Caveats – who, what, why?

What is a caveat?

A caveat is a form of warning with respect to land.  A caveat alerts others that the person who lodged the caveat (caveator) has an unregistered interest in the land against which the caveat is lodged (although at times it may not be an eligible interest in which case it is not a valid caveat – see below).

It also serves as a type of statutory injunction that prevents actions prohibited in the caveat from being undertaken by either the registered proprietor or any third party intending to deal with the land.

What does a caveat do?

Once a caveat is lodged against land, the Registrar General will generally prevent those actions described to be prohibited in the caveat from being undertaken. A common example would be to prohibit the registration of new dealings which would affect the interest of the caveator against the land.  There are, however, exceptions to this general rule, for example:

  1. where consent of the caveator to register a dealing is provided; or
  2. where a caveat is lodged pursuant to s74F of the Real Property Act 1900 (NSW) (RP Act) which does not specifically address the actions prohibited or registration of a dealing listed in section 74H(5) of the RP Act.

Who can lodge a caveat?

Caveats can be lodged to protect a wide range of equitable interests but the interests must be current and express interests in the land. These interests are generally referred to as caveatable interests.

Commonly, caveats are used to protect:

  1. people who have lent money to the owner of the land in exchange for a security interest in the land (mortgagees or chargees); or
  2. people who have signed contracts to buy the land but have not yet settled (purchasers).

At the time of registration, the caveator does not have to prove they have a caveatable interest in the land.  This can sometimes lead to abuse of process where persons lodging caveats do not have a genuine caveatable interest but use caveats to impede the registered proprietor dealing with the land. The registered proprietor can seek compensation from a caveator who lodges a caveat without reasonable cause and seek removal of the disingenuous caveats – see below.

When should you lodge a caveat?

If you have an unregistered equitable interest in land, it is very important to lodge a caveat as soon as possible to protect priority.  The sooner the caveat is lodged, the better the protection for the underlying interest.

This is most apparent in the case of mortgagees.   Imagine that two people, Person A and Person B, lent money to the owner of land.  Person A lends their money to the owner first but doesn’t register their interest or lodge a caveat.  Then Person B lends money to the owner and registers a mortgage to secure their interest.  Even if Person A later lodges a caveat to protect their interest, Person A will always be second to Person B in a priority contest, notwithstanding Person A lent money to the owner before Person B.

Removal of a caveat at Court

If a caveat is lodged on the title of the land, the registered proprietor may seek removal of the caveat by requesting voluntary withdrawal of the caveat by the caveator or, if it was lodged without reasonable cause and the caveator refuses to withdraw the caveat, by a lapsing application or by application to the NSW Supreme Court.

In fact, any person with an interest in the land against which a caveat has been lodged can apply to the NSW Supreme Court to have the caveat removed.  This means that not only the registered proprietor but people with other interests, such as a mortgagee, can apply to have a caveat removed.

If an application is made to remove a caveat, the caveator (person having the benefit of the caveat) must convince the NSW Supreme Court that the caveat should remain.

The NSW Supreme Court will ask two main questions on application to remove a caveat:

  1. does the caveator have a genuine caveatable interest?
  2. does the “balance of convenience” favour the maintenance, extension or removal of the caveat?[1]

Caveatable interest

First, the Court will check to make sure that the caveator has a genuine interest in the land that the law recognizes.

If the caveator’s interest falls into a common category of caveatable interest such as a mortgagee or purchaser, the first question will be easy to answer.

In other circumstances, the Court will look closely at the facts of the case to determine whether or not the caveator has a sufficient interest in the land.  The test is whether there is a “serious question” as to the existence of the interest claimed by the caveator.

Balance of convenience

The balance of convenience is a residual discretion of the Court to decide whether or not to maintain the caveat, even if the caveator has a caveatable interest, based on principles of justice.  To answer this question, the Court considers all the facts and circumstances to determine what is just based on the facts of the case.

Some factors which the Court has previously considered important in determining the balance of convenience include:

  1. the strength of the cavetor’s underlying interest;
  2. the fact that the caveator’s interest would be destroyed or lose priority if the caveat was removed;
  3. the owner of the land in trying to refinance or exercise another valid right in respect of the land;
  4. that the party applying to remove the caveat has a superior registered interest in the land and is being prevented from exercising their legal rights; and
  5. the value of the land being less than the mortgage debt and, as a result, the fact that no money would ever be available to the caveator.

The resolution of these factors will depend on the facts of the case.  The onus is always on the caveator to show that the balance of convenience is in the caveator’s favour.

If you would like to discuss this article or its implications for you, please contact our Property and Real Estate Projects Partner, Mike Ellis or Senior Associate, Yanlie Leung.

The contents of this publication do not constitute legal advice and are for general information purposes only. You should seek legal advice regarding your particular circumstances.

 

[1] Hanson Construction Materials Pty Ltd v Roberts [2016] NSWCA 240 at [77].