What you need to consider before registering a caveat
Registering a caveat on a property title is a way to formally claim an interest in land owned by someone else. It also prevents the Registrar General from registering certain dealings in the land by others. This in turn enables the person who lodged the caveat (the caveator) to have a say in any attempted dealings in the land by others, including the owner (including a transfer of ownership to someone else).
In order to lodge a caveat, you must have a valid reason for doing so, which means being able to demonstrate some form of proprietary interest in the land (i.e. an enforceable right to ownership, possession or use of the property and the right to have a say in what happens to it). Many caveats are lodged without a valid reason, or at least the landowner might claim that is the case. In such instances, the landowner can apply for a lapsing notice to be issued, which will result in the caveat being removed, unless the caveator goes to court within 21 days to get an order extending the caveat by keeping it registered.
Even when the caveat is validly lodged, that is sometimes only half the battle won; the other half being to convince the Court that it should extend the operation of the caveat when the Court doesn’t see any point legally in doing so.
On 8 April 2021, the Supreme Court of NSW handed down its decision in the case of EJS Developments Pty Ltd v Dunmore Street Pty Ltd (EJS Developments). The Court’s findings highlight the potential pitfalls for people lodging a caveat over property when the landowner wants it to be lapsed, namely:
- If you hold units in a unit trust that owns some form of land, you may well have a sufficient beneficial interest in that property to lodge a caveat.
- If you do register a caveat, the trustee of the unit trust may try to have it lapsed.
- Should they do so, you will have to apply to the courts to seek to have the caveat extended so that it doesn’t lapse.
- Although you may be able to demonstrate that you have a valid interest to support registration of the caveat, you may not be able to show that you have a valid basis for extending its operation.
- An inability to prove that you have a case requiring a legal remedy (e.g. a court order to make someone do something or stop doing something) to resolve a dispute regarding the trust property may result in the Court refusing to extend your caveat.
The relevant facts in EJS Developments
The plaintiff, EJS Developments Pty Ltd (EJS) was a unitholder in a unit trust established in 2007 to buy and develop land in Wentworthville, a suburb in western Sydney.
Unit trusts are a popular vehicle for property developments. Investors purchase units in the trust and are entitled to receive distributions of income or capital from in accordance with rights attaching to their units as set out in a trust deed. The trustee of the unit trust owns the property that is developed, but holds the property on trust for the unitholders, who will usually have a beneficial interest in the property under the trust deed.
In EJS Developments, a multi-unit residential development was built and owned by the defendant, Dunmore Street Pty Ltd (Dunmore St), as trustee of the Dunmore Street Unit Trust (the Trust). EJS owned 5 units in the Trust, which was equivalent to 23.18% of the issued units.
After the development had been completed and 24 of the 54 lots had been sold to pay out an ANZ Bank loan, the remaining 30 lots were leased out. Then, on 21 December 2019, there was a unitholders’ meeting at which the unitholders decided to wind up the Trust and distribute those 30 lots to the unitholders, in proportion to the value of their unitholding in the Trust.
EJS was unhappy with the lots that it was allocated, wanting alternative lots instead. EJS claimed that it had a caveatable interest in those alternative lots by virtue of being a unitholder in the Trust, and because of financial contributions it had made to the development.
On 5 March 2021, after several months of failed negotiations between EJS and Dunmore St, EJS lodged a caveat over the lots it sought to be allocated (as well as the lots whose distribution it did not object to).
In lodging the caveat, EJS claimed that it held a beneficial interest in the Trust that gave it an “equitable interest in land as unitholder in Dunmore Street Unit Trust and equitable interest in land pursuant to a constructive and/or an implied or resulting trust arising upon contribution”.
Dunmore St then caused a lapsing notice to be issued to EJS, the effect of which was that the caveat would be removed unless EJS could obtain an order from the Supreme Court of NSW pursuant to section 74K(2) of the Real Property Act 1900 (NSW) (the Act) to extend its operation within 21 days of service of the notice.
EJS applied to the Supreme Court to extend the operation of the caveat.
What the Supreme Court had to decide
In deciding the case, the Supreme Court had to determine whether it was satisfied that EJS’s claim for an order extending the operation of its caveat under section 74K of the Act “has or may have substance“. The first hurdle EJS had to overcome was establishing that it had a sufficient proprietary interest in the land to sustain the caveat (i.e., that it had a caveatable interest).
Did EJS have a caveatable interest?
In order to have a caveatable interest, a party must demonstrate a proprietary interest in the property itself. Historically, when the property in question is owned by a unit trust, this has proven to be a difficult issue to have clarity on.
EJS argued that under the terms of the Trust’s trust deed, EJS had a vested beneficial interest in the property in the trust fund, which amounted to a proprietary interest in all the assets of the Trust. It said that this was a caveatable interest, and that this justified extending the operation of its caveat.
The law is clear that beneficiaries of discretionary trusts do not have proprietary interests in any property held in the discretionary trust fund. Similarly, shareholders in a land-owning company do not have a proprietary vested interest in the property owned by the company. However, the answer in relation to unit trusts is not as clear cut.
Although unitholders in a unit trust generally have beneficial interests in the assets of the trust, it does not necessarily follow that such beneficial interests will be sufficient to give rise to a proprietary interest that would then entitle them to lodge a caveat.
A 2005 decision of the High Court confirmed that parties cannot rely on general assumptions about whether a unitholder in a unit trust has a sufficient proprietary interest to be able to lodge a caveat in respect of that property. Instead, the specific terms of the trust deed must be considered.
In support of its arguments, EJS relied on the 1986 decision of the Victorian Supreme Court in Costa and Duppe Properties Pty Ltd v Duppe (Duppe), a case involving a trust deed with similar words to those in the trust deed in EJS Developments. In Duppe, the Court concluded that the unitholder did have a proprietary estate or interest in each piece of land that was included among the assets of the trust and which was sufficient to support a caveat.
On the basis of the decision in Duppe, the Court in EJS Developments held that the ownership of units in the Trust gave EJS a vested proprietary interest in the relevant property and that EJS therefore had a caveatable interest.
Unfortunately for EJS, however, the story did not end there. The fact that they had a caveatable interest was not enough to persuade the Court to extend the operation of the caveat. This brings us to the second hurdle for EJS – proving that the claim to extend the caveat included an arguable case for protecting their caveatable interest.
What is the point of extending the caveat?
Even if the Court agrees that a unitholder has a caveatable interest, it still needs to be determined whether that is argument enough to extend and keep the caveat registered if the landowner applies to have the caveat lapsed. In EJS Developments, the Court noted:
“However, as is well understood, a caveat is no more than a form of injunction to preserve the status quo pending the determination of the plaintiff’s claim for some identified final relief. The difficulty for EJS became that it was unable to identify any cause of action for final relief about which it could be shown there was a serious question to be tried. This is the primary reason why the Court refused to extend the Caveat.”
In other words, a caveator seeking extension of a caveat must demonstrate that there is a proper basis for preserving the status quo until the matter (in this case whether EJS could change which lots it was allocated in the distribution), can be finally determined by the Court. To do so, the caveator will need to show that:
- there is “a real (or serious) question to be tried” (i.e., there is a reasonable chance of them succeeding at a full final hearing); and
- the “balance of convenience” supports the extension of the caveat (i.e., considering factors such as whether the caveator would suffer irreparable harm if it is not extended, whether damages would be a sufficient remedy in place of the caveat, whether the other party can pay such damages, the effect on the other party of any delay by the caveator in making the application, and any other such factors).
Whether or not it chooses to extend the caveat is a matter for the Court’s discretion. It is not enough for the caveator to have a caveatable interest; the Court must also consider whether there is any real point in extending the caveat to help finally resolve the legal issues in the case.
Unfortunately for EJS, although it was unhappy with the proposed distribution of the Trust, it could not point to any relevant contribution it had made, or to any breach by Dunmore St that meant there was a genuine dispute that required a final remedy. The Court therefore held that EJS was not entitled to the declaration it had sought in relation to the allocation of lots, and, consequently, there was no valid reason to extend the operation of the caveat.
Even if a unitholder is able to establish the existence of a caveatable interest, it will be a hollow – and expensive – victory if they cannot also demonstrate that the caveat needs to stay in place to preserve their claim until the Court can finally determine the main dispute in question.
Before registering a caveat that may ultimately serve no purpose, it is therefore advisable to think beyond whether or not you have the kind of interest that such action can protect, and consider whether you also have an arguable basis to seek the relief that the caveat will be used to obtain, or whether the caveat would fall foul of the kind of challenge that caused the caveator in EJS Developments to fail.
Craddock Murray Neumann Lawyers has extensive experience in all kinds of property matters, including lodging and defending caveats, as well as litigation more generally. Our team of expert lawyers are ready to assist you with all your property needs, and can be contacted on 1300 123 529 or via email.