meant that it could not be used for the retailing of goods for a fixed period of time which expired on 1 April 1983. The land is adjacent to the Marion shopping centre which opened in 1968. 5 In the result, Arndale (Marion) Pty Ltd was deregistered in 1980. Then as now, the property of a deregistered company vests in the relevant government body. At the relevant time, the applicable statutory provision was the Companies (South Australia) Code. It provided that the property of a defunct company vested in the Corporate Affairs Commission.1 The Corporate Affairs Commission became the registered proprietor of the encumbrance.2 6 There is an analogous provision in the Corporations Act 2001 (Cth). The property of a deregistered company now vests in the Australian Securities and 1 Companies (South Australia) Code s 461. 2 Real Property Act 1886 (SA) s 3. -- 3 of 10 -- [2024] SASC 3 Judge Dart 2 Investments Commission (ASIC).3 ASIC was served with the application but has not appeared before the Court. It sent a letter which said:4 ASIC has no direct knowledge of the specific circumstances or background of this matter. ASIC does not intend taking any steps on behalf of the company to assert, exercise, enforce or waive any rights the company may have. If the company itself wishes to do so, then the former officeholders must firstly reinstate the company. Please ensure you have taken steps, to the best of your ability given the age of the deregistration, to notify the former directors to afford them an opportunity to reinstate. ASIC has no direct knowledge of the background to the legal proceeding. On the strict understanding that no orders are sought against, or directly affecting, ASIC, then ASIC does not wish to be heard. 7 In light of the expressed attitude of ASIC, no further consideration needs to be given to the vesting issue. A complex issue, whether there were transitional provisions transferring property from the CAC to ASIC when the Corporations Law came into effect, can be put to one side. 8 The applicants purchased the land in 2009. At the time, the land they acquired was contained within one title. They have since subdivided the land into two titles. The encumbrance remains registered on both. Was the encumbrance validly registered? 9 The first point that needs to be considered is whether the encumbrance was valid at the time of registration. The encumbrance has two operative provisions. The first is the creation of a rent charge. The second is a restrictive covenant in relation to the use of the subject land. 10 The Real Property Act 1886 (SA) anticipates encumbrances may be registered on land. At the time this encumbrance was registered, it was governed by s 128. That has been slightly amended since but remains practically the same. The relevant provision now is: 128B—Encumbrance of land (1) If land is to be charged with, or made security for, the payment of an annuity, rent- charge or sum of money in favour of a person, an encumbrance in the appropriate form must be executed by the registered proprietor and the person. (2) This section only applies to land intended to be charged or made security under this Act by the registration of an encumbrance. 11 A rent charge is a periodic sum charged on land other than rent reserved by a lease. The inclusion of a rent charge in an encumbrance is usually a device. It is intended to make the instrument containing an encumbrance registerable. The encumbrance may contain additional terms which are not capable of registration. 3 Corporations Act 2001 (Cth) s 601AD. 4 Letter from ASIC to Eckermann Lawyers dated 11 October 2023. -- 4 of 10 -- [2024] SASC 3 Judge Dart 3 Without the rent charge, the restriction on the use of the land would not have created a registerable interest. In Clem Smith Nominees Pty Ltd v Farrelly & Ors5 Hogarth J said as follows:6 … I conclude that the rent charge proper, therefore, was validly created and that the encumbrance, so far at least as it dealt with the rent charge, was properly registered. But what of the second covenant in the present document? If the document had not created the rent charge, then it would not have been a registerable document. It would have evidenced only the creation of equitable rights, and these are not to be noted on the certificate of title. It might be thought that a rent charge should be concerned only with the actual charging of the land with payment of the rent; but, from the extract which I have already cited from the Tenth Schedule, it is clear enough that the Act contemplates that the document may contain covenants which per se would not be registerable. Support for this view may be obtained from Blacks Ltd. v. Rix. I conclude therefore that the document in its present form was properly received by the Registrar- General, and was properly registered. 12 The applicants, and the Registrar-General who has appeared as an interested party, accept that the encumbrance was properly registered and contains an enforceable rent charge. 13 The next question is whether it is appropriate to regard the restrictive covenant as a registered interest in the land. The memorandum of encumbrance creates the obligation to pay the rent charge. The payment of the rent charge does not appear to be dependent upon compliance with the restrictive covenant not to use the land for retail purposes. Each is a standalone provision. There appears to be no link between the separate obligations. 14 In Netherby Properties Pty Ltd v Tower Trust Ltd7 Perry J was considering an application to remove an encumbrance. He noted as follows:8 In this case, the form of the Memorandum of Encumbrance does not link the performance of the covenants with the enforceability of the charge. On the contrary, as will have been seen, the memorandum creates a yearly rent charge in perpetuity, which is in no way defeasible by reason of the breach of any of the covenants. Furthermore, the consideration expressed in the Memorandum of Encumbrance for the covenants (as opposed to the rent charge) is the transfer of the land. So that the covenants stand alone, unrelated to the rent charge. In my opinion, in such circumstances, the covenants, as opposed to the rent charge, cannot properly be regarded as registered. 15 In this case the same situation applies. It is appropriate to regard the restrictive covenant as not being a registered interest in the land. It follows that not 5 (1978) 20 SASR 227. 6 (1978) 20 SASR 227 at 246-247. 7 (1999) 76 SASR 9. 8 (1999) 76 SASR 9 at [57]-[58]. -- 5 of 10 -- [2024] SASC 3 Judge Dart 4 being a registered interest, it is not binding, without more, on someone who subsequently acquires the land. The Court’s power to direct the Registrar-General 16 In the originating application the applicants sought orders pursuant to s 64 of the Real Property Act 1886 (SA). There is case law on the extent to which that provision provides the Court with a power to direct the Registrar-General. The section is in the following terms: 64—Power of court to direct cancellation of certificate or entry In any proceeding in the Court respecting any land, or any transaction, contract, or application relating thereto, or any instrument or record affecting any such land, it shall be lawful for the Court to direct the Registrar-General to cancel, correct, record, substitute, issue, or make any certificate of title, or any memorial or entry in the Register Book, or otherwise to do such acts and make such entries as may be necessary to give effect to any judgment, decree, or order of such Court given or made in such proceeding, and the Registrar-General shall obey every such direction. 17 The operation of the section was considered by Stanley J in KI Seaport Pty Ltd v Abstraxion Pty Ltd & Anor.9 His Honour said:10 KI Seaport’s reliance upon the judgment of von Doussa J in Rogers v Resi-Statewide Corporation Ltd (No 2) is misplaced. In that case the Court exercised the power conferred by s 64 of the RPA to direct the Registrar-General to cancel the registered mortgage because the registration had been obtained by forgery, thereby enlivening one of the exceptions in s 69 of the RPA. However, von Doussa J held that the power conferred by s 64 is circumscribed. It is not a power exercisable at large but one limited to cases where such a proceeding is not expressly barred by s 69. Section 64 confers an ancillary power on the Court to make effective its grant of substantive relief. As KI Seaport has failed in its application for a declaration that easement B is invalid, s 64 does not confer a stand-alone source of power to impugn the validity of the easement. This is not a case that falls within one of the exceptions to indefeasibility in s 69. This distinguishes this case from Rogers v Resi-Statewide. [footnotes omitted] 18 A similar sentiment was expressed by Blue J in Jaggumantri v Registrar-General11 where his Honour said:12 Ms Jaggumantri contends that section 64 confers upon the Court an independent, or free- standing, power to direct the Registrar-General to cancel, correct, record, substitute, issue or make any certificate of title or any memorial or entry in the Register Book. I reject that contention. The power conferred by section 64 is only ancillary to a judgment, decree, or order of the Court given or made in a substantive proceeding in the Court respecting land, 9 [2020] SASC 113. 10 [2020] SASC 113 at [94]. 11 [2023] SASC 74. 12 [2023] SASC 74 at [79]. -- 6 of 10 -- [2024] SASC 3 Judge Dart 5 a transaction, contract, or application relating to land, or an instrument or record affecting land. 19 It appears that s 64 is a facilitating power. It can be used to allow the Court to perfect a judgment but it is not a standalone power to allow the Court to remove a registered instrument. It may only be used when there is a lawful reason, consistent with the provisions of the Real Property Act, for a registered instrument to be removed. 20 By the time this matter came on for argument, the applicants accepted that s 64 is limited and will not assist unless there is a proper reason to remove the document from the register. No order is now sought pursuant to s 64. Would the restrictive covenant bind the applicants? 21 This is a slightly unusual case in that the restrictive covenant was expressed to operate for a limited time. The time has expired. It is still necessary, however, to consider whether, if it had not expired, it would be binding on the applicants. The answer may assist in determining whether the encumbrance should be removed. 22 The restrictive covenant would have been enforceable against Preece’s Building Pty Ltd simply as a matter of contract law. The applicants are not parties to that contract and they are not bound by its terms. For such an encumbrance to be binding on a subsequent registered proprietor, more is required. 23 The question is whether the restrictive covenant runs with the land so as to bind subsequent registered proprietors. Equity developed the so-called rule in Tulk v Moxhay.13 It held that a purchaser with notice was bound by a restrictive covenant. Whether a restrictive covenant runs with land in equity can be a difficult matter to establish. 24 The rule in Tulk v Moxhay was ultimately considered too broad. In the result, equity requires more than mere notice of a covenant for it to be enforceable. It must be possible, from the register, to establish the land which benefits from the restrictive covenant. After a discussion about the rule and subsequent authorities, Bray CJ in Clem Smith Nominees Pty Ltd v Farrelly said:14 In my view the law is now clear in Australia that the burden of restrictive covenants will only run with the land in equity against a subsequent holder of the land with notice of the covenant when the covenant is entered into for the benefit of some parcel of land, or possibly some interest in land. The burden of a covenant in gross will not so run; such a covenant only binds the original covenantor. 13 (1848) 41 ER 1143. 14 (1978) 20 SASR 227 at 235. -- 7 of 10 -- [2024] SASC 3 Judge Dart 6 25 In Burke v Yurilla SA Pty Ltd15 Debelle J was dealing with the enforceability of a restrictive covenant. It is a decision of the Full Court. King CJ and Cox J agreed with Debelle J who wrote the reasons. His Honour said:16 The burden of restrictive covenant will run with the land in equity against a subsequent holder of the land who has notice of the covenant when the covenant is entered into for the benefit of some parcel of land, or possibly some interest in land: see Clem Smith Nominees Pty Ltd v Farrelly, per Bray CJ (at 235); Re Louis and The Conveyancing Act [1971] 1 NSWLR 164 at 175, 177-178. Before it can be held that the burden of a restrictive covenant will run with the land under the Torrens system, it is necessary to establish that the land entitled to the benefit of the covenant is capable of identification from the registered document or from the Register. 26 The necessity to have at least a quasi-dominant tenement is missing in this case. It is not possible to tell from the documents on the register what land is benefited by the restrictive covenant. It follows that the restrictive covenant did not run with the land. Discussion 27 The position the applicants find themselves in is that they own land upon which is registered an encumbrance. The encumbrance contains a restrictive covenant which, in its terms, expired 40 years ago, was not itself a registered interest in land and would not, in equity, in any event, bind the applicants if it had not expired. 28 The only issue which allows the document to remain on the title is that it contains a rent charge which, at common law, may exist in perpetuity. 29 The ultimate question is whether the existence of a rent charge, which is undoubtedly registerable and has no end date, prevents the encumbrance from being removed, notwithstanding the expiry and unenforceability of the restrictive covenant. 30 The original document is a contract. It records an agreement made between the parties to that contract. The question of whether or not it is appropriate to remove the encumbrance from the title can best be answered by ascertaining the contractual intention of the original parties. 31 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd17 the High Court said in a joint judgment:18 This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and 15 (1991) 56 SASR 382. 16 (1991) 56 SASR 382 at 389. 17 (2004) 219 CLR 165. 18 (2004) 219 CLR 165 at [40]. -- 8 of 10 -- [2024] SASC 3 Judge Dart 7 conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. [footnotes omitted] 32 The law of contract is objective. That has the advantage, in a case such as this, of meaning that the Court does not need to bother itself with the subjective beliefs of the original contracting parties. 33 The Court can have regard to the surrounding circumstances known to those parties. The relevant circumstance is that the Marion shopping centre had or was about to open and that the deregistered company wished to protect its investment in that shopping centre. It did so by restricting the use of adjacent land in competition to it. 34 The operative question is whether a reasonable person, knowing the circumstances and looking at the terms of the document, would understand that it was the intention of the parties that after 15 years the encumbrance could be removed from the title to the land. 35 The purpose of the agreement was to restrict the use of the subject land for a period of 15 years. No provision was made in the agreement for that period to be extended. The purpose was achieved and is now spent. The rent charge of $0.10 per annum was never more than a device to permit the registration of the document containing the primary purpose of the agreement. No rent charge would have been necessary if it was otherwise permissible to register the restrictive covenant. The purpose of the agreement having been spent, the encumbrance is simply a barnacle on the register book. 36 The intention of the parties was to restrict the use of the land for a period of 15 years only. The encumbrance was not to remain on the title after that time had expired. In cases such as this the Court should assist the parties to clean up the register. 37 The Registrar-General attended on the hearing and made submissions about the matter generally. She does not take a position one way or the other on whether the Court should remove the encumbrance. The intervention was to ensure the Court was taken to the correct authorities and had regard to the relevant considerations in determining whether or not to remove the encumbrance. The Court is grateful for the assistance provided by the Registrar-General. 38 I am satisfied it is appropriate to make a declaration that the encumbrance creates no rights or obligations binding on the applicants. There is a standard conveyancing document for the removal of a caveat. It may be in the circumstances -- 9 of 10 -- [2024] SASC 3 Judge Dart 8 of this matter, ASIC not wanting to be involved, to have the Registrar of the Court execute the discharge. 39 I will hear the parties as to the form of the orders. -- 10 of 10 --