Lenders frequently submit caveats to safeguard their interest in the security property they are lending against until the loan is settled. However, it is crucial for lenders to verify their eligibility to lodge a caveat beforehand. If a caveat is lodged without a valid claim, lenders expose themselves to significant liability. Additionally, it is important to understand the common circumstances in which caveats can be overridden.
Definition of a Caveat:
A caveat is a legal injunction that prevents the Registrar-General from registering certain transactions or plans associated with a property's title until the caveat is removed or consent is obtained.
When do Lenders have a Legitimate Claim for a Caveat?
According to the Real Property Act 1900 (NSW) and general law, lenders can lodge a caveat based on their legal or equitable interest in the land. To establish a valid claim, lenders require evidence that they possess an interest in the land beyond contractual remedies against the prospective borrower.
The critical question is determining when a lender is considered to have a valid interest in the land. If the borrower and/or guarantors have already executed the appropriate mortgage forms, the lender is entitled to an interest. However, the situation becomes less clear when the finance documents are yet to be executed. In such cases, lenders rely on a well-drafted letter of offer or binding term sheet. A comprehensive term sheet should include a charging clause that states the borrower and guarantor(s) charge their interest in the real property to secure the amounts payable under the term sheet. This grants the lender a caveatable interest upon the execution of the term sheet.
Consequences of Unjustified Caveat Lodging:
Serious consequences await those who lodge a caveat without reasonable cause. Caveators must have an honest belief, supported by reasonable grounds, that they possess a caveatable interest. If a caveat is lodged without reasonable cause, the caveator may be liable to pay compensation to any party who suffers monetary loss due to the caveat. For instance, if a caveat prevents the transfer of a property to a prospective purchaser, the caveator may be liable for additional interest payable on the loan that would have been avoided if the transfer had proceeded. It is irrelevant whether the caveator is aware of the likely loss resulting from the caveat. Furthermore, a solicitor who prepares a caveat without a valid caveatable interest may face charges of professional misconduct.
Circumstances in which Caveats can be Overridden:
Lenders often assume that a caveat on title fully protects their right to collect fees for a proposed loan facility. However, there are certain dealings that the Registrar-General will continue to register despite the existence of a caveat. An example is when a current registered mortgagee exercises their power of sale granted by the mortgage or under the law. In such cases, once the property is transferred to a new purchaser, the title becomes free of all mortgages, charges, and covenant charges. Therefore, if a prior registered mortgagee exercises their power of sale and there are insufficient funds to pay both the registered mortgagee and the caveator, the caveat will be removed, and the caveator will not have any claim to the property.
Important Note:
The information provided above reflects the general position in New South Wales at the time of this publication. As caveats are governed by state legislation, it is essential to carefully consider the relevant laws in your particular state or territory.
Summary:
Lenders frequently file caveats to protect their interest in the land until the settlement is finalized. However, lenders must ensure their eligibility to lodge a caveat to avoid liability. It is also important to understand the circumstances in which caveats can be overridden. Caveats are not absolute guarantees of protection, as prior registered mortgagees can exercise their power of sale even with caveats on the title.
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