When used correctly, caveats can be an important ally in your security arsenal.
Loaned someone money? You should consider a caveat.
Contracted to purchase real estate? You should consider a caveat.
You get the idea.
A person seeking the protection of a caveat is called a "caveator".
A caveat is used to protect a caveator's legal or beneficial interest in real estate — they are a cost-effective way for a caveator to let the world know that they have a legal or beneficial interest in the relevant piece of real estate.
With the advent of online conveyancing platforms like PEXA, a caveat can now be registered in a matter of moments.
But what happens when a caveatable interest has not been properly described on a registered caveat? Caveats are a very technical area of the law – there is more to caveats than assuming you have a caveatable interest and registering one.
A failure to properly describe a caveatable interest, both in an underlying document and on the caveat, can lead to a caveat being lapsed, ruled ineffective and in some circumstances, can also lead to a caveator being sued for damages.
Caveats are one area of the law where there has been little juridical guidance when it comes to drafting them. And this can, and often does, lead to courts ruling them ineffective.
The Court of Appeal's decision in Ta Lee Investment Pty Ltd v Antonios [2019] NSWCA 24 is a recent example of such a ruling.
In this case, the Appellant, Ta Lee Investments Pty Ltd (Ta Lee), had loaned funds to a developer (the second respondent in the proceedings) MV Developments (Lane Cove) Pty Ltd (MV).
The loan agreement between Ta Lee and MV contained a provision purporting to grant Ta Lee a caveatable interest over real estate owned by MV (namely, lot 34 in the development site) to secure the loan if MV committed an event of default under the loan agreement. MV committed a number of events of default under the loan agreement and Ta Lee registered a caveat, accordingly.
Following the registration of Ta Lee's caveat, MV sought to sell lot 34 to the first respondent, Mr Antonious. Ta Lee's caveat prevented the legal estate in lot 34 from transferring from MV to Mr Antonious. Accordingly, Mr Antonious instituted proceedings to remove Ta Lee's caveat and have lot 34 transferred to him.
The relevant clause in the loan agreement expressed that, following an event of default, Ta Lee "may lodge and maintain a caveat" over lot 34.
The issue (in respect of the caveat) considered by the Court of Appeal was whether the use of the words "may lodge and maintain a caveat" was enough to create a charge over the security real estate sufficient to give rise to a caveatable interest.
The Court dismissed Ta Lee's appeal. In doing so, the Court referred to the decision in Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSW LR 174, and noted that in the case of Ta Lee, there was a failure to adequately express in the loan agreement that there was any 'security', 'secured interest' or 'secured charge' being granted over the security real estate [98 – 104].
There ultimately needed to be an express intention to create a charge in the loan agreement which was capable of supporting a caveat and alas, words which merely authorised lodgement of a caveat did not lead to the conclusion that there was such an intention.
In the Supreme Court decision of Woodsman Pty Ltd v Jozic [2018] NSWSC 1311, the Court looked at the wording of the nature of the interest claimed as it was written on the caveat.
In that case, the Court held a caveat to be "incurably deficient" where the interest claimed as expressed on the caveat was stated to be "the whole of the Registered Proprietor's interest in the land". The Court denied a request to extend the caveat because the "nature of the claimed interest was uncertain on its face".
It is important to note that caveatable interests can arise in different manners. For example, an equitable interest in land may not need an underlying charging clause to support registration of a caveat.
In the circumstances of Ta Lee, a properly drafted charging clause was necessary to grant Ta Lee did an equitable interest in the land. In the case of Woodman, the underlying charging clause was properly drafted however, the interest claimed as expressed on the caveat itself was too uncertain to subsist.
Ultimately, when there is a dispute over whether a caveator does indeed have a caveatable interest, the subsistence of a caveat will be decided having regard to all admissible facts and circumstances, as well as:
- the construction of the clause which purportedly grants a caveatable interest, in the agreement or contract in question; and
- the way in which the caveatable interest is expressed on the face of the caveat.
Therefore, when preparing agreements or contracts which contain clauses purporting to give rise to a caveatable interest, caveators and practitioners alike must ensure that:
- the drafting of the charging clause properly grants a caveatable interest; and
- the drafting of the caveat properly expresses the interest claimed.
In the case of Ta Lee, whilst registration of a caveat may have been the easier (yet, in the circumstances, ultimately fruitless) road to take, Ta Lee may have been better placed to request the granting of a mortgage over the developer's security property.
For further information please contact:
Daniel Kentwell, Senior Associate
Phone: + 61 2 9233 5544
Email: dck@swaab.com.au
Carly Howard, Solicitor
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
