this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

Select from any of the filters or enter a search term
Calendar
Calendar

Road blocks on the path to settlement

Road blocks on the path to settlement

By Simon Libbis and Dan Prior


Snapshot Watch for the requirements of the incoming mortgagee. Examine the plan to check what is being sold. Stratum and company share titles can pose a threat to the unwary. Conveyancing can be an onerous task. Since 2016 it has become more so with the move to PEXA. Conveyancing practitioners are now required to change their data collection requirements, change their identity requirements, upgrade their hardware to prevent hackers trying to steal PEXA monies, train clients in how to not send money to the wrong account and report on and collect capital gains tax and GST. These are in addition to the usual trials and tribulations that occur during a conveyancing transaction. The main aim of conveyancing is to get to settlement. The purpose of this article is to identify some of the issues that can prevent that happening. They are not everyday issues. If they are identified at an early stage, they can be dealt with, minimising disruption to the process and unpleasant surprises for the client. Requirements of the incoming mortgagee The most common way in which a title issue threatens to derail a settlement is the requirements of the incoming mortgagee. When the purchaser asks to borrow money on the strength of the security that they will offer at settlement, the incoming mortgagee looks at the title and sends back to the purchaser’s banker/broker/solicitor a list of things that they will need to certify their file for settlement. Noting that the incoming mortgagee would like the best security possible, the mortgagee will invariably and perhaps quite reasonably ask for any irregularities or unusual aspects on title to be rectified. The problem arises when the vendor is not able or willing to attend to the title issue and presses the purchaser for settlement. The purchaser is then in the invidious position of choosing between: seeking to have their current proposed mortgagee change their mind with respect to their requirements; or obtaining finance from a different mortgagee (usually at short notice); or finding a cash buyer who doesn’t consider the title issue to be material and then nominate that buyer; or negotiating an exit with the vendor; or a combination of some or all of the above. Each of the aforementioned scenarios is undesirable and goes well beyond the scope of the initial conveyance. In each of these situations timeframes become tight and purchasers can experience considerable stress. The question will then be asked: could this have been identified earlier? A purchaser’s representative must inform themselves as to existing title issues and advise the purchaser early in the engagement whether a title issue presents a risk to the purchaser and whether there are steps required of the purchaser to ameliorate some of the risk. General Law Land The amount of General Law Land is continuing to diminish rapidly as the conversion regime set out in the Transfer of Land (Single Register) Act 1998 takes effect. One of the important provisions of that legislation was to allow the registrar to create provisional folios pursuant to s23 of the Transfer of Land Act 1958 (TLA) This process was one of the steps deemed necessary as a result of the slow uptake for the conversion process. The registrar, pursuant to s26S(b)(ii), can create the provisional folio on their own application. When such a folio is created, it is issued to the Registrar of Titles and should the registrar consider it appropriate, notice will be provided to the proprietor of the provisional folio of the creation of the folio, pursuant to s26U. A provisional folio can also be created by an “entitled person”1 pursuant to s22 on a lodging of a specified dealing, or under s23. The provisional folio will contain warnings, most commonly warnings as to subsisting interests and as to dimensions. The subsisting interests warning will expire 15 years from the provisional folio being created, pursuant to s26Y. The dimensions warning will not expire until a survey application is completed (such as a s26P application). The warnings are to be treated as encumbrances (s17). The issue for practitioners is that when a provisional folio is created, the title appears to some clients to be a perfectly good title. This is especially so in an environment where many clients are able to conduct their own title searches. A vendor client may advise that they wish to sell their property, instruct for the preparation of a Section 32 and one may be prepared without consideration of whether the title is in fact able to be provided at settlement or how a purchaser will fund the purchase if security is a provisional folio. It is not uncommon for a vendor to sell land that has a provisional folio. In accordance with s23(1) of the TLA it has been brought under the operation of the TLA by the creation of the provisional folio. This means that General Condition 9 (General Law Land) of the prescribed contract will not apply. Under the contract, unless some other provision gives the purchaser relief, the purchaser could not refuse to settle on the basis that the vendor had only a provisional folio. There is no prohibition on sale of land contained in a provisional folio. Section 26L does, however, prohibit subdivision and consolidation of provisional folios with subsisting interest warnings. In reality, a vendor’s representative should be conscious of the need to assist and will usually do so by agreeing to apply for a s14 conversion before settlement. If such agreement is not reached, the purchaser is left in the position of trying to complete a contract in which there are slim prospects of a financier providing the funds if the security is a provisional folio. In those circumstances, relief of the Court should be sought well before settlement, seeking orders that the vendor make the necessary application. Practitioners should also note that while PEXA appears to allow registration on a provisional folio in that it will advise that the title is available for electronic lodgment, the title would have to be nominated by the registrar. This is unlikely and a request for paper lodgment would be necessary. Accessory, restricted and other lots Strata and cluster subdivisions, or sales which should deal with more than one lot, continue to confuse vendors and purchasers. Often a practitioner will be presented with the volume and folio by their client of the land that they are proposing to sell, or a practitioner will rely on the automated assessment by their search provider of the parcels relevant to a particular unit that is being transacted. The difficulty with this approach is that in relying on the client or a search provider, additional lots that need to be part of the transaction may be overlooked. Perhaps, for example, the unit on the plan has two accessory lot carparks, however only one accessory lot has returned in the searches. The issue eventually presents itself after signing of the contracts and before settlement. A rush ensues to try to have the contracts amended to include the accessory lot if possible – but what if the omission of a lot from a contract of sale has been perpetuated over time, resulting in a chain of owners that have not transacted at all on a carpark that was originally designated to the unit? Land Victoria’s Customer Information Bulletin Edition 132 in December 2011 noted that this remained an issue and specified that the provisions of s47 TLA (completed purchase) were not available to the purchaser unless it could be established that normal conveyancing practice cannot occur. Practitioners should consider seeking instructions to conduct historical searches of the title and then instrument searches of earlier transfers to rule out any missing accessory lots where instructions, the plan or the nature of the property suggest that there may be an accessory lot that has been orphaned on the plan. These instructions should be obtained early so that the resolution of the matter can be attempted before settlement. Restricted titles are treated slightly differently as they will not be able to be dealt with unless the restricted lot is accompanied on the transfer by a carpark lot.2 This means in practice that it is less likely for a carpark to be forgotten, but if there are two carparks the same issues as mentioned for accessory lots could apply. The problems are not limited to forgetting lots on RP, SP, CP or PS plans. Old laneways claimed or bought from council and lots created by adverse possession are often forgotten from sales documentation. It is not unheard of for adverse possessions to be claimed again by the successor in title years after they were first claimed by a predecessor in title, but forgotten. There should be less of this issue in future as the Titles Office has, several years ago now, changed its process so that it marks the parcel claimed as a lot on the plan with the existing fee simple parcel owned by the possessor. This has meant that when a search is done of the plan, all parties to the transaction ask the question of the additional parcel on the plan and the parcel becomes part of the transaction. However, the previous practice of the Titles Office was to simply issue the parcel without reference to the primary lot, and to make matters worse, many of these small adverse possession parcels did not find their way to the mapbase so do not appear on planning searches etc. Practitioners should always go beyond the title plan returned to them by their search provider and look at the lot in the context of the lots around it. When acting for the vendor or purchaser before contract, or the purchaser post contract, the mapbase through LASSI3 should be examined to establish whether there is an old laneway that abuts the lot or there exists other plan references that indicate a further examination is required. If there are plan references, copies of those plans should be obtained. Examination of the titles to the property at this level of inquiry will ensure that the practitioner has done all they can to prevent a parcel being forgotten. Separate interest titles In some cases, where two or more proprietors own a property, they are able to create separate interest folios pursuant to s32 TLA.4 Upon registration of the application, the existing folio of the register will be cancelled and titles issued to each of the tenants in common as to their respective interests in the property. Search providers occasionally miss an interest folio and practitioners must make sure that they check the proprietorship so that each share is accounted for. The task is made easier by the additional information at the end of the register search statement which provides the details of other folios with interests affecting the land. If a practitioner is acting in relation to a sale of land where there is a life tenant and an estate in remainder, great care must be taken to ensure that the appropriate documentation is available before preparation of the contract. If the life tenant is still alive, both the life tenant title and the estate in remainder title must be provided at settlement to the purchaser. If the life tenant has died, an application must be made for certificate absolute.5 The title would then cease to be an interest title. PEXA will not allow an electronic transfer of an interest, so any transaction dealing in interest titles must be conducted in paper and time allowed to arrange the same. Notices of Action The Registrar of Titles is able to take any other step necessary to protect the operation, effectiveness and integrity of the register, including, but not limited to, the making of a notation on a folio of the register (s106(1)(f) TLA). The notation will appear at the bottom of a register search statement under “Activity in the last 125 days”, even in circumstances where the Notice of Action has been “noted” on the title well past that timeframe. Land Use Victoria’s Customer Information Bulletin (CIB) in April 2018 noted that the registrar will place a Notice of Action over a folio of the register when exercising the power. That power is typically exercised when the registrar is aware of proceedings affecting land which may result in an amendment to the register. It goes on to explain that a Notice of Action will not prevent the lodgment or registration of dealings with land. It simply allows the registrar to monitor dealings affecting a folio. This may be necessary to ensure, for example, that dealings which may frustrate the proceeding are not registered. A Notice of Action will be removed from a folio when it is no longer necessary. For example, when the registrar is informed that a proceeding has concluded. The bulletin’s release followed earlier commentary in this journal.6 Notably, the bulletin does not specify how long the registration of a dealing may be delayed and so incoming proprietors and their mortgagees (incoming parties) must assess the risk of proceeding to settlement. If the incoming parties can be satisfied that they have knowledge of all proceedings that may affect the folio, then they may proceed to settlement. However, the chances of this occurring in reality are slim. In those circumstances, if the vendor presses for settlement, the purchaser must carefully consider their next steps. Counsel’s advice is a prudent start. Problems will recur until either the prescribed form contract of sale is updated to specify that Notices of Action are to be considered an encumbrance requiring removal (GC2.3(e)), or the registrar provides a process that can be relied on by purchasers that establishes what is required for the removal of the Notice of Action. Registrar’s Caveats Section 106(a) of the TLA gives the registrar the power to lodge a caveat on behalf of the Crown where the registered proprietor is a minor or of unsound mind. Formerly Queen’s Caveats, now known Registrar’s Caveats, they are commonly seen as a result of the registrar acting on the representation orders of the Guardianship List at VCAT. Conveyancing practitioners often come into contact with these caveats. They should now pose no issue to settlement provided the mortgagee understands how they work and when they will be removed. The February 2019 CIB provided helpful explanation by the registrar as to when a Registrar’s Caveat will be removed: If the transferor in a transfer of land is the represented person and the transfer is signed under certification on behalf of the transferor, the Registrar’s Caveat will be removed upon registration of the transfer No further evidence will be required in support The mortgagee can be forwarded the CIB if they are anxious about settling with these caveats in place. The PEXA workspace will settle notwithstanding that the caveat is in place Stratum and company share titles There are still quite a lot of these around and they can pose a threat to the unwary. It is important to ascertain at the outset of a conveyancing transaction if the title for the property comes under one of these categories and, if so, which one. The processes are quite different. The sale of a company share title is in fact a sale of shares in a company. The shares carry with them the right to exclusive occupation of an area of the building. There is usually a service agreement between the shareholders. The Sale of Land Act 1962 does not apply to company shares and there is no transfer of land involved. The standard contract of sale of real estate cannot be used for the sale of them. The sale usually has to be approved by the company that owns the land. This approval needs to be sought immediately upon signing of the contract. The seller of the shares must have the share certificates to provide to the purchaser and the transfer of shares must be lodged with the company and the company’s register on ASIC updated accordingly. Normally the manager of the company share building would undertake this task, but the practitioner needs to make sure that this step is taken as the Corporations Act 2001 requires that ASIC be informed of the share transfer within 28 days of the date of settlement of the transfer. Stratum titles also have company shares and a service agreement. They also have a title which will usually be encumbered by a charge in favour of the service company. This can be of concern to lenders as it will take priority over their mortgage. Like company share titles, the service agreement for stratum titles often requires that the company consent to the transfer of the shares. Share certificates are not required in circumstances where they are already shown to be included in the relevant folio of the register,7 but will be required where this is not the case.8 The title must be examined closely to establish the shares are included in the relevant folio, not just copies attached to the vendor’s statement. It is important at the outset of a conveyancing transaction to identify stratum and company share titles. Failure to do so and to follow the appropriate processes will result in significant problems as settlement approaches. Conclusion As with many aspects of life, things are not always as they seem in conveyancing transactions. Time spent before contract identifying potential roadblocks before you get to them is well rewarded. Failure to identify the roadblocks before the contract or early in transaction can result in unhappy clients and headaches for the practitioner. Simon Libbis is a consultant with Prior Law, which incorporates his practice Subdivision Lawyers. He is an LIV accredited property law specialist and the author of several publications. Dan Prior is a partner with Prior Law and has extensive experience in commercial, employment and property law. 1 See s10 Transfer of Land Act 1958. 2Clause 6, Schedule 2, Subdivision Act 1988. 3Land and Survey Spatial Information, accessible at https://maps.land.vic.gov.au/lassi/ 4Form 11, Application for a New Folio of the Register, Transfer of Land (General) Regulations 2004. 5As above. 6Russell Cocks "Notice of Action" LIJ April 2018, p63. 7Regulation 7(2) Transfer of Land (General) Regulations 2004. 8Regulation 7(1), as above.

The content you are trying to access is exclusive to LIV members*

To access your exclusive member content please click the 'Already a Member' button below and you will be redirected automatically.

Not a member but would like to find out about the value of LIV membership? Click the 'Become a Member' button below or call our membership team on (03) 9607 9470.

*Note that some content may be exclusive to specific types of members. If you would like to inquire about your access please contact the membership team on (03) 9607 9470.