Caveats - 15 pertinent comments

A caveat is one method by which a creditor may compel payment of outstanding debts by a debtor, or any guarantor of the debtor's obligations under an agreement.

If a creditor has a charging or security clause in its agreement or any guarantee, the creditor may lodge a caveat over the real property of a debtor or guarantor when the debtor falls to pay its debts on time.

It is strongly recommended that, if any form of credit is provided (including by way of a lease), the creditor should always secure payment of its ongoing debts by way of a charging clause.

Often, the act of lodging a caveat will be sufficient motivation for a debtor or guarantor to make arrangements to pay any debt.  After all, nobody wants to risk the loss of their home.  Further, the lodgement of a caveat may cause the debtor or guarantor to be in breach of arrangements they might have with their financier, which could result in the financier taking its own default action.

The charging clause should contain words to the following general effect:

"The debtor (or guarantor) charges all of its real property, both present and future, and whether owned personally or in its capacity as trustee of any trust, with the payment of any and all moneys which become payable pursuant to the terms and conditions of the agreement (or guarantee)."

To comply with the requirements of property legislation (for example, the Property Law Act in Queensland and the Real Property Act in New South Wales), any agreement or guarantee with a charging clause must be signed by the party providing the security.  If it is not, the charging clause will likely be unenforceable and any caveat lodged may be unlawful.

Once a caveat has been lodged on the title of any real property, it will prevent any dealing with that property until such time as the moneys due and payable under the agreement or guarantee have been paid in full.  However, the caveat does not prevent a registered mortgagee (ie, a bank) from exercising its right of default sale and recovering payment of any moneys owing to it.

If there is no equity in the property, all the proceeds of default sale will go towards the payment of the mortgagee and the creditor's caveat will automatically be discharged.  If there is equity in the property, the mortgagee should keep any caveator apprised of the sale of the property and the proceeds recovered.

There are different requirements for the caveat to remain on the title of the property, depending on the state or territory in which the caveat is lodged. In Queensland, the creditor must file a claim in the court, seeking orders for the sale of the property or vesting ownership of the property in the creditor.

This claim must be filed and a notice of action lodged with the Titles Office within three months of the date that the caveat was lodged.  If no notice of action is lodged, the caveat will automatically lapse, unless there is a court order to the contrary.

In Victoria and New South Wales, the caveat will remain on the title unless the registered owner of the property initiates action challenging the validity of the caveat.  If this occurs, the caveat will be removed from the title of the property, unless the caveator provides sufficient material to confirm the validity of the caveat.

A caveat may only be lodged once in respect of each separate interest that a creditor has in real property by virtue of any charging clause.  If a creditor lodges a caveat pursuant to an agreement or guarantee and that caveat lapses or is withdrawn, the creditor will not be able to lodge a further caveat under the same agreement or guarantee.

What remedies a creditor might have in respect of its caveatable interest in property will depend on whether the debtor or guarantor is the sole owner of the property or whether an innocent co-owner has an interest in the property.

If the debtor or guarantor is the sole owner in Queensland, there is capacity for ownership in the property to vest in the creditor and it may decide to retain possession of the property and earn income from it.  Where there is an innocent co-owner involved, ownership will vest in the creditor for the purpose of sale only.

Where there is an innocent co-owner involved, that innocent co-owner will recover 50% (if that is its interest in the property) of the sale proceeds, after payment of sale costs and any mortgagee.  As such, the creditor will only have access to 50% of the equity in the property on sale.