Clauses permitting a builder to a charge over the property for unpaid fees, and to lodge a caveat to protect the charge has become commonplace in relation to building contracts. However, it is important to bear in mind that the wording of charging clauses needs to be clearly drafted as the case of Adrija Pty Ltd v Mohamed, Ahmed and Registrar General ACT Land Titles Office [2013] ACTSC 120 illustrates what could happen when charging clauses are not properly drafted.

What is an effective standard clause?

A large body of case law has held that an effective standard clause that creates a caveatable interest generally conforms to the following language [at 22]:

“The owner hereby charges the land on which the works are to be erected, with the due payment to the builder of all monies that may become payable to the builder by virtue of this contract, or otherwise arising from the carrying out of the works.”

What is a charging clause?

A charging clause is a provision in a contract or legal document that grants a party the right to secure a debt or obligation against certain assets. This ensures that the creditor can claim these assets if the debtor fails to meet their obligations

Example of a charging clause

An example of a charging clause is: “The Borrower hereby charges all its present and future rights, title, and interest in the property located at [Address] to secure repayment of the loan.” This ensures the lender can claim the property if the borrower defaults on the loan​

The issue in Adrija Pty Ltd v Mohamed

Instead of using the language in the aforementioned standard clause, the builder in Adrija Pty Ltd v Mohamed wrote the charging clause in the following manner [at 27]:

“The owner grants to the builder a charge over the site to secure the due performance of the contract. The builder may lodge a caveat over the site … This charge continues until the contract price is paid.”

(The terms in bold were defined in cl. 2 of the contract)

The builder lodged a caveat, but at a later date, terminated the contract alleging that the owner had failed to pay for the building work. In response, the owner wished to have the caveat removed on the grounds that the termination of the contract by the builder put an end to the charge, with Master Mossop agreeing [at 43]: “[I] n my view the charging clause had no operation after the termination of the contract and cannot support the maintenance of the caveat that was lodged.”

The extent of the charging clause boiled down to an interpretation of the terms with the clause securing “due performance of the contract”, which more or less was interpreted to mean that the full amount would be payable to the builder upon completion of the works. However, in the event that the builder terminated the contract, he was no longer entitled to the “contract price”, but rather was entitled to the cost of the works done, and a 20% margin.

Concluding remarks

Master Mossop observed that [at 45] “had the charging clause been in a more standard form, the evidence in relation to these matters was that it was clear that there were serious questions to be determined as to the liability of the Owners to pay the amounts claimed by the Builder prior to its termination of the contract. I would have considered that the Builder had an arguable case that a charge existed and would have continued the caveat.” However, the charging clause was expressed in such a manner that it would have endured only until “the contract price” was paid – which was no longer payable. As a consequence of how the charging clause was expressed, it was no longer operational and therefore, the caveat could no longer be maintained.

The decision in Adrija Pty Ltd v Mohamed is a reminder to builders to draft charging clauses clearly, and that even seemingly minor deviations from the standard form can produce undesirable results if a matter goes before the courts.

This article or the information contained therein does not purport to provide a full explanation of the law, give advice or any guidance to anyone in connection charging clauses or drafting of construction contracts generally or any other issue and this article is not to be used by anyone to support their legal position or otherwise. For clarification purposes and further to the above this article does not purport to be advice in any regard. This firm cannot take responsibility for any action readers take based on this information. We would be happy to assist you with any property, real estate, development, building, construction and engineering related legal issues you may have, please get in touch via [email protected] or telephone our Brisbane office on (07) 3087 3463, Sydney office on (02) 9293 2546 or Sunshine Coast office on (07) 5413 9270 and one of our experienced lawyers will respond to you.