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The brave new world of electronic conveyancing

Feature Articles

Cite as: March 2015 89 (3) LIJ, p.36

An EC clause has been drafted for inclusion in the  LIV/REIV standard contract of sale of real estate.

By Murray McCutcheon, Russell Cocks and David P Lloyd

The Electronic Conveyancing (EC) project has finally come to practical fruition. The first pilot with full financial settlement is already being undertaken in selected parts of New South Wales and Victoria. The necessity for an EC clause that can be added to the LIV/REIV standard contract of sale of real estate1 goes without saying.

Drafting of the clause was undertaken principally by us, the authors of the standard contract. We initially drew the EC clause as a national non-jurisdiction specific clause for the Law Council of Australia. We then created a Victoria specific EC clause by designating it as a special condition, limiting the terminology to that used in Victoria and adding a provision dealing with the assessment of duty.

A separate sheet containing the special condition is now included in all “hard copy” versions of the standard contract available from the LIV bookshop and in the electronic online version published by the LIV.

General drafting principles for the EC clause

The general principles that we employed in drafting the EC clause were:

  1. We recognise that the conveyancing process is not perfect at present. We have resisted any temptation to reform the conveyancing process itself and have only included matters relating to electronic conveyancing as it will be operated by Property Exchange Australia Ltd (PEXA) or as otherwise required because there will be no physical settlement if it is conducted electronically;
  2. Stylistically, the EC clause has been drafted on a property law principles-based approach, and it is specifically designed to not be overly prescriptive;
  3. The EC clause is drawn in a plain English style as far as practicable. However, the simplicity of its drafting style should not mislead anyone into believing that the clause can safely be used by someone other than a practitioner with suitable knowledge, experience and skill in property law and electronic conveyancing;
  4. The EC clause is designed to be added as a special condition to the standard contract in the first instance. This has the advantage that it can be “road tested” by the first pilot firms to use electronic conveyancing to enable evaluation of how the clause operates in practice and allow us to make any necessary changes to take account of unexpected issues before it is incorporated as a general condition in the next edition of the standard contract; and
  5. We have avoided numerous and lengthy definitions. The drafting style intends that words have their plain meaning except in a few specific cases. Expressions used and defined in the relevant legislation2 are not defined again in the EC clause as this would be merely repetitious.

Specific aspects of the EC clause

The rationale for the drafting is explained in detail here following the layout of the clause. It is assumed that the reader is reasonably familiar with the manner in which electronic conveyancing will operate through PEXA and has a working knowledge of the standard contract.

The rectangular border area with text and a small box

Settlement and lodgment will be conducted electronically in accordance with the National Electronic Conveyancing Law and special condition 2 applies, if the box is marked “EC”

This is an important part of the clause. It can be part of a special condition, as at present, and later be incorporated in the particulars of sale when the EC clause becomes a general condition. The EC clause can be universally inserted into every contract but it will only be operative if the box is marked “EC” or the parties subsequently agree in writing that it will apply. The border and box used in the special condition can eventually be moved directly to the particulars of sale without any significant redrafting.

Special condition 2.1

This special condition has priority over any other provision to the extent of any inconsistency. This special condition applies if the contract of sale specifies, or the parties subsequently agree in writing, that settlement and lodgment of the instruments necessary to record the purchaser as registered proprietor of the land will be conducted electronically in accordance with the Electronic Conveyancing National Law.

The Electronic Conveyancing National Law requires no further definition as it is the expression used in the Victorian legislation.3 It follows that everything else required for electronic conveyancing includes the Electronic Conveyancing National Law, the definitions within it and its subsidiary documents authorised by that legislation as well as contractual documents flowing from the legislation.

As a consequence, the definitions in the Electronic Conveyancing National Law, the Model Operating Rules, the Participation Rules and the Participation Agreement do not need to be repeated in the EC clause other than for educational purposes. We believe that the educative role for EC is best undertaken elsewhere and in a more thorough manner rather than in the EC clause itself. This ensures that the EC clause is not cluttered with unnecessary instructions and lengthy and potentially inconsistent definitions and rules of interpretation.

The expression “Electronic Conveyancing National Law” is shown in italics as this is the way legislation is displayed in the standard contract itself.

The statement that “This special condition has priority over any other provision . . .” is a reference to the whole of special condition 2 having priority over other conditions of the contract to the extent of any inconsistency.

Special condition 2.2

A party must immediately give written notice if that party reasonably believes that settlement and lodgment can no longer be conducted electronically.

There will be many occasions when the parties do not know whether they will be able to continue with electronic conveyancing or not. The authors felt it best that the parties have an easy opt-out provision in the event that it becomes apparent to one or other that a party will be unable to proceed electronically.

The inability to proceed may be because of fault but may also be without fault by any particular party. As an example, electronic settlement may not be able to proceed on account of there being a number of settlements that will be linked either sequentially or concurrently. PEXA has indicated that, at least initially, there will be a limited number of sequential or concurrent transactions that can be handled at the same time, and the subscribers may not know that the limit has been reached until the settlement statement is completed just before the scheduled workspace locking before settlement.

There may be other reasons for the inability of a party to proceed to electronic settlement. As a consequence, it was felt that the parties need to be able to effectively opt out of electronic conveyancing at any time without penalty. It is implicit for the purposes of special condition 2.2 that where a notice is given under this provision, the parties must revert to non-electronic settlement without liability on the part of the person giving the notice.

This provision may need to be reviewed in the unlikely event that there is a perception that parties are unnecessarily opting out without good cause. However, unnecessary opting out is not the type of behaviour that is expected at present and in any case there will be no tactical or financial incentive to do so even if a party is in default.

The authors are aware of a belief on the part of some that special condition 2.2 may be inconsistent with special condition 2.1, and that special condition 2.1 should have priority, leaving limited or no room for special condition 2.2 to operate. Such a concern is unfounded. There is no disharmony between the two provisions. As already noted, the purpose of the statement in special condition 2.1 that “This special condition has priority over any other provision . . .” is a reference to the whole of special condition 2 having priority over other conditions of the contract where there is inconsistency.

Special condition 2.3

Each party must:

  1. be, or engage a representative who is, a subscriber for the purposes of the Electronic Conveyancing National Law;
  2. ensure that all other persons for whom that party is responsible and who are associated with this transaction are, or engage, a subscriber for the purposes of the Electronic Conveyancing National Law; and
  3. conduct the transaction in accordance with the Electronic Conveyancing National Law.

One purpose of special condition 2.3 is for the parties to make clear that they intend to conduct the transaction electronically, notwithstanding the provisions of special condition 2.1. The clause effectively provides that a party must not only engage a subscriber but also must ensure that all persons associated with the transaction and for which that party is “responsible” engage a subscriber. For example, a purchaser will be responsible for indicating that the incoming financier is able to conduct the transaction electronically if the purchaser signs the contract with the box marked “EC” or advises the vendor that the purchaser can proceed electronically.

Special condition 2.4

The vendor must open the Electronic Workspace (workspace) as soon as reasonably practicable. The workspace is an electronic address for the service of notices and for written communications for the purposes of any electronic transactions legislation.

The authors believe that the vendor is the party best placed to open the workspace in PEXA. This is consistent with the vendor’s role to prepare the contract of sale and set up the terms and manner of the sale. Special condition 2.4 requires the vendor to open the workspace as soon as reasonably practicable.

The other important issue addressed in this clause is the statement that the workspace is an electronic address for service of notices. This has significant legal and operational consequences for subscribers and their clients. It means that as a matter of practice, a subscriber should either:

  • on a daily basis, view each of the workspaces in which the subscriber has registered their participation, or
  • select the option that the subscriber receive an email or SMS message every time a notice is posted into the workspaces for which the subscriber has registered their participation, when subscribing to PEXA.

The subscriber may miss a significant communication, such as a default notice, if they do not diligently monitor their workspaces (and their emails and SMS messages), because the workspace is a valid means of service of communications for the purposes of the contract.

Special condition 2.5

The vendor must nominate a time of the day for locking of the workspace at least seven days before the due date for settlement.

This special condition was first drafted at a time when it was believed that the parties could initially nominate the date for the anticipated settlement and could nominate a time for the settlement at a later stage. It is understood that PEXA currently requires that the time for the settlement be selected simultaneously with the date for settlement.

The authors have nevertheless left the special condition in its current state because that requirement by PEXA may change or other electronic lodgment network operators may come into the market and have different requirements. As it stands, the provision may be somewhat redundant except insofar as it constitutes a reminder that nomination of the settlement date is required at least seven days before the due date for settlement.

Special condition 2.6

Settlement occurs when the workspace records that:

  1. the exchange of funds or value between financial institutions in accordance with the instructions of the parties has occurred, or
  2. if there is no exchange of funds or value, the documents necessary to enable the purchaser to become registered proprietor of the land have been accepted for electronic lodgment.

This clause defines the point at which settlement is deemed to occur for the purposes of the contract. Identifying what precisely constitutes settlement by electronic means has taken considerable time and effort to conceptually arrive at what is most appropriate. In drawing this provision the authors have borrowed from the concept of electronic completion in Queensland legislation and held detailed discussions with PEXA on the subject.

Settlement is primarily financial settlement. It is when there is an exchange of funds or value within the workspace. The authors understand that the Reserve Bank of Australia will be notified that there has been an exchange of funds or value even where the incoming and outgoing mortgagee is the same institution for a particular transaction. In other words, the Reserve Bank is notified through the exchange settlement account of the financial institution common to both the vendor and purchaser when there is an exchange of value, even when that institution internally nets off the amounts and transfers the money between its respective customers’ accounts. The authors understand that the workspace will not record the exchange of funds or value until the Reserve Bank is notified of the exchange.

This is a significant change from the current position in Victoria for settlement with paper documents, where financial settlement occurs before lodgment.

Financial settlement in PEXA will occur after receipt of notification of lodgment and will stop if acceptance for lodgment is rejected (unless the responsible subscriber opts to proceed in spite of the notification of failure of lodgment acceptance or notification of rejection) but there is still a small theoretical chance that financial settlement could occur without lodgment acceptance. This is the way the settlement process is designed in PEXA. It is preferable to the alternative which is the theoretical possibility of acceptance for lodgment but no financial settlement. This is because the land cannot move and is easy to locate, whereas money can be dispatched to remote parts of the world without trace in a matter of seconds.

Special condition 2.7

The parties must do everything reasonably necessary to effect settlement:

  1. electronically on the next business day, or
  2. at the option of either party, otherwise than electronically as soon as possible –if, after the locking of the workspace at the nominated settlement time, settlement in accordance with special condition 2.6 has not occurred by 4pm, or 6pm if the nominated time for settlement is after 4pm.

The authors appreciate that there will be some practical difficulties and delay if for some reason settlement cannot occur after the workspace is locked. It is possible that settlement may not be able to occur because any one of a number of electronic systems may go down or be inoperable. For example, the Land Titles Office system may be unavailable for a final search or title activity check, the State Revenue Office may be unavailable, any of the banks’ computer systems may be unavailable, the Reserve Bank’s systems could be unavailable, any of the subscribers’ systems may be inoperable or the internet may fail entirely.

Special condition 2.7 provides for the parties to attempt to conduct a failed transaction electronically on the next business day or as soon as possible by some other (non-electronic) means. The financial settlement funds which have been reserved will be remitted back to the institutions and the accounts from which they came if the settlement does not occur on the day the workspace is locked. The parties’ subscribers and the financiers will then need to re-authorise the financial settlement statement and a new settlement date and time to reinstate the locking of the workspace and completion of the settlement.

The authors recognise that the alignment process being undertaken by the Registrar of Titles means that subscribers will be able to sign paper transfers of land documents on behalf of their clients if the electronic transaction fails once the alignment legislation is in operation. However, it is likely there will nevertheless be considerable delay, frustration, complications and practical difficulties if at the last moment the parties are forced to revert to completing the transaction with paper documentation.

Special condition 2.8

Each party must do everything reasonably necessary to assist the other party to trace and identify the recipient of any mistaken payment and to recover the mistaken payment.

Provision has been made for each party to assist any other party in the event of a mistaken payment. Mistaken payments may be made because of “fat fingering”, the supply of an erroneous payment direction by the parties to their subscriber or by the subscriber making a mistake with the input of data into the workspace.

There are difficulties with the rectification of these errors because financial institutions are often reluctant to contact parties to whom funds are being transmitted due to privacy breach concerns. The authors understand that the banks are proposing to address this issue with their customers by including their customer’s consent to notification and rectification of mistaken payments in the account opening forms. Nevertheless there may be many situations where no consent has been obtained or can practicably be obtained.

Special condition 2.9

The vendor must before settlement:

  1. deliver any keys, security devices and codes (keys) to the estate agent named in the contract,
  2. direct the estate agent to give the keys to the purchaser or the purchaser’s nominee on notification of settlement by the vendor, the vendor’s subscriber or the Electronic Network Operator,
  3. deliver all other physical documents and items (other than the goods sold by the contract) to which the purchaser is entitled at settlement, and any keys if not delivered to the estate agent, to the vendor’s subscriber or, if there is no vendor’s subscriber, confirm in writing to the purchaser that the vendor holds those documents, items and keys at the vendor’s address set out in the contract, and
  4. direct the vendor’s subscriber to give (or, if there is no vendor’s subscriber, give) all those documents and items, and any such keys, to the purchaser or the purchaser’s nominee on notification of settlement by the Electronic Network Operator.

General condition 10 of the standard contract effectively provides for the handing over of title documents at settlement and for the giving of vacant possession. It does not address the provision of keys and other relevant documentation such as a lease affecting the land, but well-established conveyancing practice has always accommodated such issues.

There is no opportunity to do any of these things when there is no physical settlement, as is the case with electronic settlement. Special condition 2.9 attempts to comprehensively address the handover of all documents and things which are, or in theory ought to be, dealt with at a physical settlement but cannot be accommodated in the electronic settlement framework.

Special condition 2.10

The vendor must, at least seven days before the due date for settlement, provide the original of any document required to be prepared by the vendor in accordance with general condition 6.

As payment of duty will be simultaneous with electronic settlement, all requirements of the State Revenue Office must be satisfied beforehand. This will require the purchaser’s subscriber to certify via Duties Online that all relevant documentation is in order. To do so the vendor will need to provide to the purchaser any original document that is required for the assessment of duty, such as a goods declaration or off-the-plan declaration. This special condition requires such documents to be provided at least seven days before the due date for settlement.

Other matters considered but not included

The authors considered the need to make provision for the unavailability of electronic systems where default under the contract might be imminent, but decided that such a term is unnecessary. There is at present nothing in the standard contract allowing for events that could prevent a party complying with their traditional settlement obligations without fault. Obvious examples include fire, flood, criminal acts, unavailability of lifts to high rise buildings, building lockdowns or lockouts, traffic jams, building fire drills and other events which are normal “force majeure” exclusions in most insurance policies, such as war, civil unrest, and impact from aircraft or items falling from them.

A recent example is the siege in Martin Place, Sydney. On the day, SAI Global advised that all settlements in its Sydney settlement room were being postponed on account of the events. There are also plenty of other natural or man-made disasters which have the potential to stand in the way of a physical settlement.

Apart from this, there is always a risk of the Land Titles Office system being unavailable for a final search or title activity check. In short, there are many matters beyond the parties’ control which might result in physical settlement not being able to be carried out on its due date under the contract, potentially placing a party in default for the purposes of the contract.

In the context of electronic conveyancing, there are also various issues relating to computer systems, as mentioned in the commentary to special condition 2.7, which might prevent settlement occurring on its due date.

The authors appreciate that the consequences of a settlement not being able to be carried out on the last day of a 14 day default notice given under general condition 27 of the standard contract may be dire, in that the contract may automatically come to an end by force of general condition 28. However, there have always been risks for a purchaser in receipt of such a notice leaving settlement until the last moment. Those risks are not appreciably greater where settlement is scheduled to be conducted electronically.

There were numerous other matters which the authors considered and discussed, but ultimately determined not to address in the EC special condition. There may be additional matters which will emerge from the early pilot program and which will require addressing in due course, but for the moment we are satisfied that the present EC special condition is, at the very least, a good place to start.


MURRAY McCUTCHEON has recently retired from legal practice as a senior consultant with Hunt & Hunt Lawyers. He is a member of the LIV Property Committee and the Law Council National Electronic Conveyancing Committee, and chair of the Electronic Conveyancing Group. RUSSELL COCKS was a property lawyer before joining the LIV as a research solicitor. He then established a solicitors’ consultancy service in conveyancing and is the author of 1001 Conveyancing Answers. He writes a regular property law column for the LIJ. DAVID P LLOYD is a barrister with 35 years’ experience in property law. He has been a member of the LIV Property Committee for more than 20 years and is a regular seminar speaker. He has published several articles in the LIJ.

What did you think of this article? Please let us know by leaving a comment below.

  1. The September 2014 edition of the Contract of Sale of Real Estate co-published by the LIV and the Real Estate Institute of Victoria (the standard contract)]
  2. Electronic Conveyancing (Adoption of National Law) Act 2013 which applies the Electronic Conveyancing National Law as set out in the Appendix to the Electronic Conveyancing (Adoption of National Law) Act 2012 (NSW).
  3. See Note 2 above.

Comments

Lauren
Extremely helpful and appreciated
5/03/2015 12:17:08 PM


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