Modern Studies in Property Law - Volume III 9781474200530, 9781841135588

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Preface HE THIRD VOLUME of Modern Studies in Property Law celebrates the fifth biennial conference of the Centre for Property Law at the University of Reading. Again, grateful thanks are due to the British Academy, whose generous provision of a British Conference Grant subsidised the travelling expenses of conference speakers from overseas and enabled the conference to include a rich variety of jurisdictions and legal traditions. Most of the papers given at the conference are presented here. Papers from the earlier Reading conferences were published as:

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The Reform of Property Law, Paul Jackson and David C Wilde (eds), Ashgate Dartmouth 1997 Contemporary Property Law, and Property Law: Current Issues and Debates, Paul Jackson and David C Wilde (eds), Ashgate Dartmouth 1999 and as the first two volumes of Modern Studies; volume I contains papers from the conference in 2000, while volume II represents the 2002 proceedings. All the Modern Studies volumes are refereed publications, and the editor is most grateful to the small team of distinguished, and anonymous, scholars who helped select and refine papers for publication, as well as to the authors of the papers for their friendly co-operation with this process. This volume opens with the keynote address for the conference, given by Stuart Bridge, Law Commissioner for England and Wales; and his chapter explains one of the Law Commission’s many current property law projects, on the reform of the law of easements. Our guest of honour at the conference dinner was Charles Harpum, Stuart’s predecessor at the Law Commission, and it is particularly helpful that Stuart’s paper includes a section on village greens, prompted by Charles’ very entertaining after-dinner discourse. Another of the Law Commission’s recent projects has been the reform of the law of land registration, and the next section of the book comprises three chapters discussing various aspects of registration from a worldwide perspective. David Fox’s contribution looks at the new English legislation and at part of the problem of indefeasibility, while Pamela O’Connor looks at a different aspect of the indefeasibility conundrum from the perspective of the Torrens system. Murray Raff gives us a fascinating insight into the origins of modern title registration. The next section of the book is entitled “Law and Equity”, in which we examine a number of topics within English property law where the interventions and traditions of equity have had a considerable effect. The first of these is Gary Watt’s discussion of personal liability for the receipt of trust property; those

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vi Preface interested in the indefeasibility problem discussed under land registration will recognise the pertinence of this topic to issues in land registration. Heather Conway’s chapter takes a comparative look at equitable accounting, a subject often neglected in the study of the law on the family home. Charlotte Smith gives a very welcome historical perspective on the origins of the law on undue influence. Sarah Nield’s chapter considers issues surrounding the use of property as security, particularly from a human rights point of view; and Paul Eden’s chapter takes a fresh look at Re Goldcorp Exchange Ltd and possibilities of a proprietary remedy for investors in an insolvent company. Traditionally the conference has included a session on the law of landlord and tenant, and has included some work on the emerging law of commonhold; these interests are represented by an appraisal of commonhold by Peter Smith and Cornie van der Merwe, and by Martin Davey’s chapter on the regulation of long residential leases. The reader’s attention is then diverted to the much wider scene; one of the great pleasures of the conference at Reading is the number of international speakers we have been able to welcome, and the chapters given on overseas and international topics. Section four of this volume contains two chapters on aspects of property law in Europe; first, a doctrinal examination of different European legal regimes for property law, by Stanislawa Kalus and Magdalena Habdas, written from the perspective of possible European integration, and second Sarah Williams’ fascinating examination of the legal difficulties posed by the situation in Kosovo. The final section is entitled “Property Worldwide”. Patrick McAuslan’s chapter looks at the reform and development of land law in a number of developing markets, and at the interaction between traditional and market-driven legal ideas. A similar problem is faced in South Africa, and Hanri Mostert and Juanita Pienaar have provided a discussion of the continuing and complex development of land law in south Africa under the new constitution. Bruce Ziff’s chapter looks at the relationship between private property and state powers, and the protection for private property given by Canadian law. Finally, Andre van der Walt looks at the very nature of property and the notion of a transformative property theory. He focuses on the idea that whole property institutions or property law systems could be transformed as a result of changes in social and economic policy; the relevance of this to much of the content of this book is obvious. It is hoped that those who attended the conference at Reading in 2004 felt that their understanding of property law was deepened and broadened by the experience, and that something of the flavour of a wonderfully enjoyable two days has been communicated in this volume.

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Notes on Contributors Stuart Bridge is a Law Commissioner for England and Wales. Heather Conway is a Lecturer in the School of Law at the Queen’s University, Belfast. Martin Davey is a Senior Lecturer in the School of Law at the University of Manchester. Paul Eden is a Lecturer in International Commercial Law at the University of Sussex. David Fox is a Fellow of St John’s College, Cambridge. Magdalena Habdas is a Lecturer at the University of Silesia. Stanislawa Kalus is a Professor of Law at the University of Silesia. Patrick McAuslan is a Professor of Law at Birkbeck College, London. Cornie van der Merwe is a Professor of Law at the University of Aberdeen. Hanri Mostert is a Professor of Law at the University of Stellenbosch. Sarah Nield is a Senior Lecturer in the School of Law at the University of Southampton. Pamela O’Connor is a Senior Lecturer and Associate Dean in the School of Law, Monash University. Juanita Pienaar is a Professor of Law at the University of Stellenbosch. Murray Raff is a Senior Lecturer and Head of the School of Law at Victoria University, Australia and Associate of the Institute for Sustainability and Innovation at Victoria University. Charlotte Smith is a Lecturer in the School of Law at the University of Reading. Peter Smith is a Reader in Property Law at the University of Reading. Andre van der Walt is a Professor of Law at the University of Stellenbosch. Gary Watt is a Senior Lecturer at the School of Law at the University of Warwick. Sarah Williams is a Lecturer in the Faculty of Law at the University of Durham. Bruce Ziff is a Professor of Law at the University of Alberta.

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Table of Cases Australia Addison v Billion [1983] NSWLR 586 .........................................................160 Arcadi v Whittem (1992) 59 SASR 51............................................................56 Associated Alloys Pty Ltd v ACN 001 452 106 Ltd [2000] HCA 25, 202 CLR 588 ..........................................................................................194 Bahr v Nicolay (No 2) (1988) 164 CLR 604 ...................................................54 Benmar Properties Pty Ltd v Makucha [1996] 1 Qd R 578 .............................45 Biviano v Natoli (1998) NSWLR 695.....................................113, 114, 115, 117 Boulter v Boulter (1898) LR (NSW) Eq 135 .................................................120 Breskvar v Wall (1971) 126 CLR 376 .......................................................56, 57 Brickwood v Young (1905) 2 CLR 387 ........................................................120 Browne v Cranfield (1925) 25 SR (NSW) 443...............................................159 Caltex Oil (Australia) Pty Ltd v The Dredge ‘Willemstad’ (1976) 136 CLR 529 (HCA)........................................................................191, 192 Cardinaels-Hooper v Tierney (Supreme Court of New South Wales, 20 December 1995)............................................................113, 121, 122, 128 Carkeek v Tate-Jones [1971] VR 691 ...................................................124, 126 Chapman Brothers v Verco Brothers and Co Ltd (1933) 49 CLR 306 (HCA) .....................................................................................186, 191, 192 Chasfield Pty Ltd v Taranto [1991] 1 VLR 225..............................................56 Chatterton v Chatterton (1989) 53 SASR 337 .......................................117, 120 Chieco v Evans [1990] 5 BPR 11..................................................................113 Clark v Clark [1961] VR 137 ......................................................................121 Clements v Ellis (1934) 51 CLR 217 ..............................................................56 Dugac and the Official Trustee in Bankruptcy (Federal Court of Australia, 6 February 1987) .............................................................121, 123 Edwards v Edwards (1998) 43 NSWLR 695.................................................117 English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 .......160 Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504...191, 192 Fettell, Re (1952) 52 SR (NSW) 221.............................................................117 Figgins Holdings pty ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245 ..................................................................................157, 158, 164 Forrest Trust, Re [1953] VLR 246 ................................................159, 160, 161 Grant v Grant [1952] OWN 641 .................................................................122 Greig v Watson (1881) 7 VLR 79 ..................................................160, 161, 162 Hitchins v Hitchins (Supreme Court of New South Wales, 11 December 1998) .................................................................................128

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xii Table of Cases Horsburgh v Lavis (1991) 30 ACWA (3d) 706 .............................................112 Jacobs v Steward (1872) LR 5 HL 464.........................................................113 Jager v Jager 136 NJ Eq 379 (1945) .............................................................113 Latec Investment Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 .............159 Luke v Luke (1936) 36 SR (NSW) 310 ..................................................116, 117 Lyons v Lyons (Supreme Court of New South Wales, 2 September 1987) ...........................................................................119, 120 McComb v McComb (1990) 21 ACWS (3d) 1169 ........................................113 McMahon v Public Curator of Queensland [1952] St R Qd 197 ....120, 122, 123 McNeill v McDougal (1896) 28 NSR 296 ....................................................121 Marriott v Franklin (1993) 60 SASR 457................................114, 117, 122, 128 Mayer v Coe [1968] 2 NSWR 747 .................................................................56 Newcrest Mining (WA) Ltd v Commonwealth of Australia (1997) 147 ALR 42....................................................................................65 Nguyen v Schieff [2003] NSWSC 253 ..........................................................114 Noack v Noack [1959] VR 137 ...................................................................121 Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453 ..................................157 Perry v Rolfe [1948] VLR 297.......................................................159, 160, 162 Progressive Mailing House Pty Ltd v Tabili Pty Ltd (1985) 157 CLR 17 .......114 Protean (Holdings) Ltd v Environment Protection Authority [1977] VR 51....69 Pyramid Building Society v Scorpion Hotels Pty Ltd [1998] 1 VR 188 (VCA)......................................................................................................56 Quint v Robertson (1985) 3 NSWLR 398 ....................................................159 Reece v Harris [1943] SASR 127 .................................................................191 Rees v Rees [1931] SASR 78........................................................................128 Registrar-General v Northside Developments Pty Ltd (1988) 14 ACLR 543 ...96 Rock Bottom Fashion Market Pty Ltd (In Liq) v HR & CE Griffiths Pty Ltd (Queensland Court of Appeal, 6 March 1998) ...................................114 Rogers v Resi-Statewide Corporation Ltd (1991) 29 FCR 219........................56 Ryan v Dries [2002] NSWCA 3 ....................................................120, 124, 126 Sandgate Corporation Pt Ltd v Ionnou Nominees Pty Ltd [2000] WASC 91 ........................................................................................159, 161 Scapinello v Scapinello [1968] SASR 316 ...............................117, 120, 124, 125 Schultz v Corwil Pty Ltd (1969) 90 WN (Pt 1) (NSW) 529 .............................54 Sloan v Sloan (1985) 32 ACWS (2d) ..............................................................19 Smith v Davis [1978] 3 ACWS 220 .......................................................114, 122 South Australian Insurance Co Ltd v Randell (1869) LR 3 PC 101 ........186, 191 Thrift v Thrift (1975) 10 ALR 332 .......................................................114, 128 Tracey v Bifield (1998) 28 Fam LR 260 ..................................114, 124, 125, 126 Travinto Nominees Ptty Ltd v Vlattas (1973) 129 CLR 1...............................45 Van den Bosch v Australian Provincial Assurance Association Ltd (1988) 88 WN 357...................................................................................160 Vasili v Cross (Supreme Court of New South Wales, 14 December 1995)...................................................................121, 124, 128

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Table of Cases xiii Warner v Warner (1998) ACWSJ 66092 ......................................................120 Westfield Holdings Ltd v Australian Capital Television [1992] NSWLR 194 ...........................................................................................163 Yarrangh Pty Ltd v National Australian Bank Ltd [1999] NSWSC 97 ..........161

Bahamas Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072 (PC)................179, 188, 194, 195, 196

Bermuda Grape Bay Ltd v AC of Bermuda [2000] 1 WLR 574 (PC) ............................348

Canada Adamson v Adamson (1889) 17 OR 407......................................................113 Authorson v Canada (2003) 227 DLR (4th) 385 (SCC) .........................345, 346 BC Motor Vehicle Act, Re [1985] 2 SCR 486...............................................346 Beaumier v Peterborough [1993] 2 SCR 1084 ..............................................343 Beneficial Realty Ltd v Bae (1996) 82 AR 356 ................................................58 Brewin v Ferguson (1982) 134 DLR (3d) 538 ........................................124, 126 British Columbia v Tener [1985] 1 SCR 533 ................................................349 Busse v Edmonton Grain & Hay Co [1932] 1 DLR 744 ...............................191 Canada (Attorney General) v SD Meyers Inc [2004] CarswellNat 94 (Fed Ct)..................................................................................................357 Casamiro Resource Corp v British Columbia (1991) 80 DLR (4th) ..............349 Cie generale des Establishments Michelin-Michelin & CIE v CAWCanada [1997] 2 FC 306 (TD) .................................................................343 Citadel General Insurance Co v Lloyds Bank Canada [1997] 3 SCR 805..................................................................................92, 104, 107 Clarke v McClellan (1893) 23 OR 465.........................................................191 Committee for Commonwealth of Canada v Canada [1991] 1 SCR 139.......343 Curtis v Coleman (1875) 22 Gr 561 .............................................................128 Delgamuukw v British Columbia [1997] 3 SCR 1010............................343, 344 Diotallevi v Diotallevi (1982) 134 DLR (3d) 477 ..........................................114 Forgeard v Shanahan (1994) 18 Fam LR 281 ....117, 120, 121, 124, 125, 126, 128 Gameday Publication(s) Ltd v Keystone Agriculture & Recreation Centre Inc (1999) 170 DLR (4th) 617 (Man CA) ......................................343 Gosselin v Québec (Procureur général) [2002] 4 SCR 429 ............................342 Handley v Archibald (1899) 30 SCR 130 .....................................................120

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xiv Table of Cases Harrison v Carswell [1976] 2 SCR 200 ........................................................343 Hermanson v Martin [1987] 1 WWR 439 (Sask CA) .....................................58 Kneebone and Matheson, Re (1981) 124 DLR (3d) 538.........................120, 125 Lasby v Crewson (1891) 21 OR 255 ............................................................119 Manitoba Fisheries Ltd v The Queen [1979] SCR 101 ..........................345, 349 Manitoba Ltd v Manitoba (2002) 214 DLR (4th) 37 (man CA) ....................349 Mariner Real Estate Ltd v Nova Scotia (Attorney General) (1999) 68 LCR 1 (NSCA) ....................................................................349, 350, 360 Mastron v Cotton (1925) OLR 251 ......................................................120, 121 Munsie v Lindsay (1883) 10 PR (Ont) 173 ...................................................128 Nash v McKay (1868) 15 Gr 247 .................................................................112 Osachuck v Osachuck (1971) 18 DLR (3d) 413 ......................112, 117, 125, 128 Paterson v Paterson (1979) 108 DLR (3d) 235..............................................125 Pope & Talbot v Canada (2000) 122 ILR 293.......................................357, 358 Ruptash and Lumsden v Zawick [1956] 2 DLR (2d) 145..............................119 R v Big M Drug Mart [1985] 1 SCR 295......................................................342 R v Côte [1996] 3 SCR 139 .........................................................................344 R v Feeney [1997] 2 SCR 13 ........................................................................342 R v Sparrow [1990] 1 SCR 1075 ..................................................................344 R v Van der Peet [1996] 2 SCR 507 ......................................................343, 344 Ramsden v Peterborough [1993] 2 SCR 1084...............................................343 Reid v Reid (1978) 87 DLR (3d) 370............................................................128 Rice v George (1873) 29 Gr 221 ....................................................117, 120, 121 RJR-MacDonanald v Canada [1995] SCR 199 ............................................342 Ruff v Strobel (1978) 86 DLR (3d) 284 .................................................124, 126 SD Meyers v Canada (2000) 121 ICR 72......................................................353 Shore v Shore (1975) 63 DLR (3d) 354.........................................................123 Spelman v Spelman [1944] 2 DLR 74 ..........................................................128 Stewart v Sculthorp (1894) 25 OR 544 ........................................................191 Toronto v Quickfall (1994) 16 OR (3d) 665 (CA) ........................................343 VanDongen v Royal (1990) 72 OR (2d) 533 ................................................120 Weisfeld v Canada (1994) 117 DLR (4th) 232 (Fed CA) ...............................343 Wuychik v Majewski [1920] OWN 207 ...............................................113, 117

ECHR Buckley v UK (1996) 23 EHRR 101 .............................................................168 Di Palma v UK (1986) 10 EHRR 149...........................................................169 Gillow v UK (1986) 11 EHRR 335 ..............................................................168 Hentrich v France (1994) 18 EHRR 440 ......................................................174 James v UK [1986] 8 EHRR 123 ...................................................171, 172, 375 Loizidou v Turkey (1996) 23 EHRR 513 .....................................................282 Papamichalopoulos v Greece (1993) 16 EHRR 440......................................171

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Table of Cases xv S v UK (1986) 47 DR 274 ............................................................................168 Sporrong and Lonroth v Sweden (1982) 5 EHRR 35.............................171, 282 Vasilescu v Romania (1998) 28 EHRR 241 ..................................................171 Wood v UK (1997) 24 EHRR CD 69 ....................................................169, 173

Germany BverfGE 1, 264 ...........................................................................................365 BverfGE 7, 198 (1958).................................................................................370 BverfGE 24, 367 (1968)........................................................................368, 375 BverfGE 50, 290 (1979)...............................................................................375 BverfGE 51 .........................................................................................193, 365 BverfGE 58, 300 (1981)...............................................................................365 BverfGE 65 .........................................................................................196, 365 BverfGE 89, 1 (1993) ..................................................................................366 BverfGE 100, 226 (1999) .............................................................................367 BverfGE (Groundwater case) 58, 300 (1981) ..........................365, 366, 369, 371 BverfGE (Landlord and Tenant Case) 89, 1 (1993)................363, 365, 366, 368, 369, 370, 371, 372, 375 Cathedral of Beech Trees Case Buchendomurteill (1957) DVBl 861; (1957) DÖV 669 ............................................................85 Kreuzberg Monument Decision (1882) 9 PrOVG 353 ....................................84

Hong Kong CA Pacific Finance Ltd (In liquidation) [2000] BCLC 494 (HK CFI).............184 Frencher Ltd (In liquidation) v Bank of East Asia [1985] 2 HKC 263............162 Hang Seng Bank v Mee Cheong Investment Co Ltd [1970] HKLR 94...........162

ICJ Case Concerning Gabcikovo-Nagymaros Project (Hungary/Slovakia) (ICJ), 1997 no 92 ......................................................................................75

Ireland Estate of David Dunne [1988] IR 155 ..........................................................238

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xvi Table of Cases Malaysia Adorna Properties Sdn Bhd v Boonsom Boonyanit@Sun Yok Eng [2001] 1 MLJ 241 .................................................................................................59

New Zealand Assets Co v Mere Roihi [1905] AC 176 ..............................................53, 55, 56 Boyd v Mayor of Wellington [1924] NZLR 174 .................................53, 55, 56 Coleman v Harvey [1989] 1 NZLR 726 (NZCA)...........................186, 191, 192 Colls v Home and Colonial Stores [1904] AC 179 .........................................10 Commissioner of Internal Revenue v San Carlos Milling Co (1933) 63 F (2d) 153...........................................................................................192 Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (NZHC) .............186 Elders Pastoral Ltd v Bank of New Zealand [1989] 2 NZLR 180 (NZCA) ...195 Equiticorp Industries Group Ltd (In Statutory Management) v The Crown [1996] 3 NZLR 586 ..................................................................................95 Ferguson v Miller [1978] 1 NZLR 819 ........................................................113 Fortex Group (in Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171 (NZCA) .............................................................................185 Frazer v Walker [1967] 1 AC 569 .................................26, 53, 54, 55, 56, 59, 77 Gibbs v Messer [1891] 1 AC 248 .............................................................54, 56 Goldcorp Exchange Ltd, Re [1995] 1 AC 74 (PC) .................................177–199 Good v Bruce [1917] NZLR 514 (NZCA) ...................................................186 Liggett v Kensington [1993] 1 NZLR 257 ..............................178, 187, 197, 198 McCormick v McCormick [1921] NZLR 384 ...............................112, 116, 117 National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 ...................................................................106 Newall v Johnston (1903) 23 NZLR 406 .....................................................121 Sky City Auckland v Wu [2002] 3 NZLR 621 (CA) .....................................343 Thomas v Houston Corbett & Co [1969] NZLR 151 ..................................106 US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589 (NZCA)...................................................................197 Vector Ltd v Transpower NZ Ltd [1999] 3 NZLR 646 (CA)........................343

Papua New Guinea Administration of the Territory of Papua New Guinea v Blasius Tirupia [1971–72] PNGLR 229 (HCA) ..................................................................58 Emas Estate Developments Prty Ltd v Mea [1993] PNGLR 227 .....................58 Mudge and Mudge v Secretary of State for Land [1985] PHGLR 387.............58

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Table of Cases xvii South Africa Richtersveld Community v Alexkor Ltd 2001 (3) SA 193 (LCC) ..................324

United Kingdom Abbahall v Smee [2003] 1 All ER 465 ..........................................................226 Abbey National Building Society v Cann [1988] AC 56 ...............................159 Abbott v Price [2003] EWHC 2760 .............................................................127 Abigail v Lapin [1934] AC 491....................................................................159 Advocate General for Scotland v Taylor [2003] SLT 1340 ....................172, 174 Agip (Africa) Ltd v Jackson [1990] Ch 265....................................................91 Albany Homes Ltd v Massey [1997] 2 All ER 609........................................166 Allcard v Skinner (1887) 36 ChD 145 .....................131, 132, 133, 134, 135, 136, 137, 139, 140, 142, 143, 144, 146, 147, 148, 149, 151, 152, 153 Alliance and Leicester Building Society v Slayford [2001] 1 All ER 1 (Comm).................................................................................166 Aluminium Industrie Vaaseen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (Qb and CA).......................................................186, 191 Argy Trading Development Co v Lapid Developments Ltd [1977] 1 WLR 444...................................................................................237 Argyle Building Society v Hammond (1984) 49 P & CR 148 ..........................26 Associated Japanese Bank (International) Ltd v Credit du Nord [1989] 1 WLR 255 ....................................................................................45 Aston Cantlow and Wilmcote with Billesley PCC v Wallgrave [2003] UKHL 37.......................................................................167, 169, 170 Attorney General v De Keyser’s Royal Hotel [1920] AC 508 (HL) ...............345 Austerberry v Oldham Corporation (1885) 29 ChD 750 ..............................225 Aylesbond Estates Ltd v MacMillan [1999] L & TR 127 (CA) .....................213 Baden v Société Générale Pour Favoriser Le Développement Du Commerce et de L’industrie en France [1993] 1 WLR 509 (ChD); [1983] BCLC 325......................................................................102, 104, 105 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA) ................................39, 91, 93, 94, 95, 103, 104, 108, 109 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL) ........................................................................................194, 197, 198 Barnes v Addy (1874) LR 9 Ch App 244 ........................................................97 Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250...........................................................................................82 Bernard v Joseph [1982] 3 All ER 162 ...........................................111, 114, 118 Billson v Tristrem [2000] L & TR 220 (CA) ................................................214

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xviii Table of Cases Binions v Evans [1972] Ch 359......................................................................42 Birmingham Citizens Permanent Building Society v V Caunt [1962] Ch 883..................................................................................164, 173 Birmingham Midshires Mortgage Services Ltd v Sabberwal (2000) 80 P&CR 256 .........................................................................................173 Bishopsgate Investment Management ltd v Homan [1995] Ch 211 (CA) .....................................................................184, 195, 196, 199 Bolam v Friern Hospital Management Committee [1957] 1 WLR 582..........107 Bolitho v City and Hackney Health Authority [1998] AC 232 (HL) .............107 Bond Worth Ltd, Re [1980] Ch 228 .....................................................186, 191 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (CA) ....186, 191 Bracken Partners Ltd v Gutteridge [2003] EWHC 1064; [2003] 2 BCLC 84 aff’d [2003] EWCA Civ 1875; [2004] BCLC 377 ........................195 Bristol & West Building Society v Ellis (1997) 29 HLR 282 ..........................165 Brown, Re [1954] Ch 39 .............................................................................238 Bryant v Foot (1867) LR 2 QB 161..................................................................9 Buckinghamshire County Council v Moran [1990] Ch 623............................12 Bull v Bull [1955] 1 QB 234.........................................................................113 Byford, Re [2003] EWHC 1267 .............................................118, 119, 124, 127 Campbell v Holyland [1877] 7 Ch D 166.....................................................162 Caparo Industries v Dickman [1990] 2 AC 605............................................178 Carl Zeiss Stiftung v Herbert Smith (no 2) [1969] 2 Ch 276 ....................91, 103 Central London Commercial Estates v Kato Kagaku Ltd [1998] 4 All ER 948.............................................................................................13 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105....................................................................................37, 179 Cheltenham & Gloucester Building Society v Norgan [1996] 1 WLR 343.....165 Chowood Ltd v Lyall (No.2), Re [1930] 2 Ch 156 .........................................32 Chowood’s Registered Land, Re [1933] Ch 583 ............................................32 Church Commissioners for England v Vi Ri Best Manufacturing Co Ltd [1957] 1 QB 238 ..........................................................................158 Clough Mill Ltd v Martin [1985] 1 WLR 111 (CA)...............................186, 191 Cook’s Mortgage, Re [1896] 1 Ch 923 ........................................................122 Cooper v Wandsworth Board of Works (1863) 14 CB (NS) 180 .....................71 Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700.........105 Cracknell v Cracknell [1971] 3 All ER 552 ..................................................118 Creska Ltd v Hammersmith and Fulham LBC [1998] 3 EGLR 35.................244 Creswell v Hughes (1862) 1 H & C 421.......................................................114 Criterion Properties plc v Stratford UK Properties LLC [2003] 1 WLR 2108 (CA); [2004] 1 WLR 1846 (HL).................................................................93 Cubitt v Porter (1828) 8 B & C 257 .............................................................113 Cumberland Court (Brighton) Ltd v Taylor [1964] Ch 29............................157 Customs and Excise Commissioners v Everwine Ltd [2003] EWCA Civ 953; (2003) 147 SJLB 870.......................................................187

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Table of Cases xix Daejan Properties Ltd v London Leasehold Valuation Tribunal [2002] L & TR 5 (CA) .....................................................................213, 215 De Mattos v Gibson (1854) 4 De G & J 276 ................................................184 Delahay v Matlodge [1987] CLY 2158 ........................................................214 Dennis v McDonald [1982] Fam 63 ..............................................114, 115, 118 Dextra Bank v Bank of Jamaica [2002] 1 All ER (Comm) 193......................106 Dickie v Torbay Pharmacy (1986) Ltd [1995] 3 NZLR 429 (NZHC)............185 Diplock, Re [1948] Ch 465 (CA) ...................................................................98 Donoghue v Stevenson [1932] AC 562 ..........................................................71 DPP v Jones [1999] 2 AC 240 (HL) .............................................................343 Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 ....................................94 Doe v Bird (1809) 11 East 49.......................................................................113 Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484.................................91 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 ...............................93 Embassy Court Residents’ Association v Lipman (1984) 271 EG 545 ...........215 Epps v Esso Petroleum Co Ltd [1973] 1 WLR 1071 .......................................51 Eyre v McCracken (2000) 80 P & CR 220 (CA) ...........................................244 Field v Field (1910) 8 ELR 374 ....................................................................128 Finchbourne Ltd. v Rodrigues [1976] 3 All ER 581 ......................................214 First National Securities Ltd v Hegerty [1985] QB 850 ..................................26 Foskett v McKeown [2001] 1 AC 102 (HL) ............................178, 185, 195, 198 Four Maids Ltd v Dudley Marshall Properties Ltd [1957] Ch 317 ................164 Freer v Unwins Ltd [1976] Ch 288 ................................................................51 Gilje v Charlegrove Securities Ltd [2002] 16 EG 182 (CA) ....................213, 214 Gingles v Magill [1926] NI 234 ...................................................................128 Glass v McManus [1996] NI 401.................................................................113 Glencore International AC v Metro Trading International Inc [2001] 1 Lloyd’s Rep 284 (QBD)..............................................................191 Goodtitle v Tombs (1770) 3 Wils 118..........................................................114 Gorman, Re [1990] 1 All ER 717 ..................................................118, 124, 127 Goss v Chilcott [1996] AC 788 (PC) ............................................................106 Grand Junction Union v Bates [1954] 2 QB 160...........................................157 Griffies v Griffies (1863) 11 WR 943............................................................116 Hammond v Osborn [2002] EWCA Civ 885 ........................................131, 133 Harvard Securities, Re [1997] 2 BCLC 369 (ChD) .......................................184 Henderson v Eason (1851) 17 QB 701 ..................................................116, 128 Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (QBD) .......................................................................191 Hi-Lift Elevator Services v Temple (1995) 70 P & CR 620 (CA)...................215 Hill v Fulbrook (1822) Jac 574....................................................................112 Hill v Hickin [1897] 2 Ch 579 ..............................................................116, 118 Hodgson v Marks [1971] Ch 892 ................................................................239 Hogg Robinson Trustees Ltd v J Alsford Pension Trustees Ltd (1997) 11(2) TLI 48; [1997] Pension LR 99...............................................105

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xx Table of Cases Houghton v Fayers [2000] 1 BCLC 511 .........................................................92 Hunter v Moss [1994] 1 WLR 452 (CA)........................................181, 182, 183 Hyde v Hindley (1794) 2 Cox 408 ...............................................................112 Indian Oil Corporation Ltd v Greenstone Shipping SA [1988] QB 345............................................................................................186, 191 Inverugie Investments Ltd v Hackett [1995] 3 All ER 841 ............................115 Iperion Investments v Broadwalk House Residents Ltd (1995) 27 HLR (CA)..........................................................................................214 JA Pye (Oxford) Ltd v Graham [2003] 1 AC 419 ...........................................16 Jacksons v Mulvaney [2003] 1 WLR 360 .....................................................125 James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62.....................184, 188, 196 John v Dodwell & Co Ltd [1918] AC 563 .....................................................94 Jollybird Ltd v Fairzone Ltd (1990) 43 EG 63 (CA)......................................214 Jones, Re [1893] 2 Ch 461 ...................................................................121, 122 Jones v Jones [1977] 2 All ER 231 ...............................................................118 Jones v Morgan [2001] EWCA Civ 995................................................162, 163 Kansas Flour Mills Co v Board of Commissioners of Harper County (1927) 54 ALR 1164 ................................................................................192 Karl Construction Ltd v Palisade Properties plc [2002] SLT 312 ....167, 171, 174 Kayford Ltd, Re [1975] 1 WLR 279 (ChD) ..................................................194 Kelly v Solari (1841) 9 M & W 54 ...............................................................106 Kennedy v DeTrafford [1896] 1 Ch 762 ......................................................111 Kenrick v Mountsteven (1899) 48 WR 141....................................112, 120, 121 Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783 ..............................108 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL) .............97 Knightsbridge Estates v Bryne [1940] AC 613..............................................163 Krelinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25 ....163 Lahiffe v Hecker (High Court, RI, 28 April 1994) ................................113, 114 Leake v Bruzzi [1974] 1 WLR 1528 ...............................................118, 124, 127 Leigh v Dickeson (1884) 15 QBD 70 .............................................112, 119, 121 Lewis’s of Leicester Ltd, Re [1995] 1 BCLC 428 (ChD)................................184 Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 AC 548 (HL) ....................97 London Borough of Harrow v Qazi [2003] UKHL 43....................168, 169, 170 London Wine Company (Shippers) Ltd, Re [1986] PCC 121 (Ch D) .....182, 191 Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044...................................42 Mac-Jordan Construction Ltd v Erostin Ltd [1992] BCLC 350 (CA)............184 Malory Enterprises Ltd v Cheshire Homes Ltd [2002] Ch 216.....................................................................30, 31, 35, 37, 38, 41, 51 Manchester Trust v Furness [1895] 2 QB 539 ..............................................108 Martin v Maryland Estates Ltd [1999] 26 EG 151 (CA) ........................216, 217 Martin-Smith v Woodhead [1990] WAR 62 ................................................120 Maunder-Taylor v Blacquiere [2002] EWCA Civ 1633 ................................209 Mercer v Craven Grain Storage Ltd [1994] CLC 328 (HL)..........................................................................186, 187, 190, 191, 193

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Table of Cases xxi Midland Bank Trust Co Ltd v Green [1981] AC 513 .....................................42 M’Mahon v Burchell (1846) 2 Ph 127 ..........................................................116 Montagu’s Settlement Trusts, Re [1987] Ch 264 .........................39, 40, 91, 103 Morgan v Stainer [1993] EGCS 162 (Ch D) .................................................214 Morris v Kanssen [1946] AC 459 (HL)..........................................................96 Murray v Hall (1849) 7 CB 441 ......................................................................4 National and Provincial Building Society v Lloyd [1996] 1 All ER 630 .........165 National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51.......131, 132 New Pinehurst Residence Association (Cambridge) v Silow [1988] 1 EGLR 277 (CA) ...................................................................................215 Niru Battery Manufacturing Company v Milestone Trading Limited [2004] EWCA Civ 487; [2004] 2 Lloyd’s Rep 319 .......................................93 Northern Counties of England Fire Insurance Company v Whipp (1884) 26 Ch D 482...................................................................................76 Norwich and Peterborough Building Society v Steed [1993] Ch 116 (CA) .............................................................................................26, 27, 49 Official Receiver for Northern Ireland v Kearney [1999] NIJB 24 ................118 Oxfordshire County Council v Oxford City Council [2004] EWHC 12........5, 8 Palk v Mortgage Services Funding plc [1993] Ch 330...................................171 Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341.......93 Parker v Trigg [1874] WN 27......................................................................120 Pascoe v Swan (1859) 27 Beav 508...............................................................116 Passley v London Borough of Wandsworth (1996) 30 HLR 165 (CA)...........244 Pavlou, Re [1993] 3 All ER 955 .............................................111, 114, 118, 123 Peachdart Ltd, Re [1984] Ch 131 .........................................................186, 191 Peffer v Rigg [1977] 1 WLR 285....................................................................42 Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd’s Rep 359 .........115 Pennington v Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075..................183 Polly Peck plc v Nadir (no 2) [1992] 4 All ER 769..........................................41 Prince Jefri Bolkiah v KPMG (A Firm) [1999] 2 AC 222 (HL) ......................107 Pwllbach Colliery Co v Woodman [1915] AC 634...........................................4 Quennel v Maltby [1979] 1 WLR 318..........................................................166 R (Beresford) v City of Sunderland [2004] 1 AC 889 .......................................6 R (Cheltenham Builders Ltd) v South Gloucestershire District Council [2003] EWHC 2803 ....................................................................................6 R v Attorney General for England and Wales [2003] EMLR 24 ..................................................................131, 132, 134, 152, 153 R v City of Sunderland, ex parte Beresford [2003] UKHL 60; [2004] 1 AC 889 .........................................................................................7 R v Ghosh [1982] QB 1053 (CA) .................................................................197 R v Oxfordshire County Council, ex parte Sunningwell Parish Council [2000] 1 AC 335 .......................................................................3, 5, 6, 20, 21 R v Sinclair [1968] 3 All ER 241 ..................................................................105 R v Suffolk County Council, ex parte Steed (1996) 75 P & CR 102 ..............5, 6

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xxii Table of Cases Rapid Results College v Angell (1986) 277 EG 856, aff’d (1985) 275 EG 247.............................................................................................214 Regent Oil Co Ltd v JA Gregory (Hatch End) Ltd [1966] Ch 402.................157 Rhone v Stephens [1994] 2 AC 310 ......................................................205, 225 Ropaigealach v Barclays Bank plc [2001] 1 QB 263 .......................164, 165, 168 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.....................41, 92, 103, 104, 105, 196 St Mary’s Mansions Ltd v Limegate Investment Co Ltd v Sarruf [2002] EWCA Civ 1491...........................................................................214 Sandeman & Sons v Tyzack & Branfoot SS Co Ltd [1913] AC 680 (HL) .....186 Saunders v Vautier (1845) 4 Beav 115, aff’d (1845) Cr & Ph 240.........................................................................35, 36, 37, 38, 39, 101 Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 Lloyd’s Rep 289..............................................................................92, 104 Sella House v Mears [1989] 1 EGLR 65.......................................................214 Shogun Finance Ltd v Hudson [2004] 1 All ER 215 .......................................27 Short’s Tr v Keeper of the Registers of Scotland 1994 SC 122 ........................52 Skilleter v Charles [1992] 13 EG 113 (CA) ...................................................214 Smalley v Bracken Partners Ltd [2003] EWHC 1064; [2003] 2 BCLC 84, aff’d [2003] EWCA Civ 1875; [2004] BCLC 377.......................................195 Smith v Henniker-Major & Co (A Firm) [2003] Ch 182 (CA)........................96 Smith v Smith (1984) 9 Fam LR 1014 ..........................................................111 Smith v Spaul [2003] QB 938 ......................................................................158 Squire v Roger (1979) 39 FLR 106........................................................120, 128 Stapylton Fletcher Ltd, Re [1994] 1 WLR 1181............................................187 Stephenson (Inspector of Taxes) v Barclays Bank Trust Co Ltd [1975] 1 All ER 625.................................................................................101 Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246......................................................................................114 Suttill v Graham [1977] 1 WLR 819 .....................................................118, 127 Swan v Swan (1820) 8 Price 518 ..................................................................119 Swiss Bank Corporation v Lloyds Bank Ltd [1979] Ch 548 ..........................184 Swordheath Properties v Tabbet [1979] 1 WLR 285 .............................114, 115 T Choithram International SA v Pagarini [2001] 1 WLR 1 (PC)...................183 Target Home Loans Ltd v Iza Ltd [2000] 1 EGLR 23...................................158 Target Home Loans v Clothier [1994] 1 All ER 439.....................................165 Teasdale v Saunderson (1864) 33 Beav 534 ............................116, 119, 120, 121 Tehidy Minerals Ltd v Norman [1971] 2 QB 528 ..........................................11 Thomson v Clydesdale Bank Ltd [1893] AC 282 (HL) .................................107 Turner v Morgan (1803) 8 Ves 143 .............................................................116 Twinsectra Ltd v Yardley [2002] 2 AC 164 ..........41, 94, 178, 194, 196, 197, 198 Vandervell v IRC [1967] 2 AC 291................................................................36 Wait, Re [1927] 1 Ch 606 (CA) ...................................................................181 Wandsworth LBC v Griffin [2000] 26 EG 147 (LT)......................................216

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Table of Cases xxiii Weg Motors Ltd v Hales [1962] Ch 49 ........................................................157 Wells, Re [1933] Ch 29 ...............................................................................159 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 ...............................................................34, 36, 37, 38, 39, 40 Western Bank v Schindler [1977] Ch 1 ........................................................173 Wheeldon v Burrows (1879) 12 Ch D 31 .........................................................4 White v City of London Breery Co (1898) 42 Ch D 237 ...............................171 Wilkinson v Haygarth (1847) 12 QB 837 .....................................................113 Williams v Williams (1899) 68 LJ Ch 528 ....................................................121 Wilson v Secretary of State for Trade and Industry [2003] UKHL 40..........................................................................167, 169, 170, 172 Yorkbrook Investments Ltd v Batten (1986) 52 P & CR 51 (CA) .................215 Zappacosta v Zappacosta (1976) 2 Fam LR 11............................................111

USA Albertson’s Inc v Young 131 Cal Reptr 721 (App, 2003) ..............................343 Chase v Washburn 1 Ohio St 244, 59 Am Dec 623 (1853) ............................190 Hawaii Housing Authority v Midkiff 467 US 229 (1984) .............................350 Kaiser Aetna v United States 444 US 167 (1979)...........................................348 Lochner v New York 198 US 45 (1905) .......................................................346 Loretto v Teleprompter Manhattan CATV Corp 458 US 419 (1982)............348 Lucas v South Carolina Coastal Council 505 US 1003 (1992) ...............................................................................348, 349, 360, 365 Metalclad Corp v United Mexican States (2000) 119 ILR 615 ...............355, 360 Nollan v California Coastal Commission 483 US 825, 57 (1987) ..................366 Palazolov Rhode Island 533 US 606, 630 (2001)...........................................366 Penn Central Transportation Co v City of New York 438 US 104 (1978) .....348 Rice v Nixon 97 Ind 97, 49 Am Rep 430 (1884) ...........................................190 Robins v PruneYard Shopping Centre 447 US 74 (1980), aff’d 592 P2d 341 (Cal, 1979).................................................................................343 State v Shack 277 A2d 369 (NJ Sup Ct, 1971) ..............................................343 Tahoe-Sierra Preservation Council Inc v Tahoe Regional Planning Agency 535 US 302 (2002) .......................................................................348 United Mexican States v Metalclad (2001) 119 ILR 645 (SC) .......................356

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Table of Legislation Primary Legislation Australia Constitution, s 51(xxxi) ................................................................................................ 65 Industrial Arbitration Act 1940 (NSW), s 88B ....................................................................................................... 45 Land Titles Act 1980 (Tas), s 73........................................................................................................ 158 Land Titles Act 1994 (Qld), s 74........................................................................................................ 158 Local Government Act 1936 (Qld), s 34(8) ..................................................................................................... 45 Property Law Act 1969 (WA), s 55........................................................................................................ 161 Real Property Act 1858 (SA), s 69 ......................................................................................................... 83 Real Property Act 1884 (SA), s 132...................................................................................................... 158 Real Property Act 1900 (NSW) .................................................................. 158 Real Property Act 1925 (ACT)................................................................... 158 Transfer of Land Act 1893 (WA), s 106...................................................................................................... 158 Transfer of Land Act 1958 (Vic), s 40 ......................................................................................................... 80 s 41 ......................................................................................................... 80 s 42 ......................................................................................................... 83 s 42(2) ..................................................................................................... 80 s 43 ......................................................................................................... 80 s 79........................................................................................................ 161 s 81 ................................................................................................ 158, 164

Austria Civil Code................................................................................................. 253 s 285...................................................................................................... 253

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xxvi Table of Legislation s 293...................................................................................................... 257 s 302...................................................................................................... 253 s 354...................................................................................................... 264 s 451...................................................................................................... 268

Canada Alberta Bill of Rights 2000......................................................................... 345 Alberta Personal Bill of Rights 2000........................................................... 345 Bill of Rights (1960) .................................................................... 344, 346, 347 s 1(a) ..................................................................................................... 344 s 2(e) ..................................................................................................... 346 Constitution Act 1867, s 90........................................................................................................ 352 sub 91(24).............................................................................................. 344 Constitution Act 1982................................................... 341, 343, 344, 346, 360 s 1 ......................................................................................................... 342 s 2 ......................................................................................................... 342 s 7 ......................................................................................................... 346 ss 7–15................................................................................................... 342 s 8 ......................................................................................................... 342 s 15........................................................................................................ 342 s 33........................................................................................................ 342 s 35........................................................................................................ 344 sched B, part I ................................................................................ 341, 342 Department of Veteran Affairs Act, sub 5.1(4) ....................................................................................... 345, 347 Expropriation Act 1989 ............................................................................. 347 Expropriation Act 2000 ............................................................................. 347 Land Registration Act 2001, RSNS, ch 6, s 35 ......................................................................................................... 59 Land Registry Act RSBC 1996, c 250, s 297(3) ................................................................................................... 59 Land Titles Act 1981, s 70 ......................................................................................................... 52 s 71 .................................................................................................... 52, 53 Law of Property Act 1980 (Alberta), s 17........................................................................................................ 128 Manganese-based Fuel Additives Act 1997 ................................................. 354 Pension Act, sub 41(1) ............................................................................................... 345 War Veterans Allowance Act, sub 15(2) ............................................................................................... 345

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Table of Legislation xxvii China Constitution, Art 10(4)................................................................................................ 301 Contract Law 1999.................................................................................... 301 Chap 13, arts 212–236............................................................................ 301 General Principles of Civil Law 1987 ......................................................... 301 Land Administration Law 1986 ................................................................. 301 Land Administration Law 1998 ................................................................. 301 Urban Real Estate Administration Law 1994.............................................. 301 Urban Real Estate Development and Management Control Regulations 1998................................................................................ 301

France Civil Code ......................................................................................... 253, 259 art 517................................................................................................... 258 art 518................................................................................................... 258 art 519................................................................................................... 258 arts 520–523 .......................................................................................... 258 art 523................................................................................................... 258 art 524................................................................................................... 258 art 544................................................................................................... 260 art 545................................................................................................... 260 art 553................................................................................................... 260 Law of 9 July 1965, art 9 ...................................................................................................... 239 Law of 10 July 1965, art 20..................................................................................................... 246

Germany Apartment Law, art 18(1) ................................................................................................ 247 art 18(2) ................................................................................................ 247 art 19..................................................................................................... 247 Basic Law, art 14 .................................................. 363, 364, 365, 366, 369, 370, 371, 379 art 15..................................................................................................... 364 Civil Code............................................................................. 82, 256, 365, 366 s 93 ................................................................................................ 252, 256

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xxviii Table of Legislation s 94........................................................................................................ 256 s 95........................................................................................................ 256 s 96........................................................................................................ 256 s 903.................................................................................... 85, 86, 363, 366 s 905...................................................................................................... 257 s 906...................................................................................................... 262 Federal Constitution, Art 14 ......................................................................................... 84, 86, 262 Art 20a.................................................................................................... 86 s 22........................................................................................................ 262 Rheinland-Pfalz Monuments Act........................................................ 369, 371 Weimar Constitution 1919, Art 153.................................................................................................... 84

Indonesia Basic Agarian Law 1960....................................................... 305, 306, 307, 309 art 5 ...................................................................................................... 307 art 6 ...................................................................................................... 306 art 7 ...................................................................................................... 306 art 10..................................................................................................... 306 art 15..................................................................................................... 306 Regional Administration Act 1999 ............................................................. 305

Ireland Administration of Justice Act (Ireland) 1707, s 27 ...................................... 128 Prescription (Ireland) Act 1858 .................................................................... 17

Malaysia National Land Code 1965, s 340........................................................................................................ 59

Maldives Companies Act.......................................................................................... 303 Contract Act ............................................................................................. 303 Land Law Act 2002 ............................................................................ 304, 312 Maldives Tourism Act............................................................................... 303

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Table of Legislation xxix Poland Civil Code................................................................................................. 252 art 21..................................................................................................... 261 art 45..................................................................................................... 261 art 46..................................................................................................... 254 art 47, 252 art 48..................................................................................................... 254 art 140............................................................................................ 262, 263 arts 140–231 .......................................................................................... 261 art 143................................................................................................... 254 arts 144–154 .......................................................................................... 262 art 179................................................................................................... 263 art 191................................................................................................... 254 art 232–243............................................................................................ 265 art 235................................................................................................... 255 art 252................................................................................................... 266 art 253................................................................................................... 266 art 254................................................................................................... 266 art 272................................................................................................... 255 art 279................................................................................................... 255 art 285................................................................................................... 266 art 299................................................................................................... 266 art 300................................................................................................... 266 Book II .................................................................................................. 261 Construction Law Act 1994 ....................................................................... 262 Land Register and Mortgages Act 1982...................................................... 256 art 65, s.4............................................................................................... 267 art 67..................................................................................................... 267 arts 91–93.............................................................................................. 267 art 109................................................................................................... 267 Law of Environment Protection Act 2001................................................... 262 Management of Real Estate 1998............................................................... 262 Management of Real Property Act 1997..................................................... 265 Ownership of Units Act 1994..................................................................... 255 Pensions and Other Benefits for Farmers and Their Families Act 1977............................................................................................. 255 Planning Act 2003 ..................................................................................... 262 Transfer of Farms to the State in Return for a Pension and Monetary Payments Act 1977 ............................................................. 255

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xxx Table of Legislation Singapore Land Titles Act 1993, s 160 ........................................................................................................52 Land Titles (Strata) Act 1987, s 92........................................................................................................ 234 South Africa Abolition of Racially Based Land Measures Act 108 of 1991....................... 325 Act 18 of 1936 ........................................................................................... 319 Black Land Act 27 of 1913 ......................................................................... 317 sched ..................................................................................................... 325 Close Corporation Act 69 of 1984.............................................................. 339 Co-operatives Act 81 of 1981 ..................................................................... 319 Communal Land Rights Act 2004 ................................ 317, 320, 321, 322, 324, 325, 326, 327, 328, 329, 330, 331, 332, 335, 336, 337, 338, 339, 340 Chap 7 .................................................................................................. 335 Memorandum ....................................................................................... 337 s 1 .................................................................................................. 322, 334 s 2.................................................................................... 324, 325, 326, 332 s 3 .................................................................................................. 333, 334 s 4 ........................................................................................... 322, 328, 329 s 5 ........................................................................................... 322, 333, 327 s 6 ........................................................................................... 332, 333, 334 s 7 .................................................................................................. 334, 338 s 9 ........................................................................................... 331, 336, 338 s 10........................................................................................................ 338 s 11........................................................................................................ 338 s 12 ................................................................................................ 330, 331 s 13........................................................................................................ 331 s 14 .................................................................................................327, 328 s 15(1) ................................................................................................... 328 s 16 ..........................................................................................327, 329, 330 s 17 ................................................................................................ 328, 329 s 18.................................................................... 322, 327, 329, 330, 331, 333 s 19 ......................................................................................... 334, 335, 336 s 20 ................................................................................................ 327, 335 s 21 ................................................................................................ 335, 339 s 22........................................................................................................ 335 s 24 ..........................................................................................333, 334, 335 s 25 .................................................................................................321, 331

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Table of Legislation xxxi ss 25–27................................................................................................. 334 ss 31–35................................................................................................. 325 s 39........................................................................................................ 325 Communal Property Associations Act 28 of 1996 .......... 318, 319, 325, 326, 339 s 8(10) ................................................................................................... 327 Companies Act 61 of 1973 .................................................................. 319, 339 Constitution 1993, s 229...................................................................................................... 323 Constitution 1996, s 9 .................................................................................................. 321, 322 s 25 .................................................................................................319, 325 Deeds Registries Act 47 of 1937................................................... 318, 334, 338 s 3(1A)................................................................................................... 336 s 11(1) ................................................................................................... 334 s 102............................................................................................... 333, 334 Development Facilitation Act 67 of 1995.................................................... 318 Development Trust and Land Act 18 of 1936 ............................................. 325 Extension of Security of Tenure Act 62 of 1997 .......................................... 318 Group Areas Act 36 of 1966....................................................................... 317 Interim Protection of Land Rights Act 31 of 1996 ........................ 318, 324, 331 KwaZulu-Natal Ingonyama Amendment Act 9 of 1997 .............................. 325 KwaZulu-Natal Ingonyama Trust Act 3 of 1994 ................................. 324, 325 Land Reform (Labour Tenants) Act 3 of 1996..................................... 318, 322 Land Survey Act 8 of 1997........................................................... 318, 333–334 Prescription Act 68 of 1969 ........................................................................ 324 Proclamation 170 of 1922 .......................................................................... 326 Proclamation 196 of 1920 .......................................................................... 326 Proclamation R28 of 1992 ......................................................................... 325 Proclamation R188 of 1969........................................................................ 323 Prohibition on the Subdivision of Agricultural Land Act 70 of 1970 .................................................................................................. 330 Provision of Land and Assistance Act 126 of 1993 ...................................... 318 Restitution of Land Rights Act 22 of 1994........................................... 318, 324 s 39........................................................................................................ 326 s 25A ..................................................................................................... 326 Sectional Titles Act 95 of 1986, s 7 ......................................................................................................... 334 s 11(3) ....................................................................................................336 s 12........................................................................................................ 334 s 13........................................................................................................ 334 Self-Governing Territories Act 21 of 1971 .................................................. 324 State Land Disposal Act 48 of 1961 ............................................................ 324 Trust Property Control Act 57 of 1988....................................................... 339 Upgrading of Land Tenure Rights Act 112 of 1991.............................. 323, 326

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xxxii Table of Legislation s 1 ......................................................................................................... 323 s 3 ......................................................................................................... 326 s 19........................................................................................................ 326 s 20........................................................................................................ 326 sched 1.................................................................................... 323, 324, 326 sched 2.................................................................................... 323, 324, 326

Spain Law of 21 July 1960, art 21(1) ................................................................................................ 246

United Kingdom Access to Neighbouring Land Act 1992...................................................... 232 Administration of Justice Act 1705, s 27........................................................................................................ 128 Administration of Justice Act 1970, s 36 ................................................................................................ 165, 173 Arbitration Act 1996, s 6 ......................................................................................................... 213 Bills of Sales Acts 1878–1891 ..................................................................... 194 Commonhold and Leasehold Reform Act 2002........................... 205, 207, 211, 213, 215, 217, 218, 219, 220, 226, 227, 228, 229, 231, 232, 233, 234, 235, 238, 241, 247 Pt 2, Chap 1 ........................................................................................... 210, 228 Chap 2 .................................................................................................. 227 s 1(1)...............................................................................................227, 228 s 3(1)(b)................................................................................................. 228 s 7(3)(a) ................................................................................................. 229 s 9(3)(b)................................................................................................. 236 s 11 .................................................................................................230, 232 s 15 ................................................................................................ 228, 238 s 16(2) ................................................................................................... 247 s 17 ................................................................................................ 228, 239 s 18........................................................................................................ 240 s 19(2) ................................................................................................... 240 s 20 ........................................................................................................238 s 21 ........................................................................................................241 s 22(1) ................................................................................................... 238 s 23 ........................................................................................................241

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Table of Legislation xxxiii s 24 .................................................................................................241, 242 s 25 .................................................................................................232, 233 s 26 .................................................................................................237, 243 s 27(1) ....................................................................................................242 s 28 ........................................................................................................242 s 29 ........................................................................................................243 s 30 ........................................................................................................243 s 31........................................................................................................ 228 ss 31–34.......................................................................................... 207, 208 s 32........................................................................................................ 228 s 34........................................................................................................ 207 s 38 ........................................................................................................234 s 39 ........................................................................................................245 s 41 ........................................................................................................243 s 47(1) ....................................................................................................235 s 94(3) ................................................................................................... 210 s 151...................................................................................................... 216 ss 151–155 ............................................................................................. 211 s 155............................................................................................... 215, 231 s 156...................................................................................................... 222 s 158...................................................................................................... 217 s 160...................................................................................................... 209 s 161...................................................................................................... 209 s 162...................................................................................................... 218 s 164...................................................................................................... 218 s 167...................................................................................................... 219 ss 167–71 ............................................................................................... 219 s 168...................................................................................................... 219 s 171...................................................................................................... 219 s 173...................................................................................................... 212 s 174...................................................................................................... 212 s 175...................................................................................................... 212 s 205(1)(ix) ............................................................................................ 226 sched 2, para 1(1)................................................................................... 226 sched 3, para 7....................................................................................... 228 sched 9, para 7....................................................................................... 211 sched 11 ................................................................................................ 217 sched 12, para 10 ................................................................................... 212 Commons Act 1876, s 29 ........................................................................................................... 4 Commons Registration Act 1965 ................................................................5, 6 s 2(2)......................................................................................................... 5 s 14 ........................................................................................................... 6 s 22(1) ....................................................................................................... 5

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xxxiv Table of Legislation Companies Act 1985, Part XII ................................................................................................. 194 Consumer Credit Act 1974............................................ 155, 164, 167, 170, 172 Countryside and Rights of Way Act 2000, s 98 ........................................................................................................... 5 Enterprise Act 2002 ................................................................................... 155 Housing Act 1974, s 124...................................................................................................... 211 Housing Act 1980, s 136...................................................................................................... 211 sched 19 ................................................................................................ 211 Housing Act 1988............................................................................... 211, 212 Housing Act 1996...................................................................................... 209 s 81........................................................................................................ 219 Housing Finance Act 1972, s 90........................................................................................................ 211 s 91........................................................................................................ 211 s 91A ..................................................................................................... 211 sched 19 ................................................................................................ 211 Human Rights Act 1998 ........................................ 153, 156, 165, 167, 168, 174 s 3 ......................................................................................................... 166 s 6 ......................................................................................................... 166 s 10........................................................................................................ 166 Insolvency Act 1986, s 107...................................................................................................... 184 Land Charges Act 1972 ............................................................................... 42 Land Registration Act 1925 .............................................. 30, 32, 36, 51, 52, 53 s 20 .................................................................................................... 36, 37 s 69 ......................................................................................... 35, 36, 37, 51 s 70(1) ..................................................................................................... 30 s 75(1) ..................................................................................................... 13 s 82 .............................................................................................. 30, 49, 53 Land Registration Act 2002 ............................................. 13, 25, 29, 33, 36, 39, 42, 43, 47, 49, 51, 62, 155 Part 9................................................................................................. 13, 16 s 23 .................................................................................................... 27, 29 s 23(1)....................................................................................... 35, 155, 157 s 26 ......................................................................................................... 35 s 27 .................................................................................................... 27, 28 s 28 ......................................................................................................... 42 s 29 .............................................................................................. 28, 34, 41 s 31 ......................................................................................................... 40 s 32 ......................................................................................................... 31 s 33 .................................................................................................... 34, 41

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Table of Legislation xxxv s 35 .................................................................................................... 31, 41 s 49........................................................................................................ 155 s 51........................................................................................................ 155 s 58 ......................................................................................................... 29 s 70(1)(f).................................................................................................. 32 s 86(1) ..................................................................................................... 40 s 96 ......................................................................................................... 13 s 116(b) ................................................................................................... 30 s 131(2) ................................................................................................... 50 s 132(1) .............................................................................................. 42, 50 sched 3, para 2 ................................................................................................ 34, 51 para 3...................................................................................................... 31 sched 4 .................................................................................................... 49 para 1........................................................................................... 31, 35, 50 para 2................................................................ 27, 28, 31, 32, 37, 38, 49, 50 para 3 ......................................................................................................50 para 5 ................................................................................................ 27, 50 para 6 .................................................................................................27, 50 para 8 ................................................................................................ 29, 51 para 19(a)................................................................................................ 37 sched 8, para 1.................................................................................30, 31, 33, 37, 50 para 5........................................................................................... 34, 38, 50 para 6(a) ................................................................................................. 33 para 6(b) ................................................................................................. 30 para 8...................................................................................................... 30 Land Registration Act (NI) 1970.................................................................. 52 s 69 ......................................................................................................... 52 Land Registration (Scotland) Act 1979, s 9 ............................................................................................................52 Landlord and Tenant Act 1985 ........................................................... 211, 215 s 4 ..........................................................................................................213 Pt II ....................................................................................................... 209 s 18........................................................................................................ 211 ss 18–30 ........................................................................... 210, 211, 222, 245 s 19........................................................................... 212, 213, 214, 215, 216 s 20 ......................................................................................... 216, 217, 222 s 20B ..................................................................................................... 211 s 20C.............................................................................................. 211, 214 s 20Z(1)................................................................................................. 217 s 20ZA ........................................................................................... 216, 222 s 21........................................................................................................ 222 ss 21–24................................................................................................. 209

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xxxvi Table of Legislation s 21A ..................................................................................................... 222 s 21B ..................................................................................................... 222 s 22........................................................................................................ 222 s 27A....................................................................................... 213, 215, 218 s 31C ..................................................................................................... 212 s 38........................................................................................................ 213 Landlord and Tenant Act 1987 ........................................................... 211, 221 Pt IV...................................................................................................... 218 s 37(8) ................................................................................................... 218 s 42 ................................................................................................ 222, 245 s 42A ..................................................................................................... 222 s 42B ..................................................................................................... 222 Law of Property Act 1925 .................................................... 156, 157, 161, 226 s 1(2)(c) ................................................................................................. 157 s 30........................................................................................................ 113 s 56(1) ................................................................................................... 157 s 62 ........................................................................................................... 4 s 85(1) ................................................................................................... 157 s 87(1) ........................................................ 156, 160, 161, 163, 166, 170, 174 s 88(2) ................................................................................................... 161 s 91........................................................................................................ 161 s 93(2) ................................................................................................... 164 s 101...................................................................................................... 158 s 115............................................................................................... 159, 161 s 146 ....................................................................................... 157, 158, 219 s 205(1)(ix) ............................................................................................ 258 Leasehold Reform Act 1967 ........................................................ 204, 207, 221 Leasehold Reform Housing and Urban Development Act 1993 .............................................................................. 207, 208, 221 Pt 1, Chap 1........................................................................................... 227 Pt 1, Chap 2........................................................................................... 208 s 87........................................................................................................ 209 Leasehold (Repairs) Act 1938 .................................................................... 158 Limitation Act 1980 .................................................................................... 13 s 15(1) ..................................................................................................... 13 s 19........................................................................................................ 213 Merchant Shipping Act 1854 ....................................................................... 78 Partition Acts of 1868 and 1876 ................................................................. 111 Powers of Attorney Act 1971 ....................................................................... 27 Prescription Act 2 & 3 Will 4, c 71............................................................... 10 Prescription Act 1832.................................................. 6, 8, 9–12, 17, 18, 19, 20 s 1...................................................................................................... 10, 11 s 2...................................................................................................... 10, 11 s 4 ........................................................................................................... 10

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Table of Legislation xxxvii Protection from Eviction Act 1977 ............................................................. 164 Rent Act 1977 ............................................................................. 115, 211, 212 sched 10 ................................................................................................ 212 Rights of Way Act 1932 ................................................................................ 6 Roman Catholic Relief Act 1829................................................................ 138 Sale of Goods Act 1979.............................................................................. 179 ss 16–19................................................................................................. 183 s 20A ..................................................................................................... 183 s 20B .............................................................................................. 183, 190 Sale of Goods (Amendment) Act 1995........................................................ 183 Statute of Uses 27 Hen VIII c 10 .................................................................. 76 Trusts of Land and Appointment of Trustees Act 1996 .............................. 111 s 13(6)(a) ............................................................................................... 113 Usury Repeal Act 1854 .............................................................................. 156

United States Bipartisan Trade Promotion Authority Act 2002, s 3801(3)(d)............................................................................................ 359 Constitution.............................................................................................. 348 Third Restatement of the Foreign Relations Law of the US ........................ 357 Uniform Commercial Code, s 7–205 .................................................................................................. 190 s 7–207 .................................................................................................. 190 Uniform Common Interest Ownership Act ......................................... 232, 242 s 2–107(d).............................................................................................. 234

Secondary Legislation – United Kingdom Commonhold and Leasehold Reform Act 2002 (Commencement No 2 and Savings (England)) Order 2003 (SI 1986/2003), reg 2(c)...................................................................................................... 213 sched 2, para 2 .......................................................................................... 211 Commonhold and Leasehold Reform Act 2002 (Commencement No 4) Order 2004 (SI 2004/1832)......................................................... 226 Commonhold (Land Registration) Rules 2004 (SI 2004/1830), reg 13........................................................................................................ 241 Commonhold Regulations 2004 (SI 2004/1829) .......................................... 226 reg 3(1)(b) ................................................................................................. 228 reg 8 ......................................................................................................... 230 reg 9 ........................................................................................231, 232, 233 reg 11 ............................................................................................. 228, 239

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xxxviii Table of Legislation reg 14 .................................................................................................... 234 reg 15 ............................................................................................. 228, 232 reg 18 .................................................................................................... 243 sched 2 .................................................................................................. 234 sched 3, para 4.5.1 ................................................................................. 228 Companies (Tables A–F) Regulations 1985 (SI 1985/724), Table A..................................................................................................... 235 Table C..................................................................................................... 235 Land Registration Rules, r 114–15 ................................................................................................ 159 Leasehold Valuation Tribunals (Fees) (England) Regulations (SI 2098/2003) ............................................................................. 212, 222 Right to Manage (Companies) (Memorandum and Articles of Association) (England) Regulations (SI 2120/2003).............................. 210 Right to Manage (Prescribed Particulars and Forms) (England) Regulations (SI 1998/2003) ................................................................. 210 Service Charges (England & Wales) (Consultation Requirements) Regulations (SI 1987/2003) .......................................... 216 SI 1966/1470 ................................................................................................. 5 SI 1970/383 ................................................................................................... 5

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1

Prescriptive Acquisition of Easements: Abolition or Reform? STUART BRIDGE 1

Any legal system must have rules of prescription which prevent the disturbance of long-established de facto enjoyment.2

INTRODUCTION

Prescription is the method by which legal recognition is given to the unchallenged use of rights over land for a long period of time. Prescriptive claims, based as they are on the analysis of factual evidence going back by definition many years, are often hotly contested, and there is much reported litigation. The substantive law has itself been the subject of acute criticism, and the case for reform is weighty. Item 1 of the Law Commission’s Eighth Programme of Law Reform3 (“Property Law”) includes an examination of “easements and analogous rights, together with a possible system of land obligations”. The Programme explains: This is an area of law of great practical importance to large numbers of landowners and others, and where there is pressure for reform. The law is outdated and causes problems but there has never been a comprehensive review. We shall be examining easements and analogous private law rights (particularly profits a prendre) with a view to their reform and rationalisation . . .

1 Law Commissioner for England and Wales. This chapter, which is written in the author’s personal capacity, nevertheless owes a great deal to team work at the Law Commission, and particular mention should be made of the contributions made by Judith Cairns, Solicitor, Law Commission, and Amy Goymour and Katherine McCormick during their employment as Research Assistants at the Law Commission. The section on village greens was prompted by my predecessor in title at the Law Commission, Charles Harpum, whose after-dinner speech at the Reading Property Conference raised awareness of the subject, and I am also grateful to Charles Mynors, counsel of 2 Harcourt Buildings, for discussions at the conference and subsequently. 2 R v Oxfordshire County Council, ex parte Sunningwell Parish Council [2000] 1 AC 335, 349 (Lord Hoffman). 3 Law Com No 274.

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4 Stuart Bridge Prescription is one of the four broad methods of creating easements, the other three being creation by express grant (or reservation), by implication4 and by statute. If there is any single area of the law of easements and profits which requires treatment, it is prescription. No less an authority than Holdsworth believed that: . . . there is no branch of English law which is in a more unsatisfactory state. There are, indeed, other branches of English law which stand in need of an intelligent restatement; but no mere restatement can clear up the muddle which the courts and the Legislature have combined to make of the law of prescription. What is required is a total repeal of the existing common and statute law, and the substitution of an entirely new set of rules, based upon an understanding of the meaning of the doctrine of prescription, and of the results at which it should aim.5

Prescription is a means of acquisition of both public and private rights. The current work of the Law Commission is restricted to prescriptive acquisition of easements and analogous rights. It is important however to appreciate that prescription has a wider scope, and that it is of particular significance in relation to public rights of way, rights to common, and town and village greens. Litigation has been rife in recent years in relation to town and village greens, and has led to the appellate courts exploring the underlying principles of prescription in a somewhat different context than that of private rights as such. While this is outside the remit of the Law Commission, a brief examination of the recent case law may form a useful prelude to the discussion of the reform of prescription of easements and analogous rights.

TOWN AND VILLAGE GREENS 6

It is “no trivial matter for a landowner” to have land registered as a town or village green.7 By section 29 of the Commons Act 1876, any encroachment, building upon or disturbance of the soil of a town or village green is deemed to be a public nuisance. This criminal offence operates as a remarkably effective bar upon development. Invocation of town or village green status has accordingly become very popular among those seeking to resist the predations of property developers in both urban and rural environments. 4 Easements may arise by implication where the intention to grant (or to reserve) can be inferred. This may be from the language of the conveyance or lease, from the particular use intended by the parties (Pwllbach Colliery Co v Woodman [1915] AC 634, 646, Lord Parker), under the doctrine of non-derogation from grant, under the rule in Wheeldon v Burrows (1879) 12 Ch D 31, or as a way of necessity. Easements may also arise under section 62 of the Law of Property Act 1925. See generally Jonathan Gaunt QC and Paul Morgan QC (eds), Gale on Easements, 17th edn (London, Sweet and Maxwell, 2002) (hereafter Gale), ch 3. 5 W Holdsworth, A History of English Law, 2nd edn (1937), vol vii, p 352. 6 See generally N Ubhi and B Denyer-Green, Law of Commons and of Town and Village Greens, (Bristol, Jordans, 2003). Hereafter “village greens” is used for “town and village greens”. 7 R v Suffolk County Council, ex parte Steed (1996) 75 P & CR 102, 111 (Pill LJ).

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Prescriptive Acquisition of Easements: Abolition or Reform? 5 Town and village greens are registrable under the Commons Registration Act 1965, section 22(1), which sets out a tripartite classification based upon statute, custom, and long use: (a) land which has been allotted by or under any Act for the exercise or recreation of the inhabitants of any locality; (b) land on which the inhabitants of any locality have a customary right to indulge in lawful sports and pastimes; (c) land on which the inhabitants of any locality have indulged in such sports and pastimes as of right for not less than 20 years.8

Classes (a) and (b), statute and custom, are now in effect obsolete, as the 1965 Act provided that no land capable of being registered was deemed to be a village green unless so registered9 and the same Act prescribed strict time limits for registration.10 In effect, the Act initiated a “once-and-for-all nationwide inquiry into commons, common rights and town and village greens.”11 Class (c) is, however, far from obsolete. Proof of 20 years’ user (by indulgence in lawful sports and pastimes), albeit subsequent to the 1965 Act, may lead to the successful invocation of village green status. As a result, the concept of the ‘modern’ class (c) green has been judicially recognised, despite well articulated doubts about its legitimacy.12 In R v Oxfordshire County Council ex parte Sunningwell Parish Council,13 a parish council applied to the county council for registration of Sunningdale Glebe as a village green. The glebe, being 10 acres of open land near the ancient village church, had been used for many years by local people “for such outdoor pursuits as walking their dogs, playing family and children’s games, flying kites, picking blackberries, fishing in the stream, and tobogganing down the slope when snow falls.”14 The land was at the time of the application in the ownership of the Oxford Diocesan Board of Finance, which had obtained planning permission for the erection of two houses on the glebe. The county council decided to hold a non-statutory public inquiry and appointed a barrister, Vivian Chapman, as inspector, to make recommendations.15 He advised that the

8 The definition of a Class (c) green was amended by the Countryside and Rights of Way Act 2000, s 98, with effect from 30 January 2001. It is now required that a significant number of the inhabitants of any locality or of any neighbourhood within a locality have so indulged, and continue to do so up to the date of the application to register (author’s emphasis added). The transitional effect of these amendments is considered by Carnwath LJ in Oxfordshire County Council v Oxford City Council [2005] EWCA Civ 175, at para 91 et seq. 9 Commons Registration Act 1965, s 2(2). 10 Greens had to be registered by 31 July 1970: SI 1966/1470, as amended by SI 1970/383. 11 R v Oxfordshire County Council ex parte Sunningwell Parish Council [2000] 1 AC 335, 348 (Lord Hoffman). 12 Oxfordshire County Council v Oxford City Council [2005] EWCA Civ 175, per Carnwath LJ at para 51 et seq. See further note 26 below. 13 [2000] 1 AC 335. 14 Above, 347 (Lord Hoffmann).

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6 Stuart Bridge application should be refused on the ground that the user of the glebe land by the villagers had not been “as of right.” The Court of Appeal had considered the meaning of “as of right” in the context of a village green claim in R v Suffolk County Council ex parte Steed.16 It had held that the right must have been exercised in the belief that it was a right enjoyed by the inhabitants of the village to the exclusion of all other people, and that it was not enough if the users merely thought they were exercising a general public right, or if they simply had no views on the matter. Steed was a major obstacle to claimants, and an important limit to village green claims, as it required proof positive of belief in the basis of the rights being alleged, a singularly difficult onus for claimants to discharge. When the applicants in Sunningwell appealed to the House of Lords, their appeal was in effect a challenge to the decision of the Court of Appeal in Steed. In his “magisterial speech”,17 Lord Hoffmann related the history of the expression “as of right”. He traced its development from the common law concept of nec vi, nec clam, nec precario, through the Prescription Act 1832 in its application to private rights via the Rights of Way Act 1932 in its application to public rights of way, to the Commons Registration Act 1965. He could find no basis in authority for the imposition of “a new and additional requirement of subjective belief” and accordingly held that Steed was wrongly decided.18 The county council should not have refused to register the glebe as a village green merely because the witnesses did not depose to their belief that the right to games and pastimes attached to them as inhabitants of the village.19 There were two further arguments advanced on behalf of the county council. First, it was contended that the evidence of user was too broad, in that it showed that the glebe was being used by some people who were not inhabitants of the village. It was sufficient, however, held Lord Hoffmann, that the land was used predominantly by the inhabitants of the village. The recent amendment to class (c) may make this problem less acute for claimants in future.20 Secondly, it was argued that the use of the glebe was attributable to neighbourly toleration by successive owners (the rector, then the Oxford Diocesan Board of Finance) and was not therefore “as of right”. This argument, rejected by the House of Lords in Sunningwell, was to be revisited four years later in Beresford. In R v City of Sunderland ex parte Beresford,21 the question arose whether the 15 There is no statutory procedure set down for the determination of class (c) claims. This procedure is one that has been judicially approved, and is frequently adopted by councils. The Commons Commissioners have no jurisdiction save in relation to class (a) and class (b) claims. The findings of the inspector may be challenged either by application to rectify the commons register under Commons Registration Act 1965, s 14, or by judicial review: see generally R (on the application of Cheltenham Builders Ltd) v South Gloucestershire District Council [2003] EWHC 2803, Sullivan J. 16 (1996) 75 P & CR 102. 17 R (Beresford) v City of Sunderland [2004] 1 AC 889, 911 (Lord Walker of Gestingthorpe). 18 [2000] 1 AC 335, 355. 19 [2000] 1 AC 335, 356. 20 See n 8 above.

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Prescriptive Acquisition of Easements: Abolition or Reform? 7 use by local inhabitants of Washington, Tyne and Wear, of a piece of land known as the Sports Arena entitled them to have it registered as a village green. It was another class (c) claim. The local authority which now owned the Sports Arena claimed that in so far as sports and pastimes had been carried on for a period of at least 20 years, they had been so conducted with the implied permission of the previous owners. In 1977, a double row of wooden benches (seating as many as 1100 people) had been installed on three sides of the arena, and since then each landowner had mowed the grass in the summer, thereby (so the council alleged) encouraging the playing of games, the eating of picnics, and the walking of dogs. The council’s contention, that use was accordingly by their licence or consent and therefore could not be “as of right”, succeeded before the Court of Appeal, but not before the House of Lords. It is clear that where the landowner has given permission, the use cannot be “as of right”. Where the landowner merely “tolerates” or passively “acquiesces” in the use, the possibility of prescriptive acquisition remains. The difficult question however is where to draw the line. One thing is clear from Beresford: the line is not drawn between “express” and “implied” permission. To do so would, as Lord Walker states, “reduce this part of the law to a state of incoherence”, as the ready invocation of “implied licence” would involve resort to one fiction too many. It would be intuition rather than reasoning which would make the divide between implied licence and toleration. Lord Walker requires that any permission sufficient to subvert a claim to user “as of right” should derive from “overt conduct of the landowner”. According to Lord Bingham, the landowner “may so conduct himself as to make clear, even in the absence of any express statement, notice or record, that the inhabitants’ use of the land is pursuant to his permission”. The necessary ingredient appears to be that the landowner has effectively communicated to the users of the land that their use is with permission. Two means of such communication are to make a charge for admission, or to exclude users by closing the land on occasional days.22 “Such actions have an impact on members of the public and demonstrate that their access to the land, when they do have access, depends on the landowner’s permission.”23 The problem for the council was that the provision of seating and the mowing of the grass were equivocal actions.24 If the land were town or village green, then one would expect the council to maintain it and its facilities and to encourage its use by the local inhabitants. Lord Walker reached his decision in Beresford “with mixed feelings”: The campaigning group named Washington First may feel that they have won a famous victory, and saved an important public amenity from being built on. That seems to be the likely consequence of this case. But the campaigners have achieved that 21 22 23 24

[2003] UKHL 60, [2004] 1 AC 889. Above, 894 (Lord Bingham; 914, Lord Walker). Above, 914 (Lord Walker). Above, 895 (Lord Bingham; 908, Lord Rodger).

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8 Stuart Bridge end by a route which has by-passed normal development controls, and in a way which may be thought to stretch the concept of a town or village green close to, or even beyond, the limits which Parliament is likely to have intended. Any change in the law is of course a matter for Parliament but I respectfully agree with Lord Bingham’s observations as to the need for care on the part of the decision-makers, whose conclusions as to the existence of a town or village green may have very important practical consequences.25

There is no sign that the enthusiasm of those claiming rights to town or village green is on the wane.26 The developing law of village greens, and in particular the difficulties being experienced in relation to the necessary elements of prescriptive acquisition, do send a warning for those looking for the appropriate means of reforming analogous areas.

EASEMENTS AND ANALOGOUS RIGHTS

As we shall see, prescription has been critically examined by law reform bodies in this jurisdiction three times over the last two centuries: by the Real Property Commissioners in 1829, the Law Reform Committee in 1966, and (in passing) by the Law Commission in the course of its title registration project in 1998. Ironically, the only legislation to have resulted has proved to be of extremely low quality, and if there is one thing on which all commentators seem to be agreed it is that the Prescription Act of 1832 must be repealed. Our current law is notable in having three distinctive methods of prescription.27 Prescription at common law Prescription must, traditionally, have a “lawful” character. At common law, this required the claimant to establish user since time immemorial: in other words, since the accession of Richard I in 1189. As the centuries passed, the claimant’s burden became greater, and inevitably presumptions had to be 25

Above, 917. In Oxfordshire County Council v Oxford City Council [2005] EWCA Civ 175, the Court of Appeal was recently asked to rule upon no fewer than ten issues of law concerning a class (c) claim. The most interesting of these issues was suprisingly fundamental, concerning as it did the legal effect of a finding that land has become a village green. At first instance, Lightman J had held that, once a green was established, there inevitably attched to the green the rights of local inhabitants to “indulge in lawful sorts and pastimes.” Carnwath LJ, giving the single judgment of the Court of Appeal, did not agree. It was wrong to assume the existance of “a single package of rights ordinarily incident to the status of a green” attaching to all classes of green. It was impossible to hold that registration of a class (c) green implied any formal legal right to its use, whether by the public in general or by any particular group of persons. The overall effect of the Court of Appeal decision is that the conferment of class (c) village green status carries the protection of the criminal law, but is not creative of any new rights of use and enjoyment. At the time of writing, the outcome of an application for permission to apeal to the House of Lords is awaited. 27 See Gale, ch 4; Megarry & Wade, The Law of Real Property, 6th edn, (London, Sweet & Maxwell, 2000) by C Harpum (hereafter Megarry & Wade), 18-121 to 18-170. 26

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Prescriptive Acquisition of Easements: Abolition or Reform? 9 applied. Proof of 20 years’ user became sufficient, but it was (easily) rebuttable by proof that at some time since 1189 the right could not have existed. This has led to few claims of common law prescription in recent generations. Prescription by lost modern grant Lost modern grant was developed to mitigate the difficulties caused by prescription at common law, particularly the relative ease with which it could be proved that any right enjoyed must have post-dated 1189. It was, as Cockburn CJ once put it, a work of judicial ingenuity “to atone for the supineness of the legislature” in failing to intervene to reform the law.28 As far as legal fictions go, lost modern grant is up there with the very worst. It requires the court to shut its eyes to the blindingly obvious. Once the claimant has proved 20 years’ uninterrupted user, then (in the absence of evidence that the existence of a grant was impossible) grant of such an easement will be presumed, and that presumption cannot be rebutted by proof that no grant was made.29 Prescription Act 1832 It may seem strange that lost modern grant remained necessary following the legislative reform of prescription which occurred in the early nineteenth century. The Real Property Commissioners had been appointed by letters Patent of George IV to make “diligent and full inquiry . . . into the Law of England, respecting Real Property, and the various interests therein, and the methods and forms of alienating, conveying and transferring the same, and of assuring the titles thereto, for the purpose of ascertaining and making known to Us, whether and what improvements can be made therein”.30 In their First Report, published in 1829, they announced that “the Law of Real Property [that is the law as to enjoyment of Real Property] seems to require . . . very few essential alterations.”31 They went on to pronounce that When the object of transactions respecting land is accomplished, and the estates and interests in it which are recognised are actually created and secured, the Law of England, except in a few comparatively unimportant particulars, appears to come 28

Bryant v Foot (1867) LR 2 QB 161. Note that this criticism post-dates the 1832 legislation. “Juries were first told that from user, during living memory, or even during 20 years, they might presume a lost grant or deed; next they were recommended to make such presumption; and lastly, as the final consummation of judicial legislation, it was held that a jury should be told, not only that they might, but also that they were bound to presume the existence of such a lost grant, although neither judge nor jury, nor any one else, had the shadow of a belief that any such instrument had ever really existed.” Bryant v Foot (1867) LR 2 QB 161, 181 (Cockburn CJ). 30 First Report of the Real Property Commissioners (1829) (hereafter RPC), p 3. The Commissioners comprised J Campbell QC and four Barristers at Law, WH Tinney, J Hodgson, S Duckworth and PB Brodie. 31 RPC, p 3. 32 RPC, p 6. 29

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10 Stuart Bridge almost as near to perfection as can be expected in any human institutions. The owner of the soil is, we think, vested with exactly the dominion and power of disposition over it required for the public good, and landed property in England is admirably made to answer all the purposes to which it is applicable.32

They were however less impressed with the law respecting the transfer of Real Property. “It appears to us that the modes by which estates and interests in Real Property are created, transferred and secured, are exceedingly defective, and require many important alterations.”33 In particular, the Real Property Commissioners considered that the law of prescription of easements and profits was in serious need of reform. The common law rule that long use back to 1189 must be established was “inconvenient and absurd”, as a result of which the courts had resorted to the “clumsy fiction” of the lost grant.34 The Prescription Act 1832 was enacted as a response to the criticisms of the existing law articulated by the Real Property Commissioners.35 Professor Simpson’s succinct appraisal of the object of the 1832 Act cannot be improved upon: it was “to do away with the need for the fiction [of lost modern grant], but to preserve the effect of it, and to render obsolete prescription at common law.”36 Unfortunately, this object was not successfully realised by the Parliamentary draftsman. The language of the statute is spectacularly obscure. Famously, it failed to supersede either of the pre-existing methods of prescriptive acquisition but merely engrafted another means onto the existing law. It gave rise to two new statutory forms of prescription, based on 20 and 40 years’ user (which we may term “short” and “long” prescription respectively). It introduced special regimes for profits, rights of common, and rights of light. Short prescription After 20 years’ use, a prescriptive right to an easement can arise without the need to prove that it existed in 1189.37 Such a right will however only arise where the claimant of the right is party to “some suit of action” in which the right is called into issue.38 Until the action has been brought, the right is “inchoate” only.39 Not only must the existence of a right be established during some proceedings, but the claimant of the right must also show that he or she has enjoyed the right

33

RPC, p 7. RPC, p 51. 35 ‘An Act for shortening the Time of Prescription in certain cases’, the Prescription Act, 2 & 3 Will 4, c 71, once known as ‘Lord Tenterden’s Act’, obtained royal assent on 2 August 1832. 36 AWB Simpson, An Introduction to the History of Land Law, 2nd edn (Oxford, Clarendon Press, 1986), p 267. 37 Prescription Act 1832 (hereafter PA 1832), s 2. The period required for profits is 30 years: PA 1832, s 1. 38 PA 1832, s 4. 39 Colls v Home and Colonial Stores [1904] AC 179, 190 (Lord Macnaghten). 34

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Prescriptive Acquisition of Easements: Abolition or Reform? 11 for the requisite period immediately prior to those proceedings.40 The user must have been “as of right” and without interruption.41 There are special rules relating to disabilities.42 Long prescription After 40 years, enjoyment as of right of an easement is deemed “absolute and indefeasible”.43 As with short statutory prescription, the right will only be acquired when a legal action is brought, and the user period must extend right up until that action. Likewise, user must be as of right with no interruption. Some rules relating to these requirements are specific to long statutory prescription. There are special rules regarding capacity. Any honeymoon period the 1832 Act may have had was desperately shortlived. In 1839, seven years after the Act was promulgated, Mr Gale in the Preface to his first Edition remarked that the Prescription Act “has not only failed in effecting its particular object, but has introduced greater doubt and confusion than existed before its enactment.”44 It is little short of astonishing that it has never been reformed. Virtually incomprehensible, it remains “one of the most derided statutes on the statute book”.45

The three options A person wishing to bring a prescriptive claim has therefore a choice of three possible doctrines. As the Court of Appeal stated in 1971: The coexistence of three separate methods of prescribing is in our view anomalous and undesirable, for it results in much unnecessary complication and confusion. We hope that it may be possible for the Legislature to effect a long overdue simplification in this branch of the law.46

Common law prescription can be safely discarded as an anachronism which has no real practical significance in current law. Lost modern grant cannot be 40 This is the result of the words “the period next before some suit or action wherein the claim or matter to which such period may relate shall have been or shall be brought into question”, PA 1832, s 4. 41 PA 1832, s 2. 42 Any time during which the servient land was in the hands of a minor, a mental patient or a tenant for life will be deducted from the claimant’s user period. The period during which an action is pending will likewise be deducted. 43 PA 1832, s 2. The period required for profits is 60 years: PA 1832, s 1. 44 Gale, vii. 45 Gale, Preface, v. See also Law Reform Committee, 14th Report, Acquisition of Easements and Profits by Prescription, Cmnd 3100 (hereafter LRC), para 40: “one of the worst drafted Acts on the Statute Book”. Simpson, above, p 251: “The Act is the classical example of an incompetent attempt to reform the law, and its retention on the Statute Book is indefensible.” 46 Tehidy Minerals Ltd v Norman [1971] 2 QB 528, 543 (Buckley LJ).

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12 Stuart Bridge dismissed so easily. Despite the enactment of the Prescription Act over 170 years ago, lost modern grant remains surprisingly popular. It is not so much because it is a remarkable presumption that cannot be rebutted by proof of real fact. It is more because the claimant often has evidential problems with the statutory requirements of the 1832 Act, in particular proving that the right has been in uninterrupted use for 20 years ante litem motam, “before action brought”. Whereas in the case of lost modern grant, it matters not when the 20 years’ enjoyment occurred, for statutory prescription it is an essential concern. This is a very important distinction to emphasise. In practical terms, what it means is this. Where a person can establish user as of right for 20 years, they will get home on lost modern grant, even though the 20 year period ended many years ago. Of course, the deeper into the past it is, the more evidential difficulties facing the claimant, but the fact that user has stopped by the time the question of entitlement is raised is irrelevant. Lost modern grant and statutory prescription therefore operate quite differently. Once use of the relevant character, for the relevant period, is proven, then the lost modern grant is “presumed”: the right is in effect “created”. Under the Prescription Act 1832, long use prevents the servient owner from contending that the claimant has no right in law. But should the claimant’s de facto use have ceased for a significant time before the claim is litigated, then the servient owner will inevitably win.

ADVERSE POSSESSION

The acquisition of easements by prescription is often justified on the same policy grounds as those on which the extinction of title by adverse possession is traditionally based. “Both seek to achieve certainty in relation to the title to land by adjusting rights in favour of those who have made use of the land for a long time.”47 But it is important to realise that prescription and adverse possession are conceptually quite different. Our law of prescription, which essentially mirrors the Roman law,48 acts in a positive manner, creating rights in favour of the claimant. Our law of adverse possession, on the other hand, operates in a negative manner, extinguishing the rights of the paper owner and thereby entitling the person in possession to assume the mantle of ownership. It is “the antithesis of prescription and rests on wrongful possession rather than on any presumption of right.”49 47 Irish Law Reform Commission, The Acquisition of Easements and Profits a Prendre by Prescription, LRC 66 (2002) (hereafter ILRC), para 2.06. 48 Holdsworth, A History of English Law, 2nd edn (1937), vol vii, 343. Roman law had a single doctrine for the extinction and acquisition of rights in land and servitudes, and the idea that prescription can both create and destroy title has been adopted in Scots law and French law: see T Carson, Prescription and Custom––Six Lectures (1907), p 2. 49 Megarry & Wade, 21–002. ‘Possession as of wrong’, per Nourse LJ in Buckinghamshire County Council v Moran [1990] Ch 623, 644.

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Prescriptive Acquisition of Easements: Abolition or Reform? 13 The reason why we do not use the doctrine of prescription to “create” title to land stems from the fact that this would have been an unnecessary function. It is a peculiarity of English law (as it applies to unregistered land) that the person in possession has title good against everyone except for the true owner. Limitation was therefore all that was required. Once it was established that the true (or we should say “paper”) owner’s title had been effectively extinguished, the possessor would obtain, albeit by default,50 a full and indefeasible title to the land. This meant that: [a] system of usucapio which, by lapse of time, turns possession into dominium is unnecessary, and, . . . unintelligible.51

By contrast, easements could not be “possessed”. In consequence, a person enjoying some use of land obtained no rights that could come to fruition when the servient owner’s own rights against him were barred. Prescription was required in order to perform the positive function of creating easements. The law of adverse possession has traditionally been grounded in the statutes of limitation. Take for instance the Limitation Act 1980, s 15(1), which bars a land owner from bringing an action for his or her land twelve years or more after a right of action against a squatter has accrued to him or her. The squatter, through possession, acquires his or her estate in the land once the previous owner’s rights have been extinguished. This means that the squatter acquires a new, independent right. It is not a right that has been conveyed from the previous owner. This logic breaks down, however, where title to the land is registered. As the register is conclusive of ownership of title, the registered proprietor remains owner for as long as he or she is registered as such. Once the Limitation Act 1980 barred the owner’s rights against the squatter, resort to a statutory fiction was necessary to ensure that the squatter did acquire the title. This was achieved by means of the statutory imposition of a trust in favour of the squatter, operating by way of a “Parliamentary conveyance”.52 Part 9 of the Land Registration Act 2002 has now radically changed the law of adverse possession so that the circumstances in which land may be adversely possessed are more limited. No longer does the Limitation Act apply to registered land,53 and adverse possession of a registered estate in land will never of itself bar the registered proprietor’s title. Instead, adverse possession for a period (normally of ten years) will entitle the squatter to apply to be registered as proprietor.54 Following the enactment of the Land Registration Act 2002, 50 Law Com No 254, Land Registration for the Twenty-First Century: A Consultative Document (hereafter Law Com No 254), para 10.79. 51 Holdsworth, An Historical Introduction to the Land Law (1927), p 277. 52 Land Registration Act 1925, s 75(1); Central London Commercial Estates v Kato Kagaku Ltd [1998] 4 All E R 948. 53 Land Registration Act 2002 (hereafter LRA 2002), s 96. 54 This is reflected in the rule, under the LRA 2002, that squatter B who evicts squatter A cannot add A’s period of adverse possession to his own.

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14 Stuart Bridge “certainty of title” is no longer sufficient justification for the acquisition of title by adverse possession.55 The question we must now pose is whether the acquisition of easements or profits by prescription should have a continuing role in this brave new world of universal title registration or whether recognition of the public interest in ensuring that the register is as full and accurate record of interests affecting titles should inexorably lead to its abolition. As we have seen, that public interest has already resulted in the radical reappraisal of adverse possession as a means of obtaining title to registered land. It can be contended that retention of a prescriptive system of rights acquisition is hostile to the “mirror principle” whereby a purchaser should be bound only by those interests which are entered on the register. Similar logic has led some Torrens-based jurisdictions, notably New Zealand, to abolish prescription over registered land, and proposals to abolish prescription outright have been made elsewhere. Should the same logic apply here or are there important differences?

THE LAW REFORM COMMITTEE

One hundred and thirty four years after the First Report of HM Real Property Commissioners, and two years before the statutory creation of the Law Commission, the Law Reform Committee was invited to consider the law as it affected the Acquisition of Easements and Profits by Prescription, to seek evidence from interested bodies, and to make recommendations for reform. Reporting in 1966, the Committee concluded unanimously that the law of prescription was “unsatisfactory, uncertain and out of date, and that it needs extensive reform”.56 The crucial question, then as now, was whether to abolish prescription or to preserve it in a reformed state. In answering this, the Committee split down the middle. The majority (8 out of 14) recommended that (subject to necessary transitional arrangements) the prescriptive acquisition of easements should be abolished, and should not be replaced by any other method of acquisition.57 A minority which can only be described as significant (both quantitatively and qualitatively) did not agree with abolition, but were in favour of preserving prescription albeit in an amended form.58

55 There may be other (limited) justifications: see, eg, Law Com No 271, Land Registration for the Twenty-First Century: A Conveyancing Revolution (hereafter Law Com No 271), para 2.72. 56 LRC, para 30. 57 The majority comprised Lord Pearson (Chairman of the Committee), Diplock LJ, Orr J, Sir John Burrows, the Hon HAP Fisher QC, Lord Lloyd of Hampstead, Mr GWR Morley and Mr RJ Parker QC. 58 The minority comprised Winn LJ, Buckley J, Professor AG Guest, Mr RE Megarry QC, Professor FJ Odgers and Mr RH Walton QC.

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Prescriptive Acquisition of Easements: Abolition or Reform? 15 The arguments in favour of abolition as articulated by the majority of the Law Reform Committee can be summarised as follows.59 (1) Prescription allows the claimant to get something for nothing. That may indeed have been the claimant’s intention: if not, the acquisition was “purely accidental”. Either way, there is little moral justification for the acquisition of easements by prescription. (2) The prescriptive claim may well originate from the servient owner’s “good neighbourly” attitude (no complaint being made of the claimant’s assertive approach). Initially the servient owner may even have given consent to the actions in question. Prescription may operate to penalise those who behave altruistically. (3) Certainty of title demands that a purchaser can discover not only what kinds of interest burden the property being purchased, but also what the extent of those interests is. In other words, any potential easement should be capable of precise definition. Better by far that easements are in writing—prescriptive acquisition will inevitably lead to doubt as to the precise nature and extent of the easement.60 (4) Although this was 1966, and universal registration of title was some way off, the majority recognised that the aim of the register to be a mirror of title would be endangered by retention of prescriptive easements (potentially some of the most troublesome of overriding interests) which would bind the land without being registered. The majority identified here a public interest in the “advantage to the community of being able to rely on the accuracy and completeness of the register”, and contended that this should be allowed “to tip the scales” against the continuance of prescription. There is a further short argument based on proportionality which is worthy of consideration. At best, the claimant owner may “deserve” some recognition of the expectations which have arisen from the servient owner’s acquiescence. But should this result in the conferment of a property right which may be equivalent in duration to a fee simple absolute in possession? Would it be more appropriate (and more proportionate) in many cases to offer the claimant a more limited right? The minority of the Law Reform Committee sought to assimilate prescription with adverse possession. As there were no proposals to restrict adverse possession, it was argued, it was premature to abolish prescription. In terms of moral justification, the two were inextricably linked, and it was unrealistic in moral terms to draw a distinction between them:

59

LRC, paras 32 to 36. For a recent decision exemplifying the difficulties in defining the extent of a prescriptive easement, see Jackson v Mulvaney [2003] 1 WLR 360. 60

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16 Stuart Bridge to represent prescription as easement-stealing is to ignore the fact that it involves open enjoyment over a long period in the assertion of a right, and that it is a process designed to give legal recognition and validity to a state of affairs of long standing, in which successive servient owners may have acquiesced.61

Following the recent reform of adverse possession contained in Part 9 of the Land Registration Act 2002, one thing is clear. Simple reliance on the analogy of acquisition of title by adverse possession will no longer suffice as a defence of prescriptive acquisition of easements and similar rights. If the abolitionists are not to have their way, it will be necessary to find some separate justification for the retention of prescriptive easements. There is one very obvious and important distinction which can and should be drawn between adverse possession and prescription. It is a qualitative distinction. It is a distinction between a “factual” possession which bears fruit in legal ownership and a factual use which gives rise to a legal entitlement to use. It is a distinction between obtaining title, ownership, an estate in the land (whatever terminology we elect to employ) and between obtaining rights in or over land. Adverse possession involves the acquisition of title, and it effects the transfer from one person to another of estates in land, of potentially very great value. It does not merely bar claims. It can result in considerable tracts of land being acquired for no consideration: the best example in recent years being the decision of the House of Lords in JA Pye (Oxford) Ltd v Graham.62 While an easement may be created as a result of long use which may seriously restrict the use to which the servient land may be put, prescription does not and cannot involve outright transfer of the servient title. In short, prescription does not have the same Draconian quality as adverse possession. Prescription does no more that legitimise, admittedly by the conferment of legal entitlement, an existing state of affairs. Although the conferment of that right is unquestionably valuable, as it affords the claimant security in its enjoyment against the owner of the servient land as well as third parties, the person who obtains an easement by prescription cannot make any greater use of the servient land after the prescriptive period has expired (and the right has crystallised) than before. The same cannot be said of the successful adverse possessor, who, clothed with title, may now sell, lease or mortgage the land. The minority of the Law Reform Committee made the important point that a person claiming an easement by prescription, perhaps because there is relatively little to gain, bears little similarity to a person asserting “squatter’s rights.” A person will rarely set out deliberately by long use to acquire an easement: consequently a claimant is much more frequently a person who believes or assumes he or she is entitled to an easement. This belief, which has

61 62

LRC, para 38. [2003] 1 AC 419.

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Prescriptive Acquisition of Easements: Abolition or Reform? 17 been acquiesced in by the servient owner, may or may not have induced the purchase of, or the expenditure of money upon, the dominant land.63

IRISH LAW REFORM COMMISSION

The Irish Law Reform Commission has recently visited the law governing the acquisition of easements and profits by prescription, and has published a Report with a Bill annexed.64 The current Irish substantive law is similar to that of England and Wales in that it is based upon three modes of prescription, namely common law, lost modern grant and statute. The statute is the very same Prescription Act of 1832, which was adopted in Ireland in 1859.65 The Irish Report draws upon the work of the Law Reform Committee of 1966 as well as the Law Commission Report of 1998, and recommends improvement rather than abolition of prescriptive acquisition, in relation both to easements and profits a prendre. It advances the case of a single statutory method of acquisition. Prescription at common law and by lost modern grant would therefore be abolished, and the Prescription Act 1832 would be repealed. In its place it recommends a commendably succinct statutory formulation which would apply universally:66 An easement or profit a prendre shall be acquired by prescription where there is a relevant user period immediately before a suit or action taken to establish or dispute such acquisition.67

A “relevant user period” is a 12-year period of user or enjoyment as of right on the part of the dominant tenant save where the servient tenant is a State authority or the servient tenement is foreshore.68 This period must be without interruption (although there are qualifications where the servient tenant is incapable of managing his affairs because of a disease or impairment of his physical or mental condition).69 The period of 12 years has been chosen so as to assimilate the period of prescriptive acquisition with that which is necessary in order to establish the

63 LRC, para 38. It can be argued that in many, but not all, cases, the claimant may not need to rely on prescription as an easement may arise by proprietary estoppel, and that estoppel is a doctrine which is more subtle and responsive to the merits of the dispute than prescription. 64 Report: The Acquisition of Easements and Profits a Prendre by Prescription, LRC 66–2002. 65 By the Prescription (Ireland) Act, 1858, which came into force on 1 January 1859. 66 There would no longer be special rules for the prescriptive acquisition of easements of light. See generally ch 4. 67 Prescription Bill, cl 4(1). 68 Prescription Bill, cl 2(1). Where the servient tenant is a State authority, a minimum period of 30 years is recommended, and where the servient tenement is foreshore, 60 years. 69 Prescription Bill, cl 2(1). Interruption means interference with, or cessation of the use or the enjoyment for a continuous period of at least one year. For qualifications, see cl 5.

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18 Stuart Bridge acquisition of title by adverse possession.70 The period must be (in the words of the 1832 Act) “before action brought”, the Commission taking the view that this would mean that the evidence before the court is likely to be fresher and that a purchaser of the servient land would be more likely to discover the existence of the right.71 (The Commission goes on to recommend that failure to use the easement for a period of 12 years will give rise to its extinction by means of abandonment.) The Irish Law Reform Commission considers that the common law requirement of “user as of right” is satisfactory, although the statute should make clear what is meant by this term.72 It therefore recommends that “user as of right” should be defined as: User or enjoyment of the relevant easement or profit a prendre without force, secrecy or permission. User or enjoyment with the written or oral consent of the servient tenant shall not constitute user as of right.73

It is not entirely clear that English practitioners, contemplating the complexities highlighted by the recent village greens litigation, would share the confidence of the Irish that “user as of right” is entirely satisfactory, and (one assumes) readily comprehensible and applicable with ease.

THE LAW COMMISSION

In 1998, the Law Commission together with HM Land Registry published its Consultative Document on Land Registration for the 21st Century.74 Although a full review of the law of easements was outside the terms of reference, that paper provisionally recommended modifications to the law on prescription as it applies to registered land “to accommodate the changes that will result from the introduction of electronic conveyancing.” These proposals were no more than interim measures pending fuller consideration of the law of easements and profits.75 The Commission outlined two “principal concerns”: (1) The fictitious doctrine of lost modern grant was wholly inappropriate to registered title, as “The concept of a lost modern registration is not one that we can contemplate with equanimity. Indeed its existence would undermine one of the principal objectives of this Report, which is to ensure the registration of rights that are expressly created.”76 Lost modern grant therefore had to go. 70 71 72 73 74 75 76

Para 3.02. Para 3.08. Para 3.32 et seq. Appendix A: Prescription Bill, cl 2(1). Law Com No 254. Law Com No 254, para 10.87. Law Com No 254, para 10.89.

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Prescriptive Acquisition of Easements: Abolition or Reform? 19 (2) Purchasers should not be bound by rights which they could not discover by reasonable enquiries and inspections. This was another reason to jettison lost modern grant. As the right being claimed does not need to be exercised at the time of the claim being made, one cannot therefore rely upon its being discovered during the usual processes of conveyancing. The provisional recommendations of the Law Commission in 1998 (in relation to registered land) were as follows: (1) It should cease to be possible to claim any easement or profit by prescription except under the Prescription Act 1832. (2) Therefore both common law prescription and lost modern grant should be prospectively abolished. (3) There would be savings for vested rights. In other words, where the claimant could show that an easement or profit had been acquired by either of these doctrines prior to the coming into force of the legislation, then that right would remain good.77 Whatever this might at first sight have indicated, this was not, the Commission stressed an endorsement of the 1832 Act; it was nothing more than a stop-gap.78 But the advantages of the 1832 Act model in terms of consistency with the overall objectives of the title registration legislation were clear to see: Although this Act has numerous unsatisfactory features, rights acquired or in the course of acquisition under this Act are more readily discoverable by any intending purchaser of the land burdened by them. First, the servient owner should normally be aware of the exercise of the right (and should therefore disclose it to any purchaser unless it is obvious on a reasonable inspection of the land). Secondly, subject to the comparatively limited doctrine of interruption, the right claimed must be asserted up to the time that it is in issue in court proceedings or in a hearing before the registrar. Rights that were at one time exercised but have ceased to be for more than a year will not ground a claim under the Act.79

In effect, the Commission was recommending the adoption of a single, rather than tripartite, scheme for prescription, and although the 1832 Act was verging on the totally incomprehensible, it did have the saving grace that it required litigants and conveyancers to concentrate on the present day, or at least the very recent past. It did not encourage the formulation of claims requiring extensive in-depth historical research. When the Final Report on Land Registration was published in July 2001, three reasons were given for the abandonment of the provisional recommendations concerning reform of the law of prescription:

77 78 79

Law Com No 254, para 10.94. Law Com No 254, para 10.91. Above.

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20 Stuart Bridge (1) There was not a compelling case for the reform of the law of prescription in the context of registered land alone as there was in relation to the law of adverse possession. (2) The Law Commission is now undertaking a comprehensive review of easements and land obligations which will include prescription and it seems better to view prescription as a totality. (3) Some of the conveyancing concerns that informed the earlier recommendations have now been addressed in more direct ways in the Land Registration Bill.80

OPTIONS FOR THE LAW REFORMER

In 1829, the Real Property Commissioners put in a nut-shell the dilemma of the law reformer: We are conscious how much easier it is plausibly to expose the imperfections of the Law as it now stands than to show how it may be safely amended.81

They were wise men who had thought long and hard about the perils of those who sought to bring about legal change: We dread the shock that would be occasioned by any precipitate attempt at emendation, and we recollect that it is as impossible suddenly to change the laws as the language of any country. The remote consequences of every proposed amendment must be sedulously traced, and the consideration constantly kept in view, whether it may not raise new doubts and questions and cause more mischief than it is calculated to cure.82

The irony of these words will not be lost on those who have sought to interpret and to apply the Prescription Act 1832. With these words echoing in our ears, we ask with a degree of trepidation: what are the possible ways forward for those contemplating reform of the law of prescriptive acquisition of easements and profits at the beginning of the twenty first century? In simple terms, there are three basic options which require consideration. We can do nothing: leave the law as it is. This is not in our view a serious possibility: the case for doing something with the current morass of duplication, overlap and uncertainty is quite overwhelming. We can be radical, and abolish prescriptive acquisition altogether, with necessary savings for vested rights. Or we can retain the concept of acquisition by long use but re-design the conditions for its operation in a much clearer, coherent, and simpler form. This paper commenced with the words of Lord Hoffmann in Sunningwell emphasising the importance of preventing the disturbance of long-established 80 81 82

Law Com No 271, para 1.19. RPC, p 9. Above.

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Prescriptive Acquisition of Easements: Abolition or Reform? 21 de facto enjoyment, and the major contribution made by the rules of prescription to such an objective.83 Prescription may do more good than harm, and abolition may be an over-reaction to the imperfections of the detail of the current law rather than a considered response to the policy it seeks to advance. It is essential that the case for abolition of prescription receives separate and informed consideration. We should certainly not assume that abolition of prescription is an inevitable or even necessary consequence of the adoption of the new statutory regime for adverse possession.

83

R v Oxfordshire CC, ex p Sunningwell PC [2000] 1 AC 335, 349. See para 3 above.

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2

Forgery and Alteration of the Register under the Land Registration Act 2002 DAVID FOX*

This chapter considers the provisions of the Land Registration Act 2002 which apply when a disposition of the registered estate in land has been forged. It will be seen that the liability of a person who forges a disposition of the registered estate to himself is straightforward. Alteration of the register will be ordered against him on the ground the registration of him as proprietor of the estate was a mistake. The essay therefore concentrates on the possible liability of a third party to whom the forger makes a subsequent disposition of the estate. It will be seen that, in general, the third party is immune to any application for alteration which the original registered proprietor may bring against him. Very occasionally, he might be liable to a personal claim in knowing receipt even after he has transferred away the estate to a new proprietor. The topic is practically important. Forgery is common and expensive.1 The right of a victim of a forged transaction to enforce what is in effect a proprietary remedy to recover his registered estate, free of any adverse interests which third parties might have acquired in the meanwhile, would be of paramount concern to him. The possibility of having a claim against a third party to the forgery transaction would be important because the forger himself is likely to be insolvent or untraceable, and therefore not worth suing on any personal claim once he has transferred the estate to a third person. More generally, the resolution of forgery cases under the alteration provisions of the Land Registration Act 2002 illustrates the extent to which the Act works according to a self-contained set of principles, rather than according to * I am grateful for the comments of Matthew Conaglen and of the participants at the Property Law Conference. 1 The Annual Reports of the Land Registry record the number of fraud and forgery claims for which the Registry pays an indemnity; see http://www.landregistry.gov.uk/publications/. In recent years the number of claims have been: 4 (2002–03); 7 (2001–02); 9 (2000–01); 15 (1999–2000). These figures do not include the many forgeries which the Registry detects before registration. Indemnities for forgery often represent a large proportion of the Registry’s total indemnities payable. In 2002–03, for example, the Registry paid a £194,000 indemnity for a single forged transaction.

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26 David Fox the traditional priority rules which applied to unregistered land. It shows just how far a third person dealing with the original forger is entitled to assume that the register is a complete and accurate description of the title to the registered estate, whatever the means by which the forger might have succeeded in having himself entered as the registered proprietor of the estate. It tests the strength of the principle that registration should act as a system of state-guaranteed indefeasible titles against the competing concern to provide redress for the victims of fraud.2 In the discussion which follows, it will be assumed that the facts follow one standard pattern, though in reality many variations on the facts are possible. It will be assumed that the original registered proprietor of an estate, R1, is the victim of a forgery by R2. R2 forges a transfer of the registered estate to himself and is registered as the new proprietor. He then transfers the registered estate to R3, who becomes the new registered proprietor. R3 may take the registered estate innocently or with some degree of awareness that he is taking property which R2 originally obtained by a forgery. With two important differences, similar principles would apply where the wrongdoer forged a disposition of the registered estate to an innocent third party, R2. This would cover the common case where one joint registered proprietor of land forges a mortgage to an innocent third party.3 Rectification of the register would generally be ordered against R2 just as it would be in a standard case where he himself was the forger, provided that R2 was not himself in possession of the relevant land.4 The difference would be that R2 might be entitled to resist an application for rectification against him because he was an honest proprietor in possession of the land.5 Failing that, if he were not in possession, he might claim an indemnity for losses resulting to him from the loss of his registered estate. In contrast, where a person claiming an indemnity suffers loss wholly or partly as a result of his own fraud, no indemnity is payable.6 Much of the account which follows would also apply to other kinds of case which do not involve forgery. One defining consequence of a forged transaction is that it is void. Similar principles would therefore apply where the original transaction between R1 and R2 was void under the doctrine of non est factum 2 For a full statement of the competing principles, see K Gray and SF Gray, Elements of Land Law, 4th edn (Butterworths, London, 2005) para 12.106; and E Cooke, The New Law of Land Registration (Hart Publishing, Oxford, 2003) ch 6; and P O’Connor, “Registration of Title in England and Australia” in E Cooke (ed), Modern Studies in Property Law (Hart Publishing, Oxford, 2003) vol 2, ch 5. 3 Cf Frazer v Walker [1967] AC 569; First National Securities Ltd v Hegerty [1985] QB 850; Argyle Building Society v Hammond (1984) 49 P & CR148 (reversed on different findings of fact in Norwich and Peterborough Building Society v Steed [1993] Ch 116 (CA)). 4 Land Registration Act 2002, sched 4, para 3(2). 5 Above, sched 4, para 3(2). The effect of this exception is to bring English law closely into line other Commonwealth Torrens title systems where rectification can only be ordered against the immediately disponee of a void transaction if he was himself guilty of fraud: see O’Connor, above, n 2 at 91–92. 6 Land Registration Act 2002, Land Registration Act 2002, sched 8, para 5(1)(a).

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Forgery of the Register under the Land Registration Act 2002 27 or where R1’s intention to transfer the registered estate to R2 was vitiated by a fundamental mistake.7 It would apply also where the donee of a power of attorney granted by R1 exceeded his authority under the power and none of the relevant statutory protections under the Powers of Attorney Act 1971 applied to protect the title of R2.8 In all these instances, however, R2 is more likely to be innocent, so the exemption for the honest proprietor in possession would often protect him from an application for rectification.

I . R 1 ’ S CLAIM FOR ALERATION OF THE REGISTER AGAINST R 2

It will be assumed in this section that a forger, R2, forges the transfer of the registered estate from the original proprietor, R1, to himself. After R2 has been registered as the new proprietor of the estate, R1 applies to the court or the registrar to have the register altered so that R2’s name may be removed from the proprietorship register and his own name replaced. On these facts, the register would be altered against R2 irrespective of whether he was in possession of the land.9 The relevant ground of alteration would be to correct the mistake which was made in registering R2 as the proprietor of the estate.10 The reasoning to explain this conclusion depends on the fact that the purported transfer of the estate made by the forgery was a nullity. It was not a disposition of the registered estate. It was not a real exercise by R1 of his owner’s powers of disposition which were conferred on him through his status as the registered proprietor.11 Since the transaction was not a disposition of the registered estate, it was not one which section 27 of the Land Registration Act 2002 required to be completed by registration.12 The registrar was therefore mistaken in recording the supposed disposition on the register as having had any effect.13 7 Eg, Shogun Finance Ltd v Hudson [2004] 1 AC 919 (effect of mistake of identity in formation of hire purchase contract); see generally D Fox “The Transfer of Legal Title to Money” [1996] Restitution LR 60. 8 See generally RB Roper et al, Ruoff and Roper, Law and Practice of Registered Conveyancing (Sweet & Maxwell, London, 2003) para 13.007.02–05. 9 Alteration of the register will not in general be ordered against a registered proprietor in possession of land without his consent, except where he has caused or substantially contributed to the mistake by his own fraud or lack of proper care. The exception would apply where R2 forged the transfer to himself and was in possession of the land: Land Registration Act 2002, sched 4, para 2(2)(a), 6(2)(a). 10 Above, sched 4, para 2(1)(a), 5(a). 11 Above, s 23. 12 Above, s 27(2)(a). 13 It is not strictly the forgery which is the “mistake” referred to as the ground of alteration. Rather the relevant mistake is in registering the effect of a transaction which was not in fact a registrable disposition of a registered estate. Cf E Cooke, above, n 2, at pp 126–27. The analysis of alteration of the register following from a disposition void for forgery is different from that which applies where the disposition is merely voidable for fraud, as in Norwich and Peterborough Building Society v Steed [1993] Ch 116. In that case, the disposition is valid until R1 rescinds it. There would therefore be no mistake in registering it. The relevant ground of alteration of the register would be to give effect to an interest which was excepted from registration, that is, R1’s unregistered equity to rescind

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28 David Fox At first sight, it may seem that the effect of altering the register against R2 is to produce the same outcome as would have happened according to the principles of unregistered conveyancing. In that system, R1 would have retained his legal title to the estate throughout the entire transaction, because he could not have been divested of it under the forged transfer between himself and R2. However, the analogy with unregistered conveyancing is not necessary to explain why the register can be altered against R2. The independent principles of registered conveyancing—and in particular, the notion of a mistake—are sufficient to explain the outcome.14 The principles of the general law are only relevant so far as they determine whether there has been an effective disposition of the registered estate which would attract the requirement of registration in section 27 of the Act. It should be added that the priority rule in section 29 of the Act is fully consistent with this conclusion. In the standard case which is considered here, R2 will have given no consideration which would attract the more favourable rule of priority protection in section 29 of the Act. Even in a case where R2 was an innocent beneficiary of a transaction made by a forger, R2 could not claim to take the estate free of R1’s claim to alteration against him. Even though the purported disposition to R2 would have been registered, the priority of R1’s alteration claim over R2’s title to the registered estate would be preserved. The rule in section 29, which postpones the priority of an interest affecting a registered estate when the disposition of the registered estate is registered and made for valuable consideration, can only apply when the registered estate is the subject of a valid disposition. When the purported transfer between R1 and R2 is merely a forgery there is no disposition of the estate which could cause the priority rule in section 29 to have any effect. This example shows that the priority rule in section 29 assumes the normal operation of the rules on alteration.

II . THE LIABILITY OF R 3 TO R 1 ’ S CLAIM FOR ALTERATION

Although R2’s title would be vulnerable to an application for alteration of the register, it would be rare that R3’s title would be vulnerable in the same way. Apart from some exceptional circumstances, R1 might only be able to alter the register against R3 if the transfer of the registered estate from R2 to R3 were not made for valuable consideration, or if R1 protected the priority of his claim to alter the register in one of the ways specified in section 29 of the Land

the transfer for fraud: Land Registration Act 2002, sched 4, 2(1)(c). See generally, RB Roper et al, Ruoff and Roper, Law and Practice of Registered Conveyancing (Sweet & Maxwell, London, 2003), paras 46.037–46.040. 14 HM Land Registry and Law Commission, “Land Registration for the Twenty-First Century” (Law Com No 254), para 8.38.

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Forgery of the Register under the Land Registration Act 2002 29 Registration Act 2002. R1 would need to have protected the priority of his claim by entry of a notice or by remaining in actual occupation of the land. It is necessary first to establish why the regime for alteration of the register cannot generally apply to R3, however vulnerable to alteration the title of R2 may be. Section 58 of the Act provides that the legal estate is deemed to be vested in R2 even though it would not otherwise have vested in him owing to the invalidity of the forged transfer between R1 and himself. This provision gives effect to the fundamental principle of registered conveyancing that a person’s title to registered land depends on the fact of registration, not the validity of any disposition which that entry in the register may record. Once registered in this way, R2 takes advantage of the effect of section 23 of the Act, which confers upon him full owner’s powers of disposition over the estate. Accordingly, R2 has the legal capacity to transfer the registered estate to R3. His powers of disposition remain unqualified so long as his registration as proprietor remains effective. It cannot be said therefore that the transfer to R3 is a nullity in the same way as the forged transfer between R1 and himself was. Equally, when the registrar registers the transfer to R3 it cannot be said that the registration of R3 of proprietor is a mistake. The entry accurately records the effect of a valid disposition between R2 and R3. The entry of R3 as registered proprietor cannot become a mistake retroactively since the correctness or not of the entry made in the register must be determined on the facts as they were at the time when the entry was actually made.15 There can be no argument that the effect of altering the register against R2 would have been retroactively to remove R2’s powers to make a valid transfer of the estate to R3. The intention of the Act was that any alteration of the register should operate prospectively.16 It cannot be deemed to have operated retroactively so as to deprive R2 of powers of disposition which he actually had at the time when he transferred the estate to R3. For all these reasons, therefore, there can be no ground for argument that the entry of R3 as the proprietor of the estate was a mistake which R1 could apply to have altered. This outcome shows how far removed from the principles of unregistered conveyancing the alteration regime in the 2002 Act has shifted. In explaining whether or not R3’s title is defeasible by R1, the priority rule nemo dat quod non habet has no part to play. In unregistered conveyancing, R3’s title to the land would have been void and, provided that the relevant limitation period had not passed, R1 would have had an action to recover the land from him. For all relevant purposes, the combined effect of sections 23 and 58 of the Act is to give R2 full powers of disposition which are binding even on R1. Naturally, the result under the 2002 Act seems harsh on R1. He loses all title to his land, and with that any right to recover possession of it. However, he would not be left completely without a remedy. Apart from any action he might 15 HM Land Registry and Law Commission, “Land Registration for the Twenty-First Century”, Law Com No 271, para 10.7. 16 Land Registration Act 2002, sched 4, para 8.

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30 David Fox have against R2 for fraud, he would be prima facie entitled to an indemnity from the registrar corresponding to the value of his estate at the time when the forgery to R2 was mistakenly registered.17 The relevant ground of his indemnity would be that there had been “a mistake whose correction would involve rectification of the register”.18 The relevant mistake was the entry of R2 as registered proprietor of the estate. This could no longer be corrected owing to the transfer of the land from R2 to R3. Nonetheless, it would still support a claim to an indemnity, provided that the claimant brought it within the limitation period. Time would begin to run, at the earliest, from when R1 should have discovered the forgery to R2.19

Right to alteration as a proprietary interest Are there any exceptions to this outcome? The most obvious one appears in the decision of the Court of Appeal in Malory Enterprises Ltd v Cheshire Homes Ltd20 which recognised the proprietary status of a statutory right to rectify the register under the former Land Registration Act 1925. Although, in my view, the decision is not sound in all respects,21 its reasoning in this point would still have a place under the 2002 Act. The claimant and original registered proprietor of a plot of development land, Malory BVI, was the victim of a forgery. A company was dishonestly set up with the name Malory Enterprises UK Ltd. By deception it obtained a new land certificate in which the name of the registered proprietor was recorded as “Malory Enterprises Ltd”. The company then sold and executed a transfer of the land to the defendant, Cheshire Homes Ltd. The claimant was successful in its application under section 82 of the 1925 Act to have the proprietorship register rectified so that it would again appear as the registered proprietor of the land. Significantly for present purposes, the Court of Appeal held that the claimant’s right to seek rectification of the register was proprietary in character so that it could amount to an overriding interest under section 70(1) of the 1925 Act. Since the claimant remained in actual occupation of the land throughout the whole sequence of events, the registered transferees, Cheshire, took subject to their right and rectification could be ordered against them. If anything, the conclusion of the Court of Appeal on this point has been affirmed by the Land Registration Act 2002 which provides that a mere equity is capable of binding successors in title from the time that it arises. This affirms its proprietary effect.22 17 18 19 20 21 22

Above, sched 8, para 6(b). Above, sched 8, para 1(b). Above, sched 8, para 8. [2002] Ch 216. For criticism, see text accompanying n 47 below. Land Registration Act 2002, s 116(b).

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Forgery of the Register under the Land Registration Act 2002 31 The holding that a right to rectification is an interest in land would be relevant to claims for rectification against a transferee in the position of R3. It would mean that although there was no mistake in the registration of R3 as proprietor of the land, the right would be enforceable against him provided that its priority was preserved over the transfer of the registered estate from R2 to R3. With a transfer of the registered estate other than for valuable consideration, the priority of R1’s right to rectify against R2 would be preserved. This follows from the basic rule of priority provided in section 28 of the Act that a disposition of registered estate does not affect the priority of an interest affecting it. If, as would be more common, the transfer to R3 was registered and made for valuable consideration, then R1 would need to take positive steps to protect the priority of his right to alteration. This follows from the modified priority rule in section 29 applying to dispositions of that sort. R1 would enter a unilateral notice of his claim.23 Alternatively, its priority would be protected if he remained in actual occupation of the land, as happened in Malory Enterprises.24 Another possibility would be for him to apply to the registrar to enter a restriction on R2’s powers of disposition as soon as he discovered that a forgery had taken place.25 In any event, the effect would be that R1 would be successful in his application for alteration against R3. The question is then, whether R3 would be entitled to claim an indemnity from the registrar. The answer is not straightforward. The better view is, however, that he should be entitled to an indemnity, though it is likely to be greatly reduced in amount to reflect his contributory fault. The reason for doubt depends on the technical definition of “rectification” applied in the Act. “Rectification” in its strict statutory sense is an alteration which corrects a mistake and which prejudicially affects the title of the registered proprietor.26 The right to an indemnity only arises where there is rectification in this strict sense, or the correction of any mistake which would amount to rectification if it were actually made.27 Typically, where the register is altered to give effect to an unregistered interest which overrides the 23

Land Registration Act 2002, ss 32, 35. Above, sched 3, para 3. In principle, the explanation of the right to rectify as an interest in land could also be applied to R2, but it would be unhelpful to do so. Suppose that R2 became the registered proprietor in land under void transfer made by a third party forger where R2 was duped into paying valuable consideration to the forger. Suppose also that R1 had remained in actual occupation throughout. R1 could rectify against R2. But R1’s occupation of the land would be coincidental to ensuring this result. He would claim on the straightforward statutory ground that the registration of R3 as proprietor was a mistake: Land Registration Act 2002, sched 4, para, 2(1)(a). It is only necessary to rely on the proprietary status of the right to rectify––and hence on the rules which might protect its priority––when the claim to rectify is being enforced against a third person who was not a direct party to the original transaction that led to the mistaken registration of R2 as proprietor. 25 Land Registry Practice Guide, “Rectification and Indemnity”, at 3. 26 Land Registration Act 2002, sched 4, para 1. 27 Above, sched 8, para 1(1)(a)–(b). 24

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32 David Fox disposition to the current registered proprietor of the estate, then the alteration would not amount to rectification. The alteration would not prejudicially affect the title of the registered proprietor, since it would merely reflect the fact that his title was already subject to that interest. If anything, the relevant ground would be to bring the register up to date or to record the effect of an interest which was excepted from the effect of registration.28 Re Chowood Ltd v Lyall (No 2),29 decided under the Land Registration Act 1925, provides a relevant analogy which would support this first interpretation. In that case, the Court of Appeal held that the register could be altered against the plaintiffs who were the first registered proprietors of a parcel of land along an uncertain boundary line. Long before the plaintiffs had become the first registered proprietors of the land, the defendant had established a good title to it by adverse possession. The defendant’s possessory title would have overridden the plaintiff’s registered title.30 When the court ordered that the register should be altered against the registered proprietors, it was not requiring “rectification” in the modern statutory sense, since it was simply giving effect to an interest which already had priority over the registered estate. In the sequel to the case, Re Chowood’s Registered Land,31 Clauson J held that the registered proprietors were not entitled to an indemnity when the register was altered against them. Their loss resulted from the fact that they had acquired an estate which was subject to the defendant’s better possessory title. It did not result from the alteration of the register against them. In my view, however, this analogy is not conclusive against allowing R3 to claim an indemnity when the register is rectified against him. This is because the very interest subject to which R3 takes the land is R1’s proprietary entitlement to rectification. It would be strange if the right to rectification when enforceable against R2 would confer a prima facie right to an indemnity on R2, but it would not confer a similar right on R3 when it was enforced against him. In each case, the claimant relies on the same mistake generating a right to rectification in R1 as the cause of his loss. It is not enough simply to say that the real loss suffered by R3 results from his having taken the estate subject to R1’s interest and treat R1 as if he were in the same position as the squatter with the overriding possessory title in Re Chowood Ltd v Lyall (No 2). The distinction is that the very interest affecting R3’s title is R1’s claim to rectification. It can justifiably be said therefore that the rectification is the cause of R3’s loss, not simply the fact that he has taken the estate subject to some unspecified interest of R1. At this point, one possible cause of misunderstanding should be raised and put aside. The Act provides that a registered proprietor of an estate claiming in good faith under a forged disposition is, where the register is rectified, to be 28 29 30 31

Land Registration Act 2002, sched 4, para 2(1)(b),(c). [1930] 2 Ch 156. Land Registration Act 1925, s 70(1)(f). [1933] Ch 583.

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Forgery of the Register under the Land Registration Act 2002 33 regarded as having suffered loss by reason of the rectification as if the disposition had not been forged.32 This merely aims to clarify that the registered proprietor can still be treated as having suffered loss even though he might not have been the proprietor of the estate had he not been registered as such. In other words, there can be no argument that the registered proprietor has suffered no loss through the rectification since he claimed through a forgery which could have conferred no title on him in any event.33 The provision cannot be used to argue that R3 would be entitled to an indemnity when the register is rectified against him, irrespective of whether R1 had protected the priority of his claim to rectification. First, the provision is intended to refer to a registered proprietor in R2’s position, not a remote disponee in the position of R3. R3 does not “claim under a forged disposition”. He derives his title under a valid exercise of R2’s powers of disposition as registered proprietor, albeit one that was open to being nullified if R1 protected the priority of his claim to rectify the register. To treat R3 as if he claimed under the forged disposition between R1 and R2 would be to re-introduce the nemo dat rule into registered conveyancing. This would undermine the fundamental objective of the land registration scheme that the fact of registration constitutes a proprietor’s title to a registered estate, not the chain of conveyances through which that estate has passed to the registered proprietor.34 Secondly, the provision contemplates that the registered proprietor is only entitled to an indemnity if the register is first rectified against him. Unless, R1 has taken steps to protect the priority of his claim to rectify the original mistaken entry of R2 as proprietor, there can be no independent ground of rectification arising in R1’s favour arising out of the disposition between R2 and R3. The provision cannot be used to argue that R3 has a right to an indemnity irrespective of whether R1 had any claim to rectification enforceable against him. In assessing the amount of indemnity to which R3 would be prima facie entitled after the loss of his registered estate, the court would consider the value of the estate in the land immediately before rectification but make the assumption that there would be no rectification ordered against him.35 In that way, the present value of R3’s estate would not be discounted by the risk that it would be lost to him through rectification. Having said that, the amount of the indemnity which R3 could claim from the registrar would be substantially reduced to

32

Land Registration Act 2002, sched 8, para 1(2)(b). See Law Com No 271, para 10.31. One of the concerns that led to the formulation of the grounds of alteration in the Land Registration Act 2002 was that the former provisions under the 1925 Act were being interpreted in a way that made a person’s right to rectification depend on the principles of unregistered conveyancing. See RJ Smith, ‘Rectification of Registered Titles’ (1993) 109 LQR 187; and Law Commission and HM Land Registry, “Land Registration for the Twenty-First Century: a Consultative Document” (Law Com No 254) at 187–88. 35 Land Registration Act 2002, sched 8, para 6(a). 33 34

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34 David Fox reflect his lack of care.36 He would have been negligent in taking a disposition of property where R1 had protected the priority of his right to rectification by actual occupation, or, still more, by entering a notice against the registered estate. This would require the court or adjudicator to put some value on R3’s failure to take care to make himself aware of R1’s reasonably discoverable occupation of the relevant land.37

R1’s interest under a constructive trust A second analysis could be adopted to explain R1’s right to have the register altered against R3. It depends on the argument that R1 has an equitable interest in the land under a constructive trust, the priority of which may be preserved over the transfer of the registered estate from R2 to R3. It is considered here because it also provides the foundation for R1’s possible personal claim against R3, which is considered in the following section.38 In Westdeutsche Landesbank Girozentrale v Islington LBC39 Lord BrowneWilkinson said obiter that a thief who steals property holds it on constructive trust for his victim. The thief’s fraud in obtaining the property wholly without the victim’s consent generates in him a distinct equitable title to the property in the thief’s hands. Accordingly, the property is recoverable and traceable in equity. Similar reasoning may apply where the R2 forges the transfer of the registered estate from R1 to himself. It would be different, however, if the forger caused the registered land to be transferred to an innocent transferee. The transferee would not hold on constructive trust since his conscience would not be affected in the same way as where the forger himself was the transferee.40 R1’s equitable interest under the constructive trust would be vulnerable to being subordinated in priority when R2 makes the transfer to R3 so that R3 would effectively take free of it. The effect of the relevant rules of priority has already been set out in the context of the priority of R1’s right to alteration of the register.41 There are two differences, however, between the protection of the priority of R1’s interest under the constructive trust and his proprietary right to have the register altered. First, R1 could not protect the priority of his interest under the trust by entry of a notice.42 A restriction limiting R2’s powers of 36 Above, sched 8, para 5(2). If the registered transfer from R2 to R3 were not made for valuable consideration, then R3 would be barred from claiming any indemnity at all: above, sched 8, para 5(1), (3). He would effectively be treated as standing in R2’s shoes. 37 In a case where R1’s occupation was not reasonably discoverable, it would typically be unnecessary to consider whether R3 was guilty of any contributory fault. The priority of R1’s claim to alteration would be lost in those circumstances: above, s 29(2)(a)(ii), sched 3, para 2(c). 38 See section III below. 39 [1996] AC 669, 715–16, and the authorities there cited. 40 Above, 705 per Lord Browne-Wilkinson. 41 See text accompanying n 23 above. 42 Land Registration Act 2002, s 33(a)(i).

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Forgery of the Register under the Land Registration Act 2002 35 disposition over the registered estate would effectively protect his claim to recover the registered estate against any disposition of it. Secondly, since R2 would be a trustee of the registered estate, it would be necessary to consider whether R1’s interest would be overreached by the transfer of the registered estate to R3. Provided that R2 was the sole proprietor of the registered estate, he could not overreach R1’s interest under the trust.43 If R2 forged the transfer of the registered estate to himself and another as joint proprietors then they could overreach R1’s interest when they transferred the estate to R3. This would be case even though the transfer to R3 would be in breach of the bare trust under which they held the registered estate for R1. As registered legal proprietors holding the registered estate without any restriction entered on the register to limit their equitable powers of disposition, they would have full powers to enter into an overreaching transfer of the registered estate to R3.44 Assuming that R1 protected the priority of his interest under the constructive trust, then he could enforce it against R3. The enforcement of the trust would eventually lead to the R1 being restored as proprietor of the registered estate. Since R3 would hold the registered estate as a bare legal trustee for R1, he would be subject a duty under Saunders v Vautier to convey the registered estate according to R1’s directions.45 If a court ordered him to do so, then the transfer back to R1 would take effect as a registrable disposition of the estate. R3 would have no right to claim an indemnity. Any loss he suffered would not result from any rectification of the register, where rectification is used in its strict statutory meaning of correcting a mistake.46 Before leaving this second analysis of R3’s proprietary liability to R1, one other aspect of the reasoning in Malory Enterprises Ltd v Cheshire Homes Ltd.47 must be considered. In that case, the Court of Appeal found that the claimant had two grounds for its claim to have the register altered against the party who took the property under the forged transfer. The first, which has been considered, was that the claimant’s right to rectification was an interest in land, which could be enforced against the forger’s successor in title. The second was that the claimant retained throughout the beneficial interest in the land since he was not effectively divested of it by the forged transfer to the defendant. The Court of Appeal held that the effect of section 69 of the Land Registration Act 1925 in vesting the registered estate in the registered proprietor was only to confer on him a bare legal title to the estate. A valid conveyance was needed to make the beneficial interest vest in him.48

43

Law of Property Act 1925, ss 2(1)(ii); 27(2). Land Registration Act 2002, ss 23(1), 26. 45 (1845) 4 Beav 115, affd (1845) Cr & Ph 240; Underhill and Hayton, Law Relating to Trusts and Trustees, 16th edn, by DJ Hayton (Butterworths, London) at 57–58. 46 Land Registration Act 2002, sched 4, para 1 and see text accompanying n 26 above. 47 [2002] Ch 216. 48 Above, 232 per Arden LJ. 44

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36 David Fox This second ground may seem very similar to the reasoning based on the constructive trust arising from fraud, which Lord Browne-Wilkinson explained in Westdeutsche Landesbank Girozentrale v Islington LBC. It is, however, different, and, whether or not it was a correct interpretation of the 1925 Act, it should have no place under the 2002 Act. The Court of Appeal in Malory formed its second reason for decision from a comparison between sections 20 and 69(1) of the 1925 Act.49 Section 20 describes the extent of the rights of a registered proprietor after a disposition of the estate. That person is expressed to have “an estate in fee simple in possession in the land, together with all rights, privileges, and appurtenances belonging or appurtenant thereto”. Section 69(1) expresses the effect of registering the party to the conveyance as proprietor of the land: “The proprietor of land . . . shall be deemed to have vested in him without any conveyance, where the registered land is freehold, the legal estate in fee simple in possession”. From this difference in wording the Court of Appeal concluded that registration only vested the bare legal estate in the registered proprietor. A valid disposition was needed to divest the transferor of his beneficial title to the land. Necessarily, therefore, the effect of a void conveyance was to make the transferee, as new registered proprietor, a trustee to the former proprietor. It would follow—though this point was not mentioned by the Court of Appeal—that the former proprietor could exercise his rights as the beneficiary of a bare trust under Saunders v Vautier 50 to require the transferee to reconvey the land to him. He could in this way circumvent the usual statutory protections which limit a person’s right to have the register rectified against the registered proprietor. The better view is that the registration of a person as the legal proprietor of an estate will, of itself, vest the entire beneficial ownership in him as an incident of that estate. This should be true unless there is some specific reason why the jurisdiction of equity should be invoked to split the beneficial ownership from the legal estate and vest it in some other person under an express, resulting or constructive trust of the estate. One such reason would be the fraud which gave rise to a trust of the kind explained by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC. But absent such a reason, it should be assumed in registered land, as it is in all other kinds of property, that the person who has the legal interest in property generally also has the beneficial interest in it. A person who is the undivided legal and beneficial owner of property has no separate equitable interest in it, since he may rely entirely on his legal title to the property to protect his rights.51 It is unnecessary to suppose therefore that 49 For a detailed analysis on which this account draws, see C Harpum, “Registered Land––A Law Unto Itself” in J Getzler (ed), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Butterworths/LexisNexis, London, 2004). For further criticism of Malory see E Cooke, above, n 2 at 116–21. 50 (1845) 4 Beav 115, affd (1845) Cr & Ph 240. 51 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 706 per Lord BrowneWilkinson and the authorities there cited, including Vandervell v IRC [1967] 2 AC 291, 311 per Lord Upjohn; 317 per Lord Donovan.

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Forgery of the Register under the Land Registration Act 2002 37 a valid transfer is needed to vest the beneficial ownership in the new registered proprietor of the estate. Indeed, it is positively incorrect to assume that the effect of a void disposition is somehow to cause the former proprietor of the estate to “retain” his equitable interest in the property. He has no such interest to retain. That argument has been authoritatively rejected by the House of Lords in an analogous context. In Westdeutsche Landesbank Girozentrale v Islington LBC.52 Lord Browne-Wilkinson held that when a person’s intention to transfer money was vitiated by mistake, the effect could not be to cause the payer to retain his equitable title. The same must also be true of a forgery where there is a total absence of intent by the victim to transfer the relevant property to the beneficiary of the forgery. Westdeutsche Landesbank Girozentrale v Islington LBC also cast doubt on the argument that “absence of consideration”, in the sense of absence of a valid transactional basis, would generate a fresh equitable proprietary interest under a trust.53 Aside from these points of general principle, there are no provisions in the 2002 Act whose wording could be said to be clear enough to support the same interpretation as the Court of Appeal in Malory imposed on sections 20 and 69(1) of the1925 Act.54 Sections 28 and 29(1) of the 2002 Act explain the effect of a disposition of a registered estate on the priority of interests affecting it. Section 58 confirms that registration as proprietor of a registered estate or charge has the effect of making him the proprietor of it, irrespective of whether it would otherwise be vested in him. In my view, there is no clear difference in the wording between them which would support the distinction accepted in Malory, particularly when read against the background of the general law principles for the recognition of distinct equitable interests in property. Rejection of the reasoning in Malory would better uphold the statutory scheme of rectification and indemnity under the 2002 Act and, in that way, better promote the policy of indefeasibility of title. If the reasoning in Malory were applied to that Act, then the former proprietor, R1, would could call for a reconveyance of the legal estate to him from R2 by exercising his Saunders v Vautier rights as sole beneficiary of a bare trust absolutely entitled to the legal estate. R1 could circumvent the proper statutory scheme for rectification. In these circumstances, R2 could have no claim to an indemnity since the reconveyance would not be founded on any correction of a mistake in the register.55 The statutory limits on rectification which protect the title of the honest registered proprietor in possession would not apply.56 Now in the case where 52 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 714 per Lord BrowneWilkinson rejecting the reasoning of Goulding J in Chase Manhattan Bank NV v Israel-British Bank (London) Ltd [1981] Ch 105. 53 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 683 per Lord Goff; 709, 714–15 per Lord Browne-Wilkinson. 54 For a full analysis see C Harpum, n 49 above. 55 Land Registration Act 2002, sched 4, para 19(a), sched 8, para 1(1)(a). 56 Above, sched 4, para 2(3).

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38 David Fox R2 is himself the dishonest forger, enforcement of the bare trust by reconveyance would not produce any result different from that under the Act. The protection for a proprietor in possession is not available to a registered proprietor whose fraud caused the mistaken registration,57 nor would he be entitled to claim any indemnity for the loss of his estate by rectification.58 But in a case where R2 was the innocent beneficiary of another person’s forgery, then the result might be completely different from that which would have obtained under the statutory procedure for rectification of the register. If R2 were an honest proprietor in possession of the land, even though as the result of a mistake, then he could resist R1’s application for rectification against him. If, however, R1 enforced his rights under the Malory trust against R2, then he would not only lose possession of the land but have no claim to an indemnity from the registrar. The Malory trust would have defeated the statutory scheme of indefeasibility that was intended for the benefit of proprietors in his position. No system of title registration any Commonwealth country leaves the title of the registered proprietor so conspicuously vulnerable.59 It should be noted that an analysis depending on a constructive trust arising under Westdeutsche Landesbank Girozentrale v Islington LBC to reverse the consequences of fraud would not disrupt the statutory scheme of indefeasibility in the same way. If R2 himself were the fraudulent forger, then his registration as proprietor would be open to rectification and he might be required to reconvey the estate under Saunders v Vautier. If, however, R2 were the innocent beneficiary of another person’s fraud, then he would not hold the land on constructive trust. His conscience would be unaffected by that person’s fraud.60 Accordingly, R1 could not require him to re-convey the legal estate, nor could he succeed in an application to rectify the register against him. It will be seen therefore that the circumstances where a Westdeutsche trust could enforced against a registered proprietor would coincide with those where an application for rectification under the Act would be allowed.

III . THE LIABILITY OF R 3 TO R 1

If R3 is generally immune to R1’s application to alter the register against him, the question arises whether he can be personally liable as a constructive trustee to R1 under the constructive trust which arose because of R2’s conduct. The grounds of R3’s possible liability are various, all depending to some degree on the wrongfulness or unconscionability of R3’s conduct as against R1

57 58 59 60

Above, sched 4, para 2(3)(2). Above, sched 8, para 5(1)(a). See O’Connor, above, n 2 at 91–92. See text accompanying n 39 above.

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Forgery of the Register under the Land Registration Act 2002 39 in becoming the registered proprietor of the estate.61 This paper concentrates on R3’s personal liability in knowing receipt of the legal estate subject to the beneficial interest of R1, which arose when the Westdeutsche constructive trust was imposed upon it in response to R2’s fraud. In that sense, R3’s personal liability depends on his being the equitable successor in title of R2, rather than on the effect of his own conduct in generating a fresh equitable interest in R1. The view advanced in this section is that R3 generally could not incur liability in knowing receipt, unless he knew enough of the forgery to make it unconscionable for him to retain the benefit of the transfer. Also, if the transfer to him were registered and made for valuable consideration then R3 could not be made personally liable under this head unless R1 had protected the priority of his equitable interest over the disposition. Knowing receipt is a form of equitable personal liability under which the defendant is made liable to account for the value of misapplied property which he receives and to which the claimant has a subsisting equitable title. The liability is personal in the sense that it fixes on the defendant when he receives the claimant’s property. It does not depend on the defendant’s having retained the identifiable proceeds of the property. In this way it is separate from any concurrent proprietary claim that the claimant may have, such as a right to have the register altered against the defendant or to obtain an order to have the legal estate re-conveyed by exercising his rights under Saunders v Vautier. The defendant’s liability depends on the claimant proving that he knew enough of the facts to make it unconscionable for him to retain the benefit of the transfer to him.62 Treated more generally, the claimant’s remedy against the defendant would be categorised as restitutionary in that he is made liable for the gain that accrues from the transfer of the property to him.63 Knowing receipt is more common in cases where the defendant receives misapplied trust money from a trustee. There is, however, no reason why it should not apply to other kinds of property such as an estate in land. Indeed, one of the leading English cases on the subject involved an unauthorised transfer of chattels from a settlement,64 and there are many cases decided in the United States where the transferee was made liable for receiving property other than money.65 Although the receipt of non-money benefits does not always trigger restitutionary liability for unjust enrichment because it is open to the recipient subjectively 61 See text accompanying n 80 below. In its consultative document which preceded the Land Registration Act 2002, the Law Commission left open the possibility that a proprietor of land might incur some personal liability to a former proprietor. It gave the example of a transfer of land in breach of trust to a person who knew or had notice of the breach. See Law Commission, “Land Registration for the Twenty First Century” (Law Com No 254), para 3.48. 62 BCCI (Overseas) Ltd v Akindele [2001] Ch 437. 63 Beyond that, it is a debateable question whether the defendant’s restititionary liability arises to reverse what would otherwise be unjust enrichment, to enforce the claimant’s subsisting equitable title to the property, or in response to the defendant’s wrongful participation in the transferor’s wrong. 64 Re Montagu’s ST [1987] Ch 264. 65 See the authorities gathered in Scott on Trusts at para 291.2.

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40 David Fox to devalue the benefit which he receives,66 this possibility would rarely be a problem in cases where a transferee takes a disposition of an estate in land. By consenting to the transfer of the land, he would be taken to have freely accepted it as a benefit. He would be barred from making any argument based on subjective devaluation. It could be practically important to R1 to establish R3’s personal liability in knowing receipt. It would allow R3 to remain liable to R1 even after he had transferred the estate to a new registered proprietor who took free from R1’s proprietary claim to have the registered altered against him. The circumstances in which this might happen are explained below.67 In that case, the continuing liability of R3 to R1 would provide an important alternative to the proprietary claim which would have been barred.

The conditions to R3’s personal liability in knowing receipt Turning to a transfer of an estate by R2 to R3, R1 could only make R3 liable for knowing receipt if he proved that R3 knew enough about the initial forgery for it to be unconscionable for him to retain the benefit of the transfer to himself. R3’s receipt would have to be unconscionable even if the estate were transferred to him for no consideration. This is because R1’s personal claims against R3 based on constructive trusteeship are more extensive than the simple enforcement of his proprietary interest against R3’s registered legal estate.68 A donee is not a constructive trustee, in the sense that he owes a continuing personal liability to account to R1 for the value of the property received, simply because he took the property in circumstances where it is subject to an existing trust.69 Whether R3’s receipt would be unconscionable would be a question of fact and evaluation, varying with each case. Nonetheless, a few general observations may be made. Nothing in the requirement of unconscionability should be taken as reintroducing the requirement of strict constructive notice into the transaction. To impose a routine obligation to make inquiries on a transferee of a registered estate would undermine the aims of the land registration system. In general, the doctrine of notice has no place in determining the priority of interests in registered land.70 So far as possible, the transferee should be able to rely on the register as a complete indication of the state of the transferor’s title to the land. 66 PBH Birks, Introduction to the Law of Restitution, revised edn (Clarendon Press, Oxford, 1989), pp 109–16; Goff and Jones, Law of Restitution, 6th edn (Sweet & Maxwell, London 2002) pp 30–32. 67 See text accompanying n 74 below. 68 See Re Montagu’s ST [1987] Ch 264, 272–73 per Megarry V-C. 69 Westdeutsche Landesbank Girozentrale v Islington LBC 669, 707 per Lord Browne-Wilkinson. 70 See Law Com No 254, paras 3.44–3.47. The only exceptions where notice is relevant in dispositions of registered land are in determining the binding effect of statutory charges for unpaid inheritance tax and the priority of petitions in bankruptcy or bankruptcy orders: Land Registration Act 2002, ss 31, 86(1).

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Forgery of the Register under the Land Registration Act 2002 41 In my view, there are good reasons why the same principle should be adhered to in determining whether the transferee should incur any equitable liability in knowing receipt as a result of the transfer. A system which made notice irrelevant to the enforcement of a proprietary claim to land but which allowed it full rein in determining the personal liability of the proprietor would mean that any routine purchaser of land would still have to make inquiries into the title of his vendor. The risk of incurring liability in knowing receipt arising from the transfer might have the same inhibiting effect on transfers as that of incurring a proprietary liability.71 It would be necessary therefore to set the threshold of unconscionability so that it was sensitive to the legislative policy of minimising off-register inquiries in concluding land transactions. This implies a high standard of fault.72 In my view, R3 should not be liable for knowing receipt unless his conduct and knowledge in taking the transfer from R2 can be said to be dishonest. He would need to be implicated in R2’s forgery to the extent that his conduct could be said to fall below that of the ordinary, honest purchaser of registered land and that he realised it was dishonest in this way.73 However, a more formidable obstacle to R1’s knowing receipt claim against R3 would often present itself. This arises from the statutory rule of priority provided in section 29 of the Land Registration Act 2002. It is a condition of R3’s liability to R1 in knowing receipt that R1’s equitable interest continue to bind the legal estate until the registration of the transfer to R3.74 If the transfer were made for valuable consideration then the effect of registration of the transfer would be to postpone R1’s equitable interest to R3’s legal estate, unless R1 had positively protected its priority. Since he could not enter a unilateral notice against R2’s title to record the burden of the trust interest,75 the only way for him to protect its priority would be for him to have remained in actual occupation of the land at the time of the disposition to R3.76 Without this protection, R1’s interest affecting the legal estate would be extinguished for all practical purposes, and could not trigger any liability in knowing receipt.77 The problem 71 See generally D Fox, “Constructive Notice and Knowing Receipt” [1998] CLJ 391; and in relation to Torrens registration systems, M-A Hughson, M Neave and P O’Connor, “Reflections on the Mirror of Title” (1997) 21 Melbourne ULR 460 at 489–92. 72 An analogy exists for imposing a higher standard of fault set at dishonesty in certain knowing receipt cases. These are where a person receives money subject to an equitable claim in a so-called “commercial” payment transaction. Here it is accepted that the level of fault necessary to make the person’s receipt unconscionable must be greater than that of mere constructive notice because it would be commercially impracticable to impose routine duties on inquiry on a recipient in such a transaction. See for example Polly Peck plc v Nadir (No 2) [1992] 4 All ER 769. 73 Cf Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; Twinsectra Ltd v Yardley [2002] 2 AC 164. 74 See generally Underhill and Hayton, Law Relating to Trusts and Trustees, 16th edn, by DJ Hayton (Butterworths, London) at 968. 75 Land Registration Act 2002, ss 33, 35. 76 Cf Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] Ch 216. 77 Although, strictly, the priority of the trust interest would merely be postponed to R3’s registered estate, it would be extinguished for all practical purposes of priority against that estate. A subsequent disposition of the registered estate could not cause the trust interest to revive so that

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42 David Fox would remain even if the consideration which R3 paid were inadequate. It is inconceivable that the effect of the priority rule in section 29 was meant to depend on inquiries into the adequacy of the consideration which R3 paid.78 By contrast, if the transfer to R3 were not made for value, or if it merely took effect in equity because it was not registered, then the effect of the basic priority rule in section 28 of the Act would be to preserve the priority of R1’s equitable interest over the interest that R3 acquired by the transfer. R1 would not need to take any special steps to protect the priority of his interest. In relation to registered transfers for value, the outcome that R3 cannot be liable for knowing receipt unless R1 protects the priority of his interest goes to show how the priority rule in section 29 is wholly separate from of any question of good faith or unconscionable conduct on the part of R3. References to the transferee’s state of mind are conspicuously absent from the priority rules in the 2002 Act. The intention of the legislature seems to have been to avoid any of the spurious arguments and decisions that arose under earlier legislation which was expressed in terms of the party to the conveyance taking in good faith.79 The outcome is therefore that liability in knowing receipt based upon R3’s being the equitable successor in title to R2 as constructive trustee would be very rare indeed. The effect of the priority rules in the 2002 Act would typically be to exclude it even in cases where R3’s conduct could be characterised as unconscionable. The only remaining basis of R3’s liability might then be to bring the facts within those occasional instances where R3’s conduct causes him to incur a fresh liability as constructive trustee to R1. These are cases where R3’s liability is not triggered by the receipt of property in which R1 retains a surviving equitable interest but by his own wrong in seeking to defeat R1’s rights. In that sense, R3’s liability does not derive from the primary liability of R2 in causing the legal estate to be subject to an equitable interest in R1’s favour. The authorities are scanty so that it is difficult to generalise about when such a constructive trust would arise.80 But one possibility would be where R3 expressly agreed to take the land subject to R1’s claim against R2 and had the purchase price reduced accordingly.81 The breach of R3’s undertaking to honour R1’s claim it would again take priority over the estate. This follows from section 28 of the Land Registration Act 2002, which provides that the disposition of a registered estate does not affect the priority of an interest affecting it. See further Ruoff and Roper, Law and Practice of Registered Conveyancing (2003), para 15.039. 78 Cf Midland Bank Trust Co Ltd v Green [1981] AC 513 decided under the Land Charges Act 1972. The 2002 Act merely excludes nominal consideration and marriage consideration from the definition of consideration: s 132(1). 79 This was the clear intention of the Law Commission in its consultation paper, particularly in its criticism of Peffer v Rigg [1977] 1 WLR 285: Law Com No 254, para 3.46. 80 See S Bright, “The Third Party’s Conscience in Land Law” [2000] Conv 398. Many of the instances from other common law jurisdictions are gathered in K Gray and SF Gray, Elements of Land Law, 4th edn (Butterworths, London, 2005) 1215–21. This so-called “in personam” exception to indefeasibility is well developed in the Australian Torrens land registration systems; see AJ Bradbrook, SV MacCallum and AP Moore, Australian Real Property Law, 2nd edn (LBC Information Services, Sydney, 1997) paras 4.68–4.72. 81 Cf Binions v Evans [1972] Ch 359; Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044.

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Forgery of the Register under the Land Registration Act 2002 43 might be a fresh reason to impose a trust on him, although no trust previously bound the property. Without considering these instances in detail, it is enough to say that the standard of fault necessary to impose the trust on R3 should again be set high. As with the standard of unconscionability necessary to generate liability for knowing receipt, it would be necessary for his conduct at least to fall below the standard of the ordinary honest purchaser of registered land. This standard would again reflect the policy of minimising off-register inquiries in purchases of registered land and in preventing the doctrine of constructive notice from being surreptitiously re-introduced.

IV . CONCLUSION

The case of a forgery followed by a disposition to a third person illustrates starkly how strongly the Land Registration Act 2002 protects the indefeasibility of title of a registered proprietor. Unless the priority of R1’s claim to rectify the register after the forgery has been protected in one of the ways specified by the Act, then R1 loses all title to the estate. He cannot recover possession of it specifically. Apart from in the most exceptional cases, neither could he bring any personal action in knowing receipt against the new registered proprietor, R3. His only right is to a monetary indemnity from the registrar. The case of forgery also illustrates the extent to which the Land Registration Act 2002 operates according to a self-contained set of principles. Legal outcomes no longer depend on the principle of nemo dat quod non habet, as would have applied to the corresponding case in unregistered land. It illustrates the effect of the fundamental objective of the Act: a person in the position of R3 should be entitled to assume that the registration of R2 as proprietor is valid and that R2 has full powers to make an effective disposition to him.82

82

See Law Com No 271, para 1.5.

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3

Registration of Invalid Dispositions: Who Gets the Property? PAMELA O’CONNOR

I . INTRODUCTION

Under systems of registration of title to land, an unregistered instrument may pass an interest in equity, but legal title to a registrable interest is conferred only by registration. The instrument of disposition serves a different purpose than under unregistered conveyancing. Instead of passing title by its own force, it authorises the making of an entry in the register that will create or terminate an interest in land. It sometimes happens that the instrument has some defect that renders it void or voidable at law. For example, the instrument may bear the forged signature of the registered owner (O), or it may be that O lacks legal capacity to dispose of the interest, or is acting under a mutual or unilateral mistake of a kind that would invalidate the disposition under the general law.1 The disposition could also be void for breach of a mandatory statutory requirement, eg that it be made only with the approval of a regulatory authority,2 or that it comply with certain procedures.3 If the instrument or transaction is invalid for any reason, its registration is not duly authorised by law. Systems of registration of title are said to be “positive” systems, indicating that the register is not merely evidence of claims, but is authoritative or conclusive as 1 The common law regarded very few types of mistake as sufficiently fundamental to vitiate the intention to transfer title and render the transaction void. There is some authority that a mistake about the substance of what is being transferred will invalidate the transfer ab initio. See, eg, Associated Japanese Bank (International) Ltd v Credit du Nord (SA) [1989] 1 WLR 255 at 268 per Steyn J; C Rotherham, Proprietary Remedies in Context (Hart Publishing, Oxford, 2002) 126–28. 2 For example, a provision in industrial legislation required the approval of the industrial commission for a lease of premises to a person to conduct contract work of hairdressing for the lessor as principal. A contract entered into without the commission’s approval was void: Industrial Arbitration Act 1940 (NSW), s 88B, considered in Travinto Nominees Pty Ltd v Vlattas (1973) 129 CLR 1. (The purpose was to prevent principals of hairdressing business from avoiding their obligations to employees.) 3 For example, a provision that land cannot be subdivided without provision for the opening of a road, unless the lodged plan bore a special notation by the local authority (s 34(8) of the Local Government Act 1936 (Qld) (since repealed), considered in Benmar Properties Pty Ltd v Makucha [1996] 1 Qd R 578).

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46 Pamela O’Connor to the interests shown.4 The advantage of the positive system is that a purchaser can safely assume that, subject to known exceptions, the person shown on the register as the owner of an interest is indeed the legal owner. In a positive system, even an unauthorised registration is legally effective to create or terminate an interest, unless and until the register is rectified to restore title to the person previously entitled. If the purchaser registered the invalid disposition fraudulently or not in good faith, policy dictates that the register should be rectified to remove the entry. Determining what types of conduct should render his title defeasible is one of the more difficult legal problems in the design of land registration systems. This issue of the conduct standard is discussed elsewhere,5 and is not considered here. This chapter focuses on a different question. What should happen where the purchaser does not obtain his registered title fraudulently, or in breach of whatever conduct standard applies in any given land registration system? The law must provide an adjudication rule to determine which of the two innocent parties gets the disputed property interest—the prior registered owner (“O”), or the purchaser for value in good faith (“P1”). Either may have an entitlement to monetary compensation from a statutory indemnity scheme or a damages claim against a wrongdoer who caused the loss (such as a forger or imposter, or someone who has induced one or both parties to make a mistake in entering the transaction). The existence of a claim to compensation can reduce the pain for the loser, but does not avoid the need for an adjudication rule. In most cases, O wants her registered title restored free of P1’s interest, P1 wants to keep his registered interest, and it is not possible to satisfy both. The law must create a winner and a loser. The problem becomes more complicated where P1 disposes of an interest to a subsequent purchaser (“P2”). If O is to be permitted to rectify the register against P1, should she also be able to challenge the subsequent registered interest of P2, a purchaser for value without fraud? An owner whose registered title cannot be impugned for any defect or invalidity in the instrument or transaction is said to have an “indefeasible” title.6 In some countries the rule used to resolve third party disputes arising from an unauthorised registration is called an indefeasibility rule. The choice of 4 The distinction between positive and negative systems derives from Paul E Norman, Photogrammetry and the Cadastral Survey (Paul E Norman International Training Centre Series A No 33, Delft, The Netherlands, 1965). In negative systems the register merely evidences claims to interests in land, which are registered without guarantee or affirmation by the State. The distinction between positive and negative systems was formulated to overcome the difficulty of classifying particular systems as either title registration or deeds registration. 5 E Cooke and P O’Connor, “Purchaser Liability to Third Parties in the English Land Registration System: A Comparative Perspective” (2004) 120 LQR 640. 6 Some commentators object to the use of the term “indefeasible” in the context of UK land registration, because they associate it with particular rules of overseas systems. In the present context, it describes a registered estate or interest, the entry of which cannot without the owner’s consent be removed or altered so as to deprive him or her of the estate or interest by reason of a prior defect in title. It has been used in this sense by the Law Commission, see n 19 below.

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Registration of Invalid Dispositions: Who Gets the Property? 47 indefeasibility rule is a key distinguishing feature of the land registration systems of the world, for it measures the security of title that registration confers. This chapter compares three rules that are widely used in title registration systems in common law countries, although it is acknowledged that these by no means exhaust the range of options. The first approach examined is that used under the English Land Registration Act 2002. The second and third are used in the Torrens jurisdictions,7 and are respectively called “immediate indefeasibility” and “deferred indefeasibility”. Any of these rules can exist in either absolute or presumptive forms. In the presumptive form, the court has discretion to vary the rule in circumstances where it would cause undue hardship. The rule applies unless the court exercises its discretion in a particular case. In its absolute form, there is no discretion to relieve from the application of the rule. The presumptive form is intended to provide fairness in all cases; the absolute form to provide certainty for the market. The chapter starts by examining why the choice of an indefeasibility rule to adjudicate disputes arising from unauthorised registration presents a dilemma for the law. Then follows an analysis of the scope of and the justifications for each of the three rules used in the common law jurisdictions, and the extent of their international following. This leads into a comparative evaluation of the rules, with reference to economic theory and the extent to which the rules conform to general principles of law and fairness.

II . THE DILEMMA OF SECURITY

The choice of an adjudication rule to resolve disputes arising from unauthorised registration is perhaps the most vexed legal problem in land title registration systems. It presents a stark choice between two antithetical conceptions of security of title that Demogue called static and dynamic security.8 Demogue applied the term “static security” to rules that protect the interests of existing owners in a third party property dispute with purchasers. Static security is based on the idea that owners should not be deprived of their property by the act of another without their consent.9 This type of security is static in the sense that it preserves the existing allocation of property. The opposing principle, dynamic security, is so called because it provides an incentive to acquire assets for productive 7 This term is a broad historical category referring to the jurisdictions whose land title registration statute is derived, directly or indirectly, from Sir Robert Torrens’ Real Property Acts of 1858–61 (South Australia). These systems exist in the Caribbean, the Asia-Pacific, Africa, Western Canada, and some States of the USA: see generally, M Raff, Private Property and Environmental Responsibility (Kluwer, Amsterdam, 2003) 9. 8 R Demogue, “Security” in Fouillée et al (eds), Modern French Legal Philosophy (The Boston Book Co, Boston, 1916, (republished by Augustus M Kelley, New York, 1968)) ch XIII. 9 Above 428.

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48 Pamela O’Connor purposes. It protects the reasonable expectations of purchasers that they will acquire a title free of unknown prior claims and defects.10 Land title registration is established to promote both forms of security. It has long been said that the objects of the system are twofold: “security of title” and “ease of transaction”.11 The first object refers to making existing property rights secure, and is identical to static security. The second object is often expressed as being to facilitate the transfer of property rights, or to make conveyancing quicker, cheaper and easier, but these are merely the consequences of enhancing security of transfer and acquisition. If purchasers are unsure that they are dealing with the true owner and that nobody else can enforce a prior claim against them in respect of the land, they will expend time and resources on title investigations in an attempt to remove the insecurity. If the insecurity can be relieved by other means, the transaction costs of conveyancing will diminish. The second object of land title registration can therefore be reformulated as follows: to reduce transaction costs, and thereby to make conveyancing quicker, cheaper and easier, by providing dynamic security. Accordingly, the two objects of land title registration systems are in fact to provide static security and dynamic security. Both objects are essential to the enterprise of land title registration. For land assets to be used productively, existing owners must be sure that they will not be deprived of their property without their consent. Without static security, there would be little incentive to invest in improving land or bringing it into production. Purchasers need to be sure that the law will uphold their reasonable expectations that they are acquiring a sound title free of hidden claims. If they are to invest in the productive use of land, they need to be sure that no challenger will step forward in the future to assert a prior claim. Long after acquisition, purchasers and owners continue to require dynamic security. The dilemma for the law is that it is sometimes impossible to provide both forms of security when the rights of a prior owner conflict with those of a good faith purchaser. Land title registration systems use a combination of risk management strategies to reduce the incidence of such conflicts. The strategies include: generating publicity for interests so that conflicts of property rights are less likely to arise, establishing new priority rules that provide an incentive to register, transferring some risks to the State, and spreading risk through an indemnity scheme.

10

Above 425. See eg, JE Hogg, Registration of Title to Land Throughout the Empire (Law Book Co, Sydney, 1920), 100 and n 32; TW Mapp, Torrens’ Elusive Title: Basic Legal Principles of an Efficient Torrens System (Alberta Law Review, Edmonton, 1978) 59–60; V DiCastri, Registration of Title to Land (Carswell, Toronto, 1987) vol 2, at para [756]; M Dixon, Principles of Property Law, 3rd edn, (Cavendish, London, 1999) 67. The two objects are listed in the preamble to the first English registration of title statute, the Land Registry Act 1862: “Whereas it is expedient to give certainty to the title of real estates and to facilitate the proof thereof and also to render the dealing with land more simple and economical”. 11

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Registration of Invalid Dispositions: Who Gets the Property? 49 These measures do not entirely eliminate the possibility for a collision of rights to occur. Where a purchaser in good faith registers an unauthorised disposition, the law must still provide an adjudication rule to determine who gets the land. A rule that awards the land to O promotes static security. It assures existing owners that they cannot be deprived of their land through a non-consensual disposition. But this rule ipso facto diminishes dynamic security, for purchasers can no longer be sure that they will get a clear title if they take an instrument for value and register it in good faith. Alternatively, the law might adopt a rule that awards the land to P1. This promotes dynamic security, by upholding the reasonable expectations of purchasers that they will gain an indefeasible title if they register an instrument in good faith. Owners of land are now at risk of losing their title to land as a result of an invalid instrument. P1 will be happy that the rule enables him to acquire his title more securely, but must then live with the risk that he could lose his title through a non-consensual disposition occurring after his registration.12 The law’s dilemma is that we need both dynamic and static security, but the law must sometimes choose between them. The dilemma lies at the heart of land title registration, which incorporates both forms of security in its objects.

III . THE ENGLISH APPROACH TO INDEFEASIBILITY

English registration law favours static security in cases of unauthorised registration, subject to a wide exception. The repealed Land Registration Act 1925 allowed the court, at its discretion, to order rectification of the register for any defect that would render a disposition void or voidable under the general rules that apply to unregistered conveyancing.13 The current provisions for alteration of the register are contained in the Land Registration Act 2002 (“the LRA”), Schedule 4, and are intended to codify the practice under the old Act.14 The LRA, Schedule 4, cl 2(1), 5 allows rectification, inter alia, for the purpose of “correcting a mistake”. The term “mistake” has caused ambiguity in other registration statutes, since there are two kinds of mistake that may affect an entry in the register. The mistake may be in the disposition itself (eg a forgery); or it may be that the disposition is in order but the entry is not in conformity with it, 12 Thomas Mapp observed that security of title is “an elusive ideal” for “to whatever extent [a registered owner] can acquire an interest from a predecessor through error, he is vulnerable to losing that interest to a successor through the same error”: Mapp, above, 66–68; see also DJ Whalan, The Torrens System in Australia (Law Book Co, Sydney, 1982) 296–97. 13 This wide interpretation of s 82(1)(a) and (b) of the Land Registration Act 1925 was apparently assumed by the Court of Appeal in Norwich & Peterborough Building Society v Steed [1993] Ch 116: RJ Smith, Property Law, 3rd edn (Longman, Harlow, Essex, 2000) 236–37; E Cooke, The New Law of Land Registration (Hart Publishing, Oxford, 2003) 121. 14 Lord Chancellor’s Department, Land Registration Act 2002 Explanatory Notes, para 229; Law Commission for England and Wales and HM Land Registry, Land Registration for the Twenty-First Century: A Consultative Document, No 254 London, 1998) (“LC 254”), para 10.6.

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50 Pamela O’Connor due to an administrative or computer error.15 The Law Commission appears to have assumed that “mistake” is not confined to registry error, but extends to the registration of a forged instrument as well as registrations made under an innocent error.16 The provisions dealing with unauthorised registration make a major concession to dynamic security. While the grounds for rectification are very broad, the Act provides a qualified immunity for the proprietor of a registered estate in possession of the land.17 Under the extended definition of “proprietor in possession” in s 131(2) of the Act, the qualified immunity may extend to a registered proprietor of an estate in land where his land is in the possession of a tenant, mortgagee, licensee, or a beneficiary under a trust of which he is the trustee. The definition excludes mortgagees, since they do not hold a registered estate in land but only a registered charge.18 A proprietor in possession enjoys what the Law Commission calls “qualified indefeasibility”.19 This means that his registered title cannot be rectified without his consent unless (a) he has by fraud or lack of proper care caused or substantially contributed to the mistake, or (b) it would for any other reason be unjust for the alteration not to be made.20 The registered titles of proprietors other than “proprietors in possession” are more readily defeasible by rectification. If application is made to rectify their titles, and grounds for rectification exist, the court or registrar must grant the application unless there are exceptional circumstances.21 The faultless owner who suffers loss by rectification is entitled to be indemnified by the registrar.22 For proprietors who are not in possession, registration confers, not an indefeasible title, but a right to be compensated if the title is rectified against them. The English system uses two rules to resolve disputes arising from unauthorised registrations—one for registered proprietors in possession and one for other registered proprietors. If the person obtaining registration under a void disposition is a proprietor in possession, a presumptive rule of dynamic security applies. The reasonable expectation of the purchaser will prevail, and the deprived former owner compensated, unless the court or registrar exercises the 15 Scottish Law Commission, Discussion Paper on Land Registration: Void and Voidable Titles (DP No 25 Edinburgh, 2004), paras 3.35–3.36; Registrar of Titles (WA) v Franzon (1975) 132 CLR 611; DC Jackson, “Security of Title in Registered Land” (1978) 94 Law Quarterly Review 241, 253. 16 UK LC 254, n 14 above, para 8.15, explaining that the registration of a forged instrument is a mistake because the instrument is a nullity and should not have been registered; Cooke, n 13 above, 122. 17 LRA 2002, s 131(2). 18 LRA 2002, s 132(1). 19 Law Commission for England and Wales and HM Land Registry, Land Registration for the Twenty-First Century: A Conveyancing Revolution (No 271 London, 2001) (“LC 271”), para 8.23. 20 LRA 2002, Sched 4, para 1, 2, 3(1),(2), 5, 6(1),(2). 21 LRA 2002, Sched 4, para 3(3), 6(3). 22 LRA 2002, Sched 8, paras 1(1), (2), 5.

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Registration of Invalid Dispositions: Who Gets the Property? 51 statutory discretion to authorise rectification on the ground that it would be unjust not to. But if the purchaser is anyone other than a proprietor in possession, the rule is a presumptive one of static security. His title will be rectified unless exceptional circumstances are found. The use of the two rules in combination represents an attempt to balance dynamic and static security in a way that protects owners in possession.23 An issue that has long been unsettled in England is under what circumstances the deprived registered owner, O, can rectify against P2, a registered successor in title to P1.24 If P2 is the proprietor of a registered estate in possession, he enjoys the “qualified indefeasibility” under the rectification provisions as outlined above. If O is in actual occupation, O will have a right to seek rectification against P2 to give effect to her overriding interest.25 In other circumstances, it has yet to be decided whether O’s right to rectify continues or terminates when P1 is succeeded on the register by P2, or even P3. This question is discussed fully in David Fox’s chapter, and need only be mentioned briefly here. In cases decided under the LRA 1925 there were obiter dicta in a couple of cases indicating that registration of a void disposition confers upon the registered owner a bare legal title, the beneficial title remaining with the person who would have been entitled to the land had the register entry not been made.26 It would seem to follow from this view that a purchaser under the LRA 1925 was not protected against a defect in derivative title, no matter how far back in the chain the void disposition occurred, so long as O or her heirs and successors remain in actual occupation. To the extent that this argument relies on a particular construction of s 69(1) of the 1925 Act, the differently worded provisions of the LRA 2002 should render it irrelevant.27 Several jurisdictions have broadly adopted the English approach of allowing rectification on broad grounds with a qualified immunity for the proprietor in possession. The provisions are summarised below.

23 Note that if O remains in actual occupation of the land, P1 takes subject to her right to seek rectification of the register, since this is an overriding interest under Sched 3, para 2 of the LRA 2002: Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216. 24 Roger Smith says that the question of rectification against successors in title to the party who registered the void disposition ‘has been little explored’ in England: Smith, n 13 above, 237–38. The question of rectification against successors has sometimes been conceived in terms of whether rectification is retrospective to the date of the unauthorized registration: Freer v Unwins Ltd [1976] Ch 288. See generally, K and SF Gray, Elements of Land Law, 3rd edn (Butterworths, London, 2001) 1078–80. The LRA 2002, Sched 4, para 8 now provides that rectification of the register can affect the priority of derivative interests, but only prospectively. 25 O’s right to rectify the register has been recognized as a proprietary interest, which is protected by her actual occupation: Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216. 26 Epps v Esso Petroleum Co Ltd [1973] 1 WLR 1071 at 1077 per Templeman J; Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216 at 232 per Arden LJ. 27 C Harpum, “Registered Land––A Law Unto Itself?” in Getzler (ed), Rationalising Property, Equity and Trusts: Essays in Honour of Edward Burn (LexisNexis, London, 2003) 187–203.

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52 Pamela O’Connor (a) Northern Ireland and Scotland Northern Ireland’s Land Registration Act (NI) 1970 is based on the English LRA 1925. Section 69 provides for the register to be rectified to correct any error in the register. Cooke says that this has been interpreted to include the registration of void and voidable dispositions.28 Section 69(3) restricts the power of the court to rectify against a registered owner in possession, save where the court is satisfied it would be unjust not to rectify. The current Scottish title registration statute is the Land Registration (Scotland) Act 1979. Section 9(1) provides that the Keeper of the register may rectify any “inaccuracy” in the register. The Scottish Law Commission says that an “inaccuracy” will be found in any case where the registered title is held by someone who would not be the owner under the ordinary rules of property law.29 Section 9(3) protects the proprietor in possession from rectification except where the inaccuracy has been caused by his fraud or carelessness. Unlike the English provision, this is an absolute rule: there is no judicial discretion to depart from it. (b) Singapore Singapore’s Land Titles Act 1993, s 160(1) states the general rule that the court may order rectification on the ground, inter alia, that it is satisfied that the registration or notification of an instrument has been obtained through fraud, omission or mistake. Subsection 160(2) then narrows the rule, stating that the register may not be rectified so as to affect the registered estate or interest of a proprietor who is in possession “unless that proprietor is a party or privy to the omission, fraud or mistake in consequence of which the rectification is sought, or has caused that omission, fraud or mistake or substantially contributed thereto by his act, neglect or default”. It is notable that while for historic reasons Singapore is usually included in the Torrens family, its indefeasibility rule is influenced by the English approach. (c) Canada—New Brunswick New Brunswick’s Land Titles Act,30 s 70 allows the court to order rectification of an entry in the register “obtained, made or omitted by fraud, wrongful act or mistake”. This general rule is subject to section 71, which provides that rectification is not to affect detrimentally the title of a registered owner who is in possession, unless any one of three conditions is satisfied. Two of these 28

Cooke, n 13 above, 170. Scottish Law Commission, DP No 25, above n 15, para 2.11, citing Short’s Tr v Keeper of the Registers of Scotland 1994 SC 122, 140 G. 30 SNB cl–1.1. The Act was assented to on 1 July 1981 but registration was only extended province-wide in 2000–01. 29

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Registration of Invalid Dispositions: Who Gets the Property? 53 are virtually identical to the English provisions quoted above,31 but the third condition considerably narrows the protection given by the section. Section 71(b) provides that the register may be rectified adversely to the owner in possession if the immediate disposition to him was void, or if he obtained title as a volunteer from a transferor who took under a void disposition.32

IV . THE TORRENS RULES

A Immediate and deferred indefeasibility compared The Torrens jurisdictions have taken a different approach to the problem of unauthorized registrations. They generally use one of two rules to resolve property disputes arising from the registration of void or voidable instruments, where the person deriving title under the entry has not been fraudulent.33 Under the rule known as “immediate indefeasibility”, a purchaser (P1) who registers a disposition of an estate or interest in land obtains an immediately indefeasible title to the estate or interest, even if the instrument is void or voidable at law for any reason including forgery.34 So long as P1 gave valuable consideration for the disposition and has acted without fraud, he is protected against any action by O, the previous registered owner, to rectify the unauthorized entry or to recover possession. Under the alternative rule known as “deferred indefeasibility”, P1 does not get an indefeasible title by registering a void or voidable instrument, even if he acted without fraud. O can take action to rectify the register and restore her title, or to eject P1 from the land. So far, the rule is one of static security. But O’s remedies are lost once a subsequent purchaser in good faith, P2, purchases from P1 and registers a valid disposition from him. The rule gets its name from the idea that indefeasibility does not arise on the first registration to P1, but is “deferred” until the subsequent registration of P2’s disposition.35 The effect of 31

See text following n 20 above. The Land Registration Act 1925 (UK) used to have an equivalent ground of rectification in s 82(3)(b). It was repealed in 1977, pursuant to recommendations made by the Law Commission in WP No 45 Land Registration (3rd Paper) (1972), paras 82–86. 33 All the Torrens statutes expressly deny indefeasible title to an owner registered through fraud. Fraud has a special meaning in this context. It does not encompass broader conceptions of equitable or constructive fraud, but means actual fraud involving subjective dishonesty. The fraud may be that of the registered owner, or his or her agent; it may even by fraud committed by another party to the transaction, if the registered owner or his or her agent knew about it, or had suspicions but abstained from making inquiries for fear of learning the truth: Assets Co v Mere Roihi [1905] AC 176 at 210 (PC). 34 This rule was asserted in Boyd v Mayor of Wellington [1924] NZLR 174; Frazer v Walker [1967] 1 AC 569; Breskvar v Wall (1971) 126 CLR 376, among many other authorities. Whalan says that no distinction has been made in the cases between void and voidable instruments, since the central question is whether it is registration or the instrument that confers title: n 12 above, 319–20. 35 This rule was asserted in Gibbs v Messer [1891] AC 248; Clements v Ellis (1934) 51 CLR 217 (Dixon and McTiernan JJ), among other authorities. 32

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54 Pamela O’Connor the rule is that only P2, a purchaser for value in a transaction one stage beyond the void disposition, gains an indefeasible title. One feature common to both the Torrens rules is that they apply to all registered owners and purchasers, regardless of the type of registered estate or interest,36 and regardless of whether the owner of the interest is in possession or not. The English rule, by contrast, differentiates between (a) owners of registered estates in possession, and (b) other owners of registered estates and interests. The owners in group (a) get an indefeasible title, provided that they have not caused or contributed to the mistake, and in the absence of circumstances making it unjust not to rectify. The group (b) owners do not get indefeasible title, and even their heirs and successors may not enjoy indefeasibility unless they are in possession. Both deferred and immediate indefeasibility rules provide dynamic security to the subsequent purchaser, P2, provided that he purchases in good faith and for value from P1 and registers a valid disposition.37 This means that a purchaser can rely on the conclusiveness of the register, and has no need to investigate the derivative title (the chain of instruments and registrations through which the title devolved upon the present owner). Both rules therefore serve the principal object of the Torrens System, as formulated by Lord Watson in Gibbs v Messer: The object is to save persons dealing with registered proprietors from the trouble and expense of going behind the register in order to investigate the history of their author’s title and to satisfy themselves of its validity.38

The two rules achieve this common result by different routes. Immediate indefeasibility holds, quite simply, that the purchaser’s title is conferred by registration alone, regardless of any prior defects. Under deferred indefeasibility, the purchaser acquires no interest or estate by registration if the instrument from his transferor (“the immediate disposition”) is void. If P1 takes under a voidable disposition, he takes a title that is defeasible if O brings suit, but until then he can provide a good root of title to P2 who purchases from him without fraud and registers a valid disposition.39 This means that under deferred inde36 In Gibbs v Messer [1891] AC 248, 254–55 the Privy Council drew no distinction between the indefeasibility enjoyed by a registered transferee and a registered mortgagee. See also Frazer v Walker [1967] 1 AC 569 (holding that a mortgagee derived an immediately indefeasible title on registration). Di Castri says that because of different wording, it is not clear whether the Canadian Torrens statutes confer indefeasible title on registered mortgagees: n 11 above, vol 2, para 744. 37 Volunteers are in a different position as, in most jurisdictions, they take a title subject to any equities that affected their transferor. Some Australian jurisdictions have extended immediate indefeasibility to registered volunteers, either by legislation or by judicial interpretation. 38 [1891] 1 AC 248, 254. This statement was made in the course of giving the advice of the Privy Council, endorsing the deferred approach to indefeasibility. Although Gibbs v Messer was distinguished by the Privy Council in Frazer v Walker [1967] 1 AC 569, Lord Watson’s dictum continues to receive judicial endorsement in Australia and New Zealand after the acceptance of immediate indefeasibility. See, eg, Bahr v Nicolay (No 2) (1988) 164 CLR 604, 637 (Wilson and Toohey JJ). 39 Gibbs v Messer [1891] AC 245, 257; Schultz v Corwill Pty Ltd (1969) 90 WN (Pt 1) (NSW) 529, 535 (Street J).

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Registration of Invalid Dispositions: Who Gets the Property? 55 feasibility, any risk to the purchaser arises from the immediate disposition, not from any defect in derivative title.40 Since both rules protect purchasers against a defect in derivative title, the difference between the two Torrens rules lies in their answer to the following question. As between two non-fraudulent parties, a prior registered owner (O) and a purchaser for value (P1) who holds a registered interest, who should bear the risk that the purported disposition from O to P1 is in breach of the general rules of property law? Immediate indefeasibility—a pure rule of dynamic security—protects P1’s reasonable expectation that he will acquire a good title if he acts in good faith. Deferred indefeasibility seeks to balance the competing conceptions of security as follows. O’s static security is protected so long as P1 has not yet disposed of his registered title. P1 bears the risk of an error in his own transaction, but the same rule protects him from losing his title through a nonconsensual transaction after he has acquired it.41 When P2 purchases from P1, the error in the transaction between O and P1 is now a defect in derivative title, so does not affect him or subsequent purchasers.42 B The choice between deferred and immediate indefeasibility In some countries, the courts have not yet been called upon to decide which adjudication rule to apply in third party disputes resulting from an unauthorized registration. For example, the question does not appear to have presented itself for judicial determination in Ireland.43 It is possible that in some countries, third party disputes are resolved administratively by the registry. The choice between deferred and immediate indefeasibility is a live issue for many of the Torrens jurisdictions. The merits of the competing rules are therefore a matter of international importance. (a) New Zealand Like most Torrens statutes, the Australasian statutes were ambiguous as to which rule was intended; they could be read as consistent either with deferred or immediate indefeasibility. Legislatures were content to leave this important question to the judges. The result was that it remained unsettled for decades. New Zealand judicial authority shifted towards immediate indefeasibility at the beginning of the 20th century in Assets Co Ltd v Mere Roihi 44 and in Boyd v Mayor of 40 In the terminology of the Scottish Law Commission, an error that already affected the register before P1 acquired his interest is called a “Registry error”, while an error in his own disposition or transaction is called a “transactional error”: Scottish Law Commission, DP No 25, n 15 above, 3.15–3.18. It is submitted that the term “Registry error” is confusing, as it tends to suggest an error made by the Registry, as opposed to an error already on the Register. 41 W Taylor, “Scotching Frazer v Walker” (1970) 44 Australian Law Journal 248, 253. 42 Scottish Law Commission, DP No 25, n 15 above, 4.45. 43 Cooke, n 13 above, 169. 44 [1905] AC 176 (PC).

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56 Pamela O’Connor Wellington,45 despite the 1891 decision of the Privy Council in Gibbs v Messer 46 which appeared to favour deferred indefeasibility. In 1967, in the landmark decision of Frazer v Walker,47 the Privy Council confirmed that immediate indefeasibility was the correct interpretation of the New Zealand Torrens statute. (b) Australia After many years of uncertainty during which deferred indefeasibility was assumed to be the law in Australia,48 the High Court of Australia followed Frazer v Walker, adopting immediate indefeasibility in Breskvar v Wall.49 The rule is now firmly entrenched in Australian law. While the higher courts in Australia rely on arguments of statutory interpretation to justify the rule, they appear to regard it as a principle of sufficient importance to justify a national approach despite differences in the wording of the State and Territory statutes. In cases where the rule of immediate indefeasibility produces an unsatisfactory result, trial judges have occasionally sought to rely on these differences to distinguish Breskvar v Wall,50 but appellate courts have curbed these local outbreaks.51 This uniformity among the States suggests that the choice of rule is a matter of policy, although the courts have avoided discussion of the policy considerations. The most commonly citied justification for immediate indefeasibility is that the Torrens system is a system of “title by registration”, in which title is conferred by the act of registration, independently of the validity of the instrument.52 The principle was enunciated in Frazer v Walker as follows: “It is in fact the registration and not its antecedents which vests and divests title”.53 Barwick CJ expressed the principle as follows: The Torrens system . . . is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietor formerly had, or which but for registration would have had. The title which it certifies is not historical or derivative. It is the title which registration itself has vested in the registered proprietor. Consequently, a registration which results from a void instrument is effective according to the terms of the registration.54 45

[1924] NZLR 1174 (Sup Crt NZ). [1891] AC 248 (PC). 47 [1967] 1 AC 569 (PC). 48 The High Court of Australia was evenly divided on the choice of rule in Clements v Ellis (1934) 51 CLR 217, so that the decision of the trial judge (which was in favour of deferred indefeasibility) prevailed. For a summary of the Australian authorities, see Whalan, n 12 above, at 302, n 41. 49 (1971) 126 CLR 376. 50 Chasfild Pty Ltd v Taranto [1991] 1 VLR 225; Rogers v Resi-Statewide Corporation Ltd (1991) 29 FCR 219. 51 Arcadi v Whittem (1992) 59 SASR 51 (SASC, Full Crt), Pyramid Building Society v Scorpion Hotels Pty Ltd [1998] 1 VR 188 (VCA). 52 This was stated in Assets Co Ltd v Mere Roihi [1905] AC 176; Boyd v Mayor of Wellington [1924] NZLR 174; Frazer v Walker [1967] 1 AC 569; Mayer v Coe [1968] 2 NSWR 747; Breskvar v Wall (1971) 126 CLR 376, among the relevant authorities. 53 [1967] 1 AC 569, 580 (Lord Wilberforce). 54 Breskvar v Wall (1971) 126 CLR 376, 385. 46

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Registration of Invalid Dispositions: Who Gets the Property? 57 These statements make the point that that the Torrens System is a positive system of land registration. In a “negative” system of land registration, the validity of a registered instrument depends upon its conformity with the general rules of property law. The registered interest is only as good as the deed or instrument on which it is based; the colonial deeds registration systems are of this type. In a positive system, the State guarantees the validity of registered titles. It is the act of registration that confers title, not the instrument upon which the registration is based. The Scottish Law Commission observes that positive systems are “bijural” because they must operate with two different laws of property.55 An instrument will not be accepted for registration unless it complies with the general rules of property law that determine the validity of instruments. But under the registration law, registration of an interest confers title, even if it is based upon an invalid instrument. This conflict of laws in positive systems is normally resolved by saying that registration of a defective instrument confers a title that is defeasible under specified circumstances.56 What their Honours were saying in Breskvar v Wall is that a registered interest is defeasible on only one ground— the statutory ground of fraud. They based this conclusion on statutory interpretation alone, without acknowledging that the statute was ambiguous on this point. The policy arguments for widening the grounds were not discussed. While the shift to immediate indefeasibility was received favourably enough at the time, some disquiet has recently been expressed, prompted by an increase in fraud and forgery cases in the 1980s and 1990s,57 and by concern about the hardship caused by the rule.58 The Victorian Law Reform Commission examined the issue in 1987, and concluded that a presumptive rule of deferred indefeasibility was preferable in forgery cases.59 In 2003, a former Chief Justice of Australia, Sir Anthony Mason, cautiously expressed his provisional view that “deferred indefeasibility would generate fairer results”.60 (c) Papua New Guinea Papua New Guinea, which enacted Torrens legislation on the Australian model,61 followed the Australian rule change. The leading decision was given by 55

Scottish Law Commission, DP No 25, n 15 above, para 1.11. Above. The Commission refers to the entries as “voidable” rather than “defeasible”. It is submitted that “defeasible” is preferable. Unless the indefeasibility rule provides that a voidable disposition necessarily results in a “voidable” entry, it is confusing to use the same term for both. 57 Toomey, n 11 above; see n 82 below. 58 J Greenwood and T Jones, “Automation of the Register: Issues Impacting upon the Integrity of Title” in Grinlinton (ed), Torrens in the Twenty-first Century (LexisNexis, Auckland, 2003) 323–48, 344–48. 59 LRCV, Rep No 12 The Torrens Register Book (Melbourne, 1987) para 18. 60 Sir Anthony Mason, “Indefeasibility––Logic or Legend?” in Grinlinton, n 58 above, 3–20, 18. 61 The Torrens system was introduced into Papua by the Real Property Ordinance of 1889, and into New Guinea by the Land Registration Ordinance 1924. The current legislation is the Land Registration Act (Ch No 191), and is modeled on the Australian Torrens statutes. 56

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58 Pamela O’Connor the High Court of Australia at a time when the country was still under Australian administration, and has been followed post-independence.62 John Mugambwa reports some judicial dissatisfaction with the consequences of the rule in that country.63 The concern arises from irregular grants or cancellation of state leases by government officials, in circumstances that raise a suspicion of corruption.64 The fraud exception does not provide a remedy in such cases, because of the difficulty of proving that the purchaser was complicit. Even if officials can be shown to have acted ultra vires, registration confers an immediately indefeasible title upon the purchaser despite the invalidity in the transaction. Mugambwa argues that a rule of immediate indefeasibility is not suited to the present circumstances of Papua New Guinea as a developing country with systemic corruption in the public sector; he proposes that it be replaced by deferred indefeasibility.65 (d) Canadian provinces and territories The choice of rule has not been authoritatively settled in the Torrens provinces and territories of Western Canada and the territories, with the exception of Saskatchewan where, in 1987, the Court of Appeal adopted immediate indefeasibility in Hermanson v Martin.66 While the Alberta Law Reform Commission expressed the view in 1990 that immediate indefeasibility is probably the law in Alberta,67 it remains to be seen whether the Hermanson decision will be followed in other provinces.68 Di Castri reports that “the majority of Canadian decisions on the subject of forgery indicate a preference for deferred indefeasi-

62 The Administration of the Territory of Papua and New Guinea v Blasius Tirupia and others [1971–72] PNGLR 229 (HCA); Mudge and Mudge v Secretary of State for Land [1985] PNGLR 387 (Sup Crt PNG, Platt J); J Mugambwa, “Transportation of the Torrens System to Developing Countries” in Grinlinton, n 58 above, 126–32. 63 Above. 64 For example, Mugambwa refers to Emas Estate Developments Pty Ltd v Mea [1993] PNGLR 227. The Minister purported to forfeit Mee’s registered Crown lease. He then leased the land to Emas Estate, which registered its lease. The court held that Mee’s lease had been unlawfully terminated, and ordered its reinstatement. Emas Estate argued that its lease was indefeasible, as no fraud had been proved against it. By a majority, the Supreme Court dismissed Emas’ appeal, refusing to apply the principle of indefeasibility in this case. Salika J said that the principle was not appropriate to a case where registered title was procured ‘under the influence of position of power and money’: [1993] PNGLR 227 at 227–28; Mugambwa, above, 129–31. 65 Above, 132–37. Mugambwa argues that ‘in a corrupt environment the Torrens system is apt to facilitate fraudulent land deals because of the difficulty of proving fraud against a registered proprietor’: above, 132. 66 [1987] 1 WWR 439 (Sask CA). 67 Alberta Law Reform Institute, Proposals for a Land Recording and Registration Act for Alberta, Rep No 69 (2 vols) 1993) 16. See also B Ziff, Principles of Property Law, 3rd edn (Carswell, Scarsborough, Ont, 2000) 426, n 79. 68 In Beneficial Realty Ltd v Bae (1996) 82 AR 356 (Alberta QB), a Master giving judgment on an interlocutory application distinguished Hermanson on grounds that indicated that he did not regard that decision as adopting a general rule of immediate indefeasibility.

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Registration of Invalid Dispositions: Who Gets the Property? 59 bility”.69 However, most of these decisions predate the Privy Council decision in Frazer v Walker. Some Canadian provinces have legislated to clarify the indefeasibility rule. British Columbia’s Land Registry Act70 appears to indicate that deferred indefeasibility is the law in that province.71 In 1990, a committee comprising representatives of most Canadian provinces drafted a Model Act which incorporated express provision for a presumptive rule of deferred indefeasibility, with statutory criteria for the exercise of the judicial discretion.72 Nova Scotia has recently legislated for a presumptive rule of deferred indefeasibility; the rule is alleviated by a judicial discretion to confirm the unauthorized registration where it is “just and equitable” to do so.73 (e) Malaysia Malaysia legislated to incorporate deferred indefeasibility into its Torrens statute, the National Land Code 1965, s 340.74 However, in 2001, a full bench of the Federal Court (Malaysia’s highest court) interpreted the Malaysian statute as consistent only with immediate indefeasibility. The decision of the Federal Court in Adorna Properties Sdn Bhd v Boonsom Boonyanit @ Sun Yok Eng75 was received with some consternation by sections of the Malaysian legal profession,76 not only because it upset the accepted interpretation, but also because Malaysia lacks an indemnity scheme to compensate those deprived of their property through the operation of immediate indefeasibility.

69 Di Castri Vol 2, n 11 above, para 758. At para 16, Di Castri says that it remains to be seen whether the Canadian courts will endorse the rule of immediate indefeasibility. The Canadian authorities are sumarised in Ziff, n 67 above, p 426. See also M Neave, “Indefeasibility of Title in the Canadian Context” (1976) 26 University of Toronto Law Journal 173, 178, stating that “[i]n the Canadian context, the principle of deferred indefeasibility appears to have been accepted with little criticism” both in the Torrens jurisdictions and those that are based on the English model. 70 RSBC 1996, c 250, s 297(3), which provides that a person taking under a void instrument acquires no interest in the land by registration of the instrument. 71 Di Castri, n 11 above, para 760. Apart from the case of the registration of a discharge of mortgage in error, Di Castri assesses as “remote” the chances that the courts in British Columbia “will accept immediate indefeasibility in any unqualified way”: para 762. 72 Joint Land Titles Committee Canada, Renovating the Foundation: Proposals for a Model Land Recording and Registration Act for the Provinces and Territories of Canada (Edmonton, 1990), 24–26 and ss 5.6(3), (4) of the Model Act annexed to the report. 73 Land Registration Act 2001, RSNS ch 6, s 35. The Act was proclaimed on 24 March 2003. 74 Y Pei Keng, “‘Immediate Indefeasibility’ or ‘Deferred Indefeasibility’?” (2001) XXXI INSAF, The Journal of the Malaysian Bar 85, 87; P Butt, Land Law, 4th edn (Lawbook Co, Sydney, 2001) para 2016, n 79. 75 [2001] 1 MLJ 241. 76 Keng, above n 74; A Moosdeen, “On the Proviso in Section 340(3) of the National Land Code 1965” [2002] 2 Malaysian Law Journal 66.

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60 Pamela O’Connor

V . EVALUATION OF THE RULES

There are many options for an adjudication rule to resolve third party disputes resulting from unauthorised registrations. Elizabeth Cooke’s survey of selected European land registration systems finds a variety of approaches. Among the systems examined, none practise immediate indefeasibility, and none of the continental systems have anything like the English rule that protects the proprietor in possession.77 Cooke finds that the five continental systems in her survey are generally closer in practice to the deferred indefeasibility approach. In Germany, for example, O can apply to set aside P1’s registered interest if it was procured by a void or voidable instrument; but P2, is protected if he takes an interest in good faith from P1 before O has filed an objection.78 Given their importance as a measure of the security of registered title, it is surprising how little research has been devoted to evaluating the rules. A detailed policy evaluation of the rules would require much more space than is available here. I can at most outline some conclusions that are more fully argued elsewhere.79

A Problems with immediate indefeasibility The first is that the rule of immediate indefeasibility as adopted in Australasia is fundamentally flawed in at least three respects: 1. It makes no attempt to balance dynamic and static security, as Demogue recommended,80 and as the other two rules each do in their different ways. The principal justification for the rule is that it relieves purchasers of the risk of a forgery or other invalidity in the immediate disposition, thereby making their titles more secure. But the gain in purchasers’ dynamic security is offset by the loss in their static security, so the net benefit is marginal.81 The rule makes purchasers and owners vulnerable to loss through a non-consensual or invalid disposition after they have acquired title. Since owners and purchasers need both dynamic and static security, it is not sensible to promote one kind of security at the expense of the other. A balanced approach is preferable. 2. The rule undermines the general rules of property law by neutralising their sanctions, since the invalidity of an instrument is cured by registration. 77

Cooke, n 13 above, ch 9 and esp pp 193–94. Above, 176–77. 79 P O’Connor, Security of Property Rights and Land Title Registration Systems (PhD thesis, Monash University, 2004) chs 5–6. 80 Demogue, n 8 above, 439. 81 Mapp, n 11 above, 67; Taylor, n 41 above, 253. 78

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Registration of Invalid Dispositions: Who Gets the Property? 61 Purchasers have little incentive to check that their instrument is in order, since they get an indefeasible title on registration. The likely result is that more forgeries and invalid instruments will slip through to registration, causing more losses.82 3. Immediate indefeasibility is far more likely than either of the other rules to allocate the property to a non-occupying party and to deprive the occupier. For example, the rule would award title to a non-fraudulent purchaser (including a mortgagee) who registers a forged disposition, and compensate the deprived owner in occupation. Yet the party in occupation is more likely to value the land more highly and to spurn monetary compensation, even if it is at market value. The non-occupying purchaser/mortgagee is more likely to regard the interest as a fungible asset, held only for its economic value. A fair and efficient rule would allocate the property right to the occupying owner and compensate the purchaser. Both deferred indefeasibility and the English approach do this in most cases, but immediate indefeasibility generally does the opposite.

B Deferred indefeasibility and the English approach If immediate indefeasibility is discounted, which of the alternative rules is preferable? The fairer and more efficient rule is the one that most reliably allocates the title to the party who values the property most highly.83 According to the wealthmaximising theory of economic efficiency, assets are allocated most efficiently when they are held by those who place the highest value upon them.84 Since market exchanges of property rights are consensual, value is measured by the highest price that a person would be willing to pay to acquire the asset if she does not have it, or the lowest price at which she would be willing to sell it if she already owns it. The measure of value allows for subjective, emotional and psychological factors that influence a person’s asking or selling price. This means that if person A values the land more highly than person B because of a psycho-social attachment, law and economic theory holds that it is more efficient to allocate the land to person A than to person B. If it is possible to devise a rule that will usually 82 Toomey argues that increased losses through forgeries and identity fraud in Australia and New Zealand is straining acceptance of immediate indefeasibility: Toomey, n 11 above. Rodrick documents slack identity checking by institutional lenders in Australia, and links this to the failure of the legal system to bring the resulting losses home to registered mortgagees: S Rodrick, “Forgeries, False Attestation and Impostors: Torrens System Mortgages and the Fraud Exception to Indefeasibility” [2002] Deakin Law Review 5. 83 RH Coase, “The Problem of Social Cost”(1960) 3 Journal of Law & Economics 1, 19. Scholars of law and economics generally agree that the law should allocate rights as efficiently as possible, replicating the outcomes that the parties themselves would have arrived at if there were no transaction costs: TJ Miceli, Economics of the Law (OUP, New York, 1997), 10. 84 This is explained by: R Posner, Economic Analysis of Law, 5th edn (Aspen Law & Business, New York, 1998) 36–39.

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62 Pamela O’Connor allocate the land to person A in the event of a third party dispute with person B, it follows that the rule will be more efficient than a rule that has the opposite effect. Many behavioural studies have found that people demand a higher amount of compensation to give up what they already have than they are willing to pay to acquire it in the first place.85 This phenomenon, known as the ‘endowment’ effect, holds that the value an individual places upon an asset is greater if it forms part of the individual’s present ‘endowment’ or asset position. A related phenomenon, known as ‘loss aversion’ refers to the tendency of people to feel losses more keenly than commensurate gains. David Cohen and Jack L Knetsch summarise the studies as showing that people’s present ownership position serves as the point of reference from which they evaluate gains and losses, and that they tend to evaluate losses from this position more highly than gains.86 Given the endowment effect and loss aversion, the person who values the land more highly will usually be O, the owner of the earlier registered interest who has been wholly or partly deprived of her title by the unauthorised registration to P1. O will usually be in possession at the time the third party dispute arises. Assuming that P1 has not been succeeded by P2, a rule that allows O to rectify the register to remove P1’s interest (deferred indefeasibility) is likely to allocate the interest efficiently most of the time. Deferred indefeasibility uses prior ownership, and the English rule uses present possession, as proxy for the party with the higher valuation. Either rule will occasionally allocate the interest to the “wrong” party—the party with the lower valuation. For example, deferred indefeasibility may restore the title of O, an absentee investor, and evict P1, who is occupying the land as his home. In the absence of a discretionary override, a rule that protects possession will prevent O from recovering her title, lost through the registration of a forged disposition to P1 during O’s temporary absence on an overseas trip, if P1 is in possession at the time the dispute arises.87 It could also tempt the party out of possession to resort to self-help to eject the occupier, in order to claim the privileged status of owner in possession.88 No absolute rule can pinpoint the higher valuing owner in every case. To do this it is necessary to adopt a presumptive rule, enabling a court or registrar to depart from the rule in particular cases. No doubt a presumptive rule is more costly to administer than an absolute rule, because the exercise of discretion requires legal process. One way to reduce the cost would be to structure the 85 RA Prentice and JJ Koehler, “A Normality Bias in Legal Decision Making” (2003) 88 Cornell Law Review 583, 600; D Cohen and JL Knetsch, “Judicial Choice and Disparities Between Measures of Economic Values” (1992) 30 Osgoode Hall Law Journal 737, 743–44 (referring to the studies). 86 Cohen and Knetsch, above, 743. 87 Of course, the English rule is in presumptive, not absolute form. The LRA provides a discretion to rectify against the proprietor in possession if it would be unjust for the alteration not to be made: see n 20 above. 88 This has been a problem in Scotland, where the English rule was adopted in absolute form: see cases discussed in Scottish Law Commission, DP No 25, n 15 above, para 4.23.

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Registration of Invalid Dispositions: Who Gets the Property? 63 discretion by providing non-exhaustive statutory criteria, indicating the factors that might warrant departure from the rule.89 This would promote settlement of disputes by making discretionary outcomes more principled and predictable. The presumptive form allows considerations of fault to modify the application of the rule in individual cases. It is sometimes the case that one party or the other contributed to the risk of a conflict of rights arising, by his or her act or omission. No rule can be formulated on the assumption that either O or P is more likely to be at fault, or is better placed to prevent the particular type of risk, so long as we want a single indefeasibility rule for all cases of unauthorised registration. The range of factual scenarios encompassed by the rule is simply too diverse for such assumptions. The presumptive form of the rule may produce more just outcomes by allowing ex post facto adjustment in egregious cases. VI . CONCLUSION

While land registration statutes incorporate strategies for avoiding collisions of rights, much more could be done to prevent them. For example, the South African system incorporates provision for notarisation of dispositions, combined with extensive and rigorous checks made by notaries and by the registry before the parties even execute the instruments.90 These procedures can detect and prevent registration of many invalid dispositions, but it may be that the cost of implementing them in all conveyancing transactions is more than the costs saved by the avoidance of disputes. In the absence of costly preventive procedures, disputes between parties arising from registration of invalid dispositions will continue to arise. There are many options for a decision rule, or combination of rules, to resolve the disputes. In common law-based land title registration systems, three generic approaches are dominant. The claim of the registered owner in possession is generally preferred in England and Wales, Ireland, Northern Ireland and Singapore, although there are varying provisions as to fault and discretionary override. Immediate indefeasibility is far from being the norm in the Torrens jurisdictions. It applies in Australia, New Zealand, Papua New Guinea, Saskatchewan and, for the time being at least, in Malaysia. Other jurisdictions generally prefer deferred indefeasibility, in absolute or presumptive form, or else have no clear decision rule. For Torrens jurisdictions debating between immediate and deferred indefeasibility, a presumptive rule of deferred indefeasibility, with a structured judicial discretion to depart from the rule in case of hardship, is the fairer and more efficient rule. For jurisdictions considering the introduction of title registration or a major reform of their current system, the English approach has much to 89

See, eg, the criteria set out in the Model Act drafted by the Canadian Committee, n 72 above. The procedures are described in PJ Badenhorst, JM Pienaar and H Mostert, Silberberg and Shoeman’s The Law of Property, 4th edn (LexisNexis, Durban, 2003) 193–212. 90

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64 Pamela O’Connor commend it, provided that it is accompanied by an adequate indemnity scheme of first resort. Perhaps the optimal approach is the English one, modified so that O’s right to rectify ends once P2 acquires an interest in the land in reliance on the register (whether P2 is a proprietor in possession or not). In sum, the approach recommended here is protection of the registered owner in possession, subject to a discretion to rectify in cases where it would be unjust not do so, and limited by a principle of deferred indefeasibility to protect good faith purchasers subsequent to P1. The latter principle is not yet clearly established by judicial authority as the law in England. If that occurs, it will narrow the gap between the English approach to indefeasibility and that of the Torrens and EU systems.

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4

Toward an Ecologically Sustainable Property Concept MURRAY RAFF

The purpose of this chapter is to review historical conceptions of the freedoms that accompany private property beside the requirement that decision makers at all levels exercise the environmental responsibility implicit in the international concept of sustainable development. Environmental reform and planning legislation is often interpreted to preserve so far as possible a complete freedom for the private proprietor, thus limiting its ability to meet the environmental problems that have inspired the reforms. If the concept of property is understood to embody responsible exercise of the proprietor’s powers rather than a “despotic dominion”1 then environmental controls called for by the ecological constraints of the property in question are not an intrusion on the proprietor’s powers. If controls express scientifically verifiable ecological limitations of the property a responsible proprietor can be expected to respect them, having acquired the property subject to its limitations. It is particularly important to appreciate this when property owners are in a position to argue that compensation must be paid by the state in view of an “intrusion” on private right.2 Potential liability for compensation is often a political dampener on the state’s willingness to act in protection of environmental qualities. The problem lies in conventional common law assumptions about what the proprietor is entitled to do with his or her property, which would be completely unsustainable if every land owner were able to realise them. However, there is significant material available in the common law to support the view that proprietary powers are to be exercised responsibly and not arbitrarily. Correction of the conventional position involves reconsideration of past uses made juristically of sacred texts. These past uses may be contrasted with contemporary mainstream positions in many of the world’s religions. In any case, in most of the Common Law world today the modern law and practice of 1 Blackstone, Commentaries on the Laws of England, 15th edn (Cadell & Davies, London, 1809) Book II, ch 1, 2. 2 For example, s 51(xxxi) of the Australian Constitution and Newcrest Mining (WA) Ltd v Commonwealth of Australia (1997) 147 ALR 42.

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66 Murray Raff land administration is barely influenced by the common law. First, deeds registration was introduced. Then, really comprehensive reform was made in the nineteenth and twentieth centuries when the Torrens and English and models of land title registration were introduced. These reforms changed existing assumptions about proprietorship and social responsibility. Both represented substantial receptions of legal principle from German models of land title registration systems. Comparative study of German Law3 demonstrates that there is a juristic concept of responsible proprietorship implicit in fundamental aspects of these systems transplanted into the Torrens and the English and registration systems. The proprietor’s responsibilities under environmental protection and planning legislation should be interpreted in light of this fundamental concept and not the superseded common law position of despotic dominion.

I . COMMON LAW RESPONSIBLE PROPRIETORSHIP

The idea of responsible proprietorship is not new in the Common Law world. The seventeenth-century Lord Chancellor and jurist Matthew Hale also engaged with this question. Hale was probably the architect of modern common law judicial method.4 Blackstone acclaimed Hale’s larger work, The Analysis of the Law,5 as the most scientific and comprehensive analysis of common law made to that time and adopted it as the basis of the arrangement of his Commentaries.6 On the responsibility of humans to care for land and to conserve biodiversity Hale wrote: In relation to this inferior World of Brutes and Vegetables, the End of Man’s Creation was, that he should be the Vice-Roy of the great God of Heaven and Earth in this inferior World; his Steward, Villicus, Bayliff or Farmer of this goodly Farm of the lower World, and reserved to himself the supreme Dominion, and the Tribute of Fidelity, Obedience and Gratitude, as the greatest Recognition or Rent for the same, making his Usufructuary of this inferior World to husband and order it, and enjoy the Fruits thereof with sobriety, moderation and thankfulness. And hereby Man was invested with power, authority, right, dominion, trust and care, to . . . preserve the species of divers Vegetables, . . . to preserve the face of the Earth in beauty, usefulness, and fruitfulness. And surely, it was not below the Wisdom and Goodness of God to create the very Vegetable Nature, and render the Earth more beautiful and useful by it, so neither was it unbecoming the same Wisdom to ordain

3 See M Raff, Private Property and Environmental Responsibility––A Comparative Study of German Real Property Law (Kluwer, The Hague, 2003). 4 See further M Raff, “Matthew Hale’s Other Contribution––Science as a Metaphor in the Development of Common Law Method” (1997) 13 Australian Journal of Law and Society 73. 5 M Hale, The Analysis of the Law ( J Walthoe, London, 1713). 6 On Blackstone’s admiration of Hale see WS Holdsworth, “Sir Matthew Hale” (1923) 39 Law Quarterly Review 402, 421. See also SFC Milsom, “The Nature of Blackstone’s Achievement” (1981) 1 Oxford Journal of Legal Studies 1, 3.

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Toward an Ecologically Sustainable Property Concept 67 and constitute such a subordinate Superintendent over it, that might take an immediate care of it.7

Before Hale, we find that even the author of liberalism, John Locke, qualified a power to destroy what one owns with considerations of need, the good of the governed, the distinction between fruits consumed and the earth itself, reason and the preservation of people, right and property. Locke also saw a limitation of the divine gift itself—“Nothing was made by God for man to spoil or destroy.”8 These acknowledgements of human responsibility implicit in the human concept of private property, made by important founders of the Common Law family, mirror Natural Law theory advocated by contemporaries on the Continent9 and are more consistent with concepts of sustainable development.

II . SUSTAINABLE DEVELOPMENT

The need to address global environmental issues was made very clear by the United Nations World Commission on Environment and Development in the Brundtland Report.10 The Commission discussed the need to integrate ecology into all forms of decision making: The common theme throughout this strategy for sustainable development is the need to integrate economic and ecological considerations in decision making. They are, after all, integrated in the workings of the real world. This will require a change in attitudes and objectives and in institutional arrangements at every level.11

And in a legal context: Sustainability requires the enforcement of wider responsibilities for the impact of decisions. This requires changes in the legal and institutional frameworks that will enforce the common interest. Some necessary changes in the legal framework start from the proposition that an environment adequate for health and well-being is essential for all human beings—including future generations. Such a view places the right to use public and private resources in its proper social context and provides a goal for more specific measures.12

7 Sir Matthew Hale, The Primitive Origination of Mankind (William Shrowsbery, London, 1677) 370. 8 J Locke, P Laslett (ed), Two Treatises Of Government (CUP, London, 1963) II, s 31. See also I, s 92 and II, s 32, and EC Hargrove, Foundations of Environmental Ethics (Prentice Hall, New Jersey, 1989) 71. 9 M Raff, above n 3, 121–39. 10 World Commission on Environment and Development, Our Common Future (OUP, Oxford, 1987). 11 Above, 106. 12 Above n 10, 107.

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68 Murray Raff These concerns manifested as expressions of international will in the Rio Declaration on Environment and Development and Agenda 21.13 The integration of ecological considerations as a matter of domestic law into private and commercial decision-making is a challenge that remains largely unaddressed, although acceptance of the concept of sustainable development into basic principles of civil law is probably the key to the long term international success that it must achieve. Private or civil law understanding of private property rights is the natural starting point, and foremost in this respect are private property rights in land. At the United Nations—FIG Workshop on Land Tenure and Cadastral Infrastructures for Sustainable Development14 one of the conclusions reached by the international experts working together on this issue was that . . . property rights in land do not in principle carry with them a right to neglect or destroy the land. The concept of property (including ownership and other proprietary interests) embraces social and environmental responsibility as well as relevant rights to benefit from the property. The registration of property in land is thus simultaneously a record of who is presumed to bear this responsibility and who is presumed to enjoy the benefit of relevant rights. The extent of responsibility is to be assessed by understanding the social and environmental location of the land in the light of available information and is subject to express laws and practices of the appropriate jurisdiction.15

This appears to contradict the mainstream view of common law property jurisprudence. However, the juridical material referred to above supports optimism for a creative integration of a common law concept of responsible proprietorship with the international concept of sustainable development. What actually stands against it?

III . THE COMMON LAW VIEW OF PROPERTY AS AN UNRESTRAINED ARBITRARY POWER

The mainstream view of the common law has been that rights of property are an implicit authority to do with the right whatever one arbitrarily wishes. With respect to ownership, this is generally seen as a right to do whatever one likes with the object of ownership, including destroy it. Environmental protection legislation has been deliberately “read down” to protect private property freedoms; freedoms conceived in the civil law as unlimited and isolated from public law “interference” attempted by the legislature. This has been a very powerful rhetorical position in Common Law systems. 13 UNCED, Report of the United Nations Conference on Environment and Development, Rio de Janeiro, 3–14 June 1992, UN Doc A/CONF151/26/Rev 1. 14 Bathurst, Australia, 17–23 October 1999, http://www.sli.unimelb.edu.au/UNConf99/index.html. 15 The Bathurst Declaration on Land Administration for Sustainable Development, 6, available at http://www.ddl.org/figtree/pub/figpub/pub21/figpub21.htm.

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Toward an Ecologically Sustainable Property Concept 69 An example is Protean (Holdings) Ltd v Environment Protection Authority,16 in which anti-pollution legislation was deliberately interpreted in a way that minimised its impact on the holder of private proprietary rights: Although it may be readily conceded that the purposes and objects of this Act are praiseworthy, the means adopted to achieve them seem to be quite authoritarian, if not draconian in character . . . Because of these features, I am of opinion that the legislature must be taken to have intended that although the statutory provisions of this Act might appear to confer powers upon the subordinate bodies,17 which would enable them to invade or erode the existing rights and privileges of the individual, either of a personal or proprietary character, such provisions if at all ambiguous should be strictly construed in favour of the subject.18

It followed that the proprietor of an abattoir located in the inner-city area of a capital city could not be restrained with the public law regulatory instruments available from producing offensive odours and noises generally. Only pollution discharged from particular point sources, such as chimneys, required antipollution licences. This restriction of the regulator’s powers was no necessary interpretation of the text of the anti-pollution legislation. Interpretation of the legislation in light of a concept of responsible proprietorship should have led to a different conclusion. The most influential source of this reading of the common law is the familiar passage of Sir William Blackstone dating from the 1760s: There is nothing which so generally strikes the imagination, and engages the affections of mankind, as the right of property; or that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.19

It is possible to detect a tone of irony in this passage. However, just as Hale developed his environmental ethic with reference to divine Creation,20 Blackstone sought support for his influential view of despotic dominion in theology: In the beginning of the world, we are informed by holy writ, the all-bountiful creator gave to man “dominion over all the earth; and over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth.” This is the only true and solid foundation of man’s dominion over external things, whatever airy metaphysical notions may have been started by fanciful writers upon this subject. The earth, therefore, and all things therein, are the general property of all mankind, exclusive of other beings from the gift of the creator.21

16 17 18 19 20 21

[1977] VR 51. Viz the Environment Protection Authority. Above n 16, 55–56. Above n 1 [my emphasis]. Above, in text at n 5. Blackstone, above n 19, Book II, ch 1, 2–3.

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70 Murray Raff Further support for the view that Blackstone intended a despotic, absolute or atomistic concept of property has been identified in this passage: So great moreover is the regard of the law for private property, that it will not authorize the least violation of it; no, not even for the general good of the whole community.22

However, Blackstone illustrated this point with the situation of private land being required for a public use, such as a road. His uncontroversial conclusion was that the land could not be taken without the owner’s consent or due process of municipal law.23 Blackstone clearly acknowledged limitations in both public and private nuisance, and the doctrine of waste.24 It follows that Blackstone did not necessarily have in mind, as an incident of property, the possibility of antisocial use. At a time when common lands were being enclosed,25 and memory of the English Revolution was not so distant, it is not surprising that he would have emphasised a “sole and despotic” power to exclude others from private property—especially the Crown. Blackstone’s pre-occupation with the proprietor’s power to exclude others is also clear in the first and second passages quoted above.26 Far less distinct is the possibility of a right of unlimited use being encapsulated in his reference to despotic dominion in the first passage.27 However, one might detect a link to the passage in Genesis I, 28, on which he relied in the second passage.28 If so, Blackstone has omitted the preceding part of that same biblical verse—the direction from God to “[b]e fruitful, and multiply, and replenish the earth and subdue it . . .” If Blackstone was contemplating unlimited use rights, he must have singled out God’s direction to subdue to support a notion of despotic dominion, despite the other injunctions from God directed to fertility and nurturing which Blackstone could have found in the same verse, which is a very selective reading of Genesis I, 28.

IV . USE AND MISUSE OF THEOLOGY IN COMMON LAW

We tend to assume that the common law system is secular but in practice oaths are sworn on the basis of a sacred text,29 from the witness stand or in support of 22 Blackstone, above n 19, Book I, 138–39. See DJ Boorstin, The Mysterious Science of the Law––An Essay on Blackstone’s Commentaries (Peter Smith, Gloucester, 1973) 171. 23 Blackstone, Commentaries, above n 19, Book I, 138–39. 24 Blackstone, above note 19. With respect to the doctrine of waste see Book II, ch 8, 122–23 and ch 18, 381–84, and Book III ch 14. With respect to nuisance see Book III, ch 13, especially at 217 with respect to toxic vapours. 25 See EP Thompson, Whigs and Hunters: The Origin of the Black Act (Penguin, Harmondsworth, 1975). 26 Passages in text above at n 19 and n 21. 27 Passage in text above at n 19. 28 Passage in text above at n 21. 29 RS Willen, “Rationalization of Anglo-legal culture: the testimonial oath” (1983) 34 British Journal of Sociology 109.

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Toward an Ecologically Sustainable Property Concept 71 affidavits, in virtually all court cases. Denominational and ecumenical religious ceremonies are an important part of the celebration of each new curial year. Theological considerations have provided significant inspiration for courts seeking a deeper ethical context for legal principles. With respect to the rules of natural justice, Byles J drew upon the hearing accorded by God to Adam before expulsion from Eden.30 Lord Atkin formulated the neighbour principle in light of the New Testament: The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour.31

Clearly sacred texts have great cultural significance. This is not to claim that in a legal system maintained by a multi-cultural and secular society the differences between legal and theological hermeneutics should be overlooked, or that religious ideas about the good and proper life should be directly carried over into law. Nevertheless, as I have pointed out, some basic norms in the common law system were originally derived from theological sources. No doubt others have been more subtly inspired by theological sources and any distinction between cultural and religious practice can never be entirely clear. We are entitled to ask in this situation, “What happens when a Jurist gets his or her theology wrong?” Surely, the world of the past cannot dictate that we must perpetuate spurious details of its religious beliefs, as well as its time-specific legal norms. So what can we say about the perpetuation of Blackstone’s view of a despotic dominion inherent in ownership, selectively devised on the basis of Genesis? Blackstone was raised in a devout Church of England family. His two brothers both became clergymen in that denomination. Warden described Blackstone as a very religious lawyer.32 Blackstone’s justification of property, formulated at the historical confluence of modern Natural Law, liberalism and early utilitarianism, was actually threefold. In addition to the Natural Law source in Genesis under discussion, Blackstone also advanced, secondly, the application of labour to matter as a reason for the person responsible for the labour excluding others from use of the resulting product,33 and thirdly, that property was created by the state to maintain peace and order.34 This suggests that the Natural Law justification which Blackstone found in Genesis, probably adopted from Locke,35 formed Blackstone’s sole basis for a power of despotic dominion if we

30

Cooper v Wandsworth Board of Works (1863) 14 CB (NS) 180, 195. Donoghue v Stevenson [1932] AC 562, 580. 32 LC Warden, The Life of Blackstone (Michie Co, Charlotteville, 1938) 20. 33 Plainly adopting the labour theory attributed to Locke. 34 Boorstin, 1973, above n 28, ch IX. 35 Above 168–69. See also EC Hargrove, Foundations of Environmental Ethics (Prentice Hall, New Jersey, 1989) 64–65, 71. 31

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72 Murray Raff are, indeed, to take it seriously. We have already seen that for Locke an owner’s power of destruction was heavily qualified.36 Today the Church of England does not share Blackstone’s view of Genesis I, 28.37 The Church might not have held it as doctrine in Blackstone’s own time.38 Today, so far as that denomination conceives human responsibilities regarding Creation in terms of property concepts, greater emphasis is accorded to a tenant status ordained in Leviticus 25, 1–35.39 In other religious denominations also, there are, to say the very least, important theological conclusions that humans do not hold Creation in their hands for their sole and despotic enjoyment, and generally that humans have positive duties to the environment.40 From all of these theological viewpoints, our companions in Creation, the plants and animals which were also created by divine hand, also have a right to enjoy the Universe created for them, and are generally considered divine.

V . ISLAMIC VIEWPOINTS

It is interesting to compare the theological conception of nature and the environment in other Abrahamic faiths. In the Islamic view, humans were granted intelligence and the ability to distinguish between virtue and sin, regarded as the essence of human dignity, precisely so they can play a role of vice-regency directly below God with obligations of responsible stewardship toward all things, and particularly plants and animals.41 Environmental stewardship is thus an essential part of the Islamic way of life.42 This conclusion must be drawn from consideration of many parts of the Qur’an.43 For example: 36

See text above, at n 8. General Synod Board for Social Responsibility (Church of England), Our Responsibility for the Environment (Church House Publishing, London, 1986) 17. 38 As we have seen, Blackstone could have drawn on the legal-theological view of his mentor in legal science, the 17th-century jurist Sir Matthew Hale: above n 5. Hale nevertheless had a Puritan background: see generally G Burnett, The Life And Death Of Sir Matthew Hale (William Shrowsbery Bible, Duke Lane, London, 1682––facsimile edn, Rothman’s Reprints Inc, New Jersey, 1972). 39 Doctrine Commission, HW Monteiore (ed), Man and Nature, (Collins, London, 1975). The former Archbishop of Canterbury, Dr M Ramsey, appointed this project of the Commission. See General Synod Board for Social Responsibility, 1986, above n 37, 18–19. 40 See Australian Catholic Bishops’ Conference, Common Wealth For The Common Good (Collins Dove Publications, 1992) 25–28; L de Silva, “The Hills Wherein My Soul Delights” and HH the Dalai Lama, “A Zone Of Peace” (Excerpts from Nobel Peace Prize Lecture) in M Batchelor and K Brown (eds), Buddhism and Ecology (Cassell, London, 1992); R Prime, Hinduism and Ecology–Seeds of Truth (Cassell, London, 1992) especially 8–21 and 36–52; and N Solomon, “Judaism and the Environment” in A Rose (ed), Judaism and Ecology (Cassell, London, 1992). 41 MY Izzi Dien, “Islamic Ethics and the Environment” . in FM Khalid and J O’Brien (eds), Islam and Ecology (Cassell, London, 1992) 25, 28. See also I Özdemir, “Toward an Understanding of Environmental Ethics from a Qur’anic Perspective” in RC Foltz, FM Denny and A Baharuddin (eds), Islam and Ecology––A Bestowed Trust (Harvard University Press, Cambridge, MA, 2003). 42 MY Izzi Dien, above. See also Al-Hafiz BA Masri, “Islam and Ecology” in FM Khalid and J O’Brien, above n 41. 43 I am using the Yusufali translation of the Qur’an; electronic edition distributed by The Islamic Computing Centre, London. 37

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Toward an Ecologically Sustainable Property Concept 73 He has created man: He has taught him speech (and intelligence). The sun and the moon follow courses (exactly) computed; And the herbs and the trees—both (alike) bow in adoration. And the Firmament has He raised high, and He has set up the Balance (of Justice), In order that ye may not transgress (due) balance.44

Later translation and commentary casts the balance referred to in Verse 7 as including ecological balance, and transgression in Verse 8 as including unsustainable practices,45 which is quite consistent with justice particularly when the principle of inter-generational equity is kept in mind. The Qur’an also describes relationships of dominion, stemming from God’s creation of the Universe and the natural laws that govern it. Seest thou not that God sends down rain from the sky, and forthwith the earth becomes clothed with green? for God is He Who understands the finest mysteries, and is well-acquainted (with them). To Him belongs all that is in the heavens and on earth: for verily God—He is free of all wants, Worthy of all Praise.46

The Muslim text, based on the Qur’an and the sayings of the Holy Prophet Muhammad contains the following lines: The world is green and beautiful and God has appointed you as His stewards over it. He sees how you acquit yourselves.47

Othman Abd-Ar-Rahman Llewellyn summarises the position thus: All properties and resources are held in trust by human beings, to be used only in accordance with their divinely ordained purposes. Therefore, while the right to hold private property is rigorously safeguarded, there are important restrictions on its use. Among the most important of these restrictions are those which pertain to the abuse of rights.48

Nature also shares divinity. There is not an animal (that lives) on the earth, nor a being that flies on its wings, but (forms part of) communities like you. Nothing have we omitted from the Book, and they (all) shall be gathered to their Lord in the end.49

44

Qur’an 55:3–8. See Al-Hafiz BA Masri, above n 42, 8. This appears to be an adaptation of the Shakir translation. 46 Qur’an 22:63 and 64. See also 7:128–29; 21:16–19; 24:42. 47 Quoted from Al-Hafiz BA Masri, above n 42, 12. 48 Othman A-A-R Llewellyn, “The Basis for a Discipline of Islamic Environmental Law” in Foltz, Denny and Baharuddin (eds), above n 41, 198. 49 Qur’an 6:38. See also 6:73; 6:95; 13:2–4; 20:53; 22:18; 24:41; 50:5–10; and 55:3–8 (set out in text above at n 44). 45

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74 Murray Raff

VI . ADJUSTING THE ETHICAL POSITION OF THE COMMON LAW

Mainstream theological traditions share the cosmological views of the human position in relation to resources and private dominion over them found in Islam. Islam, Christianity and Judaism share a substantial common wealth in spiritual traditions and sacred texts. In this connection, and with direct relevance to Blackstone’s view is the conclusion of Rabbi Dr Norman Solomon: There has been debate amongst Christian theologians as to whether the opening chapters of Genesis call on humans to act as stewards, guardians of creation, or to dominate and exploit the created world. There is little debate on this point amongst Jewish theologians, . . . So perverse is it to understand “and rule over it” (Genesis 1:28)—let alone Psalm 8—as meaning “exploit and destroy” (is that what people think of their rulers?) that many Christians take such interpretations as a deliberate attempt to besmirch Christianity and not a few Jews have read the discussions as an attempt to “blame the Jews” for yet another disaster in Christendom. The context of Genesis 1:28 is indeed that of humans being made in the image of God, the beneficent creator of good things; its meaning is therefore very precise, that humans, being in the image of God, are summoned to share in his creative work, and to do all in their power to sustain creation.50

In emphasising subdual in the 28th verse of Genesis, Blackstone has read the text very selectively. Blackstone also failed to recognise the unfolding narrative of the whole Book of Genesis. For example, if the verses I, 28–29 were all that God had to say about our relationship to nature, humans would in theological contemplation be necessarily vegetarian. Further, God saw that the world was good even before man and woman were created.51 A human power of dominion and subdual is, after the Fall from Eden, and the corruption which led to the Flood, conspicuously absent. The positive theological duty of humans to exercise enlightened and caring dominion over nature stems, not least, from God’s covenant with all of the World after the Flood, sealed by the Rainbow, containing a new relationship in which humans are only “keepers” and destruction of the Earth is discarded even from divine contemplation.52 In Christian theology the New Testament adds another dimension which the Christian Blackstone did not consider at all.53 In conclusion on this point, the biblical foundation selected by Blackstone for a Natural Law human power of absolute and unrestrained use of property54 is today widely regarded as false by theologians. The essence of property might well 50

N Solomon, above n 40, 26–7. See C Westermann, JJ Scullion (tr), Creation (Fortress, Philadelphia, 1974) 49–55, and Genesis 1:11 (SOCK, Augsburg, 1984) 470–74. 52 Genesis 9:15ff. For an interesting discussion of the concept of stewardship in an analogous biblical context see N Watson, The First Epistle To The Corinthians (Epworth, London, 1992) 36–37. 53 One might, for a start, point to the Parable of the Infertile Fig Tree in Luke 13:6ff. 54 Genesis 1:28––see text above at n 19 and n 21. 51

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Toward an Ecologically Sustainable Property Concept 75 lie in the proprietor’s fullest powers to alienate his or her interest in the object and to exclude others from it, as well as beneficial use and enjoyment of the interest, but there is no sound jurisprudential basis to exercise that right in disregard of responsibilities to human society or to other species and their habitats. A legal system that invokes religion at important points cannot dismiss as anachronistic or quaint a call for the correction of spurious juristic uses made of sacred texts in the past which perpetuate injustices into the future. The justification of a Natural Law right of unlimited dominion over an object of property is spurious in this sense. A greening of Natural Law was foreshadowed by the internationally renowned jurist His Excellency Judge Nagendra Singh, former President of the International Court of Justice, in his Forward to the Report of the Expert Group on Environmental Law of the World Commission on Environment and Development: Human laws must be reformulated to keep human activities in harmony with the unchanging and universal laws of nature. There is at the present time an urgent need: • to strengthen and extend the application of existing laws and international agreements in support of sustainable development; • to recognize and respect the reciprocal rights and responsibilities of individuals and States regarding sustainable development, and to apply new norms for State and interstate behaviour to enable this to be achieved; • to reinforce existing methods and develop new procedures for avoiding and resolving disputes on environmental and resource management issues.55

In his separate decision in the ICJ Case Concerning the Gabcikovo-Nagymaros Project,56 former Vice-President Weeramantry concluded that the contemporary concept of ecologically sustainable development equates with cultural limitations on the exploitation of natural resources which have underpinned the wealth of many civilisations of far greater longevity than western industrial civilisation has so far enjoyed. The principle of ecologically sustainable development mediates or synthesises the otherwise dialectically opposed propositions of, on one hand, the right to pursue economic development of that over which one has dominion, and on the other hand, the fact that all life depends on the existence of healthy eco-systems. As such, the principle of ecologically sustainable development is a long established principle of international customary law, which was again recognised by the international community at Rio de Janeiro—it did not emanate from the Earth Summit or the Brundtland Report. Common law presumptions about the right to exploit that over which we have dominion should reflect this principle of international law, rather than be grounded in the mistaken eighteenth-century theology of William Blackstone. A principle of responsible proprietorship should be recognised as the jurisprudential 55 Experts Group of WCED, Environmental Protection and Sustainable Development––Legal Principles and Recommendations (Graham & Trotman, London, 1987) x. On environmental aspects of classical and modern Natural Law see Raff, above n 3, 122–39. 56 (Hungary/Slovakia) International Court of Justice, 1997 no 92.

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76 Murray Raff position of the common law, not the mistaken idea of despotic dominion. In any case, common law real property law no longer exists anywhere in pure form. The two waves of legislative reform of the common law in this respect, deeds registration and land title registration, introduced a new concept of proprietorship with respect to land; one contingent upon the discharge of responsibilities with respect to one’s own land title, introduced for the wider benefit.

VII . EARLY REFORM OF COMMON LAW REAL PROPERTY

Deeds registration Blackstone published his view of property as a sole and despotic dominion in an era when the English administration of real property was based exclusively on classical common law deeds conveyancing. Deeds conveyancing was first developed in the sixteenth and seventeenth centuries through judicial interpretations of the Statute of Uses57 that achieved freedom from feudal constraints on the transfer of estates and interests in land. One of the freedoms achieved through deeds conveyancing was the possibility of confidential transactions with land. This feature appears unique in the European juristic developments away from feudalism. It was supported by the basic common law principle of priority between competing claims to an estate or interest in land—nemo dat quod non habet [“one cannot give what one does not have”]. The equitable doctrine of notice applied only as a qualification of this principle. If a legal proprietor attempted two legal conveyances of the same estate or interest, the second could not succeed because the estate or interest was already conveyed away, and this applied even if the second conveyee had no notice of the first. Legal conveyance was achieved merely by execution, sealing and delivery of the deed. In this sense there was little sense of responsibility to others in wider society who might enter transactions with respect to the same land.58 Deeds registration was developed across the nineteenth century to alleviate the problems that this absence of responsibility created. There was no mandatory direction to register deeds. Rather, conveyees who registered their written transactions gained priority over those who did not. The register was open to search by interested parties. In this way, a principle of publicity was reintroduced to the English real property law system. In Continental European legal systems in the French mould the fundamental question of when proprietors’ interests are owed respect by other members of society, with whom they have no other legal relationship, hinges around legitimate acts of publicity through which they make the existence of their interests widely known.59 In 57

27 Hen VIII c 10. Northern Counties of England Fire Insurance Company v Whipp (1884) 26 ChD 482. 59 E Beysen, “Belgien” in C v Bar (ed), Sachenrecht in Europa (Universitätsverlag Rasch, Osnabrück, 2000) vol 4, 7, at 34 and E Beysen, “Frankreich” in above, vol 4, 177, at 201. 58

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Toward an Ecologically Sustainable Property Concept 77 classical Roman Law possession was such an act, but in the French systems notarisation and registration became the required acts of publicity with respect to land. In other words, the proprietor became subject to reciprocal responsibilities to society that are recognised by the civil law. Society will enforce a private citizen’s exclusive dominion if that person has undertaken actions that enable other citizens to protect their interests with certainty, thus serving the broader social good. The responsibility to make a legitimate act of publicity is thus a social responsibility. That the private proprietor has a social function, and hence responsibility, became the mainstream jurisprudential position in the French systems through the work of Léon Duguit.60 It can be seen that with the adoption of deeds registration the social context of the institution of private property was recognised through legislative reform. It is true that deeds registration is distinguishable from notarisation and registration in the French style because the unregistered English deed remained a valid and effective instrument, however enforceability through social institutions was relative to the existence or non-existence of competing registered transactions. In other words, those who had discharged their responsibilities for the wider benefit were preferred. Blackstone’s concept of property was thus implicitly reformed by legislation establishing the deeds registration system. Where deeds registration was adopted, it could no longer be said that the proprietorship of legal estates and interests in land was completely devoid of responsibility. It was subject at least to the responsibility to publicise the transactions through which they were acquired, at the risk of loss to those claiming competing interests and who had discharged this responsibility. The introduction of deeds registration thus signals the first adoption of a legal concept of responsible proprietorship in the private law of the Common Law world.

VIII . COMPREHENSIVE REFORM OF COMMON LAW REAL PROPERTY

Land title registration Development of the Torrens System of land title registration in the 1850s and 1860s in Adelaide, South Australia, was a far more comprehensive reform of real property law than the introduction of deeds registration.61 It was originally inspired in a very large measure by the system operating in the 1840s in Hamburg through the work of Dr juris Ulrich Hübbe with the Torrens reform 60 L Duguit, “Les Transformations générales du droit privé depuis le Code Napoléon” published as “Changes of Principle in the Field of Liberty, Contract, Liability and Property” in The Progress of Continental Law in the Nineteenth Century (Little, Brown & Co, Boston, 1918). 61 Frazer v Walker [1967] 1 AC 569. This is certainly the view of the case found in W Taylor, “Scotching Frazer v Walker” (1970) 44 ALJ 248.

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78 Murray Raff group.62 The Hamburg-Hanseatic system later became the foundation of the modern German land title system.63 A different view of Hanseatic inspiration of the Torrens system has recently been adopted by Taylor.64 The objective of Taylor’s book is to celebrate the truly insightful law reforms undertaken in the early days of democracy in South Australia. Among the many progressive innovations, such as the abolition of primogeniture,65 Taylor sees the development of the Torrens system and its later success throughout the British Empire as holding special significance. However, without introducing new evidence he seeks to minimise detraction from the ingenuity of South Australians in the form of what he calls “outside help”. Who was “South Australian” in 1858? The first wave of organised largescale Lutheran immigration to South Australia from Germany began in 1838. The Irish-born Torrens was still studying Arts at Trinity College, Dublin in 1835 and did not arrive in Adelaide until 1840. Dr Hübbe arrived in 1842. Surely Dr Hübbe was no less “South Australian” than Torrens. Taylor also argues that mere coincidence explains the strong similarities between the Torrens system as it emerged in 1858 and the Hamburg system, about which Torrens’ main legal advisor, Dr Hübbe, was most knowledgeable.66 Finally, to place beyond doubt that the “brainwave” of reform ideas was truly South Australian, Taylor ironically emphasises Torrens’ knowledge of the registration of ships under the British Merchant Shipping Act 1854 (Imperial), presumably because he sees that source as more “South Australian” than the law of Hamburg could ever be.67 Robinson made a systematic analysis of the Merchant Shipping Act beside the Torrens reform and revealed significant disjuncture.68 Cooper has also noted important departures of the original Torrens legislation from the Shipping Act and that by 1877 the South Australian court had rejected analogy between land and ship registration.69 The HamburgHanseatic system has also had strong and influential connections to the sea. The original idea for the registration of property in ships and maritime inspiration

62 S Robinson, Transfer of Land in Victoria (Law Book Co, Sydney, 1979) ch 1; M Raff, above n 3, ch 1; AK Esposito, “A Comparison of the Australian (‘Torrens’) System of Land Registration of 1858 and the Law of Hamburg in the 1850s” (2003) 7 Australian Journal of Legal History 193. 63 S Buchholz, “Die Quellen des deutschen Immobiliarrechts im 19. Jahrhundert” (1978) 7 Ius Commune 250, 265. 64 G Taylor, “A Great and Glorious Reformation”––Early South Australian Legal Innovations (Wakefield Press, Kent Town, forthcoming) ch 2. I am grateful to the author for an advance copy of this chapter. 65 Act No 29 of 1867. Dr Hübbe also contributed to this reform: See U Hübbe, Letters to a Countryman on Intestate Estates, Acts, Judges and Things in General (David Gall, Adelaide, 1872). 66 On the wide distribution of technical papers by Dr Hübbe and his high level of involvement see Raff, above n 3, 26–41. See also text below at n 81. 67 G Taylor, above n 64. 68 S Robinson, above n 62, ch 1. 69 S Cooper, “Equity and Unregistered Land Rights in Commonwealth Registration Systems” (2003) 3 Oxford University Commonwealth Law Journal 201, 206 & 214.

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Toward an Ecologically Sustainable Property Concept 79 for the registration of land parcels might also be found there.70 Bending that idea to the flag of the ship and thus the protection of British imperial interests71 no doubt originated in London. Esposito72 and I have acknowledged South Australian innovation in the Torrens system’s departures from the Hamburg-Hanseatic model; such as the caveat system and the administrative rather than judicial registration of transactions. The development of the Torrens system is remarkable testimony to a nineteenth century “South Australian Legal Enlightenment” exactly because it was intelligently formulated by an inter-disciplinary group drawing on international and cosmopolitan sources in the way of a modern law reform project. There seems little doubt that Torrens led it. This reveals a far more impressive heritage than great emphasis being placed on Torrens’ very own early underdeveloped ideas, such as each transfer of the fee simple being a re-issue of the Crown Grant,73 and registering the conveyance and re-conveyance steps required in an English general law mortgage, neither of which reached fruition.74 Images of Torrens as a solitary patriarchal lawgiver, emerging from the South Australian desert in a biblical style with his system graven in stone, simply do not reflect the historical evidence. The English registration system was also developed with no small inspiration from a German model, through the influence of Fortescue-Brickdale: The population affected by the system [in Germany and Austria-Hungary] amounts to 95 millions, whereas the population of Australasia . . . is only 51⁄2 millions. The general conditions also combine in many ways to render this Central European system the most useful and general model for study and imitation.75

According to Ruoff, Brickdale was “the pioneer of effectual registration of title in [England]”.76 70 E Schalk, Einführung in die Geschichte des Liegenschaftsrechtes der Freien und Hansestadt Hamburg––Eine Darstellung des hamburgischen Grundstücksrechtes bis zur reichsrechtlichen Vereinheitlichung (A Deichertsche Verlagsbuchhandlung Dr Werner Scholl, Leipzig, 1931) 88 n 3; Raff, above n 3, 46–47. On the influence of Hanseatic maritime law see FR Sanborn, Origins of the Early Maritime and Commercial Law (William S Hein & Co, Buffalo, 2002) 76–77; JF Donaldson and CT Ellis, Lowndes & Rudolf’s Law of General Average and the York-Antwerp Rules, 8th edn (Stevens & Sons, London, 1955) 7–8. One might also draw attention to the international importance of the Hague-Visby Rules and the Hamburg Rules. 71 Cooper, above n 69, 203. 72 Above n 62. 73 Parliamentary Debates, 4 June 1857, Legislative Assembly, 204 (Mr Torrens). The Torrens system has not emerged in conformity with this idea. The paramount interest [overriding interest] in favour of reservations and conditions in the original Crown grant is entirely consistent with conventional real property law––the Crown grant creates a freehold tenure and transactions with the registered title convey or create estates or interests in that tenure. Revision of Torrens’ original views on this point attest to his withdrawal from authorship of the system’s key legal points. 74 According to Hübbe this was an early feature of the Torrens proposal: above n 66, 88–91. 75 Fortescue-Brickdale, Methods of Land Transfer––Eight Lectures (Stevens & Sons, London, 1914) 129–30 and “Registration of Title in Prussia” (1888) 4 LQR 63. 76 T Ruoff, An Englishman Looks At The Torrens System (Law Book Co, Sydney, 1957) 6; L Charlebois, “Creating Land Registration Systems for Developing Countries” [1999] Amicus Curiae 8.

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80 Murray Raff The adoption of German ideas of registered title introduced a particular concept of property. It is arguable, for example, that the idea of the conclusive land title register finally abolished the feudal concept of seisin, under which the owner was the person with the best right to possession, and substituted the modern liberal “bundle of rights” approach under which one of the rights of the owner is possession.77 Also, in the Torrens system, absent fraud, the registered legal proprietor holds free of all prior unregistered interests, whether aware of them or not,78 apart from the paramount interests [overriding interests].79 No estate or interest in land was to be created or to pass until registered in the land title register.80 The land title register is maintained for the wider social good—certainty in transactions concerning real estate and securities in it, and information symmetry in real estate markets. Implicit in these clear and comprehensive reforms is a legal concept of property subject to at least one wider responsibility—to register estates and interests in land at the risk of losing them completely, and one can imagine no greater disincentive to breach of a civil law obligation. The German idea of property has exhibited a principle of responsible proprietorship for many centuries and this has been embedded in that country’s private and public law jurisprudence. Although the points are logically inseparable, what historical evidence is there that reformers were advocating a basic principle of responsibility and common good when advancing registered title? First, as noted above, the legal machinery of the conclusive land title register sets up incentives and disincentives that stimulate the self-interest of a citizen who acquires an estate or interest in land to register it for the achievement of greater social good. This aspect of responsible proprietorship was intended by the framers of the legislation as an aspect of a comprehensive reform that would displace the common law wherever it was in conflict. This aspect is beyond doubt. Secondly, much contemporary writing in support of the measure demonstrates that a socially embedded concept of property was in the reforming mind. The jurist responsible for the German framework for the reform, Dr Hübbe, wrote an extensive pamphlet [monograph], The Voice of Reason and the History brought to bear against the Absurd and Expensive Method of Encumbering Immoveable Property,81 and had it published while the original Bill was before Parliament. Hübbe distributed a copy to each member of Parliament. In this work Hübbe made an extensive comparative analysis of the principle of publicity in many real property systems around the world. He also sought to build on the shared historical traditions of the British and German 77 To this end s 41 of Transfer of Land Act 1958 (Vic) deems registered title to be equivalent to seisin. 78 S 43 above. 79 S 42(2) above. 80 S 40 of Transfer of Land Act 1958 (Vic). 81 (David Gall, Adelaide, 1857).

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Toward an Ecologically Sustainable Property Concept 81 communities of South Australia by reminding readers that both English and German Saxon real property law required the publicity of transactions with land through symbolic ceremonies with a turf or a twig from the land before local community82 prior to the English experience of Norman feudalism commenced in 1066, and the English development of the use and deeds conveyancing to avoid its most repressive aspects. Most importantly, the work demonstrates that the legal-cultural values brought by Hübbe to the analysis of land title registration were far from mechanistic and asocial. Throughout the work he referred to feudalism as an oppressive social system, drawing attention to the ability of Saxon women to own and transact with land, and to the absence of primogeniture.83 At many points Hübbe was concerned with the situation of those in any of the studied systems who were at disadvantage in relevant transactions: • marital real securities in the French system;84 • protection afforded the “less propertied” by the principle of publicity which, in contrast to deeds conveyancing, requires transparent transactions recorded in public;85 and • drawing on the example of a young couple of limited means to illustrate transactionally the advantages and savings in interest and legal costs which flowed from land title registration.86 Hübbe also approved the relevance of public interest that he found in Saxon property law: In such . . . [national council meetings] . . . the Saxons had their first shares in their commonwealth adjusted, in point of property as well as of possession, of dignity, and of burden. The sturdy Saxons, though very far from holding communistic views were a people eminently given to meet together and devise anything and everything, under some point of view or other, as a matter of public interest.87

This democratic participation and social responsibility were for Hübbe the overarching custom, under which the most distinguishing principle was: . . . and always has been, wherever Saxons had it their own way, that transactions affecting lands must be public and notorious, and attested to at the people’s ordinary meeting, in order to be valid.88

This connection between the more technical operations of land title registration and the more philosophical ideal of a concept of property imbued with responsibility is repeated in some other jurisdictions. One must keep in mind 82 83 84 85 86 87 88

Hübbe, above n 81, 10–12 and 26–27. Above, 13 and 20–21. Hübbe, above n 81, 39 and 42. Above, 59–60 and 94. Above 68–69. Above 10. Above 11.

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82 Murray Raff that movement to land title registration coincided with rapid urbanisation and the growth of middle class land ownership on one hand and bureaucratisation on the other. The British inquiries illustrate this. In the first report to recommend land title registration,89 the Commission also pressed the need for social responsibility in land ownership as an argument for its adoption: . . . the fee simple in land shall always be represented and be in the possession of persons capable of fulfilling those new duties and offices which the ownership of land in the present state of society entails or involves.90

Similarly, the second commission appointed to draft the German Civil Code considered the objectives which the “duty of registration”91 would achieve. They included: • • • • • •

prevention of doubts and disputes; protection of the interests of third persons; making the proprietary legal relationships of a land parcel transparent; legal certainty; raising national welfare; the approval of most governments in Germany and the representatives of agricultural interests; • enhancement of secured credit; • agreement with the ideals of the people.92 So, in Adelaide, London and Berlin it was considered that the introduction of land title registration at the pivotal juncture in rapidly changing settlement patterns in all three jurisdictions would secure social benefits at a number of different levels. The responsibility to register is a social responsibility. Is there ground for saying that the principle of responsible proprietorship extended to environmentally responsible proprietorship? What of the Hamburg model? The Hamburg estates in land [Erbe] were classified according to land use in a fascinating application of civil law property concepts to the urban problem of placing inconsistent land uses in tolerable spatial relationship to each other. Examples include: • Brauerbe—brewery estate • Backerbe—bakery estate • Wohnerbe—residential estate

89 Great Britain, Report of the Commissioners appointed to consider the subject of the Registration of Title with reference to the Sale and Transfer of Land, 15 May 1857, British Sessional Papers, 1857, vol XXI, 245. Discussed in Raff, above n 3, 47–54. 90 Above, 29 [L] (my emphasis). 91 Die Eintragungspflicht. 92 Deutschland, Die gesamten Materialien zum Bürgerlichen Gesetzbuch für das Deutsche Reich (B Mugdan (ed), Berlin, 1899) vol III [Sachenrecht] 3868–82 (1979 re-edition, Aalen, Scientia) vol 3, 723–28. Discussed in Raff, above n 3, 139–58.

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Toward an Ecologically Sustainable Property Concept 83 While at first sight this might appear as a divergence between the systems, a similar capacity was actually retained for the Torrens system by instituting an exception to the security of registered title; a paramount [overriding] interest in favour of conditions and reservations in the original Crown grant of freehold tenure.93 This capacity was actually utilised in the early years of the implementation of the Torrens system in Australia in order to restrict the uses to which land might be put when laying out the development of some early country towns. This was certainly done in South Australia in later periods with respect to land not under the planning authority of a local council.94 Reservations and conditions of the Crown Grant for mining and grazing purposes have been more common. In such ways, broader social intentions were integrated in the Crown Grant with the description of the tenure. Such “pre-planning” efforts in Hamburg and Australia to integrate the civil law object of ownership with its social and environmental context contrast strongly with their equivalents at the time under the English general law system.95 Further, concern about the polluted environments of major English cities, and the need to plan Adelaide in advance to avoid such problems, was expressed in South Australia at the time when land title registration was being debated: From the immense difficulty experienced by sanitary reformers in England in purifying their great towns and cities the inhabitants of all rising towns and cities should learn never to allow theirs to become impure. We ought not, in South Australia, to neglect the painful experiences of the mother-country. Under careful sanitary and medical supervision Adelaide never need become unhealthy; without such attention it will gradually develop the same physical horrors observable in London and elsewhere . . . To prevent this melancholy pressure every means should be devised by the authorities. No person should be allowed to build hovels in populous cities. The limitation of liberty implied in proper regulations is no greater infringement upon personal rights than is demanded by the public welfare. The law allows the pulling down of hovels, and it should equally prohibit their erection.96

The editors of the Adelaide newspapers were part of the inner sanctum of the Torrens reform group, as was Dr Hübbe. Adelaide was ready for a concept of property implicitly subject to responsibility, social and environmental, and the Torrens system delivered it. 93 Ss 37 and 38 Real Property Act 1858 (SA); ss 69 and 161 Real Property Act 1886 (SA); s 42 Transfer of Land Act 1958 (Vic). 94 Some examples are Crown Grant vol 1746 folio 20, which restricts the use of the land to business purposes, Crown Grant vol 1750 folio 153, which restricts use of the land to residential purposes, in addition to those granting land to public authorities for general and specified public purposes. I am indebted to Mr D Mackintosh, Deputy Registrar-General of South Australia, for correspondence on this point (letter of 29 January 1999 on file with author). 95 See for example, descriptions of Manchester in F Engels, WO Henderson and WH Chaloner (eds and trs), The Conditions of the Working Class in England, 2nd edn (Blackwell, London, 1971). See M Raff, “A History of Land Use Planning Legislation in Victoria” (1996) 22 Monash University Law Review 90. 96 “The Contaminations of Great Cities” The South Australian Register (Adelaide) 3 July 1857 [my emphasis].

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84 Murray Raff

IX . MODERN UNFOLDING OF GERMAN REAL PROPERTY LAW

Reception of a law or system of laws often brings with it aspects that are not immediately apparent, for many possible reasons. In Australia the Hanseatic source of inspiration was overlooked in legal circles from the later 19th century until juristically rediscovered in the 1960s–70s.97 The post-reception unfolding of the donor system is recognised as a valuable aid to interpretation when locating and assessing the potential for actualisation of hitherto unrecognised aspects of the received laws.98 As mentioned above, the Hamburg-Hanseatic system was highly influential in the emergence of modern German real property law99 and the German idea of property has exhibited a principle of responsible proprietorship for many centuries, which has been embedded in that country’s private and public law jurisprudence. With amazing growth in the power of industrial society to impact adversely on natural and urban environments, over the past 150 years in the German system there has been a clear movement away from reliance on civil law responsibility alone to the enforcement of responsibility also through public law instruments. The broader social responsibility implicit in proprietorship was recognised in public law in The Kreuzberg Monument Decision100 although at the time there was no express constitutional text requiring it. Later, Article 153 of the Weimar Constitution of 1919 expressly recognised the social responsibility of property. This was recast into Article 14 of the present German Federal Constitution.101 It contains both a civil rights guarantee of property and a statement that property carries with it responsibilities: (1) Property and inheritance are guaranteed. Their meaning and limitations are defined in legislation. (2) Property carries responsibilities. Its use shall at the same time serve the common good.

The jurisprudence of Article 14 draws on a Natural Law tradition reaching back before the Enlightenment102 and a limitation within the liberal conception of property. The text of Article 14 is not regarded as the source of the responsibility of proprietorship but yet another expression of a deeper principle. The responsibility in Article 14(2) was first held to include an environmental obligation in the leading decision of the German High Court for civil cases103 in 97 Raff, above n 3, 55–60. The German-Australian community in South Australia has persistently sought to remind us of this contribution to the legal well being of the nation. 98 Raff, above n 3, 17–24. 99 In text above at n 63. 100 (1882) 9 PrOVG 353, reproduced in (1985) 10 DVBl 219. 101 Grundgesetz für die Bundesrepublik Deutschland, 23.5.1949 (BGBl. S 1). 102 Maßnahmen des Wohnungsamts (1952) 6 BGHZ 270, 278. Explored in Raff, above n 3, 121–38 and 169. 103 Bundesgerichtshof.

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Toward an Ecologically Sustainable Property Concept 85 the Cathedral of Beech Trees Case.104 The court held that the content of the environmental responsibility depended in turn upon the environmental context of the relevant property. The Court found that even in the absence of legal regulation a reasonable and economically oriented owner of the land with the common good in mind would recognise that the natural features and landscape of the land imposed a social responsibility on the owner to preserve a grove of trees. Therefore, a tree preservation order was not an expropriation of property—it merely concreted responsibilities already borne. The Bundesgerichtshof recalled that a sovereign interference in proprietary rights is to be characterised as an expropriation when it contravenes the constitutional guarantee of equality,105 by requiring of an individual or a group an unreasonable sacrifice in the interests of the commonality. On the other hand, a limitation of property is acceptable when, without contravening the guarantee of equality, it expresses inherent and social limitations of the property which stem from the general nature of its existence. The natural features of property that make it worthy of preservation are an example of such inherent limitations. Legislation or administrative action requiring preservation does not interfere with proprietors’ powers of disposition. Instead, they are a concrete expression of social responsibility associated with the property in view of its situation. The German constitutional guarantee of property also protects the citizen’s proprietary interests against undue environmental interference from governmental projects. In view of the social obligations implicit in property, which are to be determined in context, there is a level of interference generated by public initiatives that a private property owner must tolerate for the common good. However, when interference with the usual use of the property reaches the expropriation threshold compensation must be paid. There is yet a further level of interference with the property at which the property cannot be used in a relevant sense and then it must be acquired. The effective expropriation of property caused by aircraft noise in the vicinity of airports illustrates the application of these principles.106 With respect to private law, it might be objected that the definition of ownership in §903 of the German Civil Code107 reveals no sense of responsibility on the part of the private proprietor, but rather an unrestrained freedom. Soon after the German Civil Code had taken effect, Otto Gierke wrote in his monumental work Deutsches Privatrecht: When the concept of ownership is considered in isolation it cannot be viewed as an unlimited right of dominion. Only in comparison with the other rights of property can it be described as unlimited. [B]eside the illusion of absolute power, it carries 104 Buchendomurteil (1957) DVBl 861, (1957) DÖV 669. On cases that followed see Raff, above n 3, 171–79. 105 Art 3 Grundgesetz. 106 See Appeal from Environmental Assessment of Munich Airport II (1991) 87 BVerwGE 332, discussed in Raff, above n 3, 179–81. 107 Das Bürgerliche Gesetzbuch [BGB].

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86 Murray Raff limitations within its very concept . . . It confers not arbitrary power but power bound by right. . . . Here [is] the . . . German legal idea . . .—ownership is pervaded by responsibilities.108

I translate §903 of the German Civil Code as: § 903—Powers of the Owner The owner of a thing can, so far as not contrary to law or the rights of third parties, deal with the thing at discretion and exclude others from every use or misuse of it. The owner of an animal has to observe the particular provisions for the protection of animals in the exercise of his powers.

The literature and judicial interpretation concerning §903 supports translation of “nach Belieben” as “at discretion” rather than “at arbitrary pleasure”.109 We saw above that Art 14 GG is just one historical manifestation of the Natural Law responsibility pervading property, demonstrating that the jurisprudential principle lies at a much deeper level than the positive law texts that clothe it. It is also much deeper than the present line between public and private law. In German private law the principle of responsible proprietorship also manifests itself in these express proprietary responsibilities: • compliance with a doctrine of “neighbourly consideration” in the use of one’s property; • maintenance of one’s property and surrounding areas with a view to safety; • registration of one’s own proprietary interests in land at the risk of losing them in competition with someone who does discharge this responsibility.110 After surveying civil law developments in Germany to 1986, Jauernig wrote: “That social responsibility in owning land is extraordinarily strong remains without doubt.”111 This position in the private law system, consistent with German public law, promises adaptation to the challenges of the international concept of sustainability that is consistent across the existing legal system without call for further layers of public regulation.112

108 O Gierke, “Das Eigentum” in O Gierke, Deutsches Privatrecht (Duncker & Humblot, Leipzig, 1905) vol II: Sachenrecht, 364–65. This view is also reflected in the famous theoretical work of R von Ihering, Der Zweck im Recht, 3rd edn (Breitkopf & Härtel, Leipzig, 1893) 519. 109 This point is explored in great detail in Raff, above n 3, ch 5. 110 On recognition of this as a responsibility for the common good in the drafting debates toward the BGB see text above following n 90. 111 O Jauernig, “Zivilrechtlicher Schutz des Grundeigentums in der neueren Rechtsentwicklung” (1986) 41 Juristenzeitung 607, 613. 112 Addition of art 20a [“Protection of the Natural Foundations of Life”] to the German Constitution in 1994 is an interesting development in this respect: see Raff, above n 3, 181–82.

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Toward an Ecologically Sustainable Property Concept 87

X . CONCLUSION — CAN RESPONSIBLE PROPRIETORSHIP GLOBALISE ?

Common law presumptions about the world about us and the parts of it we call “ours” must change. Rather than presuming that the twenty-first century private registered proprietor has a “sole and despotic dominion” in the style of Blackstone,113 which we know to be ecologically unsustainable, we should presume that the twenty-first century private registered proprietor will act with responsibility regarding the ecological constraints of the land parcel in question. I have argued that the idea of property behind the presumption is based on mistaken theology. In any case, transition has occurred through the reception of a land title system, the inextricable underlying principle of which is responsible proprietorship, reflecting fundamental Natural Law principles. The unfolding of these principles in practice may be observed in the modern German legal system. This is a far preferable jurisprudential basis for a twenty-first century real property system than the idea of “sole and despotic dominion” which was based on theological error and is inconsistent with the international concept of sustainable development. Today the common law idea of real property exists nowhere in pure form.114 Reform of real property law throughout the Common Law legal family has introduced the essential abstract concept of responsible proprietorship which manifests itself in the text and mechanics of legislation introduced comprehensively to displace the common law real property principles of Blackstone’s era. Land title registration carries unavoidably within its structure at least one social responsibility of proprietorship enforced through civil law means. Historical evidence of reformers’ intentions confirms that this is one legal manifestation of a more abstract concept of responsible proprietorship implicit in their comprehensive reform measures. The history of the Hamburg-Hanseatic real property systems that inspired Torrens, as well as the later unfolding of the modern German legal system, show that responsible proprietorship embraces environmental responsibility. The principle of publicity implicit in deeds registration also demonstrates a socially embedded concept of property. Analogy drawn from systems influenced by French notarisation and registration of real property transactions suggests that the principle of publicity alone could well be sufficient to attract the ideas of social responsibility accepted in those systems through the jurisprudence of Duguit.115 Land title registration in the German style, deeds registration and French influenced models, and systems derived from them, account for very many of the world’s domestic real property law systems applying to urbanised land use in the world. The widespread adoption of land title registration systems around 113 114 115

Above n 19. For an extensive overview of international land title systems see Raff, above n 3, Introduction. Above n 60.

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88 Murray Raff the world suggests that it has been the globalising trend in real property law. These systems will continue to spread. United Nations Capacity Building Guidelines simply assume that land title registration systems will be adopted.116 The World Bank also prefers land title registration.117 International Monetary Fund requirements that land law reforms be introduced as a facet of structural adjustment can lead to consideration of adopting land title registration systems although this might lead to social tensions.118 This chapter should not be thought to argue for the adoption of land title registration where it would be culturally inappropriate. However, it is apparent that through momentum alone the adoption of land title registration systems will continue to be a globalising trend for many years. With recognition of the idea of responsible proprietorship implicit in land title registration systems where they have been adopted, the integration of the international concept of sustainable development into many domestic legal systems will be more achievable.

116 United Nations––Economic Commission for Europe, Land Administration Guidelines––With Special Reference to Countries in Transition, New York & Geneva, 1996, ECE/HBP/96, 15–18. 117 See J Slater, “Thailand Sets an Example––Land-Titling Initiatives Lead to Cheaper and Longer-Term Loans” in Far Eastern Economic Review, 9 May 2002, 40; FFK Byamugisha “The Effects of Land Registration on Financial Development and Economic Growth: A Theoretical and Conceptual Framework” World Bank Policy Research Working Paper No 2240 (November 1999). 118 D Lea, Melanesian Land Tenure in a Contemporary and Philosophical Context (University Press of America, Lanham, 1997) 75.

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5

Personal Liability for Receipt of Trust Property: Allocating the Risks GARY WATT

This chapter is concerned to identify the appropriate basis of a recipient’s personal liability for the beneficial1 receipt of trust assets derived from a breach of fiduciary duty, with particular reference to the receipt in commercial contexts of trust assets other than land.2 It is assumed for present purposes that the recipient is no longer in possession of the assets by the date of the court hearing.3 Two issues are relevant when seeking to identify the appropriate basis of personal liability for receipt of trust property, albeit they necessarily overlap to a great extent. The first is the issue of the burden of proof: should the claimant be required to prove that the recipient is at fault, or should the defendant be strictly liable subject to the possibility of being able to raise defences? The second is to determine what it is that must be proved. The second issue is framed according to the party required to bear the burden of proof. Where the claimant has the burden of proving fault, the issue centres on the nature and degree of the fault that must be proved: is it necessary to prove that the defendant’s receipt of the claimant’s asset (or, which may be more accurate, the defendant’s “retention”4 of the asset) was dishonest,5 in “want of probity”,6 unconscionable,7 reckless8

1 The “essential feature” of liability for knowing receipt of trust property is that “the recipient must have received the property for his own use and benefit” Agip (Africa) Ltd v Jackson [1990] Ch 265 per Millett J at 292. See, also, PJ Millett, “Tracing the Proceeds of Fraud” (1991) 107 LQR 71 at 82–83. On the meaning of “receipt” see, generally, M Bryan, “When Does A Bank Receive Money” (1996) JBL 165–76. 2 David Fox considers personal liability for receipt of land in his chapter of this volume. 3 So as to avoid discussion of proprietary claims. 4 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA), per Nourse LJ at 455. 5 According to Nourse LJ in Akindele (above at 450), the decision of the Court of Appeal in Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 establishes that dishonesty is not a necessary ingredient of liability in knowing receipt. 6 Carl Zeiss Stiftung v Herbert Smith (No 2) [1969] 2 Ch 276 per Edmund Davies LJ at 302. 7 Akindele n 4 above. 8 Re Montagu’s Settlement Trusts [1987] Ch 264; Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484 per Vinelott J at 497.

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92 Gary Watt or merely negligent?9 Where the defendant has the burden of raising a defence to strict liability, the issue is to determine what defences he may raise. Both issues remain unresolved and highly controversial despite the passage of nearly ten years since Lord Nicholls reformulated the personal liability of nonrecipient accessories to breach of trust in Royal Brunei Airlines v Tan.10 This is especially true of the debate for and against strict liability, which appears entrenched by strong arguments of principle and policy on both sides. With regard to that debate it is submitted that analysis in terms of the allocation of relevant risks may reduce the disputed ground between the rival camps. In fact this chapter will contend that in terms of risk allocation the case for strict liability is untenable in certain contexts.

I . THE BURDEN OF PROOF

In this section we will seek to determine whether a claimant should be required, as a prerequisite to establishing the recipient’s personal liability, to prove that the recipient was at fault. The alternative is to presume the recipient strictly liable, albeit (and this is apparently accepted by all advocates of “strict” liability in this context) subject to the possibility of the recipient raising certain defences. So the choice between fault-based liability and strict liability is essentially an issue of allocating the burden of proof. The complexity of modern commerce renders this a practical issue of great importance, for the cost of unravelling that complexity lies primarily upon the party with the burden of proof.11 There is also the barrier of legal complexity to overcome, for the element of fault required for fault-based liability is still unresolved and if strict liability is adopted it is as yet far from clear what defences in addition to “innocent change of position” might be raised to it. Even the “innocent change of position” defence requires proof of an original position, proof of a change brought about by the receipt and proof of innocence. The evidential burden of proving any one element of that defence would be a challenge; to prove all three would be a Herculean task for a commercial party to discharge. It is not possible to allocate the burden of proof on a case-by-case basis by reference to the substantial justice between the particular parties for the obvious reason that the burden of proof must be allocated prior to the substantial hearing of the matter. It follows from this that the burden of proof must be allocated 9 Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 Lloyd’s Rep 289 per UngoedThomas J at 323; Citadel General Assurance Co v Lloyds Bank Canada [1997] 3 SCR 805, per La Forest J at para 49. See, also, Houghton v Fayers [2000] 1 BCLC 511 at 516. 10 Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC). 11 Lionel Smith has observed that “[a]lthough there may be no difference in the classroom between fault-based liability and strict liability with defences, there is a great difference in the courtroom”. LD Smith, “Unjust Enrichment, Property and the Structure of Trusts” (2000) 116 LQR 412 at 434.

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Personal Liability for Receipt of Trust Property 93 in the same way in all like cases, so the party to bear the burden must be identified by reference to general considerations of principle or public interest.

Precedent The great weight of English and Commonwealth judicial precedent favours fault-based personal liability. We await an authoritative decision of the House of Lords on the prerequisites of personal liability for receipt of trust property, but the following statement of Hoffmann LJ, made a decade ago, has frequently been rescued by the Court of Appeal from the sea of conflicting dicta: the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.12

This statement leaves open the precise relationship between knowledge and fault,13 a point to which we will return in Section II, but it makes perfectly clear that the onus is on the claimant to prove not only that the defendant received the misapplied property in fact, but also that in doing so the defendant was at fault.14 There is, in short, an actus reus and a mens rea to liability under this head. As the authorities stand, strict liability is out.15 Undaunted by the authorities a number of senior judges have written extrajudicially in support of strict liability for receipt of trust property. Lord Nicholls, who reformed the law on non-recipient accessory liability, is one;16 Lord Millett is another.17 Their lordships have occasionally voiced their support in the decided cases, but on such occasions they have been in the minority and their comments have tended to be obiter dicta. An example is the speech of Lord Nicholls in Criterion Properties Plc v Stratford UK Properties LLC.18 In that case, the appellant pleaded knowing receipt in relation to the “receipt” of rights under an executory contract and Lord Scott of Foscote dismissed the appeal on 12 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700. Followed in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 448; Niru Battery Manufacturing Company v Milestone Trading Limited et al [2004] EWCA Civ 487; [2004] 2 Lloyd’s Rep 319, Court of Appeal, per Clarke LJ at para 154. 13 An observation made in Criterion Properties plc v Stratford UK Properties LLC [2003] 1 WLR 2108 (CA), per Carnwath LJ at paras 36–37. 14 The requirement of knowledge has frequently been confirmed. See, for example, Criterion Properties, above; and Papamichael v National Westminster Bank plc [2003] 1 Lloyds 341 at 375. 15 Smith notes that no defendant has ever been made strictly liable for the receipt of trust property (n 11 above at 437). 16 Lord Nicholls, “Knowing Receipt: The Need for a New Landmark” in WR Cornish, R Nolan, J O’Sullivan and G Virgo (eds), Restitution: Past, Present and Future (Clarendon Press, Oxford, 1999) at 238–39. 17 Sir P Millett, “Tracing the Proceeds of Fraud” (1991) 107 LQR 71 at 82–85; Sir P Millett, “Equity––The Road Ahead” (1995) 9 TLI 35 at 39–40. 18 [2004] 1 WLR 1846.

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94 Gary Watt the ground that the law relating to knowing receipt of assets may be applicable where assets have been transferred by a fully executed contract, but not where the assets have yet to be transferred.19 Lord Nicholls purported to approve the reasoning of Lord Scott of Foscote,20 but it is respectfully submitted that Lord Nicholls was alone when, with a view to advancing the wider case for strict liability for receipt of trust assets, he went on to observe that the Court of Appeal in Akindele had been wrong to consider the law of knowing receipt in relation to the fully executed contractual transfer of assets in that case: If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A’s ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of “knowing receipt” by B do not arise . . . If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B’s personal accountability will not be dependent upon proof of fault or “unconscionable” conduct on his part. B’s accountability, in this regard, will be “strict”.21

A further example is the speech of Lord Millett in Twinsectra Ltd v Yardley.22 The issue in the case was liability for dishonest assistance in a breach of trust, but his Lordship made a solo excursus into recipient liability to express his view that a recipient of misapplied trust property should be strictly liable on a restitutionary basis without proof that he had knowledge of the misapplication.23 Likewise in Dubai Aluminium Co Ltd v Salaam24 Lord Millett was alone in suggesting, again obiter, that a claimant should be permitted to elect between two types of personal claim against the recipient of trust property; one fault-based, the other strict. The former would be based on the defendant’s dishonest state of mind, the latter would be a restitutionary claim based on the simple act of receipt.25 His Lordship cited John v Dodwell & Co Ltd 26 in support of strict liability for receipt of trust property. However that case, which was an appeal to the Privy Council from the Supreme Court of Ceylon, offers, with respect, rather weak support for strict-liability. It is true that Viscount Haldane held that the money misapplied in that case (by the holder of a power of attorney) could

19 20 21 22 23 24 25 26

Above, para 27. Above, para 1. Above, para 4. [2002] 2 AC 164. Above at 194 (para 105). [2003] 2 AC 366. Above at 391 (para 87). [1918] AC 563.

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Personal Liability for Receipt of Trust Property 95 be regarded as being in some broad sense misapplied in breach of a trust or fiduciary duty, but his lordship also held (out of deference to the significant Roman-Dutch Civilian component of the law of Ceylon)27 that the case concerned an in rem claim rather than an equitable claim properly so-called.28 This reasoning explains why his lordship refused to recognise the so-called “equitable” defence of laches in that case,29 and might also explain why his lordship awarded simple rather than compound interest on the judgment. Not only is there a dearth of authority in favour of strict liability, there are even cases in which it has been expressly rejected. Such rejection can sometimes be explained away as being nothing more than deference to the lack of authority for strict liability,30 but in BCCI v Akindele31 the Court of Appeal rejected strict liability as a matter of principle. In 1985, Akindele had advanced $10m (US) to a company controlled by BCCI under an artificial loan agreement. In 1988 he received $16.79m (US) under the agreement. The liquidators of the bank sought to recover the defendant’s $6.79m profit on the basis inter alia of knowing receipt of trust property. The claimants argued that A’s dishonesty could be inferred from his knowledge of the artificial character of the loan and from his receipt of an unusually high rate of return. At first instance the court dismissed the claim on the ground that the claimant had failed to prove that the defendant had been dishonest. The Court of Appeal held that it is not necessary to prove that a defendant was dishonest in order to fix him with liability for knowing receipt; it is only necessary to prove that there was at some point an unconscionable retention of the misapplied assets for the defendant’s own benefit: Just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made.32

The appeal was dismissed on the ground that the state of the defendant’s knowledge was not such as to make it unconscionable for him to enter into the transaction in 1985 or to receive and retain the benefits of the transaction in 1988, notwithstanding the rumours that were then circulating about the 27

Now, of course, the Democratic Socialist Republic of Sri Lanka. [1918] AC 563. Above at 566. See, generally, G Watt, “Laches, Cause of Action Estoppel and Election” in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford, 2002) 353. 30 See, for example, Equiticorp Industries Group Ltd (In Statutory Management) v The Crown [1996] 3 NZLR 586 (HC, Auckland). 31 Bank of Credit and Commerce International (Overseas) Ltd v Chief Labode Onadimaki Akindele [2001] Ch 437. 32 Above, per Nourse LJ at 455. 28 29

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96 Gary Watt integrity of the bank’s management. Significantly, Nourse LJ doubted that strict liability subject to a change of position defence would be desirable in commercial contexts: I beg leave to doubt whether strict liability coupled with a change of position defence would be preferable to fault-based liability in many commercial transactions, for example where, as here, the receipt is of a company’s funds which have been misapplied by its directors. Without having heard argument it is unwise to be dogmatic, but in such a case it would appear to be commercially unworkable and contrary to the spirit of the rule in Royal British Bank v Turquand (1856) 6 E & B 327 that, simply on proof of an internal misapplication of the company’s funds, the burden should shift to the recipient to defend the receipt either by a change of position or perhaps in some other way.33

The suggestion that the imposition in commercial contexts of strict liability on recipients of misapplied trust property would be inconsistent with the “spirit of the rule” in Turquand deserves comment. That rule, it may be recalled, holds that third parties, who in good faith receive company funds from directors of the company, are entitled to assume that the directors have acted within their authority.34 If the spirit of the rule is the policy in favour of the “the smooth operation of the wheels of business”35 or the broad principle that losses caused by a company’s agents should be borne by the company before they are borne by innocent third parties, it is a spirit that should be welcomed in trust law, for it is the primary contention of this paper that in commercial contexts the risk of misapplication of trust property should be allocated to trust beneficiaries before it is allocated to third party recipients of trust property. However, it should not be supposed that the letter of the Turquand rule can be transported wholesale into the law of trusts. Trust beneficiaries have traditionally been better protected than company shareholders36 (a reflection perhaps of the commercial risk that shareholders voluntary undertake in the expectation of commercial returns, and the fact that beneficiaries are beneficial owners of the trust assets whereas shareholders are not beneficial owners of the company’s assets), so the case for strict liability, even if it is a weak case, is admittedly somewhat stronger in the trust context than in the company context.

Public interest We must ignore for the time being the weight of precedent in support of faultbased liability and consider the strength of the underlying arguments. Those arguments can be grouped under the headings of public interest and principle. 33

Above, at 455–56. Smith v Henniker-Major & Co (A Firm) [2003] Ch 182 (CA), per Carnwath LJ at 214 (para 111); citing Morris v Kanssen [1946] AC 459 (HL). 35 Registrar-General v Northside Developments Pty Ltd (1988) 14 ACLR 543 per Kirby P at 548. 36 D Hayton, “Trust Law and Occupational Pension Schemes” [1993] Conv 283. 34

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Personal Liability for Receipt of Trust Property 97 Arguments of public interest are concerned with the law’s external effect on society at large, whereas arguments of principle are concerned primarily with the internal logic and consistency of the law. Of course this categorisation is somewhat loose, since the public inevitably has an interest in the integrity of law, but it will serve its heuristic purpose. Two public interests have been particularly prominent in the debate concerning the allocation of the burden of proof between the recipient of misapplied trust property and the person claiming against him, and the apparent entrenched competition between these two public interests accounts in large part for the apparent insolubility of the debate.37 The first public interest is the interest in the security of commercial transactions and security of receipt in particular; it favours fault-based liability. It is expressed in the desire to limit the searches a commercial party is required to make prior to receipt and the desire to leave receipts undisturbed once they have occurred.38 It coincides with the economic benefits of an efficient market.39 It also coincides with the presumption against the imposition of personal liability on agents employed by trusts.40 The second public interest favours strict liability; it is the public interest in the vindication of title or, to put it another way, the desire that property rights in misapplied assets should be inviolable. In its support for strict liability this policy is allied to the principle that a recipient unjustly enriched by the claimant’s assets should account to the claimant in restitution. Of course a fault-based approach is not wholly contrary to the public interest in protecting the claimant’s rights, for if fault is proven the claimant will be entitled to a remedy; and neither is a strict liability approach wholly contrary to the public interest in security of receipt, for strict liability would be accompanied by a bona fide purchase defence and a defence of innocent change of position.41 Nevertheless, when it comes to allocating the burden of proof (in this case proof of a defence, such as the bona fide purchaser defence) it cannot be denied that the strict liability approach at the very least favours security of the claimant’s right over security of the defendant’s receipt.

37 Michael Bryan suggests that confusion in this area of law reflects “a basic tension between security of title, favouring equitable relief for the victims of fraud, and security of transaction, which protects the ultimate recipients of the proceeds of fraud if they have acted in good faith” in “Cleaning Up After Breaches of Fiduciary Duty––The Liability of Banks and Other Financial Institutions as Constructive Trustees” (1995) 7 Bond LR 67 at 94. See also J Ulph and T Allen, “Transactions at an Undervalue, Purchasers and the Impact of The Human Rights Act 1998” (2004) JBL 1 at 4. 38 Note the suggestion in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL), (a case involving money paid under a mistake of law) that to render recoverable “a payment which, when made, and for several years thereafter, was entirely valid and irrecoverable . . . would be subversive of the great public interest in the security of receipts and the closure of transactions” (per Lord Browne-Wilkinson at 359). 39 S Gardner, “Knowing Assistance and Knowing Receipt: Taking Stock” (1996) 112 LQR 56. 40 Barnes v Addy (1874) LR 9 Ch App 244 per Lord Selborne at 251–52. 41 Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 AC 548 (HL).

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98 Gary Watt Principle In addition to conflicting arguments based on public interests, there are conflicting arguments of principle in favour of and against the view that personal liability for receipt of trust property should be strict liability subject to defences. One argument in favour of strict liability is that equity should as far as possible be consistent with the common law,42 but this argument is guilty of the fusion fallacy, in that it ignores fundamental distinctions between absolute and equitable title.43 A related argument in favour of strict liability in equity is that equity already recognises a form of strict liability when executors mistakenly distribute estates to the wrong persons,44 but that argument is fatally flawed for it is arguable that equity should simply introduce fault-based liability in that context too. In fact it is not so much an argument based on reason as a preference derived from opinion. This is not to say that there is no place for opinion in this debate. The arguments on both sides are so finely balanced we should not be surprised if the choice between them becomes to some degree a matter of preference. The late Professor Peter Birks, one of the leading academic proponents of strict liability for receipt of trust property, acknowledged that his arguments derived from a “commitment” to certain principles. He was committed “to the distinction between proprietary claims and personal claims” and, most relevant for present purposes, to the principle that “wealth should be protected to precisely the same extent whether it is held at law or in equity”, except to the extent that “differences are inescapably dictated by authority or demanded by reason”.45 The response to those who support strict liability from those who do not is straightforward: there are reasonable grounds for affording greater protection to legal owners than to equitable owners under trusts. At the vanguard is Lionel Smith’s article, “Unjust Enrichment, Property and the Structure of Trusts”,46 in which he reasserts the “very basic truth” that “a beneficiary’s interest under a trust is not legal ownership”.47 Smith observes that, in general, equitable proprietary rights are protected less well than legal ones and identifies as a 42 J Martin, “Fusion, Fallacy and Confusion; A Comparative Study” (1994) Conv 13; J Martin, “Recipient Liability after Westdeutsche” (1998) Conv 13; J Ulph and T Allen, “Transactions at an Undervalue, Purchasers and the Impact of the Human Rights Act 1998” (2004) JBL 1 at 15. Peter Birks argues for something subtly distinct from equitable consistency with common law, namely that traditional common law and equitable language should both be abandoned in favour of new analysis in the language of restitution (“Misdirected Funds: Restitution from the Recipient” [1989] LMCLQ 296), but he nevertheless regards it as significant that “equity . . . is committed to strict liability” ([1989] LMCLQ 296 at 340, and 329–34). 43 Smith above n 11. 44 Re Diplock [1948] Ch 465, (CA). 45 P Birks, “Receipt” in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford, 2002) 213 at 214. 46 (2000) 116 LQR 412. 47 Above, at 430.

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Personal Liability for Receipt of Trust Property 99 policy justification for this inferior protection the fact that interests under trusts “tend to be hidden”.48 The clear implication, though Smith never actually expresses it thus, is that the nature of trust ownership creates a special risk for third parties such that it would be unjust to impose strict liability on a stranger who receives trust property. Professor Finn has made the point more explicitly, albeit in support of a different argument: I would seriously question . . . the . . . appropriateness in the present context of insisting today upon property protection with the consequential imposition of a near strict liability upon a third party who, though not guilty of any unconscientious conduct in the receipt or later dealing with the property, has had the misfortune to deal with a disloyal fiduciary. Why that third party and not the fiduciary’s beneficiaries should be asked, in effect, to bear the risk of that disloyalty . . . is not at all apparent to this writer.49

The aim of the present chapter is to demonstrate that a reasonable allocation of risk demands different treatment for recipients of property held in trust and recipients of property held absolutely. The starting point is a two-fold assumption: first, that the imposition of personal liability on a recipient of assets misapplied in breach of fiduciary duty is in effect an allocation to the recipient of at least some part of the risk of the breach of fiduciary duty; and, second, that the entire risk of the breach of fiduciary duty should be presumed to fall on the trust beneficiaries rather than the third party recipient. The author is mindful of Professor Birks’ argument (which to some extent opposes the latter assumption) that it is irresponsible in the modern investment environment to protect property differently according to the way it is held, given that it will often be “largely fortuitous” that the claimant’s wealth is owned directly or in trust.50 However, although the force of that argument is strong in relation to certain trusts, such as pension trusts, where the beneficiaries never had the choice to own their wealth absolutely, in many trusts the beneficiaries are in a real sense responsible for the fact that their wealth is held on trust and must therefore be allocated the risk of its misapplication.

Risk allocation All other factors being equal, and subject to overriding public interests, a risk should in principle be allocated to the one who creates it. If for some overriding reason the creator of the risk cannot, or ought not to, bear the risk, it should be allocated to the one who actively assumes it, then to the one who neglects to 48

Above, at 431. PD Finn, “The Liability of Third Parties for Knowing Receipt or Assistance” in DWN Waters (ed), Equity, Fiduciaries and Trusts (Carswell, Ontario, 1993) 195 at 210–11. Cited in CEF Rickett, “The Banker’s Liability for Receipt in Equity and at Common Law” (1995) 16(2) Comp Law 35. 50 P Birks, “Receipt” in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford, 2002) 213 at 215. 49

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100 Gary Watt avoid it and only as a last resort to the one who was never in a position to avoid it. This is not to suggest that trusts inhabit a world where neatly parcelled risks await allotment to the appropriate person. In reality all that can be done is to identify as precisely as possible the risk at issue between the relevant parties and determine its appropriate allocation. A given set of facts may require the allocation of more than one distinct type of risk, in which case each risk must be allocated on its own terms. In some cases the appropriate allocation of risk will be enough to determine the issues, in other cases risk allocation will do no more than inform the outcome. Where trust assets are misapplied in breach of fiduciary duty and the beneficiary of the trust brings a personal claim against a recipient of the assets or their traceable derivatives, the question is who should bear the risk of the original misapplication. The risk at issue between the parties is essentially the same risk, even though in one sense the beneficiary is concerned with the risk of a future misapplication whereas the recipient is concerned with the risk of a past misapplication. So to whom should the risk of misapplication of trust assets be allocated? In one sense the party who creates the risk of misapplication of trust assets is the settlor, but of course he cannot be liable to the beneficiary for creating the trust and its attendant risks, for without the trust the beneficiary would have no rights at all. Since the creator of the risk cannot bear it, the risk must be allocated to the one who assumes it, that is the trustee. As between beneficiary and trustee the risk of misapplication by the trustee will inevitably be allocated to the trustee (subject to contrary provision in the terms of the trust), but the difficulty comes when the trustee is unable to meet his liability in full due to personal insolvency or some other reason. The effective choice is then between the beneficiary and the third party recipient of the misapplied property. Ideally the risk will be allocated to whichever party was in the best position to avoid it, but before we turn to consider risk allocation according to ability to avoid the relevant risk a brief digression is required to demonstrate why, even where the beneficiaries cannot avoid the risk, the risk of misapplication of trust property should prima facie reside with them rather than with a third party recipient. The argument in its simple form is that beneficial ownership under a trust, unlike absolute ownership, is inherently limited by the possibility of misapplication by the legal owner. A more sophisticated version of the argument emerges from a comparison between the donor of an absolute gift and the settlor of a trust. When a donor makes an absolute gift he cedes his control of the subject matter of the gift and thereby exposes himself to the risk that it might be applied in ways he would disapprove. The donor might not care that he is exposed to such risks, but if he cares he can only hope that the donee’s intentions coincide with his own. If the donor cares what happens to the donation his legal gift is, in an extra-legal sense, an act of trust. The settlor of a trust is in a different position. He cannot escape the risk that the donee will use his bounty in ways he would disapprove, but he reduces that risk by making his donation

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Personal Liability for Receipt of Trust Property 101 subject to legal obligations binding in equity. He does not make a donation directly to the beneficiary; instead a trustee acts as an intermediary, holding legal title to the assets on trust for the beneficiary. Therefore the advantage of a trust over an absolute gift is that a trust reduces the settlor’s exposure to the risk that the subject assets might be used in a way he disapproves, but the corresponding disadvantage of the trust is that it places on the beneficiaries the risk that the trustee might misapply the assets. The theoretical ideal, however, is to allocate risk to whichever party was in the best position to avoid it. This method of risk allocation has the merit of justice and economic efficiency. The practical difficulty with this approach is that in many cases neither beneficiary nor recipient will have been in any position to avoid the risk. Obviously a third party stranger to the trust is never in a position to avoid the risk of misapplication by the trustee, which is a strong argument against strict liability, but in favour of strict liability is the counter-argument that the third party was at least free to avoid the receipt entirely and thereby avoid even the most basic factual connection to the misapplication. Of course, the problem with that counter-argument is that it would promote such excessive caution prior to commercial receipts as to render commerce stagnant. The real challenge to allocating the risk of misapplication on the basis of relative ability to avoid risk is that many trust beneficiaries are no better able than third party strangers to avoid the risk of misapplication. Infant beneficiaries are in no position to avoid the risk of misapplication by their trustee; neither in any real sense are the beneficiaries of pension funds. Wherever there is a trustee there is a risk of misapplication. There is, however, at least one category of trust in which the beneficiaries are in a position to avoid the risk of misapplication by their trustee. It is that category of trust in which the beneficiaries are able to bring the trust to an end. As is well known, a trust falls into that category if the beneficiaries are sui juris and between them absolutely entitled to the trust fund.51 This writer submits that no matter how evenly balanced the arguments might otherwise be, a risk allocation approach demonstrates clearly that a presumption of strict liability against recipients is utterly inappropriate where the beneficiaries were in a position to bring the trust to an end and thereby avoid the risk of misapplication by their trustee. It might be objected that in fact the beneficiaries can only bring the trust to an end if they all agree to do so. Against that it can be said that the beneficiaries nevertheless have the collective power to bring the trust to an end, and avoid the avoidable risk of misapplication, even where they cannot agree to exercise it. Nevertheless, even if it were conceded that in trusts with very large numbers of beneficiaries there is no real likelihood of unanimity and therefore no real power to bring the trust to an end, the concession would not touch upon the case of the sole beneficiary of a bare trust. Therefore reason demands that the risk of misapplication of trust property by 51 Saunders v Vautier (1841) 10 LJ Ch 354; Stephenson (Inspector of Taxes) v Barclays Bank Trust Co Ltd [1975] 1 All ER 625.

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102 Gary Watt the trustee of a bare trust must fall upon the beneficiary of that trust before it falls upon a third party recipient, provided the beneficiary had the power (as will usually be the case) to bring the trust to an end on demand. Indeed, even in cases where the claimant has freely bargained away his right to bring the bare trust to an end on notice, justice between claimant and defendant suggests that the claimant should be treated as if he still had that power. In conclusion, when the relevant risks are appropriately allocated the argument for strict liability for receipt of trust assets is shown to be unsustainable where the third party received assets misapplied by the trustee of a bare trust. A notable feature of the entrenched debate between supporters of strict liability and supporters of fault-based liability has been the assumed homogeneity of trusts,52 but by distinguishing bare trusts and other trusts we are at the very least able to escape the trench in the great many commercial contexts where the trust in issue is a bare trust and the beneficiaries have the power to bring it to an end.

II . WHAT MUST BE PROVED ?

If we conclude that the claimant should prima facie bear the risk of misapplication of his assets and should therefore bear the burden of proof of fault, we must next identify the element of fault that must be proved.

The nature of the fault The nature and degree of fault prerequisite to personal liability for receipt of trust property does not clearly emerge from the decided cases. Indeed the only point upon which there is unanimity is that a recipient will not be at fault if, throughout the relevant period (of receipt and retention of the trust assets), he lacked all knowledge that the assets were traceable to a breach of trust; hence the traditional description of recipient liability as liability for “knowing receipt” remains essentially sound. Disagreement has emerged where attempts have been made to define the requisite degree of knowledge53 or to align knowledge with the traditional doctrine 52 An exception is a note by Simon Baughen in which he addresses the particular relationship between “ ‘Quistclose Trusts’ and Knowing Receipt” (2000) Conv 351. 53 In Baden v Société Générale Pour Favoriser Le Développement Du Commerce et de L’industrie en France [1993] 1 WLR 509, ChD [1983] BCLC 325 Peter Gibson J accepted counsel’s submission that knowledge is of five types for the purpose of accessory liability for breach of trust: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious (this is sometimes referred to as “Nelsonian blindness”); (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. Although the Baden case concerned liability for knowing assistance (as dishonest assistance was then known), his Lordship stated that he could see “no justification” for treating knowing receipt differently in this regard.

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Personal Liability for Receipt of Trust Property 103 of notice54 or to treat knowledge as merely an element in the proof of some other touchstone of fault. In BCCI v Akindele the touchstone of liability was said to be the defendant’s “unconscionability”. In the words of Nourse LJ: “[t]he recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt”.55 This was possibly an attempt to reaffirm equitable traditions in the face of reforms advanced by restitution lawyers, in which case it ill served its purpose. Equity, and the law of trusts in particular, has surely matured to the point of being able to dispense with undefined notions of unconscionability. Certainly Lord Nicholls refused to allow them to govern accessory liability for procurement or assistance in a breach of trust, and his comments apply with equal force in the context of personal liability for receipts: Unconscionable is a word of immediate appeal to an equity lawyer. Equity is rooted historically in the concept of the Lord Chancellor, as the keeper of the Royal Conscience, concerning himself with conduct which was contrary to good conscience. It must be recognised, however, that unconscionable is not a word in everyday use by non-lawyers. If it is to be used in this context, and if it is to be the touchstone for liability as an accessory, it is essential to be clear on what, in this context, unconscionable means.56

It is true that in Re Montagu’s Settlement Trusts,57 Sir Robert Megarry V-C identified “the fundamental question” in a case of knowing receipt to be “whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him”,58 but the learned Vice-Chancellor did not place all his eggs in the loosely woven basket of unconscionability. He approved Carl Zeiss Stiftung v Herbert Smith (No 2) 59 where the touchstone of recipient liability had been the defendant’s “want of probity”.60 By that touchstone the claimant is not required to prove that the defendant was positively dishonest, but to demonstrate in a negative sense that the defendant’s conduct was not the conduct of an honest man. According to Sir Robery Megarry V-C in Re Montagu’s Settlement Trusts61 there will be want of probity where the recipient had actual knowledge of the breach, or would have acquired it had he not shut his eyes to the obvious. The recipient will also be in want of probity where he wilfully and recklessly failed to make such inquiries as a reasonable and honest man would make. His lordship doubted, however, that a defendant who merely 54 According to Megarry V-C in Re Montagu’s Settlement Trusts [1987] Ch 264 at 277, “one must be very careful about applying to constructive trusts either the accepted concepts of notice or any analogy to them”. 55 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA), per Nourse LJ at 455. 56 Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC) at 392 D–F. 57 [1987] Ch 264. 58 Above, at 277. 59 [1969] 2 Ch 276. 60 Above, per Edmund Davies LJ at 302. 61 [1987] Ch 264.

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104 Gary Watt neglected to draw appropriate conclusions from the circumstances62 or neglected to undertake further inquiries63 should be liable. Accordingly the dividing line between probity and want of probity appears to be the line between carelessness and recklessness. There is also a flavour of this in Lord Nicholls’ suggestion, in the context of accessory liability for assisting in a breach of trust, that acting “in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty”.64 Nevertheless, there are occasional dissentient statements in English and Commonwealth cases in favour a lower threshold of fault in cases of knowing receipt that would base liability on mere negligence, thus in Selangor United Rubber Estates Ltd v Cradock, Ungoed-Thomas J held that: “the standard of care is that which bankers might reasonably be expected to take according to the ordinary practice of bankers”65 and in the Canadian case Citadel General Assurance Co v Lloyds Bank Canada La Forest J held that in “knowing receipt” cases, which are concerned with the receipt of trust property for one’s own benefit, there should be a lower threshold of knowledge required of the stranger to the trust. More is expected of the recipient, who, unlike the accessory, is necessarily enriched at the plaintiff’s expense. Because the recipient is held to this higher standard, constructive knowledge (that is, knowledge of facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for restitutionary liability.66

A new touchstone of liability: conscious taking of commercially unacceptable risks to the prejudice of another What is required is to improve upon the undefined notion of unconscionabilty to which their lordships resorted in Akindele. To paraphrase Lord Nicholls in Tan, if unconscionability is to be used in this context, and if it is to be the touchstone for liability as a recipient, it is essential to be clear what, in this context, “unconscionable” means.67 If, as appears from the preponderance of authorities to be the case, the dividing line between probity and want of probity is the line between carelessness and recklessness, we can expect the line between conscionability and unconscionability to be drawn according to the extent to which the recipient consciously takes risks to the prejudice of the claimant’s rights. In fact the approach recommended here is to define unconscionability in the context of knowing receipt as the conscious taking of commercially unacceptable risks to the prejudice of another. This formulation resembles a well-known criminal definition of fraud as “the taking of a risk to the prejudice of another’s 62 63 64 65 66 67

Point (iv) on the Baden scale of knowledge (see n 53 above). Point (v) on the Baden scale of knowledge (see n 53 above). Royal Brunei Airlines v Tan [1995] 2 AC 378, PC at 390. [1968] 2 Lloyd’s Rep 289 at 323. [1997] 3 SCR 805 at para 48. Above n 56.

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Personal Liability for Receipt of Trust Property 105 rights, which risk is known to be one which there is no right to take”,68 which may appear to set the level of fault too high. However, the criminal formulation is flexible enough to encompass degrees of fault less than fraud; indeed the distinction between fraud and lesser degrees of fault will vary according to the nature of the risk-taking. A recipient of assets will be guilty of greater fault if he deliberately acted to the prejudice of another’s rights in those assets than if he was reckless to the risk of prejudice, and he will be guilty of greater fault if he was reckless than if he was merely careless to the possibility that the receipt might prejudice another’s rights. In any event, even if the taking of a commercially unacceptable risk were deemed to be equivalent to fraud, we should at least be confident that the claimant who can prove the defendant took a commercially unacceptable risk has done more than enough to establish fault. To base a recipient’s liability on his conscious taking of commercially unacceptable risks to the prejudice of another is to assume that risks can be categorised as being either “commercially acceptable” or “commercially unacceptable”. The same assumption was made in Cowan de Groot Properties Ltd v Eagle Trust plc,69 where Knox J held that the court will impute knowledge, when considering liability for knowing (as it then was; it has since become “dishonest”)70 assistance in a breach of trust, “to a person who is guilty of commercially unacceptable conduct in the particular context involved”.71 There is no reason why the same formulation should not assist to identify knowledgebased fault in the context of recipient liability. It is true that in a subsequent case Lindsay J doubted the courts’ ability to identify “commercially unacceptable” conduct when he observed that: It may, for example, be in one sense “commercially unacceptable” for a bank to lend money without security or without investigating the title to the security it is offered by its borrower. It may thus be “unacceptable” because too risky, [and therefore] “commercially unacceptable”, if at all, only in relation to the bank’s own position.72

However this doubt is easily overcome if the touchstone of personal liability for receipt of trust assets were, as it ought to be, “the conscious taking of commercially unacceptable risks to the prejudice of another”. To summarise, there are a number of advantages in adopting this new touchstone of liability: First, it offers a contextual definition of unconscionability. Second, it ensures that fault is assessed in the light of the reality of commercial practice. 68 R v Sinclair [1968] 3 All ER 241 (a case involving some of the parties in Rubber Estates, Ltd v Cradock n 9 above). Approved in Baden v Société Générale Pour Favoriser Le Développement Du Commerce et de L’industrie en France [1993] 1 WLR 509 at 574 and Royal Brunei Airlines v Tan [1995] 2 AC 378 at 389–90. 69 [1992] 4 All ER 700. 70 Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC). 71 [1992] 4 All ER 700 at 761H. 72 Hogg Robinson Trustees Ltd v J Alsford Pension Trustees Ltd (1997) 11(2) TLI 48; [1997] Pension LR 99 (noted at (1997) 6(2) Journal of International Trust and Corporate Planning 83).

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106 Gary Watt Third, it explains why the dividing line between insufficiently faulty knowledge and sufficiently faulty knowledge (probity and a want of probity) has traditionally been drawn between knowledge that is merely careless to the risk that the received assets are traceable to a breach of trust and knowledge that is reckless as to that risk. Commerce is risky and commercial parties are permitted to take risks on their own account. However, parties are not permitted to take risks to the prejudice of another. To receive assets knowing that they have been misapplied in breach of trust or being reckless as to that possibility is conduct that will justify personal liability. Fourth, it allows a distinction to be drawn between purchasers and voluntary recipients. A purchaser (such as Chief Akindele) risks his own money on the propriety of the transaction (except to the extent that the purchase is at an undervalue) and the courts should therefore be slower to fix personal liability on a purchaser than a mere volunteer. Fifth, in determining the fact of liability, or at the very least its quantum, it permits a balance to be struck between defendant and claimant on the basis of the parties’ relative fault, which may be useful where the receipt was due in part to risks the claimant had taken on his own account. There appears to be no such scope to take account of relative fault in relation to a claim to reverse unjust enrichment or in relation to the innocent change of position defence to such a claim.73 From the perspective of risk allocation this represents an undesirable lacuna in restitutionary analysis. When the Judicial Committee of the Privy Council in Dextra Bank v Bank of Jamaica 74 rejected any consideration of fault from the application of the bona fide purchaser defence, the learned Lords Bingham of Cornhill and Goff of Chieveley observed, with reference to the 1841 case Kelly v Solari,75 that: In actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover “however careless [he] may have been, in omitting to use due diligence.”76

With the greatest respect to their lordships, Dextra Bank v Bank of Jamaica was an occasion to overrule Kelly v Solari on this point. That an absolute owner who negligently deposits his asset with an unsuitable agent, who subsequently passes the asset to a third party, should be strictly entitled to recover the asset from the third party subject only to the third party’s innocent change of position 73 Dextra Bank and Trust Co Limited v Bank of Jamaica [2002] 1 All ER (Comm) 193 approving P Birks, “Change of Position and Surviving Enrichment” in W Swadling (ed), The Limits of Restitutionary Claims: A Comparative Analysis (London: UK National Committee of Comparative Law, 1997) at page 41; but see Goss v Chilcott [1996] AC 788 (PC); Thomas v Houston Corbett & Co [1969] NZLR 151; National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211(noted Grantham and Rickett [1999] RLR 158). 74 Above. 75 Kelly v Solari (1841) 9 M & W 54 at 59. 76 Dextra Bank v Bank of Jamaica [2002] 1 All ER (Comm) 193 at para 45.

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Personal Liability for Receipt of Trust Property 107 represents a most inappropriate allocation of the relevant risks. Indeed, rather than seek to conform the law governing receipt of trust property to the common law governing receipts, the time has surely come to employ risk allocation as a basis for reviewing unjustifiable strict liability in the common law of money had and received.

A new defence of compliance with investigation norms Irrespective of whether liability is strict or fault-based, and irrespective of the element of fault required to be proved, it is submitted that there should be a strong presumption against the imposition of personal liability on a recipient who can establish that he complied with a set of investigation norms appropriate to the context of the receipt. It has been said that liability in cases of knowing receipt “flows from the breach of a legally recognized duty of inquiry”,77 but this author would put it the other way round and say that there will be no liability where the defendant has complied with an industry recognized norm of inquiry. A new defence in this form, based as it is upon norms of commercially acceptable conduct, is the natural counterpart to a new touchstone of liability based on the conscious taking of commercially unacceptable risks to the prejudice of another. According to a defence based on compliance with investigation norms, a bank which receives money for its own benefit (say, in reduction of an overdraft) will escape liability if it can show that it conducted itself in a manner accepted in the banking industry. It would even suffice to demonstrate that respected members of the industry approve of the bank’s procedures even if some members of the industry do not.78 In this respect the test is similar to the test used to determine acceptable medical practice in medical negligence cases.79 As in the medical negligence context, the defence will not succeed if the defendant’s conduct is simply ratified ex post facto by experts in the relevant field; the defendant must demonstrate that during the period relevant to the receipt he conducted himself in a manner already accepted in the relevant industry.80 To reiterate, it is not suggested that the court should be required to accept the reasonableness of industry norms, only that compliance with industry norms of inquiry should raise a strong presumption against liability.81 However, where the court does 77

Citadel General Assurance Co v Lloyds Bank Canada [1997] 3 SCR 805, per La Forest J at para

49. 78 Compare the facts of Thomson v Clydesdale Bank Ltd [1893] AC 282 HL (Sc) where a bank successfully relied upon commercial norms of broker’s practice as a defence to its own conduct in paying trust money directly into the broker’s private bank account. 79 Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, McNair J. 80 Compare the rejection of ad hoc arrangements by the fiduciaries in Prince Jefri Bolkiah v KPMG (A Firm) [1999] 2 AC 222 (HL). 81 This echoes the gloss made on the Bolam test in Bolitho v City and Hackney Health Authority [1998] AC 232 (HL).

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108 Gary Watt except the reasonableness of the industry norms of inquiry, compliance with those norms should be an absolute defence to personal liability for receipt. A new defence based on compliance with investigation norms would coincide to some extent with the doctrine of notice in land law, for the gist of that doctrine is that a purchaser of legal title to land takes free of trusts where normal searches and inquiries fail to reveal them.82 It is true that the relevance of the land law doctrine of notice to personal liability for receipt of non-land assets ought not to be overstated. For one thing, the doctrine of notice does not operate as a defence to purely personal claims; for another, it does not operate in defence of volunteer recipients. Furthermore, the very detailed and timeconsuming nature of conveyancing norms would be inappropriate to normal commercial dealings with money, goods and intangible assets.83 Nevertheless, a merit of the doctrine of notice which is shared by the proposed new defence of compliance with investigation norms is that the focus is placed upon the defendant’s conduct rather than upon his state of knowledge (notice is not the same thing as knowledge). There is, however, a significant limitation to the proposed new defence, namely that it can only apply to transactions of a general type; it will not apply where the transaction, like the transaction in Akindele itself, is a genuine one-off.

III . CONCLUSION

Two issues are relevant when seeking to identify the appropriate basis of personal liability for receipt of misapplied trust property. The first is to determine whether liability should be fault-based or strict. The essence of this issue is to determine which party should bear the burden of proof. The second issue is to determine what it is that must be proved. With regard to the first issue it is acknowledged that there are strong arguments of principle and policy for and against strict liability, but on balance the arguments favour liability based on proof of fault. At the very least reason demands proof of the recipient’s fault whenever the evidence shows that the claimant was himself at fault through failure to avoid the risk that his property might be misapplied. The beneficiary of a bare trust in a commercial context has the power to bring the trust to an end and thereby avoid the risk of misapplication and so the risk of misapplication must be presumed to fall on him and strict 82

Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783. As noted in Lindley LJ’s oft-cited statement that “[t]he equitable doctrines of constructive notice are common enough in dealing with land and estates, with which the Court is familiar; but there have been repeated protests against the introduction into commercial transactions of anything like an extension of those doctrines, and the protest is founded on perfect good sense. In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country” (Manchester Trust v Furness [1895] 2 QB 539 at 545). 83

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Personal Liability for Receipt of Trust Property 109 liability must be rejected in that context. Indeed, even in cases where the claimant has freely bargained away his right to bring the bare trust to an end on notice, justice between claimant and defendant suggests that the claimant should be treated as if he still had that power. With regard to the second issue, what is required is to improve upon the undefined notion of unconscionabilty to which their lordships resorted in Akindele. The approach recommended here is to define unconscionability in the context of knowing receipt as the conscious taking of commercially unacceptable risks to the prejudice of another. It is also recommended to recognise a new defence based on compliance with investigation norms appropriate to the commercial context of the receipt. This defence will apply irrespective of whether liability is strict or fault-based, and irrespective of the element of fault required to be proved.

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6

Co-Owners and Equitable Accounting: A Comparative Commonwealth Analysis HEATHER CONWAY

INTRODUCTION

The principles of equitable accounting govern the procedure whereby expenditure on and income derived from property is allocated between co-owners, such rights and obligations deriving from joint ownership and the inherent unity of possession.1 While each co-owner is entitled to use and occupy the entire property subject to a similar right on the part of the others2, problems typically arise where one person is in sole occupation of the land, or its associated profits and expenses are not apportioned rateably. Co-ownership does not give rise to a fiduciary relationship between joint tenants or tenants in common which would render them accountable to each other in this respect.3 However, co-owners may seek an accounting adjustment either on its own, or more commonly at the end of their relationship when the property is being sold4 or one co-owner is buying out the other’s share. This has significant financial implications, given that one co-owner may have to compensate another for any improper fiscal benefit or use of the property.5

1 The same principles apply irrespective of whether the parties are joint tenants or tenants in common––Re Pavlou [1993] 3 All ER 955. The process of equitable accounting also pre-supposes the existence of beneficial co-ownership; it can only occur after the ascertainment and quantification of any equitable interest in the property under a resulting or constructive trust. 2 2 Bl Comm 181. 3 See Kennedy v De Trafford [1896] 1 Ch 762. 4 For example, under the Trusts of Land and Appointment of Trustees Act 1996 in England and Wales, or under the Partition Acts 1868 and 1876 in both Northern Ireland and the Republic of Ireland and analogous legislation in Australia and Canada. 5 The value of the property is taken at the date of sale or relevant accounting adjustment–– Bernard v Josephs [1982] 3 All ER 162. Co-owners automatically share in any increase in value to the land during their relationship, whether due to natural appreciation (Smith v Smith (1984) 9 Fam LR 1014), or an unexpected bonus such as a change in planning policy for the relevant area (Zappacosta v Zappacosta (1976) 2 Fam LR 11, 214).

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112 Heather Conway The process of equitable accounting derives largely from principles laid down by the Court of Chancery in the eighteenth and nineteenth centuries6, when an action of account between co-owners was frequently sought in conjunction with a partition action.7 These basic principles survive today, yet changing social and economic conditions and, in particular, a rapid increase in home ownership mean that financial disputes between co-owners are increasingly common. This chapter identifies the various rights and duties which exist in this respect and examines how the rules established by the Court of Chancery have been applied by courts in Britain, Ireland, Australasia and Canada. It highlights the divergences in opinion which have emerged, and attempts to resolve any confusion within the existing legal framework by focusing on the basic rules with minor modifications where appropriate. The emphasis is on four main areas of equitable accounting: liability for occupation rent, repairs and improvements, mortgage payments, and rents and profits received from the joint property.

OUSTER AND CLAIMS FOR OCCUPATION RENT

A co-owner who merely enjoys exclusive occupation of the common property is usually under no obligation to account to the other co-owners in this respect, since: [A] co-owner has a right to possession and enjoyment of the entire common property, and simply by its exercise will not be burdened by a claim for compensation at the suit of a co-owner who has failed to exercise his like right.8

However, the position is different where the occupying co-owner has ousted the others.

6 Since the original common law action of account was procedurally cumbersome, equity also exercised an independent jurisdiction to take accounts which eventually supplanted its common law counterpart––see RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies, 4th edn (Butterworths LexisNexis, Chatswood, Australia, 2002) ch 25. 7 See for example, Hyde v Hindley (1794) 2 Cox 408; Hill v Fulbrook (1822) Jac 574 and Kenrick v Mountsteven (1899) 48 WR 141. 8 D Mendes Da Costa, “Co-ownership Under Victorian Land Law” (1961) 3 Melbourne U L Rev 137 at 139. The position would, of course, be different if the occupant had agreed to act as bailiff or agent of the other co-owners, leaving him accountable for any income received in this capacity (McCormick v McCormick [1921] NZLR 384) and for income which he might have received but for his willful neglect in managing the property (Nash v McKay (1868) 15 Gr 247). However, the coowner in question must assume such responsibility; it is not sufficient that management is simply left in his hands (Osachuk v Osachuk (1971) 18 DLR (3d) 413). Alternatively, an occupying co-owner may be liable for payments of outstanding rent where he occupies the land as tenant of the other coowners (see Leigh v Dickeson (1884) 15 QBD 70) or occupies a unit in premises which the parties intended for rental and which would otherwise have generated such income (Horsburgh v Lavis (1991) 30 ACWA (3d) 706).

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Co-Owners and Equitable Accounting 113 What constitutes an ouster? An ouster is essentially conduct which constitutes a denial of title9, most often through the resident co-owner excluding the others from the property or refusing to allow them to exercise their right to possession. For example, one co-owner cannot withhold keys from another10, while locking the means of access with the intention of excluding the other co-owners will be construed as an ouster.11 Likewise, a joint tenant or tenant in common who evicts another coowner from the land commits an ouster12, while a demand of possession by one co-owner and a refusal by the occupant stating that he claims the whole is also evidence of ouster.13 One co-owner may carry out reasonable alterations to the property without being liable for any resulting interference with its shared use.14 However, a co-owner who uses the land in a manner which results in its destruction may be guilty of an ouster.15 The fact that one co-owner resists or simply ignores a request for sale of the property by another does not constitute a denial of title which would support an ouster.16 Yet, if a joint tenant or tenant in common refutes another co-owner’s interest in the property this amounts to an ouster since it is an express denial of the latter’s rights as co-owner.17 The onus of proof is on the co-owner alleging that an ouster has taken place.18 A constructive ouster may arise where the occupant’s actions fall short of physically excluding or removing his fellow co-owners, yet his behaviour towards them makes shared occupation impossible. While this could prove useful following the increase in home ownership over recent decades and resultant problems when an intimate relationship breaks down, the courts have been 9 See Wuychik v Majewski [1920] OWN 207 and Cardinaels-Hooper v Tierney (Supreme Court of New South Wales, 20 December 1995). 10 Lahiffe v Hecker (High Court, RI, 28 April 1994). 11 Jacobs v Seward (1872) LR 5 HL 464 and Glass v McManus [1996] NI 401. However, McComb v McComb (1990) 21 ACWS (3d) 1169 held that there was no ouster where the wife originally left the matrimonial home voluntarily and her husband changed the locks 18 months later. 12 Bull v Bull [1955] 1 QB 234. 13 See Doe v Bird (1809) 11 East 49 and Adamson v Adamson (1889) 17 OR 407. 14 For example, the resurfacing of a shared driveway which results in a temporary disturbance of access (Ferguson v Miller [1978] 1 NZLR 819), or the demolition and rebuilding of a common wall (Cubitt v Porter (1828) 8 B & C 257). 15 Such as digging and removing turf––Wilkinson v Haygarth (1847) 12 QB 837. 16 See the decision of the New Jersey Court of Chancery in Jager v Jager 136 NJ Eq 379 (1945). However, there have been instances of English courts indirectly imposing an occupation rent where one co-owner desired sale of the land under s 30 of the Law of Property Act 1925 and the other wanted to continue in residence, despite the absence of a formal ouster. In these circumstances, the occupying co-owner would have to undertake to pay rent, failing which the court would order sale––see MP Thompson, “Cohabitation, Co-Ownership and Section 30” (1984) Conv 103 at 110 and the cases mentioned therein. However, the same outcome can now be achieved directly in England and Wales under s 13(6)(a) of the Trusts of Land and Appointment of Trustees Act 1996 which allows for payment of compensation where one co-owner’s right to occupy the land has been excluded or restricted. 17 Biviano v Natoli (1998) 43 NSWLR 695. 18 Wuychick v Majewski [1920] OWN 207 and Chieco v Evans [1990] 5 BPR 11, 297.

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114 Heather Conway somewhat restrictive in deciding what constitutes a constructive ouster to date. For example, the mere fact that one co-owner leaves because of animosity between the parties, or as the result of simply being told by another co-owner to vacate the property if his behaviour causes offence does not suffice.19 Likewise, a co-owner who leaves voluntarily but would be welcome back is not excluded20, while a joint tenant or tenant in common who makes life difficult for another co-owner by, for example, bringing someone else into the property merely exercises rights of ownership.21 However, an ouster may be implied where actual or threatened violence by one co-owner means that shared enjoyment of the land is no longer possible.22 In contrast, a co-owner who obtains a court order preventing a violent co-owner from residing in the property is not guilty of an ouster23, even after the order expires and the excluded party does not take active steps to re-assert his right to occupy the premises.24

Calculating the occupation rent The occupation rent payable in cases of ouster is actually mesne profits which compensate the ousted co-owner for his wrongful exclusion and loss of possession.25 Despite the fact that mesne profits are not strictly rent26, they are generally based on the open market value of the premises.27 In Swordheath Properties 19

Marriott v Franklin (1993) 60 SASR 457 and Diotallevi v Diotallevi (1982) 134 DLR (3d) 477. Thus in Re Pavlou [1993] 3 All ER 955 where a husband left the matrimonial home but initially would have been welcomed back by his wife, the court held that she did not have to pay an occupation rent in respect of the period before she petitioned for divorce. 21 In Lahiffe v Hecker (High Court, RI, 28 April 1994) Lynch J stated that a co-owner not only has a right to occupy the property, but can permit a reasonable number of invitees (such as a spouse and children) to live there with him, while the court in Thrift v Thrift (1975) 10 ALR 332 held that the husband had not been ousted simply because his wife had brought a new lover and her mother to live in the matrimonial home after the husband moved out. However, in Smith v Davis [1978] 3 ACWS 220 the court imposed an occupation rent on the husband from the date on which his second wife had moved into the home, the first wife having left the property some years earlier. 22 See Dennis v McDonald [1982] Fam 63 and Bernard v Joseph [1982] 3 All ER 162 at 172 per Kerr LJ. 23 Since the co-owner is denied access to the property by the court order, and not by the actions of the co-owner who secures the order––Biviano v Natoli (1998) 43 NSWLR 695 and see H Conway, “Co-Owners, Ouster and Occupation Fees” [2000] Conv 49. However, in Nguyen v Schieff [2003] NSWSC 253 the defendant committed an ouster by changing the locks and thus excluding the plaintiff from the home before the court order was obtained, although the court arguably went too far in imposing an occupation rent from the date of the exclusion and throughout the court order until the defendant gave up exclusive possession. 24 Tracey v Bifield (1998) 28 Fam LR 260. 25 Since an ousted co-owner could always bring an action for trespass or for recovery of land, with mesne profits to compensate for any loss suffered as a result of being out of possession––see Goodtitle v Tombs (1770) 3 Wils 118; Creswell v Hughes (1862) 1 H & C 421 and Murray v Hall (1849) 7 CB 441. 26 Progressive Mailing House Pty Ltd v Tabili Pty Ltd (1985) 157 CLR 17 at 39 per Brennan J. 27 See Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246 at 252 per Somervell LJ and Rock Bottom Fashion Market Pty Ltd (In Liq) v HR & CE Griffiths Pty Ltd (Queensland Court of Appeal, 6 March 1998). 20

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Co-Owners and Equitable Accounting 115 v Tabbet28, the Court of Appeal suggested that mesne profits should be calculated on the full rental value of the premises.29 However, Beazley JA in the Australian case of Biviano v Natoli 30 suggested that this method of calculation might not be appropriate in cases of exclusion involving co-owners because “an actual letting of the property where there is already a co-tenant in occupation would not attract a market rental based on full occupation.”31 Accordingly, the occupation rent is essentially the sum which a prospective tenant would be willing to pay in order to share occupation of the premises with the ousting co-owner. The method of calculation proposed in Biviano would place the ousted coowner at an obvious disadvantage. Notwithstanding the inherent practical difficulties in estimating the amount which a prospective tenant would be willing to pay for shared occupation with a resident co-owner, it is likely to be significantly less than a full rental value and the occupation rent payable to the excluded co-owner restricted accordingly. It is suggested that the method of calculation proposed by Lizzie Cooke32 provides a more equitable and workable alternative. Courts should determine the full rental value of the premises, and reduce this to take account of the proportionate share of the co-owner who remains in occupation.33 This takes the full rental value of the property on the open market as a starting point34, and while the amount payable to the excluded co-owner will be reduced to take account of the occupant’s beneficial interest in the premises, the occupation rent roughly corresponds with the sum which that person would have received in the event of the property being let.

Sole possession and imposition of an automatic occupation rent? A co-owner who excludes another from the property must pay an appropriate occupation rent. In addition, an occupation rent may be imposed as a condition of allowing a co-owner who has enjoyed sole possession of the land to recover for repairs and improvements, even though he has not excluded the other coowners.35 However, these two specific situations aside, there has been some debate as to whether there is an automatic right to impose an occupation rent where one co-owner has merely been in sole occupation of the land. Here, the 28

[1979] 1 WLR 285 and see also Inverugie Investments Ltd v Hackett [1995] 3 All ER 841. See further Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd’s Rep 359 and Inverugie Investments Ltd v Hackett [1995] 3 All ER 841. 30 (1998) 43 NSWLR 695. 31 Above, at 704. 32 “Equitable Accounting” [1995] Conv 391 at 402. 33 For example, if A and B are joint tenants and A excludes B from the premises, A would have to pay one half of the full rental value of the property to B to compensate for this. For an illustration, see Beresford v Booth [1999] SASC 116. 34 As opposed to a fair rent payable in respect of a protected tenancy under the Rent Act 1977 as suggested in Dennis v McDonald [1982] Fam 63. 35 The reason for this practice is discussed below. 29

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116 Heather Conway occupation rent is not calculated on the basis of mesne profits; it is simply a nominal sum to account for the fact that this person has enjoyed sole possession. The proposition that such a right does exist is often attributed to statements to this effect in old editions of Halsbury’s Laws of England36 and Daniell’s Chancery Practice,37 and a number of cases in which the Court of Chancery allegedly imposed an occupation rent in these circumstances.38 However, closer inspection of the relevant caselaw casts serious doubt on these statements. In the New Zealand case of McCormick v McCormick,39 Salmond J explained some of the cases as examples of exclusion40 or claims for expenditure on repairs and improvements,41 both of which generate an occupation rent, and criticised Hill v Hickin42 in which the judge stated that it had “long been the practice of the Court of Chancery . . . to direct such inquiries” as being contrary to the established principle that a co-owner who has simply failed to exercise his right to occupy the property cannot seek compensation from another co-owner who has exercised the same right.43 Instead, Salmond J drew attention to Griffies v Griffies44 in which Kindersley VC remarked that “[e]ach party being entitled to enter upon the whole property, there could be no claim by any against the others for an occupation rent” in these circumstances.45 Likewise, Long Innes CJ in the subsequent Australian case of Luke v Luke46 drew attention to the “considerable body of authority”47 against the imposition of an occupation rent purely on the basis of sole occupation, and in particular to M’Mahon v Burchell 48 in which Lord Cottenham LC observed that: [T]he effect . . . [of this doctrine] would be, that one tenant in common, by keeping out of the actual occupation of the premises, might convert the other into his bailiff . . . There is nothing . . . to lead to that conclusion, which is contrary to the law as clearly established from the time of Lord Coke downwards.

36 21 Halsbury’s Laws of England, 1st edn (Butterworths, London, 1912) 851 citing Pascoe v Swan (1859) 27 Beav 508 and Teasdale v Saunderson (1864) 33 Beav 534. 37 Daniell’s Chancery Practice, 8th edn (Stevens & Son, London, 1914) vol II, 1186 citing M’Mahon v Burchell (1846) 2 Ph 127; Pascoe v Swan (1859) 27 Beav 508; Henderson v Eason (1851) 17 QB 701 and Griffies v Griffies (1863) 11 WR 943. 38 In particular Turner v Morgan (1803) 8 Ves 143 and Hill v Hickin [1897] 2 Ch 579. 39 [1921] NZLR 384. 40 Namely, Turner v Morgan (1803) 8 Ves 143 and Pascoe v Swan (1859) 27 Beav 508. 41 Teasdale v Saunderson (1864) 33 Beav 53. 42 [1897] 2 Ch 579. 43 The occupation rent in this particular case was imposed on the basis of Turner v Morgan (1803) 8 Ves 143 which involved an ouster, and Swan v Swan (1820) 8 Price 518 which was based on a claim for expenditure on repairs and improvements. 44 (1863) 11 WR 943. 45 Yet, this was one of the cases cited in Daniell’s Chancery Practice as supporting payment of an occupation rent upon exclusive possession. Likewise, the decision in Henderson v Eason (1851) 17 QB 701 does not support this proposition, being concerned with recovery of rents and profits from an occupying co-owner. 46 (1936) 36 SR (NSW) 310. 47 Above, at 316. 48 (1846) 2 Ph 127 at 134–35. Again, this is one the cases cited in Daniell’s Chancery Practice.

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Co-Owners and Equitable Accounting 117 Both McCormick and Luke suggest that courts cannot impose an occupation rent simply because one co-owner has been in sole possession.49 This must be the correct outcome. A co-owner who occupies the property in the absence of an exclusion or other specific circumstances50 cannot be accountable to the other co-owners. The occupant is merely exercising his right to use and enjoy the land, while the other co-owners have declined to do so. More recent Australian and Canadian cases such as Biviano v Natoli,51 Edwards v Edwards52 and Forgeard v Shanahan53 have reiterated this basic principle. However, Kirby P who delivered the dissenting judgment in Forgeard v Shanahan, argued that this rule: Fail[s] to take into account the multitude of reasons which may explain a withdrawal from land held in co-ownership after the breakdown of the personal relationship which occasioned the creation of the co-ownership in the first place.54

He accordingly recommended that an occupation rent should be payable in all cases where one co-owner has been in exclusive occupation of the land. One author55 has observed that Kirby P’s suggestion “offends one of the tenets of co-ownership”, namely that co-owners have an equal right to possession of the land. Any deviation from the established practice in respect of occupation rent would undermine this basic precept, since the resident coowner would be penalised for exercising his legal right.56 Moreover, incurring liability on the basis of sole occupation would not necessarily give a fair outcome. Take the situation where one co-owner is forced to assume sole responsibility for the land which has been abandoned by the other co-owners. Here, it seems unfair that he should be charged with an occupation rent at their impulse or indolence. In contrast, there is a much stronger case for imposing an occupation rent where disagreement occurs between the co-owners and one person feels that they are unable to occupy the land because of feelings of animosity or hostile behaviour by the resident co-owner, most often in the context of the breakdown of an intimate relationship and shared occupation of a jointly owned home. However, this could easily be achieved by courts adopting a more

49 These cases were followed in the Australian cases of Re Fettell (1952) 52 SR (NSW) 221; Scapinello v Scapinello [1968] SASR 316; Chatterton v Chatterton (1989) 53 SASR 337 and Marriott v Franklin (1993) 60 SASR 457. Similar views have been expressed in the Canadian cases of Rice v George (1873) 29 Gr 221; Wuychik v Majewski [1920] OWN 207 and Osachuk v Osachuk (1971) 18 DLR (3d) 413. 50 Namely, where that person claims for expenditure on repairs and improvements, or is liable as a bailiff or tenant of the other co-owners as suggested at n 8 above. 51 (1998) 43 NSWLR 695. 52 Supreme Court of British Columbia, 12 August 1997. 53 (1994) 18 Fam LR 281 per Meagher JA and Mahoney JA. 54 Above, at 286. 55 P Brereton, “The Rights Between Co-owners of Land” (1995) 69 ALJ 316 at 318. 56 See further E Meitus, “The Rights, Duties and Liabilities of Tenants in Common Inter Se” (1940) 24 Marq L Rev 148 at 149–50.

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118 Heather Conway liberal view of the circumstances constituting a constructive ouster, rather than abandoning one of the fundamental principles of co-ownership itself.57 English caselaw on the subject appears to have discarded this particular principle. While initially taking the view that an occupying co-owner was not accountable for sole enjoyment of the land in the absence of an ouster,58 the position now appears to be that lack of an ouster or forceful exclusion is “far from conclusive” and that an occupation rent will be imposed where this is “necessary to do equity between the parties.”59 This typically occurs where one co-owner leaves the home following the breakdown of a conjugal-type relationship, and the person who remains claims for expenditure on mortgage payments when the property is later sold—an occupation rent will be awarded in favour of the non-resident spouse or partner,60 or a trustee in bankruptcy where that person has been declared bankrupt.61 It is not clear whether this is based on the fact that shared occupation of the home is no longer possible or because the occupant claims for mortgage expenditure, or a combination of both. The latter does not, in itself, give rise to a reciprocal occupation rent.62 If we focus on the fact that shared occupation of the property is not possible, then these cases should actually be classed as instances of constructive ouster. In Re Pavlou,63 Millett J stressed that where a co-owner had left the property voluntarily but would be welcome back and was in a position to enjoy their right to occupy, the resident co-owner should not be charged with an occupation rent. Yet if a co-owner does not leave voluntarily and would not be welcome back into the premises, then surely that person can only be regarded as having been ousted or excluded. When, as in many cases, an intimate relationship breaks down acrimoniously and the practical reality is that a couple are unable to share occupation of the home so that one has to leave (as opposed to that person simply walking out on the other), this should be viewed as a constructive ouster.64 Aside from reflecting what has actually occurred, this approach would be financially advantageous to the excluded spouse or partner since the relevant occupation rent would then be calculated on the basis of mesne profits and the rental value of the land65, which may be a significant sum in an era of rising house prices and a 57

A view shared by Brereton, n 55 above, at 318. See for example, Cracknell v Cracknell [1971] 3 All ER 552 and Jones v Jones [1977] 2 All ER 231. 59 Re Pavlou [1993] 3 All ER 955 at 959 per Millett J. The learned judge was influenced by comments to this effect by Purchas J in Dennis v McDonald [1982] Fam 63 which in turn were partly based on the decision in Hill v Hickin [1897] 2 Ch 579 yet which is open to criticism for the reasons discussed above. 60 See Leake v Bruzzi [1974] 1 WLR 1528; Suttill v Graham [1977] 1 WLR 819 and Bernard v Josephs [1982] 3 All ER 162. 61 See Re Gorman [1990] 1 All ER 717; Re Pavlou [1993] 3 All ER 955 and Re Byford [2003] EWHC 1267, as well as the Northern Ireland case of Official Receiver for Northern Ireland v Kearney [1999] NIJB 24. 62 This is discussed below. 63 [1993] 3 All ER 955 at 959. 64 See the comments of Millett J in Re Pavlou, above. 65 Instead of judges, as a matter of practical expediency, simply off-setting a nominal occupation rent against part of any expenditure on the property claimed by the resident co-owner. 58

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Co-Owners and Equitable Accounting 119 buoyant property market. The same reasoning would apply to accounting adjustments between a resident co-owner and the other co-owner’s trustee in bankruptcy. While he can claim the bankrupt’s share of any occupation rent on securing an order for sale of the property, the trustee in bankruptcy should be regarded as effectively excluded from the property from the date of the bankruptcy order and entitled to an appropriate occupation rent. Again this reflects the practical realities of the situation—the bankrupt’s estate vests in the trustee in bankruptcy, yet it is impossible for the trustee to exercise his right to possession against a non-bankrupt spouse or partner66—while determining the occupation rent on the basis of a constructive ouster and mesne profits would benefit the trustee in bankruptcy and the creditors whom he represents.

EXPENDITURE ON REPAIRS AND IMPROVEMENTS

A joint tenant or tenant in common cannot claim for expenditure on repairs and improvements to the land while co-ownership persists. The majority of repairs and improvements represent “voluntary” expenditure in the sense that the person who carries out this work is usually under no obligation to do so; the other co-owners will not have to contribute towards the cost since the work can be completed without their consent, and they cannot decline any associated benefit.67 However, the position is different where the parties’ financial claims are being settled at the end of the relationship, and the property is being sold and the proceeds distributed between them.

Claiming an allowance and the reciprocal occupation rent The Court of Chancery would permit recovery for repairs and improvements, but only in a partition action.68 As Cotton LJ explained in Leigh v Dickeson: 66 This would explain the decision in Re Byford [2003] EWHC 1267 in which the court correctly imposed an occupation rent where the bankrupt had remained in occupation of the matrimonial home with his wife throughout the bankruptcy proceedings, yet on the basis that this was equitable in the circumstances of the case as opposed to recognising the trustee in bankruptcy as being effectively excluded from the premises throughout this period––see H Conway, “Co-Ownership, Equitable Accounting and the Trustee in Bankruptcy” [2003] Conv 534. 67 See Leigh v Dickeson (1884) 15 QBD 60 at 64–65 per Brett MR and Lyons v Lyons (Supreme Court of New South Wales, 2 September 1987). However, a co-owner who contracts to carry out repairs and improvements on behalf of the others can recover for these––Ruptash and Lumsden v Zawick [1956] 2 DLR (2d) 145. The position would also be different where all the co-owners are under an obligation to carry out repairs and improvements to the land––for example, co-owners of leasehold property under a tenancy agreement. In the circumstances, repairs and improvements might be classed as “necessary” expenditure, and the co-owner who carries out the work will have a right to a contribution from the others––see below. 68 See for example, Swan v Swan (1820) 8 Price 518; Teasdale v Saunderson [1864] 3 Beav 534 and Lasby v Crewson (1891) 21 OR 255.

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120 Heather Conway [N]o remedy exists for money expended in repairs . . . so long as the property is enjoyed in common; but in a suit for partition it is usual to have an inquiry . . . [T]he property held in common has been increased in value by the improvements and repairs; and whether the property is divided or sold . . ., one party cannot take the increase in value, without making an allowance for what has been expended in order to obtain that increased value . . .69

In other words, the non-improving co-owners were liable for such expenditure because the repairs and improvements had increased the value of the property on partition or sale. According to Simpson CJ in Boulter v Boulter: This course of action cannot inflict any injustice on the other co-owners, for it takes nothing out of their pockets, it only prevents them putting into their pockets moneys obtained by the expenditure of another person . . .70

This same rule applies today, so that a co-owner who carries out repairs or improvements may recover for these, but only when co-ownership is brought to an end by sale of the land since any corresponding increase in value is only realised at this stage.71 However, if that person has enjoyed sole occupation of the property, he must pay a reciprocal occupation rent notwithstanding the absence of any ouster.72 This derives from the application of the maxim that “he who seeks equity must do equity.”73 As Giles JA recently explained in Ryan v Dries,74 the improving co-owner “seeks equity” by asking for a contribution towards repairs and improvements insofar as his expenditure has increased the value of the property. He must then “do equity” by submitting to payment of a nominal occupation rent, since the other co-owners are required to pay for something which they did not undertake to pay for in the first place. However, the sum imposed should not exceed the allowance claimed by the occupant, since this would be tantamount to imposing liability for his exclusive use of the land.75 69

(1884) 15 QBD 60 at 67. (1898) LR (NSW) Eq 135 at 137. 71 See for example, Squire v Rogers (1979) 39 FLR 106; Lyons v Lyons (Supreme Court of New South Wales, 2 September 1987); Chatterton v Chatterton (1989) 52 SASR 337; Martin-Smith v Woodhead [1990] WAR 62; VanDongen v Royal (1990) 72 OR (2d) 533; Forgeard v Shanahan (1994) 18 Fam LR 281 and Warner v Warner (1998) ACWSJ 66092. 72 See Kenrick v Mountsteven (1899) 48 WR 141 and Handley v Archibald (1899) 30 SCR 130, as well as Scapinello v Scapinello [1968] SASR 316 and Re Kneebone and Matheson (1981) 124 DLR (3d) 538. 73 See Teasdale v Saunderson (1864) 33 Beav 534; Rice v George (1873) Gr 221; Mastron v Cotton (1925) OLR 251 and Brickwood v Young (1905) 2 CLR 387. 74 [2002] NSWCA 3. 75 Brickwood v Young (1905) 2 CLR 387 and Forgeard v Shanahan (1994) 18 Fam LR 281 at 300 per Meagher JA. Although exceptions to the general rule, courts have occasionally refused to impose an occupation rent where the circumstances of the case suggested otherwise––for example, in McMahon v Public Curator of Queensland [1952] St R Qd 197 where one tenant in common had erected a house at his own expense on a 1/3 acre of the jointly owned 600 acre farm. Likewise, in Parker v Trigg [1874] WN 27 the court declined to impose an occupation rent where the improving co-owner had been in possession with the consent of the other co-owners. 70

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Co-Owners and Equitable Accounting 121 What constitutes repairs and improvements? A co-owner cannot recover for expenditure on periodic maintenance.76 Instead, repairs must be necessary and of a substantial nature.77 Any improvements which are carried out must confer some permanent or lasting benefit,78 such as major building or renovation works on the property. However, there are three situations in which such expenditure may not give rise to an accounting adjustment. Firstly, if the improving co-owner occupies the property as a tenant of the other co-owners, he cannot recover for repairs or improvements which he covenanted to make under the tenancy agreement.79 Secondly, if one co-owner leases the property to a third party without consulting the others and subsequently has to carry out repairs as a result of this, the other co-owners are not obliged to contribute towards these.80 Thirdly, a right to compensation does not arise if the co-owner carrying out the alterations intended these to be a gift. Thus in Noack v Noack81 where a husband had made improvements to land which he owned jointly with his wife but failed to rebut the presumption of advancement, the court refused to grant any allowance for his expenditure.82

Calculating the amount recoverable When determining the amount recoverable for repairs and improvements, the rule is well-established. Assuming that the land is owned in equal shares, the improving co-owner is entitled to half of either the amount spent or the amount by which the repairs and improvements have increased the value of the land, depending on which is the lesser of the two sums.83 The reason for the limitation appears to be that, if a co-owner who carried out alterations was allowed 76

See Cardinaels-Hooper v Tierney (Supreme Court of New South Wales, 20 December 1995). See Teasdale v Saunderson (1864) 33 Beav 534 and Leigh v Dickeson (1884) 15 QBD 60 at 66 per Cotton LJ. 78 See Parker v Trigg [1874] WN 27 and Kenrick v Mountsteven (1899) 48 WR 141. 79 Newall v Johnston (1903) 23 NZLR 406. 80 Re Dugac and the Official Trustee in Bankruptcy (Federal Court of Australia, 6 February 1987). 81 [1959] VR 137. 82 See further Mastron v Cotton (1925) 58 OLR 251 at 255 per Ferguson JA, and Clark v Clark [1961] VR 181. 83 This rule developed in cases such as Re Jones [1893] 2 Ch 461; Williams v Williams (1899) 68 LJ Ch 528 and Kenrick v Mountsteven (1899) 48 WR 141. For a more recent application, see Forgeard v Shanahan (1994) Fam LR 281 and Vasili v Cross (Supreme Court of New South Wales, 14 December 1995) to name but a few examples. The amount recoverable will be deducted from the parties’ respective shares in the proceeds of sale, if the property is sold at the end of the relationship. In the unlikely event that the court physically divides the land between the co-owners instead, the person who has carried out repairs or improvements might be allocated the area of land upon which these have been made––Rice v George (1873) 20 Gr 221 and McNeill v McDougall (1896) 28 NSR 296. 77

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122 Heather Conway to recoup more than his expenditure or the corresponding increase in value, he would be deriving an unfair advantage from the other co-owners by profiting from his repairs and improvements at their expense. Moreover, because the very nature of co-ownership means that one co-owner can make alterations to the property without the approval of the others and they cannot usually decline any resulting benefit, there should be some limit on the amount recoverable.84 However, the practical application of this particular rule attracts two basic criticisms. In the first place, a co-owner will be unable to recoup his expenditure if the alterations do not increase the value of the common property, even if he has spent a considerable sum of money on them.85 More problematic, perhaps, is the fact that the improving co-owner is entitled to the lesser of the two specified amounts where a small expenditure results in a substantial increase in the value of the property or where a large expenditure only produces a small increase in value.86 This situation is exacerbated where the improving co-owner has been in sole occupation of the property—the court will almost certainly charge him with an occupation rent and off-set this against a claim for expenditure. Yet, the other co-owners will probably derive a functional benefit from the alterations. The second criticism relates to the court’s failure to take inflation into account where a period of time has elapsed between carrying out repairs or improvements and sale of the property.87 Such works might produce a significant increase in the current value of the property yet, since the relevant date for calculating the outlay is that on which the repairs and improvements were made, the expenditure will frequently be less than the corresponding increase in value and the amount recoverable restricted accordingly. In McMahon v Public Curator of Queensland 88 the deceased had constructed a house on jointly owned land in 1870 at a cost of £900. The land was sold in 1950, 84 There are two methods of calculating the amount recoverable, both of which yield the same result. One is to divide the proceeds of sale and add half the relevant expenditure or half the increase in value to the improving co-owner’s share––Re Cook’s Mortgage [1896] 1 Ch 923. The other is to give the entire increase in value or outlay to that co-owner, before the proceeds of sale are divided between the parties––Re Jones [1893] 2 Ch 461. If there are more than two co-owners or the parties own the property in unequal shares, the court will make an allowance on the basis of a rateable contribution and division. 85 As in Grant v Grant [1952] OWN 641 where a co-owner installed a new oil burner which did not increase the value of the property. Moreover, one co-owner may have to compensate the others if the works actually cause the property to diminish in value––Marriott v Franklin (1990) 60 SASR 457. 86 See the comments of Simpson CJ in Boulter v Boulter (1898) LR (NSW) Eq 135 at 137. The improving co-owner will be at an added disadvantage where he carried out the repairs or improvements himself. In Cardinaels-Hooper v Tierney (Supreme Court of New South Wales, 20 December 1995) the court held that such time or effort cannot be valued and does not constitute expenditure. Accordingly, the amount recoverable in these circumstances is essentially the amount spent on materials; the improving co-owner receives no allowance for his time and labour unless the parties agree otherwise––see for example, Smith v Davis [1978] 3 ACWS 220. 87 Cooke has remarked that the rule relating to recovery for repairs and improvements evolved in the nineteenth century “when inflation was not the hazard it is today”––n 32 above, at 395. 88 [1952] St R Qd 197.

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Co-Owners and Equitable Accounting 123 by which time the house increased its overall value by a considerably larger amount. However, Macrossan J rejected a suggestion that the appropriate test to be applied was the lesser of the increase in value on sale or the current value of the money spent on the improvements. Thus the deceased’s widow could only recover a proportionate share of the £900 expenditure. One possible argument in favour of retaining the current practice is that, since the property will usually fetch a higher price on sale due to the alterations, the improving co-owner invariably benefits from his expenditure. Yet a fairer outcome would be achieved if the court took inflation into account and assessed the amount which would have been required to carry out the same work at the date of the hearing. This would not involve an unduly complex calculation and would avoid the type of situation which arose in McMahon. Meanwhile, the double limitation in the standard rule for determining the amount recoverable ensures that the improving co-owner cannot benefit at the (unauthorised) expense of the other co-owners—even if the amount spent on alterations was modified to take account of inflation and increased significantly, it would still be measured against the increase in value to the property and the financial allowance restricted accordingly.

LIABILITY FOR MORTGAGE PAYMENTS

Repairs and improvements represent voluntary expenditure in the sense that coowners are not under any obligation to carry out this work and incur associated costs. However, other outgoings relating to the land may be classed as “necessary expenditure” in the sense that co-owners are under a joint obligation to make payments. Since they must all contribute a rateable amount, a co-owner who has been meeting necessary expenditure has a right to a contribution from the others for their share of the outlay.89 One of the best illustrations is mortgage payments, where one person has been meeting all the instalments on a mortgage taken out by all the co-owners.

Rejecting the improvements analogy In Re Pavlou,90 Millet J suggested that mortgage payments by one co-owner were equivalent to improvements, allowing that person to claim for payments of mortgage capital insofar as these increased the value of the equity of redemption 89 See Meitus, n 56 above, at 151–52, as well as Shore v Shore (1975) 63 DLR (3d) 354; Re Dugac and the Official Trustee in Bankruptcy (Federal Court of Australia, 6 February 1987) and Forgeard v Shanahan (1994) 18 Fam LR 281. It has been suggested that this is now part of the law of restitution, since the other co-owners are unjustly enriched at the expense of the co-owner meeting necessary expenditure––Cooke, n 32 above, at 396. 90 [1993] 3 All ER 955.

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124 Heather Conway in the property. The wife in this case having assumed responsibility for mortgage instalments after her husband left the matrimonial home, Millet J held that she was entitled to “credit for one-half the increase in value of the equity of redemption which result[ed] from the capital element of the mortgage payments since the date on which the husband left the property.”91 More recently, similar views have been expressed by a majority of the New South Wales Court of Appeal in Ryan v Dries.92 There are obvious flaws in this approach. For example, the claimants in both cases were also entitled to recover a proportionate share of mortgage interest payments. Yet, as Cooke points out, if mortgage payments by one co-owner are equivalent to improvements to the land, this does not explain why the others must contribute towards interest payments when these do not increase the value of the equity of redemption.93 Moreover, if the property was worth less than the mortgage debt, mortgage payments by one co-owner would not increase the value of the (non-existent) equity of redemption, but would nevertheless reduce the debt which would remain if the property were sold. However, the fact that this capital expenditure did not increase the value of the equity of redemption would effectively preclude its recovery. Such technicalities aside, it is simply incorrect to equate mortgage payments with improvements. While they might resemble improvements insofar as they increase the value of the equity of redemption in a manner similar to that in which improvements increase the value of the land itself, there is one vital difference. Most improvements represent voluntary expenditure, whereas a mortgage constitutes necessary expenditure in the sense that all of the co-owners have incurred a joint debt and are under a financial obligation to a third party—the lender. In these circumstances, payment of both the mortgage capital and interest by one co-owner generates a right to a contribution from the other co-owners. This analysis is consistent with the vast majority of caselaw on the point.94 However, one issue has yet to be addressed. While the relevant cases have considered liability for capital and interest under a repayment mortgage or interest payments alone under an endowment mortgage, there has been no mention to date of contributions towards the assurance policy which is invariably taken out to guarantee repayment of capital at the end of the latter mortgage term.

91

Above, at 398. [2002] NSWCA 3. See also the comments of Rolfe J at first instance in Forgeard v Shanahan [1991] 5 BPR 11,797 at 11,802 although subsequently criticised by Meagher JA on appeal––(1994) 18 Fam LR 281 at 299–300. 93 Cooke, n 32 above, at 397. 94 See for example, the Australian cases of Scapinello v Scapinello [1968] SASR 316; Carkeek v Tate-Jones [1971] VR 691; Vasili v Cross (Supreme Court of New South Wales, 14 December 1995); and Tracey v Bifield (1998) 28 Fam LR 260, and the Canadian cases of Ruff v Strobel (1978) 86 DLR (3d) 284 and Brewin v Ferguson (1982) 134 DLR (3d) 538. This approach is also implicit in the English cases of Leake v Bruzzi [1974] 1 WWR 1528; Re Gorman [1990] 1 All ER 717 and Re Byford [2003] EWCH 1267. 92

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Co-Owners and Equitable Accounting 125 Since it is an integral part of the mortgage transaction, it is suggested that payment of premiums on a joint endowment policy should be equated with payments of capital under a repayment mortgage95, giving rise to a right to a contribution in favour of the co-owner who has assumed such financial responsibility.96

Imposition of an occupation rent A co-owner who seeks compensation for repairs and improvements must pay a reciprocal occupation rent if he has enjoyed sole occupation of the property.97 However, the same rule does not apply to mortgage payments, despite suggestions to the contrary.98 Rejecting the reciprocity argument While recognising that a right to a contribution exists in respect of mortgage payments, a number of Canadian cases have held that the interest element should be credited against an occupation rent where the co-owner who met these payments has enjoyed sole possession of the land.99 This reciprocal allowance is based on the fact that, since interest payments do not increase the value of the property, the occupying co-owner must submit to an occupation rent.100 While English caselaw also differentiates between payments of mortgage capital and interest in these circumstances and off-sets the latter 95

See MP Thompson, Co-Ownership (Sweet and Maxwell, London, 1988) 52. Another issue which may arise in this context is that of payments by one co-owner towards a joint insurance policy on the property. In Scapinello v Scapinello [1968] SASR 316 and Tracey v Bifield (1998) 28 Fam LR 260, these were classed as necessary expenditure on the basis that the property purchase was financed by a lending institution and the joint owners were obliged to take out an insurance policy as a condition of the mortgage. This suggests that liability may depend on the circumstances surrounding creation of the insurance policy. In Forgeard v Shanahan (1994) 18 Fam LR 281 a majority of the New South Wales Court of Appeal held that insurance payments merely maintained the property and accordingly were not recoverable, while the respective courts in the Canadian cases of Osachuk v Osachuk (1971) 18 DLR (3d) 413 and Re Kneebone and Matheson (1981) 124 DLR (3d) 538 ordered the parties to compensate each other for payments of fire insurance premiums which had not been borne rateably. However, it is suggested that payments towards an insurance policy taken out by all co-owners should be regarded as necessary expenditure and thus generate a right to a contribution, irrespective of whether the insurance is required by a third party or is simply intended to protect the property against accidental damage. The basis of the policy is a joint undertaking by the co-owners and one person is subsequently paying a debt which he and the others owe jointly. Insurance also protects the joint asset and is not solely referable to occupation of the property. 97 See above. 98 Again it is assumed that the other co-owners have not been excluded from the land, and that there are no other special circumstances which might render the occupant liable to pay an occupation rent. 99 See Osachuk v Osachuk (1971) 18 DLR (3d) 413 at 433–35 and the cases cited therein, as well as Paterson v Paterson (1979) 108 DLR (3d) 235. 100 Osachuk v Osachuk, above, at 435. 96

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126 Heather Conway against an occupation rent, this is justified on different grounds—namely, that it is equitable in the circumstances of the case.101 It is submitted that an occupying co-owner should not be charged with a occupation rent simply because he claims for mortgage payments.102 Unlike expenditure on repairs and improvements, the occupant has a right to a contribution for mortgage payments; this exists as an independent action and is not confined to sale of the property. Accordingly, it is not a case of the occupant “seeking equity” and thus having to “do equity” by submitting to payment of an occupation rent.103 Moreover, the other co-owners are not being asked to contribute towards something which they did not undertake, since they are all jointly and severally liable to pay both the mortgage capital and interest.104 The occupant’s expenditure represents payment of a joint debt for which all the parties are responsible, and should not attract a reciprocal occupation rent.105 At a cursory glance this might seem unfair because an absent co-owner “is doing all the paying.”106 Yet, as Bruce Ziff rightly points out, imposition of an occupation rent in these circumstances is unwarranted since the person who has left the property will be able to “shirk . . . existing obligations to share expenses” while the occupying co-owner “will be paying a rent for something (occupation) that they are entitled to as of right.”107 This of course, assumes that shared occupation is still possible and situations invariably exist in which a co-owner could not reasonably be expected to return to the property—most notably in relation to the family home on the breakdown of an intimate relationship. Again, any potential injustice could be overcome by taking a more generous view of what constitutes a constructive ouster and calculating the occupation rent accordingly. The rule of practice and its inherent dangers Assuming that there has been an ouster, the occupation rent should, strictly speaking, be calculated on the basis of the rental value of the property.108 However, the practice has developed in English courts in particular whereby separate accounts are taken of payments of mortgage interest and capital by the occupying co-owner, and the former are credited against the occupation rent so 101

See the cases cited at nn 60–61 above. In support of this view, see Ruff v Strobel (1978) 86 DLR (3d) 284; Brewin v Ferguson (1982) 134 DLR (3d) 538; Sloan v Sloan (1985) 32 ACWS (2d) 19 and Tracey v Bifield (1998) 28 Fam LR 260, as well as the cases discussed immediately below. 103 See Carkeek v Tate-Jones [1971] VR 691 and Forgeard v Shanahan (1994) 18 Fam LR 281. Contrast this with the views expressed by a majority of the New South Wales Court of Appeal in Ryan v Dries [2002] NSWCA 3. 104 See the dissenting judgment of Giles JA in Ryan v Dries, above. 105 Mortgage payments also benefit the co-owners who are out of occupation, since they increase the value of the equity of redemption in the property. 106 Cooke, n 32 above, at 400. 107 B Ziff, Principles of Property Law, 3rd edn (Carswell, Toronto, 2000) 318. 108 See above. 102

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Co-Owners and Equitable Accounting 127 that the two sums effectively cancel each other out.109 Referring to this practice, Vinelott J in Re Gorman110 observed that: [It] is not, of course, a rule of law to be applied in all circumstances . . . It is a rule of convenience and more readily applies between husband and wife, or cohabitees, than between a spouse and the trustee in bankruptcy of the other co-owner.111

The parties may agree that the occupation rent should be off-set against the mortgage interest because the two amounts are similar, or as a matter of practicality.112 Failing this, the court would have to order detailed inquires into the respective amounts. While this would be more expensive in terms of costs, it may prove beneficial in terms of the value of the property and that of the mortgage secured against it. Take the example of a mortgage taken out a number of years ago and which, as a result of market forces, is for a much smaller amount than the property is now worth. In these circumstances, the rental value of the property would almost certainly be much greater than the interest payments on the mortgage, with the result that the excluded co-owner113 would lose out if the latter were simply credited against a notional occupation rent. Another problem with adopting this practice is that it fails to distinguish between repayment mortgages and endowment mortgages when this could have a significant bearing on the amount of interest being claimed and consequently the amount of occupation rent payable. Whereas the monthly payment under an endowment mortgage consists of interest only, the monthly payment under a repayment mortgage consists of both capital and interest. The interest component under a repayment mortgage is likely to be less, especially towards the end of the mortgage term as payments decrease significantly as the overall mortgage debt is reduced. This may work to the detriment of the occupying co-owner, who would end up paying more in terms of occupation rent under an endowment mortgage than they would under a repayment mortgage for the same value. While it would not be financially prudent to embark on a detailed calculation of the amounts payable in every case, judges should be alert to the possibility of such potentially disparate and inequitable results when applying sweeping rules of practice. In some instances, it might be better to calculate the relevant allowance for mortgage interest payments and occupation rent separately before subtracting one from the other to determine who owes what, as opposed to merely cancelling out the two sums.114

109 See Leake v Bruzzi [1974] 1 WLR 1528; Suttill v Graham [1977] 1 WLR 819 and Re Byford [2003] EWCH 1267. 110 [1990] 1 All ER 717 at 726. 111 However, it has been suggested that this rule is effectively applied as a rule of law––S Johnson, “Putting a Price on a Home––Two Unresolved Problems” [1992] Fam Law 545. 112 As in Re Byford [2003] EWHC 1267. 113 Possibly the trustee in bankruptcy, representing the bankrupt’s creditors. 114 For an example of a more cautious approach, see Abbott v Price [2003] EWHC 2760.

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128 Heather Conway

RENTS AND PROFITS

One co-owner may bring an action of account against another who has received more than his share of rents and profits from the property.115 This may be maintained as a separate action or as incidental to proceedings for sale of the property when ending co-ownership. A co-owner does not receive more than his just share simply because he has sole use of the property or profits from his own efforts or expenditure on the land.116 An action of account is only available where a co-owner receives in excess of his share of rents and profits from a third party.117 For example, while a co-owner must account for rents received as a result of leasing the property,118 he need not account for income generated by his own labour such as running a boarding-house119 or farming the land and selling harvested crops120 or simply grazing animals there.121 However, an action of account is available where revenue is obtained by selling natural material which diminishes the value of the land itself, such as the sale of plaster from plaster beds on the property.122 A co-owner who has received in excess of his share of rents and profits may claim for expenses used to earn that income.123 This is significant where the expenses take the form of improvements which, for example, result in the property being leased to a third party. In these circumstances, the co-owner who carried out the work may recover the entire cost of the improvements, and not just the amount by which these have increased the value of the property where this figure is less, because the improvements are referable to the letting.124 115 Originally conferred by s 27 of the Administration of Justice Act 1705. While this provision and its Irish equivalent have been repealed, the right of action persists––see Cooke, n 32 above, at 398 and A Dowling, “The Baby and the Bathwater: The Administration of Justice Act (Ireland) 1707, s 23” (1996) 47 NILQ 428. Section 27 remains in force in Australia, with the exception of New South Wales and Victoria where the 1705 Act has been repealed without any legislative replacement. Despite suggestions that the right of action conferred by s 27 is no longer available (see Forgeard v Shanahan (1994) 18 Fam LR 281 and Cardinaels-Hooper v Tierney, (Supreme Court of New South Wales, 20 December 1995)) the better view appears to be that this it is––Squire v Rogers (1979) 39 FLR 106; Marriott v Franklin (1993) 60 SASR 457 and Hitchins v Hitchins, (Supreme Court of New South Wales, 11 December 1998). Section 27 remains in force in Canada, but has been re-enacted in some provinces––see for example, s 17 of the Law of Property Act 1980 (Alberta). 116 See Field v Field (1910) 8 ELR 374 and Rees v Rees [1931] SASR 78. 117 See Henderson v Eason (1851) 17 QB 701 and Munsie v Lindsay (1883) 10 PR (Ont) 173. However, a co-owner is only liable in respect of rents and profits actually received from a third party, and not for what he might have received with better management of the property––Thrift v Thrift (1975) 10 ALR 332 and Osachuk v Osachuk (1971) 18 DLR (3d) 413. 118 See Marriott v Franklin (1993) 60 SASR 457. 119 See Spelman v Spelman [1944] 2 DLR 74 and Reid v Reid (1978) 87 DLR (3d) 370. 120 Rees v Rees [1931] SASR 78. 121 Gingles v Magill [1926] NI 234. 122 Since “the amounts received . . . are obtained by the eating away of the estate”––Curtis v Coleman (1875) 22 Gr 561 at 562 per Blake VC. 123 Marriott v Franklin (1993) 60 SASR 457 at 465. 124 See Squire v Rogers (1979) 39 FLR 106 and Vasili v Cross (Supreme Court of New South Wales, 14 December 1995).

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Co-Owners and Equitable Accounting 129 However, this does not apply where the other co-owner was unaware that such improvements were being made.125

CONCLUSION

At a cursory glance, the old rules of equitable accounting devised by the Court of Chancery might seem unjust and ill-equipped to deal with the modern realities of co-ownership, and in particular the increase in home ownership. For example, the fact that a co-owner cannot be charged an occupation rent on the basis of sole occupation alone arguably fails to take account of the numerous reasons why another co-owner may feel obliged to leave the property. It may also seem unfair when considered in the context of recovery for mortgage payments, since the resident co-owner can claim for these but cannot be charged with an occupation rent. As regards repairs and improvements, the limitation on the amount recoverable means that any expenditure will not be reimbursed if it does not increase the value of the property, or will be restricted to the amount spent even if it produces a much larger increase in value, with no allowance for inflation where a lengthy period of time has elapsed between the work being carried out and sale of the property. However, many of these rules flow from the fact that the parties are joint owners, and cannot be abandoned without also “calling into question”126 the very nature of co-ownership itself. By virtue of the unity of possession, each co-owner is entitled to use and occupy the entire property. To impose an occupation rent simply because one co-owner enjoys exclusive possession ignores this fundamental precept. Even if the occupant claims for mortgage payments, this claim arises from a right to a contribution towards the joint debt and does not yield a reciprocal occupation rent. Again, by virtue of the unity of possession, coowners cannot decline the benefit of repairs and improvements effected by another co-owner. The inherent limitation in the amount recoverable for such expenditure usually ensures some compensation for the improving co-owner without forcing the others to make full compensation for something to which they did not consent. This is not to suggest that the existing rules are perfect, yet minor modifications could be made without rejecting them completely. For example, courts could allow for inflation on expenditure on repairs and improvements, while recognising a broader range of circumstances as constituting a constructive ouster and calculating the occupation rent accordingly would allow for the practical realities of home ownership in particular without deviating from one of the core values of co-ownership. That aside, the basic principles to be applied when making an accounting adjustment are relatively straightforward, if 125 AJ Bradbook, SE MacCallum and AP Moore, Australian Real Property Law, 2nd edn (Lawbook Company, Sydney, 1997) 10–27. 126 Brereton, n 55 above, at 318.

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130 Heather Conway the parties’ respective claims are considered separately and logically. Any confusion in the relevant caselaw has been caused by judges deviating from the rules devised by the Court of Chancery, attempting to achieve what they perceive to be a fairer outcome between co-owners but with scant regard to the fact that the rules derive from the peculiar nature of co-ownership and, more significantly, to the financial implications of their decision. In some instances, courts have imposed reciprocal accounting obligations where no such mutual obligations exist, and the increasingly common practice (in English cases in particular) whereby claims for expenditure are simply credited against a notional occupation rent may produce serious financial discrepancies. It is not suggested that judges undertake strict mathematical calculations in every case. However, they should be alert to the dangers of applying sweeping rules of practice and sacrificing detailed accounting adjustments to practical expediency. Any accounting adjustment inevitably involves a number of competing interests. For example, a co-owner who has been meeting all the expenses associated with the property will almost certainly want the other co-owners to contribute towards these, but will not usually want them to share in any income which he may be receiving or perhaps account for his sole use of the land. Likewise, the non-contributing co-owners will almost certainly want to share in the income from the land and charge in respect of such exclusive possession, but may be reluctant to contribute towards expenses. The potentially large sums of money involved are important in terms of what each party receives at the end of the relationship, and may be a powerful negotiating tool in trying to reach a final settlement. The law must strike a balance between the various competing interests. It could be argued that the old rules achieve this to a large extent, apportioning liability between co-owners fairly and reconciling the conflicting interests within the confines of the law relating to co-ownership of land and the basic consequences which flow from this.

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7

Allcard v Skinner Revisited: Historical Perspectives on Undue Influence CHARLOTTE SMITH

INTRODUCTION

This chapter examines the underpinnings of the doctrine of undue influence as it operates in respect of inter vivos transactions. This doctrine allows a claimant to obtain relief where she has proved that a transaction was caused by “actual” undue influence; or, alternatively, where the claimant has successfully adduced evidence of a relationship between herself and the defendant which raises a presumption (not successfully rebutted by the defendant) that the transaction was procured by undue influence. This seems simple enough but any appearance of simplicity is misleading. It has, with some justification, been claimed that: Few areas of the law have struggled so unsuccessfully for satisfactory doctrinal exposition and analysis as the equitable jurisdiction to relieve against undue influence in the procurement of an inter vivos transaction.1

The difficulty in determining the doctrinal foundations and rationale of relief for undue influence has been highlighted by a series of recent decisions: Hammond v Osborn,2 National Commercial Bank (Jamaica) Ltd v Hew,3 and R v Attorney General for England and Wales.4 In each of these cases the court referred to the leading nineteenth-century case of Allcard v Skinner.5

THE CONTEMPORARY DEBATE ABOUT THE DOCTRINE OF UNDUE INFLUENCE

The only uncontested element of undue influence is its identity and function as a doctrine which operates in the context of relationships. The question of undue influence will only arise where a relationship of trust and confidence existed 1 2 3 4 5

R Bigwood, “Undue Influence in the House of Lords: Principles and Proof” [2002] MLR 435. [2002] EWCA Civ 885. [2003] UKPC 51. [2003] EMLR 24. (1887) 36 ChD 145.

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132 Charlotte Smith between the claimant and defendant at the time of the impugned transaction. In the words of Lindley LJ, the “The undue influence which the Courts of Equity endeavour to defeat is the undue influence of one person over another”.6 The relational context of the doctrine’s operation, though unproblematic in itself, founds the inextricable muddle at its heart. The question is whether relief for undue influence is claimant-focussed or defendant-focussed. Put another way, the question is whether relief is granted because the claimant’s ability to consent was impaired or because the defendant has behaved in an unconscionable way. Caselaw and academic commentary advances various bases at different times.7 The continued inability to reach a consensus on the basis of relief was demonstrated recently by the judgments handed down in Attorney General v R.8 The opinion of the majority, given in the judgment of Lord Hoffmann, supports the view that relief is based on the unconscionable or improper behaviour of the defendant, and the correlative need to protect the claimant made vulnerable by their subjection to the influence or relationship concerned. Thus Lord Hoffman stated that: Like duress at common law, undue influence is based upon the principle that a transaction to which consent has been obtained by unacceptable means should not be allowed to stand. Undue influence has concentrated in particular upon the unfair exploitation by one party of a relationship which gives him ascendancy or influence over the other.9

Speaking on the presumption of undue influence, he continued: Certain relationships . . . give rise to a presumption that one party has influence over the other . . . In the absence of contrary evidence, the court will be entitled to find that the burden of proving unfair exploitation of the relationship has been discharged.10

While the judgment of Lord Hoffman gives a defendant-centred account of relief, the dissenting judgment of Lord Scott favours a distinctly claimantcentred account of relief. He focusses chiefly upon the quality of the consent given to the impugned transaction, characterising relief in the following terms: It is well established that the relationship between parties to a contract, coupled with the nature of the contract and, sometimes, the circumstances in which consent to it by one party was obtained by the other, may give rise to a presumption that the consent 6

Above, 162. For detailed discussions of the opposing views and the relevant case law see P Birks, “Undue Influence as Wrongful Exploitation”, (2004) 120 LQR 34–37; R Bigwood, “Undue Influence in the House of Lords: Principles and Proof” (2002) 65 MLR 65; P Birks and CN Yin, “On the Nature of Undue Influence” in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Clarendon Press, Oxford, 1997); P Ridge, “The Equitable Doctrine of Undue Influence Considered in the Context of Spiritual Influence and Religious Faith: Allcard v Skinner Revisited in Australia” (2003) UNSW L J 26 66. 8 [2003] EMLR 24. See also National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51. 9 [2003] EMLR 24, para 21. 10 Above, para 22. 7

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Historical Perspectives on Undue Influence 133 of the former was obtained by undue influence. The presumption is an evidential presumption requiring the dominant party, seeking to enforce the contract, to introduce some additional evidence to show that the consent to the contract of the subservient party was a true consent fairly obtained.11

Lord Scott’s claimant-focussed, consent-based, account of relief echoes the account of undue influence given by the Court of Appeal in the most recent domestic authority, Hammond v Osborn.12 In that case, while explicitly absolving the defendant of any wrongdoing, the Court of Appeal focussed upon the position of the claimant, identifying as their central concern the quality of the consent given. Though the judgments of Lord Hoffman, and those of Lord Scott and the Court of Appeal, can be described as taking respectively defendant-centred and claimant-centred views of relief, it can be seen that each judgment contains elements of both bases for relief. Each focuses, albeit to differing degrees, upon the quality of consent to the transaction and the means by which that consent was produced. The obvious reason for this is the relational context in which relief arises. The quality of the consent given is inextricably linked to the position or conduct of the defendant. Thus Bigwood writes: The jurisdiction is subject, first and foremost, to the liberty principle (utmost freedom to dispose of one’s property as one chooses), but it also assists to define what “liberty” means in this connection by reference to the processes by which transferees of property may, relative to equity’s “conscience”, legitimately procure or accept the assent of their transferors.13

Given the relational context in which relief operates, the question of whether it is a claimant-centred or defendant-centred doctrine can, perhaps, only ever be a question of focus or degree. A further debate concerns the extent to which relief is given, not because any actual wrong has been perpetrated, but because public policy requires that relationships of trust and confidence should be safeguarded against the potential of abuse. Hammond v Osborn emphasised this justification for relief. Sir Martin Nourse held that relief was based, not on the proof of actual wrongdoing, but upon the need to prevent relationships characterised by a high degree of trust and confidence from being abused.14

ECHOES IN HISTORY : ALLCARD V SKINNER AND THE FOUNDATIONS OF UNDUE INFLUENCE

As each of the recent judgments has advanced its own formulation of the basis of relief, the judges delivering them have frequently appealed to different 11 12 13 14

Above, para 41. Above, n 2. Above, n 1, 438. Above, n 2.

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134 Charlotte Smith components of the judgments delivered in Allcard v Skinner. Sir Martin Nourse, for example, in basing relief on the need to preserve the integrity of trusting relationships, cited with approval Cotton LJ’s assertion that: The Court interferes . . . on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising there from being abused.15

Similarly, in his dissenting judgment in Attorney General v R, Lord Scott relied extensively on Allcard v Skinner in advancing a claimant-centred, consent-based, formulation of relief for undue influence. He cited with approval, for example, Bowen LJ’s assertion that gifts made by those subject to influence would be set aside: [U]nless it is shewn that the donor, at the time of making the gift, was allowed full and free opportunity for counsel and advice outside—the means of considering his or her own worldly position and exercising an independent will about it.16

Lord Hoffman, giving a defendant-centred, fault-based account of relief for undue influence, did not appeal to Allcard v Skinner but he could have found support for his own views there. Lindley LJ, exploring the basis of the doctrine of undue influence, determined that: . . . to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.17

Contemporary judges can take comfort in adversity from the evident vacillation, between different justifications for relief, of the judges in Allcard v Skinner. All of the judges had cognisance of the position of the defendant in the relationship producing the impaired consent of the claimant. Kekewich J, for example, while recognising that all persons were subject to a degree of influence, asserted: But the law requires that influence, however natural and however right, shall not be unduly exercised, that is, shall be exercised only in due proportion to the surrounding circumstances and the strength of the person submitting to it. The more powerful influence or the weaker patient alike evokes a stronger safeguard . . .18

In the Court of Appeal Cotton LJ’s classic exposition of the doctrine of undue influence, while focussing predominantly on the autonomy of the claimant, also had regard to the effect of the surrounding circumstances on the ability of the claimant to exercise independent judgement. Analysing the case law he held:

15

[2002] EWCA Civ 885, para 1. Above, n 4, para 40. See also his citations from aspects of that case which support the case for relief based on the need to preserve the integrity of relationships of trust and confidence. 17 (1887) 36 ChD 162. 18 Above, 151. 16

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Historical Perspectives on Undue Influence 135 These decisions may be divided into two classes—First, where the Court has been satisfied that the gift was the result of influence expressly used by the donee for the purpose; second, where the relations between the donor and the donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence over the donor. In such a case the Court sets aside the voluntary gift, unless it is proved that in fact the gift was the spontaneous act of the donor acting him under circumstances which enabled him to exercise an independent will and which justifies the Court in holding that the gift was the result of a free exercise of the donor’s will.19

Similarly, Bowen LJ distinguished between the claimant’s absolute freedom of disposition and the duties of the donee who was in a position of influence, commenting: It seems to me that persons who are under the most complete influence of religious feeling are perfectly free to act upon it in the disposition of their property, and are not the less free because they are enthusiasts . . . Passing next to the duties of the donee, it seems to me that, although this power of perfect disposition remains in the donor under circumstances like the present, it is plain that equity will not allow a person that exercises or enjoys a dominant religious influence over another to benefit directly or indirectly by the gifts which the donor makes under or in consequence of such influence, unless it is shewn that the donor, at the time of making the gift, was allowed full and free opportunity for counsel and advice outside . . .20

Finally, Lindley LJ, while characterising undue influence as a doctrine that addressed the actual or possible abuse of positions of power or influence, absolved the defendant of any unfair or exploitative conduct. The crucial factor for relief was the fact that the claimant had placed herself in a situation in which she was unable to exercise independent judgement in the disposition of her property.21

ALLCARD V SKINNER : THE STORY OF THE CASE AS A SINGLE HISTORICAL EVENT

An exploration of the authorised report of Allcard v Skinner illustrates the longevity of the debate about the basis for relief, but is of little help in the quest for a principled basis for the doctrine of undue influence. The aim of the remainder of this chapter is to explore that case, not in its accepted legal reception, but as a historical event. It is hoped that by doing so further light can be shed on the basis of relief for undue influence. The facts of Allcard v Skinner are well known and are neatly encapsulated in this pithy summary by The Times:

19 20 21

Above, 157. Above, 166. Above, 160–61.

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136 Charlotte Smith Miss Allcard’s story is not an uncommon one, and in few families is not some such tale told. Her father died in 1861 . . . In 1868 she was moved to devote herself to the religious life, and made the acquaintance of the Rev. Henry Nihill . . . Events took their natural course; that which generally happens when a wandering irresolute spirit meets those fully convinced. Miss Allcard joined the sisterhood . . . For a time she was in full sympathy with her companions . . . In course of time there came weariness, disillusion, and restlessness; the spell of Mr Nihill’s influence waned. Her associates became uncongenial to her, and she perhaps to them, and we have reason to conjecture that petty worldly troubles were not unknown within the convent walls, pushing some of the principles of her directors to their logical result. She quitted the convent in May, 1879, and on the 10th of the month sought rest in the Church of Rome.22

This contemporary summary indicates that the religious context of the case was not irrelevant to public attitudes to the case. That judicial attitudes were similarly coloured by this context is illustrated at several points. Most notable in this respect is the judgment of Kekewich J. He took great pains to establish the impartiality of his decision, stating that: There are issues of law . . . and I have considered and intend to decide them without regard to any claims which, were I not deciding them, either party might have had on my sympathy.23

Concluding his judgment, he asserted: I have endeavoured, to the best of my ability, to treat this as a question of law, regardless of feelings which might otherwise sway the judgment, and, so far as I could control thoughts or command language, I have endeavoured to express my conclusions so as to avoid wounding susceptibilities or causing pain to any person directly or indirectly interested in the matter.24

Painstaking assertions of impartiality by judges raise suspicions of the very real probability that the disclaimed biases exist. In relation to Kekewich J, who was famed for making his opinions known to the world and for unfortunate or intemperate utterances,25 some credence was given to such suspicions. The Church Times reported him as giving the following opinion of religious converts in general and Miss Allcard in particular. She gave her evidence on the whole well. It exhibited far less than I expected that deterioration of moral character which almost invariably follows change of faith, and especially religious faith.26

The immediate consequence of this report was an outcry in the religious press. While the Anglican Church Times was prepared to accept that there was much truth in it, the Roman Catholic Weekly Register was outraged. Having 22 23 24 25 26

The Times, 1 February 1887. (1887) 36 ChD 149. Above, 156. See his obituary––25th November 1907. Church Times, 4 February 1887.

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Historical Perspectives on Undue Influence 137 first noted that Christianity was based on the teachings of a man who had changed his faith in the first century, and that Protestants followed men who had changed their faith in the sixteenth century, it urged: At intervals . . . Themis has been seen to lay aside the judicial horse-hair and to don, not the fatal black cap, but the biretta of a doctor of theology. The result is a little confusing, not to say grotesque . . . In a court of civil administration where the only issue is a transfer of property it seems a little out of place that a man should unduly manifest his opinions through the folds of his judicial robes . . .27

While Kekewich J’s pronouncements attracted most attention, a cursory examination of the Court of Appeal judgments yields further statements indicative of a degree of religious partiality. Bowen LJ, for example, took pains to assert: Now I offer no sort of criticism on institutions of this sort; no kind of criticism upon the action of those who enter them, or those who administer them. In the abstract I respect their motives . . .28

A general suspicion of religious influences and powers While anxious to disclaim any particular religious partiality, the judges were far from reticent in asserting the dangerous, potent and subversive characteristics of religious influence. Kekewich J, for example, asserted that religious influence was “the most subtle of all, and may be exercised by means and channels which for other purposes might be of little avail”.29 Similarly, Lindley LJ stated that “of all influences religious influence is the most dangerous and the most powerful”.30 Concerns about the power and effect of religious influence were widespread and of respectable vintage. Arguments about the need to control ecclesiastical power and influence were at the heart of defences of the relationship between Church and State. In supporting Establishment, for example, the Edinburgh Review argued that it was the best means by which to suppress clerical pretensions and Church tendencies to tyrannise over the nation. It urged: Happily the existing jurisdiction of the Queen in Church and State affords to the nation an ancient and efficient barrier against the pretensions of the clerical party . . . by that alone the discipline of the Church may be maintained without encroaching on her freedom; and she may continue to unite, as she has done for three centuries, stability with progress.31

27 28 29 30 31

Weekly Register, 5 February 1887. (1887) 36 ChD 166. Above, 151. Above, 163. “The Ecclesiastical Jurisdiction of the Crown” The Edinburgh Review (1865) 121 180.

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138 Charlotte Smith This was not a sensationalist or populist argument. It had its roots in an understanding of English history and the role that the clergy had played in troubled periods of constitutional change. It was not confined to the pages of the periodical press. Lord Selborne LC, one of the foremost defenders and nineteenth century theorists of Establishment, also endorsed it, writing: Regarded apart from their higher moral and social effects, the relations between the Church of England and the State, which constitute the Establishment of the Church, are in their true nature securities taken against possible excesses of ecclesiastical power . . .32

The resurgence of the organised religious life in nineteenth-century England The religious backdrop to the nineteenth century was one of rapid change, upheaval and controversy, of which the resurgence of the organised religious life was one component. The organised religious life, that is convents and monasteries, was unknown in England from the dissolution of the monasteries in the sixteenth century until the Roman Catholic Relief Act of 1829.33 The Act of 1829, which recognised Roman Catholics as citizens admitted to the full civic and political life of the nation, legalised religious communities of women, though not of men. Between 1829 and the end of the nineteenth century the growth of religious communities was startling. In 1865 Mr Newdigate MP gave the following intelligence to the House: I find in England and Wales there were religious houses of men in 1841 but one; of convents, 16; of colleges, 9. But in 1851 there were religious houses of men, 17; convents, 53; colleges, 10. And now how stands the account? In 1865 there are religious houses of men 58; convents 187; colleges, 10: and if to the account we add 14 convents for Scotland, there are 201 convents established in this country, and possessing, to my knowledge, in the midland counties, considerable real property as well as personal estate.34

This rapid increase of Roman Catholic religious houses occurred at a time when other developments in Roman Catholicism were causing alarm and concern. In continental Europe many governments were taking legislative action to restrain religious communities and to subject them to state control and inspection.35 In Britain a new brand of Ultramontane, ebullient and very public Roman Catholicism replaced the more familiar sober and reticent tradition.

32 R Palmer, A Defence of the Church of England Against Disestablishment, 5th edn (Macmillan and Co, London, 1911) 73–74. 33 10 Geo 4 c 7. 34 Parl Deb (3rd ser) 177, cols 150–51. 35 Newdegate MP sought a return on these foreign initiatives in 1874, 1875 and 1876. See Parl Deb (3rd ser) 218, col 1097; Parl Deb (3rd ser) 222, col 397; and Parl Deb (3rd ser) 228, col 1002.

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Historical Perspectives on Undue Influence 139 The most obvious manifestation of this was the Papal Aggression in 1850, which re-established the full Roman Catholic hierarchy in England.36 Fears surrounding the increase in religious houses prompted repeated legislative initiatives between 1850 and 1877 to regulate and control convents and monasteries. Large parliamentary majorities voted for state inspection of convents in 1853 and 1854.37 Efforts were made to secure inquiries into convents and monasteries in 1864, 1865, 1867, 1868 and 1869.38 Finally, in 1870 a select committee was appointed to inquire into the law relating to these institutions and the amount of property held by them.39 Unsuccessful efforts were subsequently made in 1872, 1873 and 1876 to obtain a more detailed inquiry, which would examine the character and discipline of convents.40 Ultimately attempts to secure the inspection of convents failed, thanks largely to the efforts of Irish Roman Catholic MPs.41 However they had a lasting impact and effect as a result of the publicity that they gave to the alleged abuses perpetrated in convents.42 They added to the plethora of stories which appeared in the press43 and popular literature44 throughout the nineteenth century, and caused one indignant MP to complain: It was extraordinary that, while on other questions the English were the most scrupulously truthful people in the world, they appeared on the single subject of religion to be wholly reckless as to the truth or falsehood of their assertions. Nothing could be lower than the standard of morality of religious journalism; nor did men care what they said of each other in social life on religious matters.45

Against the background of this controversy, and caught up in it,46 the Anglican sisterhoods, of which the community at the centre of Allcard v Skinner was an example, grew up. They did so at a time when the Church of England was itself undergoing a period of rapid change, and was riven by controversy in 36 For an introduction to religious change in the nineteenth century see generally J Wolffe, God and Greater Britain: Religion and National Life in Britain and Ireland, 1843–1945 (Routledge, London, 1994) and WR Ward, Religion and Society in England, 1790–1850 (Batsford, London, 1972). 37 See eg Parl Deb (3rd ser) 126, 127, 128, and 129. 38 See eg Parl Deb (3rd ser) 177. 39 Report of the Select Committee on Conventual and Monastic Institutions (25 July 1870). 40 See Parl Deb (3rd ser) 210, cols 1632 ff; Parl Deb (3rd ser) 214, cols 526 ff; and Parl Deb (3rd ser) 228, col 1002. 41 The debates on convents were characterised by rifts between Irish Roman Catholics and Evangelical MPs. They were characteristically bad-tempered and irritable and initiatives were often defeated by somewhat underhand means––such as Irish MPs walking out of the House en masse, forcing the House to be counted, and leaving it without the required quorum to transact business. This may explain the anxiety of the judges not to be seen to have been influenced by the particular religious context of Allcard v Skinner. 42 See eg Newdegate at Parl Deb (3rd ser) 177, col 1057 ff. 43 See eg The Times, 9 March 1865; 1 March 1869; and 31 July 1869. 44 See eg The Awful Disclosures of Maria Monk, The Cadiere Case and RT Reed, Six Months’ Residence in a Convent (all published in numerous cheap editions in the 19th century). 45 Parl Deb (3rd ser) 128, col 575. 46 They were subjected, for example, to the select committee inquiry of 1870.

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140 Charlotte Smith matters of doctrine and ritual.47 They were frequently associated with one of the most controversial elements of that Church, the advanced High Church Ritualist movement.48 This rendered them suspect despite their links with the Established Church of England.49 An exploration of the religious themes and concerns which might have fed into the judgments delivered in Allcard v Skinner reveals several aspects of the debate about the organised religious life. These include the interaction between sisterhoods and the family, fears relating to the concentration of absolute power, the fear of physical abuse, constraint or moral impropriety, and concerns about the spiritual or moral constraints imposed by the vows and rules of the sisterhoods.

Stolen or undutiful daughters In delivering their judgments in Allcard v Skinner most of the judges alluded to family and domestic factors which might have influenced Miss Allcard’s determination to join the sisterhood, and the effect that her decision had upon her relationship with her family. Kekewich J, for example, indicated the possibility that she had joined the community as a result of unhappiness at home. Further, he contrasted her increasingly close integration into the life of the order with her progressive alienation from the influences and ties of home and family.50 Similarly, Lindley LJ recounted Miss Allcard’s progression in the life of the order in the following terms. In 1870 the Plaintiff became a postulant, and later in the same year a novice, and finally in August, 1871, a sister. Each of these steps was accompanied by religious services and bound the Plaintiff more and more closely to the sisterhood, and alienated her more and more from the world at large.51

The court’s concern with the alienation of Miss Allcard from her family is explicable on uncontroversial and unproblematic grounds, namely as an indication of her vulnerability to exploitation, and her inability to seek external help and guidance which might have been adduced to rebut the presumption of undue influence. 47 On this movement generally see JS Reed, Glorious Battle: The Cultural Politics of Victorian Anglo-Catholicism (Vanderbilt University Press, Nashville, 1996) and O Chadwick, The Spirit of the Oxford Movement (CUP, Cambridge, 1990). 48 The community of which Miss Allcard was a former member was no exception. The advanced Ritualist practices of their spiritual director were the subject of frequent complaints to his bishop. See, for example, Fulham Papers/F Temple, vol 36, ff 152–55. 49 For a historical introduction to the resurgence of the organised religious life in England see S Mumm, Stolen Daughters, Virgin Mothers: Anglican Sisterhoods in Victorian Britain (Leicester University Press, London, 1999) and M Hill, The Religious Order: A study of Virtuoso Religion and its Legitimisation in the Nineteenth-Century Church of England (Heinemann, London, 1973). 50 (1887) 36 ChD 150–54. 51 Above, 159.

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Historical Perspectives on Undue Influence 141 However, discussions of the effect of membership of a sisterhood on family relationships echoed one of the oldest charges levelled against the religious communities: that they acted in an immoral and improper manner, “stealing” wives and daughters away from their proper duties and place in the family, and encouraging them into an unnatural and unfit way of life. Numerous examples can be found in episcopal and archiepiscopal papers of complaints to this effect.52 The inference that sisterhoods in some way stole women away from their proper role in society tinged all that they did with an air of impropriety, making it easy to infer improper or unconscionable conduct on their part. For many, the alleged “wrong” was ameliorated by the services that the sisterhoods performed within society, by providing nurses, teachers and orphanages.53 For others no charitable or benevolent work was of sufficient value to justify the evil which the organised religious life represented. Thus, writing in response to a particularly notorious convent scandal, a leader writer in The Times opined: The opinion of all Protestant communities—that is, the opinion of the most enlightened and progressive part of mankind—is that conventual vows and so-called religious life are evils not sufficiently redeemed by any acts of charity and philanthropy which the persons who embrace them may render the world.54

The imputation of wrongful conduct, on the basis that sisterhoods lured women away from their proper place in the home, was potentially a doubleedged sword to any woman seeking relief against them. For, as The Times’ habitually caustic comments made clear, the adherents of those communities were not themselves entirely untouched by charges of impropriety in seeking to follow the religious life. It was of the opinion that: English opinion is dead against the substitution of such artificial modes of life for those which PROVIDENCE has put in the way of most of us, if not all. It believes that in general people enter into these institutions to escape duties rather than to seek them, and to exchange the difficulties of their lot for those of their choice.55

The Times was willing to accept that many women, due to a superfluity of the fairer sex in society as a whole, were denied the opportunity to experience conjugal bliss. However, it believed that many women had wilfully deserted the place and duties ordained for them by God. They were not blameless but had, in part, been the creators of their own difficulties. Thus, while it might have been easy to impute wrongdoing on the part of the sisterhoods, it was not easy to ignore the part that those who came before the courts had played in their own “downfall”. This was a difficulty keenly felt by Lindley LJ, who admitted that: 52

See eg, Tait Papers, vol 200, ff 432–35 and Benson Papers, vol 17, ff 36–37. See eg, the Rev William Durst (Rector of Alverstoke and Hon Canon of Winchester) speaking at the Church Congress of 1888 (Report of Church Congress, 1888). 54 See eg, The Times, 1 March 1869. 55 The Times, 3 April 1876. 53

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142 Charlotte Smith Everything that the Plaintiff did is in my opinion referable to her own willing submission to the vows she took and to the rules she approved, and to her own enthusiastic devotion to the life and work of the sisterhood. This enthusiasm and devotion were nourished, strengthened and intensified by the religious services of the sisterhood and by the example and influence of those about her. But she chose the life and work; such fetters as bound her were voluntarily put upon her by herself; she could shake them off at any time had she thought fit, and had she had the courage so to do; and no unfair advantage whatever was taken of her. Under these circumstances it is going a long way to hold that she can invoke the doctrine of undue influence . . . I am by no means insensible to the difficulty of going so far.56

A further complexity was the apparent contrast between the portrayal of sisters as weak defenceless women, and the very real freedom offered to women by the life and work of the sisterhoods. Most Anglican communities were active orders undertaking various forms of charitable work. In joining together to do this work women were offered unparalleled opportunities to order their own existence, to receive practical training, to do useful work, to travel and to interact with different elements of society. Equally, to their poorer members sisterhoods offered an escape from poverty, instability and insecurity.57 For these reasons a woman writing a “self-help” book for other women commended sisterhoods, writing: The great bulk of unmarried women are a very helpless race, either hampered with duties, or seeking feebly for duties that do not come; miserably overworked, or disgracefully idle; piteously dependent on male relations, or else angrily vituperating the opposite sex for their denied rights or perhaps not undeserved wrongs. Between these two lies a medium class, silent and suffering, who have just enough money to save them from the necessity of earning it, just enough brains and hearts to make them feel the blankness of their life without the strength to obviate it—to strike out a career for themselves, and to cheat Fate by making it neither a sad nor useless one. It is for these stray sheep, sure to wander if left alone, but safe enough in a flock with a steady shepherd to guide them, that I open up for consideration the question of Sisterhoods.58

These attributes of sisterhoods raised the suspicions of society and contributed to an alternative portrayal of sisters. These women, though sometimes characterised as weak and defenceless, if they had freely chosen the religious life could also be depicted as wilful and determined women who had abandoned their proper sphere of life and activity. Hints of this can be seen in the judgments in Allcard v Skinner. Thus, while Kekewich J asserted that: The more powerful influence or the weaker patient alike evokes a stronger safeguard, and there can be no case more urgently requiring it than one of the influence of a priest,

56

(1887) 36 ChD 163. See RT Davidson and W Benham, The Life of Archibald Campbell Tait Archbishop of Canterbury, 3rd edn (Macmillan and Co, London, 1891) vol I, 453 ff. 58 DM Craik, On Sisterhoods in E Showalter (ed), Pickering Women’s Classic Series (William Pickering, London, 1993) (first published in Longman’s Magazine in 1883) p53. 57

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Historical Perspectives on Undue Influence 143 director, or mother superior of a convent, on an emotional woman residing within the convent walls, and subject to its discipline.59

He was also satisfied that Miss Allcard was a capable and competent woman, stating: Though, as I have said, an emotional woman, she [Allcard] gave her evidence calmly and shewed no lack of memory. Above all, she satisfied me that she possessed intelligence, educated intelligence above the average . . . Perhaps she acted rashly in associating herself with Miss Skinner . . . but that Miss Allcard appreciated the full meaning of devotion to the poor and a life of hard work . . . and realised that in joining the sisterhood she would “forsake all,” no one who, having watched her in the witness-box . . . can for a moment doubt.60

Problems of isolation and absolute power In the context of a claim for relief based upon undue influence another significant factor for concern was the absolute and unqualified nature of the power exercised by the leaders of sisterhoods. These communities removed women from the authority of their relations, placing them instead under the authority of spiritual leaders over whom no systematic form of oversight was exercised. The potential for abuse was obvious. Anglican sisterhoods were particularly open to objections founded on the lack of oversight of the authority wielded by their superiors. They represented a vibrant but unsystematic development in the life of the Church of England, which had grown up despite its efforts and not because of them. The authorities of that Church were aware of this and attempted belatedly to comprehend the sisterhoods within its structures. Thus Bishop Blomfield wrote to Archbishop Tait, urging that: I think the time has more than arrived when it has become a necessity for those in authority to recognise the movement which has gone on for some years in our Church of men and women devoting themselves to . . . work in what is technically termed the Religious Life. It is too late to enquire whether it is desirable to give this a place in the Reformed Communion. This devoted life has been called forth by the spirit of the age and is a reaction on its excessive self indulgence and its low materialism. Your Grace I am persuaded has attentively watched it and you have seen how it is assuming really alarming proportions, how it defies all authority, is continually developing itself, threatens our Church with disruption and will hand over great numbers to the Church of Rome.61

However, having developed without the official sanction of the Church authorities the sisterhoods continued without the systematic superintendence of the 59 60 61

(1887) 36 ChD 151. Above, 154. (14 January 1873) Tait Papers, vol 92, ff 7–10.

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144 Charlotte Smith bishops. They were never fully integrated into the disciplinary and regulatory structures of the parochial system.62 Despite a lack of formal and systematic integration into the structure of the Church, many communities actively sought to place themselves under its authority. They invited bishops to act as visitors and sought to establish structures which fitted into the territorial organisation of the Church. They recognised the fundamental character of the objection to the lack of external checks and oversight, and sought to mitigate its effects. So, for example, one mother superior, obviously aware of the vulnerability of her community to attack, wrote to Archbishop Tait in 1875: Will your Grace condescend to act as visitor to such bad people as me . . . we want being in your Grace’s diocese, to be under your Grace’s authority and you know how obedient I am. Mr Woodward will be chaplain and the penitents will attend the parish church; so your Grace will be very safe in my hands.63

Allcard v Skinner provides an example both of objections to the absolute concentration of power, and attempts to illustrate the oversight of that power by the external authority of the Church. The absolute concentration of power was manifested in the rule that forbade sisters from consulting with externs without the consent of the mother superior. This rule was thoroughly deprecated by the judges for the possibilities for abuse that it created. Lindley LJ, for example, commented: The rule against obtaining advice from externs without the consent of the lady superior invites great suspicion. It is evidently a rule capable of being used in a very tyrannical way, and so as to result in intolerable oppression.64

In evidence (unsuccessful) efforts had been made to mitigate the effect of this rule, by demonstrating that the community was subject to authoritative oversight. Thus, questioned by opposing counsel, the spiritual director, Reverend Nihill, was anxious to assert that the bishop had held a Confirmation service in their chapel in the previous year, and that the Bishop of Bedford had visited the community. Counsel was similarly anxious to bring to the attention of the court the fact that the community was not under regular episcopal superintendence.65 Whatever the pains to which communities went to place themselves under the authority of the Church it can be noted, however, that episcopal visitation alone was unlikely to satisfy the public as an adequate safeguard against abuse. In respect of clergy discipline Parliament rejected absolute episcopal power definitively in 1874.66 In respect of convents and sisterhoods, and arguing for the 62 The bishops had to bear the brunt of this and received many complaints from disgruntled parochial clergy. See eg Tait Papers, vol 187, ff 4–9. 63 Tait Papers, vol 108, ff 98–99. 64 Above, 160. 65 The Times, 21 January 1887. 66 See CL Smith, Examining the Impact of Establishment on Reforms to Clergy Discipline, c 1840–1883: With Special Reference to the Public Worship Regulation Act 1874 (PhD Thesis, University of London, 2003).

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Historical Perspectives on Undue Influence 145 inclusion of the latter in an inquiry proposed by Newdegate MP, The Times asserted: [T]his exclusively clerical visitation is the very thing of which Protestants are suspicious, and not without good reason. They are equally suspicious of it as exercised by their own clergy . . .67

Physical abuses, convents and sisterhoods Set against a backdrop of allegations of stolen or wilful daughters, and fears regarding the abuse of absolute power and lack of oversight, another popular and long-lived element of the controversy concerned the physical restraints and discipline imposed upon their members by religious communities. Stories abounded of false imprisonment, corporal punishment, and harsh physical regimes in convents. Together with arguments about lack of oversight they formed the basis for the numerous calls for the inspection and regulation of convents. Those calls derived much of their force from the secrecy surrounding the inner life and discipline of those institutions. Unfamiliarity and lack of openness provided room for supposition and fear. Through the course of the nineteenth century disillusioned “escapees” from convents wrote highly charged accounts of their sufferings within convent walls and the depravity which they had there witnessed. Tales of beatings, abductions, starvation, incarceration and even murder jostled side by side with delicately phrased accounts of the rapacious and lewd behaviour of the clergy.68 From time to time the newspapers reported incidents which appeared to bear out the truth of such literature. So, for example, the general public was regaled with the tale of a mad Polish nun who had been incarcerated in darkness and filth for twenty years.69 Similar tales were brought before Parliament. In a single debate in the House of Commons Newdegate MP was able, in 1865, to inform his brethren of the incontrovertible truth of specific instances of child abduction, the breach of the law relating to lunatics, the escape and recapture of emaciated and fearful nuns, subterranean cells with iron bars, and secret burials.70 Small wonder, then, that The Times commented: It is only now and then we get a glimpse of the interior of these ecclesiastical shambles: A gust of wind raises for a moment the edge of the pall, and we see the festering rottenness hidden beneath its dark folds.71 67 68 69 70 71

The Times, 29 April 1870. See eg, The Awful Disclosures of Maria Monk. The Times, 31 July 1869. Parl Deb (3rd ser) 177 cols 1057–59. The Times, 27 July 1848.

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146 Charlotte Smith Despite these alarms and scandals, however, by the 1880s calumnies against convents and sisterhoods were confined to Sensation novels and the extreme Protestant press. By as early as 1876 even The Times was happy to admit that, while convents and sisterhoods were not to its taste, there was no reliable evidence to support generalised claims of ill usage and abuses.72 Convents and sisterhoods had been accepted, albeit grudgingly, into the religious life of the nation. Allcard v Skinner, however, provided an interesting example of an appeal to old fears regarding religious communities. In evidence the tone of which was strongly reminiscent of popular literature, Miss Allcard revealed the horrors of life in an Anglican sisterhood. Under cross-examination by her own counsel she spoke of the confiscation of her keys when she confessed that she wished to leave the community. She told too of being kept at the drudgery of laundry73 from dawn to the dead of night, of meagre rations, and harsh discipline. She also alleged that the spiritual director and mother superior were sustained by fare of an altogether more satisfactory, not to say luxurious, character; that the mother superior and spiritual director very frequently went to Scotland at the expense of the sisterhood; and that the mother superior often ate breakfast in her bedroom with that clergyman.74 The reaction to such claims was not entirely felicitous. Indicating, perhaps, the public’s increased familiarity with, and tolerance of convents and sisterhoods, The Times records laughter in court as Miss Allcard recited her tale of woe. This dismissive attitude was echoed by the newspaper commentary on the case. The Evening Standard was broadly representative in its somewhat sarcastic treatment of this, arguing: We do not hear that the energetic Superior actually chastised nuns with her own hands, or even that there were any dark cells for the interment of disobedient sisters under the pavements of Mark Street Finsbury.75

Vows and the destruction of private judgement and autonomy The general public might have been willing to accept that there was little real evidence supporting stories of systematic physical abuses in convents and sisterhoods, but one further fear remained. This concerned the effect that the religious and spiritual regime and beliefs of those communities had upon the ability of inmates to exercise independent and autonomous judgement. It was

72

The Times, 3 April 1876. Counsel made much of the fact that it was the custom of the sisters to do all of their own housework. 74 The Times, 21 and 22 January 1887. 75 The Evening Standard, 1 February 1887. 73

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Historical Perspectives on Undue Influence 147 generally felt that it was this which was most to be feared and deprecated. For example, The Times asserted that: Convents and monasteries are very pernicious institutions, but their evil and their cruelty lie, not in bolts and iron bars, but in moral and spiritual oppression.76

In part the concerns related to the effect of any strict regime of religious worship and work upon the will of adherents. Thomas Chambers, for example, complained that within the walls of convents: . . . the rigours of ascetic discipline, and the burdensome rites of a ceremonial religion, are wearing away the reason and the lives of those who are entitled to be free and happy, but who are suffering miseries the nature of which is imperfectly understood, enduring penances and priestly inflictions . . .77

A similar, though more temperately expressed concern was evoked in the judgment of Lindley LJ. While absolving Mrs Skinner and the Reverand Nihill of any wrongdoing, he nevertheless found that there was a valid claim of undue influence based on the effect of the religious life and rules of the sisterhood.78 Though admitting that everything done by Miss Allcard was referable to her willing submission to the life and rules of the sisterhood, and that no wrongful advantage had been taken of her, he recognised that her devotion and enthusiasm for sisterhood life were: . . . strengthened and intensified by the religious services of the sisterhood and by the example and influence of those about her.79

It was this aspect of sisterhood life that captured the attention of the newspapers commenting on that case. The Times devoted considerable column space to the evil effect of the organised religious life upon the free will and judgement of its adherents. In a leading article on Allcard v Skinner, it began its assault by commenting: Life in a sisterhood . . . may favour the growth of some virtues; undoubtedly it is apt to be baneful, even fatal, to others. The process of deterioration is slow, insidious, and sure. The will grows limp and flaccid, and the moral decay which often sets in may be concealed by fervour of speech and demeanour and some of the apparent signs of strength. Certain emotions are abnormally active and absorbing; self-abnegation seems a necessity; and, unless in rare instances, there comes a time when the devotee is little more than an automaton, when the sister’s speech is but the word of the director and her acts but his.80

Lest its readers be in any doubt of the baleful effect of life in a sisterhood, it continued: 76 77 78 79 80

The Times, 14 March 1865. Parl Deb (3rd ser) 127, cols 80–81. (1887) 36 ChD 159–60. Above, 163. The Times, 1 February 1887.

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148 Charlotte Smith Imperceptibly the horizon of the devotee contracts to that which can be seen within the convent precincts; there appears to be an attractive simplicity to all duties, which in the end are merged in one supreme duty—annihilation of self and prostration before the feet of some director.81

It concluded: How vain to hope for the free exercise of judgment in regard to anything earthly, least of all property, when, with no calm, disinterested adviser at hand, the will is paralyzed by alternate visions of bliss if only secular goods be sacrificed, and of eternal misery if a thought of the outer world and its claim visit the mind.82

The strength of opinion evinced reflected not simply a pervasive concern about the organised religious life in general, but a more particular and acute anxiety about the role played by vows and rules in the life of religious communities. The subject of vows was one of the most controversial and fiercely contested elements in the debate surrounding those institutions. Speaking on an 1865 motion to appoint a select committee to investigate convents and sisterhoods, for example, Sir George Grey asserted: The real fact is that the evil with which the hon. Gentleman proposes to grapple—for as a Protestant I cannot deny that it is an evil—arises not from physical, material restraint, but from that moral restraint, from that obligation which is felt to bind the consciences of those ladies, and even when they may have taken the veil at an early period of life, and may afterwards repent their vows, prevents them from availing themselves from the means at their disposal, of leaving these establishments if they like . . .83

Vows aroused antipathy in part because of the moral constraints that they placed on the will of individuals, and in part because of the fear that sisters were forced unwillingly to adhere to a life which they might have chosen at a young age. These can be understood in light of the liberal ethos of the age, and the emphasis placed by public policy and politics upon freedom of conscience and personal autonomy. Thus The Times, commenting on the imposition of vows, asserted: The law of this country will always protest against an imperium imperio, and the very principles of freedom of conscience upon which our public policy is built must of necessity be hostile to associations which are founded on the negative of these principles.84

Unsurprisingly, this concern with the effect of vows on the independent will of Miss Allcard stood at the heart of the judgments delivered in Allcard v Skinner. Upon profession as a full sister Miss Allcard had taken “perpetual” 81 82 83 84

Above. Above. Parl Deb (3rd ser) 177, col 1082. The Times, 30 March 1869.

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Historical Perspectives on Undue Influence 149 vows of poverty and obedience.85 The latter was supported by the Rule of the community, which defined it as follows: First, it consists in regarding the voice of your Superior as the voice of God . . . The letter of your Rule and the living voice of your Superior are nothing else but helps and guides to the end that ye may more perfectly do the will of God. Therefore, as in seeking to obey your Superior ye seek to obey God, so in the command of your Superior ye must necessarily hear the voice of God.86

In formulating their findings in favour of relief the judges paid close attention to the vow and rule of obedience. For example, Cotton LJ emphasised the importance of the rule of obedience to the Superior87 and deprecated the terms in which it was expressed, holding: [A]lthough it is necessary that a sister should be obedient to the orders of the superior in any work like that in which the sisterhood was engaged, yet I cannot but express my doubt as to the propriety of the absolute submission required by the rules to the will of the superior, and I regret the terms in which the rules expressed the obedience which was required. Certainly the rules imposed the most absolute submission by the sisters to the superior . . .88

Lindley LJ was similarly influenced by the vow and rule of obedience in reaching his conclusions. He argued: The vow and rule obliging implicit obedience to the lady superior, and the exhortation or command to regard her voice as the voice of God, produce very different effects on different minds. There can, however, be no question that the Plaintiff felt bound by the vow and by the rule until she emancipated herself from both of them, which she did when she left the sisterhood.89

Bowen LJ also relied on the presence of the vow and rule of obedience in finding for the claimant on the question of undue influence.90 Though concerns about vows can be understood on basic arguments about the importance of personal autonomy and independent judgement, it is evident that attitudes to them were also moulded by the Protestant Christian ethics and preconceptions of those examining them. Such preconceptions included the 85 Vows of this species, at least if intended to be perpetual, were contrary to the accepted teaching of the Church of England. The taking of vows by those seeking entry to religious communities was not accepted by the Convocations of the Church until 1891. Even then vows were subject to stringent controls and limitations. See the speech of WJ Butler (Dean of Lincoln) at Church Congress in 1893 (Reports of Church Congress, 1893). 86 (1887) 36 ChD 150. 87 S Mumm notes that the vow of obedience was much misunderstood and was, contrary to its popular description, primarily a promise to abide by the Rule of the community. It was only secondarily a vow of obedience to particular people, and only then insofar as the demands of those people were consonant with the constitution of the community. See S Mumm, Stolen Daughters, Virgin Mothers: Anglican Sisterhoods in Victorian Britain (Leicester University Press, London, 1999) 32 ff. 88 (1887) 36 ChD 156. 89 Above, 160. 90 Above, 166.

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150 Charlotte Smith belief that perpetual vows in general, and vows of obedience in particular, were contrary to human nature and conscience. This was an argument first employed against Roman Catholic convents.91 In one of its earliest cries against the character of these institutions, for example, The Times asked its readers: Can anything more shocking be conceived than that young women should be incarcerated in these ecclesiastical bastilles, at an age when they can have no experience of the sacrifice they are about to make; that they should bind their souls by an oath to root out human instincts from their hearts, and to regard human affections henceforth as a sin against Heaven?92

In the following years it again, speaking of vows, asserted: The engagement is one altogether repugnant to the constitution and best interests of human nature. Right reason, as a general rule, abhors irrevocable engagements. Now, can any case be made out for conventual vows which should justify us in departing from this safe and obvious law?93

The sweeping condemnation of conventual vows as unnatural and contrary to conscience appears to have had two concrete foundations. The first of these, directed at vows of obedience, was an argument based on an understanding of the Roman Catholic hierarchy and Ultramontanism. Roman Catholicism, and its organised religious life, were typified as being rigidly hierarchical, with decisions and discipline being determined at the higher levels and enforced strictly upon ordinary adherents. Protestants objected that obedience enforced in this way, especially through vows, caused individuals to neglect their proper duty to exercise their own independent moral judgement. The Times made this argument in the following terms: By imposing vows of irrevocable obedience to a human authority they create an artificial conscience, which gradually undermines every healthy moral principle . . . A person who has once taken such vows has no will and no judgment of his own. The most tremendous spiritual influence is brought to bear on him, not merely to submit his actions to the command of his superior, but to suppress every movement of his mind and conscience which opposes his superior’s judgment.94

Vows of obedience were objectionable because they paralysed the mind and conscience of the individual and rendered them incapable of independent judgement. Further, vows of absolute obedience to human authority were unacceptable. Such arrangements were false and contrary to the will of God and to

91 It is reminiscent of the argument for excluding the Roman Catholic clergy from the civic life of the nation on the ground that compulsory celibacy was unnatural and barred the clergy from the full (family) life and relationships of society. See most famously ST Coleridge, On the Constitution of Church and State According to the Idea of Each, 3rd edn (William Pickering, London, 1869). 92 The Times, 27 July 1848. 93 The Times, 12 May 1853. 94 The Times, 30 March 1869.

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Historical Perspectives on Undue Influence 151 true Christian teaching. They placed the voice and authority of a human being between the individual and the will of God.95 Elements of these attitudes can be seen in the judgments delivered in Allcard v Skinner. They seem to be at the root of Cotton LJ’s disapproval of the vow and rule of obedience.96 Further, it was not, perhaps, without significance that Miss Allcard described the Reverand Nihill as “bishop and Pope rolled into one.”97 More prominent in those judgments, however, was the more common objection to vows. This was the argument that God’s work should be done by willing hands, and that individuals should trust to God to give them the strength to do that work rather than relying on vows to hold them to the task.98 A typical manifestation of this sentiment can be seen in the letter of an Anglican clergyman to The Times on the subject of brotherhoods. Its writer urged: Certain regulations must, of course, be conformed to by all members of a community, but the introduction of a system of “vows,” which would practically divide the clergy into two bodies, and the establishment of a new “dispensing” power in the Church cannot be acceptable to those nurtured in the belief that the noblest service is that rendered by free men, whose motives for self-devotion are far deeper and stronger than any temporary obligation to external authority.99

Cotton LJ echoed this sentiment when, in answer to the argument that recovery should be barred because of the impact that it might have on the charitable and godly work of the community, he opined: Such work to be effectual must be done with a willing mind, and in my opinion it would be productive of evil to attempt to retain in such a society as the sisterhood, by the pressure of loss of property, those whose hearts and will are no longer in the work, and who desire to exercise their legal right of withdrawing.100

CONCLUSION

This chapter began its historical exploration of undue influence by setting that study in the context of the modern debate surrounding the doctrine. Modern 95 This sounds like an attack on the Ultramontane Roman Catholic doctrine of Papal Infallibility and conceptions of a sacerdotal priesthood which mediated between the individual and God. See RT Davidson and W Benham, The Life of Archibald Campbell Tait Archbishop of Canterbury, vol I, 3rd edn (Macmillan and Co, London, 1891) 453 ff. 96 Above, n 87. 97 The Times, 22 January 1887. 98 See above, n 57. This appears to relate to a typically Evangelical notion of the world as a testing or proving ground for the soul and the faith of the individual. For an introduction to Evangelical eschatology see generally A Noll, DW Bebbington and GA Rawlyk (eds), Evangelicalism: Comparative Studies of Popular Protestantism in North America, the British Isles, and Beyond, 1700–1900 (OUP, Oxford, 1994) and DN Hempton, “Evangelicals and Eschatology” 31 (1980) Jl Eccles Hist 179. 99 The Times, 5 October 1889. 100 (1887) 36 ChD 157.

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152 Charlotte Smith case law and academic writing have been seen to offer at least three justifications, sometimes simultaneously (albeit in differing degrees), of relief for undue influence. Relief has been justified on the basis of unconscionability on the part of the defendant, impairment of the quality of the consent or autonomy of the claimant, and for public policy reasons relating to the perceived need to safeguard the integrity of relationships of trust and confidence. At the heart of this array of justifications lies the relational context in which undue influence arises. It is only relevant to relationships of trust and confidence. The very presence of such a relationship renders it impossible to distinguish entirely between the position of claimant and the conduct of the defendant. Having noted that many of the modern statements of the basis of the doctrine of undue influence appeal to the case of Allcard v Skinner this chapter has undertaken an examination of that case in its historical context. Through this examination it was hoped that some assistance could be proffered to those attempting to untangle the problem of the basis of relief. Instead the existence in history of the morass of competing ideas and concerns with which modern commentators are so familiar has been affirmed. Perhaps such a multiplicity of justifications is inescapable given that the doctrine operates in the sphere of human relationships. Perhaps it is an unavoidable consequence of the inevitable tension between the quest for doctrinal rationality and justice in individual cases. Probably it is a consequence of both of these factors. Human relationships and their consequences are infinitely variable and will never sit neatly in a doctrinal framework. Thus in Allcard v Skinner, as in the modern cases, appeals can be found to all of the most prominent justifications for relief. Some elements of the history of the case are indicative of a strong concern with the possibility of physical constraint or a generalised sense of impropriety. Examples of this include arguments surrounding the “theft” of women from their families, and evidence of false imprisonment, physical deprivation and corporal punishment. These would, if given prominence, have operated to focus the attention of the court upon the improper conduct of the defendant. A concentration upon physical constraint might have suggested a reading of undue influence alike to that adopted by the majority in the recent decision of Attorney General v R, bringing that doctrine into close alignment with the common law doctrine of duress. Other aspects of the history of Allcard v Skinner indicate a concern to prevent even the possibility of exploitation of relationships of trust and confidence. An emphasis upon the seclusion of sisters from the world, and the absolute power exercised over them by their superiors would support this, as would the willingness to grant relief even though the court was convinced that the defendant had not exploited his or her position of power. Finally, the prominent concern relating to the effect of sisterhood life and vows on the independence of individuals, would have focussed attention firmly upon the question of autonomy and the quality of consent. In this way it would have directed the attention of the court to the position and capacity of the claimant.

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Historical Perspectives on Undue Influence 153 Given the presence of all the above factors in Allcard v Skinner it is only with some reticence and trepidation that any decisive statement about the proper basis of relief can be made. I would suggest, however, that an examination of Allcard v Skinner in its historical context indicates that, while many factors were relevant to the formulation of relief, the primary concern of the court was with the quality of consent and the potential for abuse of the powers exercised by the religious superiors. The primary rationale for relief was not the unconscionable conduct of the defendant. This stands in stark contrast to the natural consequence of a close alignment (such as that demonstrated in R v Attorney General for England and Wales101) of relief for undue influence and relief for duress. If such an alignment is made then the focus must inevitably be upon the wrong-doing and culpability of the defendant. Whatever lessons an exploration of Allcard v Skinner has to offer in respect of the foundations of the modern doctrine of undue influence it would be wrong to end this chapter without mentioning one final, more general, observation. This relates to the religious content of the case. As one of the foundational cases of the modern doctrine of undue influence the case is repeatedly cited and quoted from. Yet it is rare, if not unheard of, for the people citing it to have cognisance to its peculiar religious context and preoccupations. Perhaps this is harmless, but perhaps such uncritical use of this case risks the perpetuation of religious and social concerns, stereotypes and prejudices which should arguably have no place in the formulation of the modern law. In the age of the Human Rights Act 1998 and an expressly stated commitment to human rights, including freedom of religion, even the merest hint of this is problematic. Only if we recognise that such elements are present in our caselaw can we address the problems which arise as a result.

101

[2003] EMLR 24.

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8

Charges, Possession and Human Rights: A Reappraisal of S 87(1) Law of Property Act 1925 SARAH NIELD

INTRODUCTION

Reform is in the air in the law regulating credit and security. The Enterprise Act 2002 came into force in September 2003 and with it came further reform of the insolvency regimes for corporate debtors.1 The Law Commission Consultative Paper on the Registration of Security Interests: Company Charges and Property other than Land2 was published in 2003. It revives the recommendations of the Crowther3 and Diamond4 reports for a priority system of notice filing for both quasi and real security given by corporate debtors and advocates the ultimate extension to notice filing to non-corporate debtors. In December 2003 the Department and Trade and Industry published their White Paper “Fair Clear and Competitive”5 which provides the first major review of consumer credit since the Consumer Credit Act 1974. But what of land mortgages? Despite continual criticisms of the antiquated state of the English law relating to security over land nothing appears on the horizon by way of reform. In 1991 the Law Commission Report on Land Mortgages6 advocated extensive reform but, although receiving academic acclaim, it sadly remains on the shelf gathering dust.7 The Land Registration Act 2002 has effected one change to the law relating to mortgages of registered land to reflect the reality of the modern mortgage.8 It is no longer possible to create a mortgage by demise over registered land.9 All 1 2 3 4 5 6 7 8 9

See B Hannigan, Company Law (Butterworths, London, 2003) chs 25–27. Law Comm No 164. Cmnd 4596. A Review of Security Interest in Property (1989) Department of Trade and Industry. Cm 6040. See E Lomnicka, “The Reform of Consumer Credit in the UK” [2004] JBL 129. Law Comm No 204. See for instance P Sparkes, A New Land Law, 2nd edn (Hart Publishing, Oxford, 2003) 604–5. The Act also reforms the tacking of registered mortgages see s 49. Ss 23(1)a and 51.

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156 Sarah Nield mortgages of registered land must now be created by legal charge. This is hardly a revolutionary development for the legal charge by way of mortgage is in almost universal use over both registered and unregistered land. However the influence of the mortgage by demise is still apparent through the operation of subsection 87(1) of the Law of Property Act 1925 which provides: Where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protections, powers, remedies (including the power to take possession . . .) as if . . . a mortgage term for 3,000 years . . . had thereby been created in favour of the mortgagee.

The Law Commission Report noted the inappropriate nature of this hybrid where there is an interest by way of charge but the rights and remedies of a mortgage by demise with the strange result that the lender,10 although looking to the land purely as security, is treated as a tenant who is entitled to, but not in, possession. The use of a demise as a security device harks back to medieval times when the laws against usury prohibited lenders from charging interest. It provided an alternative mechanism by which lenders could make a return on their money by going into possession under the demise and recovering the income from the land.11 However the laws against usury were gradually relaxed from the time of Henry VIII and were finally abolished in 1854.12 The mortgage by demise that was adopted by the Law of Property Act 1925 was an artificial device employed purely to overcome various technical difficulties which were associated with the mortgage by conveyance.13 Whilst we await comprehensive legislative reform, this chapter will suggest possible ways to develop a modern law of mortgages by examining the operation of subsection 87(1) from two very different perspectives. First it will explore the form of the legal charge by way of mortgage and the respective rights and liabilities of the parties in the light of subsection 87(1). Secondly, it will consider whether the lender’s right to take possession conferred by the subsection is compatible with the Human Rights Act 1998 since reform could be triggered if this right is found to be incompatible with the fundamental property rights this legislation incorporates into domestic law.

10 The expressions “lender” and “borrower” are used throughout this paper to avoid the confusion that the use of “mortgagee” and “mortgagor” or “chargee” and “chargor” can create. 11 If the income from the land was used to discharge the debt, the transaction was known as a vivum vadium or live pledge but, if the income was kept as profit by the lender, it was known as a mortuum vadium or dead pledge, from which the term mort (dead) gage (pledge) is derived. 12 Usury Laws Repeal Act 1854. 13 Mortgages by demise were used in the early 19th century but they suffered from a number of defects which were addressed by the Law of Property 1925. See CHM Waldock, Law of Mortgages (Sweet & Maxwell, London, 1950) 25 and 28–29.

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A Reappraisal of S 87(1) Law of Property Act 1925 157 MORTGAGE OR CHARGE

A mortgage, properly so called, signifies the transfer or grant of a property interest to the lender subject to a condition for the retransfer or surrender of that interest upon repayment of the secured debt. It was usual before the Law of Property Act 1925 for mortgages to be granted by conveyance of the borrower’s legal estate to the lender subject to the lender’s agreement to reconvey that estate upon repayment of the debt.14 The Law of Property Act 1925 prohibited mortgages by conveyance and provided in their stead for a mortgage by demise whereby the borrower as landlord granted to the lender as tenant a lease of the land subject to the lender’s agreement for the term to cease upon the repayment of the debt. Under a classic mortgage by demise, if the debt was not repaid in accordance with the terms of the loan, the borrower lost his contractual right to enforce the condition for recovery of his legal estate and had to seek the assistance of equity through a continuing equitable right to insist upon repayment of his debt and the redemption of his property. A charge, properly so called, is the appropriation of property as security for the repayment of the debt. If the debt is not repaid the lender enjoys rights of recourse against the property to recover the debt. It is by nature a hypothecation.15 The charge is an interest in property that operates as a burden or encumbrance on the borrower’s ownership but there is no transfer of ownership. The borrower retains the legal estate although subject to the charge. A charge was only recognised as a proprietary interest by the courts of equity and it was not until the Law of Property Act 1925 that the legal charge by way of mortgage was introduced.16 The legal charge by way of mortgage by the operation of subsection 87(1) creates a hybrid form of security where the lender’s interest is by way of charge but they are placed in a position as if they were a mortgagee by demise. Nevertheless, it is important to note a number of matters regarding subsection 87(1). The subsection does not operate to actually grant the lender a lease, the lender’s interest in the land is by way of charge.17 Lenders are treated as if they have the powers and remedies of a tenant for instance the right to possession and the right to relief from forfeiture under section 146 of the Law of Property Act 14 An alternative form provided for a mortgage by conveyance subject to a condition subsequent, namely the repayment of the mortgage debt. 15 Derived from the Roman law hypotheca, which granted the creditor certain rights against the debtor’s property upon default in repayment of the loan. 16 Law of Property Act 1925 ss 1(2)c, 85(1) and 86(1). Ss 23(1)b of the Land Registration Act 2002 recognises the power of registered owner to charge his estate at law. 17 Grand Junction Union v Bates [1954] 2 QB 160, at 166; Weg Motors Ltd v Hales [1962] Ch 49, at 73; and Cumberland Court (Brighton) Ltd v Taylor [1964] Ch 29; but see Regent Oil Co Ltd v JA Gregory (Hatch End) Ltd [1966] Ch 402 where there was reference to the lender holding a notional legal estate. An attornment clause in a legal charge, whereby the borrower acknowledges that he or she holds as tenant of the lender, can only operate as a tenancy by estoppel as the lender holds no legal estate see Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453 and Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245.

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158 Sarah Nield 1925.18 These rights do not arise at common law by reason of the nature of the charge but are conferred by statute by the operation of the subsection. Borrowers are not treated as merely holding a reversion or as if they were a landlord. They retain their legal and beneficial ownership subject to the burden of the legal charge and the lender’s powers, protections and remedies as may be expressly conferred by the charge or implied by statute.19 There are thus fundamental distinctions of form between the legal charge by way of legal mortgage and the mortgage by demise. The legal charge by way of mortgage is not without its own complexities, as McHugh J observed, in relation to the Torrens system charge20 and the Victorian equivalent of subsection 87(1):21 The great difficulty of the cases arises from the attempt by s81 [Transfer of Land Act 1958 (Vic)] to confer on the mortgagee the rights and remedies of a mortgagee at common law when the nature of a Torrens system mortgage is fundamentally different from that of the common law mortgage. The difficulty is increased by the section’s failure to define the liabilities of, and the consequences for, the mortgagor as the result of conferring these common law rights and remedies on the mortgagee.

THE EQUITY OF REDEMPTION

The borrower’s interest in his mortgaged land has classically been encompassed within the equity of redemption. The mortgage by conveyance or demise was distinguished from an outright conveyance or lease by the proviso for redemption requiring the lender to reconvey the legal estate or relinquish the term upon repayment of the debt. Equity’s recognition that the borrower should be afforded a continuing right to repay the debt, despite a failure to observe the contractual terms regarding repayment, operated by granting the borrower relief from the strict legal consequences of the proviso for redemption. Save for equity’s intervention, the lender upon the borrower’s failure to repay the loan in accordance with the contractual terms would have been freed from the obligation under the proviso and allowed to assert the absolute nature of the conveyance or demise. Whilst the borrower enjoyed a continuing equitable right to repay, he could recover his land at any time and accordingly was recognised in 18 A legal charge secured on leasehold property does not affect the relationship of the landlord and tenant, even where the lender goes into possession, see Church Commissioners for England v Vi Ri Best Manufacturing Co Ltd [1957] 1 QB 238 and Smith v Spaul [2003] QB 938 disapproving Target Home Loans Ltd v Iza Ltd [2000] 1 EGLR 23, nor is a lender the person to be served or entitled to serve a counter notice under the Leasehold Property (Repairs) Act 1938 or the Law of Property Act 1925 s146(1). 19 See for instance the powers implied by Law of Property Act 1925 s 101. 20 In Australia see Real Property Act 1925 (ACT) s 93; Real Property Act 1900 (NSW) s 57(1); Land Titles Act 1994 (Qld) s 74; Real Property Act 1884 (SA) s 132; Land Titles Act 1980 (Tas) s 73; Transfer of Land Act 1958 (Vic) s 74(2); and Transfer of Land Act 1893 (WA) s 106. 21 In Figgins Holdings Pty Ltd v SEAA Enterprises Ltd (1999) 196 CLR 245 (HCA) 20, at para 65.

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A Reappraisal of S 87(1) Law of Property Act 1925 159 equity as the owner, his interest being characterised as an equity of redemption, with the lender the holder of the legal estate by way of security only. But what of the nature of the borrower’s interest under a legal charge? The borrower retains the legal and beneficial ownership subject to the burden of the legal charge. Repayment discharges the charge since there is no longer any debt which it can secure, although it is convenient and necessary for title purposes to have documentary evidence of repayment and discharge.22 Redemption in the sense of obtaining a reconveyance or cesser of the mortgaged estate is inconsistent with a legal charge for there is simply no transfer of the borrower’s estate or creation of a demise by way of security. The borrower retains the legal estate, so there is neither any property of the borrower to redeem or recover from the lender nor any proviso for redemption from which relief can be granted. What is necessary is a continuing right to require the lender to accept repayment of the debt and effect a discharge, despite default in the borrower’s repayment obligations. Thus whilst it is appropriate to talk of an equitable right to repay, or of discharge,23 it is questionable whether it is still accurate to refer to a borrower’s equity of redemption in the sense of a distinct proprietary interest.24 If the borrower’s continued right to repay the debt and obtain a discharge represents a separate equitable interest which does not merge with his legal estate, it is appropriate to continue to speak of a distinct equity of redemption.25 However if the continuing right of the borrower to obtain a discharge upon repayment, regardless of default, is characterised as an incident of the borrower’s estate then the use of the term equity of redemption, as distinct from an equitable right of repayment, is strained.26 The borrower continues to hold the legal and beneficial ownership of the mortgaged land, subject only to the burden of the charge, thus it could be argued that there is no room or need for a separate proprietary interest in the form of an equity of redemption. Nevertheless such has been the vital significance of this creation of equity in the development of mortgages that textbooks and decisions continue to talk of the equity of redemption but this talk can be misleading if we continue to think, as the House of Lords did in Abbey National Building Society v Cann,27 that the borrower only holds an equity of redemption.28 Whilst we ignore history at our

22

S 115 Law of Property Act 1925; and rr 114–15 of the Land Registration Rules. In Perry v Rolfe [1948] VLR 297 and Browne v Cranfield (1925) 25 SR (NSW) 443 the right to repay was characterised as a legal right but in EI Sykes, The Law of Securities, 4th edn (The Law Book Co, Sydney, 1986) 237 it is strongly argued that the right is equitable. 24 Per Kitto J in Latec Investment Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265, at 275; Quint v Robertson (1985) 3 NSWLR 398 and Sandgate Corporation Pt Ltd v Ionnou Nominees Pty Ltd [2000] WASC 91 but compare Re Forrest Trust [1953] VLR 246, at 271 per Gavan Duffy J. See also CHM Waldock, Law of Mortgages (Sweet & Maxwell, London, 1950) 31. 25 See for instance Re Wells [1933] Ch 29, at 55. 26 See for instance Abigail v Lapin [1934] AC 491, at 501. 27 [1988] AC 56. 28 Criticised by C Sawyer, “A World Safe for Mortgagees? Registering a Scintilla of Doubt” in E Cooke (ed), Modern Studies in Property Law (Hart Publishing, Oxford, 2001) vol 1. 23

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160 Sarah Nield peril it is surely time to shift the mind set and recognise that the legal charge by way of mortgage does involve a change in form which may have substantive consequences.

THE CONSEQUENCES

The consequences flowing from the structural change to the legal charge have been considered in far greater detail in Australia, in the context of the statutory charge over Torrens title land, than in this jurisdiction.29 The issue is particularly pertinent to the process of redemption and associated doctrines as well as the respective rights of the parties to possession.30 It also turns on the extent to which one views subsection 87(1) as a mere change in form, which leaves the equitable principles unaffected, or whether the equitable principles are applied by the operation of subsection 87(1) only to the extent that they are consistent with the concept of a legal charge or are explicitly adopted by the terms of legislation. In Australia the courts have taken the latter view of the Torrens system mortgage.31

Redemption It is has already been noted that in a strict sense a charge is not redeemed, it is discharged. There is no requirement for the estate taken by way of security, whether by conveyance or demise, to be recovered by the borrower seeking relief from the strict legal consequences of the proviso for redemption. The Victorian decisions of Greig v Watson32 and Perry v Rolfe 33 proceeded on this premise by rejecting the notion that a redemption suit or action was available to a borrower under a charge. Other Australian decisions, which consider the interpretation of various statutory provisions, have taken a wider view of the expressions “redemption” and “suit to redeem”. For instance “a suit to redeem” for the purposes of the limitation legislation,34 has been held to include the right of a chargor to repay the debt and free the land from the burden of the charge.35 29 30

See EI Sykes, The Law of Securities, 4th edn (The Law Book Co, Sydney, 1986) 235. There are other consequences see for instance S Nield, “To Sever or Not to Sever” (2001) Conv

462. 31 See for instance English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302, at 323 in relation to the Torrens system mortgage per Dixon J. 32 [1881] 7 VLR 79. 33 [1948] VLR 297. 34 A borrower’s title will be extinguished if they fail to bring a “suit to redeem” against a lender in possession within the relevant limitation period. 35 Re Forrest Trust [1953] VLR 246 although criticised in P Moerlin Fox, “Redemption and the Statute of Limitations” (1948) 22 ALJ 363 but supported in Van den Bosch v Australian Provincial Assurance Association Ltd (1988) 88 WN 357 and Addison v Billion [1983] NSWLR 586.

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A Reappraisal of S 87(1) Law of Property Act 1925 161 Likewise in Sandgate Corporation Pty Ltd (In Liquidation) v Ionnou Nominee Pty Ltd36 the right to seek an order for sale by “a person interested . . . in the right of redemption” under the Western Australian equivalent of section 91 for the Law of Property Act 192537 was held to extend to a chargor.38 Steytler J concluded that: Whatever else may be said, it seems plain that in Australia the expression “right of redemption” has come to comprehend the legal right to have the mortgage discharged as a matter of contractual right if the mortgage is paid on the due date and also the truly equitable right to “have the land restored” if there is a repayment after the due date but before foreclosure.39

Given that the Law of Property Act 1925 was drafted at a time when the legal charge was still in its infancy and mortgages could still be created by demise, such an approach to the interpretation of the many provisions which refer to a right to redeem or redemption seems eminently sensible.40 Foreclosure Foreclosure flows from the nature of the classical mortgage security as the transfer or creation of a legal estate subject to a proviso for redemption. It operates when equity no longer upholds the borrower’s right to redeem and thus extinguishes the borrower’s equity of redemption leaving the lender as the sole legal and beneficial owner. Foreclosure is not an incident of a charge and a legal chargee enjoys the right to foreclose only if it is construed as “protection, power or remedy” within the meaning of subsection 87(1). Subsection 88(2) suggests that this was the legislative intent by providing a statutory device for the vesting of ownership in the lender where a foreclosure order is obtained.41 Most Australian States acknowledge that the classic foreclosure suit is not consistent with the Torrens charge,42 but foreclosure is retained by statute as an administrative procedure that is available only if the land cannot be sold for more than the mortgage debt.43 The Law Commission recommended the abolition of foreclosure because it has fallen into disuse.44 It is only likely to be a feasible option in a widely 36

[2000] WASC 91. Property Law Act 1969 (WA) s 55. But compare Yarrangh Pty Ltd v National Australian Bank Ltd [1999] NSWSC 97 and L Aitken, “Mortgagors’ Rights” (2000) 74 ALJ 226. 39 [2000] WASC 91at para 48. 40 Incidentally although the Law of Property Act 1925 makes frequent reference to the right to redeem it refers only once to the equity of redemption see s 115(1)b. 41 See CHM Waldock, Law of Mortgages (Sweet & Maxwell, London, 1950) 41. 42 Greig v Watson [1881] 7 VR 79, at 83; Re Forrest Trust [1953] VLR 246, at 271; and Yarrangh v National Australian Bank Ltd [1999] NSWSC 97. 43 See for instance the Victorian Transfer of Land Act 1958 s 79. Only Queensland retains foreclosure as a curial procedure. 44 Law Com No 204 para 7.27. 37 38

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162 Sarah Nield fluctuating market where the value of the security has fallen significantly below the outstanding debt but there is still some prospect that the market will bounce back.45 It remains a cumbersome procedure and one whose outcome is uncertain both because a court is likely to order sale rather than foreclosure and because a foreclosure order absolute may be reopened.46

Consolidation and the costs of redemption Consolidation and the rule that the mortgagee is entitled, as of right, to his costs in a redemption suit flow from the nature of redemption. Borrowers requesting redemption were seeking equitable relief from the forfeiture of their interest consequent upon their failure to meet the contractual terms of repayment. Such relief was only granted by the courts of equity on certain conditions, including the possibility of consolidation and a requirement to meet the costs of redemption. Australian decisions have rejected consolidation47 and the lender’s entitlement to redemption costs as of right48 because they are inconsistent with the concept of a charge. A charge is not redeemed in the sense of seeking equitable relief but is discharged through an obligation to accept repayment and thus free the land from the charge.

Clogs and fetters on the equity of redemption The clogs and fetters doctrine has been subject to mounting criticism in its inflexible approach to the regulation of certain mortgage terms.49 It has been described as “an appendix to our law which no longer serves a useful purpose and would be better excised.”50 The Law Commission recommended its abolition and in its place a new jurisdiction for the courts to set aside or vary mortgage terms “with a view to doing justice between the parties,”51 as well as a new form of protected mortgage of dwelling houses in which any term postponing the right to redeem would be void.52

45 See for instance the Hong Kong foreclosure cases of Hang Seng Bank v Mee Cheong Investment Co Ltd [1970] HKLR 94 and Frencher Ltd (In liquidation) v Bank of East Asia [1985] 2 HKC 263. 46 Campell v Holyland [1877] 7 Ch D 166. 47 Greig v Watson [1881] 7 VR 79. The Law Commission recommended the abolition of consolidation––see Law Comm No 204 para 6.44. 48 Perry v Rolfe [1948] VLR 297. 49 See for instance A Berg, “Clogs on the Equity of Redemption––or Chaining an Unruly Dog” (2002) JBL 335. 50 Per Lord Phillips in Jones v Morgan [2001] EWCA Civ 995, at para 72. 51 Law Comm No 204 Part VIII. 52 Above, para 6.43. The Law Commission also proposed protection over variable interest rates––para 6.41.

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A Reappraisal of S 87(1) Law of Property Act 1925 163 Equity is prepared to strike down terms which are oppressive and unconscionable but difficulties can arise from equity’s uncompromising attitude to terms which bar the borrower’s ability to redeem even when those terms have been freely agreed by the parties without any suggestion of impropriatory. Krelinger v New Patagonia Meat and Cold Storage Co Ltd53 and Knightsbridge Estates v Bryne54 saw some rationalisation of equity’s approach by importing a wider base for its control of mortgage terms by looking at their harsh and unconscionable nature rather than solely at their effect on the borrower’s ability to redeem. Accordingly collateral advantages and terms postponing the right to redeem are not void per se but only to the extent that they can be struck down as harsh and unconscionable. This development was recognised by Young J in the Australian case of Westfield Holdings Ltd v Australian Capital Television: There does not seem to be any commercial reason why in 1992 the court should invalidate any transaction merely because the mortgagee obtains a collateral advantage or seeks to purchase the mortgaged property. Quite obviously equity must intervene if there is unconscionable conduct.55

Nevertheless the Court of Appeal in Jones v Morgan56 felt constrained to strike down an option to purchase granted to the lender despite the fact that they did not consider the option to be unfair or unconscionable. Unfortunately leave to appeal to the House of Lords was refused. Rationalisation of the doctrine could be achieved by acknowledging that there is no distinct equity of redemption to be barred or fettered under a legal charge by way of mortgage. Instead there is of course a need to preserve the borrower’s right to repay the debt and thus obtain a discharge but protection of this right could be achieved through equity’s control of unconscionable and oppressive terms as well as by utilising other methods of regulating contractual terms, whether in restraint of trade or through statutory measures, particularly those controlling the consumer credit market.57

The right to possession Lenders under a classic legal mortgage by assignment or demise enjoyed a right to possession because they held a legal estate. A charge confers no inherent right to possession and a lender under a legal charge by way of mortgage only enjoys a right to possession by the express terms of subsection 87(1).

53

[1914] AC 25. [1940] AC 613. 55 [1992] NSWLR 194, at 202. 56 [2001] EWCA Civ 995. 57 J Houghton and L Liversey, “Mortgage Conditions: Old Law for a New Century” in E Cooke (ed), Modern Studies in Property Law, Vol 1: Property 2000 (Hart Publishing, Oxford, 2001). 54

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164 Sarah Nield What is less clear is the character of the borrower’s possession prior to any exercise by the lender of their right to possession. Under the classic mortgage by assignment or demise a borrower had no legal estate to which a right to possession could attach. A borrower’s possession of the mortgaged land was said to arise from the lender’s “tacit agreement” and his position was similar to that of a tenant at sufferance.58 But under a legal charge the borrower retains the legal estate and his right to possession might equally be accounted for on this basis. For instance subsection 93(2) of the Law of Property Act 1925 suggests that the borrower’s right to bring possession proceedings or sue for trespass stems from the legal estate. The issue has received some consideration in the Australian case of Figgins Holding Pty Ltd v SEAA Enterprises Pty Ltd59 in which the High Court of Australia considered the effect of section 81 of the Victorian Transfer of Land Act 1958, which is similar to subsection 87(1).60 McHugh J was of the opinion that a borrower was more than a mere tenant at sufferance and retained the rights attached to the legal estate, including the right to immediate possession. The borrower’s rights consequent upon the legal estate, were only curtailed once the lender actually exercised their own right to enter possession, either physically or by notice to receive the rent and profits.61 The lender’s right to possession has attracted widespread criticism because it is by nature a right rather than a remedy.62 The equitable duty imposed upon lenders in possession to account strictly for any income arising from the land, does encourage lenders only to look to possession as a remedy following default either as a means of applying the income in reduction of the mortgage debt or more commonly as a prelude to sale. Nevertheless in essence the right is not dependant on default, unless expressly or impliedly so qualified,63 is not subject to any discretionary relief64 and may be exercised without court regulation where peaceful possession is obtained.65 In the context of domestic mortgages, the lender’s right to possession is regulated by statute66 primarily through both the Protection from Eviction Act 1977, 58

B Rudden, “The Mortgagee’s Right to Possession” (1961) 25 Conv 278, at 281. (1999) 196 CLR 245. 60 Save that the lender’s right to possession is dependent on default and prior to default the borrower’s quiet possession is expressly confirmed, although the judgment did not rest on either of these features. 61 (1999) 196 CLR 245 [1999] (HCA) 20, at paras 82–83 and 87–88. 62 The Law Commission has recommended that lenders only be entitled to possession to enforce their security and in the case of a non-protected commercial mortgage to protect their security––see Law Comm No 204 paras 6.16 and 7.28–7.38. 63 Four Maids Ltd v Dudley Marshall Properties Ltd [1957] Ch 317. 64 Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883. See also M Dixon, “Combating the Mortgagee’s Right to Possession: New Hope for the Mortgagor in Chains” (1998) 16 LS 279. 65 Ropaigealach v Barclays Bank plc[2001] 1 QB 263. 66 Mortgages to individuals to secure a loan of less than £25,000 by a non-exempt lender are also regulated under the Consumer Credit Act 1974. 59

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A Reappraisal of S 87(1) Law of Property Act 1925 165 under which it is a criminal offence to unlawfully evict a person from domestic property, and section 36 of the Administration of Justice Act 1970, as amended, which grants the court jurisdiction to suspend or stay a possession order against a dwelling house.67 This jurisdiction may be exercised where there is a reasonable prospect that the borrower will be able to clear any sums due or remedy any other default within a reasonable time68 or where there is a realistic prospect of redeeming the loan through the sale of the property.69 Where the financial situation of the borrower is desperate, so that section 36 does not provide any assistance, the borrower may well decide to voluntarily give up possession to the lender by surrendering the keys. The terms of a domestic mortgage are also likely to qualify the lender’s right to possession so it is only exercisable following default. These measures will assist domestic borrowers in the vast majority of cases but where the lender does not require the court’s assistance to recover possession a borrower has no grounds to dispute the lender’s right to possession nor does the court have jurisdiction to intervene. This was the situation in which Mr & Mrs Ropaigealach found themselves when their lenders, Barclays Bank, sold their house in their absence and without their knowledge.70 Certain commentators have suggested that the lender’s unfettered right to possession under a legal charge sits uncomfortably with the European Convention on Human Rights (“the Convention”) which has been incorporated into English law by the Human Rights Act 1998 (“HRA”)71 and it is to this question that we now turn.

HUMAN RIGHTS AND POSSESSION

Property lawyers are unable to ignore the HRA although they may feel unfamiliar with the broad principles it exposes. Attractive though resort to these broad principles may appear to be, they provide no immediate panacea to the disgruntled or desperate litigant. Recent decisions of the House of Lords demonstrate that the application of the Convention to the property relations of individuals is a challenging task, requiring the clearance of a number of hurdles.72

67 RJ Smith, “The Mortgagee’s Right to Possession––The Modern Law” [1979] Conv 266 and M Haley, “Mortgage Default: Possession, Relief and Judicial Discretion” (1997) 17 LS 483. 68 Cheltenham & Gloucester Building Society v Norgan [1996] 1 WLR 343. 69 Target Home Loans v Clothier [1994] 1 All ER 439; National and Provincial Building Society v Lloyd [1996] 1 All ER 630; and Bristol & West Building Society v Ellis (1997) 29 HLR 282. 70 Ropaigealach v Barclays Bank Plc [2001] 1 QB 263. See M Dixon, “Sorry We Have Sold Your Home: Mortgagees and Their Possession Rights.” [1999] CLJ 281. 71 See for instance K Gray and S Gray, Elements of Land Law, 3rd edn (Butterworths, London, 2001) 1417; D Rook, Property Law and Human Rights (Blackstone, London, 2001) 199. 72 Martin Dixon suggests that only the bravest might seek this route! See M Dixon, “Sorry We Have Sold Your Home: Mortgagees and Their Possession Rights” [1999] CLJ 281.

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166 Sarah Nield The first hurdle—horizontal application The application of the Convention rights between individuals73 has sparked extensive debate which centres on the ambit of sections 3 and 6 of the HRA.74 Section 3 requires the courts to interpret legislation in a manner which is compatible with Convention rights “so far as it is possible to do so.” Where the court finds that it is impossible to interpret legislation in a manner that is compatible with Convention rights it may make a declaration of incompatibility under section 4 whereupon the Government may amend the offending provision using the fast track procedure set out in section 10. The lender’s right to possession under a legal charge is dependent on statute, namely subsection 87(1). It would thus be open to the courts to restrict the lender’s unfettered right to possession either by construing subsection 87(1) in a manner that was compatible with the Convention, even if to do so alters the interpretation of the section, or they could declare the section incompatible with the Convention and thus trigger its amendment.75 Section 6 provides that it is unlawful for a public authority, including the courts, to act in a way that is incompatible with the Convention which could, the argument goes, be employed by the courts to develop the common law in a manner compatible with Convention rights. However this approach is subject to considerable uncertainty which it is unnecessary to explore given the statutory source of the lender’s right to possession. The application of Convention rights between individual parties does raise difficulties of interpretation as the Convention is not drafted with the evaluation of the rights of individuals inter se in mind. It is drafted to apply to state authorities and the decisions of the European court are limited to the interpretation of the Convention between states and the individual. For instance the qualifications to the right to respect for property found in Article 1 and to respect for the home in Article 8(2) are drafted with state interference in mind. In deciding whether an interference is justified under these qualifications, a “fair balance” must be struck between the interests of the individual and the state and the means used to achieve that balance must be reasonably within the discretion of the state. In human rights speak there must be proportionality between the legitimate aim of the interference and the right itself and the particular means or method of interference must be within the state’s margin of appreciation. 73 In Alliance v Leicester Building Society v Slayford [2001] 1 All ER 1 (Comm) Peter Gibson LJ doubted that the HRA applied between private mortgagor and mortgagee. 74 See in the property context J Howell: “The Human Rights Act 1998: The Horizontal Effect on Land Law” in E Cooke (ed), Modern Studies in Property Law, Vol 1: Property 2000 (Hart Publishing, Oxford, 2001) 149; S Wong, “Rethinking Rosset from a Human Rights Perspective” in A Hudson (ed), New Perspectives on Property Law, Human Rights and the Home (Cavendish, London, 2004). 75 Quennel v Maltby [1979] 1 WLR 318 may thus find a legitimate pedigree despite former criticisms of its origins in RA Pearce, “Keeping a Mortgagee out of Possession” [1979] CLJ 257. See also Albany Homes Ltd v Massey [1997] 2 All ER 609.

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A Reappraisal of S 87(1) Law of Property Act 1925 167 Jean Howell has pointed out that these tests are likely to be different when balancing the public interest, as represented by the state, and the individual as opposed to balancing the respective rights and obligations of individuals and she calls upon the courts to formulate a different test to strike a “fair balance” between the rights of individuals.76 Meanwhile Deborah Rook has observed that the concept of a state’s margin of appreciation, developed in international law, does not transport logically to the domestic context.77 Instead the courts will need to develop an alternative but analogous doctrine to allow the government a “discretionary area of judgement” where policy is in issue.78 Inevitably there is also the possibility that both parties may claim an infringement of their rights. In the context of possession proceedings whilst a borrower may claim that the lender’s right to possession breaches the respect for his or her home under Article 8 or is an interference with his or her possessions under Article 1, lenders may likewise claim an infringement under Article 1 of their security rights. A fair balance must then be struck at two levels, namely the public and private interest, in the preservation of residential security and the efficient repayment of debts.

The second hurdle—retrospective application The HRA came into force on 2 October 2000 but to what extent will it affect rights and obligations under a legal charge entered into before that date? This issue was examined in some detail in Wilson v Secretary of State for Trade and Industry,79 when the House of Lords was called upon to consider the application of the Convention to a consumer credit agreement which was entered into before the HRA came into force but was unenforceable under the Consumer Credit Act 1974. The House unanimously held that the HRA did not incorporate the Convention retrospectively, although they emphasised that it was vital to look at the context of the particular issue before the courts. The HRA applies to legislation whenever enacted,80 so it can lead to a change in the interpretation of a section where a provision is found to be incompatible with the Convention, but it cannot operate retrospectively to alter the parties’ existing rights and obligations under their particular agreement. However both Lords Scott and Roger recognised that long term transactions, for instance leases, and presumably mortgages, presented a different context to the shorter term agreement under their immediate consideration. For instance 76 J Howell, “The Human Rights Act 1998: The Horizontal Effect on Land Law” in E Cooke (ed), Modern Studies in Property Law, Vol 1: Property 2000 (Hart Publishing, Oxford, 2001) 149, 153–57. 77 D Rook, Property Law & Human Rights (Blackstones, London, 2001) 37–38. 78 See Karl Construction Ltd v Palisade Properties plc [2002] SLT 312, at para 67. 79 [2003] UKHL 40. See also Aston Cantlow and Wilmcote with Billesley PCC v Wallgrave [2003] UKHL 37. 80 Above, per Lord Nicholls, at para 17.

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168 Sarah Nield during the course of a long term lease there might be legislation enacted which prospectively affected the ability of a landlord to re-enter during the remainder of the lease.81 Lord Rogers described the distinction in terms of provisions that made prospective changes to existing rights but were not retrospective in altering accrued or vested rights.82 He also noted that procedural issues falling within Article 6 of the Convention, which guarantees a right to a fair trial before an independent and impartial tribunal, could have a retrospective impact because it impinged upon process rather than individual rights.83 The fact that a lender may be seeking possession under a legal charge entered into before 2 October 2000 may thus not bar HRA issues where possession is sought after the HRA came into force.

The third hurdle—engaged articles There are primarily three Articles of the Convention which might call for consideration should a lender seek to exercise his right to take possession; namely Article 8, a right to respect for the home, Article 1 of the First Protocol, the peaceful enjoyment of possessions and Article 6, the right to a fair trial.84 Article 8: right to respect for . . . his home Obviously this article can only be engaged where a lender is seeking possession of domestic property but the meaning of “home” is wider than might be expected and could include the Ropaigealach situation where a home is not occupied for some justifiable reason. The meaning of “home” was considered by the House of Lords in London Borough of Harrow v Qazi.85 “Home” is not a legal term of art nor is it directed solely to property interests or contractual rights. It is an autonomous concept which is demonstrated by “sufficient and continuing links” with the property.86 Mr Qazi residence could still be his home even though he was a trespasser.87 The particularly controversial issue in Qazi, upon which the House was divided, was whether the possession proceedings in question breached Article 8 by interfering with the respect required for Mr Qazi’s home. The majority, 81

Above, per Lord Scott, at para 161. Above, per Lord Rogers, at paras 188–92. 83 Above, per Lord Rogers para 209. 84 Deborah Rook also suggests that Art 14, which prohibits discriminatory treatment, might be engaged by the different treatment of borrowers in and out of possession under the Administrative of Justice Act 1970––see D Rook, Property Law and Human Rights (Blackstones, London, 2001) 202 and National Westminster Bank plc v Malhan [2004] EWHC 847. 85 [2003] UKLR 43. 86 Approving the test in Gillow v UK (1986) 11 EHRR 335 and Buckley v UK (1996) 23 EHRR 101. 87 Disapproving S v UK (1986) 47 DR 274. 82

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A Reappraisal of S 87(1) Law of Property Act 1925 169 Lords Hope, Millet and Scott held that the possession proceedings brought against Mr Qazi did not breach Article 8 because the proceedings were an enforcement of the terms, or rather lack of them, under which Mr Qazi occupied his home.88 For the majority Article 8 is concerned with state or public authority interference.89 This approach to Article 8 suggests that lenders exercising their unfettered right to possession will not breach Article 8 for they are merely exercising their rights under their security, indeed Lord Millet said as much.90 The minority, Lords Bingham and Steyn, preferred to adopt the natural meaning of “respect” and to leave an assessment of the legal issues to the question of whether the interference was justified under Article 8(2).91 Lord Steyn was particularly critical of the opinion of the majority: It is inconsistent with the general thrust of the decisions of the European Court of Human Rights and the Commission. . . . It does not accord to individuals “the full measure of the [protection] referred to”. . . . On the contrary it empties article 8(1) of any or virtually any meaning. The basic fallacy in the approach is that it allows domestic notions of title, legal and equitable rights, to colour the interpretation of article 8(1). The decision today does not fit into the new landscape created by the Human Rights Act 1998.92

It is tempting to sympathise with Lord Steyn’s complaint when the approach of the majority admits no assessment of whether a lender’s rights to possession is justified where there is no default or procedural safeguards regulating the repossession process. Article 1 Protocol 1: peaceful enjoyment of possession Lord Hope in Qazi indicated that questions associated with property rights or possessions was for Article 1 and not Article 8,93 but it was in Wilson v Secretary of State for Trade and Industry94 and Aston Cantlow and Wilmcote with Billesley Parochial Church Council v Wallgrave95 that the House of Lords have considered the impact of Article 1 on the property rights of individuals, although their comments in both cases were obiter.

88 Lord Scott, at para 137, suggested that Art 8 was not breached either because it was not engaged at all or could be justified under Art 8(2). Lord Millet preferred the former approach, at paras 100, and 107, and Lord Hope the latter, at para 78. 89 [2003] UKHL 43 per Lord Millet at para 89, per Lord Scott at para 125 and per Lord Hope at paras 43–50. 90 Above, at paras 135–36. . 91 Indeed the decisions in Di Palma v UK (1986) 10 EHRR 149 and Wood v UK (1997) 24 EHRR CD 69 were justified on Art 8(2) grounds. 92 Above, at para 32. 93 Above, at para 50. 94 [2003] UKHL 40. 95 [2003] UKHL 37.

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170 Sarah Nield Only Lords Nicholls and Hobhouse in Wilson were prepared to accept that Article 1 might be engaged. The issue under consideration was whether the unenforceability of an agreement under the Consumer Credit Act 1974 deprived the lender of his rights under Article 1. Lords Hope and Scott by contrast were convinced by the argument of the Secretary of State that the lender’s rights were defined by the agreement and restricted from the outset and thus the lender never enjoyed any right to enforce the loan from which he could be deprived. Lord Nicholls refused to accept the Secretary of State’s contention in Wilson: The proposition of the Secretary of State would mean that however arbitrary or discriminatory such legislation might be, if it was in existence when the transaction took place a court enforcing human rights values would be impotent. A convention right guaranteeing a right to property would have nothing to say. This is not an attractive conclusion.96

He considered: A law regulating a transaction between the parties in the public interest does not always escape review under Article 1 of the First Protocol. Such a law may infringe Article 1 if it creates an imbalance between the parties which would result in one party being arbitrarily or unjustly deprived of his possession for the benefit of another.97

Lord Hobhouse considered the application of Article 1 turned on whether a security interest had been created or not. If it had, Article 1 was engaged because the lender was deprived of the enjoyment of his rights under that security. Thus he too would permit consideration of the operation of legislation upon the rights and liabilities of the parties under Article 1. In Aston Cantlow the House was of the view that Article 1 has no part to play where an individual purchased property subject to a burden, however unreasonable or discriminatory that burden may appear to be.98 Their property rights are burdened from the outset. This reasoning, which echoes that in Qazi, would suggest that the parties’ respective rights are defined by the instrument from which they are derived and will not be engaged by Article 1. However, a distinction may be drawn from the fact that, whilst lenders derive their rights solely from the legal charge and purchasers their ownership subject to existing burdens, borrowers have an existing interest in the land that is then burdened by the legal charge, including the terms implied by statute into that charge, by which the lender is entitled to possession. Assuming for the time being that Article 1 may have some role to play in the statutory control of the parties’ rights and obligations in security transactions, it is necessary to ask whether the lender’s unfettered right to possession conferred by subsection 87(1) is an interference with the borrower’s peaceful enjoyment of their possessions. 96

Above, at para 41. Above, at para 43. 98 Although only Lord Hope at paras 71–75, Lord Hobhouse at paras 91 and 92 and Lord Scott at paras 133–36 expressed a view. 97

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A Reappraisal of S 87(1) Law of Property Act 1925 171 The European Court of Human Rights in Sporrong and Lonroth v Sweden99 interpreted Article 1 as encompassing three distinct but inter-connected rules: The first rule, which is of a general nature, enounces the principle of peaceful enjoyment of property; it is set out in the first sentence of the first paragraph. The second rule covers the deprivation of possessions and subjects it to certain conditions; it appears in the second sentence of the same paragraph. The third rule recognises that the States are entitled, amongst other things, to control the use of property in accordance with the general interest, by enforcing such laws as they deem necessary for the purpose; it is contained in the second paragraph.

The three rules are inter-connected in the sense that the second and third rules, permitting the deprivation of possessions in the public interest and the control of the use of property in the general interest, are essentially qualifications of the right to peaceful enjoyment enshrined in the first rule but which nevertheless must be construed in the light of this overarching principle.100 The common judicial approach has been to consider whether either the second or third rules are applicable before considering whether the first rule has been infringed. The second rule is usually associated with the deprivation of ownership as such.101 An exercise of a right to possession does not deprive the borrower of his ownership of the mortgaged land although it will generally precede the exercise of the lender’s power of sale, which will overreach the borrower’s interest in the land and transfer it to the proceeds of sale. The exercise of a right to take possession may, however, engage the third rule as a control of the borrower’s use of the property or, failing that, may fall foul of the general rule enshrined in the first rule. The control of the lender’s right to possession springs from equity, rather than any express standards of care imposed by statute. It requires lenders to take reasonable care of the mortgaged property102 and if the property is producing income, or capable of producing income, they must apply that income in reducing the secured debt and account to the borrower for any balance.103 Borrowers are thus not excluded from all fruits of their property, the income is no longer under their control but it must be applied to reduce the debt. There is thus control by the lender of the borrower’s proprietary rights to prioritise the repayment of the secured debt over any physical enjoyment of possession. A similar question of control arose in the case of Karl Construction Ltd v Palisade Properties plc104 where it was held that Scottish procedure of “inhibition 99

(1982) 5 EHRR 35, at para 61. James v UK (1986) 8 EHRR 123, at para 47. 101 Only in rare circumstances will a de facto deprivation be recognised where there has been no actual expropriation of legal ownership eg Papamichalopoulos v Greece (1993) 16 EHRR 440 and Vasilescu v Romania (1998) 28 EHRR 241. 102 Palk v Mortgage Services Funding plc [1993] Ch 330. 103 White v City of London Brewery Co (1898) 42 Ch D 237. 104 [2002] SLT 312. 100

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172 Sarah Nield on the dependence” was incompatible with the third rule of Article 1 as an unjustified control over the defendant’s assets. An “inhibition on the dependence” is a form of protective attachment, similar to a freezing order, by which a claimant can prevent a defendant from dealing freely with their assets. The crucial distinction however is that an inhibition could be obtained as of right whilst a freezing order can only be obtained in exercise of a judicial discretion. Article 6: in determination of his civil rights and obligations . . . everyone is entitled to a fair and public hearing . . . Article 6 is concerned with process. At first sight the possibility that a lender may assert their right to possession without seeking court sanction would appear to directly engage this article. However the issue is not as straight forward as it might seem. The House of Lords in Wilson105 examined the reach of Article 6 when they unanimously considered, albeit as obiter, that the Article was not engaged by the unenforceability of an agreement under the Consumer Credit Act 1974. The Article was not engaged because the unenforceability of the agreement affected the parties’ substantive rights and did not operate as a procedural bar. This approach echoes that of the European Court in James v UK106 where they held that Article 6 is a procedural guarantee in the determination of substantive legal issues defined by national law. It does not guarantee the content of that national law. Likewise in Advocate General for Scotland v Taylor107 the issue of a warrant imposing “an inhibition upon a dependence” under Scots law was held not to engage Article 6. Although clearly a procedure, it was not a procedure that determined the parties’ civil rights and obligations. The House in Wilson did note that it was not always easy to distinguish between a substantive and procedural measure. Lord Nicholls suggested that the crucial question was whether: . . .as a matter of substance, the relevant provision of national law, has the effect of preventing an issue which ought to be decided by the court from being so decided.108

Surely applying this test the exercise of a right to take possession, particularly of a dwelling house, should be an issue which ought to be decided by a court even though the right itself may spring from the substantive rights of lender. In effect the civil right to be determined is whether the security instrument creates a legal charge by way of mortgage which enjoys a right to possession. The process by which any consequent order for possession may be obtained and enforced is a

105 106 107 108

[2003] UKHL 40. (1986) 8 EHRR 123. [2003] SLT 1340. Above, para 35.

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A Reappraisal of S 87(1) Law of Property Act 1925 173 procedural matter dependent not on the substantive rights of the parties but upon the jurisdiction of the court.109

The fourth hurdle—legitimate aim and proportionality The rights under Article 1 and Article 8 that have already been discussed are not absolute. An infringement of an engaged article may be justified by a legitimate aim through an express qualification contained within the terms of the article itself. For instance, under the third rule the control of the use of property may be justified “in accordance with the general interest” and respect for the home under Article 8 is qualified, inter alia, by “the protection of rights and freedoms of others.” But even an express qualification must be proportionate in the sense of achieving a fair balance between the legitimate aim and the means employed to achieve it. The Strasbourg jurisprudence recognises that a lender’s right to possession to facilitate the repayment of the secured debt is a proportionate and legitimate aim. In Wood v UK110 the European Court, when considering Article 1, stated that . . .to the extant that the applicant is deprived of her possessions by repossession, the Commission considers that the deprivation is in the public interest, that is the public interest in ensuring the payment of contractual debts and is also in accordance with the rules provided by law.

And when considering Article 8: In so far as the repossession constituted an interference with the applicant’s home the Commission finds that this was in accordance with the terms of the loan and the domestic law and was necessary for the protection of the rights and freedoms of others, namely the lender.

These comments presuppose that the borrower is in default and the lender is seeking recourse to their security to obtain repayment. But where the borrower is not in default the lender’s legitimate aim in obtaining possession is not so obvious unless it is to take steps to protect the value of the security.111 Proportionality calls for an examination of the process by which a legitimate aim is achieved. So that, even though repossession to ensure the efficient repayment of debts is a legitimate aim, the means by which that repossession is obtained is a vital consideration under both Articles 1 and 8. The possibility that the lender may obtain possession without some form of judicial consideration 109 Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883 and s 36 Administration of Justice Act 1970 as amended. 110 (1997) 24 EHRR CD 69. See also Birmingham Midshires Mortgage Services Ltd v Sabberwal (2000) 80 P&CR 256. 111 Western Bank v Schindler [1977] Ch 1.

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174 Sarah Nield over its exercise must tip the fair balance that lies at the heart of proportionality. For instance in Hentrich v France112 the fact that the applicant received fair compensation for the expropriation of her land did not prevent a breach of Article 1 because she was deprived of the opportunity to challenge the expropriation. Also the Scottish courts’ view that “the inhibition upon the dependence” was incompatible with Article 1 was largely premised upon the fact that it was an automatic right which was not subject to adequate judicial control. Thus it failed to achieve due proportionality between the lender’s legitimate aim of recovering his debt and the rights of the debtor to deal freely with his property.113 This concern with process operates despite the fact that Article 6 may not be engaged114 and provides the strongest argument that the right to possession conferred by subsection 87(1) is incompatible with the HRA and thus should be amended.

CONCLUSION

The English law of mortgages needs to be dragged into the twenty-first century. It has been shackled for long enough by the forms that were developed to avoid the medieval laws against usury and certainly long after the charging of interest became commercially and morally acceptable. Whilst we wait for legislative reform we can begin that process by recognising the real impact of the form of the legal charge upon the rights and liabilities of the parties. We need to recognise that the borrower remains the owner of the land subject to the burden of the legal charge and that such familiar and significant terms as “redemption” or the “equity of redemption” mean something different in the regime of the legal charge. We also need to question to what extent this change in form affects the respective rights and liabilities of the parties. Reform to the law governing land mortgages could be prompted by a challenge to the compatibility of subsection 87(1) with the fundamental property rights guaranteed by the HRA. Compatibility could possibly be challenged on substantive grounds where possession is sought for some other reason than upon default or to protect the security or on procedural grounds where the process by which possession is obtained admits no opportunity for challenge by the borrower or adequate judicial scrutiny. The prospects for a substantive challenge remain uncertain while the current majority of the opinions expressed by the House of Lords consider private property rights to be solely within the definition of the parties and legislation and beyond the reach of the Convention. Nevertheless there are powerful dissenting voices with whom the Strasbourg court might well agree. 112

(1994) 18 EHRR 440. See Karl Construction Ltd v Palisade Properties plc [2002] SLT 312 and AG for Scotland v Taylor [2003] SLT 1340. 114 In AG for Scotland v Taylor above, the court decided that Art 6 had not been engaged. 113

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A Reappraisal of S 87(1) Law of Property Act 1925 175 A procedural challenge enjoys a brighter prospect of success. It is not that taking possession is an unjustified weapon in the lender’s repayment armoury but its exercise must be subject to adequate safeguards to prevent any unwarranted infringement of the borrower’s rights. Possession should operate as a remedy under judicial control and not as a right which, if it can be exercised peacefully, can escape procedural regulation. Domestic property enjoys certain safeguards which have helped to cast the right to possession in a remedial context and subject to court regulation but there are chinks in these safeguards which, while small, betray the underlying irrationality of the demise as a modern security device.

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9

Re Goldcorp Exchange Ltd Revisited PAUL EDEN

INTRODUCTION

In Re Goldcorp Exchange Ltd 1 the Privy Council was faced with the insolvency of a New Zealand company that dealt in gold and other precious metals. The company had sold ingots and coins on either an allocated or non-allocated basis. The promotional literature promised that metal stocks would be audited on a monthly basis to ensure that there were sufficient stocks to meet all commitments. After the company went into receivership it became apparent that there was a considerable shortfall in available bullion and that the stock of bullion had not been managed in the manner promised by the promotional literature (ie there was generally no earmarking of gold stocks for “allocated” customers). When the company got into difficulties, the Bank of New Zealand appointed receivers under the terms of a debenture issued by the company, at which point the bank’s floating charge over the company’s assets crystallised. The receivers applied to the New Zealand High Court for directions concerning the disposal of the remaining stock of bullion. As Lord Mustill acknowledged in Re Goldcorp Exchange Ltd,2 in complex proceedings at first instance Thorp J skilfully managed to dispose of the claims of various diverse categories of customer and only the claims of three categories of customers remained in dispute. First, the “non allocated claimants”, ie those customers who had purchased bullion for future delivery and where there had not been any appropriation of specific and segregated parcels of bullion to the individual purchase contracts by the time the bank’s floating charge crystallised. Secondly, a single claimant— Mr S P Liggett—whose claim differed in only minor respects from the claims of the “non-allocated claimants”.3 Thirdly, the “Walker & Hall claimants”, ie 1

[1995] 1 AC 74 (PC). At 86A–B. 3 The three differences, as noted by Lord Mustill (at 105G–106G), were as follows. First, Mr Liggett’s claim was very much larger. He had agreed to purchase 1000 gold maple coins at a price of NZ $732,000. Secondly, with regard to a earlier purchase of 52 maple coins, the court found that there had been an ascertainment and appropriation sufficient to pass the property. Thirdly, with regard to the purchase of the 1000 maples, the company sought to reduce its “short” position in maples by buying in a substantial quantity of extra maple coins. 2

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178 Paul Eden customers who had made contracts for the purchase of bullion from Walker & Hall Commodities Ltd before the business of that company was acquired by Goldcorp Exchange Ltd in 1986.4 This chapter re-examines the Privy Council’s decision in Re Goldcorp Exchange Ltd.5 The central question this chapter addresses is—How would an English court decide a case with near identical facts to Re Goldcorp Exchange Ltd? In other words, where the rights of “owners” of non-allocated personal property held by a hopelessly insolvent depository were contested by the holders of a floating charge over the assets of the depositary. The property deposited may be tangible (such as oil, wheat or gold) or intangible (such as shares or other securities). Although it is possible that an English court might hold the auditors of a hopelessly insolvent depository liable in tort,6 this chapter only considers whether or not an English court would be prepared to recognise a legal or equitable proprietary right, particularly in the light of the recent House of Lords decisions in Foskett v McKeown7 and Twinsectra Ltd v Yardley.8 The first part of the chapter summarises the decisions of both the New Zealand Court of Appeal and the Privy Council in Re Goldcorp Exchange Ltd. The second part discusses the effect of the decision in Re Goldcorp Exchange Ltd on, first, certainty of subject matter of trusts of fungibles and, secondly, the prospects for a remedial constructive trust in English law. The third part discusses the role of bailment on the facts of Re Goldcorp Exchange Ltd with special reference to the issues of mixing and substitution. The fourth part discusses the rights of investors—such as the non-allocated claimants in Re Goldcorp Exchange Ltd—to the monies paid for property rights in fungibles that fail to arise due to the absence of an identified bulk. Finally given the fact that—in the event of the insolvency of a depository of fungibles—investors are likely to be faced with the difficulty of tracing proceeds through an overdrawn account, the concluding part of this chapter also briefly discusses the potential liability of the holders of a floating charge.

THE DECISION IN RE GOLDCORP EXCHANGE LTD

Liggett v Kensington9 The New Zealand Court of Appeal (McKay J dissenting) held that the nonallocated customers enjoyed a proprietary interest in the proceeds of the 4 For a detailed discussion of the legal position of the Walker & Hall claimants see below page 187ff. 5 [1995] 1 AC 74 (PC). 6 Although this would involve distinguishing Caparo Industries plc v Dickman [1990] 2 AC 605 (HL). 7 [2001] 1 AC 102 (HL). 8 [2002] UKHL 12, [2002] 2 AC 164 (HL). 9 [1993] 1 NZLR 257 (NZCA).

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Re Goldcorp Exchange Ltd Revisited 179 moneys paid to the company. Cooke P, relying on the judgment of Goulding J in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd,10 held that the non-allocated customers retained a property interest in the monies paid to the company giving rise to a constructive trust on orthodox lines and a right to trace the proceeds. Cooke P sought to distinguish the Privy Council’s decision in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd11 and stated that the bank as debenture holder had taken the risk of insolvency in relation to the assets over which they had no fixed charge but that the non-allocated purchasers did not understand that they were taking any risk of insolvency.12 Gault J agreed with the conclusions reached by Cooke P and the consequences13 but in Gault J’s view the remedy was best classified as a remedial constructive trust. In a long and carefully argued dissenting judgment,14 McKay J held that the contact between the company and its non-allocated customers was a commercial contact for the purchase and storage of bullion that did not give rise to a fiduciary relationship per se and that any representations made by the company were no different in character from the normal advertising of any trader selling goods to the public and thus they did not give rise to a fiduciary relationship.15 Rejecting the arguments that the non-allocated claimants were to be regarded as the beneficiaries of either an express or a constructive trust, McKay J held that their remedy was an action in damages for breach of contract and that they were not entitled to priority against other creditors whether secured or unsecured.

Re Goldcorp Exchange Ltd The Privy Council, per Lord Mustill, relying on the New Zealand equivalent of section 16 of the Sale of Goods Act 1979 held that, as the contract was for the sale of unascertained generic goods that were not sold “ex-bulk”, no property in the goods could be transferred to the buyers unless and until the goods were ascertained. Although Lord Mustill declined to examine in detail the decision of the Court of Appeal in Re Wait on the grounds that the sale in that case was exbulk, he stated that “the reasoning contained in the judgment of Atkin LJ, . . . which their Lordships venture to find irresistible, points unequivocally to the conclusion that under a simple contract for the sale of unascertained goods no equitable title can pass merely by virtue of the sale”.16 10 11 12 13 14 15 16

[1981] Ch 105. [1986] 1 WLR 1072 (PC). [1993] 1 NZLR 257 (NZCA) at 274. At 281 line 25. [1993] 1 NZLR 257 (NZCA) at 284–306. At 299–300. [1995] 1 AC 74 (PC) at 91B.

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180 Paul Eden Lord Mustill acknowledged the statement by Atkin LJ that it was possible for a seller or a purchaser to create an equitable assignment “as one of the terms expressed in the contract of sale”17 and turned to consider whether there was anything in the collateral promises that would effect an immediate transfer of title to the customers. Lord Mustill rejected the proposition that the collateral promises could be treated as a declaration of trust by the company in favour of the customer on the grounds that the company could not have intended to create a trust of its general stock of gold that would have inhibited its dealings with what it regarded as its stock-in-trade. Lord Mustill also stated that “[t]heir Lordships do not doubt that the vendor of goods sold ex-bulk can effectively declare himself trustee of the bulk in favour of the buyer, so as to confer pro-tanto an equitable title”.18 Lord Mustill rejected the argument that the collateral promises gave rise to an estoppel on the grounds that there was no existing bulk from which a title could be carved out by a deemed appropriation and, in any event, the bank was not a party to the collateral promises.19 Lord Mustill also rejected the argument that there was a fiduciary relationship between the company and its customers that entitled the customers to a proprietary interest in the stocks on the grounds that “the essence of a fiduciary relationship is that creates obligations of a different character from the contact itself” and the Privy Council had not heard any submission that would transform the basic commercial nature of the transaction.20 Even if the Privy Council had been willing to hold that the company could properly be described as a fiduciary, Lord Mustill held that there was never an identifiable stock of bullion over which a proprietary interest could be created.21 The Privy Council also held that by leaving its stock of bullion in a non-differentiated state the company did not unjustly enrich itself by mixing its own bullion with that of the nonallocated claimants because all the gold belonged to the company.22 In response to the argument that a proprietary interest should be imposed retrospectively not to the bullion but to the moneys originally paid by the customers, Lord Mustill held23 that this was not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, nor could it be shown that there was a mutual intention that the moneys paid should not fall within the general fund of the companies assets but should be applied for a specially designated purpose.24

17 18 19 20 21 22 23 24

[1927] 1 Ch 606 (CA) at 636. [1995] 1 AC 74 (PC) at 91E–F. At 91–94. But see also below page 197. At 98. Ibid. At 99. At 100–1. For a detailed discussion of this aspect of the case see below pp 194–95.

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Re Goldcorp Exchange Ltd Revisited 181

EQUITABLE PROPERTY RIGHTS AND RE GOLDCORP EXCHANGE LTD

In Re Goldcorp Exchange Ltd Lord Mustill placed great emphasis on a rule from Lord Blackburn’s 1845 treatise,25 namely that “the parties must be agreed to the specific goods on which the contract was to attach before there can be a bargain and sale, is [a rule] that is founded on the very nature of things”.26 Having re-affirmed the orthodox position,27 namely that under a simple contract for the sale of unascertained goods no equitable title can pass by virtue of the sale, Lord Mustill turned to consider whether there was anything in the contractual promises that would enable the unallocated customers to overcome the practical objections to an immediate transfer of title.

Certainty of subject matter after Re Goldcorp Exchange Ltd Although in Re Goldcorp Exchange Ltd Lord Mustill stated that “[t]heir Lordships do not doubt that the vendor of goods sold ex-bulk can effectively declare himself trustee of the bulk in favour of the buyer, so as to confer protanto an equitable title”,28 “[o]ne interference is that the Court of Appeal’s decision in Hunter v Moss must be wrong”.29 Critics of the Court of Appeal’s decision in Hunter v Moss30 assert that Re Goldcorp Exchange Ltd holds that a failure to segregate the subject matter of a trust of fungibles will render the trust void for want of certainty of subject matter31 but this interpretation does not accord with Lord Mustill’s analysis of the facts before him. Lord Mustill held that Goldcorp Exchange Ltd had not declared themselves trustees of the subject matter of the contract of sale because “[t]he company cannot have intended to create an interest in its general stock of gold which would have inhibited its dealings with it otherwise than for the purpose of delivery under the non-allocated sale contracts”32. In other words, the facts revealed a failure of certainty of intention to create a binding trust obligation rather than a failure to clearly identify the property intended to form the subject matter of 25 C Blackburn, A Treatise on the Effect of the Contract of Sale: On the Legal Rights of Property and Possession in Goods, Wares and Merchandize (W Benning, London, 1845) 122. 26 Quoted at [1995] 1 AC 74 (PC) at 90C–F (emphasis added). The italicised words were also quoted by Lord Mustill at page 90G and 92E. 27 As represented by Atkin LJ’s judgment in Re Wait [1927] 1 Ch 606 (CA). 28 [1995] 1 AC 74 (PC) at 91E–F. 29 P Birks, “Establishing a Proprietary Base (Re Goldcorp)” [1995] Restitution Law Review 87 and P Birks, “Proprietary Restitution: an Intelligible Approach Re Goldcorp Exchange Ltd (in Receivership)” (1995) 9 Trust Law International 45. See also D Hayton, “Property Rights: The Limits of Ascertainability” (1994–95) 5 The King’s College Law Journal 143. 30 [1994] 1 WLR 452 (CA). 31 See, for example, D Hayton, Underhill and Hayton’s Law Relating to Trusts and Trustees, 16th edn (Butterworths, London, 2003) 78–79. 32 [1995] 1 AC 74 (PC) at 91F.

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182 Paul Eden the trust obligation. However the legal position is not entirely free from doubt because, in Re Goldcorp Exchange Ltd, Lord Mustill also indicated33 that the Board of the Privy Council was in entire agreement with the judgment of Oliver J in Re London Wine Company (Shippers) Ltd.34 Re London Wine Company (Shippers) Ltd In Re London Wine Company (Shippers) Ltd Oliver J expressly rejected the possibility that a trust of part of a homogenous mass could be created without segregation of the subject matter. Giving the example of a farmer who declares himself to be the trustee of two sheep (without identifying them), Oliver J stated that a trust could only arise if the farmer “by appropriate words, declare himself to be a trustee of a specified proportion of his whole flock and thus create an equitable tenancy in common between himself and the named beneficiary, so that a proprietary interest would arise in the beneficiary in an undivided share of all the flock and its produce”.35 In the case of a flock of 100 sheep, the appropriate words would be twopercent of the particular flock as opposed to the words two sheep in the particular flock.36 As Professor Goode has noted, “[i]t is surely unreasonable that so much should be made to turn on the niceties of a verbal formulation”.37 Hunter v Moss In Hunter v Moss38 Dillion LJ was content merely to distinguish Re London Wine Company (Shippers) Ltd on the grounds that the case concerned the appropriation of chattels and when property in a chattel passes, whereas Hunter v Moss was concerned with a declaration of trust of intangibles. At first instance in Hunter v Moss39, Colin Rimmer QC sitting as a deputy High Court judge, suggested that the bottles of wine in Re London Wine Company (Shippers) Ltd were not in fact true fungibles as some of the cases may have contained wine that was corked, “or may have been stored badly and have deteriorated or may have other inherent defects”.40 Consequently, in Colin Rimmer QC’s view, the degree of certainty required for trusts of intangible assets was “not necessarily governed by principles analogous to those which apply to the case of tangible assets”.41 33

At 100A–B. [1986] PCC 121 (ChD). 35 At 137 lines 28–33. 36 R Goode, Proprietary Rights and Insolvency in Sales Transactions, 2nd edn (Sweet and Maxwell, London, 1989) 25. 37 Ibid. 38 [1994] 1 WLR 452 (CA) at 458D–H. 39 [1993] 1 WLR 934 (ChD). 40 At 940D. 41 At 940F. 34

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Re Goldcorp Exchange Ltd Revisited 183 Professor Hayton has criticised the distinction drawn in Hunter v Moss between trusts of tangibles and intangibles as “surely specious”.42 Although Hayton accepts the validity of Colin Rimmer QC’s observation that while all shares of a particular class will always be absolutely identical, the odd bottle of wine in a batch of 950 might be defective: such an odd distinction does not seem sufficient to justify equity going out of its way to assist a volunteer by perfecting an imperfect gift of intangibles, even if one might also argue that sections 16–19 of the Sale of Goods Act 1979 contain a comprehensive code on passing of legal and equitable title to goods so excluding liberal development of the equitable rules that is not similarly excluded for intangibles.43

It is noteworthy that, in two recent decisions, both the Privy Council44 and the Court of Appeal45 been prepared to go out of their way to assist a volunteer by perfecting an imperfect gift. It is submitted with respect that, in his original casenote,46 Professor Hayton rather overstated the support for his position contained in an article written by Professor Goode in 1987.47 Professor Goode has not only written subsequently that he regards the Court of Appeal’s decision in Hunter v Moss as correct,48 he has also attempted to develop a more principled rationale for a distinct concept of fungibility in relation to intangible property.49 With regard to the contracts of sales of goods governed by English law, the legal position has been altered by the Sale of Goods (Amendment) Act 1995 that introduced new provisions into the Sale of Goods Act 1979 to make the prepaying buyer of a specified quantity of unascertained goods forming part of a bulk a proportionate owner in common of an undivided share in the bulk.50 It is worth noting however that if a court had to decide a case with near identical facts to Re Goldcorp Exchange Ltd on the basis of present-day English law, sections 20A and 20B of the Sale of Goods Act 1979 would not be of assistance to the pre-paying non-allocated buyers because, in Lord Mustill’s view, the sales of gold were not sales of bullion ex-bulk.51 With regard to sales of fungible intangibles, the distinction drawn by Dillion LJ Hunter v Moss between shares and chattels, has been applied in cases both in the United Kingdom52—albeit with some reluctance53—and in Hong Kong54—with considerably more enthusiasm. 42

D Hayton, “Uncertainty of Subject––Matter of Trusts” (1994) 110 LQR 337. Ibid. 44 T Choithram International SA v Pagarini [2001] 1 WLR 1 (PC). 45 Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075. 46 D Hayton, “Uncertainty of Subject––Matter of Trusts” (1994) 110 LQR 337. 47 R Goode, “Ownership and Obligation in Commercial Transactions” (1987) 103 LQR 433 at 449. 48 R Goode, Commercial Law in the Next Millennium (Sweet and Maxwell, London, 1998) 73. 49 R Goode, “Are intangible assets fungible?” [2003] LMCLQ 379–88. 50 Sections 20A and 20B of the Sale of Goods Act 1979. 51 [1995] 1 AC 74 (PC) at 91G. 52 Re Harvard Securities Ltd [1997] 2 BCLC 369 (ChD). 53 See the remarks of Neuberger J Re Harvard Securities Ltd [1997] 2 BCLC 369 (ChD) at 381b–383c. 54 Re CA Pacific Finance Ltd (in Liquidation) [2000] 1 BCLC 494 (HK CFI). 43

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184 Paul Eden The relevance of Mac-Jordan Construction Ltd v Erostin Ltd Critics of the decision in Hunter v Moss also cite the Court of Appeal’s decision in Mac-Jordan Construction Ltd v Erostin Ltd55 as supporting the principle that the creation of a separate pool of assets is required for an equitable interests in tangible or intangible property to arise. Given the fact that the decision in MacJordan Construction Ltd v Erostin Ltd rests on the application of the rule in De Mattos v Gibson56—as explained in Swiss Bank Corporation v Lloyds Bank Ltd57—it is submitted that the Court of Appeal’s decision in Mac-Jordan Construction Ltd v Erostin Ltd is not authority for the general proposition for which it is usually cited (ie certainty of subject matter requires segregation). The decision in Mac-Jordan Construction Ltd v Erostin Ltd is entirely consistent with the certainty of intention approach of Lord Mustill in Re Goldcorp Exchange Ltd.58 It is also submitted that—leaving aside the problem of the application of the rule in De Mattos v Gibson—the Court of Appeal’s decision in Mac-Jordan Construction Ltd v Erostin Ltd is merely an illustration of the problem of identification59 and tracing through overdrafts.60 Proprietary remedies—constructive trusts In Re Goldcorp Exchange Ltd Lord Mustill rejected the argument that there was a fiduciary relationship between Goldcorp Exchange Ltd and the “nonallocated” customers on the grounds that, notwithstanding the expectations engendered by the company’s promises, the relationship between the company and its customers was purely commercial.61 Lord Mustill also stated obiter that even if the company could be properly described as a fiduciary, the company never held a separate and sufficient stock of bullion in which a proprietary interest could be created.62 As Wright has noted,63 for the most part Lord Mustill’s judgment and the numerous articles concerning the case, involve a detailed discussion of the institutional constructive trust. With regard to the question of whether the court 55

[1992] BCLC 350 (CA). (1854) 4 De G &J 276. 57 [1979] Ch 548. 58 Mac-Jordan Construction Ltd v Erostin Ltd [1992] BCLC 350 (CA) concerned the interpretation of the relevant provisions of the JCT 1981 Form (excluding clause 30–4.2.2––which would have required Brookmount Erostin Ltd (the employer) to place the retention monies in a separate banking account if Mac-Jordan Construction Ltd (the contractor) so requested––was deleted (see 353b)). 59 But see also Re Lewis’s of Leicester Ltd [1995] 1 BCLC 428 (ChD) for a decision where the payment of takings into the insolvent company’s general bank account was not held to be fatal to an attempt to trace nor did tracing amount to a breach of the pari passu principle embodied in s 107 of the Insolvency Act 1986. 60 See inter alia, James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 and Bishopgate Investment Management Ltd v Homan [1995] Ch 211 (CA) considered below pp 195–96. 61 [1995] 1 AC 74 (PC) at 97H–98F. 62 At 98G–H. 63 D Wright, The Remedial Constructive Trust (Butterworths, Sydney, 1998) 52–53. 56

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Re Goldcorp Exchange Ltd Revisited 185 should create—after the event—a remedial restitutionary right superior to the security created by the charge, Lord Mustill indicated that “[t]he nature and foundation of this remedy were not clearly explained in argument. This is understandable, given the doctrine is still in an early stage and no single juristic account of it has yet been generally agreed”.64 Re Goldcorp Exchange Ltd and the remedial constructive trust Lord Mustill briefly considered and swiftly rejected two possible bases for a remedial restitutionary right, first, that an imbalance between the position of the parties would entitle a new equity to intervene and put the matter right, and, secondly, that the court should be entitled to deem that the customers retained an equitable title to the purchase money.65 Although the Privy Council could not see how a remedial resititutionary right could be brought to bear on the facts of Re Goldcorp Exchange Ltd, Lord Mustill was careful to preserve the possibility that they might “prove in the future to be a valuable instrument of justice”.66 Conclusion Although Lord Mustill’s judgment in Re Goldcorp Exchange Ltd affirms the general unwillingness of the English courts to develop a wider approach to unjust enrichment and fiduciary obligations,67 there is considerable academic and judicial support for the idea of an expanded concept of fiduciary obligation and/or the remedial constructive trust in Australia,68 Canada69 and even New Zealand70 post-Re Goldcorp Exchange Ltd.

64

[1995] 1 AC 74 (PC) at 104B–C. See below page 194 for a discussion of the potential role of the Quistclose trust. 66 At 104G. 67 But see also Foskett v McKeown [2001] 1 AC 102 (HL) considered below page 195. 68 See D Wright, The Remedial Constructive Trust (Butterworths, Sydney, 1998); P Finn, “Equitable Doctrine and Discretion in Remedies” in W Cornish, et al (eds), Resititution: Past, Present and Future (Hart Publishing, Oxford, 1998) 251–74, but particularly 264 and D Wright, “The Remedial Constructive Trust and Insolvency” in F Rose (ed), Restitution and Insolvency (Mansfield Press (an imprint of LLP Professional Publishing), London, 2000) ch 11, pp 206–19. 69 See Justice Beverley McLachlin, “Restitution in Canada” in W Cornish, et al (eds), Resititution: Past, Present and Future (Hart Publishing, Oxford, 1998) 275–303 but particularly 282: “Should the law have given the plaintiffs in Goldcorp a remedy? . . . In Canada, the answer . . . would likely be yes”. 70 See Dickie v Torbay Pharmacy (1986) Ltd [1995] 3 NZLR 429 (NZHC); Fortex Group (In Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171 (NZCA) and Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (NZHC). See also C Rickett, “Of Constructive Trusts and Insolvency” in F Rose (ed), Restitution and Insolvency (Mansfield Press (an imprint of LLP Professional Publishing), London, 2000) 188–205. 65

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186 Paul Eden

BAILMENT AND RE GOLDCORP EXCHANGE LTD

The law of bailment is restricted to tangible chattels. Although it is possible to conceptualise the relationship between the “non-allocated” claimants and Goldcorp Exchange Ltd as involving both a sale and a bailment, in South Australian Insurance Co Ltd v Randell 71 the Privy Council held that a contract that did not call for redelivery in specie could not be characterised as a bailment. The proposition that redelivery in specie is a necessary pre-requisite for a bailment has been challenged by the decision of the House of Lords in Mercer v Craven Grain Storage Ltd.72

Mercer v Craven Grain Storage Ltd In Mercer v Craven Grain Storage Ltd the House of Lords held that it was possible to have a bailment where the bailee was authorised to substitute other goods. Lord Templeman (Lord Browne-Wilkinson and Lord Mustill concurring): Lord Mustill pointed out in the course of the argument that the storage society were bailees and could not question the title of their bailor. In any event, title to the wheat lawfully mixed could not be acquired by the storage society which by no stretch of the imagination had any right thereto. The title must have remained in the growers from time to time interested in the mix in proportion to their respective tonnages. The storage society was guilty of conversion if it allowed the mix to be so depleted by withdrawals that the balance remaining was not sufficient to satisfy the demands of the plaintiffs.73

The precedential value of Mercer v Craven Grain Storage Ltd is somewhat undermined by the fact that, in the course of his judgment, Lord Templeman did not refer to any of the relevant authorities74—or indeed any authorities.75 Although Sealy and Hooley refer to the decision in Mercer v Craven Grain Storage Ltd as somewhat surprising,76 Lionel Smith is more support71

(1869) LR 3 PC 101. [1994] CLC 328 (HL). 73 At 329F–G. See also the statement of Lord Lloyd (at 331E) that “[a]ll your Lordships are agreed that the proprietary issues do not provide [the grain storage company] with an arguable defence”. 74 In particular, South Australian Insurance Co Ltd v Randell (1869) LR 3 PC 101; Chapman Brothers v Verco Brothers and Co Ltd (1933) 49 CLR 306 (HCA); Re Bond Worth Ltd [1980] Ch 228; Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (CA) and Re Peachdart Ltd [1984] Ch 131. 75 Good v Bruce [1917] NZLR 514 (NZCA); Sandeman & Sons v Tyzack & Branfoot SS Co Ltd [1913] AC 680 (HL); Aluminium Industrie Vaaseen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (QB and CA); Indian Oil Corporation Ltd v Greenstone Shipping SA [1988] QB 345; Clough Mill Ltd v Martin [1985] 1 WLR 111 (CA) and Coleman v Harvey [1989] 1 NZLR 723 (NZCA) all contain statements that might be regarded as supportive of Lord Templeman’s judgment. 76 L Sealy and R Hooley, Commercial Law: Text, Cases and Materials, 3rd edn (LexisNexis UK, London, 2003) 81. 72

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Re Goldcorp Exchange Ltd Revisited 187 ive.77 In support of the House of Lords decision in Mercer v Craven Grain Storage Ltd, Smith cites the example of the Walker & Hall claimants in Re Goldcorp Exchange Ltd.

The Walker & Hall claimants At first instance, Thorpe J found that, until about 1983, there had been sufficient ascertainment and appropriation of goods by Walker & Hall Commodities Ltd to the individual contracts to transfer title to each customer; and that thereafter the Walker & Hall customers as a whole had a shared interest in the pooled bullion, which Walker & Hall Commodities Ltd held on their behalf.78 Consequently when Goldcorp Exchange Ltd absorbed the hitherto separated bullion into its own trading stock after the acquisition of Walker & Hall’s business, and thereafter drew upon the mixed stock, it wrongfully dealt with goods which were not its own.79 Although Thorpe J affirmed the proprietary rights of the Walker & Hall claimants, he applied the conventional principles of tracing and held that the proprietary remedies of the Walker & Hall claimants was limited to the lowest intermediate balance of bullion held by Goldcorp Exchange Ltd between the accrual of their right and the receivership.80 The limitation of the claim of the Walker & Hall claimants to the lowest intermediate bullion balance did not unduly concern the bank as, on the facts, the lowest intermediate balance “was of comparatively small financial significance”.81 The bank did not appeal against this aspect of Thorp J’s judgment. When the majority of New Zealand Court of Appeal applied their remedy for the non-allocated purchasers82 to “the successful claimants in the High Court, including Mr Liggett, to the extent that they cannot recover under the judgment of Thorpe J”,83 a “rather confusing situation then arose”.84 The New Zealand Court of Appeal’s enhancement of the remedy available to the Walker & Hall claimants made Thorpe J’s adverse judgment much more serious for the bank and they sought to appeal to the Board of the Privy Council not only on the ground that the Court of Appeal had wrongly enlarged the remedy but also (in 77 L Smith, “Bailment with Authority to Mix––and Substitute” (1995) 111 LQR 10–18. “The decision [in Mercer v Craven Grain Storage Ltd] is (with respect) clearly correct” (at page 12). 78 See [1995] 1 AC 74 (PC) at 107A–D. See also Re Stapylton Fletcher Ltd [1994] 1 WLR 1181 (ChD) and Customs and Excise Commissioners v Everwine Ltd [2003] EWCA Civ 953, (2003) 147 SJLB 870. 79 See [1995] 1 AC 74 (PC) at 107E. 80 At 107F. 81 At 107G–H. 82 A charge on the bullion assets of Goldcorp Exchange Ltd in the company’s vaults (including the bullion on loan to other divisions of the company) and ranking in priority to the charge of the Bank of New Zealand. 83 Per Cooke P in Liggett v Kensington [1993] 1 NZLR 257 (NZCA) at 275 lines 23–24. 84 Per Lord Mustill in Re Goldcorp Exchange Ltd [1995] 1 AC 74 (PC) at 107H.

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188 Paul Eden case it should be held that in principle the decision of the court should be upheld) on the ground that Thorpe J. had been in error when holding that the Walker & Hall claimants had any proprietary rights at all.85 The Walker & Hall claimants objected on the ground that since the bank had never appealed to the New Zealand Court of Appeal on the issue of liability the bank could not appeal to the Board of the Privy Council. Given the fact that the New Zealand Court of Appeal appeared to have granted a remedy to the Walker & Hall claimants on their own initiative,86 the bank was in a somewhat unenviable position. Fortunately the parties agreed that “the bank accepted its willingness to abide by the decision of Thorpe J on liability (although without making any concession on it) in the event that the Board restored the judge’s decision on the measure of recovery”.87 Lord Mustill summarised the judgment of Thorpe J as follows: On the facts found by the judge the company as bailee held bullion belonging to the individual Walker & Hall claimants, intermingled the bullion of all such claimants, mixed that bullion with bullion belonging to the company, withdrew bullion from the mixed fund and then purchased more bullion which was added to the mixed fund without the intention of replacing the bullion of the Walker & Hall claimants. In these circumstances the bullion belonging to the Walker & Hall claimants which became held by the company’s receivers consisted of bullion equal to the lowest balance of metal held by the company at any time: see James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62.88

Before the Privy Council, the Walker & Hall claimants sought an equitable lien on all the property of the company at the date of receivership to recover the value of their bullion unlawfully misappropriated by the company. Having commented that it was not necessary to consider the scope and ambit of Lord Templeman’s “observations” in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd89 “because all members of this Board are agreed that it would be inequitable to impose a lien in favour of the Walker & Hall claimants”,90 Lord Mustill summarily restored the remedies granted to the Walker & Hall claimants by Thorpe J at first instance.91 It may be surmised that the foundation of Lord Mustill’s judgment in relation to the Walker & Hall claimants is based on his observations on the legal position vis-à-vis the non-allocated customers to after acquired bullion had the company properly performed the contemplated scheme.92 Alternatively, it 85

At 108C. The Board in Re Goldcorp Exchange Ltd appears to have been of the view that, had the bank and the Walker & Hall claimants been unable to agree on the way forward, a lengthy investigation of what had happened in the New Zealand Court of Appeal would have been necessary (see 108D). 87 [1995] 1 AC 74 (PC) at 108D–E. 88 At 108E–F. 89 [1986] 1 WLR 1072 (PC). 90 [1995] 1 AC 74 (PC) at 110B–C. 91 At 110C–D. 92 At 96F–G. 86

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Re Goldcorp Exchange Ltd Revisited 189 might be conjectured that Lord Mustill regarded the Walker & Hall claimants as beneficiaries of a trust declared by the vendor of goods sold ex-bulk “so as to confer pro tanto equitable title”.93 It would also be reasonable to conclude that, in restoring the remedies granted to the Walker & Hall claimants by Thorpe J at first instance, Lord Mustill was consciously affirming (albeit implicitly) the position of Thorpe J not only on the issue of mixing and bailments but on the scope of the available proprietary remedies more generally. If the last mentioned interpretation is the correct one, it is noteworthy that, at first instance, Thorpe J found that a claimant—Mr Kingston—who had delivered alluvial gold to Goldcorp Exchange Ltd for refining and assay and return to him enjoyed a proprietary interest in the bar of gold produced from his alluvial gold notwithstanding the fact that “in the course of refining his gold may have become intermingled with other gold and lost its identity”.94 Thorp J also considered the legal position of a miner—Mr Sopp—who delivered alluvial gold to Goldcorp Refiners Ltd for refining and assay and holding on his behalf thereafter on the understanding that “no refined gold would be earmarked for him and that, if he elected to uplift the gold owed to him, he would not receive his own gold back”.95 On the virtual eve of receivership, and in response to Mr Sopp’s expressions of concern about his exposure, Goldcorp Exchange Ltd sent Goldcorp Refiners Ltd two bars of unrefined gold (100 ounces and 64.2 ounces) for Mr Sopp which the responsible officer for Goldcorp Refiners Ltd put into a bag and—with the assent of Goldcorp Exchange Ltd—to which she added an unrefined bar (211 ounces). The bag, bearing Mr Sopp’s name, was held in a safe at Goldcorp Refiners Ltd, although Mr Sopp was unaware of this. Thorpe J held that Goldcorp Refiners Ltd (Refiners) had created a Quistclose trust for Mr Sopp of the first two bars but that he had no right to the unrefined bar, “as the Quistclose principle is limited to funds provided by a third party and does not enable an insolvent (here Refiners) to apply its assets to pay off some creditors in priority to others”.96 As Cooke P admitted, in view of the fact that Goldcorp Refiners Ltd was a wholly owned subsidiary of Goldcorp Exchange Ltd, Thorp J’s distinction was a fine one.97

Mixing and substitution Leaving aside the issue of the Quistclose trust,98 the legal remedies accorded the Walker & Hall claimants raise fundamental issues of legal principle with regard to the issue of mixing and bailments that, with respect, require more attention 93 94 95 96 97 98

See [1995] 1 AC 74 (PC) at 91E–F. [1993] 1 NZLR 257 (NZCA) at 261 lines 13–14. At 261 lines 20–22. At 261 lines 29–32. At 261 lines 32–33. See below page 194 for a discussion of the Quistclose trust and related matters.

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190 Paul Eden than they appear to have been accorded in Lord Mustill’s judgment Re Goldcorp Exchange Ltd or, as noted above,99 in the House of Lords decision in Mercer v Craven Grain Storage Ltd. In his article on the decision in Mercer v Craven Grain Storage Ltd, Lionel Smith stated that “[a] storage arrangement is most likely to be seen as a bailment where the depositor pays the storage charges . . .; where the grain is stored at his risk; where he is required to pay for the insurance . . .; and where the warehouse is obliged to keep enough grain to answer all receipts that are out . . .”100 The authorities cited in support of his proposition are—with one Canadian exception—nineteenth-century cases from the United States. Lionel Smith states that “there is nothing in these principles which confines them to grain”101 but that assertion, with respect, ignores the provenance of the American authorities regarding grain elevators. Several early American cases involving grain elevators, such as Chase v Washburn,102 upheld the common law principle that the failure to redeliver the identical goods deposited entailed that the transaction was a sale and not a bailment. Later American authority is however almost uniformly to the effect that such deposits constitute bailments and not sales.103 The amendment of the common law rule was prompted by the requirements of the commercial interests of the country and in order to give effect to the intention of the contracting parties.104 The rule that commingled fungible goods are owned in common by the persons entitled thereto has now been codified in §7–207 of the Uniform Commercial Code. §7–205 of the Uniform Commercial Code provides that a buyer in the ordinary course of business of fungible goods from a warehouseman who is in the business of buying and selling such goods takes free of any claim under a warehouse receipt.105 Although some Canadian decisions have been influenced by the American grain elevator cases,106 the majority of the Canadian decisions107 as well as the Australian108 and British decisions109 confirm the need for redelivery in specie 99

See above page 186. L Smith, “Bailment with Authority to Mix––and Substitute” (1995) 111 LQR 13. 101 Ibid. 102 1 Ohio St 244, 59 Am Dec 623 (1853). 103 See S Williston The Law Governing Sales of Goods at Common Law and under the Uniform Sales Act, rev edn (Baker, Voorhis & Co, New York, 1948) §154 and W Raushenbush Brown on Personal Property, 3rd edn (Callaghan & Company, Chicago, 1975) §10.6 and the cases cited therein. 104 See Rice v Nixon 97 Ind 97, 49 Am Rep 430 (1884). 105 There is an obvious analogy with the provisions of s 20B of the Sale of Goods Act 1979. 106 See, for example, Clarke v McClellan (1893) 23 OR 465, Stewart v Sculthorp (1894) 25 OR 544 and Busse v Edmonton Grain & Hay Co [1932] 1 DLR 744. 107 See generally N Palmer, Bailment, 2nd edn (Law Book Co, Sydney, 1991) 137 and the cases cited in n 53. See also L Smith, The Law of Tracing (Clarendon Press, Oxford, 1997) 89 ff. 108 See, in particular, South Australian Insurance Co Ltd v Randell (1869) LR 3 PC 101; Chapman Brothers v Verco Brothers and Co Ltd (1933) 49 CLR 306 (HCA); Reece v Harris [1943] SASR 127 and Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504. But see also Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 (HCA) at 561. 109 See Re London Wine Company (Shippers) Ltd [1986] PCC 121 (ChD); Re Bond Worth Ltd [1980] Ch 228; Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (CA); Re Peachdart 100

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Re Goldcorp Exchange Ltd Revisited 191 for a bailment to exist. However, the decision of the New Zealand Court of Appeal in Coleman v Harvey110—somewhat surprisingly not cited by Smith in his article on Mercer v Craven Grain Storage Ltd111—potentially offers support for the proposition that redelivery in specie is unnecessary for a bailment to exist.112 Coleman v Harvey In Coleman v Harvey the defendant Coleman, acting on behalf of his company, entered into an oral contract with the plaintiff Harvey with regard to the refining of silver coins to be supplied by Harvey. It was agreed that the plaintiff’s 330 kilograms of silver coins would yield about 166 kilograms of fine silver. The company proposed to refine the plaintiffs coins together with other silver materials that the company had on hand and, out of the number of two kilogram ingots so produced, the company would hold and store 166 kilograms for the plaintiff. The company did in fact melt down Harvey’s coins together with other materials and convert the mass into ingots but the company never set aside any of the ingots for Harvey and, within three months, the company had disposed of all the relevant ingots in the course of their trade. In spite of this, the company supplied Harvey with a written acknowledgement that they were holding 166 kilograms of fine silver in custody on his behalf. The company delivered 49 kilograms of silver to Harvey before they were placed into receivership and he sued the company and Coleman for the value of the outstanding balance of 117 kilograms of silver plus interest. At first instance, Davison CJ held in favour of Harvey and gave judgment for him against both Coleman and the company in conversion on the basis that the company was the bailee of the silver and Coleman was a joint tortfeaser. On appeal, counsel for Coleman argued that the delivery of the coins to the company constituted mutuum (a loan for use)113 or sale and not a bailment. Cooke P rejected the argument that the transaction between Harvey and the company was either a case of mutuum or a sale as this was not the intention of the parties.114 Ltd [1984] Ch 131 and Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (QBD). But see also Aluminium Industrie Vaaseen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (QB and CA); Clough Mill Ltd v Martin [1985] 1 WLR 111 (CA) and Indian Oil Corporation Ltd v Greenstone Shipping SA (Panama) [1988] QB 345. 110 [1989] 1 NZLR 723 (NZCA). 111 But duly considered in L Smith, The Law of Tracing (Clarendon Press, Oxford, 1997) 89 ff. 112 See also Glencore International AG v Metro Trading International Inc [2001] 1 Lloyd’s Rep 284 (QBD) at 321–33 and J Ulph, “Retaining Property Rights at Common Law through Mixtures and Changes” [2001] LMCLQ 446–56. 113 Mutuum “is the loan of something which is not to be returned in specie but which is to be replaced by something similar or equivalent . . . in mutuum . . . property in the chattel passes from the lender to the borrower”. N Palmer and A Powell, “Bailment” in Halsbury’s Laws of England, 4th edn reissue (Butterworths, London, 1991) vol 2, para 1834. 114 [1989] 1 NZLR 723 (NZCA) at 725 lines 35–40.

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192 Paul Eden Although Cooke P conceded that the deliberate destruction of the coins and the failure to set specific ingots aside were “complications”, he did not think that “either should be treated as changing the essence of the transaction”.115 In Cooke P’s view the transaction was “a somewhat special kind” of bailment that was analogous to an implied reservation of title.116 Cooke P relied upon judgment of Stephen J in the Australian case Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”117 but in that case the High Court of Australia was primarily concerned with whether the ability to recover for economic loss depends upon damage to person or property and the basis of the decision is that liability depends not the existence of a property interest but whether the plaintiff is an identifiable individual who would be likely to suffer the loss in question—the so-called “known plaintiff” principle. Given the basis of the High Court of Australia’s decision in Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”, it is reasonable to regard the following statement of Stephen J as obiter. The situation as to title which the agreement created is different both from that of the wheat considered in South Australian Insurance Co v Randell (1869) LR 3 PC 101 and in Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306 and from that of the fruit in Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504. It approaches most closely to the position referred to in Corpus Juris 2d, vol 8, pp 345–346, where a reading of the cases there cited shows that in the case of fungible goods their commingling and manufacture into other products which are to be returned to the original owner may, if the parties so intend, be consistent with a bailment, property never leaving the bailor (see generally the annotation to Kansas Flour Mills Co v Board of Commissioners of Harper County (1927) 54 ALR 1164 and Commissioner of Internal Revenue v San Carlos Milling Co (1933) 63 F (2d) 153).118

It is also submitted with respect that Stephen J’s attempt to distinguish the relevant Australian case law by reference to American authorities is wholly unconvincing. In contrast to Cooke P’s judgment, Somers J found that the relationship between Harvey and the company could not have been a bailment because “the constituent parts were not capable of segregation or identification after refinement”.119 According to Somers J, the contract between the company and Mr Harvey contemplated that Mr Harvey would—after refinement—be the owner of 166 kilograms of silver part of which, perhaps most of which, would be the product of his coins, but part of which would previously have been the property of the company. In Somers J’s view, property in the company’s silver must have been intended to pass to Mr Harvey when the company selected or 115

At 726 lines 1–2. At 726 lines 10–11. 117 (1976) 136 CLR 529 (HCA). 118 (1976) 136 CLR 529 (HCA) at 561 quoted by Cooke P in Coleman v Harvey [1989] 1 NZLR 723 (NZCA) at 726 lines 34–47. 119 [1989] 1 NZLR 723 (NZCA) at 728 lines 34–35. 116

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Re Goldcorp Exchange Ltd Revisited 193 segregated 166 kilograms for him and, at the same time, that part of Mr Harvey’s silver which was not included in the 166 kilograms so set aside would become the property of the company. In short no property in Mr Harvey’s silver and no property in the company’s silver would pass from one to the other until the company set aside 166 kilograms. As it did not ever do so neither lost any part of its property. The product of the refining process, an admixture of the silver of both was owned by both; as to 166 kilograms by Mr Harvey, as to the balance by the company. They were co-owners in common in shares proportioned to the silver each contributed.120 Somers J’s ingenious interpretation of the effect of the contract—preserving the plaintiff’s ownership of the silver—was essential for the plaintiff to be able to sue in conversion. This ingenuity would not have been necessary had the plaintiff sued in deceit for the false statement that the company was holding 166 kilograms of fine silver in custody on his behalf. Richardson J concurred with the judgments of both Cooke P and Sommers J in spite of the important differences between them.121 Conclusion Notwithstanding the North American caselaw and the decision in Mercer v Craven Grain Storage Ltd, it is submitted that the common law is not “sufficiently flexible to encompass a bailment in which the bailee is authorised both to mix the bailed goods and to substitute others”.122 It is submitted that such arrangements are loans for consumption (mutuum) and that—by analogy with the British retention of title cases123—the putative bailor will not be able to assert title to goods that have lost their identity in the event of an insolvency unless the conditions for the imposition of a Quistclose (or similar) trust are satisfied. It is further submitted that where the conditions for a Quistclose (or similar) trust are not satisfied, in the event of an insolvency, the attempt to classify a transaction as a bailment with the right to mix and substitute goods is likely to be held to be a charge that is void for want of registration under Part XII of the Companies Act 1985 or the Bills of Sales Acts 1878–91 as applicable.124

120

Page 728 line 46–729 line 3. The full judgment of Richardson J reads: “I have had the advantage of reading the draft judgments of the President and Sommers J I agree and there is nothing I can usefully add”. 122 Contra L Smith, “Bailment with Authority to Mix––and Substitute” (1995) 111 LQR 17–18. 123 See generally J Bradgate, “Twenty–Five Years of Romalpa” in I Davies (ed), Security Interests in Mobile Equipment (Ashgate, Aldershot, 2002) ch 2 (pp 29–94). 124 But see also Associated Alloys Pty Ltd v ACN 001 452 106 Ltd [2000] HCA 25, 202 CLR 588. 121

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194 Paul Eden

THE QUISTCLOSE TRUST AND RELATED MATTERS

As Sarah Worthington notes—and as the non-allocated claimants in Re Goldcorp Exchange Ltd discovered—the “absence of an identified bulk is the most common stumbling block in assertions by plaintiffs that they have an equitable property interest”.125 Although all the judges in New Zealand rejected the proposition that the non-allocated claimants had a property interest in the bullion, the majority of the judges in the New Zealand Court of Appeal accepted that Goldcorp Exchange Ltd “received all the monies of the non-allocated claimants, from the moment of their payment upon trust”126 and Cooke P applied the judgment of Lord Templeman in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd 127 to give the nonallocated claimants a priority over the rights of the debenture holder. The basis of Cooke P’s decision was that “the non-allocated Exchange purchasers certainly did not understand that they were taking any risk of insolvency, whereas the bank as debenture holder certainly took some risk in relation to the assets of Exchange over which it had no fixed charge”.128 In his judgment Lord Mustill stated that, in order for the purchase moneys to be impressed with a trust in favour of the payers from the outset, it was necessary to show either; a mutual intention that the moneys should not be fall within the general fund of the company’s assets or, that having originally having been paid over without restriction the recipient later constituted himself as a trustee of the money.129 In Lord Mustill’s view, the facts of the case before him were inconsistent with any such trust.130 Lord Mustill also rejected the conclusion of the majority in the New Zealand Court of Appeal that the company was a fiduciary.131 With regard to the reliance placed on Lord Templeman’s judgment in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd, Lord Mustill merely observed—in passing—that it was difficult to understand how the judgment would enable the non-allocated claimants “to overcome the difficulty that the moneys said to be impressed with a trust were paid into an overdrawn account and thereupon ceased to exist”.132 125 S Worthington, “Sorting Out Ownership Interests in a Bulk: Gifts, Sales and Trusts” [1999] Journal of Business Law 3. 126 [1993] 1 NZLR 257 (NZCA) at 271 lines 41–43 (per Cooke P). See also [1993] 1 NZLR 257 (NZCA) at 281 line 25 (per Gault J). 127 [1986] 1 WLR 1072 (PC). 128 [1993] 1 NZLR 257 (NZCA) at lines 29–33. 129 [1995] 1 AC 74 (PC) at 100G Lord Mustill made reference to Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL) and Re Kayford Ltd [1975] 1 WLR 279 (ChD). See also Lord Millett’s judgment in Twinsectra v Yardley [2002] UKHL 12, [2002] 2 AC 166 at paras 68–70. 130 [1995] 1 AC 74 (PC) at 100H. 131 At 97H–98G and 101D–103G. 132 At 105B.

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Re Goldcorp Exchange Ltd Revisited 195 Foskett v McKeown In Foskett v McKeown133 the House of Lords held that where a trustee wrongfully uses money to provide for part of the cost of acquiring an asset, the beneficiary is entitled at his option to either claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. The judgments of both Lord Millett134 and Lord Steyn135 in Foskett v McKeown appear to support the view that a fiduciary relationship is no longer required in order to trace the proceeds of misapplied assets.136 In any event, the legal basis of the rule that a fiduciary requirement is necessary before a plaintiff is able to trace in equity is open to question.137 Although the recent decision of the House of Lords in Foskett v McKeown offers support for the proposition that a fiduciary relationship is not an essential pre-requisite for tracing in equity, the New Zealand Court of Appeal’s application of Lord Templeman’s judgment in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd was subsequently rejected by the Court of Appeal in Bishopsgate Investment Management Ltd v Homan.138 Bishopsgate Investment Management Ltd v Homan In Bishopsgate Investment Management Ltd v Homan the Court of Appeal rejected the submission, based on the judgment of Lord Templeman in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd, that the court should impose an equitable charge on all the assets of a company in liquidation in order to recover pension fund moneys improperly paid into various overdrawn bank accounts. The basis of the Court of Appeal’s judgment in Bishopsgate Investment Management Ltd v Homan is the acceptance of the argument, endorsed by Lord Mustill in Re Goldcorp Exchange Ltd 139, that “equitable tracing, though devised for the protection of trust moneys misapplied, cannot be pursued through an overdrawn and therefore non-existent fund”.140 133

[2001] 1 AC 102 (HL). At 128H. 135 At 113A–F. 136 See Bracken Partners Ltd v Gutteridge (also known as Smalley v Bracken Partners Ltd) [2003] EWHC 1064, [2003] 2 BCLC 84 affirmed by [2003] EWCA Civ 1875, [2004] 1 BCLC 377. See also G Jones (ed), Goff and Jones: The Law of Restitution, 6th edn (Sweet and Maxwell, London, 2002) para 2–023 and Sir Robert Walker, “Tracing After Foskett v McKeown” [2000] Restitution Law Review 573–78. 137 See G Jones (ed), Goff and Jones: The Law of Restitution, 6th edn (Sweet and Maxwell, London, 2002) para 2–031. See also P Birks, “The Necessity of a Unitary Law of Tracing” in R Cranston (ed), Making Commercial Law: Essays in Honour of Roy Goode (Clarendon Press, Oxford, 1997) ch 9 (pp 239–58). See also Elders Pastoral Ltd v Bank of New Zealand [1989] 2 NZLR 180 (NZCA). 138 [1995] Ch 211 (CA). 139 [1995] 1 AC 74 (PC) at 105A–B. 140 [1995] Ch 211 (CA) at 220G (per Dillon LJ). See also 222C (per Leggatt LJ). 134

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196 Paul Eden Conclusion The rejection of the “swollen assets” theory of tracing and the reaffirmation of the “lowest intermediate balance” rule of Roscoe v Winder141 by the Court of Appeal in Bishopsgate Investment Management Ltd v Homan means that—as the Walker & Hall claimants discovered to their cost—the right to trace misapplied assets is likely, in most insolvency situations, to lead to the dead-end of an overdrawn account. It is therefore clear that often the only way in which depositors will be able to recover some or all of their misapplied assets will be to challenge the floating charge directly.

The potential liability of the holders of a floating charge A stranger to a trust who dishonestly helps a trustee to commit a breach of a trust is liable to reimburse the sum involved. In Twinsectra Ltd v Yardley,142 the House of Lords held that in order for individuals to be liable as accessories to a breach of a trust, they must have, first, acted dishonestly by the standards of reasonable and honest people and, secondly, to have been aware that—by the standards of reasonable and honest people—they were acting dishonestly.143 The so-called combined test for dishonesty applied by the House of Lords in Twinsectra Ltd v Yardley, taken from the criminal law,144 has been criticised for being too restrictive.145 Lord Millett, who disagreed with the majority in Twinsectra Ltd v Yardley on the meaning of dishonesty in the context of accessory liability for breach of trust,146 took the opportunity to analyse the true nature of the Quistclose trust—a topic on which he had already expressed himself extra-judicially.147 The academic debate about the true nature of the Quistclose trust is volumi-

141

James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62. [2002] UKHL 12, [2002] 2 AC 166. 143 Although all of the judges regarded Lord Nicholl’s judgment in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (HL) as the classic statement of the modern law, their interpretations varied. 144 R v Ghosh [1982] QB 1053 (CA). 145 See, inter alia, M Thompson, “Criminal Law and Property Law: An Unhappy Combination” [2002] The Conveyancer and Property Lawyer 387–99; R Thornton, “Dishonest Assistance: Guilty Conduct or a Guilty Mind” (2002) 51 Cambridge Law Journal 524–26; N Richardson, “Twinsectra: Knowing Assistance” (2002) 16 Trust Law International 174–81 and G Andrews, “The Redundancy of Dishonest Assistance” [2003] The Conveyancer and Property Lawyer 398–410. 146 Lord Millett would have applied an objective standard of dishonesty, see [2002] UKHL 12, [2002] 2 AC 166 at paras 104–34 (pp 194A–202A). See also US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589 (NZCA). 147 Sir Peter Millett, “The Quistclose Trust: Who Can Enforce It?” (1985) 101 LQR 269–91. 142

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Re Goldcorp Exchange Ltd Revisited 197 nous148 and Lord Millett’s exposition of his views in Twinsectra Ltd v Yardley has undoubtedly re-invigorated this debate.149 The potential liability of the bank in Re Goldcorp Exchange Ltd In Liggett v Kensington150 both Gault J151 and McKay J152 devoted attention to a consideration of whether the bank had actual or constructive knowledge of Goldcorp Exchange Ltd’s breach of trust but did not come to any firm conclusions due to the lack of corroborated evidence on the point. In Re Goldcorp Exchange Ltd Lord Mustill acknowledged the practical impossibility of founding any conclusion on the fragmentary written material available without the benefit of an investigation by the Courts in New Zealand and concluded that “[a]ll the Board can say is that if there is material in support of the more serious allegations, nothing in this opinion will prevent its deployment in a proper manner”.153 The potential liability of the holders of a floating charge after Twinsectra v Yardley Although the so-called combined test for dishonesty, applied by the House of Lords in Twinsectra v Yardley, might initially seem unhelpful to claimants seeking to prove that a bank, holding a floating charge over the assets of a hopelessly insolvent depository of personal property, had dishonestly assisted in the breach of a trust (and it should not be forgotten that the Privy Council in Re Goldcorp Exchange Ltd expressly rejected the argument that there was a fiduciary relationship between the company and its customers), one possible procedural consequence of the House of Lord decision in Twinsectra v Yardley is that it will no longer be possible for a bank to strike out a claim for dishonest assistance “because the subjective element to the combined test will almost always demand a trial at which the defendant can at least be expected to give evidence”.154 In Liggett v Kensington the Bank of New Zealand was clearly anxious that the court should not draw any adverse inferences regarding the bank’s knowledge of Goldcorp Exchange Ltd’s method of trading.155 148 See inter alia R Chambers, Resulting Trusts (Clarendon Press, Oxford, 1997) ch 3 (pp 68–89); J Payne, “Quistclose and Resulting Trusts” in P Birks and F Rose (eds), Restitution and Equity, vol 1: Resulting Trusts and Equitable Compensation (Mansfield Press (an imprint of LLP Professional Publishing), London, 2000) ch 5 pp 77–95 and S Worthington, Proprietary Interests in Commercial Transactions (Clarendon Press, Oxford, 1996) ch 3 (pp 43–70). 149 See, for example, W Swadling (ed), The Quistclose Trust: Critical Essays (Hart Publishing, Oxford, 2004). 150 [1993] 1 NZLR 257 (NZCA). 151 At 283. 152 At 304–5. 153 [1995] 1 AC 74 (PC) at 105E. 154 A Stafford, “Dishonesty: Twinsectra and Beyond” (2002) 18 Professional Negligence 222–23. See also Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28. 155 See [1993] 1 NZLR 257 (NZCA) at 305 lines 40–45 (per McKay J).

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198 Paul Eden

CONCLUSION

The Privy Council’s decision in Re Goldcorp Exchange Ltd, although decided over ten years ago, enjoys something of a totemic status amongst both Chancery and Commercial lawyers. This chapter has sought to re-examine the decision and to challenge some of the hegemonic assertions often associated with the case. The first part of this chapter provided an account of the facts of Re Goldcorp Exchange Ltd as well as a summary of the decisions of both the New Zealand Court of Appeal and the Privy Council. The second part of the chapter considered the effect of Re Goldcorp Exchange Ltd on the ambit of equitable property rights in commercial transactions with particular reference to certainty of subject matter and the remedial constructive trust. The third part of the chapter discussed the role of bailment in Re Goldcorp Exchange Ltd and sought to argue that the common law did not recognise the concept of a bailment where the bailee was authorised to mix and substitute. The fourth part of the chapter was concerned with the right of investors to retain ownership of the monies paid for property rights in fungible goods that fail to arise due to the absence of an identified bulk with particular reference to the recent House of Lords decisions in Foskett v McKeown156 and Twinsectra Ltd v Yardley.157 Because of the problem of tracing though overdrawn accounts, the final part of the chapter also considered, albeit briefly, the potential liability of the holders of a floating charge. In Barclays Bank Ltd v Quistclose Investments Ltd158 Lord Wilberforce quoted with approval the statement of Russell LJ in the Court of Appeal159 that it would be giving a complete windfall to the appellants if they established a right to retain the money. The same instinctive reaction lies the heart of the arguments for the customers in Re Goldcorp Exchange Ltd. It is very difficult to envisage how the holders of a floating charge over the assets of a hopelessly insolvent depository can ever hope to convince a court of the rectitude of their claim to the misappropriated custodial assets. Unfortunately for disappointed depositors, English courts are uncomfortable with openly acknowledging their role in redistributing property rights, as their rejection of the remedy of the remedial constructive trust demonstrates. In Bishopsgate Investments Ltd v Homan160 Dillon LJ wryly characterised the arguments that sought to distinguish the position of banks from other creditors as adopting “the simple populist approach that pensioners, like widows and orphans are ‘goodies’ while banks, like usurers, are ‘baddies’ and so the court

156 157 158 159 160

[2001] 1 AC 102 (HL). [2002] UKHL 12, [2002] 2 AC 164 (HL). [1970] AC 567 (HL) at 582F. [1968] Ch 540 (CA) at 563D–E. [1995] Ch 211 (CA).

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Re Goldcorp Exchange Ltd Revisited 199 should use its powers to ensure that the goodies are paid in full ahead of the baddies”.161 Given the importance of depositories to commercial activities in the farming and oil industries, the increasing dematerialisation and immobilisation of securities and the continuing desire of investors to hold gold bullion as part of their investment portfolios, it is hoped that this paper has offered some clarity regarding the ambit of the property rights of depositors in such schemes without ever resorting to the simple populist approach of “goodies” and “baddies”.

161

At 219H–220A.

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10

The Regulation of Long Residential Leases MARTIN DAVEY

SHORT AND LONG LEASES — INTRODUCTION

There is a sharp divide between short and long term residential leases.1 Short residential leases are traditionally defined as leases not exceeding 21 years. They are usually granted at a rack rent and the parties are characterised, in law and everyday discourse, as “landlord and tenant”. They are governed by the general “common law” of landlord and tenant, comprising a mix of case and statute law, and from time to time since 1915 have been subject to extensive regulatory codes of rent control and security of tenure. These regulatory codes were enacted for specific instrumental welfare purposes to negate the possibility of exploitation of tenants by landlords.2 As the share of the total housing market occupied by the private rented sector (PRS) has diminished and the political climate has changed, rent regulation has all but disappeared from the PRS and there is now for the most part minimal security of tenure beyond the contractually agreed term.3 Marked policy divisions between the major political parties have melted away and been replaced by a common policy centred on revival of a quality PRS. The former politically polarised tenant/Labour—landlord/Conservative model no longer applies. Regulation is now focussed on issues such as quality of product and property management.4 1 See P Sparkes, A New Landlord and Tenant (Hart Publishing, Oxford, 2001) at p vii, “If there is one central truth of this book it is the fundamental distinction between long and short leases”. 2 On regulation of unfair contracts see H Collins, Regulating Contracts (OUP, Oxford, 1999) ch 11. On the issue of regulation and its effects generally see C Sunstein, After The Rights Revolution: Reconceiving the Regulatory State (Harvard University Press, Cambridge, MA, 1990) at p 32; AI Ogus, Regulation: Legal Form and Economic Theory (Clarendon Press, Oxford, 1994) pp 55–56. 3 Save for lettings by housing associations––most of which are registered social landlords (RSL)––the bulk of lettings in the private rented sector (PRS) are now Housing Act 1988 assured shorthold tenancies. 4 Quality and Choice: A Decent Home for All (DETR, HMSO, London, 2000). See further Improving the Standard of Residential Leasehold Management, Consultation Paper (London, Department for Transport, Local Government and the Regions, April 2002) and the Housing Act 2004. The Law Commission Report, Renting Homes (Law Com No 284, 2003) is based on a similar consumer oriented approach to housing law.

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204 Martin Davey By contrast long residential leases of houses or flats are leases in excess of 21 years and are invariably for terms of 99 or 999 years. They will be granted for a premium and be subject to a ground rent that may or may not be capable of revision other than by agreement. The relationship of the parties here, although formally that of landlord and tenant, is somewhat artificial. The “tenant” (or “leaseholder” as such a tenant is commonly known as) considers himself or herself to be a home owner and more akin to a freeholder. Thus in reality both parties are “owners” (albeit of different estates) whilst at the same time they are in a landlord and tenant relationship. That relationship, like that of landlord and tenant under a short lease, is governed essentially by contractual rights and obligations and relevant principles of property law. The main statutory codes of protection enacted throughout the twentieth century, including the Rent Acts, excluded long leases from their ambit. Such lessees were considered to have sufficient security by virtue of the long contractual term whilst the rent was limited to a ground rent and therefore not in need of regulation. Thus it might be argued that those who buy houses on long leases do so with their eyes open and in the knowledge that one day the lease will come to an end.5 But this is to ignore the fact that in many areas where the building lease system was predominant the purchaser had no choice between the freehold and leasehold. Many landowners have long used their superior bargaining position to sell houses on a leasehold basis only. It followed that by the 1960s, in areas, such as London and South Wales, where the 99-year term was typical, a long leaseholder, whose lease was granted in Victorian times was faced with losing the home in which he or she had a considerable financial and emotional investment.6 Any renewal was at the discretion of the landlord who could extract a fresh premium. This bore harshly on a leaseholder who had already paid a sum that was hardly less than he or she would have paid at the time for the freehold.

LONG LEASES OF HOUSES — ENFRANCHISEMENT

A long campaign by successive aggrieved leaseholders culminated in the Leasehold Reform Act 1967.7 This measure gave a qualifying leaseholder under a long lease of a dwelling house the statutory right to obtain an extended lease

5 But see I Cole, et al, The Impact of Leasehold Reform: Flat Dwellers’ Experiences of Enfranchisement and Lease Renewal (Department of the Environment Transport and The Regions, London, 1998) where the researchers found that “many flat dwellers have a poor understanding of their legal status, believing that they own their property in the same way as owners or buyers of freehold properties.” 6 On the “personal” nature of property see M Radin, “Residential Rent Control” (1986) 15 Philosophy and Public Affairs, 350–80. 7 See G Griffiths, “The Hundred Years War” [2003] Conv 289.

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The Regulation of Long Residential Leases 205 or to “enfranchise”, that is to acquire the freehold of the house at a very favourable price.8

LONG LEASES OF FLATS

The problems By contrast to long leases of houses, long leases of flats created their own peculiar problems in addition to that of the “wasting asset.” Even more than purchasers of houses in some areas, purchasers of flats anywhere in England or Wales had no choice in fact or law to buy other than on a long lease.9 The reason of course, for this lack of choice, is the well known limitations of the common law in dealing with the issues arising from long term living arrangements in a multi-occupied building or development. A flat is part of a building. Somebody has to maintain the building and the “common parts” and to provide any necessary “services” and somebody has to pay for that maintenance and those services. Until the advent of commonhold, leasehold has been the only way of dealing with these issues because positive obligations, to support and maintain etc and to supply and pay for services, do not run with freehold land so as to bind successors in title to the original contracting owners.10 Thus long leases usually provide that the landlord will maintain the building and common parts and provide specified services and that the tenants of the individual units will reimburse the landlord through a “service charge”. However, the structures to give effect to this arrangement are many and varied. Therein lies the potential for conflict. In some cases the freeholder will retain personal control and management of the building or hand over management to a separate or, more likely, associated company that may or may not be a party to the individual flat leases. In other cases the freehold will be transferred directly to such a management company. This company might be independent of the leaseholders or it might be a tenants’ management company of which all the flat owners are members.

8 Later amending statutes that brought higher value properties within the right provided for a different basis for calculation of the purchase price which results in a higher price being payable. The qualifying conditions for enfranchisement or lease extension were subsequently relaxed, most recently by the Commonhold and Leasehold Reform Act (CLRA) 2002. 9 See further D Clarke, “Occupying ‘Cheek by Jowl’: Property Issues Arising From Communal Living” in E Cooke (ed), Modern Studies in Property Law, vol I: Property 2000 (Hart Publishing, Oxford, 2001) 388 n 70, noting that building societies had resolutely set their faces against lending on freehold flats. More than half of all leasehold flats are in London and the South East. 200,000 of the million flat owners in England and Wales have a local authority freeholder. Residential Leasehold Reform in England and Wales: A Consultation Paper (Department of the Environment, London, 1998). The redevelopment of many city centres in the last 10 years or so as places to live has vastly increased the number of long leasehold flat developments. 10 Rhone v Stephens [1994] 2 AC 310.

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206 Martin Davey Thus in the case of long leases of flats where there is an unrelated freeholder, there is a stark contrast between the interests of landlord and leaseholder. For the latter the property is his home in which he will have staked a considerable investment for a long-term interest. But what does ownership of the freehold mean to the landlord, especially where the flat leases have a long period to run?11 Its capital value is low, reflecting the low ground rent, so why would anybody want to be a landlord in these circumstances? The answer lies in the management of the services. In other words the freehold is a source of income and as such has an investment value. But this suggests of course that, for the business to be profitable, leaseholders must be paying through their service charge for more than the cost of the services to the landlord including his management expenses; this is the profit element. Some landlords also make a profit through placing insurance of the building with an insurer who pays a commission to the landlord or by placing contracts for repairs and other services with an associated company. Thus the leasehold structure of flat ownership was ripe for exploitation and so it proved to be the case. The problems are legion and were first officially identified in a Report on the Management of Privately Owned Blocks of Flats published in 1985.12 They included: • • • •

delays in dealing with repairs; the levying of excessive charges; a lack of consultation and provision of information; a lack of sinking or contingency funds for infrequent but expensive major schemes of repair and renovation; • the different levels of interest exhibited by absentee investor leaseholders and occupational leaseholders. Other legal problems identified included uncertainties over enforcement of obligations, the need for cheap and convenient resolution of disputes, the unresolved questions of ownership and taxation of sinking funds and the means of remedying defective leases. The solutions Since 1972 Parliament has sought to regulate this imbalance between landlord and leaseholder by a series of piecemeal reforms. This process culminated in the 11 Because flat development did not occur in the UK on any significant scale until after the Second World War and because leases are likely to be for a minimum of 99 years the wasting asset problem is at present only likely to affect lessees under the earliest of such schemes. See Leasehold Reform in England and Wales (1966) Cmnd 2916. This was one reason why there was not considered to be a pressing need for enfranchisement of flats until 1993. 12 The “Nugee Report” as it came to be known. The Report drew also on the findings of a report of the RICS Working Party on the Management of Blocks of Flats issued in January 1983.

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The Regulation of Long Residential Leases 207 CLRA 2002. Part 1 of that Act introduces a new form of shared ownership for flats—commonhold—whereby the flat owner or, to use the new terminology, “unit-holder” will own the freehold of his or her unit.13 At the same time the freehold of the “common parts” of the development will be owned and managed by a corporate body,14 the commonhold association, which comprises the unit holders of the individual units. It will do so in accordance with a “commonhold community statement”.15 Thus long leases have no place in this scheme.16 Nevertheless, in the absence of more radical reform, it will be some considerable time, if ever, before the long leasehold system is eclipsed by commonhold. Under the 2002 Act commonhold is applicable only to those new developments that choose to adopt it, whilst conversion of existing leasehold schemes is rendered problematic by the need for the consent of the freeholder and of all leaseholders. Thus commonhold does not address the plight of leaseholders under existing and future leasehold schemes. Hence the second feature of the Act which is a reform and extension of the the pre-CLRA 2002 law governing long residential leases in an attempt to provide a more or less comprehensive regulatory code. The remainder of this chapter critically examines the nature and coherence of that code.

Long leases of flats—a comprehensive code? The wasting asset problem A significant flaw in the 1967 Act was that it was confined, for unconvincing reasons, to long leases of houses and did not extend to individual flats or maisonettes. The logical solution therefore was to deal with the wasting asset problem by extending the principle of enfranchisement to flats. This was achieved by the Leasehold Reform Housing and Urban Development Act (LRHUDA) 1993 which gave a qualifying leaseholder, under a tenancy at a low rent or for a particularly long term, the right to obtain a new lease for a period equivalent to the unexpired portion of the existing lease plus 90 years, at a 13 For an examination of commonhold and a comparison with the solution adopted in other jurisdictions see Clarke above, p 401. 14 This will be a private company limited by guarantee whose membership is restricted to all the unit holders in the development. CLRA 2002, s 34. 15 Above, ss 31–34. 16 The scheme is not confined to residential premises and there is provision for conversion, with the consent of the freeholder and all the leaseholders, from leasehold to commonhold. Above, s 3. For the background to commonhold reform in England and Wales see Commonhold and Leasehold Reform: Draft Bill and Consultation Paper Cm 4843 August 2000, where in a foreword, the Ministers involved said that for new developments commonhold “will provide a complete answer to many of the problems that have plagued flat-owners over the decades.” For a sceptical look at this see P Kenny, “Running a Commonhold” [2003] Conv 3–9.

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208 Martin Davey peppercorn rent but on payment of a market value premium, in substitution for the existing lease.17 The management control problem—enfranchisement Individual lease extension tackled the wasting asset problem but failed to address the management issues. Thus the 1993 Act also introduced a scheme whereby qualifying leaseholders under long leases of flats or maisonettes at a low rent could acquire the freehold of their block together with any intermediate leases. They could thus become their own landlord. The fact that the beneficiaries of the regulatory code were themselves property owners, who had to pay compensation for the privilege, undoubtedly eased all Party acceptance of this redistribution of resources. Enfranchisement is thus designed to solve the problem of ownership and at the same time the matters of control and management. However, the right proved to be notoriously complex.18 Subsequent research for the Government19 surprisingly showed that of the two remedies introduced by the 1993 Act the more complex one of collective enfranchisement proved to be that most favoured by leaseholders. It was those leaseholders whose leases had a relatively short time left on their lease who were more likely to pursue the less complicated right to obtain an individual extended lease. Those who did seek to enfranchise collectively did so predominantly because of problems with current living conditions associated with high levels of service and other property charges; maintenance and management problems with the block of flats; and poor communication with the freeholder or managing agent. Perhaps unsurprisingly leaseholders of small blocks of flats were the most likely to succeed. Success tended to be associated with circumstances where there was a good co-operative relationship with the freeholder, a sense of commitment by leaseholders, some “insider knowledge” of the process and sufficient financial resources to pursue it. In other cases many leaseholders abandoned the process before completion for a variety of reasons. These included intransigence and obstruction by freeholders, the legal complexities, a paucity of informed professional advice and representation and the uncertainty of the costs involved. Some of these problems were addressed by the CLRA 2002, which abolished or relaxed some of the restrictive tests of the 1993 Act including the residence requirement and the price formula respectively. However, when the relevant provision comes into force the enfranchisement process will be conducted by a Right to Enfranchise (RTE) Company which will be set up on the same lines as 17 See pt 1, ch 2. The Act provides in practice for the lease to be renewable again at a peppercorn rent (and no premium) ad infinitum following the first extension; in effect a perpetually renewable lease at a peppercorn rent. See Clarke above at p 399. The conditions were relaxed by the CLRA 2002. 18 See Clarke, Leasehold Enfranchisement––The New Law (Jordans, Bristol, 1993) and Hague Leasehold Enfranchisement, above. 19 See I Cole, et al, above.

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The Regulation of Long Residential Leases 209 a commonhold association (see above) and be able to manage the building after enfranchisement. All qualifying tenants in the block must be given the opportunity to join the company and a claim to enfranchise cannot be made until the company has given all qualifying tenants the opportunity to participate in the enfranchisement claim. The objective of the 2002 Act reforms is to enable leaseholders to move smoothly from enfranchisement to conversion to the nirvana of commonhold. Paradoxically the RTE changes are likely to make what remains a formidably complex and potentially expensive process even more complex.20 It follows therefore that collective enfranchisement has not proved, and is unlikely to prove, to be the solution to the problems encountered by long leaseholders of flats. As noted above, research has shown that the main concerns of those seeking to enfranchise were escalating or unreasonably high service charges, including management charges and the general feeling that freeholders/managing agents were obtaining excess profits. In other cases freeholders had failed to maintain the structure of the building or had been absent or uncommunicative with leaseholders. This raises the issue of whether leaseholders might pursue more effective remedies if they are unable or unwilling to enfranchise. Appointment of a manager Despite the existence of a service charge residential management code, approved by the Secretaries of State for England and Wales,21 there are many landlords and managers who operate outside the good practice guidelines of that code. Tenants who were unhappy with the management of their building were first given the right to seek the appointment of a manager by Part II of the Landlord and Tenant Act 1987.22 The relevant part of the Act was amended significantly by the Housing Act 1996 and was further amended by the CLRA 2002.23 The power to appoint the manager was transferred from the county court to the LVT by the 1996 Act and is only exercisable if the tenant is able to establish that one of the statutory grounds is satisfied. These all relate to some fault, usually on the part of the existing landlord, including the levying of unreasonable service charges or non-compliance with an approved Code of Practice. An appointed manager is empowered to carry out such functions of a manager and/or receiver as the tribunal thinks fit. The order may provide for remuneration of the manager. Once appointed the manager is responsible to the Tribunal and does not stand in the shoes of the landlord or tenant.24 20

Hague, above, pp 31–32 and 39–40. The code, published by the Royal Institution of Chartered Surveyors, is approved under s 87 of the LRHUDA 1993. 22 Ss 21–24. The right does not apply as against an exempt or “resident” landlord. 23 Ss 160 and 161. 24 See Maunder-Taylor v Blacquiere [2002] EWCA Civ 1633. 21

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210 Martin Davey No-fault right to manage Unfortunately these powers have proved less than effective, especially against landlords who are well advised and professionally represented and thus well positioned to thwart the efforts of leaseholders. The Government has therefore introduced, in Chapter 1 of Part 2 of the CLRA 2002, a new right to manage (RTM) without leaseholders having to prove fault on the part of their landlord or to pay any compensation. The right, which cannot be excluded by contract or otherwise, is exercisable by an RTM company, limited by guarantee, formed for that purpose by qualifying leaseholders.25 Somewhat surprisingly a landlord is eligible for membership of the RTM Company. The new manager must give notice to any existing contractors. However there is no provision for the termination of existing contracts! Presumably they are frustrated but this is by no means clear. Any accrued and uncommitted service charges in hand at takeover must be transferred to the new manager.26 The manager takes over the management functions (that is repairs, services, maintenance, insurance and management) of all landlords including any intermediate landlords of the block. The new manager only becomes manager in respect of flats of qualifying tenants. It does not have rights of re-entry or forfeiture but it does acquire the right, subject to notice to the landlord, to give necessary consents, e.g. as to assignments, alterations, improvements etc. However, the landlord’s obligations under sections 18–30 of the Landlord and Tenant Act 1985 become those of the RTM Company thus raising the possibility of a claim against the RTM Company by a tenant (or landlord?). The new RTM provisions are very fundamental because they will enable tenants who are unhappy with the management of their building to be able to take over the management without going to the trouble and expense of enfranchising. There is limited liability for the landlord’s costs. A managing agent will almost certainly be required in all but the smallest of schemes. However, as indicated above, leaseholders will need to remember that management brings with it onerous responsibilities. Regulation of service charges Service charges continue to loom large in leaseholders’ lists of complaints. But this issue has been addressed for many years by a legislative code. So what has gone wrong? Has it failed? The regulatory code governing service charges in all residential leases, not just long leases, has been extended on a number of 25 The requirement of the RTM provisions closely mirror those applicable to collective enfranchisement. See further The Right To Manage (Companies) (Memorandum and Articles of Association) (England) Regulations SI 2120/2003 and The Right to Manage (Prescribed Particulars and Forms) (England) Regulations 2003 SI 1988/2003. 26 In the event of failure to agree the amounts a Leasehold Valuation Tribunal (LVT) can determine the issue. CLRA 2002, s 94(3).

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The Regulation of Long Residential Leases 211 occasions since it first appeared in 1972, most recently by the CLRA 2002. It is now contained in sections sections 18–30 of the Landlord and Tenant Act 1985 which govern the position where a variable service charge is payable to the landlord of a “dwelling” as part of or in addition to rent.27 It is supplemented by an extensive set of regulations. The meaning of service charge The code contained in the 1985 Act is structured on three levels. The first level provides for the definition of service charge. This is defined as an amount payable by a tenant of a dwelling as part of or in addition to the rent— (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvement or insurance or the landlord’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs (including overheads).28 Thus the definition does not encompass a “fixed” service charge of the sort found in Rent Act 1977 or Housing Act 1988 short term tenancies. The word “improvement” was added to the definition of service charge by the 2002 Act.29 This extension of the definition is of particular relevance to local authority owned buildings where tenants have exercised the right to buy a long lease. Such leases will usually include a right to improve by the landlord. This can come as a shock to leaseholders when faced with demands for contributions towards the costs of improvements to the block or the rest of the estate. The test of reasonableness The second level of regulation provides that once a payment is within the meaning of “service charge”, relevant costs shall be taken into account in determining the amount of a service charge for a period (a) only to the extent that they are reasonably incurred; and where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard; 27 Service charges were first regulated by Housing Finance Act 1972, ss 90 and 91. S 91A was inserted by s 124 Housing Act 1974. These provisions were extended by s 136 and sched 19 Housing Act 1980 and were eventually consolidated in the Landlord and Tenant Act 1985. Ss 20B and 20C were added by the Landlord and Tenant Act 1987 and following amendments by the Housing Act 1996 further changes have been made by the Commonhold and Leasehold Reform Act 2002, ss 151–55. 28 Landlord and Tenant Act 1985, s 18 (1). For the meaning of relevant costs see s 18 (2)(3)). 29 Sched 9 para 7. This amendment to s 18 only applies in respect of improvement costs incurred on or after 30 September 2003. (The Commonhold and Leasehold Reform Act 2002 (Commencement No 2 and Savings (England) Order 2003, SI 1986/2003 sched 2 para 2). This is an exception to the general rule that where an application is made to an LVT on or after that date it can relates to service charges or costs incurred before or on or after the operative date.

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212 Martin Davey and the amount payable shall be limited accordingly.30 Thus the crux of the test is the concept of “reasonableness.” But who determines what is reasonable? This is the third level of the code. Who decides? Until 1 September 1997 jurisdiction was vested solely in the county court. However, in 1996 the Government decided that it would be more appropriate for this jurisdiction to be normally exercised by what was considered to be the more accessible and user friendly LVT.31 Not only did this body contain members with the necessary expertise but also each party would bear its own costs. Thus there was no danger that a party would be ordered to pay another party’s costs.32 It was therefore provided that from 1 September 1997 a landlord or tenant could make an application to the LVT for a determination whether (a) costs incurred for services etc. were reasonably incurred; (b) whether services or works for which costs were incurred were of a reasonable standard; (c) whether an amount payable before costs were incurred was reasonable.33 This did not mean that the county court no longer had jurisdiction over service charges. The court retained a parallel jurisdiction to that of the LVT.34 However, where in court proceedings (eg an action for recovery of an unpaid service charge) a determination was required on a matter that fell within the remit of the LVT, the court was empowered to transfer, by order, so much of the proceedings as related to that matter to the LVT. When the LVT had determined the matter the court could give effect to that determination in an order of the court. Furthermore, any decision of an LVT could, with the permission of the county court, be enforced in the same way as a court order.35

30

LTA 1985 s 19(1). The membership of the LVT is drawn from the rent assessment panels from which Rent Assessment Committees are also drawn. See CLRA 2002, s 173 and Rent Act 1977, sched 10. Appeal from the LVT lies to the Lands Tribunal with leave of the LVT or the Lands Tribunal; CLRA 2002, s 175. 32 This generosity did not extend to fees. Thus unlike the enfranchisement jurisdiction of the LVT or the jurisdiction exercised by its members as rent assessment committees under the Rent Act 1977 and the Housing Act 1988 a fee was payable for applications under the 1985 Act. See the Leasehold Valuation Tribunals (Fees) (England) Regulations SI 2098/2003. This seems a regrettable step. For the limited power of the LVT, and of the Lands Tribunal on appeal from the LVT, to award costs against a party who has acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably see CLRA 2002, s 174, sched 12 para 10 and s 175. 33 LTA 1985 s 19(2A). The jurisdiction of the LVT also extended to prospective costs of services or works. See s 19 (2B). LVT determinations were enforceable as a court order with permission of the county court. S31C. 34 Above, s 19 (4). Save that this did not seem to extend to prospective charges. 35 Above, s 31C of the 1985 Act. 31

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The Regulation of Long Residential Leases 213 Jurisdiction and powers of the LVT Unfortunately, until 30 September 2003, the hands of the LVT were illogically tied in so far as its jurisdiction was limited to the narrow issue of determining whether service charge costs were reasonably incurred and/or whether works were of a reasonable standard.36 It was held that on the wording of the LTA 1985 as it then stood, the LVT did not have jurisdiction over liability issues. Such matters, which depended on the construction of the lease and the application of case or statutory law were therefore solely within the remit of the courts.37 This anomaly has been removed. Since the above date the LVT’s jurisdiction has extended beyond its former narrow remit and now extends to all aspects of the service charge including liability and reasonableness.38 The parallel jurisdiction of the county court has been retained and extended.39 Under the new law payment in whole or in part by the leaseholder of the disputed service charge is no longer a bar to the LVT having jurisdiction.40 The Act as amended now makes it clear that payment will not preclude an application to the court or LVT.41 Furthermore although, as before, no application may be made in respect of any matter which has been agreed or admitted by the tenant, it is provided that the tenant will not be taken to have agreed or admitted any matter by reason only of having made any payment.42 An application will be precluded if the matter has been or is to be referred to arbitration under a post-dispute arbitration agreement.43 This is a change in the law, since 30 September 2003, because it was arguable that until then the bar applied where there was a general arbitration clause contained in the lease even if, in fact, neither the landlord nor the tenant proposed to go to arbitration.44 36

Above, ss19 (2A) (2B) of the 1985 Act. Aylesbond Estates Ltd v MacMillan [1999] L & TR 127 (CA); Gilje v Charlegrove Securities Ltd [2002] 16 EG 182 (CA). For an examination of problems of LVT jurisdiction before 30 September 2003 see N Roberts, “The Leasehold Valuation Tribunals and Service Charges––Some Problems of Jurisdiction” [2001] Conv 61. 38 LTA 1985, s 27A(1)(3). The new law applies to all applications made on or after 30 September 2003 irrespective of whether the service charge costs were payable or incurred before or after the operative date (SI 2003 No 1986 reg 2(c)). Ss 19(2A) and 19(2B) are repealed. It is unclear how many years the LVT may go back when dealing with service charges. If reserved as rent the limitation period under s 19 Limitation Act 1980 is 6 years. But on the basis that the lease is a specialty it could be 12 years (Above, s 2). For the position before CLRA 2002 see Daejan Properties Ltd v London Leasehold Valuation Tribunal above. 39 Ie so as to including prospective charges. LTA 1985 s 27A (7). 40 S 27A (2) reversing the controversial decision in Daejan Properties Ltd v London Leasehold Valuation Tribunal [2002] L & T R 5 (CA). The court held that because s 19(2A) LTA 1985 referred to an application being made in respect of a service charge which was “alleged to be payable.” This wording imported futurity so that there was no jurisdiction to determine disputes as to service charges which had already been paid. 41 LTA 1985, s 27A(2). 42 Above, s 27A(4)(a). 43 Above, s 27A(4)(b). Probably the agreement must be in writing (Arbitration Act 1996 s 6, referred to by s 38 of the 1985 Act). 44 Under now repealed LTA 1985, s 19 (2c)(b). 37

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214 Martin Davey The LVT is also empowered to order that all or any part of the landlord’s costs in connection with proceedings before the LVT are not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant.45 Thus in Iperion Investments v Broadwalk House Residents Ltd46 a landlord’s costs in unsuccessful litigation against the tenant were disallowed (by the court) even though they were recoverable as a service charge under the terms of the lease and were reasonably incurred for the purposes of section 19.47 Because the task of the LVT now includes the power to determine whether a service charge is payable it can construe the lease to determine whether the landlord is permitted to charge for the item in question. This can involve difficult issues of construction as to the express and implied terms of the lease.48 However, if the tenant’s liability is uncertain from the wording of the lease, even read as a whole, the construction of the service charge clause will be against the landlord.49 We have already seen that many of the complaints of leaseholders relate to what they consider to be excessive profits being made by landlords on services. Indeed consistently with the restrictive construction approach, charging provisions in respect of services etc should be taken to relate to the landlord’s actual costs and not be construed so as to include a profit element.50 Thus it is arguable that insurance commission received by the landlord from the insurer when placing insurance should be deducted from the service charge costs payable by the tenant in respect of the insurance. Other complaints relate to excessive management charges. If a lease expressly provides, the management fees of a managing agent employed by the landlord are recoverable provided the managing agent is not the “alter ego” of the landlord. Thus in Finchbourne Ltd v Rodrigues 51 the fees were disallowed where the managing agent was a mere nominee of the landlord. By contrast in Skilleter v Charles52 the landlord was held entitled to recover the managing agent’s fees even though the managing agent was a company formed by the landlord and his wife after the leases were granted, since the company also managed other properties. However, there may be a distinction where the landlord is a tenants’ management company. Thus Finchbourne was distinguished where the land45

LTA 1985, s 20C. (1995) 27 HLR (CA). As to whether legal and other professional costs are recoverable under the terms of the lease see further Delahay v Matlodge [1987] CLY 2158; Sella House v Mears [1989] 1 EGLR 65; Morgan v Stainer [1993] EGCS 162, Ch D; St Mary’s Mansions Ltd v Limegate Investment Co Ltd v Sarruf [2002] EWCA Civ 1491. 48 See for example Rapid Results College v Angell (1986) 277 EG 856 (affirming (1985) 275 EG 247) and compare Billson v Tristrem [2000] L & TR 220 CA. 49 See eg Gilje v Charlegrove Securities Ltd [2001] EWCA Civ 1777; [2002] L&TR 537. 50 See Jollybird Ltd v Fairzone Ltd (1990) 43 EG 63 (CA), concerning calculation of sums payable for fuel supplies. 51 [1976] 3 All ER 581. 52 [1992] 13 EG 113 (CA). 46 47

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The Regulation of Long Residential Leases 215 lord was a tenants’ association and six tenants/shareholders/directors (being persons of independent mind) were appointed as managing agents and issued certificates of expenditure.53 Similarly in Embassy Court Residents’ Association v Lipman54 where the landlord was a residents company with no funds of its own. It was held that a term should be implied to the effect that it had power to incur necessary administrative expenses (including the cost of employing managing agents) and to recover these from the service charge. This creates difficulties if a leaseholder successfully challenges past service charge costs that were levied by the company whose assets are derived solely from service charge payments. An argument that if the services do not reach a reasonable standard (as required by s 19(1)) the whole costs of the item should be disallowed was rejected as draconian in Yorkbrook Investments Ltd v Batten.55 Instead a reduction should be allowed and, in this respect, it should only be in very exceptional cases that a tenant’s claim for a reduction is rejected as “de minimis”. Conversely, where the tenant’s objection was that proposed works by the landlord were far in excess of what was required, it was held that his proper course of action was to seek a declaration to that effect under section 19(1). It was not appropriate to seek an injunction to restrain the landlord from carrying out the works.56 If an interim payment had already been made, a repayment could be obtained under section 19(2) following any declaration as to unreasonableness. But suppose the LVT or court rules that service charge costs are unreasonable57 and the tenant has already paid them other than by way of an interim service charge? It is arguable that the tenant will still be able to obtain reimbursement from the landlord by virtue of section 19(2).58 However, in practice a tenant is more likely to recover what is owing to him by way of set off through withholding future payments. Consultation requirements The Landlord and Tenant Act 1985, provided that where costs incurred on the carrying out of works on a building exceeded a prescribed amount, the excess was not to be taken into account unless a consultation procedure set out in the Act had 53

New Pinehurst Residence Association (Cambridge) v Silow [1988] 1 EGLR 227 (CA). (1984) 271 EG 545. 55 (1986) 52 P & CR 51 (CA) YDM. 56 Hi-Lift Elevator Services v Temple (1995) 70 P & CR 620 (CA). 57 Under Landlord and Tenant Act 1985, s 27A as inserted by CLRA 2002, s 155. 58 But see the suggestion in Daejan Properties Ltd v London Leasehold Valuation Tribunal (above) that any such claim would be a restitutionary claim with the implication that this could possibly be subject to a defence of change of position by the landlord. The relevant dicta in that case were made without reference to s 19(2) or to the decision in Hi-Lift Elevator Services v Temple (above). See further NRoberts, “Service Charges, Daejan and Claims in Restitution” [2003] Conv 380 for a possible argument that despite the 2002 Act successful tenant applicants will still be without any effective means of recovering overpayment. 54

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216 Martin Davey been complied with.59 The court had power to dispense with all or any of the requirements of that procedure. The court’s dispensation power only came into play if the court was satisfied that the landlord had acted reasonably.60 There were separate prescribed requirements where there was a recognised tenants’ association. In the latter case the association could propose the names of persons from whom it considered that estimates should be obtained. The weakness of this process from the tenant’s point of view was that the obligation on the landlord “to have regard to any observations received” meant no more than that. Thus for example there was no express requirement to accept the lowest estimate.61 By 2000 a number of problems with these requirements had arisen. They were broadly speaking twofold. The first was that the requirements only applied to specific works and did not catch contracts for ongoing services. Landlords might therefore enter into long term contracts for the provision of works or services that would cost service charge payers considerably more than the prescribed amount over a period of time but these would not be caught by the section 20 requirements. The Government found evidence of abuse in this area “with unscrupulous landlords entering into long term contracts with associates at uncompetitive prices.”62 The second problem was that local authorities had found that the requirements of section 20, in so far as they caught works were in conflict with other requirements that compelled authorities to award contracts on a “best value” basis and in accordance with bulk purchase PFI projects. It was with these matters in mind that the Government proposed the requirements now to be found in a new section 20 and 20ZA of the Landlord and Tenant Act 1985.63 The outcome is that the relatively simple requirements of the former section 20 have now been replaced by complex and detailed requirements of mind boggling complexity! The two new lengthy sections are supplemented by regulations that are thirty pages long and contain four schedules.64 Thus, as from 31 October 2003, the former consultation requirements are recast and extended. As before they apply to tenants and any recognised tenants’ association. They continue to apply in relation to qualifying works if the qualifying works exceed the appropriate amount and now extend to the case where costs under a qualifying long term agreement exceed a specified amount.65 The 59 These requirements are additional to the requirement of reasonableness in s 19 LTA 1985. The prescribed amount was £50 multiplied by the number of flats in the building or £1000 whichever was the greater: s 20(3). 60 See Martin v Maryland Estates Ltd [1999] 26 EG 151 (CA). 61 Wandsworth LBC v Griffin [2000] 26 EG 147 (LT). However acceptance of the lowest tender tends to indicate that the costs incurred were reasonable. 62 Revised Procedures for Consulting Service Charge Payers about Service Charges, Consultation on Draft Regulations (Office of the Deputy Prime Minister, August 2002). 63 Inserted by s 151 2002 Act. 64 Service Charges (England & Wales) (Consultation Requirements) Regulations 1987/2003. 65 S 20 as originally enacted will continue to apply in relation to works begun or notices given before 31 October 2003. There are exceptions to the definition of qualifying long-term agreement including local authority management contracts.

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The Regulation of Long Residential Leases 217 formula for the costs threshold now relates to the amount payable by individual service charge payers rather than to the total cost of the job.66 The entitlement is to be consulted before estimates are obtained and afterwards.67 In the case of non-public works etc contracts, the tenants are entitled to nominate one or more contractors from whom the landlord must obtain an estimate. If the lowest estimate or that of a nominated contractor is not accepted the landlord has to provide reasons for choosing the preferred contractor. The sanction for non-compliance with the section 20 procedures is that the tenants’ contributions to the cost will be limited to set amounts. However, an LVT but not a court (reversing the previous position) has jurisdiction to dispense with all or any of the consultation requirements “if satisfied that it is reasonable” so to do.68 This can be before or after the works are carried out or the long term agreement is entered into. Unlike the court before it, the LVT’s discretion is not subject to a prior requirement that the landlord has acted reasonably. There is still much scope for argument as to how and when the new rules apply. Works may be done in stages over a period of time and it might prove difficult to determine at what point and how the regulations need to be satisfied. It is not clear how and when batches of work are to be divided from one another either in relation to the limit or for ascertaining whether the consultation requirements are satisfied.69 As before, the duty to have regard to observations means that a landlord cannot ignore the response but he could give it no weight. Administration charges The CLRA 2002 contains a new but similar extension to “administration charges” of the existing and amended statutory provisions relating to “service charges”.70 The general idea is to cover certain specified charges which would (or might) fall outside “services, repairs, maintenance, improvements . . . insurance or . . . management”. It is designed to catch matters such as consents, licences, provision of letters etc.; penalty payments for late rent payments and so on for which a landlord might otherwise seek to charge an inordinate amount.

66 LTA 1985, s 20(6)(7)). The limits are £250 per lessee or in the case of services provided under long term agreements (ie beyond 12 months) £100 per lessee. It has been pointed out by the Campaign for the Abolition of Residential Leasehold that this raises the consultation level by 400% making it less likely that leaseholders in large blocks will ever need to be consulted. 67 There may be an obligation to re-consult if additional works are found to be necessary: Martin v Maryland Estates Ltd [1999] 2 EGLR 53 (CA). 68 LTA 1985, s 20Z(1). 69 Martin v Maryland Estates Ltd [1999] 2 EGLR 53 (CA). 70 CLRA 2002, s 158 and Sch 11.

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218 Martin Davey Variation of leases Allied to the question of disputes over service charges is that of difficulty caused by defective leases that may or may not have been deliberately drafted in that way. For example leases in a development may be drafted in such a way that the total contributions of individual tenants exceeds 100% of the service costs. The Nugee Committee Report in 1985 identified difficulties in amending defective long leases of flats and made proposals to deal with this problem.71 This led to the introduction of a statutory power in Part IV of the Landlord and Tenant Act 1987 enabling the county court to vary defective leases (as defined). Part IV has now been amended by the CLRA 200272 and the jurisdiction to vary was transferred from the court to the LVT from 30 September 2003. The rationale for this transfer of jurisdiction was cheapness and speed. Unfortunately the changes to the substantive provisions governing the grounds of variation were relatively minor and many of the suggestions in the White Paper of 2000 were not enacted. Provision is made for group applications and for other affected leases to be amended at the same time. If the grounds of the application are made out the LVT can by order vary a lease (or leases) in the terms requested or in such other way as it thinks fit. It can also as an alternative order a variation to be made by the parties to a lease themselves.73 Variation will most likely be sought on the sale of a flat where the mortgagee will insist on it as a condition of the loan. Insurance Where a long lease of a house requires the leaseholder to insure the house with an insurer nominated or approved by the landlord there is scope for great abuse by requiring insurance with an insurer who gave the best possible commission to the landlord. Indeed there is evidence that abuse has become widespread in recent years. However, it is now provided that, subject to safeguards the tenant may arrange his or her own insurance.74 In all other cases, whether of houses or flats there are protections provided in the Schedule to the Landlord and Tenant Act 1985 including the right to challenge before the LVT the landlord’s choice of insurer. Insurance costs are also challengeable under section LTA 1985, section 27A on grounds of reasonableness.

71 Any variation would require the consent of all relevant parties and a freeholder might well be willing to comply only on payment by the leaseholder of a substantial sum. There is evidence of abuse particularly where the leaseholder needs the required variation in order to complete a sale. 72 CLRA 2002, s 162. 73 Above, s 37(8). 74 CLRA 2002, s 164. See also the ODPM Consultation Paper: Leasehold Houses: Insurance other than with the landlord’s nominated insurer; Consultation on the prescribed form of tenant’s notice of cover. May 2003.

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The Regulation of Long Residential Leases 219 Forfeiture The White Paper issued in August 2000 and the earlier Consultation Paper issued in November 1998 contained sections on abuses by landlords of the forfeiture process. Abuses identified included: (a) threatening forfeiture where consents to improvements or alterations were requested whether prospectively or retrospectively and the tenant refused to pay the sums requested; and (b) threats of forfeiture for non-payment of ground rent and or a penalty for late payment. To deal with these abuses the CLRA 2002 places a number of obstacles in the way of a landlord who wants to forfeit a long lease of a dwelling for breach by the tenant of a covenant or condition in the lease relating to these matters.75 Thus, a landlord will not be able to forfeit for failure by a tenant to pay rent, service charges or administration charges (or any combination of them) unless the unpaid amount exceeds a prescribed sum or consists of or includes an amount which has been payable for more than a prescribed period.76 Furthermore, where this provision is inapplicable, the Housing Act 1996, s 81 (which applies to all premises let as a dwelling) has been amended to provide that unless a tenant has agreed or admitted the amount of a service charge or administration charge the landlord may not exercise a right of re-entry or forfeiture unless the amount has been the subject of a determination by a court or LVT. This includes service of a section 146 notice. Finally, unless the tenant has admitted the breach, a landlord is prevented from serving a notice under section 146 of the Law of Property Act 1925 unless a LVT (following application by the landlord) has determined that a breach of covenant (other than failure to pay a service charge or administration charge) has occurred.77 There is also power to prescribe further or alternative requirements before forfeiture can be exercised in relation to breach of covenant or condition in a long lease of an unmortgaged dwelling.78

SUMMARY AND CONCLUSION

The system of long leasehold tenure for flats is an anomaly and is simply inappropriate at least where the “landlord” is unconnected to the leaseholder. This

75 CLRA 2002, ss 167–71. See also an ODPM Consultation Paper, Restrictions on the use of Forfeiture for long residential leases and related prescribed forms and summaries. October 2002. See also Law Commission Consultation Paper: Termination of Tenancies for Tenant Default, Law Com 174, January 2004. Paras 2.70–2.73 and 11.1–11.10. 76 CLRA 2002, s 167.The prescribed sum must not be greater than £500. For the purpose of this provision default charges are to be deducted when computing the outstanding sum. 77 Above, s 168. 78 Above, s 171.

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220 Martin Davey should not be a field for profit making save by those whose business is to provide management services to freely consenting flat owners who engage their services or by flat owners who choose to let on short leases. Flats should be owned freehold and common parts owned and managed by those flat owners. Management service providers should be properly regulated and required to comply with a Code of Practice. This is of course exactly what is provided for by the long overdue commonhold provisions in the CLRA 2002.79 With the will to make it work the new scheme could eliminate almost all of the difficulties that have beset the long leasehold system for flats, although in time commonhold will undoubtedly throw up problems of its own. It is therefore a matter of deep regret that the English scheme is so limited in scope, not least in the absence of provision for compulsory conversion for existing leasehold schemes or indeed compulsory adoption for post-2002 Act schemes.80 The provisions for voluntary conversion require the consent of everyone with an interest in the block making this a remote contingency in many cases. The fact that adoption of the scheme for new developments will be optional also does not augur well for the success of commonhold. Nor does the absence of an effective scheme for dispute resolution between unit holders as opposed to the Ombudsman scheme to resolve disputes between unit holders and the commonhold association.81 Any system that caters for multi-unit living where there is a need for mutual rights and obligations and common services is bound to encounter tensions and conflicts. The corporate structure may lead to its own problem of oppression of minorities. Nevertheless, commonhold should avoid the problems of the cynical freeholder who has invested simply to milk the development for all that it is worth irrespective of the interests of the leaseholders. It has the potential to provide autonomy for flat owners together with the framework for the communality that is inherent in flat living arrangements. Because the Government has decided not to make commonhold compulsory or to provide for compulsory conversion from leasehold to commonhold the need to reform the leasehold system was even more acute. Regulation is justified by the fact that without it the framework of property law and contract law would ensure that freeholders could abuse their superior bargaining position. Those long leasehold schemes where the leaseholders already control the freehold do not of course sit easily within this framework because they are the nearest arrangements to commonhold that the pre-2002 Act law permitted. In its 1998 Consultation paper the Government stated its intention to “undertake a major overhaul of leasehold law to help the existing 2 million residential leaseholders in England and Wales.” Five or six years later, has it succeeded? Although a succession of Governments have legislated piecemeal over several 79

Known as strata title in Australia and condominiums in the USA. The State of Hawaii also has a dual system but does not provide for compulsory conversion. 81 For a critical note on the limitations of commonhold compared with leasehold run by a tenants’ management company see [2003] Conv pp 3–9. 80

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The Regulation of Long Residential Leases 221 decades to deal with the tensions and problems associated with long leasehold tenure a code of sorts has now emerged. First, long leaseholders of house and flats now have a right to a new lease or to enfranchise which is far less hidebound than the original schemes in the 1967 and 1993 Acts. There is certainly no better time than now for those leaseholders of houses or flats who have not yet obtained a new lease or enfranchised to do so. The qualifying conditions have been relaxed and simplified. However, the process of enfranchisement remains complicated and fraught with uncertainty. Good affordable professional advice seems to remain as elusive as ever and success is very dependent on the existence of a co-operative freeholder and a group of motivated well-organised leaseholders to take the initiative. The price payable for the freehold may be prohibitive especially when the RTE rules come into force.82 A RTE company, with a prescribed corporate structure, will be the only permissible applicant and invite all qualifying tenants, some of whom may be absent leaseholders, to be a participating member.83 This will introduce a new complex layer of preliminary procedure and place a greater onus of responsibility on leaseholders. It will also introduce more prospects of disagreements between leaseholders and raise the specter of dissolution or striking off of the company if it fails. Furthermore, on enfranchisement leaseholders may find that the management of a block of flats can be a fraught, expensive and depressing business. They will become landlords of themselves and non-participating leaseholders as well as any non-long leaseholder tenants or commercial tenants, with all the responsibilities, which that entails.84 They will need to deal with contractors, comply with a host of regulatory requirements on health and safety employment etc. But this should not detract from the fact that the leaseholders will now be in control and this often brings a high degree of satisfaction especially in smaller blocks. Furthermore the tribulations of management can be avoided to a considerable degree by the appointment of managing agents. However, this will not stop aggrieved leaseholders transferring their grievance from the freeholder to the new management company or managing agent. Second, where poor management is the problem leaseholders who cannot or do not want to enfranchise can exercise the new RTM, although where the landlord is at fault the leaseholders may still prefer a new manager to be appointed by the LVT under the Landlord and Tenant Act 1987. 82 Despite the abolition in some cases and reduction in other cases of “marriage value”. And the prospective fixing of the valuation date at the date of service of the claim to enfranchise and not the later date of agreement or determination of the price. 83 This could include the landlord if as is sometimes the case he owns one or more of the leases! 84 For prospective further regulation, see Improving the standard of residential leasehold management; Consultation: Department for Transport, Local Government and the Regions, April 2002. See also J Rugg and D Rhodes, Chains or Challenges? The Prospects for Better Regulation of the Private Rented Sector (British Property Federation and the Chartered Institute for Housing, 2001).

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222 Martin Davey Third, unreasonable service charges, and now administration charges, are governed by the expanded code in sections 18 to 30 of the Landlord and Tenant Act 1985. The issue of liability and reasonableness can now be dealt with in one forum, the LVT. In the last four years LVTs have been overhauled in terms of organisation and training of Tribunal members and they can offer a speedy and cheap dispute resolution service.85 There are fast track and standard track procedures. Provision is also made for paper determinations, without an oral hearing, in appropriate cases, which reduces costs.86 Aggrieved landlords can no longer appeal to the Lands Tribunal in the hope of cajoling tenants to settle for fear of having costs awarded against them. A leave filter has been introduced and the power of the Lands Tribunal to award costs is now as limited as that of the new power to do so of the LVT. Quite apart from the general requirements as to reasonableness the service charge provisions provide a number of other important protections for leaseholders. Elaborate rules govern consultation on works and contracts,87 statements of account,88 demands for service charges,89 and the holding of service charge trust fund accounts,90 all of which can be expected to lead to increases in management charges that will be added to the service charge accounts! Fourth, the draconian use of threats of, or actual proceedings for, forfeiture by landlords under long leases for trivial breaches is combated by further changes to the forfeiture rules and new requirements as to the demands for ground rent. These erect obstacles in the way of rogue landlords but will also create extra expense for landlords pursuing legitimate claims. It is somewhat unfortunate that the Law Commission has not taken the opportunity of recommending that long residential leases should be outside the forfeiture process entirely leaving landlords to pursue normal civil remedies for unpaid service charges, administration charges, or breach of other covenants. Alternatively, the freeholder could be given a power of sale on default by the leaseholder permitting him to recoup his losses from the proceeds the balance being payable to the leaseholder. This could be regulated by the court of the LVT and would prevent a freeholder making an unjust windfall gain at the expense of an unwitting leaseholder. The remedy of forfeiture, despite safeguards, is simply inappropriate for leases of this kind and its retention for the same is to be regretted. Indeed there is a strong argument that given the disparity of inter85 The Residential Property Tribunal Service, which includes LVTs, has done much to dispel the belief of landlords that tribunals are tenant biased and the belief of tenants that they are composed of professionals whose affiliations and sympathies lie with landlords. See eg Estates Gazette 2002 p 63. LVTs now handle 57 different jurisdictional issues. 86 For LVT procedures see the Leasehold Valuation Tribunals (England) Procedure Regulations 2003. 87 LTA 1985, s 20, 20ZA. 88 Above, ss 21, 21A, and 22. 89 Above, s 21B. 90 LTA 1987 ss 42, 42A and 42B CLRA 2002 s 156.

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The Regulation of Long Residential Leases 223 est between freeholder and leaseholder, the latter should have a corresponding, if not stronger right to “forfeit” the freehold, for breach of obligation, whether or not the landlord’s right of forfeiture is abolished. The ideology of property that preserves the property right of the landlord, with all that that entails, is fallacious. The landlord is only able to possess and exploit this right because of defects in the law that have hitherto ensured that leasehold is the only tenure available for flat sales. It is a creature of law and what the law gives it can take away. Nevertheless, it cannot be denied that Government has at last made a serious attempt to regulate the system of long leasehold tenure in a more fundamental way than ever before. It has done so by seeking to identify and address the major problems that have beset the system and would continue to plague it in the absence of effective measures to combat those problems. This does not of course address the separate but related issue of whether the code will prove to be any more effective than previous measures. Legal rights will only be effective if leaseholders are aware of them and are willing and able to make of them. There is undoubtedly a problem of an information gap, and a need for relatively inexpensive advice and assistance for tribunal representation if the issues are incapable of resolution by agreement. Finally, the introduction in 1980 of right to buy for local authority, and later for, housing association tenants has led to flat developments where some residents are long leaseholders and others are periodic secure tenants. Thus although not designed for that purpose these blocks, many of them in poor condition, will comprise mixed tenures and groups of residents with different needs and expectations. We have already seen that the regulatory code for long leaseholders has had to be modified to cater for the nature of these landlords. They will continue to throw up problems in years to come that may have to be dealt with as a matter of housing policy rather than through the law of landlord and tenant. The introduction of commonhold therefore at most marks the beginning of the end of a system of leasehold tenure that has attracted criticism for over a hundred years. The legislature has had to tread a careful path between facilitating the only system available for the sale of flats and curtailing the activities of those landlords who have exploited this unsatisfactory mechanism in a myriad of sharp, albeit lawful and unlawful ways. However, although something resembling a comprehensive code of protection has now emerged that carries with it related dangers. The first is that burdens will inevitably be placed on honest landlords including tenants’ management companies that will add to the costs of the scheme and hence to service charges. However, this is an inevitable corollary of such regulatory legislation. The second danger is that leaseholders will find it impossible to negotiate the law without the professional help that seems to be so markedly missing. It is now time for leaseholders to be made aware of their rights and to exercise them where landlords are unwilling to compromise or abide by their obligations. It is therefore highly regrettable that

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224 Martin Davey the content of the “code” is not to be found in a single statute but is scattered across a range of, often poorly drafted, statutes that are supplemented by a mass of indigestible secondary legislation. This is unfortunate to say the least when the Law Commission is seeking to produce a user-friendly simple code for rented housing. Is it too much to ask for a true code of protection for long leaseholders?

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11

Commonhold—A Critical Appraisal CORNIE VAN DER MERWE AND PETER SMITH

INTRODUCTION

Sectional ownership in multi-storeyed or multi-unit buildings dates back to 500 BC. However, the institution did not find favour in many Roman law based jurisdictions because of the principle of accession which essentially requires that the owner of land is also owner of the building on the land and all units in that building. Germanic law recognised a form of ownership of floors (Stockwerkseigentum) but because of its poor regulation, especially the absence of a management structure, it soon got a bad name. However its value was recognised in the earlier French, Portuguese and Spanish Civil Codes, the latter being the basis for the spread of the institution to the whole of South America. The real impetus for the growing popularity of sectional ownership as from the 1920’s was the acute shortage of housing after the First and Second World Wars. This caused almost all the European jurisdictions to place apartment ownership on a firm statutory footing by extensive regulatory provisions. In the 1960’s this example was followed by most common law jurisdictions including the United States and the states of Australia and Canada, Singapore, South Africa, New Zealand and Malaysia.1 England and Wales formed a significant exception to most other common law systems. In these jurisdictions, a form of flat ownership was recognised based on case law and conveyancers’ skills. However, this institution never gained popularity in its competition with long leases and company owned schemes where shares entitle shareholders to the use of units in the scheme. The main obstacle was that the standard conditions devised by conveyancers in their efforts to regulate flat ownership more efficiently invariably contained positive covenants. Subject to narrow exceptions,2 these covenants are unenforceable either at law or in equity against successors in title to the freehold land (apartment) burdened with the obligation.3 To arrest the waning popularity of flat-ownership a 1 See generally CG van der Merwe, “Apartment Ownership” in International Encyclopaedia of Comparative Law (Tübingen, JCB Mohr,1994) vol VI: Property and Trust Chapter 5, ss 1–23. 2 Notably by a chain of indemnity covenants, or on the benefit and burden rule: see further RE Megarry and HWR Wade, Law of Real Property, 6th edn (Sweet & Maxwell, London, 2000) paras 16-020–16-026. 3 Austerberry v Oldham Corporation (1885) 29 ChD 750; Rhone v Stephens [1994] 2 AC 310.

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226 Cornie van der Merwe and Peter Smith working group of the Law Commission chaired by Trevor Aldridge recommended the introduction of commonhold, a sophisticated form of flatownership.4 This was followed by three Consultation Papers5 culminating in the Commonhold and Leasehold Reform Act 2002.6 The aim of this chapter is briefly to explain how the unenforceability of positive conditions stilted the growth of flat-ownership followed by an enumeration of the reasons why commonhold is generally an improvement on leasehold. However, the crux of the chapter will be devoted to a critical evaluation of the general structure and certain key (property) provisions of the Act.

THE UNHAPPY STATE OF ENGLISH LAW

The definition of “land” in the Law of Property Act 1925, including “buildings or parts of buildings” whether the division is horizontal or vertical,7 allows English law to create a freehold interest in the air, above a ground floor area, or a flying freehold.8 A grave drawback of such schemes is that regular maintenance of such premises is not assured. If the ground floor owner wishes to cure a leak in the common roof, he must carry out the repairs and then claim in nuisance against the air-space owner for a contribution to the cost. If the latter refuses to contribute, the amount of money recovered depends on an apportionment.9 Action has to be taken on an ad hoc basis. The repairing owner may also be unable to recover from the flying freehold owner if the latter is bankrupt. In any apartment ownership institution such as commonhold, the regular maintenance and repair of relevant buildings can only be reliably assured out of funds collected by a management body from all unit-holders, with proper enforcement mechanisms. On account of the difficulties encountered with flying freeholds, English developers made use of the long leasehold system in the case of flats. The developer retained the freehold of the land, divided up the building into units, and granted long leases of up to 999 years at a premium over each unit. However, the length of some leases has sometimes been much shorter than this—99-year 4 Commonhold Freehold Flats and Freehold Ownership of other Independent Buildings CM 179, 1987. 5 Commonhold: A Consultation Paper Cm 1345, 1990; Commonhold, Consultation Paper (1996) with Draft Bill, 1996; Commonhold and Leasehold Reform Draft Bill and Consultation Paper Cm 4843, 2000; Consultation Paper: Commonhold Proposals for Commonhold Regulations October 2002 (hereafter “CP” followed by date). 6 C 15 Part I, brought into force on 27 September 2004 (Commonhold and Leasehold Reform Act 2002 (Commencement No 4) Order 2004 SI 2004/1832) and Commonhold Regulations 2004 SI 2004/1829 (hereafter “regulations”). 7 S 205(1)(ix). 8 See SM Tolson, “Land Without Earth” (1950) 14 Conv NS 350. Registration of a flying freehold as commonhold land is ordinarily ruled out by the Commonhold and Leasehold Reform Act 2002 (hereafter “CLRA 2002”) Sched 2 para 1(1). 9 As in Abbahall v Smee [2003] 1 All ER 465 esp at 474b.

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Commonhold—A Critical Appraisal 227 leases being not infrequent.10 Leasehold tenure at least permits the burden of positive covenants to be enforced against any person to whom the original lessee assigned his lease.11 The fact that a long lessee does not own his or her unit causes difficulties in connection with mortgage finance if the lease term had dwindled to 45 years or less.12 The tenure issue also upset consumers, owing to the psychological attraction of owning one’s own home. The Aldridge Committee13 reported that people could not understand why they could not obtain a freehold when buying a flat. The problems with long leases do not end there. A person or corporate entity that was not the developer may hold the freehold. The freeholder may live outside the UK. He may have bought it for speculative purposes. Where the management of the premises is vested in the freeholder there may well be a mismatch between the interest of the lessees and of the landlord, causing resentments on both sides.14 Poor standards in relation to repairs and maintenance by some landlords brought the whole long leasehold system into disrepute. The Nugee Committee noted abuses.15 These included excessive delays in carrying out repairs on the part of landlord management companies, as well as high levels of service charges and low levels of reserve funds to cover major work.16 Some management companies failed regularly to collect service charges when due, so causing a lack of essential funds to maintain the premises. At any rate, the government accepted the case for change going beyond palliative measures.17

IS COMMONHOLD AN IMPROVEMENT ON LEASEHOLD ?

It is hoped that commonhold will replace long leasehold as the means of developing new residential apartment blocks and multi-unit commercial buildings. The question thus arises, whether commonholds are an improvement on leaseholds. Some specific factors may be isolated. The 2002 Act links commonholds with land registration by providing that “land is commonhold land if the freehold estate in the land is registered as a freehold estate in commonhold land.”18 The tenure problem is thus eliminated with commonholds. Tenure worries have also been mitigated for existing leasehold developments by enfranchisement legislation.19 Unfortunately, commonholds 10

DN Clarke, Commonhold: The New Law (Jordans, Bristol, 2002) para 1.22. See Megarry and Wade, above, n 2, Ch 15, passim. 12 Aldridge Committee, above n 4, para 1.4. 13 Above, para 1.19. 14 Clarke, above n 10, para 1.21 and 1.23. 15 AJ Hawkins, “The Nugee Committee Report” [1986] Conv 12. 16 The Nugee Committee, above, n 15 noted average service charges of £612 pa and average sinking fund charges of £162 pa. 17 CP (2000) above, n 5 para 1.2.4. 18 CLRA 2002 s 1(1)(a). 19 Leasehold Reform Housing and Urban Development Act 1993 Part I Chapter 1, as amended with a view to easing collective enfranchisement by CLRA 2002 Part 2 Chapter 2. 11

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228 Cornie van der Merwe and Peter Smith will be denied to a group of persons whose dissatisfaction with long leases led to the pressure for the new tenure. In particular, all registered and unregistered lessees with terms exceeding 21 years of the whole or part of the land must consent to the commonhold registration application being made.20 To overcome the resentment long lessees felt about the existence of a superior landlord, the original reformers proposed that the freehold in commonhold land would be “to all intents and purposes the same as the traditional freehold”.21 This would imply absolute ownership rights over the commonhold unit. To a limited extent this approach is reflected in the legislation. A unit holder has an absolute power to sell his unit,22 but his power to grant tenancies of a residential unit has been limited by imposing a restriction on the maximum length of a permitted lease, as discussed later on.23 The reformers recognised that in intense community living, the rights of each unit holder are necessarily subject to restrictions not found with other freeholders.24 Developers are accordingly required by the primary Act, as a condition precedent to applying for commonhold registration, to draw up a commonhold community statement.25 This document, to be largely but not entirely standardised in regulations, sets out the mutual rights of the commonhold association and all unit holders.26 These will be broadly the same whether the commonhold is in Berwick-upon Tweed or Bexhill. The problem of variations in the quality of rules encountered between different leases is thus addressed. To meet the lack of control by long lessees over the management of their premises,27 the framework legislation requires the existence of a commonhold association—its membership is, after the transfer by the developer of all the units, the unit holders.28 The association is so fundamental that it has to be in existence before any commonhold registration can be applied for.29 One of the prime duties of the association is the repair and maintenance of common property of the building concerned, paid for by regular assessments on unit holders.30 As compared to long leases, the formal structure of commonholds should be an improvement. The terms of the obligations of the association and of unit holders will be accessible to all current and future unit holders in the commonhold community statement. These documents are in standard, largely non-variable, form with respect to fundamental matters such as the repair and 20

CLRA 2002 s 3(1)(b); regulations reg 3(1)(b). Aldridge Committee above n 4 para 3.9. 22 CLRA 2002 s 15. 23 Above, s 17; regulations, reg 11. 24 Aldridge Committee, above n 4, para 6.2. 25 CLRA 2002 s 1(1)(c). 26 Above, s 31. 27 Eased by the “right to manage” in CLRA 2002 Part II Chapter I. 28 CLRA 2002 Sched 3 para 7. 29 Above, s 1(1)(b). 30 Above, s 32; Commonhold Community Statement (hereafter “CCS”) made under regulations, reg 15 and Sched 3, para 4.5.1. 21

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Commonhold—A Critical Appraisal 229 maintenance of the common property or the liability to pay commonhold assessments. Unit holders are identical in interest with the association. It is thus hoped that fewer disputes about the running of the affairs of the commonhold will occur than with leases.

THE THREEFOLD UNITY OF COMMONHOLD

As in most other jurisdictions, commonhold is structured as a threefold unity, combining ownership in a unit with collective rights with regard to the common parts and membership of the commonhold association. As in other jurisdictions the rights and obligations of unit-holders with regard to their units and the common property are governed by model by-laws called the commonhold community statement (CCS) prescribed by delegated legislation. The peculiarity of English commonhold is that the common parts of the building do not belong to the proprietors in undivided shares but to the commonhold association. As soon as the first purchaser becomes entitled to be registered as the proprietor of a unit, the commonhold association is entitled to claim registration as proprietor of the freehold estate in the common parts.31 A second peculiarity of the commonhold legislation is that the management body, the commonhold association, is structured as a company limited by guarantee and governed by a standard form memorandum and articles of association.32 Although the Uniform Common Interest Ownership Act of the United States allows developers to structure the management association as either an incorporated or an unincorporated association, England and Wales is the first jurisdiction explicitly to structure the association as a company limited by guarantee. This implies amongst other things that the memorandum, articles of association of the commonhold association and the CCS are based on an agreement between the proprietors. This is in contrast to other jurisdictions that base their by-laws on the powers of an autonomous body like a medieval commercial guild to make its own rules. The fact that the management company is limited by guarantee and does not have a share capital means that although the liability of the members is limited they would ultimately be liable for the debts of the commonhold association if the latter were to become insolvent. From the threefold unity embodied in commonhold, the institution straddles both the law of property and that of associations.

31 32

CLRA 2002 s 7(3)(a). Above, s 34(1).

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230 Cornie van der Merwe and Peter Smith

COMMONHOLD UNIT , COMMON PARTS AND LIMITED USE AREAS

In practice it is very important to identify which parts of a commonhold scheme form part of a commonhold unit and which parts are common parts or limited common property. The extent of a proprietor’s rights would vary according to whether they are exercised with regard to a unit, the common parts or limited common property with the rights to the unit being the most extensive. Also, a proprietor is responsible for the maintenance and repair of his or her unit and of limited common property allocated to him, whereas the commonhold association is responsible for the maintenance and repair of the common parts. Furthermore, since the size of a commonhold unit could determine a proprietor’s proportionate voting power, the exact extent of the unit must be easily determinable. Moreover, the commonhold association is obliged to take out building and liability insurance with regard to the common parts, leaving it to unit-holders to insure their own units. Consequently, it is crucial to know which parts of the scheme fall under common parts and which not. Commonhold unit The Act requires the CCS to identify the extent of each commonhold unit by reference to a plan that must comply with requirements prescribed by regulations.33 The location and extent of each commonhold unit is indicated in Annex 2 of the CCS which shows the number of the commonhold unit, the number of the plan, details of how the unit is shown on the plan, a property description and a further description of the commonhold units. The property description will presumably contain a description of contiguous and non-contiguous areas included in a commonhold unit,34 whereas a further description will presumably indicate which if any specified structures, fittings, apparatus or appurtenances within the area or the structures that delineate the area, are excluded from the unit.35 The draft regulations require that the plan must clearly delineate the boundaries of each commonhold unit with any adjoining property.36 By virtue of the regulations the CCS may exclude the structure and exterior of a selfcontained building or self-contained part of a building37 which contains only

33

CLRA 2002 s 11(1), 2(b) and (3)(a). CLRA 2002 s 11(3)(d). 35 CLRA s 11(3)(b)(c) and (d). CCS, Annex 2 para 4 and 5. 36 Regulations, reg 8. 37 Above, reg 9(2) defines “self-contained building” as “a building that is structurally detached” and a “self-contained part of a building” as a part of the building which constitutes a vertical division of the building which could be redeveloped and serviced independently of the rest of the building or where services could be provided without causing a significant interruption of the services to the rest of the building. 34

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Commonhold—A Critical Appraisal 231 one commonhold unit or part of a commonhold unit.38 However, the CCS must exclude the structure and exterior of a self-contained building or part of a building which contains more than one commonhold unit.39 A “structure and exterior” is defined so as to include the services in and to the building but does not include those which are within and exclusively serving one commonhold unit. “Relevant services” are services provided by the means of pipes, cables or other fixed installations.40 These may or can be excluded from a unit, even though they are located within the confines of a unit. The following characteristics of a commonhold unit can be deduced from the above provisions of the Act, the community statement and the regulations: In the first place, commonhold buildings may consist of self-contained single or multi-storeyed buildings or part of such buildings containing more than one unit or of self-contained buildings or part of buildings containing only one unit. Thus a commonhold scheme may consist of a number of detached buildings like bungalows each containing only one unit. Furthermore, a unit may consist of the main rooms of an apartment complemented by certain contiguous or non-contiguous areas in the scheme.41 Thus a contiguous balcony, atrium porch or projection may complement the central rooms of a unit. The lack of enumeration of such items allows the developer the freedom to add whatever items he deems appropriate to a unit without any risk that some of these might not qualify in terms of the wording of the Act. Examples of non-contiguous complements to a unit are garages, laundry rooms, backyards and parking spaces in the cellar of the building or on the land outside the building. A separate number or colour reference is required for each noncontiguous area within the commonhold unit. The land comprised in a development scheme need not necessarily be allocated to the common parts of the scheme. Thus a backyard, a parking space of a garden area may be added to a unit as a contiguous (backyard to a contiguous ground floor apartment) or non-contiguous area. Lastly, since a commonhold need not contain all or any part of a building,42 a unit can simply be an area delineated on the land as for example a caravan site. The provisions of the Act and regulations are open to the following criticisms: The discretion to include structures and exteriors as part of commonhold units in developments consisting of a number of single bungalows and/or garages43 might lead to differing standards of maintenance and repair which might destroy the aesthetical or visual amenity of the scheme. It would seem to be preferable that these components should, as in multi-unit buildings, always be 38

Regulations, reg 9(1)(a). Regulations, reg 9(1)(b). 40 Above, reg 9(2). 41 CLRA 2002, s 11(3)(d): The statement may further refer to two or more contiguous or noncontiguous areas. 42 Above, s 11(4). 43 Regulations, reg 9(1)(a). 39

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232 Cornie van der Merwe and Peter Smith excluded from the definition of a commonhold unit. It is only fair that the commonhold association and not the individual proprietors should be responsible for keeping the exterior and structural components of single-unit buildings and their service installations in a good and serviceable state of repair.44 The Act and the draft regulations are, moreover, unclear on the exclusion of specified structures, fittings, apparatus or appurtenances within a unit, which are service installations inside a unit, from the unit. Under the Act and the draft CCS, these installations may be excluded, while the draft regulations require that if they are part of the “structure or exterior”, they must be excluded from the unit if not within and exclusive to a unit in multi-unit buildings.45 It would be best if these components, especially service installations, should always be excluded from a commonhold unit especially in the case of multi-unit buildings. This is owing to the fact that, for example, leakage from a service installation within a unit may cause injury to an adjoining unit holder who may have to go to court46 to force his neighbour to allow access for essential repairs. An additional problem is that the description of the boundaries of units creates some confusion. The regulations require that the plans must delineate the boundaries of each commonhold unit. Presumably this refers to the floors, walls and ceilings which bound a particular apartment. But then again the Act provides that the CCS may exclude the structures that delineate an area. At face value the Act and regulations seem to prefer the provisions of the United States’ UCIOA which identify the outside surfaces of the boundary walls, floor or ceiling of the unit rather than their median lines as its boundaries.47 What is more, the constant reference to areas instead of to portions of the building creates the impression that the units in a commonhold are confined to areas of cubic airspace with no physical substratum. On a closer assessment, it must be presumed that the legislator only wanted to cater for the possibility that the creation of certain units or contiguous parts of the scheme, like caravan sites and outside parking spaces should not be limited by the requirement that they should have physical boundaries.

Common parts The 2002 Act defines common parts exclusively, namely as all parts of the commonhold which are not included in a commonhold unit.48 Many statutes define common parts inclusively by enumerating all the parts of the commonhold scheme that are considered common parts. These statutes usually specify that

44 45 46 47 48

But see now Regulations, reg 15(7) which tries to rectify the position. Cf CLRA 2002 s 11(3) (b) and (c);Regulations, reg 9(1)(b). Under the Access to Neighbouring Land Act 1992. UCIOA s 2–102(1). CLRA 2002 s 25(1).

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Commonhold—A Critical Appraisal 233 the land, the structural components and service installations of the commonhold building must always be common parts.49 The exclusive description means that the following remaining parts of the commonhold scheme are classified as common parts: First, the whole of the land up to the boundaries of the registered freeholder’s title excluding areas which are included in a unit mainly in the form of parking spaces and backyards, allocated as non-contiguous parts to specific units;50 in addition, all areas in a commonhold building not included in a commonhold unit for example entrances, lifts, stairways, passages, landings, self-contained portions of a building designated for common use as a laundry, parking area, indoor swimming pool, a recreation hall or storage facilities and even separate buildings for example a club house not included in a unit; and in the case of multi-unit commonhold buildings the structure (structural walls, supports, the roof, the foundations and the boundary walls, floors and ceilings of units) and exterior of a building as well as the service media in or serving the building.51 The last item signifies the application of the so-called “service test” which classifies plant (like a water tank or central heating installation) or pipes, ducts or wiring serving more than one unit as common parts. This promotes proper maintenance and servicing of commonhold buildings. If it was left to the unit-holder to maintain a common pipe or wiring inside his or her unit, serious problems could be caused to other unit-holders in the scheme. To maintain the structural stability and aesthetical appearance of a scheme it is further imperative that the structure and exterior of the commonhold building or buildings should be classified as common parts of the commonhold.

Limited use areas The 2002 Act provides that the CCS may specify a certain part of the common property as a “limited use area”, restricting its kind of use and the classes of person who may use it.52 Different provisions may be made in the case of different limited use areas.53 From comparative experience, these types of limited common property are mainly used in schemes which consist of more than one building confining the limited use areas like the lift, staircase, roof (with facilities for drying clothes) and exterior walls to the occupants of each building respectively.54 In a scheme that contains several buildings and two tennis courts, the use of each court may be limited to a specific building. The fact that contiguous or non-contiguous areas can be added to units seems to exclude the 49 50 51 52 53 54

See generally CG van der Merwe above n 1, s 121–29. Regulations, reg 9; CCS Part 2 para 2.3.1 referring to Annex 2 para 2. Above, reg 9(1)(b) and 9(2). Compare Aldridge Committee, n 4 above, para 8.27. CLRA 2002, s 25(2); CCS, Annex 4 para 4. Above, s 25(3). Van der Merwe, above n 1, s 130–37.

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234 Cornie van der Merwe and Peter Smith possibility of reserving a contiguous or non-contiguous area like a balcony to only one unit-holder as a limited use area.55 Consequently it seems that limited use areas must always be allocated to more than one unit-holder.

SHARE VALUES OR PARTICIPATION QUOTAS

Most apartment ownership statutes provide for the calculation of a share value or participation quota which determines a number of matters.56 In the first place, a unit’s share in the expenses of the commonhold association for the management and maintenance of the common parts; and also the value of an owner’s vote in general meeting as well as a unit owner’s share in the commonhold’s proceeds on termination of the commonhold. The 2002 Act provides that the CCS must specify the percentage share of a unit-holder in the commonhold assessment and the reserve fund levy.57 The percentages allocated to units must amount in aggregate to 100 and 0 per cent in relation to a unit is allowed.58 Once allocated, an ordinary resolution is necessary to change the percentage of the commonhold assessment or reserve fund levies allocated to a unit-holder.59 Neither the Act nor the CCS identify a basis on which the percentage should be calculated. Allocation seems to be left entirely to the developer who could presumably use relative size or value or any other formula to decide on the percentages allocated to units. The more sophisticated apartment ownership statutes require that individual contributions to expenses should be calculated on the basis of a precise formula approved by an independent professional.60 Such a formula is essential in large residential, commercial and especially mixed schemes. They reflect a fair distribution of interests amongst unit-holders and also provide a basis for reallocation of percentages when units are extended or contracted or new units are added to a scheme in the exercise of a development right. With regard to voting rights, the model articles of association provide for voting on a resolution by a show of hands and for a poll if requested. In voting on a show of hands, each member who is present in person or the authorised representative of a corporation has one vote.61 On a poll, every member has one vote during the pre-commonhold period or the transitional period. At any other time, every member has the number of votes allocated to him in the CCS in 55

Contra, DN Clarke, Commonhold (Jordans, Bristol, 2004) para 7 [22]. Van der Merwe above n 1, s 140–81. 57 CLRA 2002 s 38(1)(c) referring back to s 38(1)(a) and (b). 58 Above, s 38(2) (a) and (b); CCS Part 3 para 3.2.1 and 3.3.1 and Annex 3 paras 1 and 2. 59 CCS, Part 4 para 4.8.3. 60 See eg, the United States UCIOA s 2–107(d) and the Singapore Land Titles (Strata) Act 1987 (c 158, 1988 Rev edn) s 92. 61 Articles of Association (made under Regulations, reg 14 and Sched 2) art 28(a). Proxies do not seem to be covered by art 28. 56

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Commonhold—A Critical Appraisal 235 respect of each commonhold unit he owns.62 The number of votes can presumably only be altered by an ordinary resolution to that effect.63 Again, neither the Act nor the CCS identifies a formula upon which the votes are to be allocated. In a mixed-use scheme it may be necessary to introduce class voting, allowing holders of residential units to vote on certain matters identified in the CCS and holders of non-residential units to vote on others. Again a person who owns multiple units may effectively dominate the proceedings in a commonhold.64 To prevent this, he or she should be restricted to exercise the voting rights for a certain number of his or her units or a proportion of the total number of units.65 To retain some of the democratic ideals initially mooted, equal voting power for all owners and tenants of commonhold units on the amendment or introduction of new house rules could have been introduced. With regard to the distribution of profits or assets of the commonhold association, the model articles of association prohibit such distribution during the existence of the commonhold association. They provide that profits may only be distributed in a winding up or in accordance with a termination statement approved by at least 80% of the members seeking a voluntary termination of the commonhold.66 A provision of the Model Articles of Association which dealt with the division of assets in winding up proceedings disappeared from the latest version. This provision allowed the liquidator authorised by an extraordinary resolution of the commonhold association to divide among the members in specie the whole or any part of the assets of the commonhold association or with the like authorisation to vest the assets in trustees for the benefit of the members.67 It view of difficulties involved in reaching an extraordinary resolution on such a sensitive matter, a more certain basis for distribution for example the proportionate market value of units at the time of winding up, would be preferable.

USE OF UNITS , COMMON PARTS AND LIMITED USE AREAS

Units Most apartment ownership statutes state clearly that a unit-holder is the owner of his unit with very extensive powers with regard to its use and disposal. These statutes also recognise that the units in a development scheme are structurally interdependent and that community life is intensified because of the proximity 62 Above, art 28(b) (cf Tables A and C of the Companies Regulations 1985); CCS Part 3 para 3.4.1 and Annex 3 para 3. 63 CCS, Part 4 para 4.8.3. 64 CP (2002), above n 5 paras 82–83. 65 Above, para 84. 66 Art 72 of the Model Articles of Association read with s 47(1)(a) and (b). It may be difficult in practice to reach an 80% majority on such a sensitive issue as distribution of proceeds. 67 Draft Model Articles of Association (March 2004), art 73.

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236 Cornie van der Merwe and Peter Smith of individual owners. Consequently the rules of nuisance are applied more rigorously and the use of a unit is regulated strictly. The English Act explicitly grants the unit-holder a freehold estate in a unit.68 The policy of the Act is to endow the unit-holder with more extensive powers than a lessee while at the same time regulating commonhold life to a certain extent in the CCS. The only mandatory rule that remains is that a unit-holder or tenant may only use his or her unit in accordance with its permitted use.69 The permitted use is specified in each individual CCS.70 While under an earlier draft the unit-holder was obliged to allow the commonhold association to enter his or her unit in order to carry out work necessary to keep the common parts in a state of good repair,71 this mandatory provision has now been dropped. If required under local rules, but not mandatorily, the unit-holder can be obliged to take out insurance with regard to the unit and to repair and maintain the unit.72 Provisions protecting unit-holders from nuisance emanating from neighbouring flats, are no longer a default provision of the by-laws.73 With regard to behaviour or “house rules”, the legislator at one time opted for a detailed approach—listing in their original draft CCS a set of model rules for compulsory or optional inclusion in the CCS. Thus, showing undue fussiness, a compulsory rule was suggested requiring each unit-holder regularly to clean his or her unit including the exterior and windows thereof. Another suggested compulsory rule prohibited excessive noise by the unit holder or his invitees.74 It is now likely that no compulsory or optional model “house rules” will be prescribed for all commonholds—the matter will be left to individual schemes to decide. This flexibility is welcome, since the circumstances of commonholds are bound to vary. For instance, the issue of whether to allow pets in units, and under what conditions, seems best left to the individual circumstances of each commonhold.

Common parts Most apartment ownership statutes require that proprietors must make reasonable use of the common property. This implies that no proprietor may make exclusive or anti-social use of the common parts or prevent another proprietor or a person lawfully on the premises to use the common parts.75 68

S 9(3)(b). CCS Part 4 para 4.3.1. Significantly, the provisions in the earlier draft that a garage included in a residential unit must only be used as a private garage and that a similar parking space must only be used for the exclusive use of the unit-holder and his invitees, are omitted in the final draft. 70 Above, Annex 4 para 2. 71 Draft CCS (February 2004) Part 3 para 45. 72 CCS Part 4 para 4.5.2 and Annex 4 para 7. 73 Draft CCS (February 2004) Schedule 4 para 4.2 rule 2. 74 Draft CCS (October 2001) rules 60 and 58. We presume that these rules can be inserted optionally. 75 See CG van der Merwe, above n 1, s 201–15. 69

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Commonhold—A Critical Appraisal 237 The use of common parts may, contrary to earlier indications, be regulated on the basis that each individual CCS can make its own provisions. Instead of simply providing that a unit holder may make reasonable use of the common parts, details of rights for the benefit of the commonhold or over the common parts must now be set out in the CCS.76 To counteract anti-social conduct, it may well be advisable for an individual CCS to provide that the unit-holder is not allowed to use the common parts in such a way as to cause a nuisance or to prevent reasonable access to another commonhold unit. It could also be stated that the common parts may not be used in such a way as to prejudice the use of a commonhold unit or the insurance cover of the building. Another sensible provision is to oblige a unit-holder to indemnify the commonhold association for the cost of repairing damage caused to the common parts by a licensee or invitee with express or implied authority to be on the common parts.77 The commonhold association must insure the common parts to their full rebuilding or reinstatement costs against loss or damage by fire and such other risks as the CCS itself specifies.78 The commonhold association must further repair and maintain the common parts including decoration and putting them to a sound condition.79 It may not alter the common parts unless a prior ordinary resolution to that effect is passed.80 The rule in earlier drafts about the regular cleaning of the common parts and the exterior of the building including windows has been dropped in the final CCS. These may have smacked of overregulation.

Limited use areas In accordance with similar provisions in other apartment ownership statutes, provision may be made in local rules that limited use areas may only be used by authorised persons in a manner consistent with the authorised use specified in the CCS.81 There are no provisions on insurance, repair and maintenance of these areas. Insurance of limited use areas (at least liability insurance) is probably covered by the insurance taken out by the commonhold association for the common parts. Similarly maintenance and repair is most probably the responsibility of the commonhold association. There is, however, no provision 76

CLRA 2002 s 26(a); CCS Part 2 para 2.4.3 and Annex 2 para 6. See Draft CCS (September 2003) Part II rules 11 and 13–15. 78 CCS Part 4 paras 4.4.1 and Annex 4 para 5. This overcomes the rule that an express term is required to compel a landlord to insure the building: Argy Trading Development Co v Lapid Developments Ltd [1977] 1 WLR 444 at 445. Public indemnity insurance is optional (Annex 4 para 4) and not mandatory as required in an earlier draft (September 2003) Part II rules 16 to 19. 79 Above, para 4.5.1. 80 Above, para 4.6.1. 81 Above, Annex 4 para 4. See eg Guidance on Drafting of a CCS (DCA 2004) 87. 77

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238 Cornie van der Merwe and Peter Smith making users of these areas responsible for part of the cost of maintenance and repair of areas designated for their exclusive use.

DISPOSITIONS OF UNITS

By virtue of his or her freehold estate in a commonhold unit a unit-holder can in principle freely dispose of the unit. However, as will appear, this freedom is limited in certain cases in favour of community interests.

Transfer and the creation of charges or other interests in a commonhold unit The unit-holder is not restricted in any way as to the transfer of the whole of the unit. The expression “transfer” of a commonhold unit is widely defined so as to include outright sale and gift, as well as a transfer by operation of law, as on an intestacy.82 Since the common law regards any restraints on alienation as contrary to public policy,83 the express statutory provision in the Act that the CCS may not prevent or restrict the transfer of a commonhold unit84 seems unnecessary. The transferee of a unit is obliged to notify the commonhold association within 14 days of the date he is entitled to be registered as unit proprietor.85 Whereas a CCS cannot prohibit the creation of a charge over the whole of a unit,86 it is not possible to create a charge over part only of any unit.87 A unit holder may therefore raise mortgage money by a charge over the whole of the unit, which as a freehold unit will not be affected by the diminishing asset problem associated with leaseholds. A charge of only part of a unit is probably disallowed on account of difficulties that could arise in realising his security if the charge creditor wishes to sell that part in the event of default.88 Unit-holders are restricted in creating certain prescribed interests in a unit unless the commonhold association is a party to the creation of the interest or consents in writing thereto.89 Future regulations would presumably limit the interests concerned to those that will affect other unit-holders or the commonhold association.90 Consequently, the creation of an easement might well fall 82

CLRA 2002 s 15(1). Megarry and Wade above n 4, para 3–071; Re Brown [1954] Ch 39 at 43; E Jenks (1917) 33 LQR 11. In Estate of David Dunne [1988] IR 155 at 156, O’Hanlon J thought that an absolute restriction on alienating freehold land went back to the statute Quia Emptores 1290. 84 CLRA 2002, s 15(2). 85 CCS Part 4 para 4.7.8. 86 CLRA 2002 s 20(1)(b). 87 Above, s 22(1). 88 Clarke, above n 10, para 6.33. 89 CLRA 2002, s 20(3). S 20(4) states that such consent needs an affirmative resolution with at least 75 per cent of those voting on the resolution voting in favour of it. This requirement does not apply to charges, by s 20(6). 90 See CP (2002) above n 5, para 151. 83

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Commonhold—A Critical Appraisal 239 within the prescribed list, as a right that could interfere with the access of unit-holders to common parts or their units. By contrast, the creation of a trust over a unit would affect the conscience of the unit holder with no adverse effect on the community, as where a unit-holder declares himself an express trustee of his unit for a close relation. Or he might occupy the unit beneficially, having transferred the legal title of the unit to another person.91

Leases Leases and commonholds are treated as incompatible forms of tenure. Restrictions on the leasing of residential units were first suggested in 199092 and were justified on the ground that a unit-holder should “have the greatest interest in his unit”, playing an active part in the management of the community.93 Any idea of active management by amateurs is inconsistent with received experience.94 Despite this, an upper limit of a term of more than seven years on the maximum term of a residential lease extending to the whole as well as to any part of such a commonhold unit will be imposed mandatorily.95 A 21-year ceiling, at one time mooted,96 would have allowed the purchase of units as an investment for leasing. Any limit on letting is a grave interference with property rights,97 especially when one further notes that the taking of premiums is outlawed,98 ruling out the capitalisation of rents.99 A lease granted for an excessive length is “of no effect to the extent that it purports to create” a term of years contravening the Act.100 Thus, a lease for an excessive term is reduced by a statutory Procrustean bed to the permitted length. It might be preferable for any affected lessee to apply to court to make an appropriate order, in view of its wide discretion to protect him from any disadvantage.101 In one respect, however, the current regulations seem too lax. A provision in the earlier regulations that any lease should take effect in possession within three months of the date of the grant, and that holiday or student tenancies should be restricted,102 has now disappeared. Although, by contrast, the unit-holder of a non-residential unit can grant a tenancy of any length, the CCS of a particular commonhold may impose its own 91

Compare Hodgson v Marks [1971] Ch 892. See also Clarke, above n 10, paras 6–8. CP (1990), above n 5, paras 4.1 ff. CP (1990), above n 5, para 2.4.2. 94 For the position in France, see C Atias, La Copropriété (Dalloz, Paris, 1995) p 41ff. 95 Regulations, above, reg 11(1)(b); CCS above Part 4 para 4.7.11(b). 96 Draft Regulations (September 2003) reg 11(1)(a). 97 Under the French Law of 9 July 1965, art 9, no règlement de copropriété can limit the length, as opposed to the purpose or destination, of unit lettings. 98 CCS, Part 4 para 4.7.11(a); Regulations, reg 11(1)(a). 99 This prohibition secures the right, below, of the commonhold association to intercept rents. 100 CLRA 2002, s 17(3). 101 Above, s 17(4); Clarke, above n 10, para 6.26. 102 CP (2002) above n 5, para 140. 92 93

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240 Cornie van der Merwe and Peter Smith restrictions appropriate to prevailing local conditions.103 Examples are a prohibition on the renting of garages or designated parking spaces to persons other than unit holders or the letting of a commercial unit for residential purposes, or for a noisy or offensive trade. A proposal that a tenancy of a commercial unit must reserve a specific right in the commonhold association to carry out repair work in accordance with the CCS104 has been dropped. However, individual CCS’s should include the previous mandatory CCS provision, that tenants of commercial units are as bound by the CCS rules affecting their tenancies as are tenants of residential units.105 Only one of the matters left open by the 2002 Act106 is now covered by the latest version of the CCS. It sanctions the diversion of rent from a tenant and on default any sub-tenant, where a tenancy imposes an obligation on the tenant to make payments to the association which are due from the unit holder.107 Such ability would facilitate the collection of assessments if the unit-holder drags his feet and thus provide some financial security for a commonhold association which has to cope with absentee unit-holders. However, to safeguard tenants, they cannot be forced to pay more in unpaid assessments than they owe to the unit holder in rent.108 The CCS contains three provisions to facilitate the management function of the commonhold association with regard to tenanted units. The unit-holder must notify the commonhold association within 14 days that a tenancy in a residential commonhold has been granted.109 Thus short holiday tenancies must be notified unless these disruptive tenancies have been excluded in an individual CCS. Nothing mandatorily excludes the granting of licences to occupy of any length. In theory, the way is thus open to evasion of any limit on residential tenancy length. In addition, before any tenancy is entered into, the unit holder must supply a residential or commercial tenant alike of a unit or part of a unit with a copy of the CCS and inform him that he must comply with its provisions.110 The commonhold association is also formally required to keep a register of both commercial and residential tenants.111 There is no direct provision to involve any kind of tenant in the affairs of the commonhold association112 despite his or her possible liabilities to it if the unit holder defaults. A possible way of involving the tenant would be to appoint him or her as a proxy or to allow them to vote on house rules for the commonhold. 103

CLRA 2002 s 18. Draft CCS (September 2003) para 4. 105 CCS (September 2003) para 8; also CP (2002) above n 5, para 142. 106 CLRA 2002, s 19(2). 107 CCS Part 4 para 4.2.17–4.2.38. 108 The payment of the diverted rent discharges the tenant’s liability for rent to his immediate landlord: CCS above, paras 4.2.25 and 4.2.35. 109 Above, Part 4 para 4.7.15. The rule applies also to the grant by a tenant of a sub-tenancy. 110 CCS Part 4 para 4.7.12. 111 Above, para 4.10.2. 112 CP (2002) above n 5, para 147. 104

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Commonhold—A Critical Appraisal 241 Subdivision and resubdivision of units The subdivision and resubdivision of units is apparently allowed as an exception to the prohibition on the creation of interests in part-units. A unitholder may transfer part of a unit with the written consent of the commonhold association based on a resolution passed with at least a 75% majority.113 The effect of such a transfer could be twofold. First, the part transferred can become a new unit with the effect that the old unit is subdivided into two new units. This mechanism could prove useful to unit-holders who would like to sell off part of their unit or to two co-holders who want to effect a physical division of their unit. Second, the subdivided part of the old unit could become part of another (neighbouring) unit specified in the request for the consent.114 This resubdivision of units would be useful in commercial commonholds where for instance a large supermarket wants to purchase additional space from a neighbouring poster shop which has more space than required for its business. Regulations may provide for the registration of the new unit created and the units enlarged or contracted by the transfer.115 This would involve an amendment of the plan as well as an amendment of the CCS to reflect the new unit and an adjustment of the assessment allocation. Regulations may also have to adapt any provisions in the Act or the CCS so as to apply to a new and an enlarged or contracted unit.116

Contraction and expansion of the size of a unit The 2002 Act provides that the extent of a commonhold unit can be redefined by an amendment of the CCS. Redefinition of a unit can involve the addition of land taken from another unit or from the common parts or from land added to the commonhold.117 The size of the unit may also be reduced where land is transferred from the unit. Any such change in size must be reflected in an amended CCS and must, when appropriate, be effected by a conveyancing transaction. Amendment for this purpose requires the written consent of the unit holder and, if the unit is charged, the prior written consent of the registered chargee.118 Then the Land Registry must be approached for registration of the new version of the CCS.119

113 CLRA 2002 s 21(1)(2) read with (2)(c). Draft CCS Part 4 para 4.7.1(e) (March 2004) dealing with this topic has been deleted from the latest version. 114 Above, s 21(9)(a) and (b). 115 Above, s 21(10)(a). 116 Above, s 21(10)(b). 117 CP (2002) above n 5, para 193. 118 CLRA 2002 s 23(1) and 24(2). The court may dispense with consent: ss 23(2) and 24(3). 119 Commonhold (Land Registration) Rules 2004 SI 2004/1830 reg 13.

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242 Cornie van der Merwe and Peter Smith This is a curious provision, which, if it applies only to land which is part of a commonhold scheme, could facilitate the exchange of outside parking spaces or garden areas which form part of a unit. The exchange would have the effect of enlarging the size of one unit and reducing the size of the other unit. Reduction and enlargement could, however, also involve subdivision of a unit or resubdivision of units as discussed above. Such a transaction would be made easier since a resolution by the commonhold association is not required for redefinition. The Act should be amended to incorporate provisions similar to those in the American Uniform Common Interest Ownership Act. This Act expressly regulates the reorganisation of the boundaries of units so as to facilitate alterations in size of commercial units in accordance with commercial needs for expansion or reduction in the size of shops or other businesses.120

TRANSACTIONS AFFECTING COMMON PARTS

Alienation of parts of the common parts The 2002 Act provides that the CCS may not prevent or restrict the commonhold association from transferring its freehold estate in any part of the common parts or from creating an interest therein.121 However, a special resolution is needed.122 The proceeds of such a transfer would come in handy if the commonhold association experiences financial difficulties in performing its maintenance functions.

Creation of charges on the common parts Owing to the difficulty of enforcing a legal charge by sale against the common parts, as opposed to the units of a commonhold, one might have expected the principal Act absolutely to prohibit the creation of charges over the common parts.123 There is indeed a general prohibition on creating charges on the common parts.124 Consequently, a charge which relates wholly or partly to land added to the common parts or to land added to the commonhold is extinguished when the commonhold association becomes the registered owner of the common parts.125 If the charge covered a unit and part of the common parts, it will presumably be limited, after registration of the association, to the unit only. 120 Uniform Common Interest Ownership Act s 2–112 dealing with the reallocation of unit boundaries. For the alteration of the size of a unit subject to a charge, see s 24(4)–(6). 121 CLRA 2002, s 27(1)(a) and (b). 122 CCS Part 4 para 4.8.10. 123 As in Draft Commonhold Bill 2000 cl 22. 124 CLRA 2002, s 28(1) and (2). 125 Above, s 28(4).

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Commonhold—A Critical Appraisal 243 However, the prohibition does not apply to a legal mortgage created over the common parts and which has been approved by unanimous resolution of the association, before the creation of the mortgage.126 The unanimous resolution is a safeguard, owing to the power of sale of a legal mortgagee as opposed to an equitable chargee. It is difficult to conceive of how the common parts could be sold independently of the units. Owing to this, and because of the difficulty of obtaining a unanimous resolution in any but the smallest commonholds,127 the rationale of this particular exception is questionable.

Additions of land to the common parts and to the commonhold Land (like a parking space) which forms a non-contiguous part of a commonhold unit, may be added to the common parts with the consent of the unit-holder and the prior written consent of any registered chargee.128 The commonhold association may add new land to the common parts of the scheme by virtue of a unanimous resolution to this effect.129 In both these cases the necessary amendments must be effected to the CCS and in the land registry.130 The commonhold association would automatically be registered as the proprietor of the added land.131 It is not clear whether the additional common land may be used only for amenities or for the exercise of a development right in the commonhold association.

MAINTENANCE AND REPAIR OF COMMON PARTS

One frequent complaint about the long leasehold system was that the management structures required to ensure regular maintenance and repair of the relevant buildings were inadequate or dysfunctional. Consequently the commonhold association is given “a central part”132 as it is mandatorily required to repair and maintain the common parts and, where appropriate, put the common parts into “sound condition”.133 The association’s liability to carry out remedial work is, under the general law, triggered within a reasonable time of a common part— such as a roof or an external wall—falling out of repair or condition. Thus if a water tank in the common roof bursts due to its poor condition, flooding the apartment of a unit holder, the liability of the association, given that an 126

Above, s 29(1) and (2). See Clarke, above n 10, para 7.13. CLRA 2002 s 30(1) and (2). 129 CCS Part 4 para 4.7.10. 130 Commonhold (Land Registration) Rules above n 119, reg 18. CLRA 2002 s 41(5)–(7) governs the registration procedures when land is added to a commonhold. 131 CLRA 2002, s 30(4) and s 41(7)(b) and (c). 132 Aldridge Committee (1987) above n 4, para 8.1. 133 CLRA 2002 s 26(c); CCS Part 4 para 4.5.1. 127 128

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244 Cornie van der Merwe and Peter Smith emergency has occurred, is promptly to cure the defect and pay for consequential losses. No notice from the unit holder is required as a condition precedent to liability, as the common parts are not within units.134 Hence, regular inspections of association property will be advisable. Although the word “repair” could be stretched to include replacement of for instance pipes with a better version on the market, the model CCS does not envisage that commonhold associations will be required to improve the relevant buildings. By analogy with leaseholds, where a part falls out of condition, and an equivalent repair is impossible, the nearest modern equivalent must be used even if there is some element of design improvement in the work.135 Equally, the regulatory approach reflects the refusal of the common law impliedly to incorporate major design improvements within the concept of repair.136 There is no reason why any individual CCS may not extend the liability of the association to improvements—at greater potential cost to unit holders. With the system proposed, one can compare the Scots proposed reforms of the law of tenement, designating certain parts of the relevant or “scheme” property as “strategic parts”, no matter who owns them. The Scots Law Commission listed such parts as the external surfaces of the building—ie main walls and roof—as well as the solum and the foundations. This compulsion was justified on the ground that “such parts are properly the concern of everyone, and ought to be maintained by everyone”.137 In the case of commonholds, it is probable that most CCS’s will adopt the same approach as that suggested for Scotland.

Payments for cost of repairs A significant improvement offered by commonholds when compared with leases is that annual budgets are one of the essential components of commonholds. By law, each year, the commonhold association directors must make an annual estimate of the income required to meet association expenses.138 Unit holders must, if income is required, pay a percentage of the total estimate allocated to their unit, following a directors’ notice to pay.139 In order to overcome the fact that actual expenditure may exceed that budgeted for, the model CCS entitles the directors to make emergency estimates from time to time of the income required to be raised from unit holders in addition to the annual estimate.140 Commonhold unit holders can dispute the amounts of any annual as opposed to emergency estimates in representations to 134 135 136 137 138 139 140

Passley v London Borough of Wandsworth (1996) 30 HLR 165 (CA). Creska Ltd v Hammersmith and Fulham LBC [1998] 3 EGLR 35 at 38. See eg Eyre v McCracken (2000) 80 P&CR 220 (CA). Scottish Law Commission No 162 Report on the Law of Tenement, (1998) para 5.6. CLRA 2002 s 38(1)(a); CCS, Part 4 para 4.2.1. CCS above, para 4.2.2. The notice must specify the payments to be made. CLRA 2002 s 38(1)(b); CCS, Part 4 para 4.2.5.

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Commonhold—A Critical Appraisal 245 the directors141 and can also object at annual association meetings.142 But there is no requirement in the legislation that the assessments must be presented to an annual general meeting of the unit-holders.143 These rules emphasise the importance of raising the relevant funds efficiently rather than referring these matters to discussion at a general meeting that could result in delays and disputes. In this important matter, there is little evidence of the democratic control of commonholds which was advertised as one of their original features.144

Reserve funds One of the complaints made about landlord management companies of blocks of leasehold flats was that insufficient or no provision was made for reserve funds to cover major items of work. In the case of commonholds, matters have been improved. The CCS requires the maintenance of one or more reserve funds to finance the repair and maintenance of the common parts, if a “reserve study” by an “appropriately qualified person”, which must be commissioned at least once in every 10 years, considers it necessary.145 The funds, provided by a capital levy, may be needed to fund the long term repair and maintenance of the common parts (examples of flat roofs or renewable cladding come to mind) where its cost exceeds annual budget expenditure. The percentage of the levy specified for each unit will have to be set out in the CCS where it makes reserve fund provisions.146 Once set up, reserve funds are not held on trust, as is the case with leasehold service charge funds,147 but they have some protection from judgment creditors—to the extent that the funds can only be used for reserve fund purposes. A judgment debt that does not relate to such an activity cannot be enforced against the reserve fund.148

141 As envisaged by CCS, para 4.2.3. The directors must consider these and must issue a further 14 days’ notice to pay (para 4.2.4). 142 Clarke, above n 10, para 10.25. 143 Unit holders cannot challenge assessments, as may lessees under the Landlord and Tenant Act 1985 ss 18–30. 144 Aldridge Committee, above n 4, para 1.21. 145 CCS, Part 4 para 4.2.7. The expression “appropriately qualified person” is not defined in the model CCS. In the very first year of registration the directors must consider the question of establishing a reserve fund (para 4.2.6). 146 CLRA 2002 s 39(2)(a) and (b); CCS, Part 3 para 3.3.1 and Annex 3 para 2. 147 Landlord and Tenant Act 1987 s 42. Association directors are not equated to landlords. Their duties as fiduciaries and under the criminal law offered, allegedly, sufficient protection to unit holders (HC Standing Committee D, 15 January 2002 col 55). 148 CLRA 2002 s 39(4) and (5).

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246 Cornie van der Merwe and Peter Smith

ENFORCEMENT OF OBLIGATIONS OF UNIT HOLDERS BY COMMONHOLD ASSOCIATION

The commonhold association’s assets are likely only to consist of the funds raised by assessments and reserve fund levies. Therefore strict enforcement of the financial obligations of the unit holder is crucial to maintain the building in a state of good repair. Experience suggests that repeated failure to contribute to these expenses may hamper timely maintenance and the efficient administration of the project.149 The CCS contains detailed provisions on how levies owed by individual unit owners are calculated and how unit-holders should be given prior notice before payment is exacted. In particular, once a notice to pay is given to a unit holder, he must pay the relevant assessment as stated therein within 14 days of the giving of the notice. Interest at the prescribed rate is attracted by default on payment.150 A defaulter can either be proceeded against in court, or by the internal dispute procedure, at the choice of the commonhold association.151 In default with payment cases alone, the commonhold association may consider less drastic steps such as direct negotiation with the unit holder or even taking no action. In the case of a persistent defaulter, the way is open to ordinary debt recovery proceedings. The new suggested rules go some way to improving the efficiency of commonhold management. Unhappily, there is no provision in the principal Act creating a first charge in favour of the commonhold association in respect of unpaid assessments or reserve fund levies.152

Payment of debts by a new unit holder The draft CCS guarantees payment of outstanding debts on transfer of a unit. It requires that, on transfer, the new unit holder, following a notice procedure, must pay any outstanding commonhold assessments and reserve fund levies and any interest that has accrued on his default.153 This could create reluctance on the part of purchasers to purchase any unit burdened with any significant assessment liability (unless compensated for in the price paid) and could even lead to the discharge of arrears by the selling unit holder to facilitate the sale.154 But a 149

Van der Merwe, above n 1, s 256, p 104. CCS above, para 4.2.15 and 16. The “prescribed rate” is specified in CCS Annex 4 para 1 and can vary between different commonholds. 151 CCS above, para 4.11.11. In Spain, an administrator or junta president can simply go to court provided only he has the assembly’s authorisation: law of 21 July 1960, art 21(1). 152 As suggested by Clarke above n 10, para 11.21. 153 CCS Part 4 paras 4.7.5 and 4.7.6. 154 By above, paras 4.7.1 and 4.7.2, a unit holder can require the association within 14 days of the notice to certify sums claimed as owed, prior to transferring the unit. That sum is the most the new owner must pay (para 4.7.4). In France, the law is stricter. By loi of 10 July 1965 art 20, the syndic of the association can by notice force the seller’s notary not to pay the unit holder any sale proceeds until assessment arrears have been paid off out of these moneys. 150

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Commonhold—A Critical Appraisal 247 former unit holder has no liability under the Act for unpaid assessments passed to the purchaser.155 This differs from other jurisdictions that make the former and the new owner jointly and severally liable for unpaid assessments.156 This is a more equitable solution. The furthest the English rule goes is that the right of the association to enforce payment of assessment arrears is deemed to be assigned to the new unit holder, if he promptly clears the arrears.157

ENFORCEMENT OF USE AND BEHAVIOUR RULES

Enforcing use and behaviour rules is left to friendly persuasion and, if all else fails, to general remedies in court such as an injunction or an award of damages. The government refused to enact provisions that smacked of the discredited remedy of lease forfeiture—it was incompatible with freehold ownership.158 Consequently, there is no provision corresponding to that of Germany. There, a unit holder who has so seriously broken his obligations that the other unit holders cannot be expected to remain in a community with him can be forced, as a last resort, following a vote of a majority of unit holders, to sell his unit.159 The German remedy160 covers not only significant default with financial obligations, which can imperil the viability of the community, but also gross breaches of use and behaviour rules.161

CONCLUSION

The principal Act gives only a sketchy framework for the operation of commonholds. Delegated legislation defines “almost every aspect of commonhold life”.162 In order to understand commonholds, one needs to refer to the principal Act, the regulations, including the CCS, not to mention the specific registration rules. The claim of the government that, as a result of standardisation of documentation, the cost of advice should be reduced cannot go unchallenged. Conveyancers are not likely to face an easy task in advising clients about the new form of freehold tenure owing to the sheer bulk of complex material they will have to examine. Parliament has found it hard to strike a balance between uniformity and flexibility. Sensible mandatory provisions, such as concerning user, are absent. As a result, significant variation of individual commonhold community statements is 155

CLRA 2002, s 16(2). See Van der Merwe (above n 1) ss 270 and 275. CCS para 4.7.7. 158 HL Deb vol 627, 509 (16 October 2001). 159 German Apartment Law (WEG) 1951 art 18(1). 160 The sale is by auction (WEG 1951, art 19). 161 WEG 1951 art 18(2); see J Bärmann and E Pick, Wohnungseigentumsgesetz (CH Beck, München, 2001) 262 stressing the deterrent value of this provision. 162 CP (2002) above n 5, Annex F Part I para 5. 156 157

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248 Cornie van der Merwe and Peter Smith allowed. A similar diversity and variable quality of commonhold documentation may develop, as exists with long leases. A good example of this process is the discretion allowed to developers to include structural components and service installations inside the unit in the description of a unit in self-contained buildings which contains only one unit or part of a unit. Other aspects that detract from the merits of the commonhold scheme include uncertainties surrounding the subdivision and resubdivision of units, and the weak rules governing the enforcement of the financial and behaviour obligations of unitholders. Bell wrote in 1988 that freehold flats are a rarity and are estimated to total 20,000 out of the 800,000 flats in England and Wales.163 The government estimate that 6,500 “new build” commonhold units will be created annually once the delegated legislation is in place.164 This will hardly alleviate the shortage of affordable housing in England. As a result of these various considerations, further legislation to tidy up the loose ends of commonhold legislation is required. This might then provide a stable, reliable and attractive tenure institution to home seekers and businessmen, which is “straightforward, inexpensive and simple to run”.165

163 164 165

C Bell, “The Road to Commonhold” (1988) 132 Sol J 285–87 at 286. CP (2002) above n 5, Annex F para 9. Above, para 6(c).

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12

The Notion of Real Estate and Rights Pertaining to it in Selected Legal Systems STANISLAWA KALUS AND MAGDALENA HABDAS

The process of unifying European countries within the European Union presents its members, as well as the candidates, with a number of issues that need resolving. One of the main issues is the unification or harmonisation of legal systems. In order to achieve this, it is necessary to identify the similarities and differences among the legal systems of EU present and future member countries. As far as land is concerned, it is important to note that, since it is an immovable object, it is strongly linked to the legal system of its location. This linkage is particularly visible in private international law, where the conjunction of lex rei sitae is applied to legal relationships concerning immovables.1 On the other hand, freedoms guaranteed by the Treaty of Rome (which include the free movement of goods, capital, and services) have facilitated movements of citizens within the EU countries, who are willing to pursue various goals outside their homeland. In order to do so, however, they must acquire land or a right, which will enable them to use land, buildings, and/or units (a self-contained part of a building), in foreign countries. Consequently, it is essential to ascertain and compare the definitions of land in different legal systems. Although all legal systems reflect the fact that land is an immovable thing and that it is different from any other objects, because it can never change its location and is indestructible, further issues concerning the classification of objects and the question of defining immovables vary from one legal system to another. In the light of the above, we can say that the harmonisation of provisions on land and immovables in different legal systems would be beneficial to further promote the freedoms on which European Union is based. It is therefore important to consider how objects and land are defined and treated in selected legal systems and decide whether unifying the provisions concerning immovables is possible and if so, to what extent. 1 See M Pazdan, Prawo Prywatne Mi˛edzynarodowe (Warszawa, 2002) 144; J Giles, Prawo Prywatne Mi˛edzynarodowe (Warszawa, 2002) 164; J Goraczynski, Prawo Prywatne Mi edzynaro˛ dowe (Warszawa, 2003) 158.

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252 Stanislawa Kalus and Magdalena Habdas The method applied in this chapter is the comparative method with autonomous qualification (as developed by E Rabel2) of the notions present in the various legal systems. The result of our analysis is the presentation of the relevant legal provisions in the selected legal systems, namely in Polish, German, French, and English laws. Our conclusions concern the possibility of harmonising law concerning immovables. The starting point of the analysis is Polish law, which was greatly influenced by French, Austrian, and German laws. In the period preceding World War II, Polish civil law developed on the basis of Napoleon’s Code, the BGB and the ABGB, since Poland comprised land which previously belonged to Austria and Germany. The Code of Napoleon was adopted as law in the Polish Kingdom. It is worth noting that even though Polish law was subjected to communist ideology after World War II, private ownership of land, unlike in other communist countries, was never abolished and the existent land registers were not destroyed. The facts mentioned above determined our consideration of French, Austrian and German laws, with comments on English law included, as it is the representative of the common law system in Europe.

I . THINGS AS OBJECTS OF LEGAL RIGHTS

Polish and German laws A thing is an object of legal rights. According to article 45 of the Polish Civil Code (PCC)3 and to §90 of the German Civil Code (BGB)4 things are only corporeal objects, which have a physical existence and are sufficiently separated from their environment to be an independent object of economic relations.5 Consequently intellectual rights are not things within the meaning of PCC and BGB, as they are not material. On the other hand, coal deposits are not things because they are not sufficiently separated from their environment. They become things upon their excavation.6 Most things are composed of parts, referred to as constituent parts or components. They are physically connected with the thing and may not be separated from it without causing damage or a material change of the thing or the part being separated. As long as they are attached to the thing they may not be an object of separate real rights, that is rights effective erga omnes, against the whole world (art 47 §1 and 2 PCC, §93 BGB).

2 3 4 5 6

See E Rabel, “Problem kwalifikacji” [1961] Studia et Documenta 36. Dz U64, No 16, item 93 with subsequent amendments. Bürgerliches Gesetzbuch, RGBl S 195, BGBL III 400–2, with subsequent amendments. J Wasilkowskis, Zarys Prawa Rzeczowego (Warszawa, 1963) 8. E Gniewek, Prawo Rzeczowe (Warszawa, 2000) 4.

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The Notion of Real Estate and Rights in Selected Legal Systems 253 Austrian law In Austrian law, the definition of a thing contained in §285 of the Austrian Civil Code (ABGB)7 is considerably wider than ones present in PCC and BGB, as it denotes all objects separated from a human being, which may be utilised by humans.8 Moreover, unlike Polish and German laws, where things are only single objects, Austrian law in §302 ABGB distinguishes collective things (Gesamtsache, universitas rerum) which consist of a number of single things and are treated and referred to as a whole. An example of this may be a ten volume encyclopaedia, which in Austrian law would be treated as one collective thing, but in Polish and German law would only be recognised as a collection of single objects, namely books. In Austrian literature there is no consensus as to whether collective things may only encompass things of the same kind, or whether they may include different types of things which form and are treated as one whole.9

French law In French law, the question of the object of real rights, particularly with respect to the right of ownership, is rather complex. The French Civil Code (FCC)10 does not contain a definition of a thing, but does include regulations concerning goods (les biens), which may stand for corporal as well as incorporeal things, the former resembling the English notion of real property, and the latter denoting an estate, which is similar to the English notion of real estate. Despite the lack of definition of les biens, FCC differentiates between movables and immovables with consequences visible in the legal regimes concerning these goods. The differences are first and foremost visible when it comes to proof of ownership. With respect to movables it is assumed that their possessor is the owner, but ownership of an immovable can only be proven through legal title, usually embodied by a written document. Movables are treated as goods of lesser meaning, whereas immovables have a special value. The distinction between movables and immovables is also significant in civil procedure (different court competence/jurisdiction), and in private international law (different factors determine the choice of a proper law for movables and immovables).

7

Allgemeines bürgerliches Gesetzbuch, JGS Nr 946, with subsequent amendments. S Wróblewski, Powszechny Austriacki Kodeks Cywilny––z Uzupełniającymi Ustawami i Rozporządzeniami, Objaśniony Orzeczeniami Sądu Najwyższego (Kraków, 1914) 216. 9 S Rosmarin, Przedsiębiorstwo Jako Przedmiot Egzekucji (Warszawa, 1937) 48. 10 See www.legifrance.gouv.fr. 8

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254 Stanislawa Kalus and Magdalena Habdas English law In English law the question of things is part of the context of property. A distinction is drawn between tangible and intangible property, the former referring to material things, and the latter to things which are not material but are capable of being owned.11 However, unlike civil law jurisdictions of continental Europe, English law lacks a general set of rules concerning the enjoyment and management of things. There is no law of property in general. Instead, law concerning land, i.e. land law, has developed separately from law regarding other things, the latter being usually mentioned in courses on the law of contract.12

II . LAND AS AN OBJECT OF LEGAL RIGHTS

Polish law As has already been mentioned, in Polish and German laws only material things may the object of real rights. All things may be divided into movable and immovable. The latter are defined in the PCC, which allows one to assume, that objects, which do not fall within the definition of immovables, are movable things. According to art 46 PCC, an immovable thing is a part of the Earth’s surface which constitutes a separate object of ownership (land), as well as buildings permanently attached to land, or parts thereof, if by special legal provisions they are an object of ownership, separate from land. This definition allows us to identify three types of immovable things in Polish law, namely: 1) land (including space above and below the surface within limits of socioeconomic purpose of land—art 143 PCC); 2) buildings and other structures; 3) units. It is, however, of paramount importance to note that buildings and units are, as a rule, constituent parts of land, since Polish civil law adheres to the superficies solo cedit principle.13 According to this principle, buildings and other facilities connected with land, as well as trees and other plants, from the moment of having been planted or sown, are constituent parts of land (arts 48 and 191 PCC). Consequently, there is a very limited number of situations in which buildings and units qualify as immovable things, and are separate objects 11

J Stevens and RA Pearce, Land Law (London, 1998) 3. W T Murphy and S Roberts, Understanding Property Law (London, 1998) 38. 13 S Kalus, “Der Grundsatz Superficies Solo Cedit im Polnischen Zivilrecht” in Wiener Konferenz über Grundbuch und Kataster II Session (Wien, 1998). 12

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The Notion of Real Estate and Rights in Selected Legal Systems 255 of ownership. Only a special legal provision may grant them the attribute of being a separate immovable thing. The following buildings are treated as immovables: • buildings and other structures erected on land which is the object of perpetual usufruct (art 235 PCC); • buildings and other structures erected on State Treasury land over which an agricultural co-operative has the right of usufruct (art 272 PCC); • buildings and structures erected by an agricultural co-operative on land, which a member of the co-operative granted as a contribution in kind (art 279 PCC); • buildings on land which farmers transferred to State Treasury in return for pensions (the Transfer of Farms to the State in Return for a Pension and Monetary Payments Act and the Pensions and Other Benefits for Farmers and Their Families Act 1977). Buildings that, through special legal provisions, are immovables are a separate object of ownership, but that right takes on a particular shape, because it is always a right tied to the right of perpetual usufruct or usufruct (see section IV below for an explanation of these rights). This means that ownership of the buildings exists only as long as the right of perpetual usufruct or usufruct does; moreover, it may not be transferred to third parties without the simultaneous transfer of the right it is tied to. Therefore, an owner of a building may not sell it, unless he sells his right of perpetual usufruct (usufruct is not transferable), and vice versa—if he sells his perpetual usufruct, he must also sell his ownership of buildings. This duality of ownership, ie the existence of a separate owner of land, and a separate owner of buildings, may be viewed as being justified mainly by historical reasons. Perpetual usufruct was originally created in order to allow the State to make urban land available to citizens for residential developments.14 The State did not, however, wish to transfer ownership of land to private hands, as this was contrary to communist ideology. On the other hand, citizens needed to acquire a right which would make them feel secure enough to want to invest their own money in building a house. Perpetual usufruct was a compromise, which allowed the State to keep ownership of land, but at the same time to grant ownership of erected buildings to the perpetual usufruct holders. Ownership of buildings is only significant when perceived in the context of the right of perpetual usufruct, which has a high market value and is desirable to developers. The Ownership of Units Act 199415 is currently the exclusive source of qualifying units as immovables. Regardless of whether units are of a residential, retail, industrial, or other character, they may be immovable property, if they are set apart within a building by structural walls. Units also include, as their 14 15

J Ignatowicz, Prawo Rzeczowe (Warszawa, 2000) 176–80. Dz U00, No 80, item 903 with subsequent amendments.

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256 Stanislawa Kalus and Magdalena Habdas constituent parts, utility rooms, such as basement or attic cubicles, pantries, garages, etc, regardless of whether these rooms are adjacent to the premises in question or are located somewhere else within the building. Indeed, they may even be located in an outbuilding, as long as the latter is situated within the geodesic borders of the piece of land in question. Another constituent part of a unit is the interest its proprietor has in all common areas of the building (hallways, staircases, the roof, frontage of the building, etc) and in the right of ownership or perpetual usufruct of land on which the building in question is erected.16 In order for units to obtain the status of immovable property, certain legal steps must be observed. Firstly, the owner of land on which a building is erected (the superficies solo cedit principle applies) must in a notarial deed (which may simultaneously be a contract with the future buyer of a unit) declare the will to distinguish a specified unit as an immovable thing. Such a declaration may also form part of a civil court judgement on dissolution of co-ownership. Secondly, a land register must be created for the unit and an entry as to the owner must be made. Once the entry is made, a unit becomes an immovable thing. It is worth noting that, unlike buildings with the status of an immovable thing, units that are immovables always have a separate land register kept for them exclusively. The register contains, among other data, information about the register number of land on which the building comprising the unit in question is erected. There are no separate land registers kept for buildings, which are immovables. A register is kept only for a piece of land and an entry in the second chapter (perpetual usufruct) or the third chapter (usufruct) will show that ownership is encumbered and separate ownership of buildings exists.17

German law In German law there is no definition of immovables but, according to § 94 BGB, “land” denotes a piece of land together with its components. The latter are all things firmly attached to land and soil, such as buildings, trees, and other plants; and as long as this physical connection to land exists they may not be the object of separate real rights (§93 BGB). Rights connected with the right of ownership of land are also treated as its components (§96 BGB). However things attached to the soil for a temporary purpose as well as buildings or other structures attached to another’s land by a person who exercises a right over another’s land, do not become constituent parts of land (§95 BGB). Theoretically land includes unlimited space below and above its surface; however the owner cannot pro16 A Doliwa, Prawo Mieszkaniowe: Komentarz (Warszawa, 2003). also see S Kalus, “Rechtsveränderungen im Bereich Gesonderten Eigentums an Wohnungs––und Geschäftsräumen in Polen” in W Ogris and W Rechberger (eds), Gedächtnisschrift Herbert Hofmeister (Wien, 1996). 17 See Land Register and Mortgages Act 1982, Dz U82, No 19, item 147 with subsequent amendments, art 25 and Ordinance concerning the Maintenance of Land Registers and Document Files, Dz U01, No 102, item 1122, §§7, 27, 32, 33, 49.

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The Notion of Real Estate and Rights in Selected Legal Systems 257 hibit actions performed at heights or depths where he has no justifiable interest in their exclusion (§905 BGB). Units are, as in Polish law, also treated as separate immovables if conditions set out in an act concerning the ownership of units are met (Wohnungseigentumsgesetz). In such cases each individual unit within a building is owned separately, and the land underneath the building is co-owned.

Austrian law In Austrian law, the definition of immovable things is to be found in §293 ABGB. Immovables are things, which may not be moved from one place to another without causing them substantial damage18. Indisputably, land viewed as a part of the Earth’s surface together with its constituent parts and accessories is the most significant immovable thing. Constituent parts of land are all objects permanently annexed to the soil either physically, organically, or mechanically. Consequently, all buildings erected with the intention of being permanently located on a given piece of land as well as everything which is embedded in, cemented to, or nailed to the soil forms a component part of land.19 Land includes the underground to the extent that it may by utilised by the owner, excluding those minerals which are the subject of separate ownership; and it includes the airspace necessary to enjoy the land.20 Land also includes some water, referred to as private waters, such as: underground water and water lying on land, water in natural and artificial ponds, water collecting on land from precipitation. These are accessories of land.21 According to §293 ABGB, land is a collective thing, which encompasses accessories, that is things movable by nature, not necessarily physically connected to the land. Accessories must be indispensable to the use of the land or must be intended by the landowner as a continuous means of using land. Consequently, cereals, trees, fruits of the earth even after they have been collected, animals and equipment necessary to run a farm, are all classified as immovables.22 This resembles the notion of immovables adopted in French law. Within the definition of land are rights connected with its possession such as easements, for example.

18 S Wróblewski, see n 6 above, p 223; E Till, Wykład Prawa Prywatnego Austryackiego, t.I––Nauki Ogólne (Lwów, 1892) 228; H Koziol and R Welser, Grundriß des Bűrgerlichen Rechts (Wien, 1992) 81–82. 19 E Till, Wykład Prawa Prywatnego Austryackiego, t.II––Prawo Rzeczowe (Lwów, 1912) 53. 20 Above, pp 52–53; E Till, n 18 above, pp 228–29. 21 E Till, n 19 above, p 56. 22 E Till, n 18 above, p 229.

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258 Stanislawa Kalus and Magdalena Habdas French law In French law regulations concerning immovables are very casuistic. In the FCC the following types of immovables are listed: 1. things immovable by nature; 2. things immovable because of the purpose for which they are employed; 3. things immovable because of the thing in relation to which they are utilised (art 517 FCC). The first category includes land, buildings, and wind or water mills built on pillars or constituting a fixture of a building (arts 518 and 519 FCC). It also includes uncollected fruits of the earth and of the trees, and wood from the forest for as long as the trees have not been cut down. Even animals possessed by the lessee, when their possession was obtained from the lessor together with the possession of land, are considered to be immovables for the duration of the lease. Water pipes in the ground are immovables and constitute a constituent part of land (arts 520–23 FCC). The second category comprises goods which have been brought onto the land by the owner with the purpose of operating them to use and maintain the land. These have been listed in article 524 FCC and include animals connected with animal raising/breeding activities carried out on the land, but also objects used for production. Boilers, distilling equipment, vats, barrels, equipment in steel mills, factories, blacksmiths’ shops, etc. are immovables if they are affixed to land by plaster, cement, with the use of heat or by other means in such a way that their removal would cause their damage or damage of the land. Sculptures placed in purpose-designed bays or ledges of a building are considered as immovables, even if those sculptures can be moved to a different place (arts 523 and 524 FCC). The third category comprises rights connected with immovables such as: usufruct, easements, land services, claims to vindicate immovables. Also rights such as transferable public offices, senior rights or annuities were once classified as immovables.23

English law In English law a definition of land is to be found in s 205(1)(ix) of the Law of Property Act 1925. Land is perceived not only as the physical surface of the Earth but also includes mines and minerals underneath its surface, buildings on land and also rights over land, called incorporeal hereditaments (eg ease-

23 See R Savatier, Cours de Droit Civi (Paris, 1947) 302–3. See also H Dyson, French Property and Inheritance Law (Oxford, 2003) 13–19.

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The Notion of Real Estate and Rights in Selected Legal Systems 259 ments). Water itself is not treated as an object capable of being owned, but the land underneath it is. It is important to mention the category of fixtures, which resembles the notion of constituent parts present in continental civil law systems. It includes objects which, through their physical attachment to land, are treated as its parts. However certain objects brought onto the land and not physically attached to it may still be treated as part of land, despite not being formally classified as fixtures. Usually the removal of such objects would cause their damage (eg a dry stone wall) and so like fixtures, but unlike chattels, they are viewed as a part of land.24 The test to be applied when regarding the question of whether a given object is a fixture or not comprises two elements: the degree of annexation and the purpose of annexation, the latter becoming increasingly significant. Therefore although some works of art may be physically secured to interior walls, they are viewed as ornaments, rather than fixtures, although their removal may require some effort.25 Generally it may be said that the distinction between fixtures (and certain objects brought onto land, mentioned above) and chattels or accessories is most significant when considering the scope of ownership and transactions pertaining to it, as fixtures and constituent parts may not, as a rule, be excluded from legal effects of conveyancing land.

III . OWNERSHIP OF IMMOVABLE PROPERTY

French law It is appropriate to begin considering the nature of ownership in the context of French law. French provisions on ownership are contained in the FCC—also referred to as the Code of Napoleon. The FCC greatly influenced the legal regulations of many European legal systems based on nineteenth-century legal acts. The shape of ownership adopted in the mentioned code became the foundation of socio-economic systems based on the freedom of an individual.26 Any restrictions of this freedom could only result from protecting “freedom of citizens and personal safety”.27 The development of economic relations in subsequent centuries brought about amendments of provisions on ownership in the FCC. The direction of these changes shows a reduction of differences between ownership of movables and immovables. Additionally, the tendency to market all kinds of goods and the phenomenon of capital concentration brought about the acknowledgement 24 25 26 27

MP Thompson, Modern Land Law (Oxford, 2003) 12–14. Above, 15–16. Locré, La Legislation Civile Commerciale et Criminelle de la France, t.XVI (Paris, 1820) 499. Above.

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260 Stanislawa Kalus and Magdalena Habdas of enterprises (le fonds de commerce), intellectual property, human body parts, etc. as objects of ownership. Moreover, some obligation rights (such as leases) received protection equal to the protection of ownership.28 In French law increasing attention is paid to the division of goods into those which are means of production, held collectively, particularly by larger economic persons (e.g. companies), the State or local authorities, and those which are consumption goods, the latter not being subject to visible changes in the relevant legislation.29 Within the first of the mentioned above groups, it is necessary to note that the owner is often a separate entity (eg a public company) from the possessor (eg shareholder). Nevertheless, according to the Roman rule adopted in FCC, ownership comprises of the right to possess a thing (ius possidendi), to reap the fruits a thing brings (ius fruendi), and the power of disposal (ius disponendi).30 In the French doctrine, the following are the three fundamental characteristics of ownership: absoluteness, exclusivity, and perpetual nature.31 The first characteristic is a departure from the feudal concept of divided ownership. Currently the owner has a full and complete right which he may utilise even inappropriately, whereas the State is only entitled to public instruments, which restrict ownership in the public interest, eg the possibility of levying taxes or the possibility of expropriation, the latter being possible only if justified by public interest and with just, prior compensation (arts 544 and 545 FCC). Exclusivity of ownership means that the owner may exercise his right to the exclusion of all third parties, may manifest his right to others (eg by surrounding his land with a fence), and consequently may object to any breaches of his right. This principle also denotes the impossibility of one ownership right “belonging” to more than one person, except for co-/joint ownership. Co-ownership denotes a situation, in which each co-owner has a fractional share in the right of ownership, and may dispose of that share at any time and in any way he chooses. Joint ownership is connected with a particular legal relationship, and exists as long as that relationship does, eg joint ownership of property acquired while being married. Joint owners do not have a specified share in the right of ownership, they own a given thing jointly. When the legal relationship, which caused joint ownership to come into existence, ends (eg a divorce), joint ownership converts into co-ownership with fractional shares allotted to co-owners. Legal provisions specify the fractions, but often the new co-owners receive equal shares. However, according to article 553 FCC, ownership of land may belong to one person, ownership of buildings to another person, and ownership of other 28 GJ Martin, “L’ Evolution du Droit de Propriété de Puis le Code Civil” (1993) 53 Acta Universitatis Lodziensis, Folia Iuridica, p 235. 29 Above, pp 236–37. 30 M Planiol, Traité Élémentaire de Droit Civil (Paris, 1922) 719. 31 G Baudry-Lacantiner and M Chauveau, Traité Théoretique et Practique de Droit Civil (Paris, 1905) 152–60.

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The Notion of Real Estate and Rights in Selected Legal Systems 261 structures to yet another person. The Roman principle of superficies solo cedit, known in other legal systems of continental Europe, is only a presumption in French law, which may be rebutted through contradictory evidence. This does not contradict the principle of exclusivity, since we are dealing with separate objects and their separate owners, rather than with separate owners of one object. The perpetual nature of ownership signifies that the right exists as long as its object does and does not expire if it is not exercised; however if it is not exercised, a third party may acquire ownership through long use and deprive the previous owner of his right. Consequently, the following definition of ownership is to be found in literature: “the right on the basis of which an object is absolutely and exclusively subject to the actions and will of the owner”.32

Polish and German laws In Polish law, ownership relates to the right to own things within article 45 PCC. The highest authority for the existence and protection of ownership is provided by article 21 of the Polish Constitution of 2 April 199733 where it is stipulated that the Republic of Poland protects ownership and the right to inherit; expropriation is allowed only for public purposes and with just compensation. Further provisions regarding ownership are contained mainly in Book II of the PCC (arts 140–231). Ownership is a real right, so it is effective against the whole world and signifies everyone’s obligation not to undertake any activities which would interfere with another’s ownership. It is a right unconstrained in time that, theoretically, can last for ever, but more precisely can last for as long as its object exists. According to the Roman principle of substitution, ownership is never an aggregate right and always passes as a whole to each consecutive owner. In this respect it does not resemble the English fee simple absolute in possession, which is treated as an aggregate right, out of which smaller and simultaneous estates may be isolated, like for example: the life estate, the fee tail, estate pur autre vie. These estates are in the light of English law ownership rights which in quality and kind do not differ from the fee simple, and, as has already been mentioned, they can exist simultaneously.34 The English system differentiates between title and ownership, whereas systems deriving from Roman law distinguish ownership and lesser rights, the two categories having qualitatively different claims available.35 English ownership denotes the right to manage, enjoy or dispose of a thing, and in that respect resembles ownership of legal systems based on 32 33 34 35

Compare M Planiol, n 30 above, as well as G Baudry-Lacantinery and M Chauveau, above. Dz U97, No 78, item 483. GC Cheshire and EH Burn, Modern Law of Real Property (London, 1994). WT Murphy and S Roberts, n 12 above, p 60.

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262 Stanislawa Kalus and Magdalena Habdas Roman law, but unlike them allows ownership not only to be shared concurrently among several persons, but also to be split up over time.36 Therefore estates in land do not signify the quality of land-holding, but the quantity of land-holding, that is, the period for which land is granted.37 In Polish law ownership is not an aggregate right; any rights exercised by another person in respect of the owner’s property are rights over alien property and are not ownership rights. Although ownership is the fullest right, its scope is not unlimited. The definition contained in article 140 PCC does not enumerate the activities an owner can engage in with respect to his property (that would be indeed impossible), but merely states that an owner is entitled to use his property, in particular, he may collect fruits and other income it brings, as well as dispose of it. The provision being discussed does, however, point out that the owner’s rights are limited by rules of socio-economic justice, statutory provisions, and the economic purpose of ownership of a given thing. They delimit the scope of the fullest right to a thing. A similar provision concerning ownership is present in §903 BGB according to which, the owner may deal with his thing as he pleases and exclude others from interfering, as long as his actions are not contrary to law. In comparison to Polish law, the German definition contains a much more general delimitation of the scope of ownership and does not rely on elements such as rules of socio-economic justice and the economic purpose of ownership. However, in article 14 § 22 of the German constitution it is stipulated that ownership implies obligations, so the use of property should also serve the common good. Consequently, the civil concept of ownership based on the nineteenth-century doctrine of laissez-faire has been given a more social context.38 In the mentioned provision, the German legislator also chose to explicitly remind owners of animals that they must comply with special legal provisions on animal protection when exercising their right. Delimiting the scope of land ownership according to Polish law requires the consideration of various statutory provisions, such as: the Planning Act 2003, the Construction Law Act 1994, the Law of Environment Protection Act 2001, the Management of Real Estate Act 1998, etc. The PCC itself also contains provisions which form boundaries of ownership, for example articles 144–54—also referred to as the law of neighbours. Similar provisions concerning neighbouring (but not necessarily adjacent) land exist in the BGB (§906 and the following ones). It would not be precise to state that these provisions are a limitation of the right of ownership, because their function is to locate the boundaries of that right. Beyond these boundaries, the right of ownership simply does not exist. Exercising the right of ownership within limits set by rules of socio-economic justice may be best illustrated by a situation in which the owner of a thing exercises his right for the purpose of blackmail. For example, let us assume that 36 37 38

Above, p 52. CD Bell, Land: The Law of Real Property (London, 1997) 17. G Robbers, An Introduction to German Law (Baden-Baden, 1998) 263.

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The Notion of Real Estate and Rights in Selected Legal Systems 263 a brother owns an object of a large sentimental value to the other members of the family. The brother is threatening to sell this object, just to force the family to perform a certain action. This would be viewed as exercising the right of ownership for the purpose of blackmail. Such behaviour is beyond the scope of ownership.39 One of the boundaries of ownership is also its economic purpose. Therefore, an owner of land may exercise his right to a different extent, depending on whether he owns agricultural land, development land, land adjacent to residential properties, etc. Having pointed out the scope of ownership, article 140 PCC allows the owner to do anything he pleases within the set boundaries. Obviously, the most important prerogatives of ownership include the right to possess (ius possidendi), the right to use (ius utendi), the right to collect fruits (ius fruendi), the right of factual dispositions (ius abutendi), and the right of legal dispositions (ius disponendi).40 Legal dispositions of ownership may be divided into the following groups: • • • • •

creating encumbrances; transfer through inter vivos civil acts; transfer through mortis causa civil acts; renunciation; creating obligation rights (eg leasing, lending).

It is important to note that although inter vivos transfer of ownership of immovable property requires the form of a notarial deed, its legal effectiveness does not, unlike in German law, depend on an entry made in the land register. Such an entry is obligatory and neglecting this responsibility may lead to civil liability; nevertheless, it does not influence the validity of the actual transfer. The above also applies to creating encumbrances over immovable property, with the exception of creating perpetual usufruct and mortgages. Entering them in the land register brings about their legal existence. Also the transfer of encumbrances over land, which have been entered into the register, requires an entry which effects legal changes. Renunciation of ownership of land is allowed in article 179 PCC, where it is stated that upon renunciation, the declaration of which must take the form of a notarial deed, a local authority, identified in accordance with the location of the immovable property in question, becomes the new owner.41 The local authority is liable for the encumbrances on the immovable property, but only up to the amount of the property’s value, calculated on the basis of the property’s state of repair at the date of acquiring it, and the prices at the date of the satisfaction of the creditor. 39

J Ignatowicz, n 14 above, s 76. Above, 72–73. 41 This provision has been amended with effect from 24 September 2003, prior to which, ownership of renounced immovable property passed on to the State. 40

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264 Stanislawa Kalus and Magdalena Habdas Austrian law In Austrian law ownership, according to §354 ABGB, signifies the owner’s right to enjoy and manage the thing and its fruits to the exclusion of all others. The owner may use the thing, destroy it, neglect it, transfer his right to another person, or renounce his right and can make legal claims in order to protect his right.42 Exercising the right of ownership is limited because of the need to protect the rights of third parties and the rights which are a means of maintaining and supporting common order. Ownership is a universal right in the sense that it encompasses all powers with respect to a thing and consequently the legislator does not enumerate the individual prerogatives of the owner. In Austrian literature it is emphasised that ownership is not a sum of rights, but is an abstract right which encompasses various prerogatives.43 It is also a very flexible right which may be limited by various, even quite extensive, encumbrances, but once they expire, ownership reverts to its original state. Ownership in general, but particularly ownership of land, is subject to various limitations which predominantly stem from public law and State monopolies. These include: mining, obtaining land for public roads, and for uses connected with State security/military purposes. Limitations of ownership are especially numerous when public safety is at stake, and provisions on fire, construction and sanitary safety greatly influence the enjoyment of land. Erecting buildings requires building permissions issued by public authorities. Frequently such permissions contain additional conditions concerning, for example, the requirement to set aside land for access roads. The neighbourhood of historical properties, railroads, public roads, mines, rivers and other waters, hospitals, cemeteries, imposes further constraints on ownership.44 Like Polish and German law, Austrian law contains provisions referred to as the law of neighbours, which concern neighbouring, but not necessarily adjacent, land. Actions undertaken on land may influence the enjoyment of neighbouring land in a positive, but usually in a negative way. It was therefore essential to regulate the relations among owners of neighbouring immovables in a way that would provide ample protection of all land owners and allow them to enjoy their right to the fullest extent possible in the circumstances. Both private and public law contain such provisions.45

42 43 44 45

E Till, n 19 above, p 7. Above, p 8. Above, pp 58–63. Above, p 65.

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The Notion of Real Estate and Rights in Selected Legal Systems 265

IV . OTHER RIGHTS WITH RESPECT TO IMMOVABLE PROPERTY

Rights over another’s property may either be created at the will of the parties involved (contracts) or may be introduced by the legislator in statutes. These rights may be real rights (effective against the whole world), or obligation rights (effective inter partes).

Polish law The Polish law of real rights exhaustively enumerates rights which are real, according to the numerus clausus principle. Parties cannot create real rights which are not listed in the legislation, nor in any way amend the character of the ones available. The ratio legis of the above is the conviction that real rights bear an especially important meaning to the society as well as the economy, therefore new types of real rights cannot be randomly created at the will of individuals. This also accounts for the fact that most rules relating to real rights are iuris cogentis and the parties’ provisions which frustrate them are void ex lege. Apart from ownership, the status of real rights has been granted to perpetual usufruct and the so called limited real rights, namely: usufruct, easements, pledge, mortgage, and the proprietary co-operative right to a unit. Apart from pledge, all limited real rights may be created with respect to immovable property. It is worth noting that English law, apart from ownership interests, does recognise rights which one person may have over land which belongs to another (easements, rentcharges, charges by way of legal mortgage, miscellaneous charges, rights of entry),46 and classifies them as interests in land which are proprietary in nature. Essentially this means that they are, as a rule, effective against future owners and in this respect they resemble the continental limited real rights. The Polish right of perpetual usufruct resembles the German Erbbaurecht and the French bail emphytéootique or bail à construction and is regulated in articles 232–43 PCC and also in various provisions of the Management of Real Property Act 1997 (MRP).47 It may only be created as an encumbrance of land (and not other types of immovable property) owned by the State or local authority. Perpetual usufruct is a right in respect of another’s land and so the perpetual usufruct holder is obliged to pay an initial and yearly fee for his right. It is therefore not an ownership interest and is created for a period of 99 years. The position of perpetual usufruct among the real rights is quite strong. Although it is less than ownership, it is definitely substantially more than the limited real rights. Its usual purpose is to allow non-owners to build on land. The scope of 46 47

J Stevens and RA Pearce, n 11 above, p 38. Dz U00, No 46, pos 534 with subsequent amendments.

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266 Stanislawa Kalus and Magdalena Habdas the right is delimited by statutory provisions, rules of socio-economic justice and, additionally, by the provisions of the contract, which confine the enjoyment of land to specified purposes and may also contain other constraints agreed by the parties. The perpetual usufruct holder may enjoy the land and buildings on it, but also transfer the right, establish encumbrances on it, and devise it to his heirs. Perpetual usufruct is liable to execution for the non payment of debts. Perpetual hold is always created for a term certain of 99 years, with the possibility of creating it for a shorter term, but no shorter than 40 years. After the expiry of the right the land reverts back to the owner, ie the State or local authority, and the perpetual usufruct holder does not have any claims to purchase the land, but he should be compensated for the buildings he erected. Perpetual usufruct is an institution popular among developers who gain access to State and local authority land, which is frequently attractively located but not designated for sale. It is created by contract, which must take the form of a notarial deed and be entered on the land register. Only when the latter is performed does the right comes into existence. The fullest of the Polish limited real rights is the right of usufruct, which entitles one to use a thing and collect its fruits (art 252 PCC). It may be established with relation to all types of immovable property. It is an encumbrance over the entire immovable property, but its execution may be limited in two ways: only a part of immovable property may be used, or some of the fruits the property brings may be exempted from collection (art 253 PCC). The right may be established as a gratuitous one, or one for which rent is paid. It is not transferable and cannot be inherited (art 254 PCC). Easements are encumbrances applicable to all kinds of immovable property. They may take the form of active or passive easements (art 285 PCC). An active easement denotes the right of the owner of the dominant immovable property to use in a defined fashion an encumbered immovable property. A passive easement denotes the obligation of the owner of the encumbered immovable property to abstain from certain actions with respect to his property or the dominant property. Easements may also be divided into land and personal easements. The prerogatives they afford are the same, but property easements may only be established to increase the economic utility of a given immovable property, whereas personal easements may be established for the sole purpose of meeting individual needs of the owner (who must be a physical person) of the dominant property. Furthermore, personal easements always expire upon the death of the entitled owner (art 299 PCC). Property easements are rights which are tied to the right of ownership. Consequently they may only be transferred together with that right, and vice versa. They may be inherited together with the ownership of the dominant or the immovable property. Personal easements cannot be transferred or executed by a person other than the originally entitled one (art 300 PCC). It is interesting to point out that in situations concerning infrastructure pipes or cables, etc that must run through third party properties, the institution of

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The Notion of Real Estate and Rights in Selected Legal Systems 267 easements is not easily applied, since there is no dominant tenement. Owners of plant are usually not owners of any adjacent land and therefore land easements cannot be created. Mortgages are limited real rights which secure monetary debts. Mortgages are encumbrances which, as a rule, may only be created with respect to immovable property. However, according to article 65 section 4 of the Land Register and Mortgages Act 1982 (LRM),48 a mortgage may be created over the following rights: perpetual usufruct, proprietary co-operative right to a unit, a claim secured by a mortgage. Also, the Polish legislator has, for the past three years, been contemplating the introduction of an institution based on the German Grundschuld into the Polish legal system. Usually a mortgage is created by contract but it must be entered in the land register in order to come into legal existence (art 67 LRM). A mortgage may also arise in the course of civil proceedings out of a court’s decision or a prosecutor’s order (arts 109 ff LRM), but even then it must be entered in the land register to become effective. A mortgagee may not in way use the encumbered property but may object to any changes or actions which diminish its value and therefore undermine his security (arts 91–93 LRM). He may only satisfy his claim by instigating execution proceedings and obtaining money from the sale of the property performed by the bailiff. There are no legal provisions that would allow the mortgagee to automatically become the new owner of the immovable property. A proprietary co-operative right to a unit is a limited real right which may only exist within a housing co-operative. It is a right which allows the entitled person to enjoy the unit in accordance with its purpose (retail, residential, etc), but also to transfer the right, establish encumbrances on it, or devise it to his heirs. Due to the fact the right is transferable, it is liable to execution for the non payment of debts. The right is not limited in time but it is one for which monthly payments to the co-operative must be made. It may belong jointly to two or more people, but at least one and only one of them must be a member of the cooperative. If the right belongs jointly to spouses, both of them may be members. The right is created through a written contract between the co-operative and the party interested, subject to a condition precedent that membership will be granted. Once the right is created its transfer must take the form of a notarial deed. A land register may be created for the right, which usually happens if the person entitled wishes to encumber it with a mortgage. The market value of this limited real right does not differ from market values of owned units even though the latter are objects of ownership. It is also worth mentioning that in the beginning of 2001 the legislator attempted to create legal provisions which were to facilitate converting co-operative limited rights into ownership of units and to eventually lead to the complete demise of the former. However, the legal status of many plots of land on which co-operatives have erected buildings is 48

Dz U01, No 124, item 1361 with subsequent amendments.

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268 Stanislawa Kalus and Magdalena Habdas ambivalent and the attempt has been abandoned, especially since society was not convinced of the usefulness of such a conversion, which was not to be free of legal costs.

German law In German law the enjoyment of immovables by people other than their owners is often connected with the creation of limited real rights, which may be divided into three groups: rights of use, rights of security, and rights of administration and realisation.49 The first group includes the usufruct (not transferable, entitles one to all forms of property usage), easements (land or personal), building leases (Erbbaurecht, heritable rights which allow building on land by persons who are not its owners). The second group includes, as far as immovables are concerned, two types of mortgages, namely the Hypotek and the Grundschuld. The former exists as long as the claim it secures does, while the existence of the latter is possible even after the secured claim had been satisfied. Also, the Grunschuld may take the form of Rentenschuld, where money derived from the sale of the burdened land is paid to the creditor at regular time intervals. Recovering money from land burdened by all of the above mentioned types of mortgages is done through execution proceedings and may take the form of placing land under compulsory administration or selling it in a public auction. In the first case, the creditor’s claim is satisfied out of the profits of the land under administration.50 Austrian law In Austrian law easements are very significant rights which are an encumbrance on immovables. They may either be personal easements or land easements, the former incapable of being transferred and in existence for no longer than the lifetime of a specified physical person, the latter tied to the ownership of land and transferable with the right of ownership. Another important real right is the mortgage, sometimes called as the land pledge. It secures a valid claim of the creditor along with interest and requires an entry in the land register in order to come into legal existence (§451 ABGB). French law In French law, the following real rights are listed in FCC: usufruct, usage (usus), accommodation right, easements, land servitudes, and mortgage. The possibil49 50

G Robberts, n 38 above, p 268. Above, p 270.

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The Notion of Real Estate and Rights in Selected Legal Systems 269 ity of creating such rights stems from the freedom to convey and encumber things (la liberté d’ aliéner), which may only be limited in specifically identified situations and only due to a justified interest.51 As far as real rights with respect to immovable property are concerned, they are mainly connected with neighbouring immovables, but concern not only owners of neighbouring land, but also the users and tenants. Such rights may arise between the owners and neighbouring users out of the sheer fact of being neighbours. These relationships are regulated by provisions on easements, but French scholars disagree whether these rights are real or obligational in character. Some scholars are of the opinion that these relationships are, to a large degree, equivalent to easements (eg M Planiol, M Picard), others (eg L Josserand) point out that these relationships are connected with land itself and serve the purpose of ensuring equality between the owners. Consequently they may be treated as special type of obligations, which are half real in character (semi–réels). They exist exclusively in connection to neighbouring immovables and concern issues such as: delimiting land, the obligation to surround it with a fence, or the obligation to erect structures on land in a way that will not require access to them through adjacent land nor obscure light for the neighbour, etc. A special type of an easement is the right of way (le droit de passage) in the case of an enclave (that is, a piece of land entirely surrounded by another’s land). The scope of this right depends on the use of land in question, but the burden on adjacent land should be as small as possible, with the owners having the possibility to demand compensation for any loss incurred. An immensely interesting obligation right, which substantially limits ownership, is the leasehold, particularly the leasehold of residential properties (les baux d’ habitation). Some authors even point out that this right is a reflection of the gradual demise of the right of ownership.52 Provisions concerning the leasehold entitle the tenant to remain in the premises even when the right has expired, and do not allow for rent increases. Tenants of commercial premises and usufruct holders of agricultural land have similar prerogatives.53

CONCLUSIONS

The purpose of this chapter was to consider, in the context of possible harmonisation of laws, different ways in which land and rights pertaining to it are regulated in selected legal systems. The products of our analysis are as follows:

51

R Savatier, n 23 above, p 339. P Dupont Delestraint, Memento de Droit Civil: Droits Réels principaux (Les Biens) (Paris, 1977) 24. 53 T Kurowska, Upowszechnienie Prawa Własności Nieruchomości (Katowice, 1994). 52

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270 Stanislawa Kalus and Magdalena Habdas 1) Significant differences exist on the basic level of defining immovable property, indeed, in English law there is no property law as such, and in German law there is no definition of immovables. 2) Bearing in mind the conditions in which the considered legal systems developed and the fact that provisions concerning property law are one of the most fundamental provisions in a legal system, harmonising different laws by introducing new definitions of immovable property would be very difficult to achieve in practice. Despite the process of law harmonisation within Member States of the EU, differences in legal systems are unavoidable and are not, as such, prohibited.54 3) Although in all legal systems ownership is the fullest right to a thing, ownership of land is treated differently. Poland, Germany and Austria adhere to the superficies solo cedit principle, but France does not. In England, ownership is an aggregate right, out of which smaller interests may be carved out. This is impossible in Polish, German, Austrian and French laws, where ownership cannot be divided into smaller or lesser rights. 4) Important differences occur in the analysed legal systems with respect to constituent parts (fixtures) and accessories of land. These must be carefully considered in order to ascertain what exactly is the object of ownership, ie what shares the legal status of land itself. 5) It is obvious that the catalogues of rights with respect to land will differ from one legal system to another. Therefore, when trying to compare these rights it is essential to consider whether they are rights effective erga omnes or inter partes. Frequently, the terms employed to denote a given right in one country are easily translatable into the native language of a different country, but there they are a completely different legal institution. Consequently it is not difficult to be misled and, at first sight, to treat such rights as equivalent legal institutions. 6) Dealing in land in different countries will require an in-depth understanding of respective laws concerning the law of property or land law.

54

M Ahlt and M Szpunar, Prawo Europejskie (Warszawa, 2002) 207–14.

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13

Reaching a Balance: Addressing Property Issues in Post-Conflict Societies SARAH WILLIAMS*

Several states in different regions of the world are emerging from a sustained period of internal or international armed conflict, undergoing a transitional post-conflict phase with the assistance of the international community, with the ultimate aim of achieving a state of full and lasting peace. For many states, the difficulty of this transition cannot be overemphasised. Populations have been traumatised by violence, and large parts of the population have been forced to vacate their homes, either through discriminatory practices of the State itself or through fear of further violence. Conflict has stifled the economy, the rule of law has been eroded, and domestic institutions, including the courts, have ceased to function. Faced with the immediate need to address basic humanitarian needs and to re-establish law and order, dealing with property issues arising from the conflict may seem a low priority. Yet addressing property issues is inherently linked to the transition to a peaceful society, particularly where property issues were an underlying cause of the conflict. This often involves complex legal and political issues with the potential to shatter the fragile peace, such as the need to assess the lawfulness of actions taken during or preceding the conflict. For this reason, the legal aspects often cannot be separated from the need for a politically acceptable solution and traditional approaches to balancing property rights must be applied with caution. This chapter examines these issues through a detailed study of the experience of the Housing and Property Claims Commission (HPCC) in Kosovo, an independent organ charged with resolving the large number of claims arising from the previous discriminatory regime, the conflict and the aftermath of the conflict. * Lecturer, Department of Law, University of Durham. The author would like to thank Professor Tom Allen for his assistance in reading an earlier draft of this chapter. This chapter was current as of March 2004.

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272 Sarah Williams

INTRODUCTION

In June 1999, following the cessation of a military campaign by the North Atlantic Treaty Organisation (NATO) against the Federal Republic of Yugoslavia (FRY), the United Nations Security Council authorised the deployment of international civilian and military presences to Kosovo.1 The international civil presence is led by the United Nations Interim Administration Mission in Kosovo (UNMIK) and is mandated “to provide an interim administration for Kosovo under which the people of Kosovo can enjoy substantial autonomy within the Federal Republic of Yugoslavia”.2 The civilian component was divided into four pillars,3 with civilian efforts assigned to a lead agency by sector,4 all under the overall authority and coordination of the Special Representative of the Secretary-General of the United Nations (SRSG) and UNMIK.5 UNMIK is supported by the International Security Force (KFOR), which is mandated to perform military functions, and to establish a secure environment within which UNMIK can operate.6 KFOR does not operate under the authority of the SRSG, relying instead upon its own authority derived from Resolution 1244 and the Military Technical Agreement.7 In adopting Resolution 1244, the Security Council presented “the United Nations with an unprecedented challenge in Kosovo”.8 Together, UNMIK and KFOR undertake a wide range of functions normally associated with the government of a state.9 All “legislative and executive authority with respect to Kosovo” is vested in UNMIK, including 1

See Security Council Resolution 1244, 10 June 1999 (“Resolution 1244”). Para 10, Resolution 1244. 3 SG Report 12/7/99, para 43 and SG Report 12/6/99, paras 2–14. 4 UNMIK (responsible for the provision of interim civil administration services); United Nations High Commission for Refugees (UNHCR) (responsible for humanitarian affairs and repatriation of refugees); Organisation for Security and Cooperation in Europe (OSCE) (responsible for institution building) and the European Union (EU) (responsible for economic reconstruction). The mandate of UNHCR was fulfilled by the end of June 2000, the humanitarian pillar disbanded, and residual functions transferred to UNMIK. A fifth pillar was created in June 2001 to deal with police and justice issues. For a discussion of the mission structure UN Secretary-General Reports of 12 June 1999 (UN Doc S/1999/672) and 12 July 1999 (UN Doc S/1999/779), and M Griffen and B Jones, “Building Peace through Transitional Authority: New Directions, Major Challenges” (2001) 7(4) International Peacekeeping 75. 5 Report of the Secretary-General pursuant to Para 10 of Security Council Resolution 1244 (1999) of 12 June 1999, UN Doc S/1999/672, para 3. 6 Para 9, Resolution 1244. 7 Military Technical Agreement between the International Security Force (KFOR) and the Governments of the Federal Republic of Yugoslavia and the Republic of Serbia, 10 June 1999 (UN Doc S/1999/682). 8 Report of the Secretary-General on the United Nations Interim Administration Mission in Kosovo, 12 July 1999 UN Doc S/1999/779, para 120. 9 For an analysis of the “new role” for the UN, see M Bothe and T Marauhn, “UN Administration of Kosovo and East Timor: Concept, Legality and Limitations of Security CouncilMandated Trusteeship Administration” in C Tomuschat (ed), Kosovo and the International Community (Kluwer, The Hague, 2002). 2

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Addressing Property Issues in Post-Conflict Societies 273 “the administration of the judiciary”,10 while KFOR is initially responsible for law and order and security issues in the territory.11

PROPERTY ISSUES IN KOSOVO

Upon arrival in Kosovo, the international administration faced significant challenges. While ensuring the cessation of violence and re-establishing law and order were the initial priorities for the international administration, it quickly became apparent that the international administration would have to address the issue of property rights if lasting peace was to be secured in Kosovo.12 Problems with property rights in Kosovo stem from three events: the discriminatory practices of the former regime, the effect of the armed conflict and NATO bombing campaign, and the practice of returning refugees illegally occupying properties. Under Resolution 1244, the international civil administration was responsible for “protecting and promoting human rights” and “assuring the safe and unimpeded return of all refugees and displaced persons to their homes in Kosovo”.13 Responsibility for property issues fell within the remit of several organisations, in particular UNHCR (refugee return), UNMIK (civil administration) and the OSCE (human rights). In addition, as the ultimate authority for security matters in Kosovo,14 KFOR is mandated to establish “a secure environment in which refugees and displaced persons can return home in safety” and to support the activities of the international civil presence.15 Thus, the support and cooperation of KFOR was, and remains, vital both to protect and to enforce property rights. In addition, these provisions of Resolution 1244 confirm that one of the tasks of the international administration was to facilitate refugee returns, the political consequences of which are discussed below. In 1990, the Republic of Serbia (RoS) had revoked the status of Kosovo as an autonomous province within the RoS.16 Until this action, whilst still formally part of the RoS, Kosovo had its own administration, assembly and judiciary and was entitled to participate in both the Serbian parliament and the federal Yugoslav parliament. The rise of Serb nationalism during the 1980s led to the 10 UNMIK Regulation No 1999/1 On the Authority of the Interim Administration in Kosovo of 25 July 1999, s 1.1 (“Regulation 1”). 11 Para 9(d) Resolution 1244. 12 Secretary-General Reports, above n 4. 13 Paras 11(j) and (k) respectively. 14 MTA, Art V. 15 Paras 9(c) and (f) of Resolution 1244 respectively. 16 The following discussion is drawn from a number of sources. See T Judah, Kosovo: War and Revenge (Yale UP, New Haven, Conn, 2000); G Campbell, The Road to Kosovo––A Balkan Diary (Westview, Colorado, 2000); N Malcolm, Kosovo (Papermac, Kent, 1998) and the Report of the Independent Commission on Kosovo, Kosovo: From Crisis to Crisis (2000) and supplement. See also the reports of the OSCE n 22 below.

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274 Sarah Williams RoS gradually exerting greater control over institutions in Kosovo, including the police and security forces, the judiciary and financial institutions. Under the former command economy, property in Kosovo was both privately and socially owned, with occupancy rights in socially owned properties frequently linked to employment. The RoS introduced discriminatory legislation directed at Kosovo Albanians, which was intended to maintain the Serb presence in the province and to minimise the powers of the Albanian population. In particular, the Law on Changes and Supplements on the Limitation of Real Estate Transactions17 retroactively voided any sale of property in Kosovo to an Albanian by a Serb leaving the province and required all property transactions to be approved by the Serb Ministry of Finance. This ensured that the ethnic composition of various communities could be monitored and regulated if needed to protect Serb interests in the area. Similarly, the Law on the Conditions, Ways and Procedures of Granting Farming Land to Citizens who wish to Work and Live in the Territory of the Autonomous Province of Kosovo and Metohija18 provided that rights to socially owned land could only be allocated or transferred to individuals when this was in the Serb interest. The discriminatory legislation forced both Serbs and Albanians to rely upon informal transactions that were neither officially verified by the courts nor recorded with the registry. Some Albanians relied on trusted Serb agents to be the nominal owner of property, or “created” contracts between parties that satisfied the requirements of the legislation.19 However, a large number of property transactions were conducted completely outside the applicable legal regime. As a result, the “property records in Kosovo are incomplete and substantially inaccurate”,20 and for many properties there are at least two parties with documents evidencing a right to own or occupy that property.21 In addition, Albanians were dismissed from, or refused, employment as the result of discriminatory employment policies, not only losing their source of income, but their right to socially owned housing, deposits in employment-linked housing funds and any right to buy a socially owned residence that had accumulated through continuous employment. Socially owned housing was then reallocated to Serb employees, often on better terms, either as an employment benefit, or as part of a programme of privatisation of socially owned property.22 17 Official Gazette of the Republic of Serbia, 22/91 of 18 April 1991 (unofficial translation). For a discussion of the effect of these laws, see the OSCE reports on property rights, below n 22. 18 Official Gazette of the Republic of Serbia, 43/91 of 20 July 1991 (unofficial translation). 19 OSCE, Property in Kosovo: Historical Overview, Annex 1 to OSCE Report, The Impending Property Crisis in Kosovo, 25 September 2000. 20 S Leckie, “Resolving Kosovo’s Housing Crisis: Challenges for the UN Housing and Property Directorate” (2000) 7 Forced Migration Review 12, 13. 21 Leckie, above. 22 Leckie, above n 20. For a more detailed discussion see OSCE, Property Rights in Kosovo (January 2002) and Property Rights in Kosovo 2002–3, and UN Habitat, Housing and Property in Kosovo: Rights, Law and Justice. Proposals for a Comprehensive Plan of Action for the Promotion and Protection of Housing and Property Rights in Kosovo, 30 August 1999 (“the Habitat Report”).

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Addressing Property Issues in Post-Conflict Societies 275 During the NATO bombing campaign pressure on the property rights of Albanians increased. Military and paramilitary forces of the FRY and the RoS conducted a campaign of terror against Albanians, killing or “disappearing” some, and forcing many to flee their homes to neighbouring states.23 Serb and Roma families occupied the abandoned properties, with the FRY government transferring ownership of these homes to the new residents. Many properties were destroyed or substantially damaged by Serb forces, and some by NATO bombs. As the end of the conflict neared, property records proving Albanian ownership were destroyed by Serbian authorities or transferred to Serbia proper, out of reach of the international administration. This has perpetuated the gaps in the already inaccurate property records.24 Following the end of the conflict, many Albanian refugees and internally displaced persons returned, unlawfully occupying property owned by Serbs and other ethnic groups, often forcing the occupier to abandon the property through physical violence and intimidation.25 These forced evictions were “evidenced” through the production of false ownership certificates, or by compelling the victim to sign a disposal document, often undervalued, stating that the transaction was entered into voluntarily and free of duress. The international administration also occupied socially owned and abandoned property to house staff and to relocate refugees whose homes have been destroyed.26 The violence and reverse discrimination directed at the Serb and ethnic communities has resulted in many fleeing the province, again creating a number of abandoned properties which have been occupied by returning Kosovo Albanians, a process known as secondary occupation.27

The initial response On arrival in Kosovo, the international administration faced several key tasks. First, to protect the right to return and to provide accommodation for returning refugees of all ethnic groups. Second, to address the consequences of the discriminatory housing legislation and the large numbers of unofficial transactions during the previous regime, and the unlawful occupation of Albanian homes during the conflict. Third, to prevent and to redress the wave of secondary occupation of Serb and other minority properties by returning Albanians. Fourth, to 23

See various reports of the Secretary-General to the Security Council during this period. See sources cited, above n 22. 25 See OSCE, Assessment of the Situation of Ethnic Minorities in Kosovo (earlier reports), available on-line at: www.osce.org. 26 UNMIK is authorised to occupy property pursuant to its mandate to administer the territory under Resolution 1244. In particular, Section 6 of Regulation 1 authorises UNMIK to administer immovable property registered in the name of the FRY or the RoS or their organs that is within the territory. 27 Leckie, above n 20; OSCE reports on property, above n 22; OSCE, Assessment of the Situation of Ethnic Minorities in Kosovo (9th and 10th reports, 2002 and 2003). 24

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276 Sarah Williams develop a legal and regulatory framework, including a cadastral and property register, to support the eventual transition of the economy from a command to market-based economy. Finally, to address the issue of the compensation, if any, payable to victims of interference with property rights, both under the previous regime and the international administration.28 This task had to be performed in a legal environment in which the rule of law was virtually non-existent, important infrastructure was severely damaged or destroyed, the judicial system was non-operational, and the basic components of civil administration had yet to be established.29 In addition, Resolution 1244 was ambiguous as to the future status of the province: it is not specified whether the territory would eventually become a state (as hoped by the Albanian population) or would remain part of the FRY (the intention of the majority of interested states and the Serbs).30 This uncertainty politicised the issue of Serb returnees and property claims in an already volatile political environment. Property issues are intrinsically linked with the return of refugees, which is one of the benchmarks set by the SRSG to be satisfied before discussions on the final status of the province can commence.31 The international community required Serb returns so that the international intervention “did not lead to the creation of a mono-ethnic Kosovo”32 and to assist in convincing the Security Council that the situation was conducive to resolving the issue of final status.33 For the RoS government, high levels of returns aided its own aim, partitioning Kosovo into ethnic cantons or entities, as in Bosnia.34 RoS representatives used their participation in key issues as lever28

Points are drawn from Leckie above n 20. See Secretary-General reports, above n 4. Also OSCE reports on the judiciary, Emergency Measures for Legal Systems, 7 November 1999, and The Development of the Kosovo Judicial System, 17 December 1999 and International Crisis Group, Kosovo Report Card, August 2000. 30 This is reflected in the preamble to Resolution 1244, which reaffirms “the commitment of Member States to the sovereignty and territorial integrity of the Federal Republic of Yugoslavia”. For discussion of the current status of the territory, see: A Zimmerman and C Stahn, “Yugoslav Territory, United Nations Trusteeship or Sovereign State? Reflections on the Current and Future Legal Status of Kosovo” (2001) 70 Nordic Journal of International Law 423; L Ringelheim, “The Legal Status of Kosovo” in Kosovo 1999–2000: The Intractable Peace. Research paper produced at the European University Institute, copy on file with the author. 31 A key aim is that “all Kosovo inhabitants have their right to remain, right to property and right to return respected throughout Kosovo”. This aim is to be achieved through the attainment of several benchmarks, including “conditions for safe and sustainable returns and reintegration”. The benchmarks are available on-line at www.unmikonline.org. The Security Council has confirmed that this benchmark must be satisfied, even with the increased violence in the territory: UN Press Release, “Security Council Restates Support for Kosovo’s ‘Standards before Status’ Policy”, 30 April 2004. 32 International Contact Group Return to Uncertainty: Kosovo’s Internally Displaced and the Return Process, 13 December 2002, at 1. 33 Resolution 1244 provides that the international administration is to facilitate “a political process designed to determine Kosovo’s future status” and “in a final stage” to oversee the transfer of authority from provisional institutions to the institutions established pursuant to the political settlement: paras 11(e) and (f). 34 The Dayton Peace Agreement separated Bosnia into two largely ethnically homogeneous entities, the Federation of Bosnia Herzegovina and the Republika Srpska. 29

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Addressing Property Issues in Post-Conflict Societies 277 age for securing concessions in property rights and return issues.35 In addition, the international community focused on the number of returns, not the conditions under which these returns occurred, and the quality of life for returning refugees.36 Thus, the issue of restoring property rights has become increasingly and undesirably politicised as a result of the ambiguity of the future status of the territory, which has hindered achievement on property issues.

HOUSING AND PROPERTY CLAIMS COMMISSION

Why a separate commission for property rights? UNMIK commissioned a report on strategies for housing and property rights in Kosovo,37 which emphasised the need to address the discriminatory legislation of the former regime.38 The absence of a functioning judicial system was a significant difficulty in settling the large number of property-related disputes that was expected39 in post-conflict Kosovo.40 Even when an emergency judicial system was re-established in November 1999, its primary focus was on the processing of persons detained by KFOR during or after the conflict.41 The domestic court system was not operational until well into 2000, and continues to suffer from a chronic lack of funds and personnel.42 Its resources are focused on criminal cases, and it does not have the capacity to address a large number of property disputes, as supported by the current backlog of property cases found in most domestic courts.43 35 For example, Von Carlowitz suggests that Regulation 2001/17, On the Registration of Contracts for the Sale of Real Property in Specific Geographical Areas of Kosovo, was politically based, with the concession given to the Serb community in return for its participation in the election process: L Von Carlowitz, “Crossing the Boundary from the International to the Domestic Legal Realm: UNMIK Lawmaking and Property Rights in Kosovo” (2002) [draft on file with author]. 36 ICG above n 32 at 1. 37 The United Nations Centre on Human Settlements, or Habitat, dispatched an expert team to Kosovo to advise on property issues. Habitat was appointed as the lead agency for property issues, and was instrumental in the design and implementation of the HPCC. 38 It also emphasised the shortage of available housing and housing-related security issues, and the need to develop a system of property records and registration. Habitat Report, above n 22; Von Carlowitz, above n 35. 39 Original estimates were of approximately 60,000 disputes. 40 The judicial system had been severely affected by the conflict: see reports of the OSCE above n 29. 41 OSCE, Emergency Measures for Legal Systems, 7 November 1999. 42 The problems with the judicial system in Kosovo are well documented. See SG Reports above n 4 and OSCE reports, above n 29; H Strohmeyer, “Collapse and Reconstruction of a Judicial System: The United Nations Missions in Kosovo and East Timor” (2001) 95 AJIL 46; W Betts, S Carlson and G Gisvold, “The Post-Conflict Transitional Administration of Kosovo and the Lessons Learned in Efforts to Establish a Judiciary and the Rule of Law” (2001) 22 MJIL 371; F Lorenz, “The Rule of Law in Kosovo: Problems and Prospects” (2000) 11 Criminal Law Forum 127. 43 See Chapter 3, OSCE Property Rights in Kosovo 2002–2003, from 25. These property claims are those falling within the residual jurisdiction of the courts, or those that were pending when the conflict commenced.

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278 Sarah Williams Reports also suggest that the judicial system lacks impartiality, given the majority of Albanian judges, and is incapable of providing fair and impartial decisions, particularly where the “victim” is a Serb or the claim before the court has an ethnic dimension.44 In prosecutions for war crimes, UNMIK has been forced to introduce panels comprising of a majority of international judges, often with an international prosecutor, in order to redress the clear bias exhibited against Serb and other minority defendants.45 Property issues are intrinsically linked to the conflict, and it therefore appears likely that the courts would have been similarly unable to provide impartial decisions on property matters. Thus, a separate and independent panel, with significant international involvement was the only available method of resolving contentious property disputes. For these reasons, UNMIK determined that a new organ for property disputes was required, one which operated outside the domestic legal and administrative system and was capable of providing impartial decisions.46 Thus UNMIK established the Housing and Property Directorate (HPD) and, as a separate and independent organ of the HPD, the HPCC.47 The precedent for the HPCC is the Commission for Real Property Claims of Displaced Persons and Refugees (CRPC) in Bosnia, established in accordance with Annex VII of the Dayton Peace Agreement.48 Like the CRPC,49 the HPCC is a hybrid or internationalised tribunal in that it is composed of (initially) one panel of two international members and one local member, all of whom are experts in the field of housing and property law and are appointed by the SRSG.50 Thus international personnel form the majority of members on every HPCC panel established, which is designed to ensure impartial decisions. The need for a separate commission has been reinforced by the performance of the domestic judicial system in its residual jurisdiction for property matters (see below) and for other controversial legal matters arising from the conflict, such as trials for war and ethnically motivated crimes. Minorities in Kosovo, particularly Serbs, continue to face considerable obstacles in enforcing their rights before the regular courts.51 44 OSCE Reports, above n 29. There were a number of reviews of the justice system which suggested that bias may be an issue: see Human Rights Bar Committee of England and Wales, Kosova 2000: Justice Not Revenge, 16 February 2000; Lawyers’ Committee for Human Rights, A Fragile Peace, October 1999; and Amnesty International, Recommendations to UNMIK on the Judicial System, February 2000. 45 Regulation 64, On Assignment of International Judges and Prosecutors and/or Change of Venue, 15 December 2000. See also UNMIK Press Release, “International judges have ‘dramatically reduced’ chance of bias in Kosovo”, 20 October 2000. 46 This was the conclusion of the Habitat Report, above n 22. 47 UNMIK Regulation 1999/23 On the Establishment of the Housing and Property Directorate and the Housing and Property Claims Commission, 15 November 1999, s 2. 48 The General Framework Agreement for Peace in Bosnia and Herzegovina. 49 For further discussion of the CRPC, see H Van Houtte, “Mass Property Claim Resolution in a Post-war Society: The Commission for Real Property Claims in Bosnia and Herzegovina” (1999) 40 ICLQ 625. 50 Section 2.2, Regulation 1999/23. The SRSG has the power to establish additional panels after consulting with the HPCC. 51 OSCE reports on the situation of minorities, above n 25, and OSCE, A Review of the Criminal Justice System, July 2000 and February 2001.

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Addressing Property Issues in Post-Conflict Societies 279 Jurisdiction The HPCC is a quasi-judicial organ. It may make decisions affecting property rights, yet is not bound by rules of evidence, and it is closely linked to the administrative organ, the HPD. The HPCC has exclusive jurisdiction for claims concerning residential property made by natural persons that fall within the following categories: (a) where ownership, possession or occupancy rights have been revoked since 23 March 1989 in accordance with discriminatory legislation (category A claims); (b) where that person freely entered into an informal transaction after 23 March 1989 (category B claims); and (c) where a person was lawfully in a property prior to 24 March 1999, and are now not in possession of the property and there has not been a voluntary transfer of the property rights (category C claims).52 Claims may only be made by natural persons falling within the circumstances defined in categories A, B and C, or, where that person is unable to make a claim, by a member of the family household of that person, as determined by domestic law, or an authorised personal representative.53 It was anticipated that the HPCC would primarily be a mechanism for Albanians to recover property lost during the discriminatory era and the conflict. However, this was not to be the case, as will be discussed below. The HPD operates as a filter for the HPCC, referring to the HPCC only those claims that cannot be settled amicably.54 The national courts retain jurisdiction for all other property claims (including commercial property), and will resume jurisdiction for the full range of property disputes once the SRSG determines that the domestic legal system is competent to do so.55 The HPCC may refer specific parts of claims to the local courts or administrative organs where such parts of claims do not raise issues falling within the jurisdiction of the HPCC.56 Other than this power of referral, the HPCC operates outside the national court system, and final decisions of the HPCC are “binding and enforceable” and are not subject to judicial or administrative review by any other body.57 The Constitutional Framework states that the HPCC is independent from the provisional institutions of self-government, and incorporates through reference the regulatory instruments establishing the HPCC and HPD and their powers, obligations and structure.58 The Special Chamber on Constitutional Framework Matters has jurisdiction only to protect the HPCC from any interference with its independence by the provisional

52

Section 1.2, Regulation 1999/23. Section 7, Regulation 2000/60. 54 Section 1.2, Regulation 1999/23, and Section 10, Regulation 2000/60. 55 Section 2.5, Regulation 1999/23. 56 Ibid. 57 Section 2.7, Regulation 1999/23. 58 Chapter 11, UNMIK Regulation 2001/9, Constitutional Framework for Provisional SelfGovernment, 15 May 2001 (“Constitutional Framework”). 53

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280 Sarah Williams institutions: it does not have any supervisory or appellate jurisdiction in relation to the HPCC.59 While a separate organ for resolving property disputes was clearly required, the complete detachment of the HPCC from the domestic legal system is a major issue for the HPCC in achieving its mandate. As stated by the OSCE, the “introduction of a foreign institution to the domestic legal system did not foresee the potential conflicts of jurisdiction and how they should be addressed”.60 Judges in the domestic courts are uncertain as to the competence of the HPCC, which results in claims being transferred needlessly between the courts and the HPCC causing delay, frustration and confusion, and in some cases contradictory decisions of the HPCC and domestic courts on the same issues. While the exceptional nature of the HPCC mandate requires it to operate outside the domestic court structure “it cannot remain isolated from the legal and political reality”.61 In future, before a hybrid body such as the HPCC, is introduced into the domestic legal system, greater consideration must be given to how it will interact with that legal system. Legal status The legal basis for the HPCC differs from that of the CRPC in Bosnia. Unlike the CRPC, the ultimate authority for the HPCC does not lie within the terms of an international treaty, signed, ratified and implemented by the domestic government with the assistance and supervision of the international community.62 Instead, the authority for the HPCC and its mandate derive from the Chapter VII powers of the Security Council, delegated to the HPCC through Resolution 1244. It was the SRSG, the representative of the United Nations in Kosovo, that promulgated the two regulations establishing the HPCC and defining its mandate and authority. An effect of this different status is that the international administration has far greater control over the mandate and performance of the HPCC than the international community did for the CPRC, and is not dependent on the cooperation of the parties to the conflict for its operation, as the CPRC was dependent upon the cooperation of the entities.63 However, this does raise concerns as to the independence of the HPCC from UNMIK and the impartiality of the HPCC where actions of the international administration or KFOR are challenged.64

59

Section 9.4.11(c) Constitutional Framework. OSCE, Property Rights in Kosovo (2002), at 38. 61 Above, p 41. 62 The CRPC was established under Annex VII of the Dayton Peace Agreement. For the importance of peace agreements, see C Bell, Peace Agreements and Human Rights (OUP, Oxford, 2000). 63 For a discussion of the implementation problems in Bosnia, see L Hastings, “Implementation of the Property Legislation in Bosnia Herzegovina” [2001] Stanford Journal of International Law 221. 64 See HPD/HPCC Periodic Report 1, April–June 2002, available at www.hpdkosovo.org. 60

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Addressing Property Issues in Post-Conflict Societies 281 A second concern is that the extent of the powers exercisable by the HPCC is criticised as “side-lining” local participation in important post-conflict decisions.65 Yet, while engaging local communities in decision-making is an important aim and vital for the long-term success of a post-conflict peace building mission, the experience in Bosnia suggests that this approach does not work where the issues are politicised and linked to the underlying causes of the conflict. In Bosnia, it was not until the High Representative “forced” the entities to accept legislation and the international community linked results on property issues to continued funding, that the entities began to enforce property rights for minority communities.66 It is probable that, had the municipalities in Kosovo been responsible for implementing and protecting property rights, progress would have been slow and obstructed.67 A strong, centralised approach to property issues was, and is still, required to ensure introduction of legislation and the implementation of the HPCC’s mandate.

Applicable law for HPCC The HPCC is bound by the applicable law relating to property rights.68 The law to be applied in Kosovo is complicated, comprised of several sources of law:69 first, UNMIK regulations and administrative directions; second, the law in force in Kosovo on 22 March 1989;70 and third, the law in force in Kosovo after 22 March 1989 but only where the previous sources do not deal with an issue and the later law is not discriminatory or inconsistent with human rights standards. It is generally understood by UNMIK71 that the applicable law does not include SFRY and RoS federal and constitutional laws, including those provisions that relate to property rights.72 65 See J Beauvais, “Benevolent Depotism: A Critique of UN State-building in East Timor” (2001) 33 New York University Journal of International Law 1101. 66 Hastings above n 53. 67 This conclusion is supported by the failure of some municipalities to enforce decisions of the HPCC or to co-operate with the HPD: see OSCE reports on property in Kosovo, above n 22. 68 Section 4, Regulation 1999/23. 69 Section 1, Regulation 1. Regulation 1 was subsequently amended by a separate regulation, Regulation 1999/24, On the Law Applicable in Kosovo, 12 December 1999—effectuated by Regulation 1999/25 and by a revised regulation, Regulation 2000/54, Amending UNMIK Regulation No 1999/1 as amended On the Authority of the Interim Administration in Kosovo of 27 September 2000. All references to Regulation 1 are to the regulation as amended by subsequent regulations. 70 This is the day before the revocation of Kosovo’s autonomy by the RoS The original regulation had provided that the relevant date would be 24 March 1999, the day before the NATO bombing campaign commenced, but this proved controversial with the Albanian population which refused to accept laws from the previous discriminatory regime. See Lorenz and Strohmeyer, above n 42. 71 M Brand, “Institution-Building and Human Rights Protection in Kosovo in the Light of UNMIK Legislation” [2001] Nordic Journal of International Law 461–88. 72 For example, Article 123 of the Yugoslav Constitution states “everyone should be entitled to compensation for damages sustained as a result of unlawful or proper actions of an official or state agency or organization which exercises public powers”. This should, in theory, apply to an unlawful or lawful appropriation of property by the Serb authorities. See Leckie, above n 20.

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282 Sarah Williams It is also arguable that international human rights standards or part of the applicable law of the HPCC, as “all persons undertaking public duties” in Kosovo “shall observe internationally recognised human rights standards”.73 There are several human rights provisions relevant to property rights, in particular Articles 6, 8, 14 and Article 1 of Protocol 1 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR),74 Article 17 of the Universal Declaration of Human Rights (UDHR),75 Articles 12 and 17 of the International Covenant on Civil and Political Rights (ICCPR)76 and Article 11 of the International Covenant on Economic, Social and Cultural Rights (ICESCR).77 However, Regulation 1999/24 does not make international human rights law directly applicable to Kosovo during the international administration. Instead, this provision operates as a political, not a legal, commitment by the international administration, including the HPCC, to respect human rights standards.78 Even if international human rights standards may not be directly applicable, it is submitted that the HPCC should be guided by the jurisprudence of the European Court of Human Rights in property matters.79 In addition, the HPCC might have regard to the decisions of the Human Rights Chamber in Bosnia and Herzegovina, which has produced jurisprudence relating to similar issues faced by the HPCC.80 In addition to being bound by the applicable law relating to property rights, and possibly a range of international human rights instruments, the HPCC is also bound by its own rules of procedure and evidence.81 These were promulgated by the SRSG in October 2000 in Regulation 2000/60,82 and are intended to “guarantee fair and impartial proceedings in accordance with internationally recognized human rights standards”.83 In particular, the rules provide that the only grounds for a party to request reconsideration of a decision of the HPCC 73 Section 2, Regulation 1. Regulation 1999/24 elaborates upon this by providing a list of international instruments, including the standards include those set out in the ECHR, the ICCPR, the UDHR, and the ICESPR. 74 Right to a fair trial, right to respect for the home and family life, prohibition against discrimination, and right to peaceable enjoyment of possessions. 75 Right to own property and prohibition against arbitrary deprivation of property. 76 Right to freedom of movement and choice of residence and prohibition against arbitrary or unlawful interference with the home. 77 The right to an adequate standard of living, including housing. 78 S Williams, Accountability for United Nations Civilian Operations in Post-Conflict Kosovo, (Masters Thesis, University of Durham, Durham, 2003). 79 For example, Loizidou v Turkey (1996) 23 EHRR 513 and Sporrong and Lőnnroth v Sweden (1982) 5 EHRR 35. 80 For a discussion of the Bosnian jurisprudence, see W Englbrecht, “Property Rights in Bosnia and Herzegovina: The Contributions of the Human Rights Ombudsperson and the Human Rights Chamber towards their Protection” in S Leckie (ed), Returning Home: Housing and Property Restitution Rights for Refugees and Displaced Persons (Transnational Publishing, New York, 2003). 81 Section 2.6, Regulation 1999/23. 82 On Residential Property Claims and The Rules of Procedure and Evidence of the Housing and Property Directorate and the Housing and Property Claims Commission, 31 October 2001. 83 Section 2.6, Regulation 1999/23.

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Addressing Property Issues in Post-Conflict Societies 283 are: (1) on the presentation of legally relevant evidence which was not considered by the HPCC in deciding the claim; or (2) that there was a material error in the application of Regulation 2000/60.84 A HPCC panel is bound by its own decisions and the decisions of another panel, unless compelling reasons exist for deviating from those principles.85 There was a considerable delay in promulgating the rules and procedures of the HPCC,86 resulting from a prolonged period of internal and external consultation on the proposed regulation that was intended to gain the support of all local political and ethnic groups.87 It also reflected concerns that the HPD/HPCC did not have sufficient funds to meet their mandate. Yet Regulation 1999/23 had removed the domestic courts’ jurisdiction for claims within the jurisdiction of the HPCC. Thus, the delay in establishing a fully functional property dispute mechanism contributed to a legal vacuum in property matters, leading to varying approaches to the issues at a local level and the continued violation of property rights without an effective remedy.88 This undermined public confidence in the HPCC. Guiding principles Regulation 2000/60 is not limited to establishing rules of procedure and evidence: it also provides definitions of key terms and six substantive principles to guide the HPCC in its function.89 A “property right” is defined as “any right of ownership of, lawful possession of, right of use of or occupancy right to, property”,90 hence it is not limited to ownership, but includes the right of occupation in socially owned properties. “Property” includes both private residential houses and apartments and socially owned apartments.91 Commercial property is dealt with under a separate regime, which will not be discussed here.92 The guiding principles are: first, other than as provided for in Regulation 2000/60, any property right that was validly acquired according to the applicable law at the time of its acquisition remains valid, notwithstanding the change in the applicable law. This principle protects the rights of individuals that purchased a former state property under the system of privatisation of socially owned apartments despite the laws for this system being promulgated after 84

Section 14.2, Regulation 2000/60. Section 22.2, Regulation 2000/60. 86 Regulation 2000/60 entered into force on 31 October 2000, almost 12 months after Regulation 1999/23 established the HPD and HPCC. 87 Von Carlowitz, above n 35. 88 OSCE, The Impending Property Crisis in Kosovo (1999), at 1. 89 Set out in ss 2.1–2.6, Regulation 2000/60. 90 Section 1. 91 Ibid. 92 Commercial property is subject to the programme of economic reconstruction implemented by the European Union. 85

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284 Sarah Williams 22 March 1989.93 However, the property rights protected by this principle are still subject to claims for restitution falling within the jurisdiction of the HPCC. This resolves one of the uncertainties in the applicable law mentioned earlier, but does so only in relation to those property disputes that fall within the jurisdiction of the HPCC. Second, any person whose property right was lost between 23 March 1989 and 24 March 1999 as a result of discrimination (a Category A claim) has a right to restitution. Restitution is defined as either the restoration of the property right (restitution in kind) or payment of compensation.94 Where the claim relates to a socially owned apartment, restitution will be possible only where the apartment has not been privatised, or remains owned by the person to which the apartment was first transferred under the privatisation scheme (the first owner). In the latter situation, the claimant must pay to the HPD the price at which the claimant would have been entitled to purchase the apartment, the cost of any improvements made to the property, and a percentage of the current market value of the apartment. Such payments are to be placed in a trust fund to provide compensation to first owners who lose their property rights under this provision.95 Restitution cannot be ordered where the first owner has transferred ownership to a natural person in a bona fide transaction before the promulgation of Regulation 2000/60, even if subsequent transactions have not been bona fide.96 Where restitution cannot be ordered, the claimant may claim compensation for the property, less the amount that would have been paid to purchase the apartment.97 The regulation includes restrictions on the transfer by the current owner of previously socially owned properties subject to Category A claims pending resolution of those claims. Any transfers in violation of such restrictions are deemed null and void.98 In practice, the HPCC has limited Category A claims to an occupancy right to a socially owned apartment.99 This interpretation of Regulation 2000/60 is based on the absence of provisions contemplating restitution for a right other than an occupancy right, and it is submitted that this is not consistent with the text of the document.100 Several claimants have been unable to establish an 93 A Dodson and V Heiskanen, “Housing and Property Restitution in Kosovo” in S Leckie (ed), Returning Home: Housing and Property Restitution Rights for Refugees and Displaced Persons (Transnational Publishing, New York, 2003). 94 Section 2.2, Regulation 2000/60. 95 Section 4, Regulation 2000/60. 96 Section 3.3, Regulation 2000/60. 97 Section 4, Regulation 2000/60. 98 Section 5, Regulation 2000/60. 99 The ability to analyse the jurisprudence of the HPCC is hindered by the decision of the HPCC not to make its judicial determinations public. This decision is justified by a concern that revealing the identity of individual claimants may create potential security risks for those individuals, but is in direct contradiction of an express provision in Regulation 2000/60 requiring the Registrar of the HPCC to make at least details of the jurisprudence available. Thus, where this chapter refers to the jurisprudence of the HPCC it is relying upon the discussion of recent jurisprudence in Dodson and Heiskanen, above n 93. 100 For example, if this were the intent, the definition of “property right” would have excluded privately owned dwellings, and Section 2.2 would not be so widely drafted.

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Addressing Property Issues in Post-Conflict Societies 285 occupancy right under domestic law, and thus the claim failed.101 There is considerable concern that the FRY government will react negatively to any finding of discrimination by the HPCC, as this may have implications for its own accountability under international law.102 Any negative reaction from the FRY government may jeopardise its continued co-operation with the international administration in Kosovo.103 However, such concerns should not be permitted to influence the decisions of the HPCC on such an important issue as the discriminatory nature of previous practices. Third, any informal transaction that took place between 23 March 1989 and 13 October 1999 is valid,104 again addressing a perceived ambiguity in the applicable law. Fourth, any person who acquired the ownership of a property through an informal transaction based on the free will of the parties between 23 March 1989 and 13 October 1999 is entitled to an order from the HPD or HPCC for the registration of his/her ownership.105 An informal transaction means any real property transaction that was unlawful under the Law on Special Conditions Applicable to Real Estate Transactions or any other discriminatory law, which would otherwise have been a lawful transaction.106 These two principles define further the criteria applicable to Category B claims, limiting the notion of informal transactions to those entered into to escape the consequences of discriminatory laws.107 Thus property transactions that did not comply with the formality requirements for other reasons cannot form the basis of a Category B claim. There is little jurisprudence relating to Category B claims, due to the relatively small number of such claims received by the HPD/HPCC. There have been a number of uncontested claims, which may be processed on a fast-track procedure where there is sufficient evidence,108 but no contested dispute has been determined.109 The fifth and sixth principles relate to Category C claims. Unless otherwise provided, any refugee or displaced person with a right to property has a right to return to the property, or to dispose of it lawfully. In addition, any person with a property right on 24 March 1999, who has lost possession of that property and has not voluntarily disposed of that property right, is entitled to an order from the HPCC for repossession of the property.110 Uncontested Category C claims are subject to an expedited process, designed to deal with a large number of claims, drawing upon the experience of the CRPC in Bosnia.111 101 Under the applicable domestic law, there are three preconditions for the creation of an occupancy right: a decision by the right holder to allocate an apartment; the conclusion of an agreement with the Public Housing Enterprise; and occupation of the apartment. 102 This concern is made more immediate as the FRY has recently acceded to the ECHR. 103 OSCE, Property Rights in Kosovo (2002–3), at 15. 104 Section 2.3. 105 Section 2.4, Regulation 2000/60. 106 Section 1, Regulation 2000/60. 107 Dodson and Heiskanen above n 93. 108 Section 11, Regulation 2000/60. 109 As at March 2003, see Dodson and Heiskanen above n 93. 110 Sections 2.5 and 2.6, Regulation 2000/60. 111 Section 23, Regulation 2000/60.

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286 Sarah Williams In order to establish a Category C claim, a claimant must establish that he or she (1) had a property right (as defined by Regulation 2000/60) on 24 March 1999; (2) has lost possession of the property; and (3) has not voluntarily disposed of that right. The HPCC applies a restrictive interpretation of its mandate, limiting it jurisdiction in respect of Category C claims to claimants who have lost possession of their property due to the conflict. Thus, claimants who have lost possession of their property due to reasons unrelated to the conflict will not be successful, and must have recourse to the domestic legal system. This is said to reflect the limited mandate of the HPCC, which is to address only those property issues that arise both from the discrimination from 1989 to 1999 and the repercussions of the international armed conflict in 1999. The HPCC has also given guidance as to what constitutes giving up possession “voluntarily”: giving up possession to another for humanitarian reasons will preclude a successful claim, while handing over keys or renting out an apartment for safekeeping before escaping the conflict is not a voluntary relinquishment of the property.112

Remedies The primary remedy for a successful Category C claim has been an eviction order against the current unlawful occupation, and a possession order in favour of the claimant. For Category A and B claims, claimants are not entitled to compensation for damage to or destruction of property during or after the conflict.113 Compensation is only payable where restitution cannot be ordered as a natural person has acquired ownership of the property through a valid, voluntary transaction before the regulation entered into force.114 Thus, the primary remedy available to and used by the HPCC is to order restitution in kind of the property, not compensation.115 This is consistent with the current trend in international law towards restitution of property and housing rights, rather than compensation.116 However, reliance upon this mechanism requires that conditions for return are acceptable for minority members. In many areas of Kosovo, basic conditions required for return have not been established,117 despite the large international presence. It is simply unrealistic to expect refugees to return to an environment in which their basic human rights, including their right to life, cannot be protected. Using restitution as the primary 112

Dodson and Heiskanen, above n 93. Section 2.6, Regulation 2000/60. 114 Section 3.3, Regulation 2000/60. 115 The HPCC does have other limited powers, such as the power to order the registration of a property right, to vary the terms of a contract and to cancel a lease agreement: s 22.7, Regulation 2000/60. 116 For a discussion of this trend, see S Leckie, “New Directions in Housing and Property Restitution” in S Leckie (ed), Returning Home: Housing and Property Restitution Rights for Refugees and Displaced Persons (Transnational Publishing, NewYork, 2003). 117 See ICG, above n 32, and OSCE above n 25. 113

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Addressing Property Issues in Post-Conflict Societies 287 remedy may have been premature and a compensation-based system may have been more appropriate, at least permitting refugees a choice in whether to return or to obtain compensation. However, a compensation-based system has its own difficulties, one of the most important being which entity should meet the cost of providing compensation? It is unlikely that either the international community or the FRY government would be willing to assume this financial commitment, although the costs associated with protecting returnees has been significant. Compensation is also politically unacceptable for the international community, which has a vested interest in ensuring that Kosovo remains ethnically diverse. It is also politically unacceptable for the FRY government, as to agree to payment of compensation would result in less Serbs returning to Kosovo, decreasing both the influence of the FRY government in Kosovo and the advancement of RoS interests for the territory. In resolving a dispute, the HPCC is not required to determine conclusively the ownership of a particular property: instead, it may limit its decision to finding a right of possession only “where that would provide an effective remedy for the claim”.118 The HPCC has availed itself of this provision and has been reluctant to arrive at a final determination on ownership or other forms of property rights where it is not necessary to resolve the dispute before it.119 This can be justified given the incomplete and unreliable state of the property records, and the transitional nature of the HPCC’s mandate and authority. However, such an approach merely defers the resolution of difficult issues, such as whether the previous regime had acted contrary to international standards. Leaving these issues unresolved contributes to ongoing ethnic tension, as the issues continue to be manipulated for political purposes in the absence of a final determination.

Implementation The HPD and the HPCC are interim measures, and are not intended to be longterm institutions for the continued resolution of property related disputes. Regulation 2000/60 includes a “sunset” date for the submission of claims to the HPD, which was originally 1 December 2001, extended to 1 July 2003.120 This temporally limited mandate is consistent with the interim nature of the international administration. However, there has not been any provision for claims that fall within the mandate of the HPD/HPCC but which have not been filed, and reports suggest that this is not an insignificant number of claims.121 As the domestic courts remain precluded from exercising jurisdiction in relation to these matters, there is currently no organ in Kosovo with jurisdiction in respect of these claims. 118 119 120 121

Section 22.6, Regulation 2000/60. Dodson and Heiskanen, above n 93. Section 3.2, Regulation 2000/60. OSCE reports, above n 22.

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288 Sarah Williams As at the deadline date of 1 July 2003, the HPD had received 28,832 claims. The vast majority (26,984 claims or 93.6%) of these claims are Category C claims. Only 801 of claims filed, or 2.8% were Category B claims, while Category A claims comprised 3.6% of claims received (1047 claims). As at 12 December 2003, 42.2% of claims (12,178 claims) had been resolved. The HPCC has resolved approximately twice the number of claims to the HPD (HPD— 3876 claims or 13.4% of the total number of claims; HPCC 8302 claims, or 28.8% of the total number of claims).122 There is concern regarding the comparatively low number of Category A claims filed.123 One of the primary objectives of the HPD/HPCC mechanism was to redress the discrimination that had occurred in the 1990s against the Kosovo Albanian population. The low number of claims suggests that a separate mechanism was not required, and that claims could have been processed through the domestic courts with international monitoring to ensure impartiality. Similarly, the low number of category B claims filed raises concerns that a separate mechanism for these claims was not warranted. Thus, the work of the HPCC has been dominated by Category C claims, the majority of which have been filed by Serbs outside of Kosovo.124 One explanation for the large number of Category C claims received is that this reflects the failure of KFOR to address the security situation at an early stage. The absence of law and order in Kosovo allowed returning Kosovo Albanians to unlawfully remove Serbs, thus contributing to the wave of secondary occupation that occurred. In addition, property issues were not properly linked with related aims, such as timing of refugee returns.125 The large numbers of refugees and IDPs returning in the first few months after the conflict was higher than had been anticipated by many, and was largely unconnected to any analysis of whether housing was available for returning refugees. This placed pressure on the housing system, contributing to secondary occupation. Now, instead of returning to their properties, members of minority populations are simply obtaining possession of their properties and selling the property, usually to a member of a non-minority group, as the security situation, restrictions on the freedom of movement and general conditions for minority groups deter property owners from returning. Thus, unless these conditions are improved, the HPCC may be assisting refugees to leave Kosovo permanently, rather than to return as was intended.126

122

Figures available at the HPD website: www.hpdkosovo.org. OSCE, The Impending Property Crisis in Kosovo, p 21. 124 In March 2003, 65.5% of claims then filed had been filed in HPD operations outside Kosovo. 125 ICG Report, above n 32. 126 UNMIK has attempted to prevent the departures of minority groups through introducing Regulation 2001/17 which requires the approval of a municipal administrator for sales of homes in specific geographical area, where it is believed that minority members are being forced out, or where further sales of minority properties will affect the ability of other minority members to continue to live in that area. 123

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Addressing Property Issues in Post-Conflict Societies 289 The HPD commenced accepting claims in June 2000, with the first HPCC panel appointed in August 2000, after delays in securing funding127. The lack of available resources significantly affected the HPCC and HPD’s ability to fulfil their mandates.128 The HPCC made a very slow start in resolving claims and, by January 2002, the HPCC had issued only 239 decisions. Attempts to increase the efficiency with which claims were processed suffered setbacks with the contracts of half of its international personnel being terminated in February 2002 due to lack of funds.129 In 2001, it became apparent that unless a funding gap of approximately US$8 million was found, the HPD/HPCC would not be able to function as intended. When this funding was not received, the HPD/HPCC was forced to implement a contingency plan, where resources where concentrated on accepting and processing claims from outside Kosovo.130 Whilst the performance of the HPCC in claim intake and processing and enforcement did improve during 2002 and into 2003, the slow pace of dispute resolution led to frustration amongst claimants, and dissuaded some potential claimants from utilising the institution, with some trying to either exercise illegal evictions or the domestic courts.

Enforcement Where the HPCC issues an order for possession against a current occupier, the HPD is responsible for enforcing the order. However, enforcement depends upon the support of the various enforcement agencies in Kosovo, which include KFOR, UNMIK police and the fledgling Kosovo Police Service. This support was not always forthcoming, and the rate of evictions in accordance with HPCC orders was very low, again undermining confidence in the institution itself. This was mostly rectified with the signing of a Memorandum of Understanding with UNMIK police in September 2001, and the rate of evictions has increased.131 A further difficulty for eviction was the lack of alternate emergency or permanent housing for those evicted, although this problem has been partly alleviated by the administration by the HPD of vacant and state-owned property for the purpose of emergency housing.132

127 The HPD and HPCC are funded through the Kosovo Consolidated Budget, not from the UNMIK budget (which is itself funded by assessed contributions from member states of the UN). 128 See periodic reports on the HPD/HPC available at www.hpdkosovo.org. 129 OSCE Reports, above n 22. 130 See periodic reports, above n 128. 131 OSCE Reports, above n 22. 132 See UNMIK Regulation 2002/12 On the Establishment of the Kosovo Trust Agency, 13 June 2002, and UNMIK Regulation 2003/13, On the Transformation of the Right of Use to SociallyOwned Immovable Property, 9 May 2003.

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290 Sarah Williams

CONCLUSIONS

The UNMIK-led international administration in Kosovo was an “unprecedented challenge” for the United Nations.133 While the United Nations had previously been involved in post-conflict situations, the extent of the powers granted in Kosovo was innovative. Never before had the organisation possessed such wide-ranging legislative and administrative powers in respect of a territory. The approach adopted towards property issues reflects the wide mandate and powers, establishing “a legal framework which provides a fair, flexible and clear basis for effecting restitution” in Kosovo.134 The HPCC is a vital element of that legal framework. While it is difficult to assess the success of the HPCC as it is still in the implementation phase, some conclusions can be drawn from the initial phases. The inability of the international administration and KFOR to prevent violence and to take command of the security situation in the early phase of the postconflict administration was a significant failure with drastic implications for property issues. At the time of writing, some five years after the initial deployment of KFOR, the security situation is still volatile, with ethnic violence and riots in March being described as “a huge setback” to stability.135 In the early stages of the mission, the absence of law and order contributed to the number of secondary occupations, thus changing the practical mandate of the HPCC from a body investigating the discriminatory practices of the previous regime (Category A claims), to an organ dominated by seeking to resolve the disputes created by secondary occupation (Category C claims). In the current stage of the mission, the security situation and the inability to guarantee basic conditions for returning refugees are powerful disincentives for refugees to return to Kosovo.136 The delay in finalising the regulations required for the HPCC to commence operations also contributed to the legal vacuum. This delay was significant, as Regulation 1999/23 had removed the jurisdiction of the domestic courts in this area. Related to this is that institutions such as the HPCC must be given sufficient resources to quickly and efficiently implement their mandate, together with the necessary support in enforcement. The message to both majority and minority groups was that property rights could be violated with relative impunity, which increased the number of property violations and undermined the HPCC and the international administration. While linking property issues to determination of final status increases the incentive for the provisional institutions to secure refugee return, it is question133

SG Report 12 July 1999, para 120. Dodson and Heiskanen, above n 93, at 241. 135 UN Press Release, Kosovo: UN Envoy calls for major effort to rebuild trust after March violence, 29 April 2004. 136 See the regular reports of the Secretary-General to the Security Council for discussion of the security situation, available at www.un.org. Also ICG, above n 32. 134

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Addressing Property Issues in Post-Conflict Societies 291 able whether forced co-operation will be sustained in the long term. The ambiguity surrounding the final status of Kosovo allowed the property resolution process to be overly politicised and increased the uncertainty among refugees as to whether to return or not. As the HPCC’s mandate in resolving the large number of Category C claims was directly related to the numbers of refugee return, which is in turn related to resolution of final status, its role became increasingly political, thus challenging its independent status and the achievement of its mandate. The failure of the international community to create secure conditions for refugee calls into question the selection of restitution, and not compensation, as the primary remedy of the HPCC, as it is unrealistic and unreasonable to expect refugees to return to their properties under such conditions.137 The requirements in the regulations to order possession, and not compensation, do not require the HPCC to take into account the security situation and the conditions for return, thus its decisions are divorced from the physical reality of refugee returns. The requirement for restitution also fails to allow for the difficulties in enforcement of eviction orders, and the detrimental effect that “ineffective orders” will have on the legitimacy of the HPCC. However, moving from restitution-based remedies to compensation is not politically acceptable to the international community, which relies on achieving refugee returns to justify its intervention in the territory.138 Again, property issues are being subordinated to the political issues underlying the conflict. Setting aside these concerns, the HPCC has proved a useful model for future post-conflict situations. An independent organ, with majority international participation, provides a viable alternative to a judicial system that is severely affected by the conflict, both in its capacity to conduct hearings, and its ability to provide impartial decisions on issues related to the conflict. Diverting property disputes to the HPCC allowed the domestic courts to focus initially on the more pressing need of hearing criminal charges arising from the conflict and the initial post-conflict phases. It also ensures that decisions are made by property experts with sufficient distance from the conflict to guarantee impartiality. Participation of domestic commissioners also ensures that some domestic capacity will be created, as these commissioners will remain to guide the domestic legal system on property issues when responsibility is transferred back to the courts. The temporary nature of the HPCC is consistent with the interim nature of the international administration, and helps to rebut accusations of “imperialism” by the international community.139 However, greater planning was required to clarify how the organ was to interact with the domestic legal system, including an automatic transfer of jurisdiction for new claims once the deadline date for the HPCC had passed. This would have avoided the delays, uncertainty 137 138 139

See Dodson and Heiskanen, above n 93. ICG, above n 32. Beauvais, above n 65.

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292 Sarah Williams and frustration arising from the confusion over the jurisdiction and competence of the HPCC relative to the domestic courts. Future organs modelled on the HPCC should be bound to consider the jurisprudence of other courts dealing with property issues, such as the European Court of Human Rights and the constitutional or human rights chambers of other post-conflict societies. Consideration should also be given to whether the organ should be formally bound by international human rights standards, and whether failure to take into account such standards should be a ground of review, either by the organ itself, or another body, such as a human rights chamber or ombudsperson. It is submitted that this would enhance the legitimacy of the body’s decisions, as would making details of its jurisprudence publicly available. In addition, decisions of the body should be insulated from political pressures, such as the reaction of the FRY to any finding on discrimination. The HPCC has performed relatively well under difficult circumstances and with limited resources, both financial and human. Provided its flaws, as outlined above, are identified and resolved, it will provide a precedent for future missions. The guidelines it has established and its jurisprudence, once available, will provide valuable assistance to future organs facing similar issues. Its experience demonstrates the importance of establishing law and order as quickly as possible, and the risks of allowing property dispute procedures and remedies to be subordinated to political issues. Yet, it is still too premature to draw final conclusions, as the true test for the success of otherwise will be whether peace and the protection of property rights continues in the absence of direct international control following the withdrawal of the international administration and the transfer of power to provisional institutions.

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14

Tensions of Modernity: Law in Developing Land Markets PATRICK M C AUSLAN

BACKGROUND : THE COUNTRIES TO BE CONSIDERED

This chapter concerns the evolution of law and policy in the shaping of land markets in four countries: Botswana, China, Indonesia and Maldives, in all of which the author participated in missions which addressed this critical issue during 2002. The aim of the chapter is to explore and bring out the common themes behind the shaping of the law in four very different countries. It is necessary first to set out briefly the enormous diversity of the countries which form the subject matter of this paper. First, geographically: they range from the largest population in the world (China) to a small multi-island state (Maldives); from a large and under-populated land mass with no outlet to the sea (Botswana) to a densely populated archipelago state (Indonesia). Second, in agricultural terms, one country is mainly pastoral (Botswana), two sedentary agricultural (China and Indonesia), and one fishing (Maldives). The two largest states are rapidly urbanising with very large cities; the two smaller states have urban centres one of which (Malé in the Maldives) contains 27% of the population of the state. Third, socio-politically, one country is still tribal-orientated and significantly Christian (Botswana); two are Islamic of a relatively liberal bent (Indonesia and Maldives); one is Communist (China). Fourth, the countries have very diverse economies albeit all are capitalist-orientated: the two smallest are successful private sector orientated capitalist economies, Indonesia is a large state/private capitalist economy with traditional elements still a significant force; and China is a very large successful state capitalist economy. Fifth, there are four diverse systems of governance. Botswana and Indonesia are two multi-party states, the former reasonably clean with fair elections since independence from the UK in 1966, the latter very corrupt and emerging into multi-partyism after 53 years of authoritarian one-party states. Maldives is a no party state, independent from the UK since 1965 and a republic since 1968 with personalised and moderately authoritarian politics—the same person has been elected and re-elected as President since 1978 with no other candidate standing

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296 Patrick McAuslan against him. China too is a one-party state with the one party the dominant force and still with a very authoritarian manner and form of government. A sixth point highlights a similarity between three of the four states—Maldives being the odd one out. The others have been classified as developmental states— states in which the ruling elites are strong enough and sufficiently autonomous of special interests to ensure the implementation of a coherent set of policies to push the state as rapidly as possible to modernisation.1

THE PROJECTS TO BE CONSIDERED

The donors and the International Financial Institutions (IFIs) The projects in Indonesia and Maldives were funded by the World Bank and were national in scope. The project in China was located in Liaoning Province and focused on the city of Shenyang, a rather run-down industrial city of around 7 million inhabitants and was funded by the EU. The project in Botswana was funded by the Government of Botswana. In all the countries, the consultancy team consisted of multi-disciplinary all white males drawn from England (China); England and Canada (Maldives); Australia and England (Indonesia) and England, USA and Botswana (Botswana). In each country national counterparts, male and female, were involved in both a part-time and full-time basis; they were academics, professionals in private practice, current and former public servants. My estimate is that the external “European/Western” input and influence on outputs from the projects was not less than 75% in all cases: external input was proactive; local input tended to be reactive.

Botswana What were the projects? In Botswana and Maldives, the projects concerned the development of a new land policy with the legal element focusing on national land law reform. But there is a significant difference between the two states. Botswana is held up as a model for many states in East, Central and Southern Africa on how to manage land and how to combine into one coherent whole a legal framework which marries customary or indigenous law and the common law (as Roman–Dutch law is called in the Southern African states where it is the received law). The aim of the project was to review policies, management and laws which have lasted relatively unchanged since the mid 1970s and the view of the Government was that a group of outsiders should come and start the process off by looking at the whole field in an objective way which insiders probably could not do. 1

A Leftwich, States of Development (Policy Press, Cambridge, 2000) Ch 7 and 8.

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Tensions of Modernity: Law in Developing Land Markets 297 Maldives In Maldives, there was no national land policy and no clear national land laws. Over the years there had been numerous attempts by aid agencies to assist the government to develop these—I was involved in a UN-Habitat project in 1983 to write a planning law for the capital as part of a programme to write a national physical development plan for Malé—but these had come to nought. The World Bank project was concerned with reviewing existing laws, policies and management systems on land and housing and suggesting ways in which these could be revised so as to provide a better overall process and substance of policy making and management.

China The project in Shenyang was an EU project to work with the municipal authorities in Shenyang and the provincial authorities in Liaoning Province on a Sustainable Shenyang Urban Planning Project. My terms of reference required me to review the existing institutional and regulatory framework concerned with urban development and planning; identify obstacles to successful policy implementation and to inter-institutional co-operation; identify means of overcoming these obstacles; and assist key stakeholders in implementing these means and in encouraging cross-sectoral urban management.

Indonesia The Indonesian project was a World Bank project to review a major land titling and land management project which the Bank had funded for five years in the 1990s and prepare a project document for a new land management project also for five years. My task was to review the existing land laws and other relevant laws of Indonesia—principally, as it turned out, the mass of law on decentralisation—with a view to recommending any changes that might be required to enable a more efficient and effective system of land management in the context of the new project to operate.

THE LEGAL AND LAND MANAGEMENT SYSTEMS

We turn now to the legal systems and the land laws of the four countries. First the legal systems. In summary, we are concerned with four pluralist systems of law: Botswana has a Roman–Dutch law/indigenous law system with the Roman–Dutch element dominant in the structure and function of the legal

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298 Patrick McAuslan system. China has a Communist system with, since the late 70s, a considerable legislative input of market-orientated law derived from a variety of Western sources. Indonesia has a civil law system with significant Indonesian indigenous adat law inputs. Maldives has a traditional Islamic system operating in a rather feudal manner with modern common law inputs. These inputs are fairly recent and there has been no overt policy decision or reception law to provide the formal basis for the introduction of the common law: it is just emerging in practice.

Botswana The systems and the land law must be looked at in more detail. Turning first to the land law of Botswana, it is derived from three sources: indigenous laws; the common law and statute law. In both official publications and articles, books etc written about the indigenous laws of Botswana, reference is still made to Schapera’s two seminal works on the customary law of Botswana, A Handbook of Tswana Law and Custom and Native Land Tenure in the Bechuanaland Protectorate.2 There has been a significant amount of statutory reform of laws applicable to land in Botswana since independence in 1966. The legal framework of the land law has been transformed, even if many of the detailed substantive rules remain the same. For purposes of tenure classification, land in Botswana falls under the three main categories of freehold land, state land and tribal land . . . Fairly recent estimates . . . place freehold land at 5%, state land at 25% and tribal land at about 70%.3

Of the three categories of tenure, tribal land is the most important and will be considered first. Central to tribal land management in Botswana is the Tribal Land Act 1968 (TLA) which establishes land boards based on the tribal areas into which Botswana is divided, and subordinate land boards, vests tribal land in the boards and empowers the boards to allocate and exercise powers of management over tribal land. The boards may grant customary land rights and common law land rights to applicants. Tribal land is governed by customary law. Land under customary law is divided into three main categories according to use: residential land; agricultural land and grazing land. The rights of members of the community differ with respect to each category of land. All Batswana are under customary law entitled to a plot of land for residential purposes, a plot of land for agricultural purposes and to depasture their livestock on communal grazing land. Broadly speaking, residential and agricultural plots are allocated to individuals and are heritable 2 Handbook, 1st edn (OUP, Oxford, 1938), 2nd edn (OUP, Oxford, 1943); Native Land Tenure (Alice, Lovedale Press, SA, 1943). 3 C Ng’ong’ola, “Land Tenure Reform in Botswana: Post-Colonial Developments and Future Prospects” (1996) 11 SAPL 1.

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Tensions of Modernity: Law in Developing Land Markets 299 while land for grazing is communally used. However, under the Tribal Grazing Land Policy (TGLP) boards are empowered to grant leases of grazing land to individuals. Botswana is undergoing a very rapid process of urbanisation. The effect of this on tribal land tenure is that many land boards are now involved in the process of allocating tribal land for urban development. The same land however may have been declared to be a planning area under the Town and Country Planning Act 1980 which brings the land under the jurisdiction of the Town and Country Planning Board or the local authority within whose area the land is and to which the Board’s powers have been transferred. This results in overlapping decision-making. Urbanisation is also leading to much unauthorised development, especially in and around Gaborone, the capital. State land consists of unalienated and reacquired land—the latter being exfreehold land reacquired by the state from land owners. Two types of interest have emerged as the forms of tenure granted on the disposal of state land: the Fixed Period State Grant (FPSG) and the Certificate of Rights (COR). Both evolved in the 1970s. The first type of interest is the grant of ownership for a fixed period—usually 50 years—paid for by a lump sum at the beginning of the term. The COR was a response to the problem of squatter settlements in some urban areas. There is no clear legal framework for the COR and its exact legal status is unclear. It appears to be more in the nature of a perpetual lease. The holder of a COR may convert his interest to a lease or a FPSG, both governed by the common law. There is now very little freehold land in Botswana. The principle issue affecting land management in Botswana is the extent to which rights in land held under customary tenure are, or should be, facilitated to become marketable and if so subject to what limitations and restrictions. The TLA permits leases and grants of tribal land whether for grazing purposes or for commercial purposes in urban areas to be transferred with the consent of the relevant land board but this consent is not needed for certain categories of land amongst which the most important is “land which has been developed to the satisfaction of the land board concerned”. In recent years there have been many official indications that a land market should be encouraged. In practice, there are four overlapping land markets in Botswana. First, there is the formal private sector land market in state and freehold land where transactions take place and involves the services of professionals and para-professionals—lawyers, surveyors, valuers and estate agents—to carry out the transaction and may involve funding by banks and building societies. This is governed by the common law and various statutes of which the Deeds Registration Act, requiring the registration of all instruments connected with land transactions, is the most important. Second, there is the state land “market”; that is, the disposal of interests by the state in state land for a price (fee), decisions on whether to permit certain transactions in state and tribal land by state agencies, compulsory acquisition of land by the central government, whether from private individuals or from land

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300 Patrick McAuslan boards; and the provision of loan guarantees and subsidies to certain actors in one or more of the other land markets. Third, there is the informal market which operates in unauthorised settlements and which in many respects is a simulacrum of the formal sector land market: land is bought and sold, leased, sub-divided, developed and occupied using practices, documents and sometimes estate agents which are similar to the practices of the formal market. What is missing is the imprimatur of formal legality. Fourth, there is the customary market. This too is in a sense an informal market but also a hidden one. For instance, the allocation of a customary land grant (CLG), although meant to be based on customary principles, takes place in the state market via decisions made by land boards, so the formality of the board decision hides the reality of the application of customary law. But once a CLG is allocated, transactions with or dispositions of that interest take place under customary law, albeit not sanctioned by a board so that it is both informal and customary. I use the terms upper and lower circuit to classify the four markets. This refers to the nature of the legal regimes that govern these markets. The upper circuit of private market and state market use formal laws having nation wide application. With the lower circuit legal regimes, this is not the case. These are local laws and practices; customary laws which may differ from one part of the country to another; informal practices which have not yet have reached the stage of crystallising into law—practices accepted as binding by the community within which they apply. The upper circuit is fully recognised and has been since the creation of Botswana more than a century ago; since independence, this circuit has been fully and freely open to all citizens and, subject to some fairly minimal restrictions. Official concern here focuses on the need to ensure that the market operates efficiently. The lower circuit land markets are more problematic. There has been some official recognition of the urban lower circuit alongside some ambivalence about it. On tribal land however, there is a greater willingness to recognise the existence of a land market and the need provide for it through formal means.

China4 The Third Plenary Session of the Eleventh National Congress of the Chinese Communist Party held in December, 1978 marked the initiation of a series of economic reforms which set in train the development of the socialist market 4 P McAuslan, “Freewheeling Uphill; Pedalling Downhill: Growing Pains in Developing a Land Market in China” in J Holder and C Harrison (eds), Law and Geography: Current Legal Issues, vol 5 (OUP, Oxford, 2003). This chapter was written after my first mission to Shenyang in 2000.

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Tensions of Modernity: Law in Developing Land Markets 301 economy in China. That is the overall socio-economic context within which any overview of the law applicable to land development must be located. As part of the move towards a market economy, the Chinese authorities began to turn their attention to legal and institutional reforms and developments needed for a market economy. The development of the present legal framework of land development and its regulation dates from the late 1970s. The State Council passed a variety of trial regulations on land matters which culminated in the far-reaching Land Administration Law (LAL) 1986. This together with the General Principles of Civil Law, promulgated in 1987 set out the legal framework for the ownership, possession, use, management and exploitation of land and permitted the transfer of land use rights and the payment for same. In 1991, the Constitution was amended in a small but significant particular. Article 10 (4) which read “No organisation or individual may appropriate, buy, sell or lease land or otherwise engage in the transfer of land by unlawful means” was amended by the addition of the sentence: “The right to the use of land may be transferred according to law.” This provision was in effect, a catch-up one inserted to provide a constitutional basis for the operation of the land market. This amendment was followed up by the Urban Real Estate Administration Law (UREAL) in 1994, the purpose of which is “to strengthen the administration of the urban real estate, maintain the order of a real estate market, protect the legitimate rights and interests of real estate obligees and promote the healthy development of real estate business.” At the very end of the decade, four new pieces of legislation provided the fullest elaboration yet of the legal framework for the operation of a land market. First, there were the Regulations on Urban Real Estate Development and Management Control, 1998 based on and further detailing the management regime established by UREAL. The real estate development and management referred to in the Regulations include “the transfer of real estate development projects or sale and rental of housing.” Second, there was a replacement of the LAL of 1986 with a more detailed and considerably longer LAL, 1998 which came into effect on 1 January 1999. This was supplemented at the same time by, third, Regulations on the Implementation of the Land Administration Law, 1998 which also came into effect on 1 January 1999. The Law was enacted “in accordance with the Constitution with a view to strengthening land administration, safeguarding the socialist public ownership of land, protecting and developing land resources, rationally utilising the land, earnestly protecting the cultivated land and promoting sustainable socio-economic development.” Fourth, the Contract Law enacted in 1999 and coming into effect on 1 October the same year provides in Chapter 13, articles 212–36, for a basic law on leasing of real estate. Between them, these laws provide a complex basic legal framework for managing land and permitting the operation of a regulated land market.

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302 Patrick McAuslan There is great concern in China about the conversion of farmland to land for construction. Special regulations and circulars have been promulgated to try and improve the regimes of protection of basic farmland and cultivated land and reduce the land-take for construction purposes. The formalities for conversion of agricultural land to land for construction purposes are immensely detailed. The contents of all these laws overlap with each other to a considerable extent. There is no neat distinction between private land law—the law dealing with private rights and their use—and public land law—the law dealing with the land management functions of governmental units—and successive waves of land law have not always repealed previous laws dealing with the same matter leaving areas of uncertainty. A brief comment from two critical commentators on the reality of marketorientated land law developments in China may be quoted: With the demands of an advanced market economy, it may only be a few years before China has . . . an advanced property law bearing great resemblance to Western law . . . However, protection of property rights is another matter altogether. The legal system is still weak in China and there exists no true rule of law. As long as the CCP holds absolute power, the courts will never be strong, independent organs. Regional protectionism makes it difficult to enforce a claim from another part of the country.5 . . . [A]t the level of real property legislation, rules on everything from the definition of “ownership” to the process of registering apartment housing are still extremely ambiguous and difficult to apply, and generally grant insufficient enforcement rights. This not only creates uncertainty and insecurity for individual “owners” and increases information and enforcement costs, it is also partially responsible for allowing manipulative rent-seeking behaviour and illegality on the part of powerful bureaucratic interests.6

Thus, the message is that property rights guaranteed and protected by law and the judicial process are not yet assured in a state where party and bureaucratic interests remain dominant. The land market, which both authors assume to be the only way that China can develop an efficient system of urban land management, will only be viable and effective if the rule of law prevails. Maldives A distinction is often drawn in the literature between two ideal types of legal system: a “pre-modern”, pre-capitalist market economy legal system and a “modern”, capitalist market economy legal system. A pre-modern legal system tends to rely more on informal understandings and discretionary decisions than formal rulings given on the basis of formal 5 J Alsén, “An Introduction to Chinese Property Law” (1996) 20 Maryland Journal of International Law and Trade 1, 59–60. 6 WD Soileau, “Past is Present: Urban Real Property Rights and Housing Reform in the People’s Republic of China” (1995) 3 Pacific Rim Law and Policy Journal 299, 386.

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Tensions of Modernity: Law in Developing Land Markets 303 laws; stresses the status of parties and their relationships to each other and to the general societal hierarchy rather than the content of their case where a dispute arises between them; tends to be rather secretive as to the legal rules which operate in society as limiting knowledge of the rules is seen as an important factor in managing society; supplements and supports the man-made legal rules by reference to religious or supernatural considerations and rules; and does not, generally, recognise a full and formal separation of powers. A modern legal system on the other hand has Weberian characteristics. There are formal rules—Constitutions and Codes—made in a formal bureaucratic and reasonably open manner and then published for all to see and obtain. There are formally qualified and trained personnel to interpret and implement the rules. There is, to a varying degree, a separation of the functions of government; at the least there is an independent judicial system in which cases are decided in accordance with pre-existing rules and on the merits of the case, including cases against the government. There is, in short, predictability, transparency, and accountability. Such a legal and bureaucratic system, said Weber, was and is an essential precondition for the operation of a capitalist economic system. The Maldives has a legal system of ancient lineage. This system however is in a transitional stage from a pre-modern Islamic to a modern Islamic/common law legal system and this transitional stage is taking place in a compressed time-scale since it is only in the last 25 or so years that the Maldives has become a part of the global economy. The Government of the Maldives is being urged by IFIs to shed its responsibility for being the prime mover in the process of modernisation almost before it has fully taken it on. The market, the state is being told, should take on the role of modernisation. There is, then, in many respects a triple legal and administrative system in operation; pre-modern, state modern and market modern. The whole all points to a tripartite system which is setting up unavoidable conflicts within society and the bureaucracy. At the same time, there is a further conflict between the development of the economy and the development of the legal and bureaucratic system. The economy has made more rapid progress in the direction of a modern market economy than has the legal system which should, in theory, underpin such a development. There are piecemeal legislative reforms—the Contract Act, the Companies Act, the Maldives Tourism Act—designed to facilitate the operation of a market economy, but these operate alongside and have to interact with a legal system still exhibiting many of the characteristics of the pre-modern. It is this congruence of the economy with the legal system—defined in wide terms to include laws, practices and attitudes to law (legal culture)—which is the essence of the successful use of law to facilitate development.7 It is this congruence which is missing in the Maldives. 7 K Pistor and PA Wellons, The Role of Law and Legal Institutions in Asian Economic Development 1960–1995 (OUP, Hong Kong, 1999).

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304 Patrick McAuslan Nowhere is the tension between the underlying philosophy of a pre-modern state system and the dictates of a market-orientated approach to economy and society brought into sharper focus than with respect to land. There are many examples of this. Foremost would be the “failure” to act on past recommendations on land matters. The recommendations were based on an assumption that the principle of rational market-orientated decisions on land would become the norm. A second example is the nature of the perpetual or indefinite interest in land which government allocates to citizens: it is perpetual but government reserves the right to reallocate some or all of the land on the death of the allottee or current right-holder; it has elements of Islamic and common law within it. A third example is the evident confusion (confirmed by every interview with lawyers) on the 10-year term for leases: what is the legal basis for the rule; how, if at all, can it be got round; do leases terminate on the death of the lessor? A fourth example is the quite extraordinary percentage of revocations of gifts of property on land made by parents to siblings—between 60%–70%. Does this not suggest some considerable underlying tension within society about land? A fifth example is the lack of clear and consistent decision-making on land by the Malé Municipality in accordance with published and pre-determined rules. On the basis of the information I obtained from a very wide range of interviews together with a study of as many legal and other relevant documents in English as I managed to obtain or have been translated for me, I consider that the land law in the Maldives is at something of a crossroads. It exhibits many of the characteristics of a state-dominated discretion-based system which is operating in an increasingly market orientated economy which is applying ever more pressingly to land and housing resources. Far from there being a congruence between economy and law in this sector of the economy, there is in fact a dissonance; a growing gap between what is happening on the ground and what the law and legal institutions appear to sanction. The Land Law Act 2002 exhibits this dissonance to the full. It sets out to provide a legal framework for the allocation, using, selling, giving, leasing, mortgaging of private land and government owned land in the Maldives. The philosophy and practice of Maldivian legislative drafting is for short primary legislation concentrating on principles with longer regulations dealing with details. The Act as it stands however is too scanty on the principles and fundamentals and leaves important legal matters unclear. This in turn will hinder the writing of regulations, allow for different Ministries to put their own “spin” on fundamentals so perpetuating the present problems of differential application of the same rules for no obvious reason, and make it difficult for legal advisers and the courts to advise on or apply the law in a consistent fashion. What is principally lacking is any statement or definition of what the basic legal instruments are, what their incidents are, how they can be created, what dispositions are permitted and what the basic rights and duties of the parties are in any such relationship. What is government land and in whom or what body is it at present vested? What are the basic and fundamental functions of such a

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Tensions of Modernity: Law in Developing Land Markets 305 body in relation to government land? (In many countries, these two matters are provided for in a Constitution). What is the nature of the interest in government land that a person is allocated and what are the incidents of such an interest? What is a lease and what are the incidents of a lease? What is a mortgage and what are the incidents of a mortgage? What is the effect of an entry in a land record? What are to be the basic rights and duties of occupiers and owners of multi-ownership buildings? What exactly, in legal terms, is bought and sold when a flat is bought and sold? What remedies are available and from what organisation or body if a person is dissatisfied with a decision taken with respect to his/her rights and obligations as to land? These matters are fundamental to the management of land in the Maldives and their absence from the Act significantly detracts from its usefulness. It is, in reality, little more than a codification of existing law.

Indonesia Sudargo Gautama, a leading Indonesian lawyer, has made the point that such is the confusion of the land law that neither scholars of nor practitioners in Indonesian land law know the full extent and content of the law.8 What will be attempted here is a thematic and policy-orientated approach to the subject. Any review of the land law of Indonesia must start from the Basic Agrarian Law (BAL) which came into force on 24 September 1960. BAL is of fundamental importance in two ways: for what it is and for what it says. What is meant by the first point is that BAL has, in a sense, taken on a life of its own: it has risen above what it says—its content—and its formal legal status—a Law enacted by the national legislature—and has taken on an iconic status as a part of the fundamental basis of the nation—it helps define and cement the Unitary State of Indonesia as proclaimed in the Constitution of 1945. This is both a strength and a weakness of BAL: a strength because it gives a status and importance to land law which is absent in other countries, often to their disadvantage when it comes to land matters; a weakness because it inhibits a thorough and necessary review not just of the law on land but of policies on land, as BAL has become not just the policy but a policy which cannot be changed. This is particularly evident at the present time in relation to the decentralisation of governmental functions over land in pursuance of Regional Administration Act 1999. The fundamental principle of BAL is the abolition of the dualistic system of land law prevalent in colonial times and its replacement with a land law providing for a single system of rights based on adat law, but an adat law modified by principles introduced by BAL. At the risk of some over-simplification, it may be suggested that the overriding theme of these principles is that the national 8

S Gautama, Indonesian Business Law (Bandung, Penerdit Pt Aditya Bakti, 1995) 148, 150.

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306 Patrick McAuslan interest in land management takes precedence over both individual and communal rights in land (which are clearly provided for in the law), and local differences in social conditions and legal interests of the population groups of Indonesia which are equally clearly recognised in the law. One way of putting it is to think in terms of the State replacing the traditional institutions which managed land under adat law. Adat law recognises that individuals within the local community can have rights to occupy and use land potentially in perpetuity but these rights remain subject to overriding community interests, and some land within the jurisdiction of the traditional authorities is reserved for communal use. So too now at the level of the State. The State has a right, or more accurately, a duty of control over all land in the national interest. This duty of control is distinct and separate from ownership of the land; it derives from the sovereignty of the State over the territory of Indonesia. Whether land is allocated by the State or not, the State reserves the right to take back the rights granted to or acquired through market processes by individuals. Individuals may have “rights” to occupy land but these rights are dependent, first on the basic principle that “all land rights have social functions” (article 6, BAL), and, second, as a manifestation of that principle, on the proper use of the land which involves limitations on the amount of land that may be owned (article 7, BAL), the obligation to “actively work the land himself . . .” (article 10, BAL) and a general duty to “take care of the land” (article 15, BAL). This approach to land relations has shaped the whole evolution of land management in Indonesia since 1960. In the early years of BAL, national interest focused on land reform—the more equal distribution of the occupation of land amongst the peoples of Indonesia—but from the mid 1960s, land redistribution gave way to land development via transmigration, modern estate development in agriculture and forestry, and rapid urbanisation. This in turn involved heavy state involvement in land development, especially in the matter of acquiring land or rights in land from people who still occupied land under adat law. The creation of a “modern” system of land law by statutory provisions, regulations based on BAL and other laws on e.g. mortgages, urban planning, sales of land was a slow process but speeded up in the late 80s and the 90s. By the turn of the century, it could fairly be claimed that there was in place a quasi-statutory code of land law which provided for the operation and regulation of a land market. The criticism that may be made of this quasi-code is that it is overly bureaucratic—too many officials are involved in approving and regulating land transactions—it is scattered about in too many different legislative documents which are of different authority and are not consistent with each other; the registration system does not provide an efficient and accurate record of title; and the whole is not underpinned by any sort of efficient or effective dispute settlement mechanism. Given the overwhelming stress placed on development, adat land law and the people who still occupy land under that law have tended to be pushed to the

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Tensions of Modernity: Law in Developing Land Markets 307 margins—the national interest has required development; development has been equated with modernisation and modernisation has been equated with occupying land in accordance with the rights set out in and registered under BAL. Although BAL made constant reference to adat law and indeed claimed to be based on adat law the caveat in BAL that “agrarian law . . . shall be adat law as long as it does not run counter to the national interests and the State’s interests which hinge on the unity of the nation . . .” (article 5) (italics added) has been used to downgrade adat law, exclude traditional rights under adat law from any proper protection under the law and made it very easy for the State to acquire land from people occupying land under adat law with a minimum of procedural due process or compensation. The outcome of such an approach to land relations is that, while the language of BAL mandates a unified system of land law based on the principles of adat law, practice under BAL has created—continued is a more accurate description—a de facto dual system of land relations. One could say that there are in effect two intersecting circuits of land relations in Indonesia as in Botswana: in the upper circuit there is an official and recognised land market which the law facilitates; whereas in the lower circuit, law is designed to control and regulate use and not facilitate the operation of the market. An informal land market exists but it is outside the formal law. As BAL has developed over the years, a legal dualism has reappeared in the land law with the fault line running very much between the formal law based on Western notions of the importance of facilitating a market for land and the extralegal, informal and customary adat systems of law which, in terms of the formal law, are seen as impediments to the operation of a land market and, as such, need to be either abolished or converted to the modern system.

THE INTERNATIONAL CONTEXT OF DEVELOPING LAND MARKETS

World Bank input Since the 1990s there has been a resurgence of interest at the international level in land reform with a very definite orientation towards market-driven solutions. There were various strands that made up this interest. The World Bank has stressed the importance of building effective institutions for the land market which includes: clear definition and sound administration of property rights; simple mechanisms for identifying and transferring property rights; and thorough compilation of land titles and free access to this information.9

9 World Bank, Building Institutions for Markets: World Development Report (World Bank/OUP, Washington DC, 2002) 37.

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308 Patrick McAuslan The legal input must be noted. After a long period of disenchantment with the notion that law had any role to play in development, the Bank, other IFIs and donors began to rediscover the importance of law in development in the 1990s. The breakthrough came about from two directions; market and governance. The market breakthrough came from the collapse of the command economies in the communist states in Europe and Central Asia; command economies had been based on law so a new market orientated legal system was needed to replace the old. The governance breakthrough came from the internal and external pressures on governments in Africa to democratise themselves and advance an agenda of good governance based on the rule of law. Land law reform was seen as a key to both market and governance reform.

UN-Habitat input These various strands of interest in land reform and interest in law as an input to development came together in the output of Habitat II—the UN City Summit in 1996. This consisted of the Istanbul Declaration, the Habitat Agenda and the Global Plan of Action (GPA) and marked the formal adoption at the level of “soft” international law of global principles in tackling the problems of human settlements. Habitat II had a major impact on land law reform. The two strands of law reform referred to earlier came together in the GPA. A careful reading of the GPA shows that it connected up the political agenda of governance law reform to the market agenda; it refers to human rights, to a gender perspective to policy, to more open government, to access to justice, to the right to challenge government actions in the courts, as well as the need to revise, simplify, and reduce the scope of regulatory regimes over land. The GPA both responded to and advanced the global agenda of using land markets and reforming land laws as the principal tool for land management and development. in the reports I prepared for each country, I specifically drew attention to the precepts of the GPA and government’s obligations to have regard to them.

TOWARDS AN ASSESSMENT

The four countries of this paper are a part of a global movement towards the development of land markets via appropriate reform of their land laws: they were responding to international developments and were contributing to the strengthening of those same developments by becoming part of the process. However, while the projects were all designed with the same broad objective in mind—facilitating the operation of a land market—the specific socio-economic circumstances of the countries were very different so that outcomes in practice are likely to be very different. In standing back from the projects, however, we

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Tensions of Modernity: Law in Developing Land Markets 309 see certain common themes which assist an analysis of the tensions involved in developing land markets and the role of law therein. These commonalities may be set out in the table on the following page. The themes may be classified and discussed via the following pairs of tensions: national v local; market v state; tradition v modernity; internal v external.

National v local It is both an internal national and an external IFI and donor-driven aim to have one national land law. As noted above, the national land law of Indonesia, the BAL, is part of the national ideology and is seen as a crucial element in keeping the state as one entity and not just a collection of scattered islands. Land has always been administered from the centre and there has always been a strong resistance to any meaningful decentralisation of land administration. Since 1998, when decentralisation has been official government policy and there has been much legislation to provide for it, the national land management agency, BPN, has fought against decentralisation of land administration to the point that the World Bank has made it clear that no new land administration project will be sanctioned until this issue is resolved. The refusal to accept, despite the language of BAL, any real role for adat land tenure in land administration is part of the same syndrome: adat tenure is local; BAL is national. The history of law and the legal systems in all African states was of a dual legal system—one applying to “the natives”, one to the settlers or European administrators and nowhere was this more evident than in relation to land where the “received”, aka imposed law, was used to provide a legal veneer to a land grab by the incoming colonial power. So independence brought with it a quite understandable desire to unify the laws and the legal systems of the country and this has been one of the driving forces behind constant attempts to “abolish” customary land tenure and unify tenure on the basis of statute law. Among Anglophone African countries, Botswana has been the most successful in developing since independence a land law which is slowly moving in the direction of being a national land law but even there, there are tensions both within the dominant Tswana and between them and the San over land rights and the recognition to be accorded customary rights.10 Similar problems operate in the peri-urban areas where the tension is between what is in effect urban customary tenure and the town planning laws. In China, while there has never been any reported or overt competition from customary tenure to the dominant centralised land law, the problem is over the application of the law. In such a huge country with social and economic diversity between different parts of it, it was clear both from what was happening in 10 K Bishop, “Squatters on their Own Land: San Territoriality in Western Botswana” (1998) 31 CILSA 93.

No—not relevant

Yes—central to development of policy

7. Donor impact on land policy and land law reform

8. Poverty alleviation as a important theme of reform

No

Yes—a little. WB and others pushing. Not EU

No—not relevant

Yes—explicit part of project, public and private actors

Yes—central to policy process

Yes—explicit part of project, public and private actors

4. Reduce rent-seeking behaviour by public and private actors

Yes—implicit economic objective

6. Customary/Islamic v “modern” statute law

Yes—implicit social objective

3. Land law as a modernising element

Yes—explicit

Maldives

Yes—in project objectives but not in project details

Yes—a lot. WB and AustAid very important here

Yes—central to policy and law

Yes—referred to in the project

Yes—explicit part of project, public and private actors

Yes—very explicit Government objective

Yes—explicit

Yes—implicit but not explicitly part of policy

Yes—some. WB has an impact

Yes—central to legal and policy developments

Yes—developed by the project

Yes—explicit part of project, public actors

Yes—explicit socio-econ objective

Yes—explicit

Yes—absolutely fundamen- No—not relevant tal to policy and law

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Yes—developed by the project

Yes—explicit

2. Development of land markets

Yes—a factor in asserting control over localities

China

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5. Land law and the Habitat Yes –developed by the Agenda project

Yes—a factor in moving away from a tribal base

Botswana

1. Land law as a unifying force in the nation

Themes

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310 Patrick McAuslan

Yes—profession small but central; ditto courts Yes—RADs and in periurban areas

11. Role of lawyers; judges and legal profession

12. Unauthorised occupation of land

Yes—hidden but it exists

Yes—a major issue

Yes—role of PPATs and legal NGOs relevant

Yes—central to land management

No—nowhere in design of project

Yes—but at worst a smallish issue

Yes—lawyers becoming involved. Courts relevant

No—may exist but not in land issues

No—not referred to in policy

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No—but courts are beginning to be relevant

Yes—an issue in tenure and Yes—an issue in control use

10. Decentralisation as a point of tension

No—not considered at all

Yes—seen as an important issue

9. Gender as an element in reform

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312 Patrick McAuslan Shenyang and from my reading and research that while the centre might set out the legal framework, different provinces and cities were developing the land laws in their own way and there was little the centre could do about it. It seemed that as the centralising power of the Party waned, the central government was trying to use the law as a substitute so more and more detailed rules on land (and other subjects) were being promulgated to less and less effect. I am not sure that the Maldives has quite caught up with this issue. That is, I am not sure that the centre knows exactly what is happening in all the 200 inhabited islands which make up the state. The Land Law which was enacted in mid 2002 was clearly a law which would have much more application in Malé and the contiguous islands than elsewhere. Problems of differential land laws are still to emerge. In assessing the merit of a national land law and the role such a law might play in the creation and maintenance of a nation, it is worth drawing attention to this comment by Holdsworth about the development of English land law: The rules which regulate the manner in which land can be owned, and used, and disposed of, must always be of very great importance to the state. The stability of the state and the well-being of its citizens at all times depend, to no small extent, on its land law.11

Almost without exception, developing states have adopted this position and sought to centralise land management, despite the continued difficulties in execution. Land markets may well increase the obstacles to central control by emphasising regional and local differences. The likely solution is the continuance of a heavily regulated market with all the disadvantages that that entails.

Market v state To permit a market for land is to lose control of who gets what, and who gets what is the essence of governmental regulation of land—access, transactions, use, tax, inheritance. So all the countries under review here have attempted, even while accepting the case for a land market and going some of the way to provide the necessary legal framework for same, to keep control of the “who gets what” factor. In all countries with the exception of a very small amount of land in Botswana, the radical title to land is vested in the state; the most the citizen or foreigner can get is a 99-year right to the land. So right at the start of person/land relationship, the state is involved and can lay down the terms as landowner on which the citizen may hold, dispose of and occupy land. Despite the moves towards a greater role for a land market and law reform to facilitate this, none of the governments under review were minded either to 11 WS Holdsworth, An Historical Introduction to the Land Law (Clarendon Press, Oxford, 1927) 3.

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Tensions of Modernity: Law in Developing Land Markets 313 move to freehold tenure or relinquish their involvement in the pith and substance of the land market—transactions in land. Each state also has restrictions on what foreigners may acquire; by whatever name called, they are lesser rights than those which the citizen may acquire. The case for such regulation is always put in terms of protecting the weaker party in a land transaction or protecting the national patrimony from foreign domination: in practice, regulation rarely operates to advance those two goals and is more likely to be used for rentseeking opportunities by officials and to enable governments to continue the age-old practice of depriving the poor of their land as and when the government decides it needs it There is an extreme reluctance on the part of governments to “let go”. It is not so much that there is an antipathy to markets as an antipathy to a perceived loss of control over the polity and its main resource—land. The lessons of colonialism where seizure of the land was one of the first steps on the road to domination of the new political entity live on long after the colonial control has been relinquished.

Tradition v modernity All the states see the reform of land policy and land law in a market–orientated direction as modernising their land management systems and clearly subscribe to the idea that modernisation means development. This has always been an element behind the aim of getting rid of customary law and land tenure which is seen as an impediment to modernisation. The issues here are those of the reform of customary tenure, especially gender questions and the extent to which communal tenure can be adapted for use within a market economy. Indonesia has not thought through either of those questions; Botswana has made attempts to adapt communal grazing tenure to modern conditions but there has been a tendency to move in the direction of substituting individualised grazing tenure for communal which is unquestionably harming the rural poor. The position in the Maldives is not at all clear. The common law forms the basis of the slowly developing commercial laws of the country and this includes the leasing of tourist islands. There are elements of common law or at least nonIslamic law in the existing land laws but a good deal of the land law is clearly based on or inspired by the Shari’ah, particularly succession to land and family rights to land. It might be thought unlikely that Shari’ah will disappear but during an interview with a very senior official in government, he made it plain that ideally he would like to replace all such laws and practices with more “modern” laws based on secular principles. In China, tradition is, paradoxically, the “old” unreconstructed communist system and modernity is the new marketised system. The old system provided land for the peasant and housing for the urban workers. The new system enables

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314 Patrick McAuslan rural land to be transferred much more easily and is leading to rural landlessness; a market in urban housing is developing which is in turn leading to urban homelessness, overcrowding and illegal development—all the hallmarks of rapid urban development in the cities of the marketised developing world. Authorities in China are not yet grappling with these problems. In the rush to a land market, tradition is seen as an impediment to be pushed out of the way. Modern states in the West do not have pockets of customary tenure or Islamic rules or areas of unauthorised urban settlements impeding the operation of a fair and efficient land market. (They do have the latter, but these are not generally known about in the developing world.) Only Botswana seems to have been able to combine rapid market-orientated development with respect for and maintenance of customary tenure while slowly moving that tenure towards a more individualised and market-orientated content. Maldives could go down the same road if it were minded to. Whatever the progressive merits of BAL in the past, it is now preventing Indonesia from facing up to the need for change in the future by continuing to cast adat law and tenure as likely to contribute to the disintegration of the state instead of seeing it as part of the glue that will assist a looser unified state to survive. China’s regulatory regime for land markets seems to have lost sight of the need for equity as well as efficiency as a goal for regulation—not that regulation is particularly efficient or effective—and here too the beneficent aspects of tradition have been lost sight of.

Internal v external We are concerned here with the relative weights to be accorded to internal national pressures for reform versus the external donor-driven pressures for reform. The matter can be dealt with quite shortly. In Botswana there was no external pressure. The whole enterprise was driven by the government. What it didn’t want from the draft White Paper produced by the consultancy team, it wouldn’t take. The project in China was the largest EU project in China but the Government of China is too strong and too important for the EU to try and push it to accept the recommendations and ideas of what in Chinese terms is a pretty small exercise in a province far away from the main centres of power and population in China. It was in fact more an exercise by the EU to curry favour in China than to try and redirect Chinese land management and environmental policies. They are likely to continue trying to catch up with the exuberance of market-led practices. The World Bank’s commitment to further funding of land management reform in Indonesia is on hold pending clarification of the position of land management in Indonesia’s decentralisation programme. After a strong commitment to decentralisation in the three or four years after the downfall of Soeharto in 1998, there is evidence that parts of the government are having

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Tensions of Modernity: Law in Developing Land Markets 315 second thoughts about the whole exercise. The Bank clearly did not have the clout it expected to have. Despite Indonesia’s poor economic circumstances and the lure of a $70 million project, politics had become important again. The fundamental issue in Indonesia has always been the unity of the state and after the “loss”, as it is viewed in Indonesia, of East Timor, that issue was transcending land titling and better land management. My instinct is that BPN would do without the project if having it involved relinquishing effective control over land management throughout the country. Maldives is very small and the World Bank is very big. One might suppose therefore that new policies on land and housing backed by the World Bank would quickly be introduced. The record suggests otherwise. Donor-funded reports on land, planning and housing from the 1980s had not been acted upon. The Land Bill which I had criticised in January 2002 and which had languished in the legislature for 5 years was enacted by the time the team came back in September 2002. There have been quite remarkable and extensive developments in Malé since I was first there in 1983—high-rise buildings, a large amount of reclamation of land; paved roads, many more social and educational facilities— and a very rapid expansion in the tourism sector, so development is taking place without a clear “modern” land law or indeed legal system in place. There are bilateral donors from the South willing to assist with the new urban developments being planned both for Malé and Hulhumalé so it is not obvious what sort of pressure the Bank could bring to bear on Maldives to accept the proposed new policies if the government did not want to. These case studies are a small and unrepresentative sample of aid and the role of external agencies. But they are an antidote to the usual portrayal of heavyhanded IFIs and donors pushing poor weak states hither and yon to do as they are told. This does not always happen; states do retain their ability to say “no” or “wait” or just procrastinate. Donors and IFIs have to unload money—that is their raison d’etre—and donee governments know that. They can get their way more often than the literature might suggest but it is in the interests of neither donors nor donees to advertise that fact.

CONCLUSIONS

Introducing land markets and reforming land laws in developing countries is a fascinating and challenging task. Although the aim may be the same and the principles to be applied are the same, what these case studies show is that no two countries are the same so that detailed solutions have to be different. There is a great temptation for agencies like the World Bank to try and prescribe a standard model in its programmes of legal reforms: design one; sell it often. Unfortunately the Bank’s new land policy document and the first steps in the direction of acting on it suggests that it is going to go down that route again despite the evidence that it does not work.

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316 Patrick McAuslan The case studies also raise another important issue. Implicit in all of them is that the law matters. But does it? As noted above, IFIs and donors have rediscovered law and are piling into rule-of-law projects aimed at holistic reforms to legal and judicial systems. The thrust of the World Bank’s reforms are to create efficient legal systems which will persuade foreign investors to invest in the countries concerned. But we have seen from the case studies that despite the lack of “efficient” legal systems or land laws in China, Indonesia and Maldives, foreign investors have felt no concerns at investing. The fact is that there is no evidence of a close connection between “efficient” legal systems and foreign investment; or it must be added between a market-friendly “modern” land law and foreign investment.12 Arguably the most important issue in land reform and land law reform is equity and the plight of the poor. A recognition of customary tenure and acceptance that customary tenure can form the basis of land ownership is a major step in the direction of giving the rural poor greater security of tenure. Similarly, the recognition of the fact of occupation in informal urban settlements and programmes to regularise that factual tenure will help provide security for the urban poor. Botswana seems to be acting on these matters in a positive way and there is at the moment no intention to disturb the continuance of Islamic tenure in the inhabited islands of Maldives other than Malé and contiguous islands thereto. There is a very vigorous civil society in Indonesia which keeps issues of the urban and rural poor and their land rights in the forefront of public debate and over the years there has been progress made in regularising informal urban settlements. The decentralisation of land administration may help improve the lot of the rural poor if adat tenure is given greater recognition by regional authorities. Only, paradoxically, in China does it seem as if the land plight of the rural and urban poor is growing with little or no policy response. The evidence from the East Asian “tigers” is that land reform matters. But an equally important message is that there must be some alternative form of development to land which will stimulate economic growth and capital appreciation. Only then will the political aristocracy “let go” of control over land. There were alternatives in East Asian countries but in Indonesia, while oil provided one alternative form of outlet for elite investment, the exploitation of forests has been the other major outlet for investment and this has inhibited “letting go” of land there. Tourist development in Maldives requires land; grazing in Botswana requires land so there will always be pressure to control and regulate the land market in those two countries. In China, the bureaucracy is still very strong and has centuries of tradition of regulation; “letting go” will be very slow there. Overall then, these projects may be seen as the beginning of a reform process which will stretch far into the twenty-first century.

12 A Perry-Kassaris, “Finding the Facts about Legal Systems and Foreign Direct Investment in South Asia” [2003] LS 649.

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15

Formalisation of South African Communal Land Title and its Impact on Development HANRI MOSTERT AND JUANITA PIENAAR*

INTRODUCTION

In South Africa, a series of laws enacted during the twentieth century resulted in a perplexing array of insecure land relations and rights, varying along racial and regional lines, affecting rural black communities.1 The manner in which these laws were enforced by the governmental administration and the judiciary introduced a double-standard system of land rights,2 by which people in rural black communities were increasingly marginalised and impoverished; from governmental quarters and sometimes even from within their own ranks by corrupt community leaders.3 This was probably most apparent from laws pertaining to customary land holding, which allocated land to Blacks for exclusive occupation, according to their specific language and cultural orientation, on the basis * The research assistance of Jacques Jacobs and Ebrezia Johnson is hereby acknowledged, as is the financial assistance of the National Research Foundation. Ideas and opinions expressed in this contribution should not be attributed to this institution. All references in this text to statutory provisions are to the Communal Land Rights Act 11 of 2004 (‘CLRA’) unless stated otherwise. 1 Eg, Black Land Act 27 of 1913, which provided the statutory basis for territorial segregation by dividing South Africa into “black spots” and “non-African” areas and excluded black people from dealing with approximately 87% of the country’s land; Group Areas Act 36 of 1966, which fragmented land into areas designated to various races and secured the best agricultural and residential land for the whites. See D Visser and T Roux, “Giving back the Country: South Africa’s Restitution of Land Rights Act” and J Murphy, ‘Restitution of Land after Apartheid’ both in RW Rwelamira and G Werle (eds), Confronting Past Injustices (Butterworths, Durban, 1996) 90 and 122 respectively; maps and illustrations in CG Van der Merwe and JM Pienaar, “Land Reform in South Africa” in P Jackson and DC Wilde (eds), Reform of Property Law (Dartmouth/Ashgate, Hants/Vermont, 1997) 336–37. The racially based land control system is discussed in detail in DL Carey-Miller and A Pope, Land Title in South Africa (Juta, Kenwyn, 2000) 29–42; PJ Badenhorst, JM Pienaar and H Mostert, Silberberg and Schoeman’s Law of Property (Butterworths, Durban, 2003) 481–89. 2 H Mostert, “Diversification of Land Rights and its Implications for a New Land Law in South Africa” in E Cooke (ed), Modern Studies in Property Law (Hart Publishing, Oxford, 2003) 4–6. 3 MR Nonyana, “The Communal Land Rights Bill 2002 and Related Legislation” (2002) 6 (4) Property Law Digest, 7–8.

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318 Hanri Mostert and Juanita Pienaar of communal tenure.4 Communal customary tenure was uncertain, insecure and economically non-viable. It hindered good farming practices and lead to the fragmentation of agricultural land units, thereby discouraging investment. It did not prioritise conservation of natural resources or gender equity and perpetuated family feuds and tribal rivalries.5 The land regime resulting from these laws caused many to occupy land without any security of title or tenure, and without the possibility of securing quality living through utilisation of their land relations.6 Under the new political dispensation, attempts were initiated to redress the inequities of the existing land law system, and to entrench these initiatives constitutionally.7 The land reform process is driven by legislation, mainly resulting from governmental policy documents8 such as the 1997 White Paper on Land Policy. Over the past decade, numerous laws were promulgated to deal with issues such as access to land (redistribution), restitution and tenure security.9 These land reform initiatives are supplemented by mechanisms pertaining to land administration and regulation;10 and increasingly also more explicit endeavours to achieve economic empowerment.11 The trend is to provide for the conversion of acres over acres of “dead capital”12 by establishing access to land and secure title through registration of land use and control or alternatives to registration;13 empowering individuals and groups ridden by existing (race and gender related) inequalities associated with the old land holding and control system;14 and achieving development through educational and infrastructural support of new entrants into the land market.15 4 R Haines and C Cross, “An Historical Overview of Land Policy and Tenure in SA’s Black Areas” in C Cross and R Haines (eds), Towards Freehold (Juta, Kenwyn, 1988) 73–92. 5 T Bennett, “African land––A History of Dispossession” in R Zimmermann and D Visser (eds), Southern Cross–Civil Law and Common Law in South Africa (Juta, Kenwyn, 1996) 94; IP Maithufi, “The Law of Property” in JC Bekker, JMT Labuschagne and LP Vorster (eds), Introduction to Legal Pluralism in South Africa: Customary Law (Butterworths, Durban, 2002) 56–59. 6 Nonyana (n 3 above) 7. 7 Badenhorst, Pienaar and Mostert, n 1 above, 537. 8 Eg, Department of Land Affairs’ White Paper on Land Reform, 1991, and White Paper on Land Policy, April 1997. 9 For redistribution inter alia: Extension of Security of Tenure Act 62 of 1997 (“ESTA”); Provision of Land and Assistance Act 126 of 1993 (“PLA”), and the Land Reform (Labour Tenants) Act 3 of 1996 (“LTA”). For tenure security inter alia: Interim Protection of Land Rights Act 31 of 1996 (“IPLRA”) and the Communal Property Associations Act 28 of 1996 (“CPAA”). The Restitution of Land Rights Act 22 of 1994 is the flagship of the restitution programme. Despite the three separate land reform programmes, legislation often cannot be restricted to one particular programme only. 10 Eg, Deeds Registries Act 47 of 1937 (“DRA”); Development Facilitation Act 67 of 1995 (“DFA”); Land Survey Act 8 of 1997 (“LSA”). 11 Eg, Land Redistribution for Agricultural Development Plan (“LRAD”), since April 2000. 12 Phrase borrowed from H De Soto, The Mystery of Capital––Why Capitalism Triumphs in the West and Fails Everywhere Else (Black Swan, 2000) 32. 13 Mostert, n 2 above, 3–25. 14 PJ Badenhorst and H Mostert, “Revisiting the Transitional Arrangements of the Mineral and Petroleum Resources Development Act 28 of 2002 and the Constitutional Property Clause: An Analysis in Two Parts” [2003] Stell LR 379–84; [2004] Stell LR 22–51. 15 Eg, comprehensive agricultural support programme introduced in June 2004.

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South African Communal Land Title and its Impact on Development 319 The restitution and redistribution programmes have gained momentum;16 but the tenure security17 leg of the reform programme still lags behind. The complexity of tenure-related issues is one of the major reasons for the slow progress.18 “Tenure reform” refers to the reform of particular types of land holding and control, by moving away from apartheid’s permits-based approach to black land holding, towards a rights-based approach in terms of which persons should be able to choose the most suitable form of tenure for their own situations.19 Tenure reform is further aimed at recognizing and protecting de facto rights.20 Reform of communal tenure arrangements affect 13% of South African land (most of which is currently State-owned), and is an imperative of the reform programme. A variety of laws cater for access to land by communities. Among others, a communal property association21 may be used, or a “community development trust”22 or “housing institution”23 may be formed. However, studies undertaken in respect of various communities suggest many reasons for continued problems with the organization of such structures.24 These range from leadership problems, through internal disagreement and social conflict to problems with the allocation of land within the community. Apparently rural communities also have difficulties accessing the relevant legislation. Generally, existing and proposed legislation is criticized for not containing sufficient specifications on implementation. The problem of recording and publicizing of communal rights (by registration or otherwise) in an already overburdened system is also mentioned.

16 The total claims settled between 1994 and 2002 is 36489, resulting in 571232 ha of land being restored. See, however, criticism of AJ van der Walt, “Properties and Hierarchies of Power: A Critical Evaluation of Land-Reform Policy in South Africa” [1999] Koers 260–64; D van der Merwe, “Land Tenure in South Africa: Changing the Face of Property Law” [1990] Stell LR 321–23; H Mostert, “Land Restitution, Social Justice and Development in South Africa” [2002] SALJ 401–2. 17 S 25(6) of the 1996 Constitution. 18 Badenhorst, Pienaar and Mostert, n 1 above, 537. 19 1997 White Paper, n 8 above. 20 Above, vi; and see 329ff below: extensive ministerial discretion does not necessarily result in the tenure form of choice for the beneficiary. 21 Under the Communal Property Associations Act (CPAA) 28 of 1996. 22 Under Act 18 of 1936. 23 Established under the Companies Act 61 of 1973 or incorporated under the Co-operatives Act 81 of 1981, National Housing Code (March 2000). 24 Much of the work in this regard has been done by the Programme for Land and Agrarian Studies (PLAAS) at University of the Western Cape. See inter alia B Cousins and D Hornby, Leaping the Fissures: Bridging the Gap between Paper and Real Practice in setting up Common Property Institutions in Land Reform in South Africa (PLAAS, 2002); S Shackleton, G von Maltitz and J Evans, Factors, Conditions and Criteria for the Successful Management of Natural Resources held under a Common Property Regime: (ODI Resource Perspective Series, 1998); S Shackleton, C Shackleton and B Cousins, Revaluing the Communal Lands of Southern Africa: New Understandings of Rural Livelihoods (ODI Resource Perspective Series, 2000); P Wisborg and R Rohde TRANCRAA and Communal Land Rights: Lessons from Namaqualand (Policy Brief Series, PLAAS, 2003); A Claassens, Community Views on the Communal Land Rights Bill (PLAAS Research Report, 2003).

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320 Hanri Mostert and Juanita Pienaar The Communal Land Rights Act (CLRA), the latest edition to the plethora of laws dealing with communal access to land, is supposed to address all of these short-comings.25 It is targeted at the 15 million South Africans who live in (rural) communal arrangements.26 Prior to the 2004 elections, this Act was rushed through Parliament and promulgated on 13 February 2004, after an incubation period of more than six years fraught with difficulties and complications. The Act intends to recognise and formalise the African traditional system of communal tenure, bringing it in line with constitutional principles;27 to promote access to land by creating a uniform national registration system for rights held both individually and/or communally; and to provide for systematic and democratic administration of communal land through statutorily instituted community rules. Participation on the levels of traditional leadership, local and national government is also regulated. Redress is to be provided where tenure cannot be secured.28 Apart from being the target of academic criticism,29 the Act apparently also frustrates the larger part of the interest group it is supposed to serve.30 In particular, one may question the need for introducing even more legislative measures to promote conversion of existing insecure tenures of rural communities. Herein lies the main purpose of our essay: to assess the viability of the CLRA to deal with problems relating to access to land and tenure security in view of reservations about the over-formalisation of land rights. Issues of development policy are all the more intense, and all the more urgent where poverty and prosperity form such stark and immediate contrasts as they do in South Africa.31 De Soto’s32 ideas for the incorporation of the law into the process of political decision-making to bring about a better dispensation for 25

Memorandum on the Objects of the Communal Land Rights Bill, 2003, para 1. D Forrest, “Uproar over Land Bill” Mail & Guardian Online, 23 November 2001 (http://www.mg.co.za); W Hartley, “Communal Land Bill ‘Could Cost Up to R500m’ ” Business Day, 27 January 2004, 3; National, “Land Rights Bill ‘Deeply Flawed’ ” Mail & Guardian Online, 12 November 2003; S Hofstatter, “Critics of Communal Land Bill Say It May Spell Disaster” This Day, 03 November 2003, 3. 27 Memorandum, n 25 above, par 2(a). 28 Above, par 2(d)–(h). 29 B Cousins, “Who will really Benefit from Land Reform” Mail & Guardian Online, 15 September 2000 (http://www.mg.co.za); B Cousins, “A Return to the Apartheid Era” Mail & Guardian Online, 23 November 2001; B Cousins and A Claasens, “Looming Land Disaster” Mail & Guardian Online, 04 November 2003; A Claasens, “Community Views on Communal Land Rights Bill” (PLAAS, 2003). 30 C Cross and M Friedman, “Women and Tenure: Marginality and the Left-Hand Power” in S Meer (ed), Women, Land and Authority (David Philip, Cape Town, 1997); Claasens, n 29 above, 7; S Hofstatter, “Land Rigths Bill Slammed as a Disaster for Women” This Day, 14 November 2003, 3; S Ngubane, “Rural Women: Land and the Communal Land Rights Bill” Indonsa: Planning and Development Update, December 2003, 13–15; W Midgley, “Communal Land to be Put in the Hands of the People” Business Day, 16 October 2002, 3. 31 J Cronin, “A dangerous Mirage” Mail & Guardian, 28 May 2004, 19 provides a particularly good description of what President Thabo Mbeki has come to term South Africa’s “second economy”, in which poverty, marginalisation and underdevelopment are rife. 32 De Soto, n 12 above, 160–218. 26

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South African Communal Land Title and its Impact on Development 321 those people that are still marginalized or ostracized from society, are often presented as the developing world’s blue-print to success. He indicates that “formalisation” of norms, institutions and social constructs such as landownership is necessary for reform initiatives to serve the communities into which they are introduced best. Formalisation ensures transparency, security and clarity and promotes a reduction of discretion and political choice in the legal system. The “Law” is at the centre of future development. Formalisation by law, according to De Soto, is the instrument with which extralegal, “dead” capital may be converted effectively into utilisable capital.33 These views, importantly, force a critical look at “our own social realities, to appreciate that they are not uniquely South African,”34 but should be treated with circumspection. Particularly relevant is David Kennedy’s35 caveat that the law cannot become a safe haven from economic analysis and political choice.36 Formalizing existing extralegal relations and resurrecting “dead” capital will not be effective merely because new laws are drafted. It is still necessary to make difficult choices in deciding what relations are to be acknowledged, how this must be done, and whether the purported intention of such ventures are worthy of being pursued. Against this backdrop the South African government’s latest attempt at establishing tenure security must be assessed.

CONTEXT

The operative context of the CLRA refers to the constitutional mandate giving rise to it, the types of rights it caters for, its scope and the procedure it establishes, as well as the relation between the CLRA and other existing mechanisms of establishing secure communal tenure.

Constitutional mandate of the CLRA The Communal Land Rights Act stems particularly from endeavours to give effect to section 25(5) and (6), read with subsection (9) of the 1996 Consitution.37 Section 25(5) deals with the provision of equitable access to land by requiring the state to take reasonable legislative and other measures, within its available resources, to ensure that this objective is achieved. Section 25(6) embodies the constitutional ideal of establishing tenure security (or equitable redress) where land control is insecure because of past racial discrimination. 33

Above 185 ff. Cronin, n 31 above, 19. 35 D Kennedy, “Laws and Development” in J Hatchard and A Perry-Kessaris (eds), Law and Development: Facing Complexity in the 21st Century (Cavendish Publishing, London, 2003) 17–20. 36 Kennedy, n 35 above, 18. 37 Memorandum, n 25 above, para 2. 34

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322 Hanri Mostert and Juanita Pienaar Section 25(9) explicitly provides that legislation must be enacted to give effect to this goal of tenure security.

Scope of the CLRA and the types of rights affected The point of departure of the CLRA is set out in the constitutive section 4, which provides for the securing of “old order rights”, a term describing rights and land relations locked into the “old South Africa”.38 “Old order rights” include any tenure rights in communal land or any other rights over communal land whether formal or informal, registered or unregistered, derived from or recognized by law (including customary law, practice, and usage).39 These rights fall within the ambit of the CLRA if they existed immediately before the ministerial determination is made in terms of the pivotal section 18 of the Act, which deals with the conversion of “old order” rights into “new order” rights by means of executive action.40 Conversion is effected by providing for securing, transferring and/or registration41 of “old order” rights. They may also be cancelled and comparable redress may be paid where securing tenure is impossible.42 Consequently, a “new order” right involves a tenure right in communal or other land which has been confirmed, converted, conferred or validated by the Minister under section 18.43 The CLRA contains neither a definition of the scope and content of “old” or “new order” rights, nor any examples thereof. Certain rights are excluded expressly from the category of “old order” rights: occupancy,44 labour tenancy,45 sharecropping,46 rights in terms of an employment contract,47 and precarious rights of interim occupiers.48 For purposes of the CLRA, “old order” rights relate to communal land only, and may be derived from national or customary law, as well as from practice and usage. As a result, the ambit of the CLRA is rather extensive. It covers the following “old order” rights:

38

Bennett, n 5 above, 81–91. S 1. 40 323 ff below. 41 S 4 read with ss 5 and 6. 42 S 4(1). 43 329 ff below. 44 Including instances where the basis of occupancy is purely contractual and termination can occur in accordance with the agreement, hence excluding the possibility of long-term occupancy rights. 45 Catered for especially by the LTA. 46 Ie, a special form of labour tenancy, dealt with by the LTA. (See LTA, s 1, definition of “labour tenant”.) 47 Employment and occupancy are frequently linked. ESTA ensures security of tenure for these relations. 48 Ie, where occupation may be terminated at any stage. Long-term occupiers on communal land are, however, obviously protected. 39

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South African Communal Land Title and its Impact on Development 323 Rights to land, held nominally by the State49 and entrusted to the tribal head or “chief” (ie the traditional leader) as representative of the community, whilst portion-wise being occupied by community members individually or communally,50 qualify as “old order rights”, since they derive from customary law, practice and usage. Usually the chief allocated specific portions of the land to members for residential and/or agricultural purposes, and “informal,” unrecorded use rights such as water and grazing rights51 prevailed especially in relation to the “commons” (ie communally-used areas). (ii) Rights relating to communal land recognized by national law also qualify as “old order rights”.52 Proclamation R188 of 1969, which provided for two forms of tenure, namely quitrent and permission to occupy,53 serves as example. “Quitrent” entails the registered occupation of surveyed land, classified as agricultural, commercial or residential, for which an annual fee is payable. “Permission to occupy” (or “PTO” in short) is a statutory form of land holding involving the occupation of unsurveyed communal land against payment of rental.54 These rights can already be converted to full ownership in terms of the Upgrading of Land Tenure Rights Act 55 (the “Upgrading Act”).56 In terms of Schedule 1 of this Act, conversion of quitrent to ownership takes place automatically.57 PTO may be upgraded by means of a registration process envisaged by Schedule 2 of the Act. Schedule-2 coversions are more complicated and time-consuming, since additional requirements (relating to consent or tribal resolutions) must be met before title can be individualised. (iii) Informal rights or de facto occupational and use rights which in the past were often granted outside the prescribed procedures,58 and never recorded because of the breakdown of the land administration systems in the former “national states”59 and self-governing territories,60 are

(i)

49 S 229 of the 1993 Constitution vests all land previously under administration of the “national states” or self-governing territories in the President of the Republic of South Africa. 50 Maithufi, n 5 above, 59–64. 51 See N Vink, “The Fallacy of the Commons: Communal Grazing in Southern Africa” in C Cross and R Haines (eds), Towards Freehold (Juta, Kenwyn, 1988) 255–60. 52 DG Kleyn, A Boraine and W du Plessis, Silberberg and Schoeman’s Law of Property, 3rd edn (Butterworths, Durban, 1992) 497–501. 53 Van der Merwe and Pienaar, n 1 above, 359. 54 These rights include various kinds of PTO (most notably those relating to irrigation schemes, and Proclamation R188) and “any right to the occupation of tribal land granted under the indigenous law or customs of the tribe in question.” Upgrading Act, s 1. 55 112 of 1991. 56 507 ff below. 57 Van der Merwe and Pienaar, n 1 above, 359; Carey-Miller and Pope, n 1 above, 253. 58 Proc R188 of 1969 set out specific procedures regarding the acquisition and transfer of quitrent and PTO respectively, but these were not always followed. 59 Transkei, Bophuthatswana, Venda and Ciskei. 60 QwaQwa, KwaNdebele, KwaZulu, Gazankulu, GaNkwane and Lebowa.

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324 Hanri Mostert and Juanita Pienaar “recognized by law” and hence fall within the ambit of the CLRA. These “informal” rights are already protected by the 1996 Interim Protection of Informal Land Rights Act61 (“the Interim Protection Act”). This Act protects, first, the use or occupation of (or access to) land in terms of any tribal, customary or indigenous law or practice; or the custom, usage or administrative practice in areas which previously fell under the administration of the South African Development Trust, a self-governing territory’s government or one of the four so-called national states’ governments. Further, rights or interests in land of trust beneficiaries are protected in the “interim” where the trustees held a public office, or were appointed in terms of an act of parliament. Beneficial occupation,62 is also protected where it has endured for a continuous period of at least five years prior to 31 December 1997. Finally, permission-based “rights” pertaining to land identified in Schedules 1 or 2 of the Upgrading Act, where no formal or official records of the “rights” exist, are also protected. As concerns the scope of the CLRA, it appears as if the act was intentionally formulated vaguely, to leave room for treatment of the many diverse types of communal rights that might need protecting. The vagueness of formulation is, however perpetuated in the provisions dealing with the land affected by the CLRA as well as the ministerial discretion to determine the fate of the land. From the types of rights affected by the CLRA, it is evident that the Act caters for various types of “communal land” (ie land occupied or used by a community or members thereof subject to the rules and custom of that community)63 that are all directly related to pre-1991 land-control forms, and can be described as “classic” communal areas.64 These include (i) state land which is beneficially occupied65 and at any time vested in the governments of the former selfgoverning territories66 or national states; (ii) undisposed67 state land that vested 61

31 of 1996. Ie, occupation by someone as if he/she is the owner, without force, openly and without the permission of the registered owner: Interim Protection Act, s 1. Cf identical definitions of beneficial occupation in the CLRA and the Interim Protection Act, which correspond to the requirements set for acquisitive prescription under the Prescription Act 68 of 1969, and pose problems for gender equality in the application of the CLRA. See submissions of G Budlender for the Commission on Gender Equality [2003 November 27]; PLAAS [2003 November 10] 5–6; National Land Committee [2003 November 10] para 8.3. 63 S 2. The definitions of “community” under the CLRA and Restitution of Land Rights Act 22 of 1994 are identical, and refer to “a group of persons whose rights to land are derived from shared rules determining access to land held in common by such a group”. Cf Richtersveld Community v Alexkor Ltd 2001 (3) SA 193 (LCC), 1330A–B. 64 Eg, the former land legislation of Bophuthatswana, Venda, Ciskei, QwaQwa, KwaNdebele, and Transkei (now repealed by the Schedule to the CLRA, which also amends various sections of the KwaZulu-Natal Ingonyama Trust Act 3 of 1994). 65 N 62 above. 66 Under the Self-Governing Territories Act 21 of 1971. 67 Under the State Land Disposal Act 48 of 1961. 62

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South African Communal Land Title and its Impact on Development 325 in the SA Development Trust;68 (iii) land that was listed in the Schedule to the Black Land Act69 before it was repealed;70 (iv) land listed as “released areas” under the Development Trust and Land Act;71 and (v) land subject to the KwaZulu-Natal Ingonyama Trust.72 However, the CLRA goes beyond addressing the pre-1991 land regime, by being explicitly applicable to “beneficiaries of communal land or land tenure rights in terms of other land-reform laws”73 and by catering for a number of “new” categories of communal land. It incorporates “land acquired by or for a community whether registered or not”74 and applies to “any other land, including land which provides equitable access to land to a community as contemplated in section 25(5) of the Constitution.”75 Under the redistribution programme, embodied by s 25(5) of the Constitution, it is possible for communities to acquire and register land by establishing communal property associations in terms of the Communal Property Associations Act (CPAA).76 Although the CLRA goes on to state that the Minister will determine the extent of the land affected by this provision through a notice in the Government Gazette,77 the scope of the CLRA and the CPAA are confused by these provisions. Communities living on land affected by the CLRA have no choice but to adhere to the Act’s requirements in order to have their rights secured. The very broad ambit of the CLRA established by section 2(1)(c) and (d) read with section 39 (as discussed above) could perhaps simply be an indication of the legislature’s attempt to bring all measures relating to tenure security and access to land under one hat. But although communal land is certainly the object of each of these categories of rights, the implications of these provisions are much 68 The SA Development Trust was constituted by the Development Trust and Land Act 18 of 1936 and abolished in March 1992. Land held by it was transferred to the (then) Administrators of the former Transvaal and Orange Free State provinces, Minister of Regional and Land Affairs and/or the governments of the former self-governing territories. Proc R28, GG 13906, 31 March 1992. 69 27 of 1913. 70 By the Abolition of Racially Based Land Measures Act 108 of 1991. 71 Now repealed (n 68 and n 70 above). This Act extended the areas for exclusive black occupation by providing for released areas. 72 Established by the Kwazulu-Natal Ingonyama Trust Act 3KZ of 1994 as amended by the KwaZulu Ingonyama Trust Amendment Act 9 of 1997, to ensure application of the overall land reform measures to land affected by this Act. CLRA, ss 31–35 now specifically deal with this land. Cf criticism of pre-promulgation versions of the CLRA: Hlangananie-Polokwane Community Group, Submission to the Portfolio Committee on Agriculture and Land Affairs [2003 October 11]; Umbumbano Lwabesifazane, Submission to the Portfolio Committee on Agriculture and Land Affairs [2003 October 11]; COSATO, Submission to the Portfolio Committee on Agriculture and Land Affairs [2003 November 13], 4. 73 S 39. The mere statement that the CLRA is linked to the other land-reform measures does not render the link effective or well considered. This vague provision simply confuses the role and scope of the CLRA in relation to other existing land reform legislation. 74 S 2(1)(c). 75 S 2(1)(d). 76 28 of 1996. 77 S 2(2).

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326 Hanri Mostert and Juanita Pienaar more far-reaching than initially meets the eye. This is very evident from an analysis of the relation between the CLRA and existing reform legislation.

The role of existing land related legislation The CLRA is by no means a first attempt at addressing insecurity of tenure. Its introduction poses serious risks for the effectiveness of existing legislation with the same purpose. As indicated,78 the Upgrading Act 79 already provides for the upgrading and conversion of certain rights into ownership. The CLRA amended the Upgrading Act by providing for two further statutory forms of quitrent,80 repealing the provision dealing with transfer of tribal land to a tribe,81 and rendering the Upgrading Act nationally applicable.82 None of the other provisions in the Upgrading Act was repealed or amended. In particular, the whole of section 3, which provides for the conversion of Schedule-2 land tenure rights (ie those relating to unsurveyed land and incapable of automatic upgrading),83 is still in tact. It provides for the conversion of Schedule-2 rights into ownership through registration of the land in the name of the applicant, subsequent to a community resolution to this effect.84 As such, the CLRA overlaps with the Upgrading Act, also since the tribal areas affected by both of these acts are identical. Due to section 39 of the CLRA, it seems as if the latter will prevail. The continued purpose of those portions of the Upgrading Act currently also providing for the conversion of tribal land rights to ownership is uncertain. It is illogical, expensive and confusing to have two different procedures in place. Accordingly, the Upgrading Act will in future probably only be relevant for Schedule-1 rights (ie the registrable rights of quitrent). Another important legislative mechanism to ensure communal access to land is the Communal Property Associations Act (CPAA),85 of which the CLRA does not amend or repeal any provisions. However, the CLRA, may according to section 2(1)(d) apply to “any other land, including land which provides equitable access to land to a community”. This impacts on the continued operation of the CPAA. Additionally, the CLRA provides86 that the ownership of communal land registered in the name of a communal property association upon ministerial 78

322 ff above. N 55 above. 80 Ie, quitrent title referred to in Proclamations 196 of 1920 and 170 of 1922 (presumably omitted unintentionally when Schedule 1 was originally drafted). 81 Upgrading Act, s 20. Although the whole of this section was repealed, s 19 has been retained. The latter provides that any tribe can acquire ownership in land and, subject to a moratorium (which lapsed in 2001) the land can be sold, exchanged, donated, hypothecated or otherwise disposed of. To retain s 19 makes no sense in view of the newly promulgated CLRA. 82 Substituting the existing s 25A with a new version. 83 322 ff above. 84 Upgrading Act, s 3(1)(a)(ii) and (b). 85 28 of 1996. 86 S 5(2)(iii). 79

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South African Communal Land Title and its Impact on Development 327 determination vests in the community on whose behalf such land is held or in whose interest such registration was effected, despite any other law. The CLRA may therefore also apply to land that have been redistributed by the establishment of a communal property association.87 Members of communities organised into communal property associations already have secure title. Yet they will apparently be compelled to undergo the CLRA’s process of determination and registration. Still, the CLRA remains vague and nonsensical concerning the continued operation of such communal property associations. For instance, it is unclear what procedure needs to be followed if the community (which was originally embodied in a communal property association) wants to amend their original constitution. The amendment procedure set out in section 8(10) of the Communal Property Associations Act surely cannot be available over and above the provisions of section 20 of the CLRA relating to the “amendment of community rules.” If the Communal Property Associations Act still has any role to play, it is not in the context of customary tenure to communal land. The relevance of communal property associations is thereby limited to awards of land restoration to communities under the restitution programme; made subject to the formation of a communal property association.88

PROCEDURE OF THE CLRA

The CLRA sets out to identify “old order” rights, in order to “confirm,” “convert,” “confer” or “validate” these under a system of “new order” rights. No “old order” rights can be secured, transferred, converted or cancelled without a land rights enquiry, instituted by the Minister, where the particular land is affected by the CLRA.89 After having received the land right enquirer’s report, the Minister has to exercise the discretion in terms of section 18(1) of the Act, if he/she is satisfied that all the requirements of the Act are met. The enquiry and determination decide the fate of the land and hence necessitates more detailed analysis.

The land rights enquiry A land rights enquiry follows upon publication of a notice.90 The land rights enquirer designated by the Minister may be an official of the Department of 87 The community in question will succeed the communal property association (s 5(2)(b)) but still has the same entitlements and limitations it had previously under the CPAA. 88 Cf MR Nonyana, “The Housing Institution/Association in Communal Property Association ‘Maphepheni Case Study’ ” [2002] Butterworths Property Law Digest 3–5. 89 S 14(1). 90 S 16(a).

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328 Hanri Mostert and Juanita Pienaar Land Affairs or another suitable person.91 The CLRA does not require land right enquirers to have any specific qualifications, but some expertise in the field of land and related matters, as well as a sensitivity to gender issues and the power relations pertaining to communal land would probably be necessary. The land rights enquirer must investigate the situation of a particular community or piece of land openly and transparently, in order to make recommendations about the transfer, validation, cancellation or recognition of any existing old order rights.92 Section 14(2) lists the aspects to be considered in the enquiry.93 In enquiring into the “options available for securing rights”94 the appropriate approach would be to consider the specific rights at stake and all relevant options, as well as the preferences of the current holder, before making a recommendation. Amongst others, the enquirer has to deal with conflicting rights, which may relate to conflicts between family members or tribal affiliations or, where relevant, the effect of possible restitution claims on the land and existing rights. The interests of the State must also be considered.95 The provision of land on an equitable basis96 and gender equity are further factors to be taken into account.97 Other categories of vulnerability (such as age or infirmity) may also be considered, as may the quality, size or location of the land to be awarded. Spatial planning, land use management and land development98 constitute another essential aspect of the enquiry, which will require the co-operation of local government and traditional leadership structures in the enquiry. The need for and extent of comparable redress is another factor to be considered.99 The scope of the enquiry is thus very broad. The umbrella provision of section 14(2)(i), that the enquiry must concern “any other matter as prescribed or as instructed by the Minister,” contributes to the embodiment of a multidisciplinary or all-encompassing approach towards the enquiry.100

91

S 15(1). S 17. 93 Including inter alia the nature and extent of all constitutional and human rights, all old order and other land and tenure rights as well as all competing or conflicting rights. S 14(2)(a)(i)–(iii). 94 S 14(2)(c). 95 S 14(2)(b). 96 S 14(2)(d). 97 S 14(2)(g). Prior to promulgation, the CLRA (version of 17 October 2003) provoked major criticism concerning the insufficient provision for gender equity. Provisions authorizing recognized traditional structures to perform the functions of land administration committees (see n 29 and n 30 above) were especially disconcerting, because female representation in these structures is limited and the likelihood of female demands or needs being overseen strong. It remains to be seen whether the two additional provisions in favour of gender equality (s 4(2) and s 4(3)) added to the promulgated version of the Act will be sufficient to counteract the unamended provisions in favour of traditional authorities’ influence on the enquiry, and the existing ingrained customs and traditions. 98 S 14(2)(e). 99 S 14(2)(h). 100 Although directly linked to rural land tenure, agricultural considerations are not explicitly mentioned in the Act, and probably will have to be dealt with as “other relevant matters”. 92

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South African Communal Land Title and its Impact on Development 329 The results of the enquiry are published by notice,101 and a phase of community participation introduced.102 According to section 17(3)(b), the report can be inspected by any interested person or community and opportunity must be made for representations, whereafter the report and representations are submitted to the Minister.103 Although laudable, these provisions are unlikely to assist the rural communities in question to prepare themselves for the land rights enquiry, or partake in its recommendations, since accessibility to governmental publications remains a problem. Additionally, no time frames are provided within which such enquiries have to be completed, and no sanctions attached to delays or postponements in the conducting of the land rights enquiry.

The determination phase The process of determination is aimed at identifying the best possible solution for every holder of a specific “old order” right. When the enquirer’s report has been lodged and all the CLRA’s requirements met, the Minister can exercise his/her discretion in making a determination under the pivotal section 18 of the CLRA. The ministerial determination under section 18 is made with reference to the relevant report, all relevant laws (relating to spatial planning, local government and agriculture),104 the “old order rights of all affected holders”105 and the need for the promotion of gender equity.106 Where applicable, the location and extent of the land to be transferred has to be determined.107 Where boundary conflicts arise, the Minister will have to clarify such boundaries. The CLRA does not compel the Minister in such an event to consult or gain the cooperation of the affected communities. The Minister may decide that the whole of an area has to be surveyed and has to be registered (or remain registered) in the name of a specific community.108 Here the CLRA is particularly elusive, not clarifying why an already registered right must be redesignated. The only plausible explanation seems to relate to the registration in the name of a particular community, and endorsement of the title deed to that effect, as a method of replacing the person, traditional leader, communal property association, trust or legal entity who was the predecessor-in-title 101

S 16(b). S 17(1). 103 S 17(3)(c). 104 This places an almost impossible burden on the Minister. It is inconceivable that she would be able to make such a determination in light of the plethora of existing legislation dealing with the matters listed. This function would probably be delegated to other functionaries. 105 Many of these “old order” rights have not been captured in records, databases or other official documents. Use rights bestowed on women would be especially difficult to track down. 106 S 18(1)(e). Gender equity is further particularly provided for by s 18(4)(b) read with s 4(2) and (3). 107 S 18(2). 108 S 18(3)(a). 102

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330 Hanri Mostert and Juanita Pienaar of that community.109 The Act does not specify whether land already registered in the name of a community needs to be reregistered, or whether the title deed needs to be endorsed. Yet the section-18 determination applies to all communities, even where they are already registered owners of their land. In confirming, converting or canceling “old order” rights, the Minister may determine that the whole of the communal land has to be surveyed and subdivided into sections to be registered in the names of individuals.110 Alternatively,111 parts of the land in question may be registered in the name of the community while other parts are subdivided and registered in the names of individuals, and/or reserved to the State.112 The CLRA noticeably does not deal with the restrictions on the subdivision of land as prescribed by the Prohibition on the Subdivision of Agricultural Land Act (the “Prohibition Act”).113 This may be the case simply because the repeal of the latter Act has been anticipated for quite some time. It may also have been envisaged that the Minister could under the Prohibition Act exempt its operation, while making the section-18 determination. This would, however, require a construction of simultaneous application of the CLRA and the Prohibition Act that cannot readily be inferred from either these acts as they currently stand. Section 18(3)(d) deals with the destiny of “old order” rights. The rights may be confirmed114 or converted into ownership or other new order rights of which the Minister must determine the nature and extent, or cancelled, whereupon the land to which such right relates will be incorporated into the communally-held land and the holder awarded comparable redress.115 The CLRA does not give any indication as to the type of rights that may be confirmed. Confirmation could entail that land pertaining to a PTO will be surveyed and registered; that former “informal” use rights will be formalised and registered; or that rights which are already secure nevertheless must go through the determination process and be reregistered, because of section 18(3)(a). It remains unclear whether confirmation will result in an “old order” right being embodied in a new form, or whether such rights will continue to exist, essentially unaltered. Section 18(3)(d)(ii) provides for conversion of “old order” rights into either ownership and/or new order rights, implying that not all “new order” rights will necessarily be ownership. It seems as if the Act here anticipates diversification of secure rights to land control and holding,116 109

S 5(2)(a) read with s 5(3)(a). S 18(3)(b). 111 S 18(3)(c). 112 Probably reserved for municipal service provision. 113 70 of 1970. If the land in question is not classified as “agricultural”, the Act is in any event not relevant. 114 S 18(3)(d)(i). 115 S 12 contains detailed provisions. 116 Eg, PTO can be converted into ownership or another “new order” right not qualifying as ownership, but which is still formalised, registered and secure, such as a registered right of occupation. 110

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South African Communal Land Title and its Impact on Development 331 although different signals are sent from other sections of the Act.117 As concerns both confirmation and conversion, the CLRA does not contain any time frames for the switch to a “new order”. These provisions of the CLRA were obviously not well contemplated, probably because of the haste to have it enacted before the elections. Consequently, applicability of the provisions on confirmation and conversion is troublesome. The Minister clearly may not, however, make any determination in relation to land or rights affected by a dispute, until such dispute has been resolved by some form of mediation.118 Although this guarantees that rights will not be tampered with before disputes have been resolved, it inevitably sacrifices expediency under section 18. The obvious result is an extremely lengthy, time-consuming determination phase. As concerns cancellation of rights, the relation between section 18(3)(d)(iii) and sections 12 and 13 are also unclear. In the case of section-18 cancellations, the land will be incorporated into existing communal land and comparable redress will be awarded.119 Section 12 refers to cancellation subsequent to an application to the Minister by the holder of a right contemplated in section 25(6) of the Constitution. Section 12(3) provides that the procedure set out in section 18, read with the necessary changes, has to be followed here. Section 12(2) elaborates on the kind of redress that may be considered, namely: (i) land other than the land to which the old order right relates; (ii) compensation in money or in any other form; or (iii) a combination of (i) and (ii). It remains unclear at what stage the holder should apply to the Minister for cancellation, since the latter initiates the land rights enquiry that leads to the determination. The Act furthermore gives no indication of the factors that will determine when security would be considered “impossible” and at what stage redress will be paid. During the determination phase the Minister may finally also validate or invalidate an old order right, depending on whether it was acquired with bona or mala fides. Depending on the circumstances, the Minister must identify the holder(s) for the (“new order”) right thus validated.120 Once validated, the “old order” right presumably, (and in the absence of any provisions to this regard) has to be converted into a “new order” right.121 Despite the fact that section 18 is vital to the operation of the CLRA, and despite its length, it is strangely vague and ambiguous. There are no indications as to what “new order” rights may entail. They obviously will not always be classified as ownership, since this would render the provisions dealing with conversion of new order rights into freehold122 illogical. A difference must then 117

Eg, s 9. Eg, traditional or non-traditional dispute resolution mechanisms, or by the court. S 18(5). S 18(3)(d)(iii). 120 S 18(4)(c). 121 Presumably this section is aimed at addressing those categories of “informal” rights, granted de facto in the absence of any explainable legal basis, and which currently already enjoy protection under the Interim Protection Act (326 ff above). 122 S 9(1). It is however, possible that the community as a body receives ownership in the land registered to it and individual members thereafter apply for individual freehold. 118 119

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332 Hanri Mostert and Juanita Pienaar remain between new order rights and freehold, although the exact details of such a difference cannot be pinpointed with reference only to the CLRA. The Act seemingly suggests that new order rights will resemble old order rights, but will be formalised and registered. The CLRA’s idea of formalisation through registration is explored in the following section of our contribution.

SECURITY OF TITLE AND THE CLRA ’ S REGISTRATION PROCEDURES

During the drafting of the CLRA, two separate Bills representing different underlying paradigms of tenure reform were presented to the Minister of Land Affairs. One supported the transfer of title to occupants of communal land. The other proposed nominal ownership of communal land which would remain in the hands of the state, alongside the granting of use and occupation rights secured by statute or existing legal constructs such as servitudes.123 Eventually, government opted for a model securing communal tenure through an adapted registration mechanism which would fit in with the existing system of title transfer through registration. The procedure comprises the transfer and registration of communal land in the name of the community; registration of “community rules”; and eventual conversion of new order rights into freehold.

Transfer and registration of communal land Section 4 of the CLRA constitutively clarifies that the purpose of the Act is to ensure legally secure tenure. In conjunction, section 5 renders imperative the registration of all communal land and new order rights thereto in the name of the relevant community, irrespective of whether the predecessor of that community was an individual, a traditional leader or a communal property association, a trust or other legal entity. Thus communal tenure security is made real, through adoption of a registration procedure which applies to all communities, regardless of how title succeeded to them.124 The Act contemplates awards of state land to communities,125 and confirms communal title to land owned by persons/entities other than the State.126 In view of the Act’s broad scope,127 contemplated in section 2, the registration procedures obviously target all communal land. Provision is accordingly made for the endorsement of existing title deeds to communal land, in order to reflect that the communities themselves are the registered owners of the land.128 123 B Cousins, “Labour Pains Plague Land Reform’s Laatlammetjie” Mail & Guardian Online, 18 June 2003. 124 S 5(2). 125 S 5(1) read with s 6. 126 S 5(2)(a) read with s 5(2)(d). 127 322ff above. 128 S 5(2)(c).

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South African Communal Land Title and its Impact on Development 333 Transfer of land to a community takes place subject to the conditions set out in section 18(4),129 which relate to the consideration of the relevant municipality’s Integrated Development Plan, the reservation of rights or conditions which may serve the public interest or a public purpose, and gender equity. Registration follows upon the ministerial determination under section 18, irrespective of other legislation. The result of registration is that the ownership of communal land vests in the relevant community.130 Where the land was previously registered on behalf or in the interest of a particular community, it is likely that some form of title deed will exist as proof of the community’s right under a previous dispensation. Documents evidencing such “old order” rights which are cancelled or replaced by a new order right, subsequent to ministerial determination, must be lodged with the Registrar who then will endorse these as being cancelled.131 However, the very nature of communal tenure as insecure under the previous dispensation implies that documents evidencing proof of title were seldom issued. Where no proof of title existed, or where it was lost or destroyed, an appropriate affidavit to that effect may be lodged with the Registrar,132 either by the affected right holder (ie the community or individual) or by the Minister. A community can now become the lawful holder of rights and obligations in respect of land, and can be indicated as such in the Deeds Registry. Provisions to this effect are supplemented by simultaneous amendment of the definition of “person” in section 102 of the Deeds Registries Act (“the DRA”)133 to include a “community” for purposes of the Communal Land Rights Act. Section 102 of the DRA and section 5 of the CLRA, read with section 3, which determines that a community acquires juristic personality with perpetual succession only once its rules are registered, set out the conditions under which communities can gain legal capacity to deal with their land. The Minister must ensure that the transfer and registration requirements are met pursuant to a section-18 determination134 and the relevant land administration committee must ensure that new order rights are then allocated in accordance with the law, and that communal land and new order rights are indeed registered.135 Transfer of the land to the community therefore is only the beginning of a complicated process. The registration of communal land depends upon the preparation and approval of a communal general plan136 in terms of the Land 129 The Minister must heed the Integrated Development Plan of each relevant municipality. He/she may decide to reserve a right to the State (or municipality) and stipulate any land use or other condition(s) necessary for public purposes or in the public interest; or to protect the affected land, rights in land, land owner or right holder; or to give effect to the CLRA. 130 S 5(2). 131 S 5(3)(a). 132 S 5(3)(b). 133 47 of 1937. 134 S 6. 135 S 24(3)(a). 136 S 6(b)(i).

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334 Hanri Mostert and Juanita Pienaar Survey Act,137 whereupon it has to be registered and a communal land register has to be opened in terms of the DRA.138 The functions of conveyancer as required in terms of the DRA may be performed by a “suitably qualified” official of the Department of Land Affairs139 where the CLRA’s procedure is involved. Eventually, communal land will be removed from the ordinary land register by insertion of a reference to this effect, and registered under a special set of codes intended for communal land only.140 Once the communal land register has been opened, new order rights can be transferred to entitled persons or the community, by means of the specifically instituted Deed of Communal Land Right, or another appropriate deed.141 New allocations of rights and all registrable transactions in respect of communal land have to be registered in terms of the CLRA as well as the DRA,142 once the allocations have been ratified in writing by the relevant Land Rights Board143 of the area.144 Apart from the requisite registration of all new order rights in the communal land register, these rights must also be reflected in the registers and records of the relevant land administration committee and transactions affecting such rights as may be prescribed or required by the community rules.145 It is not clear what the purpose of this back-up provision to the arrangement of formal registration is. In fact, it seems to complicate the already intricate dual registration method even further.

Community rules Section 3 of the CLRA, read with section 19, requires the community to adopt and register community rules for registration of the land to be effective. Upon registration of the rules, the community acquires juristic personality, regardless of changes in its membership. It may then acquire and hold rights, incur obligations and own and dispose of movable and immovable property, for instance through encumbering by mortgage, servitude or otherwise.146 The community’s 137

8 of 1997. No specific provision of the DRA deals with the opening of the communal land register. The appropriate provision therefore is CLRA, s 6(b)(ii). 139 S 7. Supposedly, admission as conveyancer and successful completion of the conveyancing examination must be minimum requirements for this office. 140 Cf Sectional Titles Act 95 of 1986, ss 7, 12 and 13 and DRA, s 11(1). 141 S 6(b)(iii), read with s 1 (definition of “deed of communal land right”) and the amended DRA, s 102 (definition of “deed of communal land right”). No prescribed form for the mentioned deed exists to date. 142 S 8. 143 The function of the various land rights boards is to advise the Minister and assist communities, to ensure participation and liaison on various levels of government and civil society and to monitor compliance with the Constitution and the CLRA. See ss 25–27 for provisions on the composition of such boards and the qualifications for board members. 144 Cf s 11. 145 S 24(3)(b). 146 S 3(a) and (b). 138

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South African Communal Land Title and its Impact on Development 335 land administration committee,147 established in terms of chapter 7 of the CLRA, is its representative. The community rules confer to the land administration committee administrative powers and duties.148 The community rules regulate the administration and use of communal land, and matters considered necessary by the relevant community, or prescribed by law.149 They are binding on the community and its members.150 Adoption and registration of the community rules are compulsory. If a community fails to do so, standard rules, to be prescribed by regulation, will be deemed applicable to and registered in respect of those communities, with adaptations as the Minister may regard necessary. Communities further apparently do not have a choice regarding whether or not they want to fall under the CLRA. The Act here also fulfils an umbrella function by incorporating under its ambit all types of communities, regardless of how they are constituted.151 Registration of the community rules represents the initial step in ensuring access to land and secure tenure for a specific community. The ministerial determination consequently is dependent for effectivity on the registration of the community rules, since the registration of the rules enables the community to own land and deal with it. This means that proof of registration of the community rules must be presented to the Registrar of Deeds upon application for opening of the communal land register. Registration of the community rules must take place not at the Deeds Registry, but in a special register kept by the Director-General of Land Affairs152 and maintained by registration officers employed by the Department of Land Affairs itself.153 Once the community has adopted the rules and submitted them to the Director-General, they must be considered, along with any relevant information and the report of the Land Rights Board for a specific area.154 If the community rules comply with the requirements of the constitution and the CLRA, they may be registered. Alternatively, the Director-General may inform the community of steps to be taken to ensure compliance and registration.155 If rules are to be amended or revoked, the same procedure must be followed, subsequent to a decision taken by the community at a general meeting.156 On registration of the rules, they are deemed to be a matter of 147 The CLRA contains extensive provisions on how the land administration committee (LAC) should be constituted. See ss 21 and 22. Traditional leadership structures still enjoy precedence in matters relating to the administration of the land, but at least one third of the LAC’s members should be women and one member must represent the interests of vulnerable community members. 148 S 24(1). 149 S 19(2). 150 S 19(3). 151 These provisions refer to communities that fall within the ambit of s 2––see discussion at 322 ff above. 152 S 19(4)(a). 153 S 19(4)(c). 154 S 19(4)(b). 155 S 19(4)(c) and (d). 156 S 20(1). An amendment or revocation will only become effective once it is registered (s 20(2).)

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336 Hanri Mostert and Juanita Pienaar public knowledge, and they must be accessible to the public.157 It is unclear why the CLRA separates registration of the communal land from registration of the community rules in the way it does. If registration in the deeds registry is the appropriate method of ensuring tenure security to communal land, and the community rules are constitutive of registration, it would surely be sensible and more efficient to provide for registration of the rules alongside registration of the land in the deeds registry.158

Conversion of new order rights into freehold Eventually holders of new order rights may apply to the community owning the land relating to those rights for their conversion into freehold. The community considering the application may approve or reject it, subject to its community rules and the applicable title conditions.159 In case of approval, the community may impose any condition or reserve any right in its favour,160 before the conversion is recorded by the Registrar of Deeds as prescribed.161 As yet, the CLRA does not prescribe a procedure for registration of these conversions. It only amends the DRA to place an additional duty on the Registrar of Deeds to “register the conversion to full ownership of old order rights.” The reference to “old order” rights here is, however, ambiguous. The DRA’s new section 3(d)ter(1A) may refer to those instances where the CLRA’s section-9 conversions from “new order” rights to freehold are at stake. Then the reference to “old” order rights would simply be a clumsy oversight. Alternatively, the amended DRA provision may contemplate those instances where a ministerial determination “confirms” existing rights, whereupon these become “new order” rights. If this is the case, no provision is made for the Registrar dealing with conversions contemplated by section 9 of the CLRA, and no procedure is prescribed. Until such time as a procedure is established, section 9 will have no practical effect. Uncertainty also surrounds the purpose of section 9 and the consequences of conversion. The CLRA does not clarify the potential status of land affected by a converted “new order” right. Two possibilities exist. The land may revert to the ordinary land register, in which event it will not fall under the ambit of the CLRA any more, since it will not qualify as “communal” land. Alternatively, the land could still be classified as communal land under freehold, which would amount to a bizarre paradox. If the land reverts to the ordinary register, section 9 results in a restriction of the Act’s original ambit, rendering the Act an interim measure for achieving equitable access to land. In any event, the CLRA’s 157 158 159 160 161

S 19(3). Cf Sectional Titles Act, s 11(3)(b) and 11(3)(e). S 9(1). S 9(3). S 9(4).

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South African Communal Land Title and its Impact on Development 337 provisions on conversion into freehold leave much to be desired and remain of no effect as they stand.

CONCLUSION

On the whole, the Communal Land Rights Act might bring about slight changes in the land reform process by securing customary tenure and other tenure arrangements for traditional communities ignored under the previous regime. The question is, however, whether statutory formalisation of these relations as such can ensure quality living or development as intended by the Constitution and Government. The value of land and land rights as social capital and as tool for enhancing the living conditions of individuals is beyond dispute. The awareness of the link between “social and economic advancement” of people living on communal land and the necessity to formalise land relations in these areas is very evident from the CLRA’s Memorandum.162 However, closer analysis of the Act reveals not only a rather poor attempt at formalisation of land relations, but also, and more disconcertingly, that formalisation through registration might frustrate the objectives of access to land and tenure security. First, it is uncertain whether the award of juristic personality to communities will contribute to empowerment of marginalised and impoverished communities. Experience with Communal Property Associations, which is comparable to the new communal tenure arrangement, indicates that the likelihood of success in this respect is slim.163 Equitable access to land requires much more than simply putting the impoverished and marginalised members of our society in possession of land. It entails comprehensive training and provision of basic infrastructure in order to enhance the value and productive use of land and to ensure that tenure security secures quality livelihoods.164 Legally “recognising” traditional communities, without extracting commitments from agencies willing to invest in development, or governmental departments entrusted with the task of ensuring development, will render these attempts at empowerment of little real importance. Communities will further most likely resort to entrusting their projects and funds to expert service providers or to the district councils.165 The expert outside contractors will take over the most important managerial and developmental duties, effectively precluding the communities from participating in attempts at their own empowerment. Additionally, effective management from outside will depend on the community’s ability to remunerate such services. Fund-raising ability is related to infrastructural or developmental support, rendering it near impossible for communities not receiving such to generate the requisite income. Moreover, this arrangement 162 163 164 165

Memorandum, n 25 above, para 1. Nonyana, (n 3 above), 8. Above, 10. Above.

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338 Hanri Mostert and Juanita Pienaar leaves the system of communal land rights prone to abuse, both by malicious government officials as well as by outside contractors, once again endangering the already vulnerable members within these communities. In addition, the “safety net function” that communal property still fulfills at present, will be lost once the rights have been formalised. The eventual section-9 individualisation of rights in the long run poses the risk of loss of subsistence for families who part with their land if they do not receive sufficient support and/or training.166 Secondly, and more importantly, the process of establishing tenure security through registration is questionable. Under ordinary circumstances, and at the best of times, the registration process for land transfer is slow and timeconsuming, due to insufficient manpower in the registries and the demands of a meticulous registration process. The ability of the Deeds Registry to cope with an increased demand of registration due to the proliferation of laws relying on this procedure to ensure land title security has already been questioned,167 and need not be elaborated again. The CLRA itself sets up a grand scheme for the unification of the registration of tenure rights in a national register, amidst acknowledgement by top officials from the Land Affairs Department that the official budget for the Act may be as much as five times less than the estimated costs of implementation.168 These figures exclude surveying and registration costs, although the Act provides that the Department must carry the lion’s share of these costs.169 The ongoing land reform programmes (envisaging the transfer of 30% of the land by the year 2015) are already impeded due to budgetary constraints and limited resources. Without sufficient funding to expand the Deeds Registry and related institutions, security of tenure for communities will remain an unobtainable ideal. A related concern is that once communal land has been privatized, access to these areas for newcomers will be affected by financial considerations: those who can afford to purchase portions of land will thereafter gain access to land. In the long run, therefore, the Act might limit access to land to those with financial resources, thus frustrating its initial goal. Alternatives to the registration procedure have already been explored in scholarly work, and by the legislative drafters.170 Some of these alternatives pose relatively inexpensive and uncomplicated substitutes to the process of registration as mechanism to address the need for publication and securing of land title. However, the unwillingness of the Land Affairs Department to back 166 See PG Moll, “Transition to Freehold in the Reserves” in C Cross and R Haines (eds), Towards Freehold (Juta, 1988) 314 in relation to research done in Zaire and Nigeria. Here results indicated that large portions of arable land ended up in the hands of moneylenders, who cannot farm. See also more recently B Cousins, “Reforming Communal Land Tenure in South Africa––Why the Draft Communal Land Rights Bill is Not the Answer”, (2002) 11 ESR Review no 3, 7–9. 167 Claasens, n 29 above, 33–35. 168 See http://www.treasury.gov.za for an overview of the 2004 annual government budget and also Forrest, n 26 above. 169 S 10 and 11. 170 332 ff above and cf s 7, which provides that “a suitably qualified official of the Department of Land Affairs may perform the functions of a conveyancer in terms of the Deeds Registries Act”, and is probably an attempt to cut down on the responsibilities of the Deeds Registry.

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South African Communal Land Title and its Impact on Development 339 a land control system based on statutory security, rather than title transfer is evident from its rejection of previous drafts of the CLRA. This hesitation might be understandable in view of the unfortunate experience of black South Africans under Apartheid particularly with statutory land rights, but in a model of title transfer the stakes are so high that problems are bound to arise from a system based on surveying and meticulous recording in the register, for instance, with imminent boundary disputes. It is expected that the model chosen by the legislature will also contribute, rather than abate, evictions and landlessness. Thirdly, the idea of communal organisation as espoused by the Act is not novel. Many other legislative arrangements (communal property associations;171 voluntary associations; trusts;172 section-21 companies or private companies;173 and close corporations174) exist and may be utilised to achieve basically the same goals. Other legislative measures in place to ensure access to land and tenure security surely will not become obsolete because of the CLRA, but the legislature has also not provided much guidance as to how the proliferating number of laws should be reconciled. Increasingly, therefore, different legislative measures aim at resolving same or similar problems, without much success. The need for a consolidation and simplification of laws and a move away from an overly regulative approach seems to be increasing alongside. In view of the many organisational forms already available, it may be questionable whether the new juristic person created by the Act contributes in any way to simplification of the already perplexing system of land management. Although the basic characteristics of the different institutions may vary according to the method of establishment, the basic procedure of gaining control over land held by a community jointly remains largely similar. The success of traditional communities as land holders will accordingly depend on the measure of simplicity and ease with which such institutions may be established and managed. The CLRA as umbrella legislation complicates, rather than simplifies the process, especially in view of the many shortcomings evident from the Act discussed above. Finally then, formalisation for the sake of formalisation is nonsensical. With reference to De Soto,175 formalization through the law can be employed to systematize relations and to ensure transparency, thereby promoting security, clarity and the reduction of discretion. The CLRA however, relies heavily on formalization to empower the Minister of Land Affairs to exercise her extreme discretionary powers under the Act. As Kennedy warns, the actual effect may be exactly opposite from that intended, on the level of the law itself, where formalization for the sake of formalization may stunt transparency; but more importantly also on levels directly affecting communities and individuals, where 171 172 173 174 175

Under the CPAA. Regulated by the Trust Property Control Act 57 of 1988. Under the Companies Act 61 of 1973. Under the Close Corporations Act 69 of 1984. Considerations mentioned by De Soto and Kennedy discussed at 320 ff above.

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340 Hanri Mostert and Juanita Pienaar the Act is already seen as supporting a system of traditional leadership which has been shown to be corruptible under Apartheid. Formalisation as such in particular does not effectively address gender based power relations that go hand in hand with land control, especially in rural areas. So the increased tendency towards development through legislative formalisation raises concerns as to the ability of the land reform initiative effectively to reverse patterns of domination and discrimination in the land regime and the ability of the CLRA to fulfill its own objectives. The South African land reform initiative has thus far not rendered a single out-and-out successful example of development through formalisation. In most instances “development” along this route requires a compromise either upon the commitment to economic growth, or upon the responsibility towards general social advance. This is a compromise the South African government can no longer afford to make.

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16

“Taking” Liberties: Protections for Private Property in Canada BRUCE ZIFF

INTRODUCTION

A recent editorial in a Canadian newspaper lamented the lack of protection afforded under Canadian constitutional law for private property. Even the Republic of China, we are told by the commentator, is moving toward the implementation of protections against state confiscation.1 Many share the view that Canadian law should include an entrenched constitutional protection for property (although I am not among them). Something along the lines of the American approach is often advocated. There, put simply, where property is otherwise validly expropriated by the government (at the federal or state level), the Constitution mandates that compensation be paid. Nothing so indelible exists in Canada, at least in the form of a generic protection. Even so, Canadian law is not silent on the relationship between private property and state powers. Moreover, there exist in Canada certain measures, constitutional and quasi-constitutional in nature, that equal—and in some ways may even surpass—the American regime governing “takings”. In this chapter I will examine the current position in Canada.

THE CONSTITUTIONAL DIMENSION

The Canadian Charter of Rights and Freedoms2 was enacted in 1982. The Charter contains a set of political and legal rights, which includes guarantees of freedom of speech, assembly, religion, the right to a fair trial, and equality before the law. It is a fairly standard package of protected entitlements. These, and all other protections, are qualified by section 1, which permits the legislative abridgment of these guarantees. More specifically, that section provides that the rights conferred are always subject to such limitations as can be 1 2

L Gunter, “‘Property Rights are in Jeopardy in Canada’” Windsor Star, 23 October 2003, A8. Constitution Act, 1982, Schedule B, Part I [referred to below as the Charter].

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342 Bruce Ziff demonstrably justified in a free and democratic society.3 In addition, some core Charter provisions are not entrenched in the sense normally understood by that term, for the federal and provincial governments may override the Charter by legislative edict. The “notwithstanding clause” (as it is called) applies to all of the guarantees mentioned above.4 As already alluded to, there is no express protection against state confiscation under the Canadian Charter. This is not an oversight, and indeed the issue of property rights was intensely debated as the document was being formulated and finalized. As Richard Bauman has explained, an unusual coalition of stakeholders lined up against the inclusion of a property protection.5 Predictably, the New Democratic Party, a light pink social democratic party, opposed the measure. But so did the government in the province of Alberta, which has a political culture that steadfastly embraces a free market ideology. Alberta acted out of concern that its regulation of the oil and gas industry might be impeded. Likewise, the diminutive province of Prince Edward Island saw a threat to its controls on the foreign ownership of land. In the end, these interests prevailed. Although there is no purpose-built protection for property in the Charter, it nevertheless affects property rights in a range of ways. Consider these illustrations. The Charter protects against unreasonable search and seizure, and this abridges the power of law enforcement agencies to enter homes and business premises6 or to seize personal property. The guarantee of freedom of expression has been used to undo regulations affecting commercial advertising.7 Similarly, the right to freedom of religion has been used to attack Sunday trading prohibitions.8 Section 15 provides for equality under law and may be used to attack discriminatory property entitlements.9 As mentioned, a contravention of the Charter can be saved under section 1. Hence, the need to protect defined property interests can be marshalled as a justification under that section. In sum, Charter rights have been effective in protecting a range of commercial interests and activities.10 Moreover, the Charter works to impose restrictions on the regulation of public property. The exercise of the right to freedom of expression and assembly on public property can be abridged by the state, provided that this is done in 3 As to the judicial treatment of this provision, see generally PW Hogg, Constitutional Law of Canada (Carswell, Toronto, 1997 Student edn) at ch 35, passim. 4 Charter, s 33. Rights conferred in s 2, and ss 7–15 may be overridden. So far the clause has not been used extensively, at least outside of Quebec: see further T Kahana, “Understanding the Notwithstanding Mechanism” (2002) 52 UTLJ 221. 5 See generally RW Bauman, “Property Rights in the Canadian Constitutional Context” (1992) 8 SAJHR 344. 6 Charter, s 8. See R v Feeney [1997] 2 SCR 13. 7 See, eg, RJR-MacDonald v Canada [1995] SCR 199. 8 See, eg, R v Big M Drug Mart [1985] 1 SCR 295. 9 See, eg, Gosselin c Québec (Procureur général) [2002] 4 SCR 429. 10 See further RW Bauman, “Business, Economic Rights, and the Charter” in D Schneiderman and K Sutherland (eds), Charting the Consequences: The Impact of Charter Rights on Canadian Law and Politics (UTP, Toronto, 1997) 58.

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Protections for Private Property in Canada 343 accordance with the Charter. So, the Supreme Court of Canada has held that restrictions on political leafletting at an airport must be shown to be a reasonable limitation.11 The same is true of regulations governing the posting of notices on power poles.12 These holdings reflect an appreciation that the ability to exercise free speech can be costly (and in that sense it is hardly “free”), so that access to public arenas of protest is often essential. As is perhaps well known, some American cases have gone further still, protecting access to certain quasi-public spaces such as shopping centres.13 So far, Canadian law has not developed a comparable doctrine.14 Finally, the Constitution provides protections against state interference with Aboriginal rights. Over the past 30 years there has been a steady stream of Supreme Court cases relating to Aboriginal rights, the most important of which is the 1997 land rights decision of Delgamuukw v British Columbia.15 A claim to Aboriginal title must be supported by proof of exclusive occupation of the subject lands at the time of the assumption of British sovereignty. Such a claim, if recognized, gives rise to a communal interest in the lands, one that is inalienable except to the Crown. These land rights are not equivalent to fee simple ownership; rather they are sui generis (unique). Moreover, rights short of title are also amenable to recognition at common law. For example, a site-specific right to fish or hunt is cognizable so long as that right was an integral element of the community’s culture at the point of initial European contact.16 Other property rights, say to certain forms of tangible cultural property, may well be recognised under the same criteria. Under these common law rules, Aboriginal land rights can be altered or extinguished. Two methods of extinguishment are possible: unilateral state action, or a surrender of the lands to the Crown. Commonly, surrender occurs under 11 Committee for Commonwealth of Canada v Canada [1991] 1 SCR 139. This application of the Charter was discussed in the House of Lords decision in DPP v Jones (Margaret) [1999] 2 AC 240 (HL) where it was held that it was acceptable to use public roads as a site for peaceful protest. Lord Hutton’s judgment refers to Committee for Commonwealth of Canada v Canada. His Lordship offered (at 288) that the reasoning used under the Charter “should also apply to the common law right of public assembly.” Cf Weisfeld v Canada (1994) 116 DLR (4th) 232 (Fed CA). 12 Ramsden v Peterborough [1993] 2 SCR 1084. See also Toronto v Quickfall (1994) 16 OR (3d) 665 (CA). Cf Beaumier v Brampton (1998) 46 MPLR (2d) 32 (Ont Gen Div). 13 Robins v PruneYard Shopping Centre 447 US 74 (1980) affirming 592 P2d 341 (Cal, 1979). See also State v Shack, 277 A2d 369 (NJ Sup Ct, 1971). Cf Albertson’s Inc v Young 131 Cal Reptr 721 (App, 2003). 14 In the leading pre-Charter case of Harrison v Carswell [1976] 2 SCR 200, the Supreme Court denied that there existed a right of access for peaceful picketing in a privately owned shopping centre. Laskin J (as he then was) delivered a vigorous dissent. See also Gameday Publication(s) Ltd v Keystone Agriculture & Recreation Centre Inc (1999) 170 DLR (4th) 617 (Man CA). See also Cie generale des Establishments Michelin–Michelin & CIE v CAW–Canada [1997] 2 FC 306 (TD) where it was argued––to no avail––that the right of free expression gave a union the right to use a Michelin trademark in printed materials used during an attempt to unionize workers of that company. Finally, compare the New Zealand developments in Sky City Auckland v Wu [2002] 3 NZLR 621 (CA) and Vector Ltd v Transpower NZ Ltd [1999] 3 NZLR 646 (CA). 15 [1997] 3 SCR 1010 [referred to below as Delgamuukw]. 16 R v Van der Peet [1996] 2 SCR 507.

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344 Bruce Ziff treaty, and in Canada there are many treaties in force, covering vast tracts of land. However, the ability to extinguish Aboriginal title is subject to a host of limitations. The onus of proving extinction lies with the party so asserting; typically that is the Crown. It must be demonstrated that there was a clear and plain intent to eliminate the right. There are also constitutional constraints. One arises from the Canadian federal structure: Jurisdiction over Aboriginal peoples is vested in the federal Parliament,17 and that precludes a provincial government from expunging title.18 Another constraint is found the constitutional amendments that came into effect in 1982. Section 35 of the Constitution Act, 1982 provides in part that “[t]he existing aboriginal and treaty rights of the aboriginal; peoples of Canada are hereby recognized and affirmed.” This provision is not part of the Charter, and as a consequence it cannot be overridden by the application of the notwithstanding clause. Furthermore, it cannot, strictly speaking, be moderated by the reasonable limitations provision (section 1), though the Supreme Court has infused section 35 with a very comparable balancing test.19 And it would also appear that section 35 prevents even the federal government from expropriating Aboriginal lands. Indeed, the Supreme Court has declared that “[s]ubsequent to s 35(1) Aboriginal rights cannot be extinguished and can only be regulated or infringed consistent with the justificatory test laid out by this Court . . .”.20 As will soon be seen in the analysis of the case law on expropriation, the line between extinguishment on the one hand, and regulation and infringement on the other, is far from clear-cut.

NON - CONSTITUTIONAL PROTECTIONS

Before the onset of the Charter age there was the Canadian Bill of Rights (1960). It remains in force, even though many of the rights contained in the Bill are now more robustly protected by the Charter. Its prime significance today relates to property rights because the Bill—unlike the Charter—recognises a right to the “enjoyment of property, and the right not be deprived thereof except by due process of law.”21 The Bill of Rights applies only to the federal level, however, several provinces have comparable legislation. For instance, the Alberta Bill of Rights contains language that is virtually identical to its federal counterpart.22 17

Constitution Act, 1867, sub 91(24). Delgamuukw, above n 15, at 1115 ff. However, an otherwise valid provincial law can regulate, and so in that way infringe, Aboriginal rights: Above at 1107, citing as an example R v Côté [1996] 3 SCR 139. 19 Delgamuukw, above n 15, at 1107 ff, explaining R v Sparrow [1990] 1 SCR 1075. 20 R v Van der Peet, above n 16, at para 28 (Lamer CJ). See further K McNeil, “Extinguishment of Aboriginal Title in Canada: Treaties, Legislation, and Judicial Discretion” (2001–2) 33 Ottawa L Rev 301. 21 Canadian Bill of Rights, SC 1960, c 44, s 1(a). 22 RSA 2000, c A–14, para 1(a). 18

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Protections for Private Property in Canada 345 And on the belief that this was somehow not enough, in 1999 that province enacted the Alberta Personal Property Bill of Rights,23 which is designed to provide an additional layer of protection. The principal limit on these non-entrenched protections is the same in each instance: each may be overridden by express legislative action. Given that, it seems these measures add very little, if anything, to the canon of interpretation at common law, endorsed in Canada, that “unless the words of a statute so demand, a statute is not to be construed so as to take away the property of a subject without compensation”.24 Indeed, the recent decision in Authorson v Canada,25 decided in 2003, illustrates the limited heft of these statutory measures. Authorson involved an action for breach of fiduciary duty brought by a disabled World War II veteran against the federal government. The crux of the complaint concerned the failure of the federal government to administer properly funds held for decades by the Department of Veterans Affairs for war veterans regarded as incapable of managing their own affairs. Generally speaking, no interest was credited for the monies being held until management practices were reformed in 1990; nor were the funds invested prior to that time. If the Crown owed a fiduciary obligation it would be liable to account for its failings for the period prior to 1990. Its defence was founded solely on legislation that explicitly absolved the Crown of liability arising before that date.26 A more sympathetic plaintiff can hardly be imagined. Joseph Authorson, who championed the cause for all similarly situated veterans, was a war hero. The federal government, which had sent these men off to war fifty years ago, was seeking to escape liability by cloaking itself in a purpose-built statutory immunity. The legislation was passed just three days before Remembrance Day, a national holiday always held on the anniversary of the Armistice of WWI. A greater affront could hardly have been orchestrated. Given these highly skewed equities, one might predict that a Canadian court might be able to find some means of circumventing the immunity, and indeed both the Ontario Supreme Court and the Court of Appeal were able to do just that; both relied on the Canadian Bill of Rights.27 However, the federal government succeeded on a further appeal to the Supreme Court of Canada. 23

RSA 2000, c A–31. Attorney General v De Keyser’s Royal Hotel [1920] AC 508 (HL) at 542 (Lord Atkinson), applied in Manitoba Fisheries Ltd v The Queen [1979] SCR 101. 25 Authorson (Litigation Guardian of) v Canada (Attorney General) (2003) 227 DLR (4th) 385 (SCC) [referred to below as Authorson]. 26 The statute reads: “No claim shall be made after this subsection comes into force for or on account of interest on moneys held or administered by the Minister during any period prior to January 1, 1990 pursuant to subsection 41(1) of the Pension Act, subsection 15(2) of the War Veterans Allowance Act or any regulations made under section 5 of this Act”: Department of Veterans Affairs Act, RSC 1985, c V–1, s 5.1(4) as amended by SC 1990, c 43, s 2. 27 Authorson (Litigation Guardian of) v Canada (Attorney General) 2002 CarswellOnt 815 (CA) affirming 2000 CarswellOnt 3707 (Ont SCJ), and affirming 2001 CarswellOnt 2578 (SCJ); additional reasons at 2002 CarswellOnt 1871 (CA). 24

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346 Bruce Ziff There is a paucity of case law on the meaning of the Bill’s property rights protections. The term “due process” has two possible connotations in this context. Its primary definition is obvious: it means that fair procedures must be followed—notices given, hearings held, etc—whenever expropriation is sought. On this reading, one might think that a statutory scheme might need to provide, at a minimum, something akin to the rules of natural justice that are applicable to administrative tribunals. Another interpretation is possible: Due process may require that the taking be assessed against a standard that focuses on the result and not just the procedures adopted. In other words, the due process protection may require substantive legitimacy. Such an approach was adopted by the United States Supreme Court from 1905 to 1937, the Lochner era.28 It is also the interpretation given to the due process language found in the Canadian Charter of Rights and Freedoms.29 The use of the term in the Canadian Bill of Rights has not been resolved, though there is dictum resisting the recognition of a substantive element. In Authorson, the Supreme Court of Canada held that the Bill of Rights contained no substantive protection against confiscation, while leaving aside the question of what, if any, other substantive protections for property might exist under the Bill. Procedural due process can also be thought of as contemplating two distinct situations. One is that fairness of process is required in the enactment of confiscatory legislation. That position was rejected in Authorson. It was said that to allow the Bill to regulate Parliamentary procedure would be tantamount to a constitutional amendment. The due process protection does apply to the application of a law once enacted. And one would have thought, as the courts below did, that a legislative provision that comprehensively removed a property right without affording an opportunity for a claimant to demonstrate, say, special hardship, could not be acceptable. In Authorson the Supreme Court of Canada held that the Bill of Rights guaranteed a right to a hearing if and only if an individualized determination of whether a rule is applicable must be made in judicial or quasi-judicial proceedings. However, “no adjudicative procedure is necessary for the nondiscretionary application of a law to incontestable facts.”30 In sum, a statute that provides for wholesale confiscation—with no exceptions and absolutely no procedure—is unassailable as a denial of due process.31 28 Named after Lochner v New York 198 US 45 (1905). See further WB Stoebuck and DA Whitman, The Law of Property, 3rd edn (West, St Paul, MN, 2000) at 545 ff. 29 Charter, s 7. See Re BC Motor Vehicle Act [1985] 2 SCR 486. 30 Authorson, above n 25, at para 45 (Major J). 31 On the same reasoning it was found that s 2(e) of the Bill of Rights, which provides a more generic due process protection is not offended by the impugned legislation: Above at paras 58–61. Note: all is not lost for the veterans. Following the Supreme Court of Canada decision, a motion was brought before the trial judge, Brockenshire J, in which it was argued that all rights to compensation had not been foreclosed by ss 5.1(4) of the Department of Veterans Affairs Act. That argument succeeded: see Authorson (Litigation Guardian of) v Canada (Attorney General), 2003 CaswellOnt 5245 (SCJ).

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Protections for Private Property in Canada 347 The expropriation statutes Even if the Canadian Bill of Rights and its provincial counterparts fall short in guaranteeing that the state act fairly when confiscating property—and that surely is the moral of Authorson—there are statutory schemes across Canada to provide compensation for the expropriation of land.32 All of these follow a conventional pattern: if land is acquired by the state, the erstwhile private owner is compensated accordingly. The rules for fixing the appropriate quantum, rights to payment for ancillary losses, and the procedures to be followed may not be identical, but the spirit of this legislation is the same across Canadian jurisdictions.33 While the Canadian statutes contemplate direct expropriation of title to land, it is possible that property may be acquired through less direct means. In particular, it has long been recognised that state action that has the effect of gutting the incidents of ownership is functionally equivalent to a full-blown confiscation. At some point, admittedly hard to locate, excessive regulation must be seen as equivalent to confiscation. If property is a bundle of rights, then state action that removes the ability to exercise those rights leaves merely the twine of the bundle (bare title), but little else. One might call this an indirect taking, creeping, de facto, or constructive expropriation. In American law, this form of action is referred to as a regulatory taking. Just how much state interference is too much for these purposes is a vexing question, and there are very few Canadian cases that provide answers.34 By contrast there is an ever-expanding American jurisprudence on point. I will start with a thumbnail sketch of the American position, in part because it allows for an understanding of the conceptually weaker notion in Canada, and also because this will shed light on the law of takings in an international trade context, a topic that is addressed in the next section of this paper. American regulatory takings law recognises that a critical distinction exists between the application of the state’s police powers to regulate public health, welfare and safety, and its use of the eminent domain (or expropriation) power. As to the former, Joseph William Singer notes that “Every exercise of the police power by the states affects existing property interests in some way”.35 However, not all such measures give rise to compensation. Something more must be shown, and that required essence is hard to distil. It is a determination that

32

See, eg, Expropriation Act, RSA 2000, c E–13; Expropriation Act, RSNS 1989, c 156. See further ECE Todd, The Law of Expropriation and Compensation in Canada, 2nd edn (Carswell, Toronto, 1992). 34 See further RJ Bauman, “Exotic Expropriations: Government Action and Compensation” (1994) 52 Advocate 561. 35 JW Singer, Property Law: Rules, Policies and Practices, 2nd edn (Aspen Law & Business, New York, 1997) at 1204 (emphasis in original). 33

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348 Bruce Ziff normally involves a case-specific (or ad hoc) inquiry.36 A range of factors must be taken into account, and generally speaking is it is not enough simply to show that the impugned measure is not of universal application.37 In Kaiser Aetna v United States, the Supreme Court summarised the ad hoc approach: This Court has generally “been unable to develop any “set formula” for determining when “justice and fairness” require that economic injuries caused by public action [should] be compensated by the government, rather than remain disproportionately concentrated on a few persons”. Rather, it has examined the “taking” question by engaging in essentially ad hoc factual inquiries that have identified several factors— such as the economic impact of the regulation, its interference with reasonable investment backed expectations, and the character of the government action—that have particular significance.38

These criteria are loose, and it should therefore come as no surprise that the result has been the development of a largely impenetrable thicket of case law, which has been coated with generous layers of scholarly commentary. In certain instances the ad hoc inquiry is by-passed, and instead a purported exercise of the police power will be treated as a per se (or categorical) taking. These are the clearest cases, where balancing is not required. A permanent physical occupation of land is a per se taking.39 So, too, is the imposition of regulations that have the effect of draining away the full economic benefit of a property holding. The standard-bearer for that position is Lucas v South Carolina Coastal Council,40 a case involving building restrictions on environmentally sensitive coastal lands. In Lucas, the United States Supreme Court held that when the owner of real property is required to sacrifice all economically beneficial uses in the name of the common good, the result of which is “to leave [the] property economically idle,”41 a compensable taking has occurred.42 The protections found in the Constitution of the United States are justified first and foremost on grounds of fairness. If the state is pursuing a valid public measure in exercising its right to expropriate, it is just that the costs of its action be shared by the citizenry as a whole, and not borne only by the deprived owner(s). There are at least two other supporting rationales for the protection. By requiring compensation, the takings doctrine also provides an incentive for governments to act prudently. This is so because the financial burden of the

36

Penn Central Transportation Co v City of New York 438 US 104 (1978). Above. See also Grape Bay Ltd v AG of Bermuda [2000] 1 WLR 574 (PC), where the Privy Council adopted the Penn Central approach. 38 Kaiser Aetna v United States 444 US 164 (1979) at 175 (Rehnquist J (as he then was)). See also Tahoe-Sierra Preservation Council Inc v Tahoe Regional Planning Agency 535 US 302 (2002), applying the ad hoc approach to a temporary moratorium on development. 39 Loretto v Teleprompter Manhattan CATV Corp 458 US 419 (1982). 40 505 US 1003 (1992). 41 Above at 1019 (Scalia J). 42 Unless it can be shown that the impugned regulation merely reflects pre-existing limits on the owner’s property entitlements, such as those imposed under the law of nuisance. 37

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Protections for Private Property in Canada 349 governmental action is internalised by the paying of compensation. Another economics-based explanation draws on the promotion of investment. The entrenched promise of compensation provides insurance to property owners that they will have some recourse should their property be confiscated by the authorities. The law thus protects reasonable investment-backed expectations. The Canadian decision in Mariner Real Estate Ltd v Nova Scotia (Attorney General)43 provides a convenient vehicle for comparison. As with Lucas, the Mariner dispute concerned legislation aimed at protection for ocean beaches. The Nova Scotia regulations that were put in place in were not identical to those in South Carolina, but the driving force, environmental protection, was the same in both locales. The owner in Mariner complained that the stringent regulations on development had the effect of eliminating the economic value of his property. On this basis, a claim for compensation under Nova Scotia law was launched. The argument that this, alone, could count as an expropriation was accepted at trial, but rejected on appeal. Cromwell JA adopted the principle that a de facto taking can be said to exist if and only if there has been a confiscation of all reasonable private uses of the lands. It is only when virtually all of the aggregated incidents of ownership have been taken away that a de facto claim has been made out.44 Such was the situation, for example, in a case where a denial of access to mineral rights essentially destroyed the entitlement to those rights.45 In addition, in determining whether the bundle of rights has been emptied by public control measures one does not look just at the potential highest and best use; rather, one must have regard to “the nature of the land and the range of reasonable uses to which it has actually been put.”46 Development on dunes is somewhat problematic, and there were other possible uses to which the subject lands could be put. In Mariner it was acknowledged that American law was different. However, the Court was reluctant to draw heavily on case law informed by a constitutional mandate. Three distinguishing features were raised. First, expropriation legislation cannot call into question the validity of the state measure. Second, the rationale of American law was described as being to prevent an unfair burden being placed on a small set of owners is unfair. In Canada, by contrast, a court’s task, it was said, is to determine whether and how much compensation is due, but “not to pass judgment on the way the Legislature apportions the burdens flowing from land use regulation.”47 Third, it must be appreciated that in

43

(1999) 68 LCR 1 (NSCA). Above at 21–2. See also p 33, and 64933 Manitoba Ltd v Manitoba (2002) 214 DLR (4th) 37 (Man CA). 45 As in British Columbia v Tener [1985] 1 SCR 533. See also Casamiro Resource Corp v British Columbia (1991) 80 DLR (4th) 1 (BCCA) and Manitoba Fisheries Ltd v The Queen [1979] SCR 101, where loss of goodwill was seen as requiring compensation. All three cases are cited with approval in Mariner, above n 43. 46 Above n 43, at 22. 47 Above at 18. 44

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350 Bruce Ziff Canada the bundle of rights associated with ownership must be understood to involve the possibility of stringent land-use regulations.48 I am not persuaded that these distinctions are pertinent. First, it is true that American takings law may be applied to prevent takings that are not undertaken for a public purpose, and that no such power is conferred by Canadian expropriation legislation. However, American courts have set the public purpose threshold very low; there is a marked deference to legislatures on that issue.49 Second, we have seen that American takings law is informed by three policies, referred to above as fairness, internalization, and insurance. Arguably all three make sense in a Canadian context. At the very least, the fairness rationale must surely be the driving force behind the statutory right of compensation found in Nova Scotia and across the country. Third, American law likewise recognises that governments have wide regulatory powers, and the notion that rights can be subjected to extensive valid regulation is to be found in American legal culture. Given that the Court in Mariner recognised the potential for compensable de facto takings to arise, it is therefore being acknowleded that a line must be drawn somewhere. Canadian courts, in the few cases in which they have been called upon to decide such questions, have looked for a high level of interference before finding that the bundle has been effectively emptied. That is a rational position to adopt, but it is one not dictated by the non-constitutional nature of the inquiry.

UNDER THE SHADOW OF NAFTA 50

The idea of free trade with the United States was the critical issue in the general elections of 1911 and in 1988. On both occasions, these economic issues were bound up with concerns over sovereignty. In the first instance, the idea of reciprocity (as it was called) failed to hold sway; in 1988 the outcome was different. In that year, the Progressive Conservatives won re-election on a free-trade platform, and in due course a treaty was finalized between the United States and Canada. By 1994, that accord had been supplanted by the North America Free Trade Agreement (NAFTA) to which Mexico is also a signatory. NAFTA is wide-ranging. For the purposes of this analysis, the most significant terms are found in Chapter 11, which deals with various protections for private investors. Article 1110 provides for mandatory compensation for expropriation that affects foreign investors. Put simply, a taking by Canada that effects Mexican or American investors triggers this right of compensation. 48

Above at 17. See further Hawaii Housing Authority v Midkiff 467 US 229 (1984). 50 North American Free Trade Agreement, online at: [referred to below as NAFTA]. 49

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Protections for Private Property in Canada 351 Article 1110 provides that a signatory must not “directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment . . .” unless that action is: (a) for a public purpose; (b) is applied in a non-discriminatory fashion; (c) is undertaken in accordance with due process; and (d) compensation is provided to the affected investor.51 The term “investment” is broadly defined. The definition embraces real and personal property rights of all kinds, including those acquired in the expectation of being used, or those actually used for business purposes. This includes secured and unsecured loans, business entities, shares in those entities, and certain contracts with affected business entities.52 I believe that the function of article 1110 is to protect foreign investors: the insurance rationale found in American takings law. Investors are insulated against the chance of nationalization of their property by a foreign power. While the introduction of the first free trade agreement prompted considerable public discussion on the general principle, the move to NAFTA was seemingly less contentious. And while both instruments contain investor protections, in neither case were these terms subject to much public discussion at the time of adoption. However, over the past decade, the terms of Chapter 11—and especially article 1110—have prompted concerns raised from various quarters. I will outline the main issues in ascending order of perceived severity.53 One complaint relates to the procedures for resolving disputes—the use of mandatory arbitration. The stakes can be quite high and can affect the public in very direct ways, but claims proceedings so far have been held in camera. Likewise, the pleadings and other documents need not be placed on a public record. Even the arbitral awards need not be published. In fact, transparency has emerged as the norm, and it is probably easier to obtain documents relating to Chapter 11 cases than is the case for domestic court proceedings.54 A second concern relates to the vulnerability of the federal government to liability for actions taken that are beyond its control. The signatory states are responsible for breaches by any governmental institution from the top on down. This principle of ultimate accountability is found within international customary law,55 and it is given explicit recognition in NAFTA.56 Under 51 Compensation is pegged at the fair market value of the expropriated investment immediately before the expropriation took place, but is not to reflect any change in value occurring because the intended expropriation had become known earlier: art 1110(2). 52 Art 1139. 53 A more detailed list of complaints can be found in J Atik, “Repenser NAFTA Chapter 11: A Catalogue of Legitimacy Critiques” online at: . See also the references cited there. 54 A private website contains the available materials: see . 55 See Metalclad, below n 75, at 634. This principle applies even if the authority has exceeded its powers: Above. 56 Article 105 provides that “The Parties shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments.”

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352 Bruce Ziff Canada’s federal system, both the federal and provincial levels of government enjoy extensive powers to affect property. An otherwise valid provincial expropriating measure that contravenes NAFTA renders the federal government liable, as would action at the municipal level. And there is no obvious way by which the federal government can transfer liability. There may, however, be prophylactic measures available to the federal government. Under the Canadian constitution, the national government is endowed with a power of disallowance over provincial legislation.57 The last invocation of that power occurred over 60 years ago, and it has for some time been considered impolitic to resort to it.58 Yet, in the right context, NAFTA may give rise to a renewed application of the power of disallowance as a last resort to prevent liability arising under that agreement. In addition, where otherwise valid federal and provincial laws conflict it is established doctrine that the federal statute is paramount, rendering the provincial act inoperative to the extent of the conflict. Therefore in some instances paramountcy can thus neutralize provincial expropriative action.59 A third concern relates to the individual rights conferred by the treaty. The effect of violating Chapter 11 is not to invalidate the relevant measure. Rather, breach gives rise to a cause of action, not in the hands of the signatory state, but in favour of the affected investor against the offending signatory. That right, included in investment treaties for about forty years, stands in marked contrast to the nation-to-nation remedy regimes found in most other treaties.60 In a Chapter 11 claim it is not necessary for the private interest to seek leave from the state of origin in order to pursue a claim. Self-interest can be the sole consideration.61 There are good reasons for creating a private cause of action, but it hints at a larger problem associated with NAFTA. Signatory states have surrendered a large measure of control over domestic public policy initiatives. David Schneiderman and others have stressed that arrangements such as NAFTA enjoy a quasi-constitutional status.62 Amendment of the terms of the agreement can be accomplished only with consent of all parties, and unlike the Charter 57

Constitution Act, 1867, s 90. See further PW Hogg, Constitutional Law of Canada (Carswell, Toronto, 1997) 118, where it is opined that today the exercise of the power of disallowance “would provoke intense resentment on the part of the provinces.” 59 Above at ch 16, passim. 60 See further JS Wiltse, “An Investor-State Dispute Mechanism in the Free Trade Area of the Americas: Lessons From NAFTA Chapter 11” (2003) 51 Buff L Rev 1145, 1151 ff. See also C Tollefson, “Games Without Frontiers: Investor and Citizen Submissions Under the NAFTA Regime” (2002) 27 Yale J Int’l L 141; JJ Coe, “Taking Stock of NAFTA Chapter 11 in its Tenth Year: An Interim Sketch of Selected Themes, Issues, and Methods” (2003) 36 Vand J of Transnat L 1281 especially at 1415 ff. 61 See further RK Paterson, “A New Pandora’s Box? Private Remedies for Foreign Investors Under the North American Free Trade Agreement” (2000) 8 Willamette J Int’l L & Dispute Res 77. 62 See D Schneiderman, “Investment Rules and the New Constitutionalism” (2000) 25 Law & Soc Inquiry 757 and the references cited there. 58

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Protections for Private Property in Canada 353 there is no override mechanism; a party-state cannot unilaterally opt out of a term. Nor is there a provision equivalent to section 1 of the Charter permitting derogations in demonstrably justified circumstances. Apart from trilateral amendment, the only escape route for a signatory is to withdraw from the agreement as a whole on six months’ notice. For many, this general critique has a particular focus: There is worry that the imposition of a takings regime will stifle, indeed throttle, Canadian public policy, especially in relation to environmental protection.63 The extent to which NAFTA is an environmentally friendly treaty is still under debate. The preamble contains some comforting language. It declares that the parties have resolved to improve trade relations, standards of living, employment, and so forth, while at the same time undertaking to do so “in a manner consistent with environmental protection and conservation.” These recitals go on to state that the agreement is supposed to “preserve [a Party’s] flexibility to safeguard the public welfare, promote sustainable development [and] strengthen the development and enforcement of environmental laws and regulations”. In addition, article 1114(1) provides that the chapter should not be construed to prevent a party from “adopting, maintaining or enforcing any measure otherwise consistent with this Chapter”64 that is targeted at ensuring that investment activity is undertaken in an environmentally sensitive fashion. In addition, article 1114(2) recognizes that it is not appropriate to encourage investment by relaxation of domestic health, safety, or environmental measures.65 This language is consistent with the tenor of the environmental side-agreements entered into when NAFTA was implemented. Environmental critics of NAFTA have underlined the limitations of these terms. Although the preamble refers to environmental protection as a motivating consideration, the “objectives” of NAFTA, found in the operative part of the agreement, refer only to trade enhancement. And while it has been offered that “by prohibiting Parties from pursuing investment goals at the expense of the environment, Article 1114 even implies that environmental considerations should be receive priority over encouragement of investments,”66 this seems a highly generous (and dubious) reading. When a party improperly offers to lower environmental standards as a ploy to lure investment, the parties are required to consult with one another; that is all. Plus, it is hard to see just what article 63 See generally M Poirier, “The NAFTA Chapter 11 Expropriation Debate Through the Eyes of a Property Theorist” (2003) 33 Envtl L 851; DA Gantz, “Potential Conflicts Between Investor Rights and Environmental Regulation Under NAFTA’s Chapter 11” (2001) 33 Geo Wash Int’l L Rev 651; JC Beauvais, “Regulatory Expropriations Under NAFTA: Emerging Principles & Lingering Doubts” (2002) 10 NYU Envtl LJ 245. Cf M Stone, “NAFTA Article 1110: Environmental Friend or Foe?” (2003) 15 Geo Int’l L Rev 763, where a much less sceptical view is expressed. 64 Emphasis added. 65 Art 1114(2). 66 Stone, above n 63, at 767. See also the separate opinion of Bryan Schwartz in SD Meyers v Canada (2000) 121 ICR 72, at 153: “I do not believe that article 1114 must be viewed as empty rhetoric”.

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354 Bruce Ziff 1114(1) is supposed to accomplish. Likewise, the side-agreements provide no concrete defence to a Chapter 11 claim. The first suit filed under article 1110 lends some credence to the angst surrounding NAFTA. That dispute involved a claim by an American firm, Ethyl Corp, which is the sole manufacturer of a manganese-based gasoline additive called MMT. The function of the additive is to enhance engine performance. But it is a toxin and, so it was feared, a public health risk. In 1997, the Canadian government proposed legislation that, while not prohibiting the use of MMT, would ban both cross-border and interprovincial importation of the product. These prohibitions meant, in effect, that Ethyl Canada would be required to establish manufacturing plants in any province in which it wished to supply the additive. At the time of the proceedings, it had one Canadian plant, which is located in the province of Ontario. Controversy over the federal government’s plan escalated as the legislation proceeded through Parliament. Indeed, even before the legislation came into force, Ethyl commenced proceedings under article 1110 of NAFTA, seeking about $250 million (US) in compensation. Canadian government documents acknowledged that the legislation might so severely reduce Ethyl’s revenue that the parent company might well re-evaluate the wisdom of maintaining a Canadian operation. Hence, it was alleged that government action would be tantamount to expropriation of the Canadian operations. Ethyl also alleged breaches of article 1102, designed to ensure parity of national treatment, and article 1106 which prevent a signatory from imposing stated “performance requirements” (such as export quotas or domestic content). Since the claim was launched before the importation ban came into force, and hence before sales would be affected, how then can one account for a claim of such magnitude? It was complained that the governmental measures had damaged Ethyl’s goodwill in Canada and abroad, and that this too was tantamount to expropriation. About two months after the Notice of Arbitration was filed, the Manganesebased Fuel Additives Act67 was declared in force. In October 1997, a statement of claim under NAFTA was filed by Ethyl. The allegation of loss of goodwill was reiterated. The damage to the commercial reputations of Ethyl and Ethyl Canada was alleged to have been produced by “the defamatory statements of Canadian officials,” and these were said to constitute expropriation of both firms’ goodwill. It does appear that at least in some respects Ethyl had drawn a rather long bow. Article 1110 is triggered by a state “measure”, which is defined as any law, regulation, procedure, requirement or practice; statements by officials hardly fit within that definition.68 However, both the cogency of that line of argument, and the more difficult question of whether the legislation produced a regulatory 67 68

SC 1997, c 11. Art 201.

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Protections for Private Property in Canada 355 taking are now moot, for in 1998 the dispute was settled. The Canadian government agreed to lift the ban, and paid $13 million (US) in compensation to Ethyl. Concerns over NAFTA liability were seen by many as the main cause of the government’s about face. There is little doubt that the Ethyl dispute alerted many observers to the potential impact of NAFTA’s investment protections. Still, the episode tells us nothing about the meaning that tribunals will give to phrase “action tantamount to expropriation” as used in article 1110. (Indeed, given the fact that three NAFTA articles were invoked in the statement of claim, it is not clear which of these created the greatest threat of exposure to damages.) Although the agreement provides that its terms shall be interpreted in accordance with customary international law, there is dispute as to the content those principles, and in any event, there are few decisions that provide useful guidance. Extant international law decisions based on the European Convention are probably not particularly helpful because of the language adopted in that instrument.69 The same is true of the law governing awards for claims made by Americans whose property was confiscated by Iran after the regime change in 1979. To date, about a dozen claims have been filed under article 1110 of NAFTA, but only a few have produced arbitral results on the merits, and only in one case has a breach of article 1110 been found. While the agreement provides that these awards are not binding on other NAFTA tribunals,70 panels will no doubt strive for rational coherence as the body of jurisprudence develops. What has been decided? The sole takings award so far was granted in Metalclad Corp v United Mexican States,71 where the Mexican government was ordered to pay $17 million (US) to an American firm that was attempting to establish a hazardous waste treatment facility. Federal and state authorization for the building of a new facility had been obtained, but the stumbling block was permission from the local authorities. Based on an understanding fostered by federal agencies in

69 See further V Been and JC Beauvais, “The Global Fifth Amendment? NAFTA’s Investment Protections and the Misguided Quest for an International ‘Regulatory Takings’ Doctrine” (2003) 78 NYULRev 30, 56. See further C Ovey and CA White (eds), European Convention on Human Rights, 3rd edn (OUP, Oxford, 2002) 300–19. Article 1 of Protocol 1 of the European Convention on Human Rights provides as follows: Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. The greatest disparity between this provision and article 1110 of NAFTA is in relation to the second para of the European article. As Been and Beauvais note (at 57): “It is not at all clear that any such balancing is required by general international law, nor have the NAFTA tribunals adopted a similar approach.” 70 Art 1136(1). 71 (2000) 119 ILR 615.

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356 Bruce Ziff Mexico that there was no valid reason for the local permit to be refused, Metalclad began construction of a new facility. Some months later, the local authority issued a stop work order, and one year following that it formally denied the required building permit. Metalclad sought recourse through domestic channels, though that strategy was abandoned at a fairly early stage; a NAFTA claim was then launched. Several months later, an ecological decree was issued by the state government, declaring the relevant area to be an environmental preserve. That action was added as a ground of the complaint. An arbitration tribunal held that Mexico’s obligation to provide investors with fair and equitable treatment under article 1105 had been breached by the actions at the local level. Article 1110 was also found to have been violated. The tribunal defined article, 1110 as contemplating not only express acts of expropriation, but also “covert or incidental interference with the use of property which has the effect of depriving the owner of the use of reasonably-to-beexpected economic benefit of property even if not necessarily to the obvious benefit of the host state.”72 The claim based on expropriation also concerned (i) the actions of the local authorities, and (ii) the ecological decree. As to (i), it was decided that the representations of the Mexican government, which Metalclad had relied on, the absence of a timely and orderly process, as well as the fact that there was no valid basis for a denial of the construction permit, amounted to an indirect expropriation.73 As to (ii), it was found that the decree “had the effect of barring forever the use of the property as intended by the claimant.”74 While stressing that the ruling on the decree was not essential to the finding of expropriation, it was concluded that it did, in fact, constitute an act tantamount to expropriation. The alternative finding concerning the ecological decree was couched as obiter dictum, but in the end it was far more significant than that. The arbitration was heard in Vancouver, BC, and following the award an application for judicial review was brought before the British Columbia Supreme Court.75 There, it was held that the tribunal had acted beyond the scope of its authority by holding that transparency was an element of due process under article 1105 of NAFTA. As the lack of transparency was also integral to the panel’s ruling as to the municipal expropriation, that part of the award was likewise set aside. However, the Court found no reason to upset the ruling that the ecological decree was tantamount to an expropriation. That holding, then, stands as the sole breach of NAFTA in the case.

72

Above. Above at 639. 74 Above at 640. 75 United Mexican States v Metalclad (2001) 119 ILR 645 (SC), additional reasons at (2001) 95 BCLR (3d) 169 (SC). There were further appeals but in October 2001, the matter was settled. Mexico paid Metalclad just over $16 million (US): see Note (2001) 119 ILR 645. 73

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Protections for Private Property in Canada 357 The award in Pope & Talbot v Canada76 takes the meaning of expropriation slightly further. There, the crux of the complaint against the Canadian government concerned the imposition of fees levied against lumber exported to the United States. The claimant was an American firm carrying on business in Canada via a subsidiary. It argued that the levy impeded the firm’s ability to compete in the American market. The arbitration tribunal concluded that the “Investment’s access to the US market is a property interest subject to protection under Article 1110.”77 That article, it was added, covers non-discriminatory regulation (as was the case here) even that which falls within a state’s “police powers.”78 Interference with the claimant’s business by restricting market access would necessarily have an impact on the investor’s property (ie, its “investment”). Yet, no measure tantamount to expropriation was found, even though the profits of the company were reduced as a result of the export levies: the degree of interference was not severe enough. It added: While it may sometimes be uncertain whether a particular interference with business activities amounts to an expropriation, the test is whether the interference is sufficiently restrictive to support a conclusion that the property has been taken from the owner. Thus the Harvard Draft defines the standard as requiring an inference that would “justify an inference that the owner . . . will not be able to use, enjoy, or dispose of the property.” The Restatement, in addressing the question whether regulation may be considered expropriation, speaks of “action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays effective enjoyment of an alien’s property.79

As the award notes in passing, the Restatement also suggests that one test to be used in determining if an expropriation has occurred under international law is whether the action has made it “impossible for the firm to operate at a profit”.80 In SD Meyers Inc v Canada,81 the issue of market access was also at the heart of the dispute. That action was launched by an American firm following a temporary ban on the cross-border transfer of PCBs, a highly toxic product once commonly used as an insulator. In the end it was found that no expropriation had occurred: the ban had been temporary, with the result that a benefit was not 76 (2000) 122 ILR 293. This was an interim award in the overall proceedings, but it was final as to the expropriation claim. 77 Above at 334. 78 Above. The reference to “police powers” is unfortunate. It seems to suggest that actions falling on the correct side of the police powers/eminent domain line are compensable. If so, that would mean that the scope of NAFTA article 1110 goes far beyond that of current American law. Under the US Constitution, “[w]here the police power is applied properly and uniformly, compensation is not owed”: Poirier, above n 63, at 872. 79 Pope & Talbot v Canada, above n 76, at 336. 80 Above at 336, n 81, quoting Third Restatement of the Foreign Relations Law of the US §712, comment (g). 81 (2000) 121 ILR 72 (Partial Award). An application to set this award aside was dismissed: Canada (Attorney General) v SD Myers Inc, 2004 CarswellNat 94 (Fed Ct).

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358 Bruce Ziff foreclosed but merely delayed, and there was no transfer of either property or a benefit to another entity. On the meaning of expropriation, the tribunal said this: The term “expropriation” in Article 1110 must be interpreted in light of the whole body of state practice, treaties and judicial interpretations of the term in international law cases. In general, the term expropriation carries with it the connotation of a “taking” by a government type authority of a person’s property with a view to transferring ownership of that property to another person, usually the authority that exercised its de jure or de facto power to do the “taking”. The tribunal accepts that, in legal theory, rights other than property rights may be “expropriated” and that international law makes it appropriate for tribunals to examine the purpose and effect of governmental measures. . . . The general body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA, although the tribunal does not rule out the possibility. Expropriations tend to involve the deprivation of ownership rights; regulations a lesser interference. The distinction between expropriation and regulation screens out most potential cases of complaints concerning economic intervention by a state and reduces the risk that governments be will be subject to claims as they go about their business of managing public affairs.82

Given the language in this award, especially, and the fact that only once so far has a contravention of article 1110 been found, one might be driven to conclude that concerns about its impact are overblown. Vicki Been and Joel Beauvais83 are far less sanguine. They argue that the cases decided under NAFTA extend regulatory takings beyond the bounds of the American conception. For example, the authors opine that the rulings in Pope & Talbot and SD Meyers accept the idea that a loss of market share or business opportunities can count as a taking under NAFTA, while American courts have resisted recognising such things as property. As there are so few clues in the NAFTA rulings to date, the Been and Beauvais critique may be premature. It has taken decades for the American courts to hammer out the contours of takings law, and even then its current state is far from certain. As we have seen from the quoted passages from the NAFTA rulings, so far there has been no deep exploration of the law, and no detailed assessment of the extent to which NAFTA allows for, say, the type of balancing approach employed in American law. It remains debatable whether article 1110 tracks customary international law, or American law, or whether it is a lex specialis. However, perception may be as important as reality. The concern over the potential for NAFTA to expand the sphere of regulatory takings seems to have influenced current American trade policy. Although progress on the Free Trade 82 83

Above at 122. See also the separate opinion of Bryan Schwartz at 178 ff. Been and Beauvais, above n 69, at 60 ff.

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Protections for Private Property in Canada 359 of the Americas treaty has slowed to a crawl, new bilateral investment treaties (BITs) are being created. In 2002, the Bush administration received authority to pursue fast-track negotiations on additional BITs. However, the enabling legislation seeks to reign in foreign investor protections. The statute directs that a principal negotiation objective be that expropriation rules inserted into new BITs accord with those now found under American constitutional law, so that foreign investors will not have rights superior to those of American citizens.84 The impact of this legislative directive has already been felt. In 2003, the United States signed free trade agreements with both Chile and Singapore. The expropriation provisions in the body of the texts85 resemble those in NAFTA. However, the treaty includes an explanatory “Annex” that controls the interpretation of the provisions. In the agreement with Chile, for instance, the Annex provides that indirect takings are to be governed by the following principles: (a) The determination of whether an action or series of actions by a Party, in a specific fact situation constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors: (i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment backed expectations; and (iii) the character of the government action. (b) Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives such as public health, safety, and the environment, do not constitute indirect expropriations.86 It can be seen that the description of the scope of the right to compensation for takings runs parallel to the American law concerning ad hoc takings. It brings to mind the passage quoted earlier, in which the ad hoc approach is summarized.87 That aspect of American takings law leaves scope for the legitimate application of a state’s police powers, as does para (b), above.

84

See Bipartisan Trade Promotion Authority Act, 2002, 19 USCA, §3801(3)(D). See, eg, United States-Chile Free Trade Agreement, art 10.9, in force as of 1 January 2004. Online at: . 86 Annex 10-D n 8 of the agreement provides that: “For greater certainty, Article 10.9 shall be interpreted in accordance with Annex 10-A and 10-D.” Annex 10-A deals with international customary law. 87 Above n 38. 85

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360 Bruce Ziff

CONCLUSION

Until now, the thorny questions associated with the protection of property rights in general, and regulatory takings in particular, have not much troubled Canadian law. That can be seen in the first part of this chapter. However, the landscape is now changing, as the discussion in the second half reveals. There is little doubt that NAFTA has ushered in a new era. Its terms are functionally entrenched, and contain language amenable to a broad interpretation. Whatever one might think about comparisons with American law, it is safe to say that the NAFTA cases go further than the law in Canada: Metalclad seems more in line with the American case of Lucas,88 than Mariner,89 its Canadian opposite number. Whether the major criticisms of NAFTA are ultimately borne out remains uncertain, but I am nevertheless troubled by these developments. In brief, in my view the political decision not to include a domestic takings rule under the Canadian Charter of Rights and Freedoms has merit: Until one is confident that the distribution of wealth in Canada is optimal,90 I believe that the state should hold plenary powers of reallocation. That remains the law for all Canadians, but not for certain privileged foreign (read: American) investors. NAFTA— even if realigned to conform to the new direction being taken in investor protections—may in time prove to have a dramatic impact on the Canadian state, in aid of that constituency.

88

Above n 40. Above n 43. 90 On wealth disparities in Canada, see A Yalnizyan, Canada’s Great Divide: The Politics of the Growing Gap between Rich and Poor in the 1990s (Centre for Social Justice, Toronto, 2000). 89

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17

Property Theory and the Transformation of Property Law ANDRE VAN DER WALT

I INTRODUCTION 1

In this chapter I investigate the notion of transformative property theory, in other words theory that explains the legitimacy of political reforms of the institutions and systems that constitute property law. In one sense, property theory always relates to the legitimacy of state interference with individual rights,2 but I am interested in the idea that whole property institutions or the property law system could be transformed as a result of changes in social and economic policy—a notion that only gathered momentum over the past few decades.3 During the first half of the twentieth century American Progressives and Realists started questioning the classical Blackstonian view that private property simply secures individual freedom and autonomy.4 As Gregory Alexander points out, the liberal conception of property was described as “inaccurate because it wrongly suggested it was possible for one person to have absolute freedom in the use and control of his things; disingenuous because it hid from view the political function of property.”5 In the postrealist world, most theorists accept the political function of property.6 Stephen Munzer therefore concluded his book on property theory with the statement that “[a] theory of property

1 Research for this chapter was made possible by grants from the Alexander von Humboldt Foundation, the National Research Foundation (grant number GUN 2050532) and Stellenbosch University. Opinions and conclusions expressed in the chapter do not necessarily reflect the views of these institutions and should not be attributed to them. 2 See LC Becker, Property Rights: Philosophic Foundations (Routledge & Kegan Paul, Boston, 1977) 1–2; SR Munzer, A Theory of Property (CUP, Cambridge, 1990) 7. 3 Postrealist sensibility for the contextuality of rights played a role, as did awareness of the state’s responsibilities in the aftermath of two world wars and––particularly––the end of the cold war and of apartheid. 4 GS Alexander, Commodity and Propriety: Competing Visions of Property in American Legal Thought 1776–1970 (University of Chicago Press, Chicago, 1997) 311–13. 5 Alexander (1997) 311. 6 For the constitutional argument see FI Michelman, “Property as a Constitutional Right” (1981) 38 Wash & Lee LR 1097–114.

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362 Andre van der Walt should not be an intellectual plaything but an instrument for reforming institutions of property.”7 However, explaining the political nature of property in a theoretical framework that traditionally justified the inviolability of property rights is problematical. Consequently, the paradoxical nature of property8 has become a recurring theme9—some analyses focus on competing visions of property,10 others highlight conflicting functions of property,11 but they all establish that property is both strongly protected and qualified by the social and political context. The resulting paradoxes are especially pertinent in jurisdictions where there is political will or a constitutional obligation to effect socio-economic transformation.12 The South African context is an almost perfect setting for discussing the transformation of property law: in the post-apartheid era the need for extensive transformation (including property reforms) is indisputable; the Constitution obliges the state to effect social, economic and legal reforms, but also guarantees property; and the property system combines uncodified common law that protects property rights strongly13 and potentially conflicting land-reform legislation. This combination could keep property theorists busy almost indefinitely,14 but I will concentrate on general theoretical developments. 7

Munzer (1990) 469. The literature highlights individual autonomy vs social justice; established rights vs redistribution; recognition vs regulation; stability vs change. 9 Besides other sources see BA Ackerman, Private Property and the Constitution (Yale University Press, New Haven, 1977) 4, 10, 15 (opposing perspectives of the Scientific Policymaker and the Ordinary Observer); Alexander (1997) 1–2 (competing visions of property as commodity and as propriety); LS Underkuffler, The Idea of Property: Its Meaning and Power (OUP, Oxford, 2003) 37–51, 143 (the competing “common” and “operative” visions of property; property as absolute idea and relative institution); RW Gordon “Paradoxical Property” in J Brewer and S Staves, (eds), Early Modern Conceptions of Property (Routledge, London, 1996) 95–110 (property as absolute dominion and de facto restraints on it); JW Singer, Entitlement: The Paradoxes of Property (Yale University Press, New Haven, 2000) 1–18 (seemingly unrestricted ownership and de facto regulation); JW Harris, Property and Justice (Clarendon Press, Oxford, 1996) 4 (property as governing the use of things and allocation of social wealth). 10 Eg, Ackerman, Alexander, Underkuffler, (n 9 above) Ackerman contrasts the scientific, systemdominated policy objectives of Scientific Policymakers with the practical solution-oriented vision of Ordinary Observers; Alexander distinguishes the efficiency-oriented vision of maximum commodification from the propriety-orientation of contextual restrictions; Singer emphasizes the proclaimed absolute freedom of ownership and de facto existence of restrictions. Alexander relates the two visions to the nature (power) and function (contextuality) of property, minimizing the difference with Singer and Gordon (n 11 below). 11 Eg, Singer, Gordon, Harris (n 9 above). Singer and Gordon highlight the supposed absoluteness of property and the existence of restrictions. See n 10 above. Harris identifies the dual role of property in governing the use of things and allocation of social wealth. 12 Large-scale transformation could include land reform, social and economic reforms. The 1996 South African constitution provides that social and economic reforms have to be accompanied by general law reform. 13 Roman-Dutch law as developed by the courts. 14 Foreign theorists are fascinated by developments in South Africa. Underkuffler (2003) Preface vii–viii acknowledged that these developments made her rethink her theoretical premises. Other theorists from the US who have been involved in and written on South African property developments include Frank Michelman, Gregory Alexander, Joseph William Singer and Cass Sunstein. 8

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Property Theory and the Transformation of Property Law 363 The newer strain of theoretical inquiry continues to focus on tension between the sanctity of vested rights and the justification of state regulation, but also takes note of larger-scale reforms that affect property law systemically.15 In this context one might speak of the transformation of property law, as opposed to “normal” police-power restriction of individual property rights. Developments of this scope are often said to erode the institution of private property, or to undermine the inherent logic of property law, rather than just restricting individual holdings in the public interest. The aim of this paper is to evaluate the feasibility of a property theory that explains such institutional or systemic transformation of property law adequately. It would be impossible to analyze all the relevant property theories, and therefore the article will focus on three recent publications. The first is a German book about the status of private ownership in German law;16 the second is another German book that adopts a more conventional position,17 and the third is an American book that explicitly accommodates redistributive reforms.18

THE PERCEIVED THREAT AGAINST PRIVATE OWNERSHIP IN GERMAN LAW

Context: constitutional cases German critics have identified a perceived threat against private ownership19 in decisions of the Federal Constitutional Court20 that brought about significant changes to private ownership as it was traditionally perceived in private law circles. In the most controversial decision the Court stated that the tenant’s right to occupation of the lease object is “ownership” for purposes of the constitutional guarantee in article 14 of the Basic Law,21 because a residential lease 15

Examples are discussed below. T von Danwitz, O Depenheuer and C Engel, Bericht zur Lage des Eigentums (Springer, Berlin, 2002) includes three essays: Engel, “Die Soziale Funktion des Eigentums” (9–107); Depenheuer, “Entwicklungslinien des Verfassungsrechtlichen Eigentumsschutzes in Deutschland 1949–2001” (109–213); von Danwitz, “Eigentumsschutz in Europa und im Wirtschaftsvölkerrecht” (215–318). The first two are of most interest here. 17 M Ruffert, Vorrang der Verfassung und Eigenständigkeit des Privatrechts (Mohr Siebeck, Tübingen, 2001). 18 Underkuffler (2003). See further LS Underkuffler, “On Property: An Essay” (1990) 100 Yale LJ 127–48; “Takings and the Nature of Property” (1996) 9 Canadian J Law & Jurisprudence 161–205. 19 The German Civil Code (BGB §903) and the German Basic Law (GG art 14) refer to Eigentum, which translates into “ownership”, although interpretation arguably extends art 14 GG to property; a development criticized by civilists. 20 See eg BVerfGE 53, 257 (1980), where the Constitutional Court included public-law patrimonial interests (certain public-law pension benefits) as ownership for purposes of art 14. Depenheuer, “Entwicklungslinien” (2002) above n 16 at 126–28, 173–78 criticizes this expansion. 21 BVerfGE 89, 1 (1993) (Besitzrecht des Mieters). DP Kommers, The Constitutional Jurisprudence of the Federal Republic of Germany, 2nd edn (Duke University Press, Durham, 1997) 255 calls it the “Landlord-Tenant Case”. At stake was the statutorily restricted right of the landlord to cancel the lease because she needed the property for her own use. The text of art 14 GG reads as follows: “(1) Property and the right of inheritance are guaranteed. Their content and limits are 16

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364 Andre van der Walt serves the same purpose for the tenant—providing a secure area of freedom where she can take responsibility for control over her own life22—that ownership does for “traditional” property owners. This decision reinforces legislative efforts to strengthen housing rights,23 but from a fundamentalist private law point of view it threatens the inherent logic of private property. Apart from technical matters,24 critics of this decision argue that it brings about a functional splitting of ownership between the landlord and the tenant,25 negating the fundamental turn that German private law made when Thibaut rejected the medieval categories of direct and beneficial ownership (and thereby the remnants of feudalism) in 1817.26 A functional splitting of ownership is said to threaten the modern institution of private ownership (and with it the free market economy) by pushing it back towards feudalism. A further criticism is that this controversial development was brought about by judges, who are not elected lawmakers.27 Because of its dogmatical implications and its logical weaknesses this decision forms the main target of criticism against reformist judgments of the Court. Three recent reactions illustrate the problems with this decision, the arguments against it and the implications for the question whether a transformational property theory is feasible.

Private law fundamentalism Otto Depenheuer criticises the Federal Constitutional Court for decisions that tend, in his view, to erode private ownership as a cornerstone and guarantor of

determined by law. (2) Property entails obligations. Its use should also serve the public interest. (3) Expropriation shall only be permissible in the public interest. It may only be ordered by or pursuant to a law which determines the nature and extent of compensation. Compensation shall reflect a fair balance between the public interest and the interests of those affected. In case of dispute regarding the amount of compensation recourse may be had to the ordinary courts.” 22 The test used to establish whether an individual interest qualifies for constitutional protection as ownership; see Ruffert (2001) 53–60. 23 Like the South African Constitution, the German Basic Law (art 15) and the property clause in particular (art 14 I and 14 II) obliges the legislature and arguably the courts to promote social and economic justice. Depenheuer, “Entwicklungslinien” (2002) above n 16 at 114–18, 187–91 minimises these provisions by subjecting them to what he describes as the “fundamental decision” to establish constitutional property according to the privatist, liberal model. 24 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 124–26, 129–30; O Depenheuer, “Der Mieter als Eigentümer” (1993) 46 NJW 2561, 2563: the Court finds that the tenant has a (restricted and temporary) right of disposal, but in fact the tenant has nothing more than a right of use and occupation. If the right of disposal is central to the assessment of ownership, the decision in fact proves that the tenant does not acquire ownership. 25 See Depenheuer “Entwicklungslinien” (2002) above n 16 at 128–31, 186–87; further Depenheuer (1993) 46 NJW 2561–64. Compare Ruffert (2001) 366–392. 26 AFJ Thibaut, “Über Dominium Directum und Utile” in Versuche über Einzelne Theile der Theorie des Rechts (reprint Aalen 1970, Jena, 1817) vol I part II 67–69. 27 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 120–24. See Ruffert (2001) 373–79.

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Property Theory and the Transformation of Property Law 365 the free market.28 His first target is the Groundwater case,29 in which the Court said that article 14 grants the legislature a comprehensive power, limited only by the institutional guarantee,30 to determine the content and boundaries of ownership.31 In the Court’s view, the protection of article 14 therefore applies to ownership as defined by legislation. The statutory definition of its content and limits is not a restriction of ownership, but a pre-guarantee determination of what is recognized as ownership for purposes of article 14. Depenheuer rejects this argument for paradoxically reversing the hierarchy of constitution and legislature by allowing the latter to determine the content and scope of a constitutional guarantee.32 In Depenheuer’s view, article 14 is grounded in the liberal primacy of the individual property owner, so that every legislative determination of the content or limits of ownership is an infringement that requires justification with reference to legitimate public interests and the proportionality requirement.33 The point of departure is the assumption that the constitutional property concept is established on the basis of the private law property concept in the Civil Code,34 28 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 118. Private law fundamentalism regards private law ownership as the point of departure for constitutional property notions. See Depenheuer’s argument in favour of the private law perspective below. 29 BVerfGE 58, 300 (Naßauskiesung) (1981). 30 Art 14I includes an institutional guarantee that protects the institution of private property and an individual guarantee that protects individual property holdings. See Ruffert (2001) 75 ff; AJ Van der Walt, Constitutional Property Clauses: A Comparative Analysis (Juta, Kenwyn, 1999) 128–30. 31 Art 14 II of the Basic Law provides that the content and limits of ownership are determined by the legislature. Some claim that the legislature starts out with a clean slate and defines what qualifies as ownership for art 14; others argue that the legislature starts out with a given phenomenon that is amended subject to the requirements in art 14. 32 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 157–70. At 165 Depenheuer indicates that this paradox quickly escalates into a “scandal” as the restrictions increase. See Ruffert (2001) 371 ff for the counterargument. 33 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 113, 114–20, 156. The proportionality requirement in the Übermaßverbot or prohibition against disproportionate regulation requires an equitable balance between the interests of the property owner and the public interest. As appears below, this requirement applies only to state infringements of private ownership as a defensive subjective right. See n 54 and n 60 and surrounding text below. 34 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 166–70. At 167 Depenheuer describes §903 of the Civil Code, which defines ownership as the right that allows the owner to dispose of the property as he wishes and to exclude everybody else from its use, as the “magna charta” of the constitutional right in art 14 of the Basic Law. The idea that the constitutional concept of ownership is developed with the private law institution as its starting point derives from the Federal Constitutional Court, which stated the principle in BVerfGE 1, 264 at 278; BVerfGE 65, 196 at 209. It is debatable whether the Court intended to establish an hierarchical link, since it also stated that the constitutional institution had to develop according to its own requirements and context: BVerfGE 51, 193 at 218. By underplaying this qualification and then criticizing the Court for developing a separate constitutional institution that differs from the private law one is begging the question. Contrary to O Depenheuer, J Dietlein, Die Lehre von den Grundrechtlichen Schutzpflichten (Duncker & Humblot, Berlin, 1992) 49 states quite categorically that a fixed, preconstitutional notion of ownership is foreign to the German Basic Law. However, the notion that property is a prepolitical or preconstitutional phenomenon shaped by private law finds support in the theory of Harris (1996); and Underkuffler (2003) 38 points out that it is “a matter of apparent constitutional and common assumption” in the US that the meaning of “property” in constitutional law is the same as in private law, with reference to Lucas v South Carolina Coastal Council 505 US 1003, 1030

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366 Andre van der Walt in other words in the tradition of the “unitary, abstract notion of ownership as shaped by Roman law”. The baseline content and limits of ownership are, therefore, determined by the private law tradition as embodied in the Civil Code’s definition of ownership as the right of free disposal and exclusion.35 In terms of article 14 the legislature is empowered to extend the ownership concept and to restrict owners’ entitlements, but in either case the legislature is bound to the private law framework, and accordingly new extensions of the concept or restrictions of the right have to be justified with reference to legitimate public interests and the proportionality requirement.36 Depenheuer criticizes the Groundwater decision for the “paradoxical” result that the legislature is allowed to determine the scope of the constitutional guarantee, but his approach creates a similar “paradox” in that private law tradition (not just legislation) determines the content and scope of the constitutional guarantee. He might not see this as a paradox, because his point is that the constitution adopted private law’s liberal, free-market oriented interpretation of the property definition in §903 of the Civil Code as its foundation, but his premises are contentious in the face of authority since the Groundwater decision. It is also debatable whether the idea was to ground the meaning of article 14 in private law tradition, or rather to take tradition as the point of departure and shape it in accordance with constitutional notions and values. In the final analysis, the reality is probably more complex than either of the two views set out here, and the ownership that is protected by article 14 is not determined exclusively by legislation or by private law tradition. I return to this point later. Depenheuer is also critical of the Landlord-Tenant decision,37 which splits ownership up between holders of different entitlements,38 thereby eroding the (1992); Nollan v California Coastal Commission 483 US 825, 57 (1987). In Palazolov Rhode Island 533 US 606, 630 (2001) the US Supreme Court described constitutional property with reference to “the common, shared understandings . . . derived from a State’s legal tradition”. As Underkuffler points out at 38, 159–61, it is by no means clear that the professed similarity of private law and constitutional notions of property is in fact (or should be) honoured in practice. Furthermore, as JW Singer and JM Beerman, “The Social Origins of Property” (1993) 6 Canadian Journal of Law & Jur 217–48 demonstrate, the private law notion of property is unstable and contextual, which detracts from its supposed force as a fixed, preconstitutional baseline. For a thought-provoking theoretical exploitation of the tension between preservative common law baseline and dynamic contextuality within private law see H Dagan, “The Craft of Property” (2003) 91 Cal LR 1517. 35 §903 BGB defines ownership as the right to dispose freely of the property and to exclude everybody else from its use. 36 This is the heart of Depenheuer’s argument; see “Entwicklungslinien” (2002) above n 16 at 168–70. Extensions of the guarantee to new forms of ownership have to conform with the requirement that the new right can also be assigned to the owner as full rights of disposal, like “normal” ownership of things. Restrictions have to conform to the constitutional requirement that they should be justified by legitimate public interests and proportional. See n 33 above. 37 BVerfGE 89, 1 (1993). See Depenheuer, “Entwicklungslinien” (2002) above n 16 at 128–31, 186–87; (1993) 46 NJW 2561–64 and n 21 above. For further critical reactions see Ruffert (2001) 366 n 61. 38 Depenheuer disagrees with the Federal Constitutional Court’s statement that the tenant has a right of disposal—in his view, this entitlement remains with the landlord, and the tenant has no more than occupation and use rights. See n 24 above.

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Property Theory and the Transformation of Property Law 367 unitary, abstract ownership right that forms the backbone of the free market. In this case it was the judiciary who overstepped its boundaries and interfered with the traditional notion of ownership by “determining” its content and limits contrary to private law tradition and without statutory support or authority. Depenheuer’s criticism boils down to this: decisions of the Federal Constitutional Court that overemphasize the powers of the legislature (Groundwater) or exceed the boundaries of legitimate judicial activity (Landlord-Tenant) erode the constitutional property guarantee and undermine the security of property as the backbone of the free market.39 In his view, the security of private property can only be guaranteed if the liberal private law concept of property forms the basis of the constitutional property provision, so that every state determination40 that affects the content and scope of ownership has to be justified with reference to legitimate public interests and the proportionality principle. Despite his criticism of individual cases, Depenheuer concludes41 that the Federal Constitutional Court can overall be said to protect private property adequately, especially in view of more recent judgments such as the Rheinland-Pfalz Monuments Act decision.42 He approves of this decision because it subjected legislative and administrative regulatory actions that could have qualified, in terms of the Groundwater decision, as legitimate determinations of the content and scope of property to constitutional scrutiny, indicating that statutory determinations are measured against some extra-statutory baseline.

Law and economics justification of functional changes Christoph Engel also initially associates “widespread skepticism about the security of ownership” with the sources of uncertainty that undermines the strong private law protection of ownership, namely legislative amendment and constitutional interpretation.43 However, Engel analyzes these amendments of ownership in view of “the social function of ownership”—a term he uses to 39 See Depenheuer, “Entwicklungslinien” (2002) above n 16 at 128–31, 186–87; Depenheuer (1993) 46 NJW 2561. 40 Through legislation or judicial activity. 41 Depenheuer, “Entwicklungslinien” (2002) above n 16 at 213. 42 BVerfGE 100, 226 (1999), known as the Rheinland-Pfälzische Denkmalschutzgesetz Case. The issue was whether the owner could be forced to bear the cost of maintenance of a property that has no private or commercial use or value because of preservation restrictions. The owner’s application for demolition was turned down because of the restrictions, leaving her with no use option and high expenses. In such a case, the Court held, the state either had to allow development to make the property usable, or expropriate it in the public interest. See Depenheuer, “Entwicklungslinien” (2002) above n 16 at 138–39, 152, 195, 213. 43 Engel, “Soziale Funktion” (2002) above n 16 at 13, identifies the following categories: removing things from property ownership altogether; removing property from private ownership; restricting ownership of property through state allocation; expropriation; forced transfer to other private owners; erosion of the content of ownership; splitting of ownership interests; and imposing temporal restrictions on ownership.

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368 Andre van der Walt describe the ways in which ownership is a suitable and beneficial institution for modern commercial society.44 For this purpose, Engel undertakes a Law and Economics analysis to prove that important benefits would be lost if ownership should be abolished or eroded by legislation or through the jurisprudence of the Federal Constitutional Court.45 A market economy is the optimal social arrangement, private ownership is the most efficient property institution for a market economy,46 and the perceived threat against private ownership must be evaluated against the benefits that would be lost for market efficiency if ownership were eroded or abolished. Engel’s analysis indicates that decommodification47 and expropriation can weaken the institution by interfering with efficient market allocation, although a more dynamic perspective48 could justify such interferences in certain conditions. Up to this point, Engel’s efficiency analysis supports Depenheuer’s position, but they part ways on the splitting of use rights into independent property interests in the Landlord-Tenant decision.49 In Engel’s view, the functional splitting of ownership may be the most efficient solution for a problem and as such it could strengthen rather than weaken the market.50 Engel’s analysis starts out by echoeing the libertarian sentiment that property should be free from all but clearly inevitable and beneficial state interferences but concludes that certain legislative changes are efficient and therefore acceptable, even when they change the institution of private ownership fundamentally. On this point he contradicts Depenheuer by justifying the functional splitting of ownership. Even more significantly, Engel approves exactly the one judicial innovation that Depenheuer (and basically everybody else) rejects most strongly, namely the functional splitting of ownership in the Landlord-Tenant case. Even more curious is the fact that Engel accepts this decision on the basis of market efficiency—economic analysis could in some cases support the functional splitting of ownership, but economists would see the Landlord-Tenant decision as market-threatening rather than market-enhancing. In the final analysis Engel’s view of the Landlord-Tenant case is unconvincing. 44

Engel, “Soziale Funktion” (2002) above n 16 at 23. Engel describes this as a “functional analysis”, while like-minded jurists (Depenheuer in “Entwicklungslinien” (2002) above n 16 at 144–46) reject functionalism, because negative developments such as the splitting of ownership are inspired by functionalism. Engel (50, 78–94) is not negative about functional developments, although he proposes “more elegant” alternative solutions if they are available and more efficient. 46 Engel, “Soziale Funktion” (2002) 47. 47 This refers to the famous Deichordnung decision of the Federal Constitutional Court, where legislation that removed dyke land from private property to ensure more efficient public control over flooding was given the constitutional thumbs up: BVerfGE 24, 367 (1968). It is curious that this decision does not pass Engel’s efficiency analysis. 48 Engel, “Soziale Funktion” (2002) 59 ff points out that allocation is a static concept, and that many analysts prefer to complement it with a more dynamic development––or evolution––based analysis that takes into account aspects such as socialization and conflict solution. 49 BVerfGE 89, 1 (1993). See the text surrounding n 21 above. 50 Engel, “Soziale Funktion” (2002) 50, 78–94. 45

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Property Theory and the Transformation of Property Law 369 A more conventional approach Unlike Engel, Matthias Ruffert51 agrees with Depenheuer that the LandlordTenant decision is on the wrong track, but he reaches that conclusion via a conventional interpretation of the state’s legislative powers in terms of article 14. Ruffert systematically distinguishes between the powers of the legislature in making landlord-tenant laws and the powers of the courts in adjudicating landlord-tenant disputes in terms of those laws, and so creates a theoretical framework—with reference to the Groundwater decision—within which he evaluates this and other decisions.52 The conventional point of departure is that article 14 gives the legislature a wide discretion in making laws—including landlord-tenant statutes—that determine the content and limits of ownership. This legislative discretion is subject to the institutional guarantee,53 so that legislation that totally deprives the owner of the capacity to realize or enjoy use her ownership entitlements will be subject to review. This is the perspective in which the Rheinland-Pfalz Monuments Act decision must be understood. However, in determining the content and limits of ownership within the limits of article 14 the legislature does not encroach upon a pre-existing baseline—the content and limits of constitutionally protected ownership are established and not infringed by lawmaking, provided it establishes an equitable balance between the personal interest of the property owner and the public interest served by the regulatory measure in question.54 To understand Ruffert’s criticism of the Landlord-Tenant decision these principles must be applied to the landlord-tenant situation. The critical point is that the legislature, in making landlord-tenant laws, must establish an equitable balance between the landowner’s personal interest and the public interest in the provision of housing, and not between the landlord and the tenant. In the vertical relationship, article 14 protects the landowner’s defensive right of ownership against legislative infringements, but individual tenants do not qualify as owners and do not have a defensive right against the state. The interests of tenants are represented abstractly in the legislature’s lawmaking activities, and not by constitutional enforcement of defensive ownership rights.55 Tenants require 51 Ruffert (2001): see primarily 360–92, where Ruffert applies the theoretical argument that he develops earlier in his book to property issues and the Landlord-Tenant case. 52 The argument is central to and runs right through Ruffert (2001), but for present purposes the summary at 371–72 is useful. 53 See n 30 above. 54 This is the constitutional Übermaßverbot (prohibition against disproportionate regulation): Ruffert (2001) 117–18. The proportionality requirement functions on the vertical level where state interferences with defensive private rights are tested by weighing the individual interest against the public interest served by the regulation. The landlord’s interest is not weighed against the tenant’s interest. See n 33 above and n 60 below. 55 Ruffert (2001) 378, 387. In Ruffert’s theoretical structure, the landowner’s right is protected against the state on the vertical level as a subjective defensive right, whereas the tenant’s interests are protected through legislation on the basis of an objective duty to protect, derived from the fundamental right in art 14.

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370 Andre van der Walt protection against landlords, not against state power, and therefore their interests are primarily served in legislation that restricts ownership on their behalf, and not in the courts. In this sense, the classic defensive function of article 14 does not apply to tenants, although it is possible to conceive of instances where tenants might claim a defensive right in terms of article 14 to protect them against state action that threatens their occupation and use rights as tenants.56 However, these would be extraordinary instances that bear no relation to the decision in the Landlord-Tenant case, where the tenant’s right was explicitly placed alongside and in opposition to the landlord’s right. The remaining question is whether the reflexive protection that the tenant enjoys through the statutory restriction of ownership is complemented by subjectifiable protective duties emanating from article 14.57 The theory of protective constitutional duties is complicated and cannot be canvassed in full here.58 German theorists and the Federal Constitutional Court developed the theory on the basis that the fundamental rights contain not only subjective public-law rights against the state, but also objective constitutional values that can, amongst other things, form the foundation of constitutional state duties to promote and protect fundamental rights.59 Obviously the construction of such a constitutional duty to protect can have significant impact in private law, even though a claim to protection is addressed at the state and not another private person. If a protective duty can be construed in favour of the tenant, the tenant’s claim would be directed at the legislature, and the duty would be to promulgate legislation that establishes a justifiable balance between the interests of landowners of rental stock and the public interest in the provision of housing. These protection rights against the legislature are described as rights to the minimum protection60 required by the objective values embedded in the funda56 Ruffert (2001) 370: in certain cases tenants would be able to enforce occupation rights against the state on the defensive level, eg when the state settles further occupants in the property by force. For that purpose the tenant’s right might be recognized as ownership for art 14. 57 Ruffert (2001) 370: direct horizontal enforcement of the tenant’s occupation right against the landlord is not the issue. The horizontal clash of interests becomes interesting when the question is whether the state has a protective duty towards the tenant on the basis of art 14. That is the real question concerning constitutional protection of the tenant: 387. 58 See AJ van der Walt, “Constitutional Rights and Private Law Rules” (forthcoming). 59 See Ruffert (2001) 141 ff; further Dietlein (1992) passim; M Sachs in K Stern Das Staatsrecht der Bundesrepublik Deutschland vol III/1, III/2 with M Sachs (Munich, CH Beck, 1988 & 1994) vol III/1 §69. Sachs in Stern III/1 (1988) §69 at 888–994 sets out the basis of the theory and the arguments for and against it, and reviews the cases in which it has been adopted. See further Stern III/1 (1988) §72 at 1177–209, §76 at 1509–95. The idea that new law must be in accordance with what was then described as the “objective value system embodied in the fundamental rights” was stated in the Lüth decision BVerfGE 7, 198 (1958) at 204 and confirmed in many subsequent decisions. See Ruffert (2001) 15–16 on the Lüth decision, and 8–30 for an overview of the development of theory concerning the effect of fundamental rights in private law. The protective duty theory features at 20–28. 60 Untermaßverbot or constitutional prohibition against inadequate regulation, a term coined by C-W Canaris, “Grundrechte und Privatrecht” (1984) 184 Archiv für die Civilistische Praxis 201; see further C-W Canaris, Grundrechte und Privatrecht–Ein Zwischenbilanz (de Gruyter, New York, 1999). See Ruffert (2001) 212–23 for a discussion. The notion of minimum protection contrasts with the notion of proportionality: the latter functions on the level where state interferences with subjective defensive rights must be kept to the minimum; the former functions on the protective level

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Property Theory and the Transformation of Property Law 371 mental rights. The content of the tenant’s right would be that the lease relationship and the right to occupation and use should be protected as much as is necessary to satisfy the public interest in housing security, which means that the legislature must ensure a justifiable minimum protection, not optimal protection of all aspects of the tenant’s right. In making the appropriate laws, the legislature has a wide (although not unlimited) discretion. Its duty is to establish a just and equitable balance between the individual interest of the landowner and the public interest in regulation, somewhere in the space that is delimited by the minimum protection to which the tenant is entitled in terms of the protective duty and the maximum interference that the landlord has to bear in terms of the proportionality principle. In effect, the legislature has to ensure that legislation ensures the minimum protection of the tenant’s occupation and use interest while not unjustifiably infringing on the landlord’s defensive right against state interference.61 As opposed to the legislature, who determines landlord-tenant relationships abstractly in legislation, the courts balance conflicting interests in individual cases in terms of already promulgated legislation. In this regard, the civil courts and the Federal Constitutional Court have distinctive powers. In Ruffert’s view, the civil courts have fairly limited power in interpreting and applying private law legislation in such a way that the balance created by the legislature is upheld; they do not have the power to create or shape landlord-tenant relationships abstractly or generally. The Federal Constitutional Court has no power with regard to private law legislation at all, unless the legislature fails to embody the state’s protective duty towards the tenant in suitable legislation or when legislation infringes upon the constitutional right of the landlord.62 Ruffert agrees with Depenheuer that the Federal Constitutional Court has often crossed the line that separates legitimate and illegitimate judicial activity by handing down judgments that in effect establish general principles that regulate the abstract landlord-tenant relationship.63 Ruffert’s theory makes it possible to explain the Federal Constitutional Court’s decisions in the Groundwater and the Rheinland-Pfalz Monuments Act cases without resorting to Depenheuer’s restrictive baseline assumptions. The Groundwater decision is the authoritative exposition of the powers of the legislature to determine the content and limits of ownership in terms of article 14. The Rheinland-Pfalz Monuments Act case, on the other hand, can be explained in terms of the constitutional limits within which the legislature exercizes its where the state must provide the minimum protection guaranteed by objective duties derived from the objective content of the fundamental rights. Compare n 33 and n 54 above. 61 Ruffert (2001) 388–89. In protecting tenants’ rights the legislature is no longer determining the content and limits of landlords’ ownership but infringing on it, and the proportionality requirement is activated. 62 Ruffert (2001) 391–92. 63 Ruffert (2001) 373–79. In Ruffert’s view, the reform of ownership rights in a landlord-tenant situation lies outside scope of constitutional law, and specifically outside the powers of the Federal Constitutional Court: 367.

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372 Andre van der Walt powers, and need not be seen as a departure from the Groundwater position. Following Ruffert’s theory it is possible to accept and accommodate reformist legislation and adjudication within the boundaries of the constitutional property guarantee—a possibility that does not exist in Depenheuer’s more restrictive approach. At the same time Ruffert makes it possible to agree with Depenheuer’s critique of the problematical Landlord-Tenant decision, but not because it erodes the private law notion of ownership. Ruffert’s explanation of the relative positions of landowners and tenants in view of the constitutional provision makes room for reforms of ownership as a tradition-bound institution. III . ACCOMMODATING REFORM WITHIN PROPERTY THEORY

Laura Underkuffler’s theory of property explicitly accommodates reform and transformation of property holdings and regimes.64 The aim of her analysis is “to provide a theoretical structure which explains, predicts, and justifies the variable power of claimed individual property rights in law”;65 “both to acknowledge the socially constructed nature of property and to proceed with a way to analyse difficult property questions”;66 to explain why and how there are “distinct and compelling reasons why property lacks—and should lack—the presumptive power traditionally associated with rights, across a broad range of cases” [while retaining that power in others].67 Underkuffler pursues this goal by developing a suitable framework,68 analyzing the protection of individual property interests against competing public interests within that framework, and considering the implications for the constitutionalization of property. The theoretical framework is built around the argument that four dimensions need to be considered if property is to be understood adequately as the “complex package of normative choices” that it is.69 These dimensions are described as a theory of rights,70 space or area of field,71 stringency of protection,72 and time.73 Analysis of property with refer64

Underkuffler (2003). Underkuffler (2003) 4. Italics in the original. 66 Underkuffler (2003) 7. Italics in the original. 67 Underkuffler (2003) 5. Italics in the original. 68 She calls this part (11–33) “Property as Idea”, but her analysis is not idealist. 69 Underkuffler (2003) 5, 16–33. 70 This dimension refers to the theory of rights that informs a particular conception of property: Underkuffler (2003) 16–21. 71 This dimension refers to the space or area to which the theory of rights applies, the phenomena that are considered objects of property rights: Underkuffler (2003) 21–24. Conceptual severance features here. 72 This dimension refers to the stringency with which property rights are protected, e g the notion (also accepted in German constitutional law) that the family home enjoys stricter protection than commercial property: Underkuffler (2003) 24–28. The notion of property for personhood and human flourishing features here. 73 This dimension refers to considerations that influence the decision as to when a property right is considered vested, as well as whether it becomes inviolate once vested or is subject to amendment: Underkuffler (2003) 28–30. 65

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Property Theory and the Transformation of Property Law 373 ence to these dimensions indicates that two different conceptions of property are used in law, depending on different choices regarding the four dimensions (particularly the last two): the “common” conception provides individuals with powerful protection against competing public interests, while the “operative” conception allows public interests to compete with and sometimes outweigh individual interests.74 Both conceptions of property enjoy support in law, but they differ in a crucial aspect: changes in existing property holdings are possible but extraneous and exceptional for the common conception, while they are internal and normal for the operative conception.75 This raises the central question in Underkuffler’s book: is it possible to explain the simultaneous existence of and support for these two seemingly diametrically opposed conceptions of property? In view of the previous section of this paper her question can be stated as follows: is it possible to operationalize Depenheuer’s “common” conception of property without resorting to Engel’s unconvincing brand of functionalism? Underkuffler finds the key to answering this question in what she calls “a normative hypothesis”: the presumptive power of property claims is justified when the interests that underlie an individual claim for protection involve values that are presumably more important or worthy than the competing public interests.76 This is the case when the core values underlying the individual claim are different from the core values involved in the competing public interest.77 When the claimed rights and the competing public interests involve the same or similar core values they present different interpretations of the foundational right that both, in different ways, attempt to implement, and then the conflict is an internal struggle over the definition, content, scope and meaning of that right. In that case, the claimed individual right enjoys little or no presumptive power and can more easily be overriden by the competing public interest.78 This explains why claimed property rights enjoy strong presumptive power in some cases but not in others, and why some existing property rights are more susceptible to change through reform than others. Underkuffler concludes that the very existence of a legally enforced property regime will necessarily involve the state in critical allocation questions with 74 Underkuffler (2003) 37–63. The common conception of property does not deny the legitimate exercise of public power, but restricts it to exceptional instances of justifiable public need. This socalled “police-power exception” to the Takings Clause excludes “normal” or day-to-day state tasks. The operative conception of property, by contrast, refers to instances where “simply ‘desirable’ instances of public regulation” override individual rights without compensation: Underkuffler (2003) 46. 75 Underkuffler (2003) 46. 76 Underkuffler (2003) 74. The core values Underkuffler refers to pertain to the content-specificity and reason-dependence of rights as elucidated by A Harel “Revisionist Theories of Rights: An Unwelcome Defense” (1998) 11 Canadian J Law & Jur 227; A Harel, “What Demands are Rights? An Investigation into the Relation between Rights and Reasons” (1997) 17 Oxford Journal of Legal Studies 101. See Underkuffler (2003) 70–73. 77 Underkuffler (2003) 75–84. Examples at 87 ff are land titles, exclusion, and patents. 78 Underkuffler (2003) 85–102. Examples at 94 ff are environmental conservation and zoning controls.

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374 Andre van der Walt regard to external, physical, finite resources, where competing individual and public claims will almost always involve competing but similar core values. In conflicts regarding the allocation and distribution of these resources, competing claims constitute different interpretations of what property rights regarding these resources are and should be. This conclusion underlines the social and political nature of property79 and requires state assertion of redistributive claims.80 With regard to external, physical, and finite resources, property law is not only susceptible to political reform, but inherently demands its accommodation as an internal matter of justice, and the common conception of property (Depenheuer’s conception as shaped by private law tradition) loses its presumptive power. In another recent theoretical analysis, Hanoch Dagan argued in favour of a realist notion of “property as institutions”, combining “property as forms” and “property as a bundle of sticks” thinking in an effort to reexamine existing property forms and evaluate whether they optimally promote human values.81 The interesting thing about Dagan’s theory is that he—like Underkuffler— locates the stability and the changeability of property within the institutions of property, and characterizes decisionmaking about the continued suitability or reform of these institutions as a normative process that is informed by human values.82 Identifying this feature in the theoretical approach of Underkuffler and Dagan provides an important key to the concluding section of this article.

IV . CONCLUSIONS

At this point it becomes possible to formulate cautious conclusions about the feasibility of a transformative property theory, and to consider the problems involved in developing such a theory. A good place to start is to ask whether a transformative theory is really necessary—is it really clear that property law requires transformation? Abstractly, this is a difficult question, as it would be presumptuous to state categorically that specific property institutions, regimes or systems need to be transformed. My contention is not that all of property law needs to be transformed either—there may be a case for that proposition, but I don’t make that case here. My claim is less ambitious, namely that there is a weak and a strong argument in favour of developing a property theory that accommodates and explains the transformation of property law. The strong argument is that property law is in fact being transformed wholesale in quite a few jurisdictions worldwide where large-scale transformation is an issue,83 and sound theoretical explanation of these reforms is required. The weak argument 79 80 81 82 83

Underkuffler (2003) 145, 151, 159–61. Underkuffler (2003) 146. Dagan (2003) 91 Cal LR 1517. Above at 1534, 1542, 1558–64, 1570. Obvious examples are post-apartheid South Africa and eastern European states.

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Property Theory and the Transformation of Property Law 375 is that smaller-scale systemic or institutional reforms have taken or are taking place in jurisdictions where large-scale systemic transformation is not an issue, and that it is worthwhile to develop a theory that explains these developments in legal theory.84 In line with these reasons, my aim in this article was a fairly unambitious one, namely to determine whether a transformative theory of property is at all feasible and, if it is, to develop an impression of the broad characteristics that would distinguish such a theory of property from others. Based on my analysis it certainly seems possible to develop a transformative theory of property, and several existing theories already move in that direction. Underkuffler’s effort to understand property as a “complex package of normative choices”85 is a good example. Initially, the result of Underkuffler’s analysis looks less like “the idea of property” than “the idea of property theory”, in the sense that she designs a model that applies to all property theories (they can only function if they consider the four dimensions and then proceed to explain the two conceptions of property), while leaving the exact content and theoretical leaning of each theory open (choices involving the four dimensions can vary from one theory to another and will determine the “attitude” of the theory). Despite the impression of essentialism created by this approach, Underkuffler’s model opens theories of property up for analysis in a way that eventually provides an answer to the question posed in this paper: a transformative theory of property is possible, provided it is built on a suitable theory of rights and includes adequate choices with regard to space, stringency, and time. In my view, property theory (including transformative theory) benefits from considering the dimensions of property that Underkuffler distinguishes and the way they work out in the tension between the conflicting conceptions of property. An example illustrates the usefulness of this framework. The first dimension is the theory of rights that one adopts as a baseline choice, which has a significant bearing on the conception of property that will emerge and, consequently, the possibility for change and reform of property holdings and institutions. If one adopts Depenheuer’s view that private law tradition establishes a pre-constitutional property baseline that requires justification for every legislative and judicial action that affects property holdings, the constitutional property guarantee functions as a fence that renders private property practically immutable. As a result, reform becomes very difficult or impossible. A transformative theory of property cannot be grounded in a general theory of rights that does not allow changes to existing property holdings and to the property regime. 84 The obvious examples from Germany are the Landlord-Tenant cases already referred to, which comprise fairly extensive institutional reforms. Other examples are BVerfGE 50, 290 (1979) (Mitbestimmung, concerning employee rights); BVerfGE 24, 367 (168) (Deichordnung, the Hamburg Flood Control case); and the Kleingarten cases (concerning the rights of tenants of allotment gardens). Landlord-tenant and land reform issues have surfaced in the jurisprudence of the ECHR as well, see James v UK [1986] 8 EHRR 123. 85 Underkuffler (2003) 5, 16–33.

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376 Andre van der Walt One could further conclude that a fundamentalist private law theory of rights will restrict constitutional property to private law notions of what is considered property, and that it will favour a restrictive attitude towards stringency and time, so that ownership rights, once vested, become absolute and immune against change. Consequently, reform of property law will be limited to the rare instances where the operative conception is acceptable, and a truly transformative theory of property should be all but impossible. A transformative theory of property is therefore only possible when, apart from the theory of rights, other baseline choices regarding space, stringency, and time are not restrictive either. However, Underkuffler’s theory allows us to go beyond the rather frustrating conclusion that conflicting approaches will bear conflicting results and to meet the challenge of resistance against reform from private law traditionalism. The baseline choices of conservative theorists are mostly derived from private law notions of property, and generally speaking private law tends to protect existing property interests—particularly ownership—strongly, as Underkuffler’s notion of “presumptive power” suggests. The traditional distinction between private law and public law means that property reforms are typically regarded as political initiatives that are more properly at home and dealt with in public law—the force and outcome of this attitude were demonstrated graphically by apartheid. Consequently it is to be expected that property reforms of any kind will offend the sense of security at the core of private law property theory, and that reforms of property law will meet with resistance clothed in the pretence of objectivity and scientific neutrality. A transformative theory of property will have to meet and respond to this challenge. In fact, the greatest challenge for a transformative theory of property is undoubtedly to bridge the gap between security and stability concerns (hedged in behind baseline notions of autonomy, tradition, or scientific neutrality) and concern for reform in terms of social and economic policy (described with reference to notions of justice and equality). For critical theory this is nothing new—it is the old tension between form and substance, and the issue is how to bend form to substance, without breaking it. The most interesting theories discussed in my analysis all suggest that we have to include normative evaluation, based on human values, in the theoretical mix. On that basis a transformative property theory has to be a normative theory that justifies the balance between stability and change, in every individual context, on consideration of human values. In a postrealist world where we can no longer deny the political nature of every property right and every property rule, this should come as no surprise. Towards the end of her book Underkuffler says that the very existence of a legally enforced property regime necessarily involves the state in critical allocation questions with regard to external, physical, finite resources, where competing individual and public claims underline the social and political nature of property and require state assertion of redistributive claims.86 This unequivocal 86

Underkuffler (2003) 146.

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Property Theory and the Transformation of Property Law 377 assertion of the political nature of property belies the apparent open-endedness of Underkuffler’s “property as idea” and suggests that, although baseline choices with regard to theory of rights, space, stringency and time could vary, the nature of particular resources and the social and economic context within which conceptions of property apply establish a normative framework within which value judgments regarding the tension between the common and the operative concepts of property are possible, even inevitable. In order to evaluate a theory of property one can (and should) consider the baseline choices with regard to the dimensions of property, but in view of the normative hypothesis it is eventually possible to expound normative criticism of the result of those choices as it affects the tension between the common and the operative conceptions of property. Neither baseline choices nor the resulting property theory can be politically value-neutral, and hence the effect of baseline choices on the eventual balance between protection and regulation is open to normative criticism. A choice for a transformative property theory therefore requires and grounds a critical evaluation of purely protective property theories. This does not mean that property theory can or should justify the wholesale abolition or denial of existing property rights. In Underkuffler’s view, reform of property holdings and property law is possible and sometimes even necessary, depending on the core values that support the protection of individual rights and those that promote the public interest in change. However, she establishes a basis for not just leaving individual property at the mercy of political will: according to the normative hypothesis the presumptive power of individual protection remains intact when the two sets of core values are different. She therefore provides value-driven and substantiated reasons for changing property regimes when it is justified and leaving them alone when change is not justified. A transformative theory of property requires similar value-driven and context-sensitive decisions. With his theory of property as institutions Dagan reaches a similar result: his approach holds on to traditional forms of property, but simultaneously evaluates (from the “property as a bundle of sticks” perspective) the normative desirability and the value-enhancing potential of the substance of a particular property form in its specific context. However, from a certain perspective both the Underkuffler and Dagan theories could be described as reform-friendly rather than transformative property theory. The problem is that these theories are context specific in their application to the US, which is why their “doctrinal payoffs”87 tend to facilitate theoretical explanation of conundrums created or raised in US takings law (Underkuffler) or private law (Dagan). These theories combat the anti-reform attitude of mainstream US law in smaller, rather specific settings where property law may be in need of further doctrinal development, but they do not present the wide transformational scope that is required in strongly reform-oriented jurisdictions. Accordingly, these theories do not provide an adequate theoretical 87

This is Underkuffler’s very useful term; see (2003) 150.

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378 Andre van der Walt framework for sophisticated analysis of a major area of systemic property reform, namely land redistribution. Underkuffler is sensitive to the problem that conflicting land claims are not examples of “weak property claims” that are susceptible to reform, because the core values in this area could be different rather than the same.88 It is in fact possible to develop a more wide-ranging transformative theory on the premises of either the Underkuffler or the Dagan theory, but in their current form these theories do not yet provide satisfactory responses to the German Landlord-Tenant situation or similar South African eviction conflicts,89 or to other wide-ranging systemic transformations of property regimes. German constitutional theory regarding the effect of constitutional fundamental rights in private law provides the analytical tools to counter purely protective arguments in German doctrine, and therefore suffer from the same context specific restrictions. Like Underkuffler, Ruffert acknowledges that reform of property holdings and transformation of the property regime are possible and may even be required as a constitutional duty. His approach also makes it possible to evaluate property as a political, value-laden institution. The distinction between Ruffert’s approach and Underkuffler or Dagan is that the main focus of his theory is the analytical distinctions,90 derived from German constitutional jurisprudence, that make it possible to explain difficult reformrelated decisions such as Landlord-Tenant in a theoretical framework that promotes rather than obstructs transformation. The greatest merit of Ruffert’s theory is that he uses the conventional doctrinal distinctions in German constitutional theory to justify the possibility of change and reform, without abandoning the conceptual rigour and clarity that characterizes German theory. His “doctrinal payoffs” are, therefore, also largely restricted to the German constitutional debate. Ruffert argues that the primary duty (deriving from either constitutional duties or a political agenda) to reform property holdings and institutions rests with the legislature, which makes general laws that establish the content and limits of ownership in accordance with the social-democratic state principle and the social obligations of ownership as set out in the Basic Law. Reform is constitutionally sanctioned, but it takes place within constitutionally prescribed 88 Confirmed by Underkuffler (2003) 87–94, where land titles are discussed together with other examples of traditionally powerful property claims. In a “caveat” at 93–94 Underkuffler recognizes that the public interest values regarding land title are shifting in reform-oriented societies, and that the picture could change in those contexts. 89 A really interesting exercise would be to subject the landlord-tenant relationship, or tenancy as a property institution, to Dagan’s double-barrel inside-outside normative analysis, to see whether and how this institution could be developed, within its existing form, to maximize the values underlying it. In (2003) 91 Cal LR 1517 Dagan’s focus is on a different institution, namely marital property, but the approach is no doubt expandable. 90 Between legislative and judicial functions with regard to the protection of property, objective and subjective content of the fundamental rights, defensive and protective aspects of property rights, and minimum protection and proportionality. See the discussion above.

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Property Theory and the Transformation of Property Law 379 parameters. Accordingly, the shaping of property interests is not left to politicians to do as they please. In particular, the clear distinction between the relevant duties and powers of the legislature and the courts on the one hand, and of the civil and constitutional courts on the other serves as a guideline that structures the problem for theoretical analysis and evaluation. The legislature determines the content and limits of ownership within the boundaries set by the institutional guarantee on the one hand and the constitutional minimum and maximum limits of state interference with property on the other. The defensive public subjective right in article 14 protects a property owner through the maximum interference limit contained in the prohibition against disproportionate regulation, which means that ownership is not immutable but can only be changed subject to the institutional guarantee and the proportionality requirement. Proportionality means that the interest of the owner is weighed against the public interest in regulation, and regulation is only upheld if it establishes a fair and equitable balance between them. The tenant, on the other hand, is protected via the objective content of the fundamental right in article 14, which creates a legislative duty to establish a minimum protection for tenants. In determining the content and limits of ownership, the legislature must keep an eye on the institutional guarantee and move between the minimum provision of protection for tenants on the one hand and the maximum allowable interference with ownership on the other. In effect, property as an institution is both guaranteed and protected and open to reform. The civil courts have the duty and power as a matter of civil jurisdiction to balance the interests of landlord and tenant in accordance with private law legislation, and to control legislative activity as a constitutional matter when the required minimum protection of tenants is not realised or the maximum permissible interference with a landlord’s ownership rights is transgressed in conflict with the proportionality principle. This not only makes it possible to reflect systematically upon the distinctive duties and powers of the legislature and the courts, but also to argue constructively about when existing rights and institutions can be changed and when not, and about the effects and implications of such changes. A property theory that accommodates the transformation of property law will have to be founded on baseline choices that acknowledge the political nature of property, and it will have to expound both analytical or doctrinal and normative guidelines for difficult choices between individual interests and the public interest. This chapter indicates that it is indeed possible to develop such a theory. One does not have to agree with all Underkuffler’s or Ruffert’s political, theoretical or interpretive assumptions to see that the analytical instruments they employ can be developed into a theory that justifies and facilitates the transformation of property law. The essential characteristics of such a theory would be that it accommodates relatively large-scale reforms and changes in property institutions, systems and regimes within a context-sensitive and doctrinally justifiable framework, without abandoning or seriously compromising

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380 Andre van der Walt the deep-seated sense of security and stability associated with property holding; and that it finds the balance between stability and change on the basis of and with reference to normative choices informed by human values.

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Index Accounting see Equitable accounting Adverse possession easements, and, 13 limitation, 13 prescriptive acquisition, and, 12, 13, 15, 16 and see Prescriptive acquisition registered land, and, 13 squatters, and, 13, 16 statutory reform, 16 title acquisition, 13, 14, 16 extinguishment of, 13 owner’s title, 13 registered title, 13, 14 Allcard v Skinner see also Undue influence abuse influence, of, 135 physical, 145, 146 power, of, 135, 143, 144, 145 autonomous judgment, 146, 147, 152 facts, 136 family pressures, 140 gifts, setting aside, 134, 135 independent judgment, 134 integrity of relationships, 134 justification for relief, 134 public attitudes, 136, 137, 138 religious influences, 137, 138, 139, 141, 153 religious vows, 146, 148, 149, 150, 151 social development, 142 unconscionable conduct, 141 Austrian law immovables, 257 and see Immovables land, under, 257, 264 legal rights, 253 ownership rights, 264 real rights easements, 268 mortgages, 268 Bailment fungibles, 190–192, 198 loan for use (mutuum), 191, 192, 193 mixing of goods, 190–194 redelivery in specie, 186, 190, 191 reservation of title, 192 substitution of goods, 186, 193, 194

tangible chattels, 186 Botswana land law customary law, 298, 314 grazing tenure, 313 sources, 298 state land, 299 statutory reform, 298 tenure, 298, 299 tribal land, 298, 299 land management, 296, 299 land market customary market, 300 development of, 299, 300 external pressures, 314 informal market, 300 lower circuit, 300 private sector, 299 state land, 299 upper circuit, 300 land policy, 296 urbanisation, 299 Canada see also Canadian Charter of Rights and Freedoms Aboriginal rights, 343, 344 Canadian Bill of Rights (1960), 344, 346 expropriation see Expropriation North American Free Trade Agreement (NAFTA) see North American Free Trade Agreement (NAFTA) private property protection bilateral investment treaties (BITs), 359 constitutional protection, 341 due process protection, 344, 346 expropriation legislation, 347 legislative action, and, 345 non-constitutional, 344 state confiscation, 341, 342, 347, 349 state powers, 341, 342 Canadian Charter of Rights and Freedoms Aboriginal rights, 343, 344 fundamental freedoms, 341 legislative abridgement, 341, 342 property rights, 342, 360 protection, under, 341 public property, 342, 343

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382 Index Canadian Charter of Rights and Freedoms (cont.): state confiscation, 342, 360 Charge see also Legal charge mortgage, distinguished from, 157 repayment of debt, 157 security, as, 157 China economic reforms, 300, 301 land development, 301 land law, 302, 311, 312 land management, 301, 302, 313, 314 land market development of, 301, 302, 309 external funding, 314 farmland, 302 urbanisation, 313, 314 legislative development, 301 property rights, 302 rule of law, 302 urban development, 297 Commonhold see also Commonhold and Leasehold Reform Act (2002) advantages, 227 articles of association distribution of profits, 235 division of assets, 235 voting rights, 234, 235 behaviour rules, 236, 237, 247 common parts additions to land, 243 alienation of, 242 anti-social conduct, 237 charges, creation of, 242 extent, 233 insurance provisions, 237 repair and maintenance, 237, 243 service facilities, 233 statutory definition, 232 transactions, affecting, 242, 243 use of, 236, 237, 247 commonhold assessment, 234 commonhold associations distribution of assets, 235 enforcement powers, 246 expenses of, 234 management of, 240 membership, 228, 229 requirement for, 228 responsibility, 243 role of, 207, 228 status, 229 commonhold units changes in size, 241, 242 characteristics, 231 charges, creation of, 238

extent, 230–232, 241, 242 exteriors, 231, 232 leases of, 239 location, 230 non-contiguous areas, 231 nuisance rules, 236 permitted use, 235, 236, 247 repair and maintenance, 231 service installations, 232 share of expenses, 234 share values, 234 structures, 231, 232 subdivision, 241 transfer of, 238, 246 community statement, 207, 228, 234, 236–238, 240 financial obligations default, 246 enforcement, 246 payment of debts, 246, 247 future development, 247, 248 introduction of, 207, 220, 223 land registration, and, 227, 228 and see Land registration leases non-residential units, 239 notification, 240 rent payments, 240 restrictions on, 239, 240 tenant involvement, 240 tenant liability, 240 tenant register, 240 legislation governing, 207, 220 limited use areas, 233, 234, 237, 238 multi-occupied buildings, 225, 226, 227 origins, 225 ownership rights, 228, 229 participation quotas, 234 repair and maintenance annual estimates, 244 equivalent repair, 244 payment for, 244, 245 remedial work, 243 replacement work, 244 reserve funds, 245 responsibility, 243, 244 reserve fund levy, 234 structure, 229 tenure, and, 227 termination, 235 Commonhold and Leasehold Reform Act (2002) common parts, 232 commonhold units, 230, 231, 238, 241 enactment, 226, 227 land registration provisions, 227 limited use areas, 233

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Index 383 Communal Land Rights Act (CLRA) see also South Africa access to land, 320, 324, 325 assessment of, 337, 338 communal land registration of, 325, 330, 332, 333 rights relating to, 322–325 transfer of, 332–334 community rules purpose of, 335 registration of, 334, 335 compliance, 325 constitutional mandate, 321 enactment, 320 existing legislation, and, 326, 327 formalization, effect of, 339, 340 “new order rights” conversion to, 322, 327, 331 freehold conversion, 336 nature of, 322 registration, 333 transfer of, 334 validation, 331 procedure determination phase, 329 land rights enquiry, 327–329 registration, 332–336, 338 rights affected communal land, 323–325 informal rights, 323 “old order rights”, 322, 323, 327, 329, 330 state land, 323 security of title, 332 scope, 322, 324 Constructive trusts bare legal trustee, 35 equitable interests, and, 34, 38 existence of, 34, 179, 185, 194 forgery, and, 34, 35 and see Forgery fraud, and, 36 overreaching interests, 35 priority of interests, 34, 35 proprietary interests, and, 179, 185, 194 third parties, and, 38 Co-owners alterations to property, 122 compensation claims, 111, 112 fiduciary relationship, 111 joint ownership, 111, 129 joint tenants, 111, 119 occupation rent automatic, 115, 116, 117 calculation of, 114, 115, 116, 118, 126 cohabitation, and, 118 mesne profits, and, 114, 115, 116, 118 mortgage interest, and, 125, 126, 127 mortgage payments, and, 125, 126

payment of, 114, 115, 118, 120, 125 reciprocal, 120, 125, 126 rental values, and, 126 repairs and improvements, 120 sole possession, 115–118, 120, 125, 129 ouster, and, 112, 113 and see Ouster property allocation, 111 rents and profits action for, 128 excessive share, 128 expenses, relating to, 128 improvements, and, 128 repairs and improvements see Repairs and improvements right to possession, 112, 113 sole possession, 115–118, 120, 125, 129 tenants in common, 111, 119 trustee in bankruptcy, 119 unity of possession, 111, 129 Credit and security law reform, 155 Deeds conveyancing deeds, 76 registration deeds, 76 Developing land markets see Land markets Dispositions see also Invalid dispositions defective instruments, 45 fraudulent, 46 legal capacity, 45 negligent, 34 power of, 29 registered estate, 25–27, 34, 45 statutory requirements, 45 third parties, to, 25, 28, 29, 33, 34 unilateral mistake, 45 validity of, 29 Easements adverse possession, and, 13 and see Adverse possession commonhold, and, 238 and see Commonhold creation express grant, 4 implication, 4 long use, 16 prescription, by, 4 statute, 4 law reform, 3, 14, 15, 17, 18 prescriptive acquisition see Prescriptive acquisition Environmental responsibility compensation, and, 65 environmental controls, 65

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384 Index Environmental responsibility (cont.): German law, in, 84, 85 Islamic considerations, 72, 73 property rights, and, 65 and see Property rights resources exploitation, 75 natural law rights, 75 use of, 74, 75 sustainable development integrated decisions, 67 legal implications, 67, 68 Rio Declaration, 68 theological considerations, 69–72 Equitable accounting co-owners see Co-owners mesne profits, 114, 115, 116 mortgage payments see Mortgage payments occupation rent, 114, 115 principles governing, 111, 112 process, 112 rents and profits, 128 repairs and improvements see Repairs and improvements trustees in bankruptcy, 119 Equity of redemption see also Mortgage borrower’s interest, 158 clogs and fetters doctrine, 162, 163 equitable ownership, 158, 159 legal charges, and, 159 European Convention on Human Rights (ECHR) see also Human rights discrimination (Article 14), 282 fair and public hearing, (Article 6), 172, 282 Kosovo, and, 282 and see Kosovo peaceful possession (Article 1(P1)), 169, 170, 171, 173, 282 property rights, 168 respect for home (Article 8), 168, 169, 173, 262 European law harmonisation, 251, 269 real estate, under, 251 and see Real estate Expropriation see also Canada action amounting to, 355, 356, 358 awards, relating to, 355–358 compensation for, 347–350, 359 direct, 347 environmental considerations, 348, 349 excessive regulation, 347, 348 fairness, and, 348, 349

indirect, 347, 359 North American Free Trade Agreement (NAFTA) see North American Free Trade Agreement (NAFTA) powers, relating to, 347, 348, 359 private use, and, 349 public purpose, for, 350 regulatory takings, 351, 353–355, 358 state action, 347, 348, 352, 359 state measures, validity of, 349, 354 takings doctrine, 347–350, 358 United States’ experience, 347, 348, 350 Flats arbitration, 213 commonhold see Commonhold flying freehold, 226 forfeiture, 219, 222, 223 insurance provisions, 218 Land Valuation Tribunal jurisdiction, 212, 213, 217, 221, 222 and see Land Valuation Tribunal (LVT) leases defective, 218 variation of, 218 long leases capital value, 206 covenants, 225, 227 enfranchisement, 208, 209, 221 landlord’s interests, 206 maintenance costs, 205, 220, 226 management control, 208, 209, 210 mortgage finance, 227 multi-occupied buildings, 205, 220, 226 RTE companies, 208, 221 service charges, 205, 206, 209, 210 problems, with, 205, 220, 221, 226, 227 wasting asset, 207, 208 management administrative charges, 215, 217, 219, 221 excessive charges, 208, 214 management companies, 205 management control, 208 managers, 209, 210, 221 problems, with, 208, 214, 220 right to manage (RTM), 210 RTM companies, 210, 221 residential leases see Residential leases service charges see Service charges works/services “best value” contracts, 216 consultation requirements, 215, 216, 217, 222 excessive costs, 215, 216

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Index 385 excessive works, 215 legislation governing, 211 Public Finance Initiative (PFI), 216 reasonable standard, 211, 212, 215 Forfeiture entitlement, 219 jurisdiction, 219 provisions governing, 219, 222, 223 Forgery constructive trusts, 34, 35 and see Constructive trusts disposition limits on, 34, 35 negligent, 34 power of, 29 third parties, to, 25, 28, 29, 33, 34 validity of, 29 effect non est factum, 26, 27 void transaction, 26, 36 indemnity claims for, 26, 30, 31, 32, 33, 35 right to, 31, 37 land register alteration of, 27–31, 34 mistaken entry, 27, 29, 30 overriding interests, 31, 32 liability, 28, 29, 31, 35, 38, 39 priority rules, 26, 28, 29, 31, 33, 34, 35, 41, 42 proprietor in possession, 26, 27, 38 rectification, and, 30, 37, 38 and see Rectification registered estate constructive trusts, and, 34, 35 disposition, 25–27 knowing receipt, and, 39 loss of, 26 priority rules, 26, 28, 29, 31, 33, 34 recovery of, 25, 29 transfer of, 29, 34 registered proprietor beneficial ownership, 35, 36, 37 indemnity claims, 33 loss suffered, 32, 33 rectification, 37 rights of, 35, 36, 37, 43 remedy indemnity, as, 30, 31, 37, fraud, action for, 30 restitution, 39 third party, against, 25 third parties constructive trustee, as, 38, 39, 40 dishonest conduct, 41 entitlement of, 25, 33 indemnity claims, 31, 32, 33, 35 knowing receipt, and, 39, 40, 41

liability of, 28, 29, 31, 35, 38, 39 loss suffered, 32 personal liability, 38, 39 possessory title, 32 rectification, and, 33 registration of, 29, 30 remedy, against, 25 title indefeasible, 26, 37, 38, 43, 46 protection of, 28, 29, 34, 40 registration of, 29 third parties, 28, 33, 40 unregistered conveyance analogy with, 28, 29 principles, relating to, 28 French law goods on land, 258 immovables, 258 land, under, 258, 260 leaseholds, 269 legal rights, 253 ownership, under, 259, 260, 261 real rights accommodation right, 268 creation of, 269 easements, 268, 269 mortgages, 268 rights of way, 269 usufruct, 268 usufruct, 258 German law environmental responsibility, 84, 85 and see Environmental responsibility immovables, 256 land, under, 256, 257 legal rights, 252, 254, 256 ownership rights, 256, 257, 262, 263, 363, 364 property rights development of, 84 environmental interference, 85 ownership, 85, 86 private ownership, 363, 364 responsible proprietorship, 80 social responsibility, 84, 86 real rights building leases, 268 easements, 268 mortgages, 268 usufruct, 268 Housing and Property Claims Commission see also Kosovo applicable law, 281 authority of, 279, 287 claims submitted, to, 287–289 enforcement, 289, 290

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386 Index Housing and Property Claims Commission (cont.): establishment of, 278 evaluation of, 291, 292 eviction orders, 289, 291 evidential rules, 282, 283 guiding principles, 283 human rights, and, 282, 292 impartiality, 278 implementation, 287–289 independence, 279 jurisdiction, 279 legal status, 280 limited mandate, 287, 291 need for, 277, 278, 280, 290 ownership rights, 287 possession orders, 286, 289, 291 powers, 281 procedural rules, 282, 283 remedies, 286, 291 structure, 278 Human rights see also European Convention on Human Rights (ECHR) fair balance doctrine, 166, 167 horizontal application, 166 importance of, 165 Kosovo, in, 273, 282, 287 and see Kosovo legislative interpretation, 166 legitimate aim, 173 margin of appreciation, 166 property rights control of use, 171 deprivation, 171 legitimate aim, 173 peaceful enjoyment, 169–171 right to possession, 171–173 proportionality, 166, 173, 174 public authority acts, 166 public interest, 171 retrospective application, 167, 168 state interference, 166, 171 Human Rights Act (1998) see also Human rights property rights, and, 165 and see Property rights retrospective application, 167, 168 Immovables ownership Austrian law, 264 French law, 259, 260, 261 German law, 261–263 Polish law, 261–263 Indefeasibility rule Australia, 56, 57 Canada, 58, 59

deferred indefeasibility, 47, 53, 54, 55, 61, 63 English approach, 49, 50, 51, 61, 63 forgery, and, 26, 37, 38, 43, 46 and see Forgery immediate indefeasibility, 47, 53, 54, 55, 60, 63 Malaysia, 59 meaning of, 46, 47 New Zealand, 55, 56 Papua New Guinea, 57, 58 qualified indefeasibility, 51, 54 security of title, 4, 48 Torrens system, 53–59 and see Torrens system use of, 47 Indonesia land law adat law, 306, 307, 309 Basic Agrarian Law (BAL), 305–307, 309 customary tenure, 313 development of, 306 land management community interests, 306 development, and, 307 evolution of, 306 external funding, 314, 315 land occupation, 306 land use, 306 reform, 297, 314 state allocation, 306 title to land, 297 Invalid dispositions see also Dispositions choice of adjudication, 47, 49, 60 compensation endowment effect, 62 entitlement, 46 loss aversion, 62 presumptive rule, 62 valuation, and, 62 damages, 46 innocent purchasers, 46 prior registered owners, 46, 48 purchaser in good faith, 46, 48 qualified immunity, 50, 51 statutory indemnity, 46, 64 subsequent purchasers, 46 Irish Law Reform Commission work of, 17, 18 Knowing receipt constructive notice, 40 liability for, 39, 40, 41, 91, 107 meaning of, 39 non-money benefits, 39 priority rules, 41, 42 remedy, for, 39 standard of knowledge, 104

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Index 387 trust monies, 39 unacceptable risk, 104, 105, 109 unconscionable actions, 39, 40 unjust enrichment, 39 Kosovo see also Housing and Property Claims Commission executive authority, 272 housing strategy, 277 human rights, 273, 282, 287 interim administration, 272 international presence, 272, 287, 290 judicial system, 73, 277, 278, 290 property issues abandoned properties, 275 compensation, 276, 284, 286, 291 discriminatory legislation, 274, 275, 277, 284 employment, and, 274 eviction, 275 informal transactions, 274, 285 ownership rights, 283, 284 political considerations, 276, 277 property records, 274, 275, 287 regulatory framework, 275 repossession, 285, 286 responsibility for, 273 restitution, 284, 286, 291 returning refugees, 275, 276, 285, 286, 288 right of return, 275, 285 secondary occupation, 275, 288 socially owned housing, 274, 275, 283 unlawful occupation, 275, 286 returning refugees, 275, 276, 285, 286, 288 security forces, 272, 273, 290 Serbian control, 273, 274, 276 Land see also Real estate definition of, 258 fixtures, 259 immovable nature, 251 Land markets assessment of, 310, 311 control central control, 312 foreign ownership, 313 government control, 312, 313 customary tenure, 309, 313, 314, 316 development, and, 313 diversity, 295, 296 dual legal systems, 309 international financial institutions, and, 296, 308, 309, 315, 316 legal issues, 295 legal systems, 297, 298, 301–303, 309, 316 modernisation, 313 national land laws, 309, 312

policy issues, 295 poverty, and, 316 pressures external, 314 internal, 314 reform, and, 316 research funding, 296 World Bank, and, 296, 307, 308, 315, 316 and see World Bank Land Registration see also Land Registration Act (2002) adverse possession, and, 13 benefits, 80, 82 commonhold, 227 and see Commonhold conflicting claims indemnity schemes, 48 preventing, 63 priority rules, 48 publicity for interests, 48 development of, 76, 79, 80, 81 dispositions see Dispositions equitable interests, 45 indefeasibility rule, 46, 47, 51 and see Indefeasibility rule limitation, and, 13 mistake defective disposition, 49, 50 registry error, 49, 50 objects ease of transaction, 48 security of title, 47, 48 positive systems, 45, 46, 57 proprietors proprietor in possession, 50, 51 registered proprietors, 50, 51 publicity principle, 76, 77, 87 rectification see Rectification register alteration of, 27–31, 34, 49 entry, effect of, 45 mistaken entry, 27, 29, 30 overriding interests, 31, 32 rectification, 26, 30, 31 status of, 26 social responsibility, 82 title certainty of title, 14 dynamic security, 47, 49, 50, 54 indefeasible title, 26, 37, 38, 43, 46, 47 legal title, 45 security of title, 47, 48, 49, 51 static security, 47, 48, 49, 51 Torrens system see Torrens system

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388 Index Land Registration (cont.): unauthorised registration dispute resolution, 50 mistake, 49, 50 qualified immunity, 50, 51 rectification, 50 Torrens jurisdictions, 53, 54 unregistered instruments, 45 Land Registration Act (2002) adverse possession, and, 13, 16 certainty of title, 14 forgery, and, 25, 27, 28, 29 and see Forgery mortgage creation, 155 see also Mortgage priority of interests, 28, 31, 37, 41, 42 rectification, 49 and see Rectification register, alteration of, 49 security of title, 47 unauthorised registration, 49, 50 Land Valuation Tribunal (LVT) application to, 212, 213 arbitration, and, 213 jurisdiction, 212, 213, 217, 221, 222 powers of, 213, 214 service charges, and, 212, 213 and see Service charges Landlord and tenant see also Residential leases forfeiture, 219 judicial interpretation, 371 landowner’s interests, 369, 371 law relating to, 203 ownership rights, 369, 370 protective duty, 370, 371, 379 public interest, 369, 371 re-entry rights, 219 service charges, 211 and see Service charges tenant’s interests, 369 Law Commission proposals prescription, 18, 19 registered land, 19 Law of Property Act (1925) peaceful possession, and, 170, 171 section 87(1) borrower’s position, 158 effect of, 156 equitable principles, 160 human rights issues, 170, 17q1, 174, 175 legal charge, under, 157, 158 lender’s interest, 157 relief from forfeiture, 157 retention of ownership, 158 right to possession, 157, 163, 164, 171–173

Law Reform Committee easements, considered by, 14, 15 Leases see Residential leases Legal charge see also Mortgage borrower’s interest, 159 equity of redemption, 159 and see Equity of redemption nature of, 157, 158 ownership rights, 159 redemption, and, 159 repayment, and, 159 right to possession, 163, 164 Legal rights immovables see Immovables land as object Austrian law, 257 English law, 258, 259 French law, 257 German law, 256 Polish law, 254 things as objects Austrian Civil Code (ABGB), 253 corporeal objects, 252 English law, 254 French Civil Code (FCC), 253 German Civil Code (BGB), 252, 254 intellectual rights, 252 Polish Civil Code (PCC), 252, 254 Maldives economic development, 303 land management consistent decisions, 304 external funding, 315 government allocation, 304, 305 leases, 304, 305 market-orientated decisions, 304 ownership rights, 305 remedies, 305 revocation of gifts, 304 land policy, 297 legal system, 302, 303 legislative reform, 303 Shari’ah law, 313, 316 Mortgage see also Mortgage payments charge, distinguished from, 157 and see Charge consolidation, 162 conveyance, by, 157 costs of redemption, 162 creation of, 155, 156 demise, by, 155–158 equity of redemption see Equity of redemption

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Index 389 foreclosure, 161 human rights, and, 165, 167, 171 and see Human rights Law of Property Act (1925) see Law of Property Act (1925) law reform, 155, 174 legal charge, by way of, 157, 158 and see Legal charge nature of, 157 proprietary interest, 157 redemption, 160, 161 right to possession, 163, 164, 171, 172, 173 Torrens system see Torrens system Mortgage payments co-owners see Co-owners endowment mortgages, 124 interest payments, 124, 125 liability for, 123, 124, 125, 129 occupation rent, and, 125, 126, 127 right of contribution, 125 North American Free Trade Agreement (NAFTA) criticisms of, 360 derogations, from, 353 environmental considerations, 353, 354, 356 expropriation action amounting to, 355, 356, 358 awards, relating to, 355–358 compensation for, 350 provisions governing, 351 regulatory takings, 351, 353–355, 358 state measures, 354 and see Expropriation federal government liability, 351, 352 investor protection, 350–352, 354–356, 359 mandatory arbitration, 351 political implications, 350 right of individuals, 352 sovereignty, and, 350, 352 Ouster behaviour, amounting to, 113, 114, 118 constructive ouster, 113, 114, 118 denial of title, 113 destruction of land, 113 eviction, and, 113 meaning of, 113 occupation rent, and, 114, 115 proof, as to, 113 Ownership see Private ownership Polish law immovables land, 254, 255

buildings, 254, 255 perpetual usufruct, 255,256, 265, 266 units, 254, 255, 256 legal rights, 252, 254 ownership rights, 255, 256, 261–263 real rights easements, 266 limited rights, 265, 266 mortgages, 267 perpetual usufruct, 265, 266 proprietary co-operative rights, 267 significance of, 265 usufruct, 265, 266 transfer of land, 255 Post-conflict societies difficulties facing, 271 humanitarian needs, 271 Kosovo see Kosovo property issues, 271, 273 transition, in, 271 Prescription Act (1832) see also Prescriptive acquisition background, 9 continuing use, 19 drafting difficulties, 10 effect, 10, 19 enactment, 10 interpretation, 20 Prescriptive acquisition see also Easements abolition considered, 14, 15, 19, 21 adverse possession, and, 12, 13 and see Adverse possession criticisms of, 15 law reform, and, 8, 9, 18, 19, 20 legislation see Prescription Act (1832) litigation, and, 3, 4 methods common law, at, 8, 11 lost modern grant, 9, 11, 12, 17, 18, 19 statute, by, 9 nature of, 3 rights of way, 4 rights to common, 4 scope, 4 statutory forms long prescription, 11 recommendations, as to, 17 short prescription, 10, 11 time period, for, 17, 18 title certainty of title, 14, 15 ownership, 13 user “as of right”, 6, 7, 18 “relevant user period”, 17

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390 Index Private ownership constitutional guarantee, 363, 366, 367, 372, 375 constitutional interpretation, 367 content of, 365, 366, 369, 378, 379 erosion of, 364, 366, 368 German law, in, 363, 364 judicial interference, 367 Landlord-Tenant Case criticisms of, 366, 367 ownership rights, 363, 366, 368, 369 law and economics analysis, 367, 368 legislative amendment, 367 limits of, 365, 366, 369, 378, 379 market economy, and, 368 market efficiency, 368 ownership rights defensive, 369 denial of, 377 erosion of, 364, 366, 368 expropriation of, 369 justification, 367, 368 private law, and, 366 protection of, 367, 376 social considerations, 367, 368, 378 splitting of, 364, 366, 368 private law fundamentalism, 364–367, 375, 376, 379 proportionality, 365, 366, 379 public interest, and, 365, 366, 371, 379 restriction of, 365, 370 security of ownership, 367 state interference, 368, 373 statutory definition, 365–367 threats against, 363 Profits à prendre law reform, and, 3 Property rights authority conferred, by, 68, 69 exercise of, 65 compensation, 65 despotic dominion, 69, 70, 76 environmental controls, 65 environmental responsibility, 65, 68, 69 and see Environmental responsibility German law development of, 84 environmental interference, 85 ownership, 85, 86 responsible proprietorship, 80 social responsibility, 84, 86 human rights, and, 165 and see Human rights Islamic considerations, 72, 73 land registration, and, 66 and see Land registration ownership, and, 68

resources beneficial use, 75 exploitation, 75 use of, 74, 75 responsible proprietorship concept, 66, 68, 77 deeds, use of, 76, 77 German influences, 80 globalisation, and, 87 land registration, and, 88 origins, 66 social responsibility, and, 84 sustainable development, 67, 68 and see Sustainable development theological considerations, 69–72 use anti-social use, 70 unlimited, 70, 74 Property theory allocation of resources, 373, 374, 376 “common” conception, 373 conflicting interests, 372–377 constitutional duties, 370, 378 denial of rights, 377 judicial interpretation, 371, 375 landlord and tenant judicial interpretation, 371 landowner’s interest, 369, 371 ownership rights, 369, 370 protective duty, 370, 371, 379 public interest, 369, 371 tenant’s interest, 369 Landlord-Tenant Case, 363, 366–369 legislative discretion, 369 nature of property, 362, 372, 374, 377, 379 normative theory, 376, 379, 380 “operative” conception, 373, 376 ownership rights, 364, 366–370, 376, 377, 378 political function, and, 361, 362 political will, and, 377, 379 presumptive power, and, 373, 376 private law fundamentalism, 364–367, 375, 376, 379 private ownership see Private ownership property institutions, 361–3 63 property law systems, 361–363, 378 protection of property, 372, 373 protective duties, 370, 371 public interest, and, 372, 373 reform, and, 362, 372–374, 376–379 state interference, 361, 368, 373, 375 theoretical framework, 372, 373, 375, 377 transformative theory feasibility, 375, 376 meaning of, 361 need for, 374 reform, and, 377–379

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Index 391 Proprietary interests see also Re Goldcorp Exchange Ltd constructive trust, existence of, 179, 185, 194 fiduciary relationships, 179 non-allocated customers, 177–179 tracing proceeds, 179, 184, 195 Public Nuisance encroachment, 4 Quistclose trust enforcement, 197, 198 nature of, 197 Re Goldcorp Exchange Ltd see also Proprietary interests assets equitable charge, on, 196 lien over, 195 background, 177 bailment see Bailment constructive trust, existence of, 179, 185, 194, 198, 199 floating charge exercise of, 177, 178 liability of holders, 196, 197, 198 non-allocated claimants, 177–179, 181, 184, 194 restitution, right to, 185 sale of goods see Sale of goods tracing equitable tracing, 195, 196 proceeds, 179, 184, 195 Walker & Hall claimants, 187, 188, 189, 196 wrongful use, 195 Real estate European law, under, 251 lex rei sitae, 251 nature of, 251 Receipt of trust property burden of proof allocation, 92, 97, 108 significance, 91, 92 commercial transactions, 97 fault carelessness, 104 degree of fault, 91, 102 degree of knowledge, 102, 103 faulty knowledge, 106 lack of probity, 103, 104, 106 nature of, 91, 102 prejudicing others, 104, 105 proof of, 91, 92, 108 recklessness, 104 relative fault, 106 unacceptable risk, 104, 105, 109 unconscionable action, 103, 104, 105, 109

fiduciary duty, 91, 100 knowing receipt see Knowing receipt misapplication, and, 100, 101 personal liability basis for, 91, 93 defence, against, 107, 108 equitable principles, 98 fault-based, 93, 94, 97, 108 investigative norms, 107, 108 precedent, and, 93–96 standard of, 104, 105, 106 strict liability, 91–96, 108 proprietary rights equitable owners, 98 legal owners, 98 third party risk, 99 public interest considerations, 96, 97 risk allocation beneficiaries, 100, 101, 108 misapplication, and, 100, 101 principles, 99, 100 risk avoidance, 100, 101 strict liability, and, 101, 102 third parties, 100 trustees, and, 100 strict liability, 91–98, 101, 102, 108 Rectification authorisation, 51 Canada, in, 52 grounds, for, 50, 51 indemnity, and, 50 invalid dispositions, 46 and see Invalid dispositions loss, resulting from, 32, 33, 50 Northern Ireland, in, 52 overriding interests, 31, 32 proprietary interests, and, 30, 31, 32, 35 proprietors in possession, 50, 54 Scotland, in, 52 Singapore, in, 52 statutory definition, 31 statutory limits, 37 statutory right, 30, 37, 38 successors in title, 51 third party, against, 33 Registration of land see Land registration Repairs and improvements amount recoverable, 121, 122, 123 benefit derived, 123 claims for, 120, 125, 129 contributions, towards, 121 equitable principles, 120 expenditure, on, 119, 129 gifts, as, 121 inflation, effect of, 122 nature of, 121

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392 Index Repairs and improvements (cont.): occupation rent, and, 120 partition actions, and, 119, 120 property values, and, 121, 122, 123, 129 tenancy agreements, and, 121 Residential leases see also Landlord and tenant defective leases, 218 flats see Flats forfeiture, 219, 222, 223 housing associations, 223 insurance provisions, 218 long leases building lease system, 204 contractual rights, 204 enfranchisement, 204, 205 ground rent, 204, 206 Leasehold Reform Act (1967), 204, 207 nature of, 204, 219 renewal, 204 security, 204 private rented sector (PRS) changes in, 203 political influences, 203 rent regulation, 203 security of tenure, 203 short leases provisions governing, 203 Sale of goods collateral promises, 180 declaration of trust, 180–182 divided shares, 183 equitable assignment, 180 equitable title, 179 ex-bulk sales, 179–181, 183 fungibles, 183 identity of subject matter, 181, 182, 184, 194, 198 intangible assets, 182–184 fiduciary relationships, 180, 184, 195 transfer of property, 179, 181 unascertained goods, 179, 181, 183 Service charges see also Flats jurisdiction, over, 212 Landlord and Tenant Act (1967), 211 meaning of, 211 payment of, 205, 206, 209 reasonably incurred, 211 regulation of, 210, 211 unreasonable, 215, 222 South Africa see also Communal Land Rights Act (CLRA) communal land communal property associations, 325, 327, 339

community rules, 334, 335 outside interference, 338 registration of, 325, 330, 332–334 survey of, 330 title deeds, 332 transfer of, 332–334 types of, 324, 325 land reforms development policy, 320 formalization, 321, 339, 340 redistribution, 318, 319, 325 restitution, 318, 319 security of tenure, 318, 319, 321, 325, 338 tenure reform, 319, 332 land rights access to land, 318, 320, 324–326 allocation of, 317 background, 317 communal tenure, 318, 319 customary tenure, 318 enforcement of, 317 land rights enquiry community participation conflicting rights, 328 enquirers, 328 gender equity, 328 land development, 328 land use, 328 procedure, 327 restitution claims, 328 results of, 329 state interests, 328 land use development policy, 320 land management, 328 registration of, 318 “new order rights” conversion to, 322, 327, 331 freehold conversion, 336 nature of, 322 registration, 333 transfer of, 334 validation, 331 “old order rights” cancellation of, 330, 331 communal land, 323–325 confirmation, 330, 331 conversion of, 330, 331 informal rights, 323 legislative provisions, 322 scope, 322 securing, 322, 330 state land, 323 Squatters adverse possession, and, 13, 16 and see Adverse possession Sustainable development integrated decisions, 67

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Index 393 legal implications, 67, 68 property rights, and, 67, 68 and see Property rights Rio Declaration, 68 Torrens system development of, 77, 78, 79, 83 German influences, 78, 79, 80, 82, 87 indefeasibility rule, 47, 53, 54, 55 mortgage consolidation, 162 cost of redemption, 162 equity of redemption, 162, 163 foreclosure, 161 redemption, 160, 161 right to possession, 164 security of title, 47 title by registration, 56 unauthorised registration, 53, 54 Town greens see also Village greens encroachment, 4 litigation, 4 registration, 4, 5 use of, 5 Tracing equitable tracing, 195, 196 proceeds, 179, 184, 195 Trust property see Receipt of trust property Undue influence abuse of power, 135, 143, 144, 145, 153 actual, 131 Allcard v Skinner see Allcard v Skinner basis of relief abuse of power, 135, 143, 144, 145, 153 claimant-centred, 132, 133

defendant-centred, 132, 133, 152 impaired consent, 132, 133 judicial views, 132, 133 unconscionable behaviour, 132, 152 consent impaired, 132, 133, 152 quality of, 133, 152, 153 duress, and, 132, 152 inter vivos transactions, 131 presumption, as to, 131, 132, 140 proof of, 131 religious influences, 137, 138, 139, 141, 153 trust and confidence, 131, 132, 152 United Nations-Habitat see also Land markets input from, 308 Village greens see also Town greens development controls, 8 encroachment, 4 litigation, 4 prescriptive acquisition, 7 and see Prescriptive acquisition registration, 4, 5, 7 use “as of right”, 6, 7 classification, 5 evidence of, 6 general public right, 6 implied permission, 7 nature of, 5, 6 World Bank see also Land markets funding, by, 296, 314, 315 input from, 307, 308, 315, 316 land policy, and, 315