It is not uncommon for business partners and acquaintances to lend money to one another.
Often the arrangements are short term, and in the interests of expediency, the parties prepare a simple document setting out the amount lent, interest rate and the repayment terms. The lender may not require any security other than a caveat to be registered on the title to the borrower’s property. In the majority of cases, there is never any issue because the loan gets repaid. However, if difficulties arise, the lender may not be able to rely on the caveat to take any action to force the sale of the property and recover their losses.
Why not? Didn’t the borrower agree to give a caveat as security?
A caveat is not security and does not give a person any rights over a property. A caveat is simply a notice on the title to a property putting anyone who searches the Land Titles register on notice that:
- the person who lodged the caveat has an interest in the property and
- the Land Titles Office will not register anything in respect of the property until the caveator has been given prior notice of it.
A caveat is not security?
In order for a loan to be secured by property, the lender must either hold a mortgage of the property, or there must be a clause in the loan agreement that ‘charged’ the property with the repayment of the loan. In the absence of these things, an agreement to allow the lender to register a caveat on the title to a property does not in itself give the lender any interest in the property.
Depending on the circumstances and the wording used by the parties in the loan document, a court may find that the lender:
- has no interest in the property. In this case the court will order the removal of the caveat
- has a contractual right to keep the caveat registered on the title to the property, but cannot take any action to force a sale of the property or
- has an enforceable interest in the property under an ancillary arrangement that the caveat was lodged to protect.
Ok, that’s one issue. Are there any others?
There are a number of other potential issues arising from the use of a caveat to secure a loan.
Upholding your right to caveat can be difficult and expensive.
The owner of the property can request the Land Titles Office to remove a caveat from their title. If that happens, the person who registered the caveat will only have 14 days within which to obtain an order of the Supreme Court to maintain the caveat, otherwise, the caveat will be removed.
Likewise, where the owner of the property wishes to register a transfer, mortgage or lease on the title of the property, the person who registered the caveat will only have 14 days within which to obtain an order of the Supreme Court to prevent the registration of the transfer, mortgage or lease. If they fail to get the order, the caveat will lapse and the transfer, mortgage or lease will be registered.
In high stakes legal proceedings such as to protect your right to maintain a caveat, 14 days is not a long time. If the notice period occurs while you are not reading your mail (while you are away, for example), or you don’t act quickly to get legal representation, the time period could expire before you have a chance to get the court order.
If the property is co-owned the caveat may be ineffective
If the property is owned by the borrower and another person, unless the co-owner has agreed to give security for the loan, the result could be dire. At best, the mortgage will only attach to the borrower’s interest in the property. At worst, the mortgage may be entirely ineffective. If the caveat does not identify that it only affects the borrower’s interest in the property, a court may order its removal.
Court orders are required before any enforcement action can be undertaken To enforce an unregistered mortgage or a charge that has been protected by the registration of a caveat, it is necessary to obtain an order from the Supreme Court. Unlike a registered mortgage, the holder of an unregistered mortgage or charge does not have the power to take possession and sell the property without a court order. The court has discretion as to whether to grant such an order, and it is not always the case that the court will grant the desired orders.
The commercial terms underpinning a loan of money are often the easiest for the parties to identify and agree. However, if the lender wishes to ensure that their loan is protected by enforceable security over property, the lender should obtain appropriate advice and documentation. Depending on the nature of the loan and the property involved, a simple paragraph in the loan agreement may be sufficient to create an enforceable charge. On other occasions, a formal mortgage document may be more appropriate.