Caveats to protect builders

By - , Build 132

Including a provision in your building contract for a caveatable interest may be a good form of insurance against potential financial loss.

WE OFTEN TALK ABOUT the remedies that building contractors have available when a contract goes wrong and they're seeking payment.

One way to secure payment from a landowner debtor is for a creditor to lodge a caveat, but they need to have an interest in the debtor’s land.

Be clear in the contract

Lodging a caveat prevents a debtor from dealing with their property and can place the creditor in a strong position. A creditor might, for example, refuse to remove their caveat to allow dealing with the property unless they are fully repaid.

Establishing an interest in another person’s land is the crucial prerequisite to the right to lodge and sustain a caveat. Many building contractors ensure that they have caveatable interests through express provisions in their building contracts.

An agreement to mortgage clause, for example, will usually record that the property owner acknowledges the builder has an entitlement to demand a registerable memorandum of mortgage – in circumstances of non-payment – and that, where the builder has this right, they are also entitled to register a caveat against the property owner’s land.

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A project that went pear-shaped

In Boat Harbour Holdings Ltd v Steve Mowat Building Limited (SMBL), the Court of Appeal considered a situation where there was no express agreement to mortgage clause. The builder tried to make a novel argument that it had an interest in land under the provisions of the Property Law Act 2007 and the Construction Contracts Act 2002.

The case involved a building project that had derailed. The builder, SMBL, had entered into a contract to develop student accommodation in Dunedin with a party called Dolphin Development Limited (Dolphin).

However, Dolphin required finance to manage the project, and its financiers had required another party, Boat Harbour Holdings Limited (BHHL) to underwrite its borrowings. As part of BHHL’s arrangements with Dolphin, BHHL entered into a sale and purchase agreement for the property.

When the project failed, SMBL successfully pursued Dolphin in adjudication proceedings it brought under the Construction Contracts Act 2002. However, before it was able to enforce the adjudicator’s decision by registering a charging order against Dolphin’s property, Dolphin completed the sale of its property to BHHL and went into liquidation.

Dolphin sold the property to BHHL at a reduced price. Instead of the approximately $4 million plus GST originally agreed, BHHL acquired the property for $3,816,666.70 plus GST.

BHHL later entered into an agreement with SMBL to finish the project.

SMBL also lodged a caveat against the title claiming that it had an equitable interest in the property by reason of it being the beneficiary of a constructive trust. In these Court proceedings, SMBL sought to preserve its caveat following BHHL’s notice to lapse it.

SMBL was successful in the High Court, which accepted that, if Dolphin’s sale to BHHL was under value, the sale was likely to be treated as a prejudicial disposition under part 6 of the Property Law Act 2007 – a disposition to defeat creditors.

The High Court said in these circumstances it was also likely a Court would set aside the sale and vest the property back to Dolphin or order Dolphin to pay compensation.

It then accepted that SMBL had an arguable basis for sustaining the caveat. It proposed leaving the caveat in place while inquiries were made about whether or not the sale was at under value.

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Court of Appeal denied caveat

The Court of Appeal disagreed, however. The Court of Appeal said that the sections of the Property Law Act 2007 could not give SMBL an interest in land until a Court made an order under the Act. If there was any constructive trust, it did not, therefore, exist at the time that SMBL lodged the caveat.

SMBL’s claim to an interest in the land was, at best, contingent on future events. The Court of Appeal also rejected an argument that SMBL had a caveatable interest because the adjudicator had approved the issuing of the charging order. The charging order had not been registered. SMBL was only an unsecured creditor and, again, it did not have a reasonable argument to support a caveatable interest.

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Lesson for builders

Builders wishing to have the right to lodge a caveat in their armoury should ensure that their building contracts include clauses giving them caveatable interests.

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Note

This article is not intended as legal advice. For further information, please contact the Harkness Henry Building and Construction team on (07) 838 2399 or email [email protected]

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