Australia: Removing Caveats on Title - Guardian Loans Pty Ltd v FTFS Holdings Pty Ltd & Ors
Banking and Finance Update

The recent NSW Supreme Court decision of Guardian Loans Pty Ltd v FTFS Holdings Pty Ltd & Ors has examined the discretion of the Court to order the removal of a caveat on title. It is one of a number of recent cases that have dealt with charging clauses in documents and the issue of "securing" properties with caveats.

While on the topic of caveats, it is worth noting that the NSW Supreme Court has also recently examined the impact of a failure to pay stamp duty (Boral Recycling v Wake). A brief discussion of the case follows at the end of this article.

Facts

FTFS Holdings Pty Ltd (FTFS) granted a mortgage over a property in favour of Suncorp-Metway Ltd (Suncorp) together with a fixed and floating charge. The mortgage and charge were duly registered.

FTFS subsequently granted a mortgage over the property in favour of Guardian Loans Pty Ltd (Guardian). The mortgage was not registered. However, Guardian lodged a caveat against title to the property to notify of their interest in the land. The caveat effectively prevented the registration of any dealing until the caveat lapsed or was withdrawn. Remember, a caveat does not create an interest; it merely is a notification that a party claims to have an interest.

Suncorp entered into a deed of priority with Guardian and consented to Guardian's unregistered second mortgage and caveat.

Eighteen months later, Suncorp notified Guardian that FTFS has defaulted under Suncorp's loan and that Suncorp intended to appoint a receiver to FTFS under its charge. Suncorp subsequently appointed receivers.

Six months later, Suncorp notified Guardian that it was proceeding to sell the property and that it was unlikely for there to be surplus funds from the sale of the property after Suncorp's loan was repaid. Suncorp asked Guardian to confirm that it would withdraw its caveat at settlement of the sale. When Guardian responded that it would leave its caveat on until settlement, Suncorp decided to serve a lapsing notice under section 74J Real Property Act 1900 (NSW).

Guardian then filed for an extension of its caveat.

Arguments

Suncorp's argument

Suncorp argued that the caveat should lapse because it was incurably bad in form. They claimed that the caveat sought to prohibit any dealing with the property and that as a basic principle of priority, Guardian's interest as second mortgagee cannot prevent Suncorp as first mortgagee from selling the property. Suncorp relied on the decision in Business Capital Mortgage Pty Ltd v Randwick Nominees Pty Ltd where the same court (albeit a different judge) did not permit the extension of a caveat for this very reason.

Guardian's argument

Guardian argued that their caveat did not prohibit the exercise of a power of sale by a superior mortgagee. They claimed that under section 74H(5)(g) Real Property Act 1900 (NSW), a property can still be sold by a first mortgagee even if a caveat is registered against title to the property. This section provides that a caveat does not prevent registration of a dealing in respect of a prior registered mortgage or charge. For example, a later registered caveat does not prevent a registration of a transfer by a mortgagee exercising power of sale under a prior registered mortgage.

Decision

The court decided that a caveat, prepared in accordance with the prescribed form, cannot be construed to prohibit the registration of a dealing if 74H(5)(g) Real Property Act 1900 (NSW) clearly states it does not.

The court's decision is therefore contrary to the authority in Business Capital Mortgage Pty Ltd v Randwick Nominees Pty Ltd. It is interesting to note that one of the reasons the court felt it could depart from authority of the same court was that the judgement in Business Capital Mortgage Pty Ltd v Randwick Nominees Pty Ltd was given on an urgent basis, without the benefit of full argument or time for reflection.

What does this all mean in practice?

The short answer is, not much.

• A first registered mortgagee can still exercise mortgagee power of sale to effect a transfer of property irrespective of whether a caveat is registered on title or not.
• A caveat registered on title to protect the interest of a later, unregistered mortgagee will still automatically lapse upon a transfer of property by a prior mortgagee exercising power of sale.
• A caveat in the prescribed form can still be validly lodged to protect the interest of a subsequent mortgagee.

It does, however, clarify that a caveat in the prescribed form, is entitled to remain on title until the title to the property is transferred by a mortgagee exercising power of sale. In other words, where a mortgagee wishes to exercise power of sale, it cannot force a caveat that protects a subsequent mortgagee's interest to lapse or be withdrawn prior to settlement of a property transfer.

It also serves as a reminder that not only can a higher a court overturn a decision of a lower court, but that a court can overrule a decision of the same court, even though that decision has been acted on as sound authority ever since it was handed down.

Boral Recycling v Wake

This case considered an application to extend the operation of a caveat. The caveatable interest was said to arise from a personal guarantee and indemnity under which the guarantor agreed to charge all their interest in a parcel of land and to deliver an executed mortgage on demand.

Whether the clause actually created a caveatable interest (i.e. a mortgage or charge) was unfortunately not considered. Instead, the court considered the narrow question of whether a caveat can be sustained if the mortgage or charge has not been stamped. As a mortgage or charge is unenforceable to the extent it is not stamped in accordance with the Duties Act 1999 (NSW), the court decided that the caveat cannot be sustained. Even if the mortgage or charge was later stamped, this could not save the caveat.

The point to take away from this is that a caveat lodged to notify of an interest arising from a mortgage or charge is bad if the mortgage or charge is not stamped at the time the caveat is lodged. Attempts to save the caveat by later stamping the mortgage or charge do not work. Rather, a new caveat should be lodged once stamping has been carried out. Better still, lenders should ensure that stamp duty is paid on a mortgage or charge as expeditiously as possible so that the problem never arises.

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