26.11.2021

Contractors, Caveats, and Retention of Title clauses

The High Court in Development Construction Company Ltd v Mackenzie [2021] NZHC 546 has confirmed  that retention of title (RoT) clauses do not provide contractors with a caveatable interest.

This decision is the latest in a string of cases that provide the following general principles:

  • A RoT clause (with or without an express right of access) is not sufficient to establish a caveatable interest (Development Construction – discussed below).
  • A charging order under the Construction Contracts Act 2002 (CCA) is also insufficient to establish a caveatable interest; a CCA charging order is a separate stand-alone security (Boat Harbour Holdings Ltd v Steve Mowat Building & Construction Ltd [2012] NZCA 305).
  • A contractual right for a contractor to register a mortgage would appear to support a caveat (Topa Partners Ltd v JWL International Group Ltd [2020] NZHC 182, where the High Court ordered that Topa’s caveat should not lapse due to the existence of such a provision).

In summary, a contractor is unlikely to have a caveatable interest unless they have a contractual right to register a mortgage against the land. 

Development Construction decision

In 2019 Development Construction Company Ltd (DCL) contracted with Mr Mackenzie to carry out earth and drainage works on Mr Mackenzie’s property.  The contract included a RoT clause, albeit this did not include an express right to enter the property and remove materials that had been installed in the structures on the land.

Under a RoT clause a contractor retains title to goods they supply until payment is received.  The difficulty is that the contractor still needs to have a right to enter the property in order to remove the goods.  Some contracts address this by expressly providing this right.  However, even then, there is the further difficulty of trying to remove goods that have been incorporated into the works and have therefore become fixtures (effectively treated as being attached to the land).  As a result, a caveat may seem like an attractive option for contractors when payment issues arise. 

In this case, when Mr Mackenzie withheld payment DCL lodged a caveat over the property in reliance on the RoT clause.  DCL subsequently applied to sustain the caveat when it was challenged by Mr Mackenzie.  For the application to succeed DCL needed to show it had a beneficial or equitable interest in the land.  A personal or contractual right to payment is not sufficient. 

The Court noted that there was already legal authority that a RoT with a right to enter and remove materials was no more than a licence and did not give an interest in land.  Consequently, a RoT clause without an express right to enter – as was the situation here – also cannot logically create an interest in land meaning the Development’s caveat had to be removed.  The result is that RoT clauses, in whatever form, will it seems not support a caveat.

If you have any questions about securing payment through a property interest, please get in touch with our Construction Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

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Kerry
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