​​Caveats are not security interests​

​​Caveats are not security interests​

You have loaned someone money in relation to a property, and in return the borrower has agreed to give you an interest in the property. You lodge a caveat, but you are worried about whether you are properly protected if the borrow does not repay you. 

Caveats are a protective mechanism that play an important role in property law. However, a caveat is not a ‘security interest’ in the traditional sense, and it is important to consider whether a caveat is the appropriate tool to safeguard your interest. 

What is a caveat?

A caveat is a notice lodged with the land registry that warns others (such as a potential buyer or financier) of a claim or interest in the property. Essentially, it acts as a ‘red flag’ that there is a pending issue regarding ownership or rights associated with the property. 

Nature of caveats

Caveats are governed by state and territory legislation, such as the Real Property Act 1900 (NSW) and the Real Property Act 1886 (SA). Anyone with a ‘caveatable interest’ – which can be either a legal interest (like ownership, lease or mortgage interests) or an equitable interest (such as a beneficial interest in a trust or a relevant contract) – can lodge a caveat.

It is important to note that you must have a caveatable interest before registering a caveat. If you are not sure, you should seek professional advice before you take steps to register a caveat.

Call us now on 1300 654 590 or email us to discuss whether you have a caveatable interest.

Once lodged, a caveat prevents the registered owner from selling, mortgaging or otherwise dealing with the property without the caveator’s consent. However, this protective mechanism does not provide the caveator with ‘security’ in the same way a mortgage does. 

Caveats are not security interests

Caveats do not create an interest in the property. Rather, they serve to protect an existing interest. This distinction is important. With a mortgage, the lender has a claim over the property in the event of default. In contrast, a caveat merely indicates the existence of an interest. 

Priority issues

A registered mortgage typically takes priority over unregistered mortgages, or a mortgage registered later in time. Caveats do not ensure the same priority – the first registered caveat appearing on a title does not necessarily take priority over other registered caveats. 

Lack of automatic enforcement

Caveats do not provide automatic enforcement rights. Should a caveat be breached, the caveator may need to seek court intervention to resolve the issue. This differs from a mortgage or other security interest, where default generally leads to automatic enforcement rights, such as the right to repossess or sell the property. 

Potential for lapsing

Caveats can lapse in certain circumstances. 

  • Expiry of time: Some jurisdictions require that caveats be renewed after a specified period. If not renewed, the caveat may automatically lapse. 
  • Court order: A caveat can lapse if a court orders its removal. This might happen if the court finds that the caveator does not have a valid interest or if the caveator fails to defend the caveat against a challenge. 
  • Withdrawal by the caveator: The caveator has the right to withdraw the caveat voluntarily. This is usually done by lodging a notice of withdrawal with the relevant land registry. 
  • Resolution of the underlying dispute: If the issue that led to the caveat being lodged is resolved (for example, if a debt is paid), the caveat may lapse. 
  • Failure to respond to a notice: In some jurisdictions, if the caveator does not respond to a notice from the property owner requesting them to show cause as to why the caveat should remain, it may lapse. 

Conclusion 

While caveats serve as an essential tool for protecting interests in property, they do not provide the same protection as a registered security interest, particularly for lenders. Consideration should be given to whether formal security arrangements, such as a mortgage (and the formal documentation that goes with it), may be more appropriate. 

We can help you to properly protect your interest in property. Call us now on 1300 654 590 or email us.

 

The information contained in this post is current at the date of editing – 14 October 2024.

Our Great Lawyer Guarantee

We want to be part of your team over the long term. We'll achieve this by sticking closely to the following principles:

  • We'll listen carefully to understand what you want to achieve. Then we'll thoroughly explain our advice and step you through the documents. You can be sure you'll know the full consequences.
  • Our lawyers work as a team, so someone will always be available to answer your questions, or point you in the right direction. You will also benefit from a range of perspectives and experience.
  • One of our key goals is to pass on as much knowledge as we can, so you can make your own informed decisions. We want to make you truly independent.
  • We only do what we're good at. You can be confident that we know what we're doing and won't pass on the cost of our learning.
  • For advice and documents, we provide a fixed or capped quote so you don’t take price risk. If you're in a dispute, we'll map out the process and costs so you know what to expect.
  • We're not in this game for our egos. We're in it for a front row seat to witness your success.

We measure our success on how efficiently we have facilitated your objectives, enhanced your relationships, and reduced the level of stress for all involved.

If we sound like people you can work with, call us now on 1300 654 590 and speak directly with a great lawyer.