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PLEASE NOTE: This article was published on the date listed below and may now contain information that has since been updated or changed. We have retained this article as it may still contain helpful comments. However, we advise you to make an appointment to see us for the most up to date information on this topic.

September 2006

Agreements “NOT TO CAVEAT” Enforceable

Nature of Caveats

The Land Transfer Act provides a procedure whereby a person claiming an interest in land can lodge a caveat against the title to that land giving notice of their interest in that land. The practical effect of a caveat having been lodged is to prevent the land from being sold or otherwise transferred without the caveat being removed.

Whilst there are procedures set out in the Land Transfer Act for caveats to be removed, the Courts will not generally remove a caveat until the substantive claim has been determined unless the Court is satisfied that the person lodging the caveat clearly does not have a “caveatable interest”. As a consequence, removal of caveats can be a time consuming and expensive exercise, often involving more than one set of proceedings in the High Court.

Caveatable Interests

In order to lodge a caveat, the person lodging the caveat must have a “caveatable interest” in the land against which the caveat is lodged. Generally speaking, a caveatable interest is an interest in the land itself. It is important to note that there is a distinction between an interest in the land itself, which is caveatable, and a personal claim against the proprietor of that land, which cannot on its own support a caveat.

There are a variety of ways in which an interest in land sufficient to support a caveat can arise. Examples include options to purchase land, agreements for sale and purchase of land, and agreements to mortgage land. A common example of the use of caveats is where there is an agreement for the sale and purchase of real estate, which has not yet settled, the purchaser may lodge a caveat against the title to the property to prevent the vendor from selling the land to someone else.

“No Caveat” Clauses

In an endeavour to avoid some of the difficulties that can be caused when a caveat is lodged against the title to land, many agreements for sale and purchase of land and leases will contain a provision whereby the purchaser or lessee of the land agrees not to lodge a caveat in circumstances in which they might otherwise have been entitled to do so. Such clauses are commonly referred to as “no caveat” clauses. However, recently there has been some uncertainty as to the validity and effectiveness of such clauses.

In Cash Handling Systems Limited v Augustus Terrace Developments Limited (1996) 3 NZ ConvC 192,398 the High Court held that a no-caveat clause could not of itself prevent someone with an interest in the land exercising their right to lodge a caveat that was conferred by statute. However, the High Court held that the presence of such a clause is a relevant (although not determinative) factor to be taken into account by the High Court when considering an application to sustain the caveat. It had been argued that a contractual term prohibiting a party from lodging a caveat should be regarded as being contrary to public policy in the sense that it prevented a party from otherwise exercising rights that were otherwise available to them under statute and therefore ought not to be enforced. In rejecting this argument, the High Court held that there was nothing inherently undesirable about such clauses, particularly in circumstances where there were commercial parties involved with no disparity in bargaining strength. Furthermore, the High Court expressly recognised that substantial commercial difficulties could be caused by the lodgement of a caveat.

The position was recently considered again by the High Court in Fu Hao Construction Limited v Land Co Albany Limited [2005] 1 NZLR 535 where the High Court took a different approach and followed Australian Authority which held that there was a public interest in having the Land Transfer records showing all claims against the land and that “no caveat” clauses hamper this and were therefore contrary to public policy and should not be enforced. The registered proprietor appealed to the Court of Appeal which, in a decision released late last year, overturned the decision of the High Court.

The Court of Appeal disagreed with the approach taken by the High Court and specifically held that “no caveat” clauses were not contrary to public policy. The Court of Appeal noted that no one is obliged to register any interest in land, even if they are entitled to do so. The Court of Appeal observed that often there were good reasons for a party not taking steps to formally register their interest in land, such as for example where family members are involved. In the case under consideration, the restriction on lodging a caveat applied until such time as a scheme plan had been deposited as to not impede progress towards completing the subdivision.

On the other hand, the Court of Appeal also observed that in situations where there was an inequality of bargaining power, injustice may result by giving effect to a “no caveat” clause. However, the Court of Appeal said that this did not necessitate a blanket prohibition on “no caveat” clauses. The Court of Appeal also observed that in particular situations where inequalities were considered problematic enough to justify a blanket restriction, such situations were more properly the subject of legislation, such as had occurred in the Credit Contracts and Consumer Finance Act 2003, (which prohibits “no caveat” clauses in “buy-back” transactions). However, in other cases any application for an order to sustain a caveat will always depend on the circumstances of any particular case.

Summary

Following the Court of Appeal decision, it is now reasonably clear that “no caveat” clauses are not contrary to public policy and may be taken into account in determining whether or not a caveat should be allowed to remain on the title. However, whilst the existence of such a clause may be taken into account by the Court in deciding whether to sustain a caveat, it will not be determinative of the issue and will not of itself prevent a caveat from being sustained. Therefore,it is essential that before signing any agreement that has a condition “not to caveat”, you need to contact us for legal advice on the issue. There may be circumstances where not having a caveat registered will not unduly affect your legal position. However, there are other circumstances (such as where you have to pay a large deposit) where it may be essential to register a caveat to protect your rights.