Protecting your interest as buyer of land by caveat
Once contracts for the sale of land have been exchanged the buyer has a binding and enforceable interest in the land. However the buyer does not become the legal owner of the land until settlement occurs. A decision needs to be made now as to whether the buyer should lodge a caveat on the seller’s title.
The purpose of this advice is to explain what a caveat is and what purpose it serves. This will help you weigh up the risks of not lodging a caveat against the costs of doing so.
What is a caveat?
A caveat is a tool unique to the torrens system of title, which applies to most but not all urban land in New South Wales. This is a system of title perfected by registration of interests in a public register maintained at the Land & Property Information Office (“LPI”).
A caveat is a mechanism, which permits a person who claims an unregistered interest inland to protect it.
The word “caveat” comes from the Latin and means “warning”.
When a person claims to have an (unregistered) interest in another person’s land, he can lodge a caveat on the title. This does two things:
- it serves as a warning to the world (ie. everybody) that the person is claiming an unregistered interest claimed in the land;
- it directs the Registrar General not to register any dealing with the land (inconsistent with the interest claimed) without notice to the person who lodged the caveat (called the caveator).
Whilst any person can lodge a caveat only certain interests can be supported and these are called caveatable interests. Examples include a lease or a mortgage. A person who buys land under an exchanged contract also has a caveatable interest.
What risks does a buyer face after exchange of contracts and before registration?
Problems can arise where fraud is involved or where the seller is under financial stress. The latter situation is demonstrated in the case of Black v Garnock (2007) HCA 31.
The Smiths owned “Wanaka”, a 1600-acre farm property near Bombala in Southern NSW. The Smiths owed money to Mr. Black, Mr. Chapman and Mr. Carter, a firm of accountants. In September 2004, the accountants obtained a judgment in the District Court of NSW for $228,000 against the Smiths.
On 15 July 2005, the Garnocks and the Luffs agreed to buy Wanaka from the Smiths for $1,000,000. Settlement was to take place at 2pm on 24 August 2005.
The day before settlement, the accountants obtained a writ of execution against the farm in the District Court. Under this writ the Sheriff was empowered to sell the property to pay the judgment debt.
The writ was recorded in the Torrens register at 11.53am on the settlement day. The purchasers’ solicitors did a final title search on the morning of the settlement day but prior to the registration of the writ.
The purchasers, who were therefore unaware of the registration of the writ, paid the balance of the purchase price and settlement proceeded at 2pm on that same day. However the purchasers were unable to have the transfer of the land registered in their names because of the earlier registration of the writ on the same day. So the buyers had paid over the full purchase price for the land but could not be registered as the owners of it.
The Garnocks and Luffs began proceedings in the Supreme Court of NSW to prevent (by injunction) the accountants and the Sheriff from executing the writ and selling the land. The case went all the way to the High Court where by a 3-2 majority, it was held that the writ took priority of the purchase because it was registered before the attempted registration of the sale to the purchasers. It was held to be irrelevant that the date the contract for sale of the land was exchanged was prior to the date of the issue of the writ.
In the end, the purchasers had to pay the Smiths’ judgment debt to the accountants so that they would withdraw their writ to allow the transfer of the land to be registered. It did not matter that the accountants knew about the sale. They had not acted fraudulently. The point is that the Torrens system is a system of title by registration and the accountants had registered their interest in the land ahead of the purchasers’ interest in it.
Even though this might seem very unfair the point is that the purchasers could have safeguarded against this scenario by lodging a caveat upon exchange of contracts. This would have prevented the registration of the writ.
Do you need a caveat too?
The answer depends on whether you think the risk is worth the extra cost. The Black v Garnock case dealt with a writ by a creditor, instructing the sheriff to seize and sell the property. Statistically, writs are very rarely used but they could become more common after this case.
What are the warning signals?
Some circumstances more than others highlight the need for caution:
- The “stressed” seller. If you know that the seller is under extreme financial pressure to sell this is an indicator you should lodge a caveat eg. the land may be being sold very cheaply, there may be a number of mortgages, there may be significant unpaid rates, which operate as a charge on land.
- Anything unusual should act as a warning. In Black v Garnock, the buyers were on notice that the seller had only a modest equity in the property (less than 10%) and they knew that creditors were closing in.
- Identity theft and forgery is on the increase. This can take the form of stolen or counterfeited certificates of title and forged signatures on contracts and transfers. As the Registrar-General serves a copy of any caveat on the registered owner this may operate as a check on the legitimacy of the sale. This is not fool-proof because of the risk that the notice may go astray or fall into the wrong hands. However cases have occurred where the caveat tipped off the true owner about the fraud in time to prevent it.
- A new mortgage may thwart the sale. This could occur when the seller, who may already have a mortgage, borrows money from another lender on the strength of the sale. If the new mortgagee is disadvantaged by a sale to you at a price below its expectations it can block the completion of the sale by refusing to provide a discharge of the mortgage. A caveat can serve to warn off a new lender from taking a mortgage over the property.
- Delays by mortgagees in lodging documents for registration. A major potential problem lies in the delay by mortgagee banks in lodging the transfer and other documents for registration. The title to the land is not in your name until the registration of the transfer. This means that another person could acquire an interest in the land without your knowledge in the meantime. For example the scenario as in Black v Garnock could occur in the period after settlement and before (the delayed) registration.
What does it cost to lodge a caveat?
There is a legal fee to cover the drafting of the caveat; attending to execution and lodgment at the LPI; notifying the vendor’s solicitors, the incoming mortgagee and any other interested parties.
There is also a registration fee charged by the Registrar-General, which at 1 July 2012 is $102.00 plus an agency fee and any applicable title search fees.
What are other buyers doing?
Different people have different perceptions and responses to risk. Some buyers are willing to take a risk by relying upon the rarity of a scenario as in Black v Garnock to save the extra cost of lodging a caveat. More buyers than before are lodging caveats but not everyone is doing so.
Note: We always do a final title search as close to the settlement time as possible (no more than 1 hour before) but it is still possible that a competing interest in the land could be registered and therefore take priority in this small window of time.
However, it is far more likely that any competing interest would be registered in the period after settlement because of the time it takes mortgagee banks to lodge the documents for registration. This is something I have no control over. In the event you suffered loss as a result of your bank’s delay in registration then you would probably have a legal action against it the bank in negligence but it would be expensive and stressful to have to resort to this.
What is our advice?
You should lodge a caveat in every purchase. Even though there may be no warning signals in the course of your purchase, it is never possible to eliminate every risk. Although risk has to be balanced against cost, the cost here of lodging a caveat is a very small proportion of the investment.
More Information or Advice from lewislegal
For more information or advice on your circumstances, please contact lewislegal on 02 9340 1740 or email us at email@example.com.
Section 54(3) of the Duties Act (NSW) 1997 is a trap for the unwary in circumstances when the trustee of a trust is changed and there is “dutiable property” under s11, such as land or shares in a NSW company etc, to be transferred from the old trustee to the new trustee.
s54(3) provides that duty of $50 is chargeable in respect of a transfer of dutiable property to a person other than a licensed trustee company, a special trustee or trustee of a special disability trust as a consequence of the retirement of a trustee or the appointment of a new trustee, if the Chief Commissioner is satisfied that:
(a) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust, and
(b) none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust, and
(c) the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as beneficiary or otherwise, to the detriment of the beneficial interest of any person.
If the Commissioner is not so satisfied, the transfer is chargeable with the same duty as a transfer to a beneficiary.
In summary if any of the above 3 requirements are not met, then full duty at ad valorem rates is payable.
s11 defines dutiable property as including, land in NSW, shares in a NSW company (but excluding shares quoted on the ASX), units in a unit trust scheme, a business asset such as the goodwill of a business or intellectual property, a partnership interest etc.
This is always an issue where there is a non-corporate trustee and the persons who are trustees are (as is usually the case) also beneficiaries or where the trust deed does not provide that the trustee cannot be a beneficiary.
Mr and Mrs Smith are trustees and beneficiaries of the Smith Family Trust, a discretionary trust that owns a strata unit in Bondi valued at $950,000.
Mr & Mrs Smith have 3 children, all of whom are also beneficiaries of the family trust. Mr Smith dies.
If Mrs Smith decides to carry on as the sole trustee of the trust the problem is that she is a continuing trustee and s54(3)(a) applies. Therefore stamp duty will be
payable on the market value of the unit when the unit is transferred into her name as the sole trustee. ie. $38,240.00 (as at March 2012).
If Mrs Smith decides instead that her eldest son should become trustee with her in place of his father, the problem is now twofold in that Mrs Smith is a continuing trustee and s54(3)(a) applies and her son is a beneficiary of the trust and s54(3)(b) also applies. Again stamp duty will be payable on the market value of the unit when it is transferred to Mrs Smith and her son as the new trustees.
What can be done to avoid this expensive and unnecessary stamp duty?
The solution is to appoint a company controlled by Mrs Smith and/or Mrs Smith and her son (if that is desired) to be the new trustee in place of both the deceased Mr Smith and Mrs Smith. Provided the company is not and cannot be a beneficiary of the trust and this is embedded in the trust deed, then the stamp duty is only $50 when the unit is transferred to the company as the new trustee.
Note this is now not an issue for a Self Managed Super Fund (“SMSF”)
Under the State Revenue Legislation Further Amendment Act 2010 a SMSF is from 1 July 2010 (backdated) a special trustee for the purposes of s54(1) by virtue of s42A of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”).
Section 54(2) provides that stamp duty of $50 applies on the transfer of dutiable property to a special trustee on the retirement of a trustee or the appointment of a new trustee.
This applies even though there is a continuing trustee who is or could be a beneficiary or the new trustee is or may become a beneficiary ie. s54(3) does not apply to a special trustee.
What does this all mean for me?
If you are establishing a trust then for many reasons including this stamp duty issue you should register a company to act as trustee. Further the trust deed should provide that the trustee cannot be a beneficiary and further that this provision cannot be amended.
If you already have trust then do not take any steps to change the trustee without obtaining legal advice from a solicitor experienced in trust law matters.
NEW LEGISLATION AFFECTS ALL BUSINESSES-JANUARY 2012
Personal Property Security Act (“PPSA”): the new national Personal Properties
Securities Register scheduled as operative from 30 January 2012
PPSA is a new regime for creating, recording, registering and enforcing security interests in Australia: this covers all property other than real estate and applies to anyone who acquires such property ie. not just a company but also individuals, partnerships and trusts.
PPSA affects not just financiers and lenders but probably every business and person as it covers the following common situations:
- businesses which obtain finance ;
- businesses that supply or acquire goods on credit including under consignment or retention of title terms ;
- businesses that supply or acquire goods under lease or licences eg. car ;
- anyone who acquires personal property.