Caveats – Limitations They Have and Pose

Written by: Sarah Jones

What is a caveat?

(a) A caveat is a notice of a charge or interest in real property (i.e. land) which is registered on the title of that property. It’s literal translation from Latin is “let him beware”. It says to other people: “I have an interest in this property, so do not do anything with it without letting me know”.

(b) There is some argument over whether a caveat (or a caveatable interest) is a “security interest”. For the purposes of a caveator who has a charging clause in a guarantee document signed by an owner of the property resulting in the caveat, the better view is that the charge underlying the caveat is a security interest. For other types of caveats, this may not apply.

When can someone lodge a caveat?

There are a number of instances which can allow for the registration of a caveat. The main examples are:

1. Security interest by way of a charge (for example: a charging clause contained in a guarantee and indemnity);
2. Security interest some other way. A common reason for this is an unregistered mortgage;
3. Interest as a purchaser under an agreement of sale;
4. Bankruptcy trustee of one or all of the registered proprietors;
5. Implied, resulting or constructive trusts.
6. Note that a caveat may only be lodged if the caveator has a genuine claim to a legal or equitable interest in the property.[1]
   
   
   [1] Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140.

Caveats and mortgages

Generally, a mortgage is an objectively better security than a caveat. A mortgage is a legal interest in the property whereas a caveat is a notice of a charge in property. A mortgage includes a host of specific security clauses and rights on default where a caveat does not.

Some further differences are:

(a) A mortgage requires the consent of the mortgagor (being the owner of the property) by way of execution (leaving aside powers of attorney). A caveat does not.

(b) A mortgagee can appoint an agent as mortgagee in possession or a receiver to sell the property if there’s been a default (having complied with various laws and requirements). A caveator must obtain a court order for the sale of a property and any party on title (including other caveators) have a broad opportunity to defend or dispute the proceedings.

(c) A mortgage must be discharged by the mortgagee except in the most extreme circumstances. A caveat can be lapsed by an interested party.

(d) Importantly, a caveat stops any further mortgages being lodged. Neither a caveat nor a mortgage can stop any further caveats being lodged

Priority disputes

The general rule as to the priority pay out from the sale of a property is that the flow of funds follows these priority rules:

First: local, state and commonwealth payments (rates, land tax, etc owing on the property);

Second: first mortgagee;

Third: first mortgagee’s solicitor’s fees;

Fourth: any further mortgagees;

Fifth: any further mortgagees’ fees;

Sixth: first caveat;

Caveat priorities are determined by the first equitable interest in time (not the first registered) generally prevailing unless the earlier interest holder’s conduct has contributed to the later interest being acquired in ignorance of the earlier one.[1] Further commentary is set out at 4(b) below;

Seventh: further caveats following the same priority principle;

Note in respect of the caveats that if there is not enough equity, they can either share the equity on a pro rata basis or challenge that the whole sum is due to one owing to a clear priority. Sometimes a property will sell and funds will flow to a trust account or court to allow for this dispute to continue without delay to the innocent third party purchaser;

Eighth: registered proprietors.

Even though the priority rules are reasonably well established, they can be thrown out by what is known as “postponing conduct”.[2] A recent case for this position is LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd[3] in the Supreme Court of NSW. In that case, the caveator had a charging clause from some years ago, and an incoming lender/secured party (LTDC) acquired its interest in the relevant property after the caveator. However, LTDC funded (and lodged a caveat) based on a certain equity position in the property in question, and the loan was specifically tied to the property. The caveator later lodged its caveat (a secondary security for an invoice finance facility). It was held that the caveator’s failure to lodge its caveat earlier in circumstances where LTDC then suffered a loss displaced the “first in time” rule, so even though the caveator’s charge was earlier, LTDC was held to have first priority.

Caveats and sales

(a) If a registered proprietor or mortgagee in possession is selling a property, they need to account to all secured parties.

(b) However, if there is not enough equity to pay out a caveator, the caveator must withdraw its caveat – it cannot keep its caveat on when there is no equity to pay it. This is because a caveat is a notice of an interest in the equity of the property; if there is no equity, there is no interest. The circumstances that a caveator should check in respect of this are:

• That the purchaser is an independent third party;

• The sale price appears appropriate for the market; and

• The settlement statement shows no funds flowing to the registered proprietor.

Lapsing notices

In most states, if you have a caveat, you can be served with a lapsing notice by an interested party or a registered proprietor.

A lapsing notice cannot be withdrawn. Once a lapsing notice has been issued, the time limit to respond begins and if a caveator seeks to maintain its caveat, it must lodge proceedings in the Supreme Court of the relevant jurisdiction (ie: the state of the relevant property). The initial step is to get an immediate interlocutory hearing to maintain the status quo until the matter can be heard properly. For example, in NSW a caveator has 21 days to bring proceedings and be heard[1] but must also follow the NSW Supreme Court’s rule to file that application at least 5 business days prior to the 21 days elapsing.

The result of this is that even if the lapsing notice was issued in error or ought not have been issued legally, a caveator must go to the initial expense of a Supreme Court hearing to maintain their caveat where one is issued. Of course, a costs order might be obtained during or at the end of the matter, but at the outset, the cost will be borne by the caveator.  

Specific State Rules

(a) It is worth being mindful of the fact that in Queensland[2] and the Northern Territory,[3] caveats (for the most part) lapse after three months unless you bring proceedings in a court of competent jurisdiction to maintain them and file a notice with the land registry confirming this has been done.

(b) A court of competent jurisdiction is a higher court – so it must be a District Court or Supreme Court proceeding.  

(c) Further, even though a caveat may have lapsed, the titles office rarely remove the caveats without a direct application from the caveator or an interested party. Therefore, a title may include caveats which have long since lapsed. It is worth reviewing the title closely where you are the registered proprietor or another caveator in a potential priority dispute to consider whether any of the caveats can be removed immediately without further argument.

---

[1] Section 74J Real Property Act 1900 (NSW).

[2] Section 126 of the Land Title Act 1994 (QLD).

[3] Section 142 of the Land Title Act 2000 (NT).

---

[1] Double Bay Newspapers Pty Ltd v AW Holdings Pty Ltd (1996) 42 NSWLR 409; J&H Just (Holdings) Pty Ltd v Bank of New South Wales [1971] HCA 57.

[2] Double Bay Newspapers Pty Ltd v AW Holdings Pty Ltd (1996) 42 NSWLR 409.

[3] [2019] NSWSC 150.