Limitations on Caveats

Limitations on Caveats A PAPER BY PAUL ANDERSON DECEMBER 2007

Limitations on Caveats by Paul Anderson

Limitations on Caveats

Summary A recent Supreme Court decision explores the limitations on the effectiveness of a registered caveat. A caveator cannot rigidly refuse to consent to a dealing (or withdraw and re-lodge a caveat) in circumstances where the caveator suffers no significant prejudice and the registered proprietor is likely to receive a significant benefit from the relevant dealing.

Who Does This Impact?

Any person who holds a registered caveat.

What Action Should Be Taken?

A caveator should consider on its merits any application for the caveator’s consent to a dealing and should also ensure its systems incorporate the required degree of flexibility.

Contents:

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Introduction

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Facts

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Background Principles

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Analysis

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Comment

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Limitations on Caveats by Paul Anderson

Introduction It is commonly known that registration of a caveat against a title at Land and Property Information New South Wales can prevent the registration of subsequent dealings affecting that title.

What are not so well known are the exceptions and limitations to this principle. For example, Section 74H (5) of the Real Property Act 1900 alone lists 26 types of dealings whose registration is not prevented by a caveat.

The recent Supreme Court decision of Buchanan v Crown & Gleeson Business Finance Pty Limited further clarifies and expands the limitations on caveats.

Facts The plaintiffs, Ruth Buchanan and her daughter, Emily, were the registered proprietors of a residential property at Crows Nest subject to a first mortgage to St George Bank for $1.1 million. The plaintiffs with some other parties borrowed the sum of $884,000.00 for business purposes from the defendant and agreed that such advance would be secured together with other securities by a mortgage over the Crows Nest property.

The day after the loan was made the defendant registered a caveat. It was not disputed that the defendant had a caveatable interest in the property.

The plaintiffs went into default under the first mortgage. Ruth Buchanan negotiated with the first mortgagee, St George Bank, an agreement for discharge of the first mortgage at a discounted sum of $935,000. Provident Capital Limited (“Provident”) agreed to lend the said sum of $935,000 to refinance the mortgage. As part of these arrangements, it was intended that Emily Buchanan’s interest in the property would be transferred to her mother, Ruth.

The only direct evidence of value of the Crows Nest property was a valuation of $790,000.00. However, in the light of Provident’s agreement to lend the sum of $935,000.00, the property might have been worth up to $1.25 million adopting Provident’s standard lending ratios.

Following the breakdown of negotiations with the defendant, the plaintiffs sought an order that the caveat be withdrawn to enable the refinance to proceed.

In the result, Justice Brereton ordered that the caveat be withdrawn but granted leave for a fresh caveat to be lodged when the first mortgage had been discharged and the new mortgage to Provident had been registered.

Background Principles His Honour stated a number of important background principles in his judgement, namely:

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The caveator bears the onus of persuading the Court that the caveat should be maintained. The Court will order that the caveat be withdrawn unless the caveator would in normal circumstances be entitled to an interim injunction.

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Where the caveator has a caveatable interest, the caveator has the onus of proving that the balance of convenience favours maintenance of the caveat.

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Limitations on Caveats by Paul Anderson

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It would not be proper to continue the caveat unless the caveator gives the usual undertaking as to damages. In this case, the defendant declined to give such an undertaking.

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“The circumstance that a caveator has a caveatable interest is not conclusive that the caveat will not be removed. The Court will order the withdrawal even of an indisputably valid caveat where the balance of convenience favours that course.”

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A highly relevant consideration is whether the removal of a caveat will derogate from the caveator’s claim. “If the removal of a caveat would have the effect of deferring the priority of the caveator’s equitable mortgage, its removal ought not be countenanced.”

Analysis It was clear that it was not conclusive that the caveat was indisputably valid. The balance of convenience would become the deciding factor even if the caveat was valid.

The critical question then became whether removal of the caveat would derogate from the caveator’s claim or priority. His Honour considered the following points and arguments: •

At first sight, the caveator’s position following the refinance would appear to be improved rather than weakened. An indebtedness to Provident of $935,000 would be substituted for an indebtedness of $1.1 million to St George Bank.

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The interest rate charged under the Provident mortgage was higher than the St George mortgage and it was argued by the defendant that this created a disadvantage for the defendant. His Honour’s response was that such disadvantage had to be weighed against the advantage or saving in terms of capital. In short, it would take a long time for the interest disadvantage to exceed the capital advantage between the respective loans of $1.1 million and $935,000.

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The defendant also raised the argument that it was disadvantaged because Emily Buchanan would cease to be a registered proprietor. However, his Honour found that the whole of the land remained subject to the defendant’s equitable mortgage and, although she might cease to be a registered proprietor of the property, that would not release Emily from her personal obligations under the loan agreement.

In summary, his Honour was not satisfied that the balance for convenience favoured maintaining the caveat to prevent the transaction from proceeding. In addition to ordering the withdrawal of the caveat, his Honour ordered the defendant to pay costs.

Comment The case is a salutary reminder that a caveator cannot rigidly refuse to consent to a dealing (or withdraw and re-lodge a caveat) in circumstances where the caveator suffers no significant prejudice and the registered proprietor is likely to receive a significant benefit from the relevant dealing. The price of inflexibility is likely to be an order for costs and possibly for damages. The immediate task for any bulk lodger of caveats will be to introduce an element of flexibility into existing systems in order to treat each application on its merits and to avoid a repetition of the unhappy outcome of this case for the defendant.

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Limitations on Caveats by Paul Anderson

For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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