Does a caveat protect the interest of a second mortgagee?

In a decision handed down on 3 November 2009 the Supreme Court gave some comfort to mortgagees who protect their mortgage by caveat.(Guardian Loans Pty Ltd v FTFS Holdings Pty Ltd & Ors [2009] NSWSC 1163 (3 November 2009)

FTFS gave a registered first mortgage to Suncorp and a second mortgage to Guardian which was not registered. Guardian lodged a caveat in the usual form claiming an estate or interest “pursuant to unregistered mortgage and Deed of Loan between the mortgagor and mortgagee dated 8 March 2006”.

The action prohibited by Schedule 2 in the caveat was:

1. The recording in the Register of any dealing other than a plan affecting the estate or
    interest claimed by the caveator and set out in Schedule 1.
4. The granting of any possessory application with respect to the land referred to above.

Suncorp served on Guardian a lapsing notice under Section 74J of the Real Property Act. A lapsing notice is a document that notifies the person who lodged the caveat that the caveat will lapse unless they obtain from the Supreme Court an order extending the caveat. The Supreme Court proceedings in this case dealt with that application.

Suncorp’s lawyers advanced a series of legal technical arguments that the caveat was not properly registered, however the court said:

Bearing in mind that Guardian has an undeniable caveatable interest, that the caveat is valid in form, that there is no evidence that its retention up to settlement of Suncorp’s sale will prejudice Suncorp’s rights, and that there are two other caveats on the title apparently protecting interests subsequent to Guardian’s interest, I see no reason to permit Guardian’s caveat to lapse.

In relation to the second mortgagee’s obligation to hand over a Withdrawal of Caveat on settlement the Court added:

In taking this view, however, I am assuming that Guardian will in fact, at the appropriate time, proffer a withdrawal of the caveat to permit settlement of a sale by Suncorp to take place.

It is to be noted that Guardian does not refuse outright to withdraw its caveat. Rather, it says that it will remove that caveat “after the property is sold”, meaning thereby, I assume, that after exchange of contracts by the first mortgagee it will hand over a withdrawal of caveat at settlement of the sale in accordance with common conveyancing practice.

Comment:

• The Court confirmed the validity of a caveat in the usual form set out above.
• A second mortgagee who protects its interest by way of caveat must, on settlement of the sale of the mortgaged property, hand over a withdrawal of the caveat. Effectively it must take whatever money is left over after the first mortgagee has been paid out.