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Property: Caveat complications

Every Issue

Cite as: (2008) 82(6) LIJ, p. 91

Commercial leasehold tenants are entitled to lodge caveats on the property.

Commercial leasehold tenants are entitled to lodge caveats on the property.

A commercial lease (as opposed to a licence) undoubtedly creates an interest in land in favour of the tenant.

A lease for more than three years may be registered on the title to the land1 and a lease for any period entitles the tenant to lodge a caveat.2

Registration of the lease will require production of the certificate of title and, in the normal course of events, an order to register from the proprietor of the mortgage. This implies a degree of cooperation between landlord and tenant and is usually only achieved in the context of negotiations when the lease begins as any time thereafter the landlord is not obliged to cooperate.

A caveat does not require production of the title or formal consent of the landlord and for this reason it is a “simpler” way of recording the tenant’s interest. That it is not universally used flows from the statutory recognition of tenants in possession as paramount interests.3

A registered proprietor/landlord may feel reluctant to have their title weighed down by a caveat lodged by a tenant, but there is no basis for an objection. Landlords may feel further discontent when a lender to the tenant seeks to obtain some security for the loan made to the tenant. Again, while the landlord may feel uncomfortable with such a move, no objection can be taken because, just as the lease creates an interest in land, so too that interest can be caveated.

The landlord is not obliged to consent to or facilitate registration of a mortgage and a lender to a tenant that seeks consent to the mortgage of lease or to its registration may find that the landlord simply refuses to consent or to make the title available. However, a lender’s caveat can be lodged without the landlord’s consent or production of the title.

It is possible for a landlord to seek to prevent such a situation by including a condition in the lease that declares such action to be a breach of the lease, making it liable to termination, but such a solution seems to far outweigh what is essentially a cosmetic problem.

Subsequent transactions

The recording of the interest of a tenant or a lender to a tenant, either by way of registration or caveat, often causes problems when the freehold interest-holder in the property seeks to mortgage or sell the property.

A lender over, purchaser of, or lender to a purchaser of the freehold conventionally desires a “clear” title. However, when the interests of the tenant and/or tenant’s mortgagee are registered or recorded, they are viewed by some as a “blot” on the title. While a careful analysis of the legal situation should result in the lender or purchaser acknowledging that they take subject to the lease (and any subsequent mortgage of that lease), regrettably “careful analysis” is rarely an apt description of the conventional demand for a clear title, particularly in relation to a lender.

The vendor/borrower of the freehold is then between a rock and a hard place with its new lender, purchaser or purchaser’s lender demanding that the lease/mortgage of lease be removed and the vendor/landlord having no right to insist on removal of those (temporary) encumbrances.

There is no solution other than a careful explanation that the tenant/tenant’s mortgagee has the right to maintain the registered/recorded interest and that the vendor/landlord sells subject to those interests.

In a sale situation it is prudent to include such an acknowledgment in the contract, although that will simply mean that the problem of convincing a purchaser’s lender of the need to settle without a “clear” title passes from the vendor to the purchaser.

The problem is exacerbated by the common habit of caveators lodging caveats that forbid dealings “absolutely”.

It is possible to include limited restrictions in caveats, such as “unless such instrument is expressed to be subject to my claim”,4 but the standard form provides “absolutely” as the default claim and it is rarely changed.

This means that even if the registered proprietor is able to convince its lender, purchaser, or lender to its purchaser that their transaction can proceed subject to the lease or mortgage of lease, the caveat acts as an absolute prohibition.

This must then be explained to the tenant/mortgagee and arrangements made for replacement of the caveat with a caveat claiming a limited interest.

For caveators, the threat of proceedings to have the caveat removed (and claim the cost of such proceedings) may encourage cooperation.

Courts have shown a dislike for the inappropriate use of absolute restrictions.5 A caveator may consent to a dealing.6 This might even apply in the case of an absolute prohibition and may provide a compromise between withdrawal and disputation. The consent will mean that the dealing takes priority over the caveat and while that might remain attractive to a tenant, who is independently protected as a paramount interest, it might not be attractive to a mortgagee of the lease.

In any event, if a caveator is asked to consent, the caveator would be entitled to claim reasonable legal costs in respect of that consent.

RUSSELL COCKS is the author of 1001 Conveyancing Answers.

1. Section 66 Transfer of Land Act.

2. Section 89 Transfer of Land Act.

3. Section 42(2)(e) Transfer of Land Act.

4. Land Registry Lodging Book 2-18.

5. Schmidt v 28 Myola St P/L [2006] VSC 343 and Floriston P/L v Kingsley Brown Finance P/L [2005] VSC 467.

6. Section 90(1)(b) Transfer of Land Act.

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