A caveat is an instrument that protects an unregistrable legal or equitable interest in real property.
The caveat is a notice to the public that the person lodging the caveat (the caveator) holds an unregistered interest in the property, and provides details of the interest claimed.
The caveat prevents the registration of any dealings a person has with the property until the caveat is removed or the caveator consents.
Lodging a caveat is a very serious matter, and as a result a caveat should not be lodged ‘without reasonable cause’.
Section 118 of the Transfer of Land Act 1958 (Vic) provides:
Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders.
What does ‘without reasonable cause’ mean?
In 2019, the High Court of Australia explained what it means to lodge a caveat ‘without reasonable cause’ for the purposes of claiming compensation under the NSW provision that is equivalent to section 118.
The case dealt with the question of what property vests in a trustee in bankruptcy. However, in determining that issue, the High Court has provided some useful insight into the issue of whether a person has lodged a caveat without reasonable cause.
In Boensch v Pascoe [2019] HCA 49; 94 ALJR 112; 375 ALR 15, the High Court (Kiefel CJ, Gageler and Keane JJ and separately Bell, Nettle, Gordon and Edelman JJ) endorsed the two-step ‘reasonable cause’ test that had been applied in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) and other cases.
Background
Mr Boensch was a trustee holding real property on trust for the benefit of his children (Trust Property). Mr Pascoe was appointed as Mr Boensch's trustee in bankruptcy upon Mr Boensch being declared bankrupt. Whilst acting as Mr Boensch’s trustee in bankruptcy, Mr Pascoe lodged a caveat over the Trust Property.
Ultimately, the caveat was removed by a lapsing notice issued by the NSW Registrar General. Mr Pascoe chose not to issue litigation to establish that he had a caveatable interest in the real property (mainly due to the limited equity that appeared to be available in the property).
Mr Boensch then commenced proceedings against Mr Pascoe seeking compensation under the Act on the grounds that Mr Pascoe had lodged and maintained a caveat over the Trust Property ‘without reasonable cause’.
In determining whether Mr Pascoe had lodged and maintained the caveat over the Trust Property ‘without reasonable cause’, the trial judge applied a two-step test, namely that a caveat is lodged ‘without reasonable cause’ if the lodging party:
- does not have a caveatable interest; and
- does not have an honest belief based on reasonable grounds that they have a caveatable interest.
As a result, in order to claim compensation under the equivalent of section 118 successfully, Mr Boensch was required not only to establish that Mr Pascoe did not have a caveatable interest in the Trust Property but also that Mr Pascoe did not have an honest belief on reasonable grounds that he had a caveatable interest over the Trust Property.
The High Court concluded that Mr Pascoe had a caveatable interest in the Trust Property for the purposes of lodging and maintaining the caveat. This was on the basis that the caveatable interest arose from Mr Boensch’s entitlement to be indemnified out of the Trust Property for liabilities he incurred while he was trustee. This entitlement to be indemnified created an equitable interest which vested in Mr Pascoe upon his appointment as Mr Boensch’s trustee in bankruptcy.
The majority (Bell, Nettle, Gordon and Edelman JJ) noted (at ALR page 46, paragraph 116):
For the reasons earlier stated, there is no reason to doubt that, upon the making of the sequestration order, the ... property vested in equity in Mr Pascoe by reason of Mr Boensch’s right of indemnity and, therefore, that Mr Pascoe had a caveatable interest in the property. Nor is there any reason to doubt that Mr Pascoe honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of Mr Boensch’s right of indemnity. On the facts as found, Mr Pascoe did not lodge or refuse to withdraw the caveat without reasonable cause.
The minority (Keifel CJ, Gageler and Keane JJ) noted (at ALR page 20, paragraph 12) that:
The existence of a caveatable interest, without more, supplies “reasonable cause” for lodging and maintaining the caveat.
In the circumstances, the High Court concluded that Mr Pascoe did not lodge the caveat ‘without reasonable cause’ and therefore Mr Boensch was not entitled to compensation under the New South Wales provision equivalent to section 118 of the Transfer of Land Act 1958.
Conclusion
This High Court decision highlights the importance of ensuring that caveats are lodged and maintained with ‘reasonable cause’.
It also provides guidance on how a Court will approach the issue of whether a caveat has been lodged ‘without reasonable cause’ under the Act, and thus whether an applicant is entitled to compensation under section 118 of the Transfer of Land Act 1958.
Legal practitioners will be aware that if they lodge a caveat without reasonable cause, they may be engaging in unsatisfactory professional conduct, or even professional misconduct. If that happened, the legal practitioner is likely to find themselves the subject of a disciplinary matter initiated by the Legal Services Commissioner, and having their right to engage in legal practice put at risk.
WG Stark
Hayden Starke Chambers
