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LAST week we discussed the position of a buyer of a piece of land which was part of a larger plot of land. That larger plot of land is being developed and after most of the purchase price had been paid, receivers and managers stepped in and the land sold off with the money used to pay the financial institution. 

This would leave the buyer holding only the Sale and Purchase Agreement (SPA) with what was written on it. 

A developer sells a parcel of land or an apartment to the buyer who makes progress payments.  

Unknown to the buyer, the property is charged to a financial institution for a loan. It would secure itself by registering a charge on the land. And in law anything permanently fixed on the land becomes part of the land unless expressly excluded. 

Once the land is so charged, whatever built on the land would belong to the financial institution if there is a default.  

To the buyer this of course appears extremely unjust. Hence a reader asks: “Why is the creditor bank allowed to sell a piece of land when certain parts of it have already been sold to purchasers? In the first place, why did the creditor bank accept the land as collateral knowing full well that certain portions of the land had already been sold?” 

The issues involve different aspects of the law. One basic fundamental aspect is whether the land was already charged to the financial institution before part of it was sold to the buyer. 

In some cases, the charge may already have been registered on the land and it is the buyer who decided to purchase a property that was already encumbered. It may be that he trusted the developer who would have told him that the loan would be repaid and the charge would be discharged by the time of the transfer of the property to the buyer. 

If this promise is not fulfilled, it is a breach of obligation by the developer. Of course theoretically it would be possible to sue the developer. However the reality could be that by this time the developer may be insolvent or no longer in existence. 

The financial institution in this situation will enforce its legal rights and it would also be morally correct for it to do so. There is no reason to blame the financial institution. It is the developer who betrayed the buyer. 

The matter, however, takes a somewhat different complexion where the land is not charged at the time that the part of the land is sold but after the developer has entered into a SPA with individual buyers and the financial institution is aware of this. 

It is in the context of such a situation that the question posed by our reader has to be viewed more sympathetically. Where a developer is selling hundreds of plots of land or apartment units, can a financial institution say that it did not know about the purchasers? And if it did, why should it have priority over the buyers? 

Here the argument becomes technical. The financial institution will claim priority because it has exercised the right to register a charge on the land and therefore have a prior right on the basis of Section 340 of the National Land Code which provides: 

(i) The title or interest of any person or body for the time being registered as proprietor of any land, or in whose name any lease, charge or easement if for the time being registered, shall subject to the following provisions of this section be indefeasible. 

(ii) The title or interest of any such person or body shall not be indefeasible.  

a) in any case of fraud or misrepresentation to which the person or body, or any agent of the person or body, was a party or- privy; or 

b) where registration was obtained by forgery, or by means of an insufficient or void instrument; or 

c) where the title or interest was unlawfully acquired by the person or body in the purported exercise of any power or authority conferred by any written law. 

The focus will now shift to whether there has been any fraud/ misrepresentation or whether there has been a forgery or an insufficient or void instrument used? In many cases the courts have expressed the view that mere knowledge on the part of the financial institution of the existence of buyers does not constitute fraud, 

It will contend that it has merely exercised its rights. It may also say that if the buyer did not want to allow a subsequent charge to be registered, the buyer should have taken appropriate steps to prevent the land being charged. How could the buyer have done this ? 

Of course it would have been open to the buyer to lodge a caveat on the land. If he had done so then the charge could not have been registered and in any event would not have taken priority. In theory this is true. 

However most buyers do not expect to be out manoeuvred. They trust the developer and think that as long as they have paid for the property they will get what has been promised to them. 

But even where a buyer may think of lodging a caveat he may be confronted by a condition of sale that he is not to lodge a caveat. Thus he is prevented by the developer from doing so if he wants to buy the property. In other cases the developer may even get the consent of the buyer to charge the property which the buyer carelessly but innocently gives. 

This will be added ammunition for the developer who will say that the buyer has failed to exercise his rights and expressly given his consent to the charge. Therefore what appears to be an unfair position cannot affect their legal rights. 

The financial institution will also say that it is not privy to the arrangement between the buyer and the developer. All that it needs to look at is the state of the property which is unencumbered and it has merely exercised its rights. 

In such a situation it could be said that a financial institution which does so is legally right. But with the possible obstacles the buyer faces there is little to commend such a financial institution on moral grounds.

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