Customer Debt Caveat

The Dispute Resolution team at Meyer Vandenberg help many business clients recover debts owed by customers.

When meeting a first-time client, a common request is for us to lodge a caveat against the title of land owned by the debtor personally or by the debtor company’s directors.

While it may seem reasonable as a matter of principle that a debtor not get to enjoy their land while owing a debt they seem unprepared to pay, lodging a caveat is not so straightforward from a legal perspective.
When can you lodge a caveat over someone’s land? When you have an interest in the land.

What is a Caveat?

A caveat is a means by which a Certificate of Title to land can be “tagged” to show that someone other than the registered owner has a proprietary interest in the land. The person lodging the notice is the caveator.
Practically, a caveat is a statutory injunction. The caveat freezes the land register in relation to the interest claimed but once lodged, a caveat serves to give ‘notice to all the world that the registered proprietor’s title is subject to the interest alleged in the caveat’. In the Australian Capital Territory, the key provisions about lodging a caveat against dealings are found in Division 10.4 of the Land Titles Act 1925.

When a dealing is lodged for registration against the land’s title, the caveator is given notice of this fact. The caveator has 14 days in which to consent to the registration or take action to demonstrate the validity of the caveator’s interest, which means showing cause why the new dealing should not be registered. The lapsed caveat cannot be renewed.

What is a caveatable interest in land?

Broadly, a caveatable interest is one which amounts to an interest or an estate in land, and includes a caveatable interest as defined by statute. In the ACT, an “interest in relation to land” means a legal or equitable estate in the land, or a right, power or privilege over or in relation to the land.

As with most things concerning the law, the question of whether or not there is an interest or estate in land will depend on the facts of the situation, but some examples of when a caveatable interest has been found by the courts to exist include:

  • the claim of a beneficiary under a trust, including the right of a unit holder in a unit trust;
  • the interest of a partner in partnership assets;
  • the interest of an optionee under a call option to purchase land;
  • the rights under an agreement for a mortgage, a charge, a lease or an easement relating to the land;
  • the interest of a purchaser under a contract for sale of land (such as where the purchaser is paying by instalments but is not yet the registered owner);
  • the interest of a person arising from contributions made to the purchase price of land;
  • the seller’s lien under a contract for sale of land (such as where the seller is receiving payment in instalments and is no longer the registered owner); and
  • the right of a person to set aside a dealing with land procured through fraud or misrepresentation.

Importantly, merely personal or contractual rights associated with the land and not giving rise to proprietary rights in the land are not caveatable rights. The claim of a creditor, including a judgment creditor, against the registered owner of land is not of itself a caveatable interest. However, with good drafting, a contract may expressly or impliedly grant a proprietary interest to secure rights under the contract. For example, an effective charging clause can be inserted into an agreement to:

  • secure payment of amounts owing under a building agreement; or
  • secure payment of debts owed by a borrower or guarantor for supply of goods and services.

The key point is that for a contractual right to become a caveatable right, the debtor must agree to give a proprietary interest in their land and this means there must be more than just a “consent to caveat”.

What is the harm in lodging a caveat without a caveatable interest?

If a caveat is lodged without reasonable cause, section 108 of the Land Titles Act 1925 confirms that the caveator shall be liable to compensate any person who sustained damage as a result of the caveat being in place. This liability for compensation may be in addition to any order made by a court against the caveator in proceedings brought by a person seeking to have the caveat removed in circumstances where the caveator has refused.

While the practical effect of lodging a caveat may be sufficient to achieve the caveator’s commercial goal, it has been said that ‘the lodging of a caveat is really in the nature of the initiation of litigation and only those persons should be entitled to initiate litigation who are entitled to litigate the matter of the dispute which is set up by the caveat’. Accordingly, a court may order a person who has lodged a caveat and wishes to retain it to give an undertaking as to damages.

Recovering a Debt

A caveat can be a powerful means by which to recover a debt, but there first needs to be a caveatable interest in the debtor’s land. A well-drafted charging clause in your trade agreements, credit applications or other contractual documents can achieve this aim and give you more protection in dealings with customers.

Who can help?

Meyer Vandenberg’s debt recovery team:

Alisa Taylor | Partner
(02) 6279 4444

Courtney Noble | Associate
(02) 6279 4444