No more caveats after termination?

Last month, the ACT Supreme Court found that a builder cannot maintain a caveat on a home owner’s property under the HIA Residential Building Contract after the contract is terminated.

Caveats

A caveat is a document registered against the title of a property that stops the owner from dealing with the land without the consent of the person who registered the caveat (the caveator). It differs from a mortgage in that it does not give the caveator any right to sell the land.

If you lodge a caveat without a ‘caveatable interest’ the owner can bring a claim against you for any loss suffered as a result of the caveat. This loss can be very substantial if a property transaction is blocked because of the caveat. In order to have a caveatable interest you generally need a written contract that expressly gives you the right to a charge over the land.

It is a common misconception that once a caveat has been lodged the caveator does not need to do anything else to protect its interest. In fact it is very easy to have a caveat lifted – all the owner needs to do is apply to the Land Titles Office for a ‘lapsing notice’ and serve that notice on the caveator. The onus is then on the caveator to obtain a court order preserving the caveat. Those court proceedings can be expensive and if the court finds that there was no caveatable interest, the caveator will generally have to bear most of the owner’s costs and pay any other loss suffered by the owner as a result of the caveat being on the property.

Caveatable interests under residential building contracts

Since 1998 caveatable interests have not been allowed in NSW residential building contracts. They are still allowed in ACT contracts. Clause 30 of the HIA contract says:
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. The cost of lodging and removing the caveat must be paid by the builder. This charge continues until the contract price is paid.

The ACT MBA residential contract also has a caveatable interest clause, but the wording is different:
The owner charges the Site with the payment to the Builder of all monies payable to the Builder under this Contract or otherwise from the carrying out of the Works.

Both clauses have generally been accepted as allowing the builder to register a caveat on the owner’s land and to keep the caveat on until all amounts owing to the builder under the building contract have been paid.

The Supreme Court Case

On 27 June 2013 Master Mossop handed down his decision in Adrija Pty Ltd v Mohamed & Ors [2013] ACTSC 120.

Adrija was a residential builder that entered into a HIA contract with Mr Mohamed and his wife to build a house on their land. The owners failed to pay a progress claim and a variations claim. Adrija lodged a caveat over the owners’ land and engaged lawyers to seek payment of the outstanding amounts. Four months later Adrija had still not been paid so it terminated the contract.

The owners served a lapsing notice to remove the caveat. Adrija then applied for a court order to preserve it.

The court found that the particular wording of the January 2008 version of the ACT HIA building contract meant that Adrija could not maintain a caveat after termination of the contract, even though substantial monies were still owed. The court reasoned that:

The HIA contract says that once the contract is terminated (by either party), the builder is entitled to be paid:

  • the builder’s margin on each of (a), (b) and (c).
  • the cost of leaving the site; and
  • the cost of materials on the site or ordered from suppliers;
  • the cost of the building work to date;

Therefore, upon termination, the obligation to pay the contract price disappears and there is an obligation to pay the sum of (a), (b), (c) and (d) instead. The effect of termination is therefore to transform a lump sum contract for the ‘contract price’ into a ‘cost plus’ contract.
The caveat clause says the ‘charge continues until the contract price is paid’.
However, after termination there is no obligation to pay the ‘contract price’ – it has been transformed into an obligation to pay the ‘cost plus’. The caveat clause interest did not secure payment of the ‘cost plus’. There was therefore no longer any caveatable interest.

The intention of the HIA caveat clause was clearly to give builders some leverage to ensure payment by the owner for work done in the event of a dispute. The court’s decision shows, however, that the particular wording of the HIA contract does not achieve this objective.

What does this mean for builders?

Every construction contract is different. Our review shows that the January 2008 and May 2010 versions of the ACT HIA Residential Building Contract include this clause, while the September 2008 NSW HIA Residential Building Contract does not. If you are working under a HIA Residential Building Contract which includes this clause you can still lodge a caveat but you cannot keep it on the property if the contract is terminated. The benefit in terminating rather than suspending when you have not been paid is that you no longer need to maintain insurance for the site, and you should be able to apply to ACTPLA to have your building license removed from the site. However you will now need to choose between maintaining the security and terminating.

The MBA contract is not affected by the decision, because the caveatable interest clause secures ‘all monies’ payable to the builder. If you are working under a customised building contract with a caveat clause, you should obtain legal advice about whether the particular wording of that contract is affected by the decision in Adrija.

For more information contact:

Alisa Taylor — Senior Associate — Building and Construction Dispute Resolution
(02) 6279 4388
alisa.taylor@meyervandenberg.com.au

Kimberly Moore — Senior Lawyer — Building and Construction Dispute Resolution
(02) 6279 4339
kimberly.moore@meyervandenberg.com.au

Jonathan Devenish —Lawyer — Building and Construction Dispute Resolution
(02) 6279 4432
jonathan.devenish@meyervandenberg.com.au

Tessa Dignam — Lawyer Building and Construction Dispute Resolution
(02) 6279 4478
tessa.dignam@meyervandenberg.com.au