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’s) 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 $14.8 million 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.

The question that remained was who was entitled to be paid first – the innocent purchasers or the innocent mortgagee, JRF?

Ultimately, the Privy Council held that the scheme of the REDDA was to not only protect purchasers, but also existing mortgagees. The Privy Council opined that the reason a developer is prohibited from entering into a prepayment contract unless the relevant property is free of any mortgage is to protect mortgagees (who would have to be paid off prior to pre-payment contracts). This ultimately protects purchasers too because only then would they be purchasing unencumbered property.

While the plain meaning of the words of section 31(5) of the REDDA make the REB charge rank in priority to all other mortgages and charges (save for one exception that JRF’s mortgage didn’t fall into), the plain meaning of section 26(1)(b) was that New World should never have entered into the prepayment contracts until JRF’s mortgage was first discharged. The Privy Council read words into section 31(5) to ensure that the intention of the statutory scheme of dual protection was preserved. Otherwise, section 31(5) would be contrary to the scheme of the REDDA. The result is that JRF’s mortgage retained its priority under section 70 of the Registration of Titles Act 1889 and the purchasers are only entitled to whatever may be left after the net proceeds of sale have been applied to the debt owed to JRF.

The purchasers remain protected, however, not only by REB’s statutory charge (which is still valid but now second, instead of first, in line), but by virtue of their other statutory remedy against the developer – they can withdraw from the prepayment contract and recover any money paid to the developer from him under section 26(2) of the REDDA. JRF, on the other hand, had no alternative remedy, precisely because the REDDA never contemplated that a mortgagee could find himself in JRF’s position since the statutory scheme prohibited the simultaneous co-existence of the (non-development loan) mortgagee and the pre-payment purchaser.

The REB charge, created by section 31 of the REDDA, shall now, by virtue of the Privy Council’s interpretation of section 31(5), “rank in priority before all other mortgages and charges [as may consistently with the scheme of the Act remain to be considered but not those which the Act requires to have been discharged] on the said land except … and shall be enforceable by the Board by sale of the said land by public auction or private treaty…”

It remains to be seen whether or not the pari passu ranking between the REB’s statutory charge and mortgages granted for the development of the land, conferred by section 31(5), will be challenged by virtue of the Privy Council’s confirmation that priority derives from section 70 of the Registration of Titles Act. JRF’s mortgage retained its section 70 priority because it ought to have been discharged by the developer before he entered into the prepayment contract subject of the REB’s charge under the REDDA. The question remains, why shouldn’t section 70 priority apply to all other mortgages that are registered first in time? After all, section 70 applies “notwithstanding the existence…of any…interest, whether derived by grant from the Crown or otherwise, which but for this Act might be held to be paramount or to have priority…” REB’s section 31 charge certainly seems to be caught in those governing words of section 70, and therefore its ranking above any charge or mortgage registered before it in time, including where the money is lent for the purpose of developing the land, may well be an issue now at large.

Alexis Robinson is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Litigation Department. Alexis may be contacted via alexis.robinson@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.