Creditors often ask whether they are entitled to lodge a caveat over a debtor's property as a mechanism for securing payment of outstanding debts.
While it is in force, a caveat prevents the registration of certain dealings affecting the land in relation to which it is lodged.
Relevantly, a registered caveat will prevent the transfer of legal ownership of land, or the registration of a new mortgage (which might otherwise deplete the 'equity' in the land).
A caveat may significantly increase a creditor's prospects of recovering an unpaid debt because:
- The debtor's ability to realise and/or dispose of the equity in the land will be limited, thereby protecting the pool of assets available to satisfy the debt; and
- A caveat may put commercial pressure on the debtor to pay the debt promptly (particularly if the debtor is relying on the sale or refinance of its land to fund its ongoing operations).
To be entitled to lodge a caveat, a party must have a 'caveatable interest' in land.
There are a range of circumstances which may give rise to a caveatable interest. Simply being owed a debt will not, on its own, suffice.
The most common way in which a caveatable interest will arise in the creditor/debtor context is the existence of a 'charging clause' in a binding contract between the parties.
Charging clauses typically provide that certain assets are to be used as security for the obligations of a party to the agreement, such that any land owned by a debtor may be sold to satisfy any amounts that may become owing to the creditor under the agreement.
Lodging a caveat provides interim protection only. The process is designed to maintain the status quo by 'freezing' title to land until a party has been given an opportunity to establish its asserted interest in the land in a competent court.
In Queensland, caveats that are lodged without the consent of the registered owner of land will lapse if court proceedings seeking to establish the interest claimed by the caveat are not commenced by the earlier of:
- Three months of lodgement of the caveat; or
- Fourteen days from the owner giving notice to the caveator requiring that such proceedings be commenced.
If a caveat lapses, it may be removed from the title and will have no further effect.
Importantly, a party may not lodge more than one caveat on substantially the same grounds without the leave of the court. In most cases, you only get one bite at the cherry.
There can be serious consequences for lodging a caveat without proper grounds.
If you or your clients are owed money, or otherwise wish to establish an interest in land, you should seek legal advice as to whether there are proper grounds for a caveat to be lodged.
And finally, if you or your clients are providing trade credit or propose entering into arrangements which may result in a significant debt being owed, a charging clause should be included in the contract to ensure that the right to payment may be secured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.