By Russell Cocks, Solicitor
First published in the Law Institute Journal
A lease (as opposed to a licence) undoubtedly creates an interest in land in favour of the tenant. A lease for more than three years may be registered on the title to the land and a lease for any period entitles the tenant to lodge a caveat. Registration of the lease will require production of the certificate of title and, in the normal course of events, an order to register from the registered proprietor. This implies a degree of co-operation between landlord and tenant and is usually only achieved in the context of negotiations when the lease begins, as anytime thereafter the landlord is not obliged to cooperate and is unlikely to do so. A caveat does not require production of the title nor formal consent of the landlord and for this reason is a ‘simpler’ way of recording the tenant’s interest. That it is not often utilized flows from the statutory recognition of tenants in possession as paramount interests.
A registered proprietor/landlord may feel affronted that their otherwise unencumbered title is weighed down by such a caveat lodged by a tenant, but there is no basis for such an objection. This feeling of discontent is often further aroused in a landlord when a lender to the tenant seeks to obtain some security for the loan made to the tenant. The landlord may be offended that its title bears the blot of a debt to a third party, but again no objection can be taken as just as the lease creates an interest in land, so too can that interest be encumbered. However the landlord is not obliged to consent to or co-operate with such a scenario and a lender to a tenant that seeks consent to the mortgage of lease or to its registration may find that the landlord simply refuses to consent or to make the title available. However a lender’s caveat can be lodged without the landlord’s consent or production of the title, so a lender may lodge a caveat claiming an interest as mortgagee of the leasehold estate.
A landlord might seek to prevent such a situation arising by including a condition in the lease that declares such action to be a breach of the lease making it liable to termination, but such a solution seems to far outweigh what is essentially a cosmetic problem.
The recording of the interest of a tenant or a lender to a tenant, either by way of registration or caveat, often causes problems when the freehold interest-holder in the property seeks to mortgage or sell the property. A lender over, purchaser of, or lender to a purchaser of, the freehold conventionally desires a ‘clear’ title, but the interests of the tenant and/or tenant’s mortgagee are registered or recorded and are viewed by some as a ‘blot’ on the title. Whilst a careful analysis of the legal situation should result in the lender or purchaser acknowledging that they take subject to the lease (and any subsequent mortgage of that lease) regrettably ‘careful analysis’ is rarely an apt description of the conventional demand for a clear title, particularly in relation to a lender. The vendor/borrower of the freehold is then between a rock and a hard place with its new lender, purchaser or purchaser’s lender demanding that the lease/mortgage of lease be removed and the vendor/landlord having no right to insist upon removal of those (temporary) encumbrances. There is no solution other than a careful explanation that the tenant/tenant’s mortgagee has the right to maintain the registered/recorded interest and that the vendor/landlord sells subject to those interests. In a sale situation it is prudent to include such an acknowledgement in the contract, although that will simply mean that the problem of convincing a purchaser’s lender of the need to settle without a ‘clear’ title passes from the vendor to the purchaser.
The problem is exacerbated by the common habit of caveators lodging caveats that forbid dealings ‘absolutely’. It is possible to include limited restrictions in caveats, such as ‘unless such instrument is expressed to be subject to my claim’ but regrettably the standard form provides ‘absolutely’ as the default claim and it is rarely changed. This means that even if the registered proprietor is able to convince its lender, purchaser, or lender to its purchaser that their transaction can proceed subject to the lease or mortgage of lease, the caveat acts as an absolute prohibition. This must then be explained to the tenant/mortgagee and arrangements made for replacement of the caveat with a caveat claiming a limited interest. Caveators in such situations are generally loath to act as there is ‘nothing in it for them’ but the threat of proceedings to have the caveat removed (and claim the cost of such proceedings) may encourage co-operation. Courts have shown a dislike for the inappropriate use of absolute restrictions.
A caveator may consent to a dealing. This might even apply in the case of an absolute prohibition and may provide a compromise between withdrawal and disputation. The consent will mean that the dealing takes priority over the caveat and whilst that might remain attractive to a tenant, who is independently protected as a paramount interest, it might not be attractive to a mortgagee of the lease. In any event, if a caveator is asked to consent, the caveator would be entitled to claim reasonable legal costs in respect of that consent.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.