WARNING - PURCHASER LOSES PROPERTY
In more recent times purchasers of real estate have not, with ordinary course, seen the need to lodge a caveat on the vendor’s title. Caveats put the world on notice of a purchaser’s interest but they also largely place an embargo on a vendor dealing with his or her own land prior to completion of the purchase.
The Case: Black v Garnock (2007) 237ALR1
However on 1 August of this year, the High Court delivered a short, sharp jolt to standard conveyancing practice in the decision of Black v Garnock, reminding purchasers to take steps to protect their interests. In Black v Garnock, the Appellants (Mr Black and others, a firm of accountants), obtained a judgment in the District Court for a sum of money against Mrs Smith, the vendor. Rather than being bankrupted by the Appellants, Mrs Smith promised them she would sell her farmland to raise funds to satisfy her debt to them.
A few months after the District Court judgment, Mrs Smith entered into a contract for sale of her farmland with the Garnocks and the Luffs, as purchasers. Upon being informed by Mrs Smith that they were likely to receive only a small sum from the proceeds of sale of the farmland, the Appellants obtained a Writ of Execution against her. The Writ was in favour of the Sheriff and empowered the Sheriff to sell Mrs Smith’s farmland to satisfy the debt to the Appellants. Notably, the purchasers were not put on notice that the Appellants intended to register the Writ. However, the purchasers’ solicitors were aware that the Appellants’ solicitors intended somehow to “stop the sale.”
In accordance with normal conveyancing procedure a title search was carried out by the purchasers’ solicitors on the morning of settlement, although a couple of hours before actual completion. Noting no prior encumbrances, the purchasers went ahead with completion of the sale. However, after settlement, the purchasers were unable to register their transfer because the Appellants had registered their Writ in the time between the purchasers’ final search and completion.
The High Court ultimately had to weigh the effect of the Writ of Execution which was registered by the Appellants on the Torrens Title for the farmland against the rights of the purchasers who settled with no knowledge of the Writ.
In a 3:2 decision, the majority of the High Court held in favour of the Appellants, adopting slightly different reasonings.
Two of the majority judges held that although the recording of a Writ did not create an interest in land, it is capable of registration and therefore gives the Sheriff rights to deal with a property subject to any encumbrances on the register. As no caveat was lodged on behalf of the purchasers, the Sheriff’s interest prevailed over the purchasers’ interest and the Sheriff was entitled to sell the property to obtain his money. It was not relevant that the purchasers had exchanged contracts for sale of the land prior to the issue of the Writ.
The third majority judge noted that the purpose of the Torrens Title system of land is simplification of conveyancing. The system effectively allows anyone to deal with a property entirely on the face of what is recorded on the Register. Put simply, the Torrens Title system is based on the principle that what is recorded on the Register is, “the first and last word on all relevant titles and interests.” The judge emphasised that the purchasers could have lodged a caveat, and had they done so, it would have prevented the later registration by the Sheriff as well as having served as a notice to all of the prior interest of the purchasers.
Lessons for Purchasers & Lenders
The decision may seem unduly harsh from a purchaser’s perspective, particularly given that the Appellants and the Sheriff were aware at the time of registration of the Writ that the purchasers had contracted to buy the land. However, it was open to the purchasers to take steps, by way of caveat to secure their position.
If it seems harsh for a purchaser, spare a thought for a lender. A lender has no caveatable interest prior to settlement, so it cannot lodge a caveat. The authorities need to find a solution to this dilemma. And quickly.
The Property Law Committee of the Law Society of NSW is currently engaged in discussions with the Department of Lands and the Attorney General’s Department regarding the practical implications of Black v Garnock. However, in the meantime, the case highlights the need for a cautionary approach to conveyancing transactions.
Purchasers who do not wish to suffer the same fate as the purchasers in Black v Garnock should take the following steps:-
- Ensure a caveat is lodged immediately after exchange; and
- Ensure a final search is carried out as close as possible to the time of settlement.
In the case of lenders, it is recommended that they do final searches immediately prior to settlement and register immediately after settlement.
Failure to follow these steps will be at the peril of the incoming parties, including lenders.
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