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Caveats are an effective instrument to protect legal or equitable interests (caveatable interests) in property. Caveats act as a notice to the public of any unregistered interests and prevent a registered owner from undertaking certain dealings with the property until such time the caveat is removed or consent from the party who lodged the caveat is obtained.

While caveats are a frequently used instrument to protect legal or equitable interests in property, those seeking to lodge a caveat should ensure they are not doing so ‘without reasonable cause’, otherwise, they may find themselves liable to pay compensation to any person who suffers financial loss as a result of the caveat pursuant to section 74P of the Real Property Act 1900 (Act).

but what does ‘without reasonable cause’ mean under the Real Property Act 1900?

The High Court of Australia in Boensch v Pascoe [2019] provided clarity in what it means to lodge a caveat ‘without reasonable cause’ for the purposes of claiming compensation under the Act by endorsing the two-step ‘reasonable cause’ test in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990).

In these proceedings, Mr Boensch was a trustee holding property in trust for the benefit of his children (Trust Property). Following Mr Boensch being declared bankrupt, Mr Pascoe was appointed as his trustee in bankruptcy. Whilst acting as Mr Boensch’s trustee in bankruptcy, Mr Pascoe lodged a caveat over the Trust Property.

Mr Boensch commenced proceedings against Mr Pascoe seeking compensation under the Act on the grounds that Mr Pascoe had lodged and maintained a caveat over the Trust Property ‘without reasonable cause’.

In determining whether Mr Pascoe had lodged and maintained the caveat over the Trust Property ‘without reasonable cause’, the Court applied the two-step test which provides that a caveat is lodged ‘without reasonable cause’ if the lodging party:

1. does not have a caveatable interest; and
2. does not have an honest belief based on reasonable grounds that they have a caveatable interest.

Therefore, to claim compensation under the Act, Mr Boensch was required to not only establish that Mr Pascoe did not have a caveatable interest in the Trust Property but further, establish that Mr Pascoe did not have an honest belief on reasonable grounds that he had a caveatable interest to lodge the caveat over the Trust Property.

The High Court found that Mr Pascoe had a caveatable interest in the Trust Property for the purposes of lodging and maintaining the caveat. The High Court determined that the caveatable interest had arisen from Mr Boesche’s entitlement to be indemnified out of the Trust Property for liabilities he had incurred as trustee. This entitlement to be indemnified from the Trust Property gave rise to an equitable interest which vested in Mr Pascoe upon his appointment as Mr Boesche’s trustee in bankruptcy.

Accordingly, Mr Pascoe was found not to have lodged the caveat ‘without reasonable cause’ and therefore, Mr Boensch was not entitled to compensation under the Act.

This decision highlights the importance of ensuring that caveats are lodged and maintained with ‘reasonable cause’, and provides guidance on how the Court will approach the issue of whether a caveat has been lodged ‘without reasonable cause’ under the Act.

Please contact us for advice on whether you have ‘reasonable cause’ to lodge a caveat, or for advice in relation to making a claim for compensation under the Real Property Act 1900.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.