The thing about caveats

We have been involved in a number of matters recently where the right to lodge a caveatable interest was in dispute.

Caveats are the ‘go to’ security for many in the building industry, because the asset at the heart of the relationship is invariably a property. But often insufficient thought is given to whether registering a caveat over the land is really going to help recover the debt. Here are some things you should know.

What is a caveat?

A caveat is a place-holder. It is registered against the title of a property and prevents the owner from dealing with the land without the consent of the person who registered the caveat (the caveator). It does not give the caveator the right to do anything with the land.

When can I lodge a caveat?

A caveat must be supported by a proprietary interest in the land. Recent cases in New South Wales and Western Australia have held that simply putting a clause in a contact that says you can lodge a caveat over another person’s land does not, of itself, create a caveatable interest in that land.

It is crucial that the contract itself creates some kind of property rights in the land. This might be expressly stated or implied from the context of the agreement.

In the context of a building contract, a caveatable interest will exist if there is a clause in the contract allowing the builder to register a caveat over the land AND the contract expressly grants the builder a charge over the land. The MBA’s standard residential building contract has a ‘caveatable interest’ clause that satisfies these requirements (and which has been upheld by the ACT Supreme Court).

However if you use a different type of building or supply contract, you need to be careful that any clause purporting to give a caveatable interest over land is actually effective to create a proprietary interest in the land. This may be something you need to seek legal advice about.

Can’t I just lodge the caveat and see what happens?

If you register a caveat without a caveatable interest, the owner of the land can bring a claim against you for any loss suffered as a result of the caveat. If a property transaction is blocked because of the caveat, this loss can be very substantial.

How will a caveat protect my interest in the land?

Many people think that if they lodge a caveat over land, this will somehow lead to the owner paying the amount due under the contract. A caveat gives you leverage, but it does not mean you will necessarily get paid quickly, or even at all. Your caveat could sit there for many years before the owner needs it lifted because of an impending sale or refinance.

Another common misconception is that once a caveat is lodged, the caveator can breathe easy. In reality, however, the owner of the land can easily apply to the Land Titles Office for a ‘lapsing notice’. Once you have been served with a lapsing notice, you will have 14 days to apply to the Supreme Court for an order to extend the caveat. That application can be costly. If you do not bother with getting an order, that will be the end of your caveat — and you are not allowed to lodge another one.

As long as you have an enforceable caveatable interest in your contract, you should be successful in getting that order. However a court will not allow a caveat to sit against a property indefinitely when there is a dispute about the underlying debt. You will generally be required, as a condition of getting the extension order, to institute court proceedings to sue for the debt owed to you. Those court proceedings can also be costly.

Further, the court will generally require the caveator to give an ‘undertaking as to damages’. This means if the caveator ultimately loses the court proceedings about the debt, the caveator will have to compensate the owner for any loss it suffered as a result of not being able to deal with the property.

If it’s so hard, why bother?

Caveats are important as they inform third parties of your interest in the land. If you did not lodge a caveat and the owners of the property were to sell to a third party, your interest will be lost forever.

Also, if you have a legitimate debt and the owner cannot pay you, it is possible they are also defaulting on their obligations to the bank. In the event that the owner’s bank steps in to sell the land under a mortgage, any money left over after the bank satisfies its debt must be given to you to satisfy your claim before any remainder is paid to the owner. This means that (albeit in rare cases) the bank might well do your debt recovery for you.

What should I do next?

You should obtain legal advice on your building or supply contracts to make sure your security is both appropriate and enforceable. Caveats are one of many options. Personal guarantees or charges over other assets might be better (or used as well), depending on the circumstances.

Before you lodge a caveat you should always check whether you have a caveatable interest. A small amount of legal advice up front can save substantial costs later if you get it wrong.

If you would like to know more about the possible legal avenues open to you to recover money owed to you, we are very happy to provide you with assistance.

For more information or assistance, please contact:

Alisa Taylor | Partner
(02) 6279 4444