Mangatal J ruled in the Supreme Court (the lower court) that a prior registered mortgage should take precedence over the Real Estate Board’s (‘REB’) later charge. The REB appealed. The Court of Appeal held that pursuant to s. 31(5) of the Real Estate (Dealers and Developers) Act (‘the Act’) the REB’s later charge had priority.

Facts

Money was loaned to NWDC, a registered developer, that was secured by registered mortgages. Through successive transfers the mortgages were assigned to Jamaica Redevelopment Foundation Inc. (‘JRF’).

Subsequently, in relation to a portion of the land, NWDC entered into prepayment contracts with several purchasers. These are contracts under which a developer sells undeveloped land with the understanding that the developer will eventually complete the desired construction (building, roadway etc) on the property. Monies are collected from the purchasers upfront to be used towards the construction. As NWDC was desirous of using the money for this purpose it registered a charge in favour of the REB against the land pursuant to the Act. In violation of the Act, NWDC did not discharge JRF’s mortgage prior to filing the REB charge nor did it inform JRF about the new charge. However, the text of the REB charge had explicitly stated that it was subject to JRF’s mortgage.

NWDC subsequently defaulted on the loan and JRF purported to exercise its powers of sale under the mortgages to sell the lots. The Registrar of Titles then refused to permit the transfers of one of the lots without the REB’s approval as it was the Registrar’s position that s. 31(5) of the Act gave the REB charge priority over JRF’s mortgage notwithstanding the wording of the REB charge. S. 31 (5) states that “Such charge [an REB charge] shall rank in priority before all other mortgages or charges on the said land…”.

The Supreme Court disagreed with the Registrar’s interpretation and followed the long established principle that the earlier registered mortgage should have priority over the later charge. On appeal to the Court of the Appeal, the appellate court held that the REB charge was a statutory charge ranking in priority to the JRF mortgage and that Parliament intended through s.31(5) to alter the usual order of priority of charges in favour of purchasers under prepayment contracts. In response to the argument that existing creditors would be unfairly prejudiced by this interpretation Brooks JA in his ruling stated that 

It is significant that, Parliament specifically provided a remedy for the victimised purchaser but did not provide a special remedy for the innocent mortgagee…in the case of an insufficiency of funds or assets, “[t]he loss would have to fall somewhere and the legislature has determined that the purchasers under the prepayment contracts should be first compensated…”.

Fortunately for creditors however, the Court of Appeal did acknowledge that its interpretation of priorities could create uncertainty for lenders in future commercial transactions and thus made two recommendations to mitigate this situation. Firstly it was recommended that the Registrar should not register a charge in favour of the REB which purports to be subject to a prior mortgage, the charge should instead reflect the provisions of s. 31(5). Secondly, the Registrar should not register a charge in favour of the REB unless the duplicate certificate of title is furnished. The duplicate certificate of title is held by the owner of the property and is normally given to a mortgagee whenever a mortgage is registered. When the duplicate certificate is demanded this should alert a prior mortgagee that another charge is to be registered against their security allowing them to enforce whatever remedies are available to them under their security documents. 

Comment

Lenders taking security over real estate are therefore encouraged to ensure that their security documents contain fulsome negative covenants/prohibited charges clauses and that the duplicate certificates of title are retained by them at all times. Developers that enter into prepayment contracts however, should be wary of relying on the fact that the current lender has possession of the duplicate certificate of title as an excuse not to register the Real Estate Board’s charge. This is because the Real Estate Board has indicated in publications as recent as May 2013 that it will commence legal proceedings against any developer that fails to register the Real Estate Board’s charge in a timely manner.

Published by Norton Rose in its Monthly Bulletin service