By Matthews Folbigg Lawyers
Caveats are a powerful tool to protect interests in land. When debt recovery is difficult (say for instance because of a COVID-19 moratorium on certain debt recovery actions) having a secured interest in property can be a significant advantage to creditors. But getting the caveatable interest wrong may end up with proceedings in the High Court of Australia and significant legal expenses and the risk of damages to the land owner. This was what faced a trustee in bankrupt in the High Court’s decision in Boensch v Pascoe (2019) 94 ALJR 112 (“Boensch”).
A simple Caveat
In the case of Boensch, Mr Boensch became bankrupt in August 2005. His trustee in bankruptcy identified a property in Mr Boensch’s name (“the Property”), and lodged a caveat.
However, although the Property was registered in his name, it was held by Mr Boensch on trust for his children. He did not have any interest in the land which the Trustee could take. Although the Trustee challenged the existence of the trust, the issue was resolved in favour of Mr Boensch.
A “Reasonable Cause”
Mr Boensch then commenced proceedings against the Trustee seeking compensation for loss he alleged the Trust had suffered by reason of the caveat being recorded on the title to the Property.
A critical question was whether the caveat had been lodged without “reasonable cause” (s 74P(1) of the Real Property Act 1900 (NSW)).
The Full Federal Court held that Mr Boensch’s legal interest had vested in the Trustee and was enough to justify the Trustee lodging a caveat.
The High Court thought this went too far. In the absence of a substantive or beneficial interest in the Property, there was no caveatable interest. However, after consideration of the complicated history of trusts and insolvency the High Court found that there may have been a right of indemnity which belonged to Mr Boensch which would have vested in the Trustee in Bankruptcy and supported the caveat. This right of indemnity and the Trustee’s ‘honest belief on reasonable grounds’ that the Property had vested in him, meant no damages were payable.
A word of warning
Whilst the Trustee in Bankruptcy was ultimately successful in avoiding liability, it took several years and a High Court case to finalise the matter. The bankrupt has since become bankrupt a second time, and it might be considered doubtful whether the Trustee’s costs may be recovered. Lodging a caveat is one of the most effective ways of preventing a disposition of a debtor’s real property, but must be supported by a proper equitable interest in land and in the absence of legal advice about that interest, may lead to significant unrecoverable legal costs, and claims for even more significant damages for a wrongly lodged caveat.
If you would like more information or advice about the lodgement of caveats, please contact:
P: (02) 9806 7459
P: (02) 9806 7446