It is not uncommon for loan and residential construction agreements (or similar) to include a clause noting the lender is entitled to lodge a caveat over land. Sometimes this happens where a borrower deletes the charging provision/s but retains the provision entitling the lender to lodge a caveat.
The question arises whether the lender actually has, in these circumstances, a ‘caveatable interest’ in land for the purposes of section 137 Transfer of Land Act 1893 (WA) (or equivalent provisions in other jurisdictions); perhaps more importantly whether the lender has an effective security interest in the land by reason of the contractual right to lodge a caveat.
Historically the answer to the question was “no”. In more modern times the courts have been willing, on a case by case basis, to imply the grant of a proprietary interest alongside the express contractual acknowledgment of a right to lodge a caveat.
Accordingly, there are three possible outcomes where a document permits the lodgement of a caveat over land without expressly granting a charge (and there is a subsequent challenge to the caveat):
- The best outcome for the lender is that it has an equitable charge – making it a secured creditor and giving it some albeit restricted enforcement rights.
- Alternatively, the lender may not have an equitable charge but nonetheless have an interest in and sufficient to support a caveat – for example a right to be repaid from proceeds of sale of the land if the borrower ever decides to sell (but without the lender having rights to apply to the court for possession of the land or to compel sale).
- Finally, the lender may have no interest in the land at all; the contractual acknowledgement of the right to lodge a caveat being nugatory.
In the recent decision of Swinburne v Bose  WASC 299, the plaintiff sought to extend the operation of a caveat lodged over the defendants’ property. The caveat was lodged after the first defendant defaulted on payments owed to the plaintiff under two loan agreements.
The loan agreements had been drafted without the help of lawyers. The relevant clause in each agreement was:
“If there is any default in repayment for more than 2 months… (the lender) has the legal right to take caveat over… [the property]”.
The interest claimed in the caveat was an ‘equitable charge’.
The questions for the Court were, firstly, whether a provision in loan agreements for a caveat to be lodged upon default in payment granted a caveatable interest in land and, if so, whether the plaintiff’s application to extend the operation of the caveat should be accepted.
The Court noted:
- In the absence of express intent, it is for the court to determine whether an intention to create an equitable charge can be implied.
- Authorisation to lodge a caveat does not create by necessary implication, the conclusion the parties intended to create an equitable interest, of for any such interest to equate to a charge over the property.
- Whether or not the relevant intention to grant an interest in land can be implied will always depend upon the terms of the relevant contract in the particular circumstances to hand.
Ultimately the Court decided there was a sufficiently arguable case, the link in the loan agreements between the authority to caveat and the obligation to pay the plaintiff reflected an intention to create an equitable charge. The operation of the caveat was extended.
Main points to take away
- Clients with the benefit of the caveat clause, in the absence of an express charging clause, ought to be advised of the risk their position is not secure.
- A contractual right to lodge a caveat should put a caveator in a position where they have an arguable case to extend the operation of a caveat on an interim basis (subject to the balance of convenience). This will in turn give the caveator some bargaining power to negotiate a commercial outcome. Whether the caveat is sustainable on final analysis is another question.
- A right to lodge a caveat, on its own, does not automatically create an equitable interest in land.
- Whether a provision granting such a right also creates an equitable charge is a matter to be determined on construction of the provision itself and the surrounding circumstances.
- The court will try to determine whether, on the facts of the case, it was the parties’ intention to create an equitable charge or some other caveatable interest in land.
- The interest claimed in any caveat should be drafted in sufficiently wide terms to catch not only an equitable charge, but also a general right to be paid from any proceeds.