Property Protection 101: How Constructive Trusts and Caveats Safeguard Your Property

A constructive trust is a remedy that will be ordered by a court where it would be unconscionable to allow the owner of the property to retain that property to the detriment of another person. But the question arises: can you register a caveat to protect your interest in land before the court declares that you have an equitable interest in the land?

What is a caveat?

A caveat is an instrument that can be used to protect an interest in real property. It can be registered on the title to real property by a person or a company, known as a caveator, and once registered, will prevent any dealings with the land without the caveator’s consent.

Who can lodge a caveat?

Section 74F(1) of the Real Property Act 1900 (NSW) provides:

“Any person who, by virtue of any unregistered dealing or by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land under the provisions of this Act may lodge with the Registrar-General a caveat prohibiting the recording of any dealing affecting the estate or interest to which the person claims to be entitled.”

Accordingly, to lodge a caveat, a person must have what’s known as a ‘caveatable interest’. A caveatable interest will arise when a person has a legal or equitable estate or interest in the land. A caveatable interest in land may arise in the following circumstances:

• a purchaser of a property

• a mortgagee

• a lessee

• a chargee

• a beneficiary of a resulting trust

• a beneficiary of a constructive trust

What is a constructive trust?

There are two kinds of constructive trusts:

• An institutional constructive trust that arises by operation of law as from the date of the circumstances which give rise to it; the function of the court is merely to declare that such trust has arisen in the past; and

• A remedial constructive trust (constructive trust), which is an equitable remedy that the court may impose when it would be unjust for a person holding property to retain it. Constructive trusts are commonly used to prevent unjust enrichment and to rectify situations involving unconscionable conduct.  

Key features of remedial constructive trusts

• Constructive trusts are often imposed when a party has acted unconscionably, for example, through unjust enrichment, fraud or breach of fiduciary duties.

• Constructive trusts are, as the name suggests, remedial in nature and may be ordered by a court regardless of the parties’ intentions, as opposed to an express or resulting trust which relies on the parties’ intentions.

• A constructive trust is a trust imposed by law whenever justice and good conscience require it. It is an equitable remedy by which the court can enable an aggrieved party to obtain restitution.

• However, idiosyncratic notions of fairness and justice are not relevant; there must be an element of unconscionability.

Common scenarios prompting a constructive trust

• Breach of fiduciary duty: If a fiduciary, such as a trustee or company director, misappropriates property or profits from their position, a constructive trust can be imposed by the court to ensure the property or profits are held for the benefit of the beneficiary or company.

• Unjust enrichment: When one party is unjustly enriched at the expense of another, a constructive trust can be used to transfer the property back to the person who should rightfully own it.

• Family and domestic relationships: Constructive trusts are often applied in disputes involving contributions to property in domestic relationships, where one party may have contributed financially or otherwise to property held in the name of another.

Case Law

Several cases have considered whether an alleged constructive trust gives rise to a caveatable interest in land.

In the case of Mayrin DM Pty Ltd v Kaiyu Deng [2019] NSWSC 1552, Justice Rein considered an application for the extension of two caveats lodged based on a constructive trust arising due to an alleged breach of fiduciary duty by a former employee.

The plaintiff, a property developer, employed Mr Deng as a property acquisition specialist from April 2017 to assist in locating and purchasing properties for development. In September 2018, Mayrin made a similar arrangement with a Mr Younes to help it find development sites and buyers.

Mr Deng and Mr Younes were involved in identifying potential properties in Westmead and surrounding areas for the benefit of their employer, Mayrin. Mr Deng left Mayrin in January 2019, and Mr Younes in March 2019.

Shortly after leaving his employment with Mayrin, Mr Deng became the registered proprietor of two properties in Westmead.

On 25 June 2019, Mayrin lodged caveats on the titles of these properties. The caveats stated the interest claimed as:

“Beneficial Interest in Trust”

“This property was purchased by the registered proprietor in breach of his employment contract with, his fiduciary duties and duties under the Corporations Act 2001 owed to, the caveator. Accordingly, the caveator has a right in equity and under s 1324 of the Corporations Act to an injunction.”

The defendants argued that a constructive trust is purely remedial and that any such interest is “completely hypothetical and future,” and therefore does not support a caveatable interest. In response, the plaintiff relied on statements made by Deane J in Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 at 614:

“The old maxim that equity regards as done that which ought to be done is as applicable to enforce equitable obligations as it is to create them and, notwithstanding that the constructive trust is remedial in both origin and nature, there does not need to have been a curial declaration or order before equity will recognise the prior existence of a constructive trust.”

Justice Rein ultimately found in favour of the plaintiff and ordered that on an appropriate undertaking as to damages being given, the caveats should be extended until after the outcome of the preliminary discovery application is known, and Mayrin has had a reasonable opportunity to decide whether to commence substantive proceedings. The defendants were ordered to pay the plaintiff’s costs of the application.

This approach is consistent with earlier authorities, as the next two cases demonstrate.

In Surfers Paradise Investments Pty Ltd v United Investments Pty Ltd [1997] QSC 179, the Queensland Supreme Court rejected the argument that a constructive trust must be declared by a court before it can support a caveat. His Honour stated:

“In my judgment the better view is that the right to obtain relief as a beneficiary of a constructive trust of land gives that beneficiary a caveatable interest in that land.”

In Mijo Developments Pty Ltd v Royal Agnes Waters Pty Ltd [2007] NSWSC 199, the NSW Supreme Court acknowledged that an alleged constructive trust could give rise to a caveatable interest.

Takeaways

It is clear that a party claiming to have an interest in land due to a constructive trust has a caveatable interest in land and may register a caveat on the title to that land to protect their interest.

However, lodging a caveat without a valid caveatable interest may give rise to a claim for damages. Accordingly, it is important to seek legal advice, from an experienced lawyer, regarding your alleged constructive trust and caveatable interest before registering your caveat.

Bartier Perry are specialists in trusts and property law and are ready to answer any questions you may have.

Authors: Chantal Ryan, Teana Raheb, Sally Heimanis and Gilbert Olzomer.

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.