What is a Caveat?

A caveat is a warning recorded on the title of land giving notice of one’s unregistered interest in the land. It also acts as a statutory injunction preventing the registration of plans and dealings against the title of the land.

Caveatable interest

One must have a caveatable interest, that is, a legal or equitable interest in the land in order to register a caveat. Caveatable interest may be created contractually. It is quite common for commercial credit applications and personal guarantees to include a charging clause entitling the supplier/creditor to register a caveat against any real property owned by the debtor/guarantor to secure payment of the trade debt. An example of a basic charging clause is:

X charges all of X’s interests in all land owned by X including any land X obtains an interest in after the date of this agreement to secure the payment of all moneys owing by X to Y.

By virtue of the charging clause, the supplier becomes a secured creditor.

How are Caveats registered?

Caveats are registered electronically through an electronic lodgement network known as PEXA in New South Wales, Victoria, Queensland, South Australia and Western Australia. In Tasmania, Northern Territory and the Australian Capital Territory, caveats are still registered on paper.

Lapsing Caveats  

Each state and territory has separate rules and legislation governing caveats. In Queensland and Northern Territory, caveats are divided into two categories: non-lapsing caveats and lapsing caveats. Examples of non-lapsing caveats are caveats registered by the owner of the land and caveats registered with the consent of the owner of the land. Non-lapsing caveats do not automatically lapse.

Most caveats registered by a supplier pursuant to a charging clause under a commercial credit application or personal guarantee would be a lapsing caveat. Lapsing caveats will automatically lapse after three months from the date of lodgement unless notification is provided to the relevant Registrar General that court proceedings claiming an interest in the land has been commenced.

Caveats registered in New South Wales, Victoria, South Australia, Western Australia, the Australian Capital Territory and Tasmania do not automatically lapse.

Caveator’s ability to sell

Subject to its construction, a typical charging clause contained in a credit application or personal guarantee would give rise to an equitable charge. The example charging clause provided earlier would give rise to an equitable charge. An equitable chargee is entitled to seek the Court’s assistance to have the charged property sold to pay the debt and for a receiver to be appointed¹.

It is said in Porter & Anor v Bonarrigo & Anor (VSC 2009) that:

an equitable charge is created when property is expressly or constructively made liable to the discharge of a debt or some other obligation and the charge confers on the chargee a right of realisation by judicial process, such as an order for sale: Swiss Bank Corp v Lloyds Bank Ltd; Re Cosslett (Contractors) Ltd. For example, an agreement that a person may place a caveat on another’s title has been held to constitute a charge. In Re Cosslett (Contractors) Millett LJ held:

It is of the essence of a charge that a particular asset or class of assets is appropriated to the satisfaction of a debt... so that the chargee is entitled to look to the asset and its proceeds for the discharge of the liability².

Unlike a mortgagee, the ability to sell the charged property by an equitable chargee may only be obtained through the court. The power of a court to order a judicial sale of the charged property arises from the court’s inherent equitable jurisdiction and it is discretionary³. It is also open to the court to make an order for possession as an ancillary order for the judicial sale⁴. The following are some of the matters that the court considers in the exercise of its discretion to order a judicial sale⁵:

• Whether there is any dispute that there has been a default and monies are owing
• Whether any registered mortgagee objects to the sale
• Any potential obstruction of the judicial sale (such as ability to obtain vacant possession of the land)
• The interests of achieving a just, quick and cheap resolution of real issues in dispute
• Proportionality of costs

When an equitable chargee undertakes a judicial sale of the charged property, it is under the same duties as a mortgagee exercising a mortgagee’s power of sale⁶.

Implications

Charging clauses are useful tools for creditors. When properly drafted, charging clauses give rise to caveatable interests and equitable charges entitling creditors to register a caveat and upon default of payment the caveator may seek a judicial sale of the charged property to pay the debt.

Creditors also become secured creditors and may stand outside of an insolvency administration of the debtor.

¹ Edward I Sykes and Sally Walker, The Law of Securities (LawBook Co, 5th ed 1993) 198, cited in Mathieson Nominees v Aero Developments & Ors (VSC 2016) at [79].
² Cited in Mathieson Nominees v Aero Developments & Ors (VSC 2016) at [71]
³ Morris Finance Ltd v Free (NSWSC 2017)
⁴ Morris Finance Ltd v Free (NSWSC 2017), [124]
⁵ Morris Finance Ltd v Free (NSWSC 2017), [116] – [117]
⁶ Morris Finance Ltd v Free (NSWSC 2017)