If you’re owed money by someone who owns property, you might wonder whether you can lodge a caveat over their real estate as security for the debt. While this might seem like an obvious solution, the legal reality is far more complex than many people realise.

Understanding when you can legally lodge a caveat, and the serious risks involved if you do it incorrectly, is crucial before taking any action. Getting this wrong can lead to significant legal consequences and potentially costly litigation.

What Is a Caveat and How Does It Work?

A caveat essentially operates as a warning to anyone seeking to deal with a piece of real estate. Think of it as a legal “red flag” that appears on the property title, alerting potential buyers, banks, and other interested parties that someone claims an interest in the property.

Importantly, a caveat is not evidence of a debt and is not the same as a mortgage. Instead, it prevents the land from being transferred (through a sale or other transfer) and stops certain dealings from being registered, such as a new mortgage.

This makes caveats particularly attractive to creditors because they can effectively prevent the property owner from selling or refinancing their property until the caveat issue is resolved. However, this power comes with strict legal requirements.

Do You Have a “Caveatable Interest”?

Here’s where many people get it wrong: you can only lodge a caveat if you have what’s legally known as a “caveatable interest.” Simply being owed money is not enough.

A caveatable interest means you must have either:

• An equitable interest in the property, or
• An interest arising from an agreement that creates a charge over the land in connection with the debt

Understanding Equitable Interest

An equitable interest is an interest in property that isn’t recorded on the title. While the registered owners hold the legal title, someone else can still have a legitimate interest in the property.

Common examples include:

Resulting or Constructive Trusts: This often occurs when someone is promised part or all of a property in return for specific actions. A typical scenario involves parents promising to gift a child property under their will in exchange for the child living at the property and helping with maintenance or care.

Property Contributions: If you’ve made financial contributions to improving a property (such as paying for additional dwellings, home improvements, or mortgage payments) with the expectation that your contribution would be secured by the property or returned upon sale, you may have an equitable interest.

Legislative Exceptions

Certain laws provide specific circumstances where caveats can be lodged. For example, the Home Building Act sets out strict criteria that, if met, can enable a builder to lodge a caveat for unpaid work. However, builders cannot simply lodge a caveat as a matter of right.

Are You Prepared for Legal Proceedings?

Before lodging a caveat, consider this crucial question: are you prepared to formally commence legal proceedings to defend your claimed interest?

This is critical because property owners can issue a “lapsing notice” to anyone who files a caveat. This notice requires the caveator to seek an order from the Supreme Court of NSW for the caveat to remain in place within 28 days.

In recent years, the Supreme Court has provided clear guidance: if you’re served with a lapsing notice, you must either commence formal proceedings to prosecute your claim before the notice lapses or have very good reasons for failing to do so.

The Court’s stricter approach reflects growing concern about the casual way people have been filing caveats over the years.

The Serious Risks of Getting It Wrong

Caveats are extremely disruptive and interfere with a person’s fundamental right to deal with their asset. If you lodge a caveat without a proper legal basis, you could face:

• Legal action from the property owner
• Claims for damages caused by the wrongful caveat
• Potential costs orders against you
• Removal of the caveat by court order

When to Seek Legal Advice

Given the complexity and potential consequences involved, careful legal consideration must be given before lodging any caveat. The law in this area is nuanced, and what might seem like a straightforward debt recovery tool can quickly become a costly legal nightmare if not handled properly.

At Complete Legal, we regularly help clients navigate these complex property and debt recovery matters. We can assess whether you have a genuine caveatable interest and guide you through the proper legal processes to protect your rights.

Need someone to have your back with a property dispute or debt recovery matter? Don’t risk getting it wrong on your own. Contact Complete Legal today for a consultation to discuss your specific situation and explore your legal options in plain English.