Beware the caveat - wespokelaw

We know that the Latin speakers among you will understand the irony of this title. Nevertheless, it is not uncommon for certain parties (particularly prospective purchasers or creditors) to lodge a caveat with the Department of Environment, Land Water and Planning on the title of a property. This is normally done to protect the party’s perceived financial interests, as a caveat prevents the owner from selling or otherwise dealing with the property without the caveator’s consent.

However, careful consideration must be given to the lodgement of a caveat, as freezing the owner’s right to deal with its property can have significant consequences, including potential defaults under a sale contract. The caveator must ensure that they have a ‘caveatable interest’ before they take such steps.

Reasonable cause

As a deterrent against vexatious lodgement of caveats, s118 of the Transfer of Land Act 1958 (Vic) (Act), provides that a person can be liable to pay compensation if found to have lodged a caveat ‘without reasonable cause’.

Factors

This section of the Act was recently considered by the Supreme Court of Victoria in KB Corporate Pty Ltd v Sayfe & Anor.^[1] In deciding that s118 was breached, the court gave a summary of the factors to be considered in an application for compensation under s118.

The court referred to several other recent decisions (particularly Edmonds v Donovan and Ors^[2]and New Galaxy Investments Pty Ltd v Thomson & Ors^[3]and affirmed that, to show that a party has contravened s118, it is not enough to simply show that the caveator did not have a caveatable interest. The court will also consider:

whether the caveator had an honest belief (subjective test) based on reasonable grounds (objective test) that a caveatable interest existed;
that the absence of a caveatable interest at the time the caveat was lodged does not of itself establish that the caveator did not have a reasonable basis for a belief that it was entitled to lodge a caveat; and
legal advice given to the caveator as to the reasonableness and entitlement to lodge the caveat, which may be of considerable significance in determining whether the claimant has established that the caveat was lodged without reasonable cause, but the content and accuracy of the legal advice must be evaluated with all other relevant circumstances.

Consequences of a wrongful caveat

If it is determined that a caveat has been lodged without reasonable cause, the caveator may be liable for significant damages that flow from the caveatee’s inability to deal with its interest in the land, including compensation for financial consequences of failed settlements, interest and other costs.

Findings and relevance to practitioners

In this judgment, the caveator was found to have lodged a caveat without reasonable cause, however the majority of the compensation claim failed as the evidence was insufficient to demonstrate a causal link between the caveat and the loss allegedly suffered.

There was also some doubt whether the party who had suffered the loss was the party who had been affected by the caveat, although it is important to note that s118 entitles relief to ‘any person’ who suffers loss as a result of a wrongfully lodged caveat.

Whilst there was no express finding in relation to the culpability of the lawyer who provided legal advice supporting the lodgement the caveat, practitioners should continue to take care when providing advice regarding what constitutes a caveatable interest, and in lodging caveats on behalf of clients.

^[1] [2017] VSC 623.
^[2] (2005) 12 VR 513.
^[3] [2017] NSWCA 153.