Ranking Among Mortgagees: Priority Restored and New Challenges Possible?
In an important decision for banks and other financial institutions, developers in the construction industry and purchasers of new developments, the Judicial Committee of the Privy Council last week overturned the Court of Appeal's decision and held that a mortgage held by Jamaican Redevelopment Foundation, Inc (JRF) retained its priority over the Real Estate Board's (REB) statutory charge, notwithstanding the express words of section 31(5) of the Real Estate (Dealers & Developers) Act 1987 (REDDA).
The facts were that New World Development Corporation Limited (New World) applied in 1994 to the Real Estate Board to be registered as a developer in respect of a development scheme of certain land. The developer borrowed a total of $14,800,000 from Horizon Merchant Bank and Horizon Building Society under various loans. The loans were secured by first legal mortgages registered between 1994 and 1996 over 24 acres of land owned by the developer. In 1996 the titles were splintered and thereafter New World offered a number of lots which formed part of the sub-division for sale, without first discharging the mortgages securing the loans. In 1999 the Horizon financial institutions failed and, ultimately, the mortgages were assigned to JRF. JRF was the first and only mortgagee of all the land and its mortgage was so registered on all of the titles.
In those circumstances, where a mortgage is registered on the title securing money loaned for a reason other than the development of the land, section 26(1)(b) of the REDDA makes it a criminal offence for a developer to enter into a prepayment contract. However, notwithstanding JRF's mortgage, New World entered into prepayment contracts with various purchasers for several of the lots and collected monies from the purchasers towards the purchase price.
New World defaulted in the repayment of the loans and was so notified by JRF in 2006. In February 2007, without JRF's knowledge or consent, New World registered a charge in favour of the REB over 4 of the 40 original splinter titles (the duplicates were in JRF's possession and therefore the charge was not registered on them), for the likely reason that without such a charge it could not access the deposits made by the prepayment purchasers. The charge specified that it was subject to the mortgages held by JRF.
New World did not repay the loans so JRF exercised its power of sale under the mortgage. A sale agreement was concluded and a transfer executed and lodged with the Registrar in November 2007. JRF first learned of the registration of REB's charge when the Registrar refused to register the transfer and returned the documents to JRF on the ground that the consent of REB was required as REB's charge ranked in priority to JRF's mortgages by virtue of section 31(5) of the REDDA. The REB refused to remove the charge or consent to the transfer unless JRF made arrangements to compensate the purchasers under the prepayment contracts.
On the issues before it, the Privy Council ruled consistently in favour of protecting purchasers, holding that though the prepayment contracts entered into were prohibited by the REDDA, they were not inherently void because of illegality. Instead, the purchaser is allowed, under the REDDA, to withdraw from the contract and recover his money from the vendor; but if he elects not to do that the contract remains binding. The Privy Council also held that, provided there is no fraud, prepayment contracts entered into in contravention of the REDDA can be the subject of a valid charge in favour of the REB.