Discovering that a caveat has been lodged on the title of your property can be an unpleasant surprise. Whether you or someone you know has encountered this situation, it’s helpful to understand what this means and to be aware of the appropriate steps you can take to respond appropriately.
What is a caveat?
A caveat is a legal right for a party to place a security interest against your property until a debt is paid or settled. That security interest prevents the property from being sold or having other such dealings.
For a party to be able to lodge a caveat, they must have an eligible interest (commonly known as a caveatable interest) in the property. That eligible interest usually arises from the owner of the property having signed a legal document giving an equitable charge or security interest against the property to a party in the event of a default for payment of a debt, provision of goods and services or other forms of liability. The parties who can place a caveat are typically lenders, suppliers, and those who have provided professional services.
A common example is where a lender/creditor who has advanced monies to the property owner requires a personal guarantee, and the deed of guarantee includes a clause that states that the individual agrees to give the lender/creditor an equitable charge over their property in the event of a default.
A second mortgage
Up until 11 October 2021, it was a requirement in NSW for a lender wanting to register a second (or subsequent) mortgage on title to obtain consent from the first mortgagee. Therefore, it was often the case that the lender could not register their second mortgage on the title of the property because the holder of the first mortgage (usually a major bank) did not consent. This often resulted in the lender/creditor lodging a caveat containing details of the second mortgage and the debt it secured.
A charging clause
Another common example is when a trade-person enters into a credit agreement with a supplier which contains a “charging clause”, whereby they grant the supplier a charge over all the current and future real property.
The NSW Land Registry Service (LRS) will notify the property address or the owner that a caveat has been lodged on the title of their property and the details of the caveator, plus the actions they can take to remove the caveat.
However, in the case of a caveat lodged on the title of an investment property, the tenant may not send the notification from the LRS to the owner of the property. Consequently, the owner is unaware of the caveat and will only become aware of the caveat when they are moving to sell the investment property. Another example is where a trade-person is unaware of the “charging clause” in the supplier’s credit agreement until they receive notification of the caveat’s lodgment from the LRS.
Implications of a caveat
The most significant implication of having a caveat lodged on the title of your property is that it can prevent you from selling or refinancing the property without paying the caveator. A caveat can also be an indicator of a dispute, such as a debt or ownership dispute, and can cause a great deal of stress and uncertainty for the property owner. If a caveat is not addressed in a timely manner, it can lead to legal action, which can be time-consuming and expensive.
Furthermore, having a caveat against your property can act as a warning to others and hinder your ability to refinance against the property. Most banks would see the registration of a caveat as a negative marker, and the existence of the caveat would erode the amount of equity that could be released in a refinance.
What to do if a caveat has been lodged
If a caveat has been lodged on your property, the first step is to identify the person or entity that has lodged it (caveator), which will be included on the LRS notification and the caveat. Determining if the caveator has a legitimate caveatable interest is also important. If the party who lodged the caveat does not have a legitimate caveatable interest or lodged the caveat without reasonable cause, you may be able to make a claim of compensation against the party for any damages caused.
However, in most cases, a caveat is legally valid and justifiable. Once it is established that the caveat is legally valid, it is important to seek resolution of the issue with the caveator directly in the first instance. This could involve negotiating a payment plan or agreeing to settle the dispute through mediation. If you are selling the property, it is possible to reach an agreement with the caveator to have the agreed upon amount paid out at settlement of the property transfer.
If unable to resolve
If you are unable to resolve the issue with the caveator, you can seek advice on your options from the LRS or your lawyer. The usual first step is to have a Lapsing Notice issued to the caveator, which will require them to convince the LRS why the caveat should not be lapsed. Sometimes the dispute will need to be resolved by an application to the Supreme Court for an order to have the caveat removed.
How to avoid a caveat being lodged
It is important that you know what you are signing. Make sure you read the fine print and understand the conditions of any finance or terms of trade. Often, individuals will sign a contract or a document not realising that it contains a special clause that enables a party to place a caveat on the property upon default of the terms of finance. If in doubt, consult a professional before signing to clarify whether the lender has a clause to place a caveat on the property.
Whilst it is not possible to stop all caveats being lodged on the title of a property, action can be taken to avoid a caveat being lodged by a person who claims to have a caveatable interest in the property by resolving the issue as soon as possible. Also ensure that you meet your financial obligations in a timely manner.
While a caveat on the title of a property can have serious implications in certain situations, it’s important to maintain perspective. Stay positive and take proactive steps to address the situation. By promptly addressing the situation and following the appropriate steps, you can effectively resolve the matter and continue with your life.
While this can be challenging, it is crucial to take action as soon as possible and seek advice from professionals who can successfully guide you through the process.
If you have a caveat placed on your property and would like to consider your options on dealing with it, you are welcome to contact our registered trustee Anthony Bagala at dVT Group at (02) 9633 3333 or by email at email@example.com.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.