Equitable Charges in Construction: How They Work in Australia

What it is

An equitable charge is a security interest over property that does not transfer legal title. The chargee gets the right to have the property sold (or its proceeds applied) to satisfy the debt, but the chargor keeps ownership and possession until enforcement. For a builder, an equitable charge is one of the few tools that can secure unpaid contract money against a client's real estate or a subbie's assets without taking a mortgage or a court judgment first.

It sits between a personal claim for debt and a full legal mortgage. A personal claim ranks the builder behind every secured creditor on collapse. A legal mortgage needs registration, costs money and is rarely available to a contractor mid-project. An equitable charge is created by agreement, can be enforced through the courts and gives priority over later unsecured creditors and later equitable interests.

How an equitable charge is created

The classic way is by contract. A clause in the construction contract or a separate charging deed gives the builder a charge over identified property: typically the client's interest in the land being built on, or specific assets, or future receivables. The agreement has to identify the property with enough certainty, identify the secured obligation and show an intention to create a charge as security, not just a personal promise.

A charge can also arise by operation of law in narrow circumstances. The most common construction examples are charges on payments by way of subrogation or where a court orders a charging order over property to satisfy a judgment debt. Some jurisdictions also recognise an unpaid vendor's lien as an equitable charge over the land.

Form requirements are light. Equitable charges over land do not need to be in deed form, but written agreement is strongly advised. Charges over personal property fall under the Personal Property Securities Act 2009 (Cth) and require attention to the PPSA registration rules to be effective on insolvency.

Differences from a legal mortgage

A legal mortgage transfers legal title to the mortgagee, or in Torrens jurisdictions creates a registered statutory charge with similar effect. The mortgagee has direct rights of sale and possession on default. An equitable charge gives the chargee a right to apply to a court for an order for sale or appointment of a receiver. The chargee does not have an automatic right to take possession or to sell without court process unless the charging instrument expressly gives one.

The other difference is priority. A registered legal mortgage usually takes priority over an unregistered equitable charge over the same land. Caveatable equitable interests can be protected by lodging a caveat on title in Torrens jurisdictions, which preserves priority against later dealings.

Fixed vs floating charges

A fixed equitable charge attaches to specific identified property: this lot of land, these particular receivables. The chargor cannot deal with the property without the chargee's consent. A floating charge attaches to a shifting fund of assets, such as stock or future book debts, leaving the chargor free to manage the fund in the ordinary course of business. The charge crystallises into a fixed charge on a triggering event such as default or insolvency, at which point specific assets become subject to the charge.

The Personal Property Securities Act 2009 redefines the language. Under PPSA section 339, a reference to a fixed charge is treated as a security interest that has attached to property that is not a circulating asset; a reference to a floating charge is treated as a security interest that has attached to a circulating asset. For PPSA assets, the old fixed/floating distinction is replaced by the security interest framework, and registration on the PPSR is the path to perfection.

PPSA and personal property

If the charged property is personal property (not land), the PPSA applies. The builder has to register the security interest on the Personal Property Securities Register to perfect it. An unperfected security interest can be defeated by a liquidator or administrator under section 267 of the PPSA. So an equitable charge over equipment, receivables or other personal property is only useful if the builder registers within the prescribed timeframes.

Charges over land remain outside the PPSA. Land charges are dealt with under state-based real property legislation (such as the Real Property Act 1900 (NSW) and equivalents) and are protected by caveat in Torrens jurisdictions.

Enforcement

Enforcement of an equitable charge over land typically requires a court order. The chargee applies to the Supreme Court for a declaration that the charge exists, an order for sale and an order applying the proceeds to the secured debt. Where the charging instrument gives a power of sale and the right to appoint a receiver, those remedies can be exercised without going to court for the underlying order, though procedural fairness still applies.

For personal property under PPSA, enforcement follows the Act's enforcement rules: notice of default, opportunity to remedy, and sale or retention in satisfaction of the debt. Consumer property has additional protections.

Subordination

Subordination is when a chargee agrees to rank behind another creditor. A builder taking an equitable charge over a developer's land often finds the bank already holds a registered first mortgage and requires the builder to enter a subordination deed before it will fund construction. The deed records the agreed ranking and any conditions on enforcement.

A second-ranking equitable charge still has value. It catches surplus proceeds after the first mortgagee is paid and it gives standing to participate in enforcement decisions. It also gives the builder a stronger negotiating position when the developer hits trouble than an unsecured contract claim would.

When a builder should consider one

Equitable charges work best when the counterparty has unencumbered or lightly encumbered property and the builder wants security beyond a contract debt. Common scenarios in Australia include a major variation funded outside the head contract, a builder financing fit-out on credit, or a contractor agreeing to wait on a portion of the contract sum in exchange for security over the asset. They are less useful where the client has already maxed out its bank security or where the property is held by a special purpose vehicle with no equity.

The cost is professional fees to draft the charging instrument or charging clause, plus PPSA registration where the asset is personal property. The benefit is moving from the unsecured queue to a secured (or part-secured) position if the counterparty fails.