Two brothers executed a business guarantee which contained the following charging clause:
The Guarantors each hereby charges their respective interests in any land now or hereafter held by them for all monies guaranteed pursuant to this Deed.
Some years later they purchased a property in their own name as trustees of their superannuation fund.
Some years later the borrower went into default and the lender did a property search identifying that they owned the property.
The lender met with the borrowers and the borrowers claimed to own the property. The lender, on the strength of the representation, lodged a caveat and allowed the borrowers to continue to incur significant credit.
The borrowers business failed and the lender sought to enforce a charge over the property. This was resisted by the corporate trustee for their superannuation fund which sought to be declared and registered as the owner.
The starting point was to determine whether or not the superannuation fund really did buy the property. Based on the available records the judge found it did.
The next question was whether the lender acquired, by virtue of the charging clause, a charge over the property. The judge found it did not:
The only interest the brothers had in the land was to hold the legal title as trustees on behalf of the Superannuation Fund. That did not give them a beneficial interest in the land. Trustees charging property held by them on trust are not to be assumed when contracting to be charging their beneficiaries’ interests in breach of trust.
The judge was unwilling to construe the charging clause widely to include legal but not beneficial interests because such an interpretation would be illegal. There is a rule that where the words of a contract are capable of two meanings, one lawful and one unlawful the lawful should be used. In this regard it is illegal to pledge your interests in a superannuation fund.
Lesson to be learned
Where a property is held on a trust lenders should not expect to see anything on a title search that puts them on notice. Accordingly if the property is held on trust, either for a superannuation fund or some other trust, a caveat lender will find that they cannot enforce against the property.
The only way to guard against this problem is to insist on a registered mortgage. That way if there is some undisclosed trust it does not matter as due to the principle of indefeasibility the registered interest will prevail.