For any business, getting some form of security from debtors is best practice but it can be difficult and is not always practical.
However, business owners who extend a large amount of credit as part of their sales process are putting the viability of their businesses at risk if they do so without having some solid form of security in place.
Often a client who comes to me, wanting to pursue a debtor, asks me “I know the debtor owns property, so can I put a caveat on it?”
After I make some basic enquiries, my response is usually “No.”
The reason is this: the bare fact that someone owes you money does not entitle you to lodge a caveat over the debtor’s property.
A word on caveats
Caveats serve two functions:
- On a practical level, they prevent dealings being registered on the property over which the caveat is lodged.
- On a legal level, they serve to notify the world-at-large that the caveator has an equitable interest in the property.
So how does one obtain an interest in a debtor or potential debtor’s property, in order to secure a debt?
One way is by way of mortgage. Most people are familiar with this because the vast majority of us are mortgagees. However a mortgage must be in a specific form and a debtor may shy away from granting a mortgage as a default by the debtor usually entitles the mortgagee to sell the property.
The other, and maybe less threatening way of obtaining security, is the humble charge. For a charge, all that is required is for the debtor to agree in writing that it “charges” its property (i.e, land) as security for the debt (subject of course to the legal requirements for a binding contract or deed).
Once the charge has been created over the debtor’s land, the creditor:
- has security for the debt; and
- can (and should immediately) lodge a caveat over the debtor’s property to protect that interest.
What are the pros and cons in taking a charge instead of a mortgage?
Pros
- A charge can be created quite easily and does not require the complex drafting that usually goes with a mortgage.
- The debtor will generally not be able to sell its property without paying you the debt secured by the charge.
Cons
- A charge does not give you the power to sell the debtor’s property if the debtor is in default. You will need to apply to the Court to appoint trustees for a judicial sale of the property.
Important!
Make sure you have a caveatable interest in a property before lodging a caveat over it. Otherwise, you will be liable to compensate the owner of the property for damage it suffers as a result of a caveat which has been lodged without a proper legal basis.
For more information contact Daniel Fleming on d.fleming@pigott.com.au
This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.