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Be careful what you caveat

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A caveat is a statutory injunction that prevents the registration of dealings and plans on a title to land, provided for under the Real Property Act 1900 (NSW) (RPA). A caveat operates essentially like a “red flag”, signalling to potential purchasers that someone out there (the “caveator”) is claiming an interest in the land.

In order to lodge a caveat, you must have what is known as a “caveatable interest”. If you lodge a caveat without a caveatable interest you may be liable to compensate anyone who suffers loss as a result (including the legal costs of removing the caveat).

What is a caveatable interest?

A caveatable interest is a proprietary interest in land rather than a merely personal right in relation to the land or against the owner of the land. The interest in land may be legal or equitable in nature. The interest must exist at the time that the caveat is lodged.

Some examples of caveatable interests include:
• An interest to purchase a property under a contract for sale;
• An interest under an equitable mortgage;
• An interest under a lease;
• An interest as someone who has been granted a charge over the property as security for performance of an obligation;
• An interest as an equitable owner of the property;
• The interest of beneficiary under a unit trust that owns the property;
• An interest under an easement or restrictive covenant that binds the land.

Common examples of non-caveatable interests include:
• Debts where there is no agreement between the creditor and debtor which grants the creditor a security interest in the property (caveats are not enforcement tools to be used as leverage when someone owes you money).
• A licence to occupy land which does not constitute a lease and is not an interest in land.
• A right of pre-emption / first right of refusal.
• Where a builder or tradesman has completed works on the property.
• A beneficiary under a discretionary trust.
• A claim under the Family Law Act 1975 (Cth) or Succession Act 2006 (NSW).
• A claim for damages against the owner of the land.

Trust issues – discretionary beneficiaries have no interest

A beneficiary of a discretionary trust does not generally have an interest in property owned by the trust that is capable of being protected by a caveat. In Anna Katherine Szozda & Ors v NSW Trustee & Guardian & Ors [2012] NSWSC 194, the NSW Supreme Court found that beneficiaries of a discretionary trust have no proprietary interest in the trust property, and thus had no right to lodge a caveat. Since trustees of a discretionary trust generally have a very wide discretion and have no duty to make a distribution of trust capital or income to a particular beneficiary, the rights of the beneficiaries are limited to equitable relief to restrain an improper dealing with trust property, or to enforce proper management of the trust. This is true even if a discretionary trust only has one beneficiary.

Cold as ice- freezing orders do not give rise to a caveatable interest

A freezing order is a draconian type of order that limits the respondent’s ability to deal with its assets. The court will only make such orders if it is satisfied that there is a danger or real risk that the assets will be dealt with in a way which would prevent the applicant from recovering a monetary judgment in the event that it is successful in court proceedings.

However, if the court makes a freezing order, it does not give the applicant a proprietary interest in any real property owned by the respondent and thus a freezing order does not create a caveatable interest in favour of the applicant.

No money, no honey – pending family law proceedings do not give rise to a caveatable interest

Another common mistake that people make is to think that a property settlement application under section 79 or section 90SM of the Family Law Act 1975 (Cth) gives them an interest in property. However, the Family Law Act confers only a bare statutory right to make a claim for property adjustment. It does not, in and of itself, generate an equitable or other interest in property capable of supporting a caveat.

Beware lodging a caveat without a caveatable interest

Under section 74P of the RPA, a person who without reasonable cause lodges a caveat without having a caveatable interest in the land may be liable for damages to a person who suffers loss or damages as a result. It is therefore incredibly important to determine whether you have a caveatable interest in property before proceeding to lodge a caveat.

Key takeaways

In Guirgis v JEA Developments Pty Limited [2019] NSWSC 164, the Supreme Court of NSW observed that “Lodging a caveat is not a trivial act to be undertaken lightly. It has immediate legal effect and can have significant commercial and financial consequences.”

A caveat provides you with a means to protect your interest in property by preventing any further dealings to occur with respect to that property. However, as it is not always clear when you may have a caveatable interest, and you may be liable for damages for improperly lodging a caveat, it is always important to seek legal advice before you lodge a caveat. McCabes has extensive experience in matters involving lodgement of caveats and alleged interests in land, as well as property disputes.

Contributors

Emma Jagot
Graduate Lawyer
Guy Lewis
Associate
Nathan Jones
Special Council

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