Tue | Dec 12, 2017

Priority among mortgage holders

Published:Monday | September 8, 2014 | 12:00 AM

When a mortgage is registered on a certificate of title, it is intended to give the mortgage holder security in knowing that the borrower's failure to repay the mortgage debt will not leave that lender empty-handed. If, for example, the mortgage holder is the first one to register a charge against a title, he usually feels confident that any later mortgage holder will not be able to trump his right. In fact, this is the way in which section 70 of the Registration of Titles Act was known to be interpreted.

For some time after a decision of the Court of Appeal on July 20, 2012, in the case of Jamaican Redevelopment Foundation Inc. vs. Real Estate Board (JRF v REB) [2014] UKPC 28, the mortgage holder's certainty about his pride of place when his mortgage is the first to be registered on a title was severely shaken.

In that case, JRF held first mortgages over several titles belonging to New World Development Corporation Limited (NWDC). After defaulting on its mortgage payments, NWDC then registered charges on the same titles in favour of REB. By then, JRF had exercised its right to sell one of the properties in its capacity as first mortgage holder. JRF's problem was that the registrar of Titles refused to register the transfer to a new purchaser on the grounds that the charges in favour of REB ranked higher than any other mortgage. Effectively, the Registrar said that the sale of the property could not be completed without REB's consent.

This was surprising, because a first mortgage holder always felt he could not be prevented from exercising his right to dispose of property by someone whose interest in the property was registered later in time. REB argued that it was an exception to that rule, because of the special provisions in section 31 in the Real Estate (Dealers and Developers) Act. In applying a literal interpretation to that section, the Court of Appeal ruled that JRF's charge, although first in time, did not enjoy priority over the REB's charge.

Contradictory

In a judgement delivered by the Privy Council on September 3, 2014, the certainty enjoyed by the mortgage holder whose charge is the first to be registered on a title was restored. The Privy Council accepted the findings of the Supreme Court judge, and ruled that "all statutory provisions must be construed in their context and that the court must have regard to the statutory purpose both of the statute as a whole and of the specific provision in particular." To interpret the statute in the manner the Court of Appeal did would only serve to "penalise[s] JRF without any identifiable justification", and that would "be contrary to the scheme of the Act".

Although there are other aspects to the Privy Council decision, the settlement of the issue of priority among mortgages is of singular importance. If the Court of Appeal's decision were upheld by the Privy Council, it is likely that financial institutions (as first mortgage holders) would be in constant fear that that their rights could be overridden if the borrower merely embarks upon a development and registers a charge in favour of the Real Estate Board. That uncertainty could have had serious economic consequences because of its potential to discourage financial institutions from investing in real estate development. Thankfully, that danger has been averted.