Leverage has observed a recent trend whereby real estate agents protect their commission by lodging caveats against title. Agents are doing this to protect their commission. The agent is of the opinion that, if they can hold up settlement until their commission is paid, they will be paid from the proceeds of sale.

This is a totally unlawful practice unless the agent holds any interest in a property. I’ll return to the concept of interests in a moment, but it is suffice to say that the standard agency agreement within the community is not halted interest. Therefore, the agent is lodging a caveat in on title as a strategy to hold up settlement, hoping that the money will be paid.

Let’s examine that!

The Real Property Act 1900 permits any person who holds an interest in title to lodge a caveat. Caveat comes from the Latin word “warning”. Hence, the concept of a caveat is to warn the world of another person’s interest in the property. These interests might be for example a interest in fee simple, a mortgage, lease, easement or covenant. An agency agreement does not create such an interest.

If a covenant is lodged on title, a registered proprietor can issue elapsing notice, which means that caveat will lapse within 21 days unless the caveator (The person lodging the caveat) seeks an order from the Supreme Court. This means that, the agent is lodging the caveat close to settlement so the three-week elapsing notice won’t be enough to get the property settled on time. They are hoping that, if the property needs to settle, the elapsing notice won’t be in time and they will have no need to go to the Supreme Court because of the vendor’s requirement to sell the property.

Sounds like a good idea! It comes with many risks. The agent owes a fiduciary duty to the vendor acting in their best interests. Acting in such a way leaves them liable to any damages which they may suffer. Moreover, it’s a breach of the code of practice in relation to the requirement that the agent must act fairly, honestly and professionally. Who knows who therefore runs the risk that, even if they obtain the commission, they can be sued by the vendor for any losses and be investigated by fair trading for breach of the code of practice.

The only way that a caveat it can be lodged is if a registerable interest is created. An agency agreement would have to be prepared which gives such an interest in title. The current standards agency agreements in the market place do not give the agent that form of power.

Therefore, if you are looking into lodging caveat, you run enormous risks of litigation and, I believe most importantly, your license may be in jeopardy. It’s the risk return balance which the agent will have to reach. Leverage has a matter at the moment where the caveat has been lodged which will essentially deprive him of his commission.

It might be a clever strategy, but it comes with enormous risk.

 

 

This article was written by Bailey Compton, Principal Solicitor & Director at Leverage Group.

To get in touch with Bailey, please email info@leveragegroup.com.au