Using a Caveat Instead of a Second Mortgage

In some cases it won’t be possible to register a second mortgage. This could happen where:

• an advance is made and the mortgage document is later discovered to be defective, is lost or misplaced; or
• for a NSW mortgage, the first mortgagee will not consent to the second mortgage.

Second mortgagees should otherwise register their second mortgage. This is because whilst the use of caveats can be a useful method of protecting the title in circumstances where a mortgage cannot be lodged, there are some real risks with respect to using caveats to secure loans:

• No power of sale on a caveat – A caveat does not of itself convey any power of sale. It is necessary to obtain a court order to procure registration of the mortgage and/or authorise power of sale, and this will add significant cost and delay to any default action.
• Caveats are subject to lapsing or removal – In most jurisdictions caveats lodged on the basis of unregistered mortgages will be lapsing caveats. That is, the caveat will lapse if the caveator has not commenced proceedings within a specified period from registration (eg. 3 months for Qld and NT) or within a specified period from notice to remove the caveat by the registrar a person with a competing interest (eg. usually 14 - 21 days from request).
• Caveat lodgement will be an event of default of first mortgage – Whereas registration of a second
  mortgage is protected in some jurisdictions like Qld and NT, nothing prevents the first mortgagee from treating the registration of a caveat as an event of default if those are the terms of the mortgage, so registering a caveat, rather than the mortgage, will not get you around this problem.
• Caveats restrict future dealings – If you are using a caveat to prohibit registration of future dealings, you should note that caveats will not prevent all future dealings, for example, a caveat will not prevent another caveat. Conversely, restriction of future dealings can be counterproductive, in that a person may then be forced to request lapsing of the caveat to secure their lodgement.
• Caveats may not prevent tacking – A caveat does not enjoy the statutory protection of the rule against tacking in Qld and NT, and whilst there is support for the fact that the common law rule against tacking applies to lenders who notify of an unregistered mortgage as well, there remains a risk of dispute as to tacking when only a caveat is registered. Tacking will be considered further in our next publication on deeds of priority.
  
  
  

Please be advised this is general information only, and is not to be taken as legal advice. If you would like more information, or have a legal query, please contact Abbott & Mourly directly.
Reviewed: 17/01/2024