Compensation Claims for Lodging Caveat Without Reasonable Cause

The recent Supreme Court decision of Mukhtar AsJ in KB Corporate Pty Ltd v Sayfe & Anor [2017] VSC 623 concerned caveats lodged by the defendant caveator without a supporting caveatable interest.  The Court was asked to determine whether the caveats were lodged without reasonable cause and whether the caveator was liable to pay compensation to the plaintiff pursuant to s 118 of the Transfer of Land Act 1958 (Vic).  It was held that the caveats were lodged without reasonable cause and the compensation claim succeeded in part.

Background 

The plaintiff filed proceedings seeking, amongst other things, an order for removal of caveats lodged by the caveator over the plaintiff’s properties and compensation for loss allegedly suffered as a result of the caveats. On 8 November 2017, McMillan J ordered the removal of the caveats and referred the application for compensation to an Associate Justice.

There were two components to the compensation claim, both concerning consequential losses said to have been suffered by the plaintiff in two other dealings. One related to additional interest and fees that had accrued on a short term loan, the repayment of which had been delayed by the caveats. The second, to penalty interest and costs associated with the delayed settlement of the purchase of another property.

The decision

The Court considered the relevant principles applying to an application for compensation for lodging a caveat without reasonable cause, as laid out in Edmonds v Donovan and Ors¹ and New Galaxy Investments Pty Ltd v Thomson & Ors². Mukhtar AsJ identified the following principles applying to applications for compensation under s 118:

1. the plaintiff must establish that the caveator had no caveatable interest;
2. the plaintiff must establish the caveator did not have an honest belief,
   based on reasonable grounds, that a caveatable interest existed;
3. as to point 2 above, the test is partially subjective and partially objective:
   1. the subjective component requires an examination of the caveator’s belief and whether it was honestly held;
   2. it is objective in that it requires that the belief is held on reasonable grounds;
4. if the caveator obtained legal advice to the effect that they were entitled to lodge the caveat, this will be taken into account. However, where a solicitor had no reasonable basis for advising a caveator to lodge a caveat, it may be found that the caveator had no reasonable grounds for believing they were entitled to lodge a caveat.

In KB Corporate, there was no direct evidence before the Court as to what the caveator’s belief was at the time of lodging a caveat. Therefore, an inference had to be drawn from the established facts. The evidence that was before the Court included correspondence from solicitors that had previously acted for the caveator asserting the caveatable interest was based on a loan agreement. However, the plaintiff and the caveator were not parties to the loan agreement. The Court found that the caveat was lodged without reasonable cause.

As to the compensation claim, the Court allowed the claim insofar as it concerned extra interest and fees on the short term loan ($3,781.78) but disallowed the second part of the claim relating to penalty interest and costs due to the vendor of another property (calculated at $29,561.44). As to the latter, the Court was not satisfied that the delayed settlement of the other property was caused by the caveats. Furthermore, the purchaser of that property was not the plaintiff but rather a related entity of the plaintiff.

Takeout from the decision

The decision serves as a reminder that, to succeed in a compensation claim under s 118, it is not sufficient to demonstrate that the caveator held no caveatable interest. A person who seeks to claim under s 118 will need to demonstrate that the caveator did not have an honest belief, based on reasonable grounds, that a caveatable interest existed.

Practitioners should take care when being asked to provide advice on whether a caveatable interest exists. A caveator who is pursued for compensation under s 118 may look to their solicitor for contribution if there is any argument about the accuracy of the legal advice. Additionally, given s 118 applies to ‘any person’ who lodges a caveat without reasonable cause, a solicitor who lodges a caveat on behalf of a client without reasonable cause could find themselves in the direct firing line.

¹  (2005) 12 VR 513
²  [2017] NSWCA 153

Authored by:
Annette Gaber, Partner, Melbourne
Anna Koumides, Senior Associate, Melbourne