Leros Pty Ltd v Terara Pty Ltd [1992] HCA 22; (1992) 174 CLR 407 (3 June 1992)

HIGH COURT OF AUSTRALIA

LEROS PROPRIETARY LIMITED v. TERARA PROPRIETARY LIMITED [1992] HCA 22; (1992) 174 CLR 407
F.C. 92/015

Torrens System (W.A.)

High Court of Australia
Mason C.J.(1), Deane(2), Dawson(1), Gaudron(3) and McHugh(1) JJ.

CATCHWORDS

Torrens System (W.A.) - Registration - Indefeasibility of title - Caveat - Subject to claims caveat - Effect - Short term lease containing option to renew - Mortgage - Caveat by mortgagee - Registration of purchaser - Caveat by lessee claiming interest under lease and option - Whether subsequent purchaser and mortgagee bound by option - Transfer of Land Act 1893 (W.A.), ss. 68, 137, 18th Sched.

HEARING

Perth, 1991, October 23-24;
Canberra, 1992, June 3. 3:6:1992

DECISION

MASON C.J., DAWSON AND McHUGH JJ. This appeal raises important questions concerning the enforceability of interests sought to be protected by caveats lodged under the Transfer of Land Act 1893 (W.A.) ("the Act"). The broad question at issue is whether an option of renewal for a further term of seven years of a lease which is to expire on 5 December 1992 is valid and enforceable against the appellant ("Leros") which, on 12 March 1990, became and still is the registered proprietor of an estate in fee simple in Lot 10 of Strata Plan 17651, being Shop 34 in the Subiaco Village. The option is said to be protected by two caveats.

2. One is a caveat lodged on 13 July 1989 when Leros' predecessor in title, Western Acquisition Pty. Ltd. ("Western"), was the registered proprietor. The caveat, which was lodged by the present lessee ("Terara"), claimed a leasehold interest under a deed of extension of lease dated 3 December 1987 between the University of Western Australia ("the University"), which was then the registered proprietor of the land, and Halesworth Holdings Pty. Ltd. ("Halesworth"), which had assigned the whole of its interest in the lease and the option to Terara on the same day. The leasehold interest was for a term expiring on 5 December 1992 with the option of renewal for a further term of seven years. The caveat forbade the registration of any instrument affecting the claimed interest unless the instrument was expressed to be subject to the caveator's claim. The principal problem that this caveat presents is that, before the caveat was lodged, the University had transferred the reversion to Seventy-Fifth Jass Nominees Pty. Ltd. ("Jass") which became registered as proprietor on 28 September 1988. That registration was not expressed to be subject either to the lease or to the option to renew. It is common ground that Jass took subject to the lease because it was a lease for a term not exceeding five years to a tenant in actual possession. And it is common ground that Jass did not take subject to the option because the lease was not at that time registered or protected by Terara's caveat, unless the option is protected by the other caveat to which we shall refer shortly.

3. Subsequently, but also before Terara lodged its caveat, Jass transferred its estate or interest in the land to Western, which became registered as proprietor on 31 March 1989. Again, it is common ground that Western took subject to the unregistered lease but free from the option of renewal unless it was protected by the other caveat. The consequence is that the interest in the option to renew that was sought to be protected by Terara's caveat is an interest which was not valid and enforceable as against Leros' predecessors in title. They acquired a title to the property free from the option, subject to the effect of the other caveat to which we shall now refer.

4. That caveat was lodged on 15 July 1988 by the National Australia Bank Ltd. ("the Bank") to protect its interest under a mortgage by way of subdemise dated 2 October 1987 ("the Charge") granted by Terara to secure the repayment of moneys lent together with interest. By the Charge Terara demised the property for the unexpired residue of the term and any renewal thereof (except the last day). Terara agreed that it would stand possessed of the last day of the term in trust for the Bank to be disposed of as the Bank should direct. The then registered proprietor consented to the Charge for itself and subsequent reversioners. By cl.5(4)(c) of the Charge, Terara entered into a covenant with the Bank that, during the continuance of the mortgage, it (Terara) would:
"exercise any option to renew or extend the term of the Lease in
accordance with the procedure set out in the Lease and sign,
execute and deliver to the Bank any documents required by the Bank
to ensure that all the powers, rights and privileges granted to the
Bank by this Mortgage continue to apply during the extended or
renewed term".
5. By its caveat, the Bank claimed an estate or interest "as mortgage(e) of leasehold by subdemise", the obvious typographical error not being argued to be in any way material. In the statement of grounds in an annexure to the caveat, the Bank recited and identified the grant of the original lease and the subsequent dealings with respect to the lease, concluding with a reference to, and brief summary of, the mortgage by way of subdemise. Although the statement of grounds specified the term of the lease and the extensions of the term, no explicit reference was made to the existence of the option. The caveat forbade the registration of any instrument affecting the interest claimed by the Bank "unless such instrument be expressed to be subject to the Caveator's claim". The caveat was noted on all subsequent transfers.

6. When it became registered as proprietor, Leros had notice of Terara's lease, the option to renew and the caveat. Indeed, the instrument of transfer to Leros noted as encumbrances both of the caveats.

7. Before registration of that instrument of transfer, Terara commenced proceedings in the Supreme Court of Western Australia against Western, seeking relief by way of declaration that the option to renew the term of the lease was protected by the caveat lodged by the Bank. Nicholson J. rejected that claim for relief.

8. The present appeal arises out of separate proceedings commenced by Terara for a declaration that it has a valid option for renewal. At first instance, Terara relied on its caveat only, the Bank not being a party to the proceedings. Rowland J. upheld Terara's claim on the basis that Leros had actual notice of the lease and the option to renew and accepted registration subject to the interest disclosed in the caveat.

9. Leros appealed to the Full Court. When the appeal came on for hearing, the Court directed that the Bank be given notice of the proceedings and of the earlier proceedings heard by Nicholson J. Subsequently, the Bank moved for a declaration that its caveat protected the option of renewal so as to make it valid against a subsequent registered interest pursuant to s.68 of the Act. The Court made an order citing the Bank as the second respondent and the appeal and the motion were heard together. The Full Court, by majority, dismissed the appeal. Malcolm C.J. and Pidgeon J. held that Terara's caveat was valid and that Leros' title was subject to the lease and the option of renewal. Wallace J. (dissenting) considered that neither caveat was valid.
The statutory provisions

10. Section 137 of the Act provides, so far as it is material:

"Any beneficiary or other person claiming any estate or interest in
land under the operations (sic) of this Act or in any lease
mortgage or charge under any unregistered instrument document or
writing or under any equitable mortgage or charge by deposit
without writing or by devolution in law or otherwise may lodge a
caveat with the Registrar in the form of the Eighteenth Schedule
hereto or as near thereto as circumstances will permit forbidding
the registration of any person as transferee or proprietor of and
of any instrument affecting such estate or interest either
absolutely or until after notice of the intended registration or
dealing be given to the caveator or unless such instrument be
expressed to be subject to the claim of the caveator as may be
required in such caveat." (emphasis added)

The words emphasized have no counterpart in the equivalent statutory provisions in New South Wales, Queensland and Tasmania. The section requires that the name of the person by whom or on whose behalf the caveat is lodged be stated. The section further provides that the "person lodging such caveat shall if required by the Registrar support the same by statutory declaration stating the nature of the estate or interest claimed and the title thereto".

11. The form of caveat in the Eighteenth Schedule contains spaces in which the caveator is required to provide relevant information. For present purposes it is sufficient to mention that there are spaces in which the caveator is required to "Specify the Estate or Interest claimed" and "Specify the grounds on which claim is made".

12. Section 68 provides:

"Notwithstanding the existence in any other person of any estate or
interest whether derived by grant from the Crown or otherwise
which but for this Act might be held to be paramount or to have
priority the proprietor of land or of any estate or interest in
land under the operation of this Act shall except in case of fraud
hold the same subject to such encumbrances as may be notified on
the folium of the register book constituted by the certificate of
title; but absolutely free from all other encumbrances whatsoever
except the estate or interest of a proprietor claiming the same
land under a prior registered certificate of title and except as
regards any portion of land that may by wrong description of
parcels or boundaries be included in the certificate of title or
instrument evidencing the title of such proprietor not being a
purchaser for valuable consideration or deriving from or through
such a purchaser. Provided always that the land which shall be
included in any certificate of title or registered instrument
shall be deemed to be subject to the reservations exceptions
conditions and powers (if any) contained in the grant thereof and
to any rights subsisting under any adverse possession of such land
and to any public rights of way and to any easements acquired by
enjoyment or user or subsisting over or upon or affecting such
land and to any unpaid rates and to any mining lease or license
(sic) issued under the provisions of any statute and to any prior
unregistered lease or agreement for lease or for letting for a
term not exceeding five years to a tenant in actual possession
notwithstanding the same respectively may not be specially
notified as encumbrances on such certificate or instrument but no
option of purchase or renewal in any such lease or agreement shall
be valid as against a subsequent registered interest unless such
lease or agreement is registered or protected by caveat."

13. The word "encumbrance" is defined by s.4(1) of the Act to include "all prior estates interests rights claims and demands which can or may be had made or set up in to upon or in respect of the land".
The validity of Terara's claim as based on its caveat

14. The validity of Terara's existing lease, the term of which will expire in 1992, is not in dispute. As a short term tenancy, not exceeding five years to a tenant in actual possession, the existing lease is specifically protected by s.68, notwithstanding that it is not registered. What is in dispute is the enforceability of the option for renewal which is not registered.

15. The purpose of the last proviso in the section, that which relates to an option of purchase or renewal, is to ensure that no such option should be valid against the person having the benefit of the subsequent dealing unless the instrument creating the lease is registered or a caveat protecting the lease is lodged. This proviso was necessary, as Barwick C.J. pointed out in Mercantile Credits Ltd. v. Shell Co. of Australia Ltd. (1) [1976] HCA 9; (1976) 136 CLR 326, at p 339 , "because, without it, the effect of the earlier substantive provision of the section would have made the subsequent dealing subject to the right of purchase or of renewal as the case may be". The assumption was that the prescribed exception to the principle of indefeasibility of the title of the registered proprietor in favour of a prior unregistered lease for a term not exceeding five years would, but for the proviso, extend to an option of renewal.

16. Terara does not dispute, nor could it dispute, that the option to renew is an "encumbrance" within the meaning of that expression as it is defined by s.4 of the Act. A covenant in a lease giving a right of renewal of the term runs with the land so that the covenant is so annexed to the land as to create an interest in the leased land (2) ibid, per Barwick C.J. at pp 337-338; Gibbs J. at pp 344-345; Stephen J. at pp 350-351. Generally speaking, such a covenant runs with the reversion as well as the land (3) ibid., per Gibbs J. at p 344; Re Davies (1989) 1 Qd R 48, at p 51. Whether such a covenant in an unregistered lease of land under the Act runs with the reversion depends upon the provisions of the Property Law Act 1969 (W.A.). Section 78 of the Property Law Act provides that a covenant runs with the reversion. However, by virtue of s.6 of the Property Law Act, in the absence of express provision, the Property Law Act, so far as it is inconsistent with the Act, does not apply to land under the Act. Section 69, which, like s.78, is in Pt VII of the Property Law Act, provides that the provisions of Pt VII "apply to leases and sub-leases of land under the Transfer of Land Act 1893, notwithstanding anything contained in that Act". Section 7 of the Property Law Act defines the expression "land under the Transfer of Land Act 1893" in these terms:

"any estate or interest registered under that Act".

As the fee simple of the land in question is an estate registered under the Act, Pt VII of the Property Law Act, including s.78, applies to leases of the land. Accordingly, contrary to the submission made on behalf of Leros, we take the view that an unregistered lease of land under the Act is a lease which satisfies the definition and that the option runs with the reversion. But this is not to say that Pt VII of the Property Law Act overrides the specific provision made in the concluding words of s.68 of the Act with respect to the invalidity of an option to renew. It would not be right to attribute to the general words of s.69 of the Property Law Act an intention to repeal the specific provision in s.68 of the Act.

17. The appellant's argument, based on the concluding words of s.68, is that Jass and its successors acquired a title free from that encumbrance from the moment at which Jass was registered as proprietor. The response to that argument, accepted by the majority in the Full Court of the Supreme Court, was expressed by Malcolm C.J. in these terms:

"Section 68 does not say that the option of renewal in an
unregistered lease is not valid against all subsequent registered
interests. It provides only that it shall not be valid against 'a
subsequent registered interest unless the said lease is registered
or protected by caveat'."

However, this interpretation ignores the fact that, in an appropriate context, the indefinite article "a" is quite capable of meaning "any". And here, when the provision is read in the light of its context and purpose, that is how it should be understood.

18. The purpose of the last proviso in s.68 is to ensure that the title of the subsequent registered proprietor is indefeasible as against an option of renewal in a prior lease for not more than five years unless the lease was registered or protected by caveat. Section 68 gives expression to the essential principle of the Torrens system, namely, that "the registered proprietor has the legal property in the land, subject only to equities and such interests as the Act expressly preserves", to quote the words of Windeyer J. in Breskvar v. Wall (4) [1971] HCA 70; (1971) 126 CLR 376, at p 400; see also Frazer v. Walker (1967) 1 AC 569, per Lord Wilberforce at p 585. A purchaser who takes with notice of an antecedent equitable interest, who becomes registered without fraud, takes free from that interest (5) Bahr v. Nicolay (No. 2) (1988) 164 CLR 604, per Brennan J. at pp 652-653. To become registered with notice of a prior unregistered interest does not constitute fraud (6) Mills v. Stokman [1967] HCA 15; (1967) 116 CLR 61, per Kitto J. at p 78.

19. The Torrens system is, as Barwick C.J. noted in Breskvar (7) (1971) 126 CLR, at pp 385-386:

"not a system of registration of title but a system of title by
registration. That which the certificate of title describes is
not the title which the registered proprietor formerly had, or
which but for registration would have had. The title it certifies
is not historical or derivative. It is the title which
registration itself has vested in the proprietor."

Torrens, in his A Handy Book on the Real Property Act of South Australia (8) (1862), p 11, in a passage quoted by Windeyer J. in Breskvar (9) (1971) 126 CLR, at p 400, described the operation of the legislation as:

"cutting off the retrospective or derivative character of the title
upon each transfer or transmission, so as that each freeholder is
in the same position as a grantee direct from the Crown".

20. This passage supports the view that the effect of the registration of a subsequent dealing bringing about the registration of proprietorship of an estate or interest in land is to extinguish all prior unregistered estates or interests which, but for that registration, would have conflicted with the proprietor's estate or interest or encumbered that estate or interest, unless the prior unregistered estate or interest falls within the exceptions to indefeasibility of title mentioned in s.68. In other words, a person seeking to preserve an unregistered interest not falling within those exceptions must register that interest in advance of the registration of a subsequent inconsistent dealing or prevent such registration by caveat or otherwise, and thereby enable registration of the unregistered interest. Once that interest is defeated by registration of a subsequent inconsistent dealing bringing about the registration of a new proprietor, the first interest is extinguished for all purposes and cannot be asserted against any later proprietor(10) Note the reference in Bahr v. Nicolay (No. 2) (1988) 164 CLR, per Mason C.J. and Dawson J. at p 619, to "registration of the transfer ... as destroying the appellants' rights". The first interest does not become an inchoate interest capable of being asserted against a later proprietor or an interest which remains in suspension so that it is capable of subsequent revival against such a proprietor. We adopt the comment of Franklyn J. in Osborne Park Co-operative Society Limited v. Wilden Pty. Ltd.(11) (1989) 2 WAR 77, at p 84 with respect to the impact of s.68 on an option of renewal in a prior unregistered lease not exceeding five years, namely, that "no ... proprietary right exists as from the date of acquisition of title by the subsequent registered proprietor".

21. It is an incident of the indefeasibility of the title of the registered proprietor not only that he or she holds free from prior unregistered interests, except those specified in s.68, but also that he or she has the capacity to transfer a title to the interest of which he or she is proprietor to a successor, free from such unregistered interests. In this respect, the operation of the Act is similar to the operation under the general law of the doctrine of the bona fide purchaser for value who acquires the legal estate without notice of a prior equitable interest. The acquisition of the legal title by such a purchaser in those circumstances defeats the prior equitable interest in the sense that the interest is destroyed. Thus a subsequent purchaser with notice of the equitable interest, who purchases from the first purchaser, is not bound by the interest. If it were otherwise, a bona fide purchaser might be unable to deal with his or her property. The sale of the property would be clogged(12) Maitland, Lectures on Equity, (1909), pp 122-123.

22. The failure of a person entitled to an equitable estate or interest to lodge a caveat against dealings with the land does not necessarily involve any loss of priority which the time of the creation of that interest would otherwise give(13) J. and H. Just (Holdings) Pty. Ltd. v. Bank of New South Wales [1971] HCA 57; (1971) 125 CLR 546, per Barwick C.J. at p 554; Windeyer J. at p 558. That is because the purpose of a caveat against dealings is to operate as an injunction to the Registrar-General to prevent registration of dealings forbidden by the caveat until notice is given to the caveator so that he or she has an opportunity to oppose such registration(14) ibid., per Barwick C.J. at p 552; Godfrey Constructions Pty. Ltd. v. Kanangra Park Pty. Ltd. [1972] HCA 36; (1972) 128 CLR 529, per Barwick C.J. at p 537. Although the failure to lodge a caveat may not result in a loss of priority in a competition between conflicting equitable interests, such a failure will, as previously explained, result in the destruction of the equitable interest as soon as registration of an inconsistent dealing constitutes the registration of a subsequent proprietor who takes free from the prior unregistered equitable interest. In this respect there is a distinction between a competition between unregistered equitable interests and a competition between a prior unregistered equitable interest and a subsequently registered estate or interest in the land. In the second case, the prior unregistered interest is defeated so that the contractual right on which that interest depends, though enforceable against the party who created it, is not enforceable as against the third party who becomes registered as the proprietor of the inconsistent estate or interest.

23. This brings us to a consideration of the effect of Terara's caveat as a "subject to claims" caveat and the fact that the caveat was noted as an encumbrance in the instrument of transfer from Western to Leros. As appears from s.137 of the Act, a caveator may lodge a "subject to claims" caveat, or "permissive" caveat as it is known in South Australia, instead of a caveat forbidding the registration of dealings. If, in conformity with such a caveat, an instrument of transfer, expressed to be subject to the caveat, is registered, the title of the transferee is subject to the rights of the caveator. In South Australia, that view has been taken by Olsson J. in Andrews v. South Australian Superannuation Fund Investment Trust(15) (1985) 124 LSJS 153, where his Honour, referring to the effect of registration of a transfer expressed to be subject to "an existing valid caveat", stated(16) ibid., at p 163. that "the effect is to preserve the rights of the caveator". In Coles KMA Ltd. v. Sword Nominees Pty. Ltd.(17) (1986) 44 SASR 120, Bollen J. (with whose judgment Jacobs J. expressed his substantial agreement) cited those remarks with approval(18) ibid, at p 128.

24. However, the effect of the registration of such a transfer is not to validate the estate or interest claimed by the caveat. All that registration in that form, in conformity with the caveat, achieves is to prevent the registration from destroying or defeating the prior unregistered interest claimed by the caveator, assuming it to be valid and enforceable. Whether the interest so claimed is valid and enforceable remains a matter for resolution after registration. The "subject to claims" caveat and registration is a procedure which enables resolution of that question to occur after, if not before, registration. The registered proprietor takes, under such a transfer, subject to the caveat, that is, subject to the claim made by the caveator; the proprietor does not take subject to the interest claimed by the caveator. The form of the registration in the present case illustrates the point. It is the caveat that is noted in the memorandum of encumbrances. And a caveat is not a defect in title or an encumbrance(19) Godfrey Constructions Pty. Ltd. (1972) 128 CLR, per Barwick C.J. at p 537; Forster v. Finance Corporation of Australia Ltd. (1980) VR 63, per Crockett J. at p 65.
The validity of Terara's claim as based on the existence of an equitable right to registration

25. Terara contends that, notwithstanding s.68, it has an enforceable equity against Leros, arising out of the conduct of Leros before it became registered as proprietor. In Bahr v. Nicolay (No. 2), this Court recognized that a purchaser who has undertaken to hold his or her title subject to a third party's right to repurchase is bound by that undertaking after registration of his or her transfer, the undertaking giving rise to a trust. In the present case, no such undertaking was given by Leros. Nor were the circumstances in which Leros became registered such as to justify an inference that Leros recognized the validity of the option of renewal claimed by Terara. Likewise, those circumstances do not warrant the conclusion that Leros' refusal to acknowledge the validity of Terara's option of renewal amounted to fraud, even according to the extended concept of "fraud", in the context of s.68, favoured by Mason C.J. and Dawson J.(20) Bahr v. Nicolay (No. 2) (1988) 164 CLR, at p 619
The efficacy of the Bank's caveat

26. The Bank submits that its caveat affords protection for Terara's interest as lessee and option holder, at least to the extent necessary to protect the Bank's subordinate interest as "mortgage(e) by way of sub-demise". Provided that the Bank's caveat complies with the statutory requirements with respect to formalities and contents of caveats, the Bank's contention is, in our view, correct.

27. The concept of protection of an estate or interest by caveat is to be derived from s.137. As noted previously, that section enables a beneficiary or other person claiming an estate or interest in land under the Act to lodge a "subject to claims" caveat forbidding the registration of any person as transferee or proprietor of or of any instrument affecting such estate or interest unless the instrument is expressed to be subject to the claim of the caveator. The section proceeds on the footing that a person claiming an estate or interest protects that interest by lodging a caveat forbidding the registration of an interest or an inconsistent interest except on a "subject to claims" basis. It should be noted that the section expressly provides for the lodging of a caveat by a person who claims an estate or interest "in any lease" under an unregistered instrument. Thus, the concept of protection which emerges from s.137 is that a caveator who claims an interest in an unregistered lease as, for example, mortgagee by way of subdemise, may protect his or her interest and, incidentally, the lease itself to the extent necessary to protect the caveator's dependent interest.

28. The purpose of a caveat, as stated earlier, is to operate as an injunction against registration of an inconsistent dealing otherwise than in accordance with the caveat so as to enable, in the ultimate analysis, a determination of the conflicting claims. There is no reason in principle why the failure of Terara to lodge a caveat to protect its interest should affect the Bank's capacity to protect fully its own interest by lodging a caveat. And if the Bank's interest was dependent on, and derived from, an interest held by Terara, as it was, protection of the Bank's interest by caveat necessarily entailed reliance on Terara's interest as an element in that protection. Protection of the Bank's interest meant protection of Terara's interest, at least to the extent of the dependency. In this respect, it is necessary to bear in mind that, in a contest between the Bank and Leros, the Bank could compel Terara, even if it was unwilling to exercise its option, to do so.

29. The argument for Leros is that every subordinate interest perishes with the superior interest upon which it is dependent(21) Bendall v. McWhirter (1952) 2 QB 466, per Romer L.J. at p 487, and, therefore, the Bank's caveat perishes with the option. However, it is necessary to distinguish between the validity of a caveat and that of the interest sought to be protected by the caveat. Although a subordinate interest will perish with the destruction of the superior interest upon which it depends, that principle can have no application to a caveat which, as stated earlier, is not a proprietary interest.

30. Therefore, the first question is whether the caveat sufficiently specifies the Bank's interest as mortgagee by way of subdemise so as to satisfy the requirements of s.137. It has been said that the purpose of requiring the caveator to "specify" the estate or interest claimed is to enable the registered proprietor to know, or find out, the claim which he or she will have to meet(22) In re Spencer; Hale (Caveator) (1904) 4 SR (N.S.W.) 471, per Darley C.J. at p 473. It has also been said that another purpose is to enable the Registrar-General to determine whether a dealing lodged for registration is inconsistent with the estate or interest claimed by the caveator. But, in evaluating the significance of that purpose, regard must be had to the existence of the Registrar-General's power under s.137 to require the caveator to provide a statutory declaration stating the nature of the estate or interest and the title thereto. In the ultimate analysis, it seems to us that "specify" should be understood in the sense of "mention definitely or explicitly". Subject to some qualification, that is the meaning adopted by the Full Court of the Supreme Court of Western Australia in Kuper v. Keywest Constructions Pty. Ltd.(23) (1990) 3 WAR 419.

31. Two objections are made to the sufficiency of the description of the interest claimed in the caveat: that the caveat does not state the amount of the security and that it does not state the term of the subdemise. However, in our view, a statement of the amount of the debt is not required as an element in the requisite description of the caveator's interest. And, although the term of the subdemise does not appear on the face of the caveat, par.6(a) of the annexure reveals to all who examine the caveat that the lessee

"demised to the Caveator all the Lessee's right, title and interest
in and to the Leased Premises for the residue of the term of the
Lease as renewed or extended from time to time except the last day
of the term of the Lease".

Paragraph 6(b) states that the lessee is to stand possessed of that last day on trust for the Bank. Paragraph 4 states that the term of the existing lease is for a term of five years from 6 December 1987. On reading these paragraphs of the Annexure, a person examining the caveat could be left in no doubt as to the extent and nature of the Bank's claim which he or she would have to meet if he or she proceeded to registration as proprietor subject to that claim.

32. However, the same cannot be said for the option of renewal, the only reference to which is that made in par.6(a) of the Annexure, as set out above. Accordingly, the option is not sufficiently specified by the Bank's caveat, and the Bank's interest is supported by the caveat only to the extent of the term expiring in December 1992. Thus, the lease, but not the option, is protected by the Bank's caveat to the extent of the dependency.

33. It should be noted that the observations made previously in Mercantile Credits Ltd.(24) (1976) 136 CLR, at p 339 do not assist the respondents' case. Even if capable of application to the different question in issue here, they cannot stand in the face of the clear words of s.68.

34. The question remains whether the caveat lodged by the Bank which, for the purposes of s.137, will protect the lease to the extent necessary to protect the Bank's interest, constitutes protection of the lease itself for the purposes of the concluding words in s.68. There is much to commend the view that the concluding words of that section contemplate a caveat protecting the lease itself as distinct from a dependent and lesser interest. That is the natural reading of the provision and it is supported by the circumstance that protection by caveat is specified as an alternative to registration of the lease itself. In other words, although the tenant's unregistered lease for not more than five years is protected without registration if he or she is in actual occupation, an option for renewal in that lease is not protected unless the lease itself is registered or made the subject of a caveat.

35. On the other hand, if s.137 permits protection of a superior interest to the extent that such protection may be necessary for the protection of a subordinate and dependent interest claimed by the caveator, why should s.68 be read in the narrow sense that its language might seem to suggest? Is there any discernible purpose to be served by insisting on the stricter requirement? Although the argument is not without force, we favour the stricter interpretation, because the concluding words of s.68 are providing for an exception to indefeasibility of title. As such, the exception should be strictly construed.

36. For the foregoing reasons we would allow the appeal.

DEANE J. I agree with Gaudron J. that the caveat lodged by the National Australia Bank claiming an interest "as mortgage(e) of leasehold by subdemise" had the effect that the underlying "leasehold" was "protected by caveat" for the purposes of s.68 of the Transfer of Land Act 1893 (W.A.). The caveat protected the Bank's interest which was clearly designated as being dependent on that "leasehold" which was, in turn, specifically identified in the statement of grounds set out in the annexure to the caveat. Necessarily, the caveat also "protected" the lease itself to the extent necessary to sustain the Bank's interest in it as mortgagee by way of subdemise.

2. While I am in general agreement with Gaudron J.'s reasons for concluding that the lease is "protected" by the Bank's caveat for the purposes of s.68, I respectfully differ from her Honour in relation to the extent of that protection. In a context where the Bank's caveat protects the lease only to the extent necessary to sustain the Bank's interest in it, the lease (and the option contained in it) is, in my view, protected by the caveat for the purposes of s.68 only to that limited extent. That being so, it will protect Terara's entitlement under the option clause of the lease only to the extent that, and for so long as, that entitlement is necessary to protect and preserve the interest of the Bank (or a person claiming through the Bank) under the subdemise by way of mortgage. If the interest under the subdemise is extinguished before the exercise of the option by Terara, the operation of the Bank's caveat (i.e. to protect the Bank's interest or estate) will be spent and the caveat will no longer protect the lease for the purposes of s.68. It is, however, unnecessary that I expand upon this aspect of the case since a majority of the Court is of the view that the Bank's caveat provides no protection of the lease at all for the purposes of s.68.

3. Subject to the foregoing, I agree with the reasons for judgment of Mason C.J., Dawson and McHugh JJ. I would dismiss the appeal in so far as it relates to the declaration made between the appellant and the Bank and otherwise stand the matter over to enable written submissions to be made as to the content of further orders.

GAUDRON J. I agree with the joint judgment save as to the meaning and operation of the words "protected by caveat" in the second part of s.68 of the Transfer of Land Act 1893 (W.A.) ("the Act").

2. The first part of s.68 is in familiar form and provides that, fraud aside, a registered proprietor of land under the Act holds it "subject to ... encumbrances ... notified on the folium of the register book constituted by the certificate of title", but, subject to stated exceptions which are not presently relevant, "absolutely free from all other encumbrances whatsoever".

3. The second part of s.68 provides that land which is included in a certificate of title or registered instrument is "deemed to be subject to" certain rights or interests, including "any prior unregistered lease ... for a term not exceeding five years to a tenant in actual possession", even though the right or interest is not "specially notified as (an encumbrance) on (the) certificate or instrument". The second part concludes:

"but no option of purchase or renewal in any such lease ... shall
be valid as against a subsequent registered interest unless such
lease ... is registered or protected by caveat".

4. Two matters should be noted with respect to s.68. First, a lease for a term not exceeding five years to a tenant in actual possession needs neither registration nor a caveat for its protection against a subsequent registered interest. That protection is given by the section itself. Second, the concluding words of s.68 limit that protection by excluding an option for purchase or renewal unless the "lease ... is registered or protected by caveat". Of course, they also confer protection, although it may be that, in that regard, they do no more than confirm what, in any event, would be the position on registration or on lodgment of a caveat protecting a lease containing an option, whatever be the term of that lease.

5. It is important to note that the protection which the concluding words of s.68 allow to an option is allowed because the option is contained in a lease of the kind to which the section refers and which is registered or protected by caveat and not because of anything done in relation to the option as such. Thus, if a lease of that kind is protected by caveat, an option in that lease is, without more, also protected.

6. It is not in the least surprising that an option should obtain protection merely on account of its inclusion in a lease which is protected by caveat and which is of a kind specified in the second part of s.68. It is now settled that, quite apart from a provision like s.68, an option in a registered lease obtains protection even though it is not noted on the register(25) Mercantile Credits Ltd. v. Shell Co. of Australia Ltd. [1976] HCA 9; (1976) 136 CLR 326. See also Fels v. Knowles (1906) 26 NZLR 604, at p 621; Pearson v. Aotea District Maori Land Board (1945) NZLR 542, at pp 550-551; Medical Benefits Fund of Aust. Ltd. v. Fisher (1984) 1 QdR 606, at p 608; Re Eastdoro Pty. Ltd. (No. 2) (1990) 1 QdR 424, at pp 426, 430. And, on the basis that an option is "so intimately connected with the term granted ... that it should be regarded as part of the estate or interest ... (obtained) under the lease"(26) Mercantile Credits Ltd. (1976) 136 CLR, per Gibbs J. at p 345., it is entirely reasonable that, if a lease is protected by caveat, that protection should extend to any option contained in it.

7. The appellant relied on two matters to advance its claim that, notwithstanding the caveat of the second respondent ("the Bank"), it took title free of the option contained in the first respondent's ("Terara's") lease. First, it was argued that the lease is not protected because the Bank's caveat does not, in terms, protect it. Alternatively, the appellant relied on the fact that the Bank claimed a subordinate estate, being an estate or interest as mortgagee by subdemise.

8. The appellant's first argument involves treating the expression "protected by caveat" as having the same meaning and effect as "the subject of caveat". But, as a matter of ordinary language, that is not so. The expression "protected by caveat" needs to be qualified by a description of the caveat as one based on the lease or, in more usual terms, as one in which an estate or interest is claimed as lessee if it is to be read as having the same meaning and effect in s.68 as the expression "the subject of caveat". And as a matter of ordinary usage, "protected by caveat" extends to any situation in which a caveat has the effect of protecting an estate or interest, notwithstanding that that estate or interest is not itself the subject of the caveat.

9. To treat the words "protected by caveat" as having the same meaning as "the subject of caveat" is to read down the words of s.68 or, more accurately, to read into those words a qualification that is not there. And it is a departure from the generality of their ordinary meaning. The expression "protected by caveat" is not a technical term and, thus, a departure from its ordinary meaning is warranted only if that meaning would lead to absurdity, repugnance or inconsistency with the rest of the Act(27) Grey v. Pearson [1857] EngR 335; (1857) 6 HLC 61, per Lord Wensleydale at p 106 [1857] EngR 335; (10 ER 1216, at p 1234). No consequence of that kind is here involved. Accordingly, the appellant's first argument must fail.

10. The appellant's alternative argument is that a lease is not protected by caveat unless the caveator claims an estate or interest commensurate with that granted by the lease. On this argument, if the Bank had taken a mortgage by way of an assignment of lease and had claimed an estate or interest as mortgagee by way of assignment, the lease would be protected. But, the argument goes, the Bank claimed only a subordinate estate as mortgagee by way of subdemise, and that was ineffective to protect anything other than the estate or interest which passed to the Bank.

11. The appellant's alternative argument relied heavily on the subordinate nature of an estate passing by way of subdemise. It was said by reference to Bendall v. McWhirter(28) (1952) 2 QB 466 - and correctly in my view - that a subordinate interest perishes with any superior interest on which it is dependent. Thus, it was said that if Terara's lease should, for any reason, come to a premature end, the Bank's interest will come to an end at the same time, and, if Terara's option is ineffective, the Bank's interest in that option is also ineffective. All this may be accepted, but it says nothing as to the effect of the Bank's caveat which was lodged during the subsistence of the lease and whilst the lessor remained registered as proprietor of the freehold. In particular, it says nothing as to whether, in these circumstances, the Bank's caveat protects Terara's lease so as to bring it within the concluding words of s.68.

12. In my view a caveat claiming an estate by way of subdemise is, for the purposes of the concluding words of s.68 of the Act, in the same position as a caveat claiming an estate as assignee of a leasehold. In either case the validity of the caveat is open to challenge on the ground that no lease was subsisting at the time of the transaction in question. And, in the case of a caveat claiming an interest by way of subdemise, it is also open to challenge on the basis that the leasehold interest has since come to an end.

13. The essence of a caveat is that it claims an estate or interest in land. And a claim having been made, the interest is protected because, in the case of an absolute caveat, it operates to forbid registration of a subsequent dealing until the caveator has had an opportunity to establish his or her claim(29) In re Hitchcock (1900) 17 (N.S.W.) WN 62, at p 63; Butler v. Fairclough [1917] HCA 9; (1917) 23 CLR 78, per Griffith C.J. at p 84; J. and H. Just (Holdings) Pty. Ltd. v. Bank of New South Wales [1971] HCA 57; (1971) 125 CLR 546, per Barwick C.J. at p 552; per Windeyer J. at p 558. And, in the case of a "subject to claim" caveat, the interest is protected by forbidding registration of a dealing which does not acknowledge that the claim has been made and, if established, will bind the person or persons taking subject to it.

14. A caveat by a person claiming an estate or interest as assignee of a lease or as lessee by subdemise is a claim with respect to the interest directly and immediately asserted. But it is made by reference to, and is necessarily also a claim with respect to, the lease which is the subject of the assignment or demise. Because the protection which a caveat affords is a protection with respect to the claim made and because the Bank's claim extended to Terara's lease, that lease was necessarily protected along with the Bank's direct and immediate interest as mortgagee by subdemise. And as already indicated, the fact that the Bank did not, in terms, claim with respect to the option is irrelevant, for the concluding words of s.68 operate by reference to a lease and not an option.

15. It does not automatically follow that, even though the Bank's caveat protects Terara's option, the appeal should be dismissed. Terara is presently bound by a judgment in proceedings between it and the appellant's predecessor in title to the effect that the option was not protected by the Bank's caveat. Of course that does not affect the position of the Bank, it not having been party to those proceedings.

16. In this Court the argument for Terara and the Bank proceeded on the basis that, unless the earlier judgment is set aside, only the Bank can rely on its caveat. The Court was informed that efforts were being made to revive an appeal from that judgment, the appeal, apparently, having been discontinued. The effect of the earlier judgment on the relief which Terara might obtain in these proceedings was not fully explored in argument. In these circumstances, the appropriate course is to dismiss the appeal so far as it relates to the declaration made between the appellant and the Bank, but otherwise to stand the matter over to enable the parties to take such action in relation to the earlier judgment as they may be advised and, thereafter, to put further submissions as to the order which should be made.

ORDER

Appeal allowed with costs.

Set aside the orders of the Full Court of the Supreme Court of Western Australia and in lieu thereof order that:

(i) the appeal to that Court be allowed with
costs;
(ii) the second respondent's motion be dismissed
with costs; and
(iii) the orders of the Supreme Court of Western
Australia (Rowland J.) be set aside and in lieu
thereof order that the first respondent's originating
summons be dismissed with costs.

Order that, within fourteen days, the first respondent lodge with the Registrar of Titles a registrable form of withdrawel of caveat E148871 duly executed.