To Caveat or not to Caveat

It is common for a loan agreement to grant the lender an equitable charge or mortgage over the borrower's property as security for the loan, particularly where the loan is between related parties or a registered mortgage already exists. The question which often then arises is whether the lender should register a caveat over the property to protect their interest.

The simple lesson from the recent case of LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd [2019] is that a caveat should be registered, otherwise the lender risks having a later loan or interest take priority over their loan.

In this case, a line of credit was provided by Cashflow Australia ('the first lender') to a company. The loan was guaranteed by the company's directors, who also granted an equitable charge over a property they owned as security. The property had a registered mortgage on title. Despite obtaining an interest in the property under the equitable charge, the first lender did not register a caveat.

The company subsequently obtained another loan from LTDC ('the second lender') which was again guaranteed by the company's directors who granted an equitable mortgage over the property as security. Before granting the loan, the second lender conducted a title search which disclosed the registered mortgage, but no other interest in the property. The second lender was satisfied there was sufficient equity in the property to cover the loan and proceeded to register a caveat claiming an interest as equitable mortgagee.  

The company subsequently defaulted under both the line of credit to the first lender and the loan to the second lender. The first lender then lodged a caveat on title.

The guarantors proceeded to sell the property and on completion, the registered mortgage was discharged. The balance of the sale proceeds were however insufficient to pay out the remaining debts and proceedings were taken by the second lender claiming it should receive the balance of the sale proceeds. The first lender contested the proceedings arguing it was entitled to these monies.

It was uncontentious that both lenders had an equitable interest in the property. The first lender's equitable interest arose first so, presumptively had priority. The second lender argued however that the first lender's equity should be postponed because of its decision not to register a caveat.

Justice Darke of the Supreme Court concluded that in the circumstances, the second lender had the better equity. The decision by the first lender not to register a caveat enabled the guarantors to represent the property was not subject to an equitable charge in favour of the first lender. The second lender acted reasonably in conducting a search of the title and, with no notice of the prior equitable charge, considered it safe to proceed with the loan. The first lender knew that failure to take the simple and inexpensive step to register a caveat may lead to the creation of subsequent interests but chose to run that risk.

Accordingly, it was held that it was inequitable for the first lender to retain the priority it would otherwise have enjoyed. In fairness and justice, its earlier interest was to be postponed to the second lender's later interest.