To caveat or not to caveat?
As part of any transaction involving security, we will often be advised by our client that they will register a caveat as security, or have a caveat registered against their property as security. But this is based on common misunderstanding of what a caveat really is.
As part of any transaction involving security, we will often be advised by our client that they will register a caveat as security, or have a caveat registered against their property as security.
This seems to be reflective of how non-lawyers understand a caveat. That understanding is not quite right. So let’s start with the basics.
A caveat, in the legal sense, is a document that is lodged with the Land Titles Office which serves as a notice. It notifies the world of the establishment of an existing claim or the protection of an (alleged) existing right. It does not create new rights.
In that regard it is not, in itself, a security.
The most common type of caveat is a “caveat against dealings” that is lodged against a particular certificate of title to serve two purposes –
- the protection of rights of the caveator by forbidding the registration of any instrument affecting the title;
- and the provision of notice to the registered proprietor of the title and anyone who searches the title that the caveator claims an interest in the land.
For a caveat to be lodged, an interest in the land must exist. This is often through a General Security Agreement, or clause in a loan document that gives rise to an agreement to mortgage or equitable interest in the land.
If such an interest exists there is a strong argument to suggest that the interest should be registered, or at the least the necessary documents to register the interest should be signed and held in escrow. Anecdotally it appears that the main reason the further security isn’t taken is because the property owner doesn’t want the existing mortgagee to know about the further interest they have granted.
I can understand the rationale that people don’t want to create a mountain out of a molehill, but if an interest in property has been granted and a caveatable interest exists, then the reality is that it is almost certain the existing mortgage will have been breached if the mortgagee hasn’t consented to the interest.
Once a caveat has been lodged, the registered proprietor needs to apply to court to have it removed or have the caveator remove it. This can be expensive if the caveator is obstinate, and in the meantime it will prevent any attempt to deal with the subject land.
A caveat (if it is lodged against your title), or a caveatable interest (if you are looking to lodge against a title) should therefore not be treated as a lightweight tool.
If you are looking to take security, remember that the caveat, while useful to prevent registration, isn’t a security itself. And if you are being asked to provide security always remember to read the fine print in a document and have someone qualified explain its meaning to you if you don’t understand. While a General Security Agreement may only relate to personal property, it may be drafted to include an interest in real property (ie land), and that may allow a caveat to be lodged.
If you would like to know more, contact Daniel Wein at Stace Hammond; [email protected]
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