There may be trouble ahead

Author's view that current practice as to conveyancing of common parts in housing developments is of doubtful validity and could be storing up trouble for the future

The Journal, January 2008, page 48

The original purpose of deeds of conditions was as a means by which burdens could be imposed, without the need for a conveyance, over a substantial area of ground so that they would affect all parts of that area equally, even after subdivision. They have never been competent as deeds of transfer. It has, however, become common for developers to refer to common property in a deed of conditions and then to convey those areas of common property in a disposition, by reference to the deed of conditions. That is perfectly competent. The difficulty is, however, that a practice has grown up of purporting to grant rights in common property the extent of which cannot be fully determined at the date of the grant. That practice, I fear, is not competent.

Let us consider a common situation. A residential developer is building a development comprising 50 houses and has put in place a deed of conditions regulating the management and maintenance of the estate. The deed is to come into force on the sale of the first house and will become binding on each house sold, by incorporation into the disposition. The disposition for each house will also dispone a one fiftieth pro indiviso share of common property in the common parts. The deed contains a provision reserving to the developer the unilateral right to alter the common parts as defined in the deed and shown on a plan, without reference to any of the owners, even in majority. The developer has not finally decided the layout of its development and wishes to retain the flexibility to deviate from the master plan as it is at the date of registration of the deed of conditions. (A variation on this theme is for the common parts to be defined as whatever is left of the whole site under exception of the individual plots sold off. The difference between the two situations is academic for immediate purposes.)

So what’s the problem?

Three come to mind.

The enquiry

Mr and Mrs Primo are the purchasers of the first house on this development of 50 houses. Their disposition is sent off for registration. They later ask you to tell them exactly what they own. Other than the house and garden ground, all that you can tell them about common property is that they own a one fiftieth pro indiviso share of the common parts but that the common parts cannot yet be definitely determined, and may not be so determined for a number of months or years to come. Effectively what we are saying to Mr and Mrs Primo is that the developer has conveyed something to them, but as at the date of the grant of the conveyance and indeed for a number of years afterwards neither the developer nor Mr and Mrs Primo actually know exactly what has been conveyed. Can that really be valid?

The asset

Assume that 45 houses have been sold off and the developer has decided on the location of the remaining five but he hasn’t started building them. At that point the developer thinks he knows exactly what is going to be the common property. Then another developer approaches our developer. Part of the common property would be useful to this other developer for his neighbouring development. Our developer sells off that area to the neighbouring developer for a substantial sum of money. He does not hand over one fiftieth of the proceeds of sale to each of the 45 proprietors. Those proprietors will not be happy.

The liability

Let us assume once again that 45 houses have been sold off and the developer has decided on the location of the remaining five. This time what happens is that the developer starts building the foundations for the first two of the remaining five houses, but discovers extremely bad ground contamination on the precise site where he was intending to build these foundations. The developer rapidly changes his plans. The two houses are relocated and the contaminated area becomes part of the common property. Pressed by enquiries from the co-proprietors, the developer gives full details of the contamination to them; after all, they will now be responsible for it as part of their common property. Won’t they? And will they be happy about this?

My point is to try to illustrate that this is not a purely academic issue. It is easy to imagine real cases in the real world which will turn into real disputes and which will end up in the real courts very soon. Really!

So what is the law?

It seems to be generally undisputed law that an area of land which is incapable of being determined by reference to the grant, as at the date of the grant, is an uncertainty and cannot be the subject of a successful conveyance. This general rule applies equally to pro indiviso shares in property. Notwithstanding that the actual area of property conveyed might be later ascertained by reference to extrinsic evidence, in the scenario painted above, until the development is completed and fully sold, the common parts cannot be definitely ascertained (the developer always has the notional option to alter the common parts), and are therefore uncertain. What then is the effect on each of the dispositions granted by the developer?

As a matter of practice, the Keeper has been accepting applications and registering interests in land in the above kinds of scenario. That is not to criticise the Keeper, who has been doing no more than trying to make the system work. Section 4(2)(a) of the Land Registration (Scotland) Act 1979 states, however, that the Keeper should not accept an application if it relates to land which is not sufficiently described to enable him to identify it by reference to the Ordnance map.

I believe that the time for assessing any want of sufficiency is the date of the relevant application, and that identification of the land on the OS map by reference to the development under a “verbal” exception may be insufficient to meet this statutory requirement. The reality in most housing estate developments is that the various applications for first registration will not be completed for some time, often a term of years, as the Keeper waits for Ordinance Survey to update mapping for the development. By the time the Keeper completes the registration process, the development may be “complete” (however that phrase may be interpreted), but this is not always the case. In the drive for greater efficiency and improved turnaround times, land certificates may be issued long before developments are complete (particularly in large developments). And even if the development is complete, registration may not cure the void conveyancing. At best the register may be inaccurate (for the purposes of rectification), assuming a real right has been created on registration (either the initial registration or a subsequent registration of a transfer), and at worst the register may contain void wording in respect of common parts (I say at worst because it is in no-one’s interest that the register contains void wording).

It appears to me that only after the sale of the last house will the common parts be ascertainable. Even then, that will only be the case where the common parts are defined by reference to what is left when the houses have been completed. If there is a specific power retained by the developer to alter the common parts, when does that power end?

Even leaving that question to one side, it appears to me arguable that even the “last proprietor” cannot claim a share of the common property. If it is correct that conveyancing of an uncertainty is invalid, then it appears to me that in the vast majority of cases I have seen, exactly what is being conveyed remains an uncertainty even at the time when the last conveyance is granted to the last co-proprietor.

If that is right (and let’s assume for argument’s sake that it is), what has happened to the common property? Logically, ownership of all of the shares in the common property must still rest with the developer. As a consequence the developer remains an owner subject to the deed of conditions, and notionally at least is also liable to pay all of the costs relating to the common parts!

The repetition by the Keeper in the title sheet of the disposition wording in respect of the common parts may not, regrettably, make the application wording any less void, and it is only by the grace of good fortune that nobody has yet had to take issue with any such void conveyancing.

If the wording in the title sheet is void, the question then arises as to whether it is covered by the Keeper’s indemnity. As I understand it, the Keeper does not believe that it is, on the basis that if the wording is void then removal of the wording does not amount to rectification and does not result in any loss (if there was no right in the first place, then nothing is lost by removal or rectification).

What should we do?

It appears to me, however, that it is only a matter of time before someone makes an issue of this. We should accordingly look at what we can do in respect of future developments. For existing developments the horse has bolted. The situation is as it is and we can only hope that controversy does not arise. As regards new developments, is there something we can do to stop the problem from arising?

The difficulty appears to be a clash between legal certainty and commercial expediency. The obvious solution is for the developer to fix the common parts at the time of registering the deed of conditions, to exclude the reserved right to alter the common parts, and never to deviate from the common parts as established by the deed of conditions. Not many, if any, residential developers will be prepared to live with this. Within the limits allowed by its planning permission, a developer will want to have the ability to make layout changes to its development.

If conveyance of an uncertainty is ipso facto invalid, then any system which allows variation of the common parts after the grant of the first disposition simply does not work. In some ways I hope that I am wrong, but I have a horrible feeling that I am right and that there may be trouble ahead.

Professor Kenneth Ross is a partner in Brodies Solicitors