Removal of caveat lodged by registered proprietor to prevent exercise of mortgagees power of sale

The recent case of Capital Finance Australia Limited v Bayblu Holding Pty Ltd & JNW Investments Pty Ltd [2011] NSWSC 24 discusses the discretionary considerations relevant to removing a caveat lodged by the owner of the land in an attempt to prevent a mortgagee from exercising its power of sale.

Facts

The first defendant was the registered proprietor of several properties, and together with the second defendant as guarantor, owed over $8 million to the plaintiff as the first registered mortgagee. The plaintiff exercised its power of sale, selling the properties for approximately $2.5 million. On the day of settlement, the defendants lodged caveats alleging an equitable interest “to prevent the property being disposed of by the mortgagee at a price below its true market value”.

The plaintiff applied to remove the defendants’ caveats

Decision

Justice Pembroke granted the plaintiff’s application and ordered the removal of the caveats.

He found that an application for removal of a caveat requires assessment of the same discretionary considerations relevant to the question of whether a caveator would obtain an interlocutory injunction to protect its caveatable interest. That is, if an interlocutory injunction would be granted, the caveat should remain. If an interlocutory junction would be refused, the caveat should be removed.

There were a number of discretionary considerations at play, but the most relevant were:

• The disparity between the amount owing to the plaintiff and the amount which could be obtained from the sale meant that, even if a higher price were obtained, the plaintiff would still have a shortfall well over $5 million. If the caveats were removed and the plaintiff sought to recover the shortfall against the defendants, the defendants could at that point seek to set off the amount by which they allege the sale price of the properties was undervalued against the shortfall owed.
• The ordinary price for an interlocutory injunction restraining a mortgagee’s power of sale is the payment into court of the amount outstanding. The defendants had not paid that amount nor offered an undertaking as to damages.
• If the caveats were maintained and the contracts terminated, the losses suffered by the plaintiffs would be exacerbated and the purchasers would be put to inconvenience and expense.

The case is also notable because after reaching this conclusion, Justice Pembroke returned to consider the issue of whether defendant as registered proprietor held a valid equitable interest sufficient to give rise to a caveatable interest. His Honour was prepared to accept that an equitable interest claimed by an owner of land could be a caveatable interest. His Honour expressly declined to follow the decision of the Victorian Court of Appeal in Swanston Mortgages v Trepan Investments [1994] 1 VR 672, which on similar facts, had previously held that a registered proprietor could not lodge a caveat against its own title.

Comments

The case suggests that while a registered proprietor may be able to lodge a caveat against its own property, the courts will be reluctant to allow a caveat to be used as an attempt to restrain a secured creditor’s power of sale without good reason, and without payment of the amount outstanding into court.