Today I want to talk about caveats—what they are, how they work and why you need to be aware of them. For those of you who may not know what a caveat is, it’s a Latin word which in most cases means ‘warning’. That’s also what a caveat means for our purposes, too. Although, as we’ll see, the ‘warning’ may be either a good thing for you in terms of asset protection or a bit of bad news depending on the situation.
What is a caveat?
A caveat is a warning about something concerning the title on block of land. Caveats can be used for many different reasons. Typically, a caveat will tell others that someone else has an interest in the land or property for one reason or another. It may be that the owner of the land owes someone money to a builder. In that instance, the builder/creditor has registered a caveat on the title of the property as a warning that the title is not ‘clear’.
It may be another person’s interest in the property other than a builder or contractor. A caveat can be, and often is, registered by a person who has no title interest in the property; say like a second mortgage or personal loan exists against the property. Most people, however, will not have any caveats registered against their property.
But a caveat doesn’t always have to be associated with money. A caveat may be registered against the title of a property to notify all potential buyers that an easement on the property exists, for example. It may also be used to protect an interest in the property, such as a joint venture partner, for instance.
Caveats don’t always have to have a negative nature about them; they can also be a useful vehicle for real estate investors. Take the joint venture example I mentioned above; it’s a perfect example of why you may need to register a caveat when yoyu get into a deal.
Say you’re a JV partner with a property owner who agrees to let you invest your time, money and effort into subdividing his property and building a rental. What will protect you from the owner of the property selling it from beneath you? After all, you’re not on title, are you? But a caveat lodged against the title, registered by mutual consent with the owner before the project got underway, will protect your interest in the property by preventing any sale of the property.
The process to lodge a caveat against a property will differ, depending on the reasons why and in some cases, which state you live in. In the joint venture example above, it’s a pretty clean and simple process. You have your lawyer prepare the document, both you and the property owner sign it, and your lawyer submits it to the land titling office. But in other circumstances it may be more difficult, especially of the owner of the property does not agree to it.
Say you have a disagreement with a property owner in a real estate deal gone bad. Firstly, you must establish that you have a right to register a caveat against a property. The owner may try to say that you don’t. Therefore, whenever a caveat is considered, the person registering the caveat must prove that he has a legitimate “caveatable” interest in the property.
Your first step will be to present your case as it were, to the land titling office. The land-titling agent will make an initial determination if you do in fact have a caveatable interest. If there is no determination regarding this, then if you still want to register the caveat, you will have to take things further to prove your interest in court.
The register-able caveat
This is case where a caveat might be able to be registered but doesn’t have to be registered until a triggering event has occurred or a threshold has been reached. These are useful when you are in the process of getting into a deal, but maybe you haven’t yet gotten the bank’s consent to register a caveat. It gives you some level of protection and indicates intent on the property owner to protect your interests.
The downside to holding an unregistered caveat is that a property owner may turn around and issue another caveat to another investor. If he does, then that registered caveat takes precedence over your unregistered caveat as a creditor. Registered caveats are always in front of unregistered ones for debt collection or interest in the property. The owner can also sell the property or take on another mortgage that will also be in front of your unregistered caveat.
That’s why you really want to be careful about deciding not to register your caveat. Another bit of advice would be not to commit any money to a deal with only an unregistered caveat in hand—at least not with any partners that you don’t trust with your life! You know what they say about good intentions…
What does a caveat cost?
A simple caveat created by a lawyer can cost you in the neighborhood of $500-$1,000 plus another $150-$200 filing and registration fees. The costs can vary, of course, depending upon how complex the caveat is or needs to be of if there is a need to establish a basis for it, which can cost you more to accomplish. If there are complicated issues in the caveat itself, then you will probably be paying your attorney by the hour. Bear in mind that these are estimates only.
Some other important points to remember are that you don’t have to mention or identity the amount of debt or interest in the property in the caveat itself. In the case of a mutual caveat, it’s best to get your lender or bank’s approval prior to putting a caveat on a property. You want to be sure that you’re not violating any loan agreement rules, which would allow the lender to foreclose on you or otherwise cause you unnecessary hardship. Get the bank’s consent first. In writing.
There is more to talk about on this subject, but we’ll stop here for today.