Vikram Misra, Barrister at Clarence Chambers continues his series into caveats as he examines the consequences of lodging a caveat without a reasonable cause. He shares the key takeaways by looking into the history of s 74P of the Real Property Act 1900 (NSW) and by analysing the “without reasonable cause” test. To hear more from Vikram, follow his series here.
Section 74P of the Real Property Act 1900 (NSW) (“the Act”) deals with the consequences of lodging a caveat without reasonable cause. It provides a mechanism for compensation to be paid to any person who sustains pecuniary loss that is attributable to any of the following acts done without reasonable cause:
- lodging a caveat;
- procuring the lapsing of a caveat; or
- failing to withdraw a caveat after being requested to do so.
History of section 74P
Between 1900 and 1988, section 98 of the Act (now repealed) provided that any person who lodged a caveat “without reasonable cause”, was liable to pay compensation to any person who sustained pecuniary loss that was attributable to that act.
In 1988 the Act was amended to refer to the lodgment of a caveat “wrongfully and without reasonable cause”. The insertion of the word “wrongfully” placed a much higher hurdle in the path of those seeking compensation than had been the case under the former s 98. In Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) 21 NSWLR 459 (“Beca Developments”), Clarke JA was of the view that the addition of the word “wrongfully” in s 74P(1) was made “in order to restrict claims for compensation to those cases in which it could be shown that the caveat was lodged deliberately by a person knowing that he had no interest in the land”.
On 1 February 1997, “wrongfully” was omitted from s 74P(1) of the Act and the test was restored to its pre-1988 formulation. As such, caution must be exercised when relying on decisions applying the 1988 amendment; i.e. Beca Developments (1990) 21 NSWLR 459.
What is the “without reasonable cause” test?
The relevant inquiry is not whether the caveator had a caveatable interest, but whether the caveator had an honest belief, based upon reasonable grounds, that he or she had such an interest. It requires a subjective analysis of the actual belief of the caveator, but in determining whether that belief was honestly held, the investigation overlaps with an objective requirement that the belief be held on reasonable grounds.
Who bears the onus?
The onus is on the person claiming compensation to prove that the caveat was lodged without reasonable cause and that the claimant sustained damage as a result of the caveat having been lodged without reasonable cause.
The claimant must prove that the caveator acted without reasonable cause at the time the caveat was lodged.
What is the effect of legal advice on the “without reasonable cause” test?
The effect of legal advice on the “without reasonable cause” test is a vexed issue.
In Western Australia, there is authority for the proposition that even negligent advice from a solicitor to a client who, in reliance on the advice, lodges a caveat, may provide the caveator with reasonable grounds for an honest belief that he or she had a caveatable interest. This only applies if the caveator has not contributed to the giving of the wrong advice, for example, as a result of failing properly to inform the solicitor of the relevant facts.
In New South Wales, on the other hand, it has been said that a caveator does not necessarily absolve himself or herself of responsibility by taking legal advice. In Lee (2004) NSW ConvR 56-067, it was held that where a solicitor had no reasonable basis for advising the caveators to lodge a caveat, the caveators had no reasonable grounds for their belief that they were entitled to lodge a caveat.
Whichever view is taken, “the content and accuracy of legal advice must be evaluated with all other relevant facts and circumstances to determine the honesty and reasonableness of the caveator’s asserted belief in the existence of a caveatable interest”. In New Galaxy  NSWCA 153, Sackville AJA held that “…it is enough to say that the significance of the legal advice received by a caveator will depend on such matters as the completeness of instructions given to the lawyer, whether the advice has an arguable basis and the commercial or legal sophistication of the particular client”.
What is the effect of lodging a caveat for an ulterior motive on the “without reasonable cause” test?
In considering the phrase “without reasonable cause”, Macfarlan J held in Young v Rydalmere Credits Pty Ltd (1963) 80 WN (NSW) 1463 (“Young”) that a caveator had acted not for the protection of his interest in the land, which was not in dispute, but for an ulterior motive and without regard to its effect on transactions to which the caveator had agreed. In that case, the caveator who exercised the power to lodge a caveat “in order to effect an improper purpose”, was considered to have acted without reasonable cause.
However, In Beca Developments (1990) 21 NSWLR 459, Clarke JA said, at 475 (Waddell AJA agreeing in substance at 479):
It cannot be said, in my view, that a person who has a caveatable interest has no reasonable cause for lodging a caveat simply because he has some ulterior motive for lodging the caveat. The existence of the interest provides the reasonable cause. In this respect I am unable to agree with the reasoning of Macfarlan J in Young.
This position was approved in New Galaxy  NSWCA 153:
 Further, as is clear from Beca Developments, any question of improper motive (properly rejected by Clarke JA) is not to be equated to a “dishonest belief”.
What losses are recoverable?
Only losses that are “attributable” to the wrongful lodgment are recoverable. In Lee (2004) NSW ConvR 56-067, Palmer J held:
 It is not necessary to show that the precise loss suffered by an owner of land as a consequence of the wrongful lodgement of a caveat is known to or foreseeable by the caveator at the time of lodgement. So to hold would be to introduce into the statutory remedy afforded by s.74P(1) notions of causation and loss which are highly developed in the law of tort and contract.
As such, where a caveat is lodged without reasonable cause, the caveator accepts the risk of liability to compensate a person for whatever loss can realistically be shown to be attributable to the wrongful lodging of the caveat, whether or not the caveator knows what that loss is likely to be. The court takes a practical commonsense approach to the identification of compensable losses that are attributable to the wrongful lodgment of the caveat.
- payments of interest under a mortgage which would have been avoided but for the lodgement of a caveat (Lee (2004) NSW ConvR 56-067);
- interest payable under a condition in a sale of land contract (as loss of bargain) where the lodgment of a caveat delayed completion (Truefilm  NSWSC 372); and
- auction and advertising costs thrown away as a result of the cancellation of an auction due to the lodgment of a caveat (Hillpalm Pty Ltd v Wilson  NSWSC 362).
Duty to mitigate
The owner of land against which a caveat is lodged is under a duty to mitigate any losses that may arise due to the lodgment of the caveat. In order to mitigate its loss, an owner of land must move promptly to have the caveat extinguished, either by lodging a lapsing notice or by bringing the matter to Court. In Lee (2004) NSW ConvR 56-067, it was held:
 I do not think that the obligation to mitigate requires the owner to do much more than that: if it were otherwise, the Court would be required to conduct a general investigation into the owner’s financial position and to enquire what other transactions might have been available to the owner to hedge against possible loss. This would place an unreasonable burden on owners of land subjected to caveats.
Does “any person” who lodges a caveat include an agent of the caveator?
In Windlock Pty Ltd v Velibor Davidovic & Ors  NSWSC 269, it was held that the phrase “any person” does not cover a mere agent of the caveator instructed to lodge the caveat, i.e. a solicitor lodging the caveat on instructions from the client. Liability under section 74P would not therefore be directly imputed to the agent. However, it should be noted that “if the advice given by the solicitor or conveyancer without reasonable ground causes the client to be in breach of contract, the client is not exonerated from liability to the other party to the contract and if the client thereby suffers loss, it may be that the client’s remedy is against the solicitor or the conveyancer”. As such, practitioners can find themselves facing a professional negligence action if erroneous advice to lodge a caveat is given.
It should also be noted that practitioners may also be reported to the relevant regulatory body for disciplinary action. In Guirgis v JEA Developments Pty Limited  NSWSC 164, Kunc J considered reporting a conveyancer to NSW Fair Trading where the conveyancer failed to make any proper inquiries to ascertain whether the caveator had an interest in the subject land and lodged the caveat in circumstances where the caveator had no valid caveatable interest.
- the inquiry is whether the caveator had an honest belief, based upon reasonable grounds, that he or she had a caveatable interest (partly subjective and partly objective);
- caution must be exercised when relying on the NSW decisions applying the “wrongfully and without reasonable cause” test;
- a practical commonsense approach is taken to the identification of compensable losses that are attributable to the wrongful lodgment of a caveat (i.e. it is not confined to those losses that are reasonably forseeable);
- investigate the facts giving rise to a valid caveatable interest thoroughly before advising the client to lodge a caveat.
 Real Property (Caveats) Amendment Act 1986 (NSW). Section 98 was repealed and replaced with section 74P, taking effect from 1 August 1988.
 Lee & Ors v Ross & Ors (No 2)  NSWSC 507; (2004) NSW ConvR 56-067,  (“Lee”).
 Beca Developments (1990) 21 NSWLR 459, 472G.
 Real Property Amendment Act 1996 (NSW).
 Bedford Properties Pty Ltd v Surgo Pty Ltd  1 NSWLR 106, 108C-D. New Galaxy Investments Pty Ltd v Thomson  NSWCA 153; 18 BPR 36811,  (“New Galaxy”).
 Truefilm Pty Ltd v J R Investment Holdings Pty Ltd  NSWSC 372,  (“Truefilm”), citing Lee (2004) NSW ConvR 56-067, 58,901.
 Bedford Properties Pty Ltd v Surgo Pty Ltd  1 NSWLR 106, 107 ‑ 108.
 Nelson v Kimberley Homes Pty Ltd (1988) NSW ConvR 55‑394, 57,656 (“Nelson”).
 See discussion in New Galaxy Investments  NSWCA 153,  – .
Bolton v Excell (Unreported, WASCA, Library No 930175, 22 February 1993); Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd  WASCA 179; 35 WAR 27 (“Brogue Tableau”).
 However, see Horswell v Paul (1983) NSW Conv R 55-126, where a purchaser lodged a caveat following advice of counsel that a caveatable interest existed. It was held that vendor failed to show that the caveat was lodged without reasonable cause, on the basis that counsel was simply expressing a tenable legal opinion on the facts presented in the brief. The outcome may have been different if the purchaser’s solicitor had deliberately or negligently misstated critical facts in the brief to counsel, see: Lee (2004) NSW ConvR 56-067, .
 View expressed by Buss JA in Brogue Tableau  WASCA 179, .
 New Galaxy Investments  NSWCA 153, .
 Cited with approval in Kuper v Keywest Constructions Pty Ltd (1990) 3 WAR 419, 434.
 Lee (2004) NSW ConvR 56-067, .
 Truefilm  NSWSC 372, .
 Lee (2004) NSW ConvR 56-067, ; Nelson (1988) NSW ConvR 55-394, 57,657.
 Note that there is contrary authority in New Zealand.
 Lee (2004) NSW ConvR 56-067, .
Vikram Misra was admitted as a solicitor in 2012 and called to the NSW Bar in 2015. He maintains a broad commercial practice and is regularly briefed in matters relating to taxation law, property law, construction law and equity. Vikram has completed a Graduate Diploma in Taxation Law at the University of Sydney in 2015 and a Master of Laws majoring in construction law and contract law at the University of Melbourne in 2016. You may connect with Vikram via email [email protected] or LinkedIn
Disclaimer: The statements, analyses, opinions and conclusions in Legalwise Insights are those of the respective authors and not of Legalwise Seminars Pty Ltd which acts only in the capacity as editorial co-ordinator of the content in Legalwise Insights. No part of any article can be regarded as legal or financial advice. Although all care has been taken in the preparation of all articles, readers must not alter their position or refrain from doing so in reliance on any information contained therein. Neither the respective authors nor Legalwise Seminars Pty Ltd accept or undertake any duty of care relating to any part of Legalwise Insights.
Liability limited by a scheme approved under the Professional Standards Legislation