Caveats are the traditional way in which a person with an equitable interest in a parcel of real property can protect their interest in that property. The High Court case of Black v Garnock suggested that purchasers under contract should always lodge a caveat and shows the risks of not doing so. The incidence of fraud in relation to sale and borrowing has also made it critical for practitioners to confirm the identity of clients.[1] This paper will discuss the circumstances in which a caveat should be asked for and lodged, and also look at the key ways of removing unwanted caveats. It will also examine the length you need to go to and also the option of title insurance to layoff risk in this area.Read less
Black v Garnock (2007) 230 CLR 438 Black v Garnock involved the following facts. A vendor and purchaser executed a contract for the sale of Torrens title land. The purchaser did not lodge a caveat against the title of the property after exchange of contract. Two hours before settlement, a writ of execution in favour of a judgment creditor of the vendor was recorded against the land by the Registrar-General. The purchaser was unaware of this. Their solicitor had carried out a title search earlier in the day and the search had not revealed anything untoward.
Settlement proceeded but the purchasers were subsequently informed that the transfer could not be registered because of the writ of execution. The purchaser applied for an injunction and consequential relief prohibiting the execution of the writ by the sale of the land to a third party. The High Court by majority held that the purchasers were not entitled to an injunction to restrain the execution of the writ recorded on the register by sale of the land. The majority reached this decision by construing section 112 of the Civil Procedure Act 2005 (NSW) and the provisions under the Real Property Act in relation to the recording of writs (and caveats). While a detailed analysis of the sections in relation to writs is beyond the scope of this paper, it is sufficient to note that while writs of execution do not create proprietary interest in land, they are capable of registration on the title and for the period of their effective subsistence, confer rights upon the Sherriff to deal with the land by and on the face entirely of the Register[2].
Once a writ of execution is registered on the title of the property, it is only subject to all equitable mortgages and liens notified by any caveat lodged with the Registrar‑General prior to the date of the registration of the writ of execution and to all other encumbrances, liens and interest notified by memorandum entered on the Register. In other words, once the writ of execution is lodged and registered on the title of the property, it obtains priority over any other equitable interest that has not been so noted upon the title. It also follows that nothing lodged after the registration of the writ will affect the title that the sale under the writ will pass.
The significance of Black v Garnock is that it stresses the importance of purchasers protecting their positions by lodging a caveat on the title. If the purchaser in this case had lodged a caveat upon the title, its equitable interest in the property would have obtained priority over the interest of the judgment creditor. The purchaser would have also been notified when the judgment creditor sought to register the writ of execution upon the title.
While it is prudent for purchasers to lodge caveats aginst the title of the property, it does not appear to be common practice for this to occur. Unfortunately for the purchasers in Black v Garnock, the failure to lodge a caveat against the title has proved to be very costly to them.
In my view, it is prudent to lodge a caveat against the title of a property whenever the caveator holds a legitimate equitable interest in the property. This way, the caveator and owners of the legitimate equitable interest will be notified every time a dealing is sought to be registered against the title of property. In addition, registration of the dealing will not be possible so long as the caveat remains on the title of the property.
The Real Property Act and Caveats
In order to have a caveat removed from the title of the property, the registered proprietor or the holder of the equitable interest in the land may apply to the Registrar General to serve a lapsing notice upon the caveator. The effect of this lapsing notice is that unless the caveator takes steps to extend the operation of the caveat, then the caveat will lapse within 21 days of the date of service of the lapsing notice.
If a caveator wishes to extend the operation of the caveat after he is served with a lapsing notice, then he must approach the Supreme Court, because the Supreme Court is empowered to extend the operation of the caveat. The practical way in which this is achieved is that the caveator generally with the help of a solicitor prepares a Summons and a supporting affidavit. These documents are then ideally served upon the registered proprietor before the caveator approaches the Supreme Court for the order extending the operation of the caveat.
It happens in practice that the applications to extend the operation of the caveats occur just before the caveat’s lapse and it is usually the case that the caveator through their counsel will have to approach the duty judge for the orders sought in the Summons. In order to be successful, the caveator has to essentially demonstrate to the Court that it has a legitimate equitable interest that is capable of being protected by caveat and to provide an undertaking as to damages. An undertaking as to damage is a promise to the court that if the caveator is later shown not to have a legitimate caveatable interest and has caused the owner loss and damage as a result of the lodgement of the caveat against the new titles of the property, then the caveator will compensate the owner for that loss and damage. An application for extension of the caveat is usually brought before the duty judge on more than one occasion as the duty judge invariably does not have the time to deal with the application in its entirety on the first occasion it is before the duty judge. This can make an application to extend the operation of the caveat quite costly as it invariably involves more than 4 visits to the Court to have the application dealt with completely.
In addition, any person who has or claims to have an estate or interest in the land the subject of the caveat may apply to the Supreme Court for an order that the caveat be withdrawn by the caveator.
There are restrictions on the lodgement of further caveats by the same caveator if the early caveat lapses or is withdrawn. The Real Property Act also provides that compensation may be payable in certain cases. These include where a person has without reasonable cause lodged a caveat with the Registrar-General, procured the lapsing of such a caveat or being a caveator has refused or failed to withdraw such a caveat after being requested to do so. This section complements the undertaking as to damages that the caveator has to provide to obtain an order extending the operation of the caveat.
Title Insurance
Another way that purchasers and lenders can protect themselves is via the purchase of title insurance.
Residential lender title insurance
Title insurance is a product that was developed and sold in the United States. It is designed to provide protection for lenders in the event that they are required to realise on their security and suffer loss as a result of certain defects covered by the insurance policy. Cover is generally for actual loss, not exceeding 125% of the amount of indemnity covered by the policy.
Title insurance is taken out by lenders (but paid for by the purchaser) to cover them for risk in the mortgage documentation, settlement and registration process including:
- identity and title fraud;
- gap cover for the period between advancing funds at settlement and registration of documents;
- where the mortgage is not valid and enforceable as an encumbrance against the title;
- the mortgage does not have the correct priority;
- outstanding rates on the property resulting in a claim against the secured property;
- instances of duress, incompetence or incapacity;
- any defects that would have been revealed by an up to date survey including encroachment of improvements;
- non-compliance with covenants and restrictions on title;
- title to the land is unmarketable;
- any defect or lien or encumbrance on title which is unknown to the lender;
- invalidity or unenforceability or any assignment of the mortgage;
- any adverse circumstance which affects the land and that would have been disclosed by searches of public records;
- fraud which discharges, varies or affects the insured mortgage or causes a loss in its priority;
- improvements constructed after settlement which encroach upon or interfere with an easement or right of way;
- encroachment of an improvement on to the land secured by the mortgage constructed after settlement by someone other than the owner;
- lack of necessary approvals for existing structures on the property or modification or replacement of the existing structure after settlement.
Title insurance also provides cover for the costs of defending proceedings based on the covered risks.
An example of a real life claim in circumstances[3] where the lender held title insurance is the following:
A lender loaned money to a borrower to purchase a house. After receiving payments regularly the loan went into arrears. When enforcement proceedings began, the lender learned that a forced discharge of their mortgage had been registered sometime earlier although mortgage payments had continued to be made. After the mortgage discharge was registered, the borrower sold the property to an innocent purchaser. The lender’s insured mortgage was unenforceable against the title. In this situation, the lender was paid out the balance owing on the mortgage by the insurer.
Commercial lender title insurance
Commercial lender title insurance is also available against properties that are zoned commercial, industrial, retail and mixed use. Commercial lender title insurance is a contract of indemnity that provides cover for the following risks which are inherent in the lending transaction. They cover similar risks to residential lender title insurance set out above. In addition, it also covers the risk arising in the period between advancing funds at settlement and registration of documents;
As for residential lender title insurance, defence costs are also covered under the policy. The costs of defending proceedings based on covered risks or in relation to defending the validity or priority of the insured mortgage are covered.
An example of a claim scenario could be where a lender takes an equitable charge over a property for a loan and is unaware at the time of the provision of the loan that the registered proprietor has already given an equitable charge over the property which has not been noted on the title of the property by way of caveat. In general, the interests of lender and holder of the equitable charge second in time would be postponed to the interests of the first lender. If the proceeds of the property are insufficient to discharge both loans, title insurance can come into play to compensate the second lender.
Another example is where a husband obtains a mortgage over the family property by fraud and the wife successfully has the mortgage set aside in relation to her share of the property. The lender would be entitled to indemnity under the policy.
Purchaser’s title insurance
Purchaser’s title insurance is now available in Australia and is provided by First Title Insurance and Stewart title insurance. It covers the purchaser from the date of settlement to the date of resale of the property for a one-off premium paid at the date of settlement. It typically covers similar risks as residential lender title insurance except the insured is the purchaser. Significantly however, it also covers mortgage or title fraud after settlement, incorrect signature of a document, defective registration of a document and problems with the registration gap (eg. issues arising in Black v Garnock)
The Title Insurer will also defend any challenge to the insured’s title, and if ultimately unsuccessful, will indemnify the insured against their loss if an insured risk occurs.
Amendments to the Real Property Act 1900 and the Conveyancing Act 1919
In addition to title insurance, there is a Torrens Assurance Fund whereby victims of mortgage fraud are able to make a claim for their loss and damage. Generally, the Fund is available to victims in six situations, namely, loss by acts or omissions of the Registrar-General, registration of another person as owner, error in the Register, the bringing of the land under the Real Property Act from old systems title, fraud, and error in official searches.
To partly combat the effect of Black v Garnock and the amount of compensation that the Torrens Assurance Fund have paid in the past, amendments which came into force on 13 May 2009 have been enacted in the Real Property Act 1900 and the Conveyancing Act 1919.[4] The general thrust of the amendments is that mortgagees (lenders) have to take reasonable steps to confirm the identity of the mortgagor (the borrower and the provider of security) before presenting a mortgage for lodgement and registration at the Land Titles Office. If the mortgagee fails to comply with the guidelines known as the “Registrar-General Directions” which involve in part a “100 point check” in line with security checks currently in place with financial institutions and the keeping of written records of the steps taken as well as a copy of any associated documents, the Registrar-General ultimately has the power to cancel any recording of a mortgage.
The intention behind this amendment is to prevent unscrupulous lenders (who are often lenders of last resort who charge exorbitant interest rates) from relying on and benefiting on the security of title provided by the NSW Torrens Title System.
The amendments also place a limit upon the amount of compensation payable to victims of mortgage fraud by the Torrens Assurance Fund. Any claim for compensation is limited to the market value of the land plus costs and interest. The amount of interest payable is also capped to 2% above the official cash rate.
Another interesting aspect of the amendments is that the Torrents Assurance Fund is no longer liable for easements that are not recorded in the Register unless the easement is not recorded due to an error caused by the Registrar-General. The error of the Registrar Registrar-General however does not extent to a failure to carry out searches or inquiries as to the existence of any easement in relation to the creation of a qualified folio of the Register.
The rationale behind these amendments is to ensure that the Torrens Assurance Fund is available to those persons who have legitimately through no fault of their own been deprived of their land in part by attempting to reduce the instances of identity fraud and by restricting the amount of compensation payable for legitimate claims.
Conclusion
Caveats have been and continue to be the traditional way in which holders of equitable interest in real property can protect their interest in the land. Not only is the Registrar-General compelled under the Real Property Act to notify the caveator in the event of any dealing that is sought to be registered against the title, the Registrar‑General is also prevented from registering any dealing so long as the caveat remains enforced.
Title insurance is important and can protect the interest of lenders and purchasers.
However, as purchaser’s title insurance only protects the owner from the date of closing, it still leaves the purchaser open to the risk of competing legal or equitable interests that are created prior to the date of settlement. This is because it is still possible that the purchaser’s equitable interests may be postponed to another equitable interest created either before or after the date of exchange. The most effective way to protect a purchaser’s interest from the date of exchange to the date of registration of the transfer on the title of the property is by the lodgment of a caveat as soon as contracts for sale have been exchanged, while the caveator may have to incur in the order of $10,000 to $20,000 if his entitlement to the caveat is challenged, this must be viewed as relative to the value of the property being purchased. A cheaper alternative is obtaining purchaser’s title insurance which is significantly cheaper and will protect the interests of the purchaser in the majority of cases. It would certainly have protected the purchaser in Black v Garnock.
Laina 9th Floor Wentworth Chambers (02) 8815 9211 laina.chan@ninewentworth.com.au
[1] See eg Chandra & Anor v Perpetual Trustee Victoria Ltd & Ors [2007] NSWSC 694. [2] See sections 105-105D of the Real Property Act and 230 CLR 438 at 471 per Callinan J. [3] Provided by Stewart Title Limited, a provider of commercial and residential lender title insurance.
[4] The changes were enacted via the Real Property and Conveyancing Legislation Amendment Act 2009
