Posted on December 2, 2022 by Frances Tse and Megan Hawley 7

Risks of Relying on Caveats

The recent Supreme Court case Kitanovski v Ibraham [2022] NSWSC 1232 provides a reminder that the registration of a caveat on title to protect an unregistered interest in land is ultimately less secure than a registered interest in land and that its continued existence will always be subject to the risk of it being removed by order of the Court.

Facts

Ms Kitanovski, a purchaser entered into a contract for sale in November 2019 (Contract) to purchase land for $2,805,000.

Registered on title to the land was a mortgage to Westpac and two caveats. The two caveats were:

• a caveat lodged by the Commissioner of Taxation claiming the interest of an unregistered mortgagee dated February 2016 by virtue of a deed between the Commissioner of Taxation and Ms Lahood, and
• a caveat lodged by Mr Ibrahim claiming the interest of an unregistered charge by virtue of a loan agreement dated  April 2015 between Mr Ibrahim and Ms Lahood.

The purchaser applied to the Supreme Court under s74MA of the Real Property Act 1900 (RP Act) for an order to withdraw the caveats which prevented completion of the sale.

If settlement occurred, the purchase price would be applied first to satisfy any outstanding council rates and land tax, and then to the Westpac mortgage. It was unlikely that any remaining amount would  be sufficient to satisfy both of the unregistered interests to whichthe caveats related.

The caveators objected to the removal of the caveats on the basis that the purchase price under the Contract was significantly below the prevailing market value.

Court’s consideration

Section 74MA of the RP Act allows any person who is or claims to be entitled to an estate or interest in the land described in a caveat to apply to the Supreme Court for an order that the caveat be withdrawn. The only precondition to the Court making such an order is that it must be satisfied that a copy of the application has been served on the caveator, or that the Court has made an order dispensing with such service.

Although the language of s74MA is broad and appears relatively unconstrained, the Courts have historically approached such applications by considering two key matters:

• the caveator bears the onus of showing that there is a serious issue to be tried as to the existence of the interest claimed in the caveat, and
• if that onus is discharged, the continuation or removal of the caveat would depend on the Court’s assessment of the balance of convenience, and the result of such an assessment will depend on the circumstances of each case.

See the Court of Appeal in Hanson Construction Materials Pty Ltd v Roberts (2016) 93 NSWLR 1.

Existence of interest claimed

The first requirement is an important reminder that a caveat can only be lodged by a person who claims to be entitled to a legal or equitable estate or interest in land and only to prohibit the recording of any dealing which affects that legal or equitable estate or interest: see s74F.  The interest that is claimed must be a proprietary interest in the land, and not merely contractual or personal.

The legislation recognizes the serious nature of a caveat and the real difficulties that one may create for the registered proprietor and other interest holders. It provides that a person who lodges a caveat without reasonable cause, or who refuses to withdraw a caveat without reasonable cause, is liable to pay compensation to any person who sustains financial loss because of the caveat: see s74P.

The Supreme Court in this case was satisfied that there was a serious question to be tried in relation to the two caveats on the basis that the Commissioner of Taxation and Mr Ibrahim had equitable estates or interests in the land by virtue of the deed which created the mortgage and the loan agreement which provided for a charge on the land.

Balance of convenience

Despite the existence of an equitable interest in the land, the Court nevertheless has a discretion whether or not to remove the caveat on the balance of convenience. The matters that the Court will look at in making this assessment will vary from case to case. Examples include, the nature and extent of the caveator’s interest, whether removal of the caveat will clearly destroy the caveator’s interest, and the strength of a caveator’s claim.

In this case, the Court accepted expert evidence that the Contract was entered into for a price significantly below the prevailing market value and completion of the sale at that price would cause substantial prejudice to the caveators. The Court went so far as to say that the balance of convenience would normally favour the continuation of the caveats in these circumstances.

However,  as the purchaser in this case offered to pay to the Court a security amount equal to the difference between the purchase price and the market value, the Court considered that this addressed the undervaluation and would put the caveators’ in the same position that they would have been had the property been sold for its market value.

The Court was satisfied this proposal meant that the caveators would not suffer practical detriment if their caveats were removed and that the balance of convenience was no longer in favour of continuation of the caveats.

Conclusion

This case highlights several basic but important aspects of caveats.

Firstly, a caveat can only be registered in respect of a legal or equitable interest in land, and the caveator has the onus of proving that such an interest exists in legal proceedings.

Secondly, where possible, registering an interest on title to create a legal interest is always preferable to registering a caveat to protect an equitable interest. In this case, not only did the caveators have to bear the onus of proving the existence of their equitable interests, there was also a question of priority between the interests claimed which would need to be determined in separate proceedings.

Lastly, even if a caveat is registered in respect of an undisputable equitable interest in land, if an application is made to the Supreme Court for  its withdrawal, the Court will nevertheless consider the balance of convenience in deciding whether or not to make such an order.

The case of Kitanovski v Ibraham can be found here.

Please do not hesitate to contact Frances Tse on 8235 9711 or Megan Hawley on 8235 9703 to discuss this article.