Mon | Jan 21, 2019

Financing development projects

Published:Monday | April 27, 2015 | 12:00 AM

In a judgment delivered on April 20, 2015 - JMMB Merchant Bank (formerly Capital and Credit Merchant Bank Limited) v The Real Estate Board [2015] UKPC 16 - the UK Privy Council has clarified yet another issue involving the Real Estate Dealers and Developers Act (the Act).

Although this ruling also concerns Section 31 of the act, which was considered in the case of Jamaican Redevelopment Foundation Inc v The Real Estate Board [2014] UKPC 28, about which I wrote on September 8, 2014, this decision considered two additional points. In the previous judgment, the Privy Council confirmed that a first-mortgage holder's charge will rank in priority to the Real Estate Board's charge over a development property.

The two questions posed and answered in the JMMB case are (i) whether a charge in favour of the Real Estate Board (the REB) is valid only if it has been registered under Section 93 of the Companies Act 2004; and (ii) to what extent (if at all) does a charge in favour of a regulated financial institution rank pari passu (on equal footing) with the REB's charge. I will only address the first issue in detail.

KES Development applied to REB to be registered as developer for Mountain Valley Development. KES and its Attorneys collected deposits from prospective purchasers but, in breach of section 29 of the act, none of those sums was paid into a trust account for the protection of the purchasers.

JMMB loaned KES $146-million to, among other things, finance four developments, and obtained a mortgage over several properties, including the site of the Mountain Valley Development. The mortgage was registered on the title for the property and at The Companies Office in keeping with section 93 of the Companies Act. KES also granted a charge over the same land in favour of the REB to secure its liability to repay deposits received from prospective purchasers, but no charge was registered at The Companies Office in favour of the REB.

The development failed and JMMB used additional funds to complete the project and attempted to sell the land in exercise of its rights as a mortgagee. The REB sought a declaration from the Supreme Court that its charge ranked in priority to that of JMMB, and JMMB, in turn, sought a declaration that REB's charge was void since it had not been registered at The Companies Office.


JMMB's appeal


At first instance, the learned judge held that REB's charge was valid and raked in priority to JMMB's mortgage. JMMB's appeals to the Court of Appeal and to the Privy Council were dismissed, although the reasons stated by the Privy Council differed (in part) from those in the Court of Appeal.

The following points made by the Privy Council should be noted:

• The REB's charge over development property is not a statutory charge, in that it does not simply take effect because of the provisions of a statute.The developer of the property must still execute and register the charge in the normal way.

- The scheme set out in the act is a self-contained one that ensures that the sums prepaid by purchasers are isolated from any other sums that are available to the developer, so that its creditors will not have access to those sums in the event of default. This is why the establishment of a trust account with an authorised financial institution and the prohibition against the use of the funds by the developer prior to completion unless it creates a charge over the land in favour of the REB are so important.

- The act makes no mention of the need to register the REB's charge at The Companies Office. Such a stipulation would put the provisions of the act and The Companies Act in conflict.

- On the second issue, the Privy Council concluded that a general charge over development property will not allow an authorised financial institution to have a charge that ranks parri passu with the REB's charge. In order to achieve that ranking, the financial institution must obtain from the developer "a charge which specifies its purpose as the funding of construction within the development either expressly or by reference to a loan document which provides funding exclusively for this purpose".

Financial institutions will now have to reconsider the wording of loan documents created for the purpose of funding development projects, or ensure that they have mortgages that predate the pre-payment contracts.

• Sherry-Ann McGregor is a partner and mediator in the firm of Nunes Scholefield, DeLeon & Co. Please send questions and comments to or