Impersonal Transactions and Registries of Property Rights

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January 1, 2015 /

Fernando P. Méndez González.

Director of International Relations. Colegio de Registradores de la Propiedad y Mercantiles de España (Public Corporation of Property Rights and Business Registrars of Spain). 

Introduction

In the first place I would like to thank the Organisation for giving me the opportunity to address this General Assembly of the European Land Registry Association.

Secondly, I’d like to express my deep satisfaction for attending an ELRA Meeting, after all these years.

Like some of you may know, especially those who have been a part of ELRA since the beginning, almost ten years ago, I was then one of the most convinced advocates of the necessity of establishing a European Association of Registrars, which ten years later is an outstanding reality.

As it’s stated in the documents that have been handed over to you, the title chosen for this lecture is “Impersonal Transactions and Registries of Property Rights”.

With this title I want to stress the close interdependence between both concepts.

I’m sure this will help us all to better understand the specific purpose of Property Rights Registries -or if you will and for the sake of using a more common term: Land Registries)- in resolving some of the characteristic issues linked to Impersonal Transactions- which on one hand can contribute in the daunting task of achieving an adequate functional and organisational design of the Registries as an Institution, and on the other hand, can help to properly distinguish it from other Institutions, such as Public Cadastres.

It is my opinion that this task should be carried out without further delay.

An adequate resolution of this matter will contribute, among other benefits, to increase the quality of Legislation in force in different Member States, as well as European Regulations and Directives, in such important areas for the proper functioning of Financial and Real Estate Markets.

In a more precise aspect, this task could also help an Organisation like ours: the European Land Registry Association, to properly and more effectively define its policies, for instance, in relation to what projects should be undertaken, or with regards to the policies to be adopted in our relation with other Organisations also focused in Territorial (Land) Information or in the Graphic depiction of the territory, which, no doubt, are responsible for a valuable and useful work .

These same Organisations, however, occasionally seem to be trying to absorb the functions of the Property Rights Registries, and sometimes it even appears as if they were trying to pass their products/services as a compulsory requisite in the registration procedures.

Well, in my opinion, these issues cannot be properly addressed unless a previous consensus on certain fundamental concepts relating to the functions of each of these Institutions is achieved.

Provided the limited time available for this presentation, I will just point out but a few of these issues.

For this purpose, I find it necessary to make a brief theoretical excursus about the function of the Registries of Immovable (Real Estate) Property, which becomes meaningful in an environment of Impersonal Transactions, as found in Modern Market Economies after the fall of the Old Regime.

On the contrary, in a sphere of personal transactions, characteristic of primitive societies, with individuals grouped in small communities where land is used for hunting and subsistence agriculture, modern registries probably would have no purpose to serve.

Personal Transactions and Perfect Information.

Ideally, in the simplest scenario of personal transactions, perfect information exists.

Accordingly, there is no need for any institutions to correct or compensate for informative asymmetries, as these are nonexistent, and as consequence there are no associated «transaction costs».

Resorting to an oversimplification we could state that this situation is that of a perfectly competitive market, as defined by Walras. Usually found in small communities where real estate (land) is not frequently exchanged or offered as collateral, but used to produce the necessary inputs for the subsistence of its proprietors. Land usually stays in the same hands for generations and all members of the community know each other. In the infrequent occasions when Land changes hands, such exchange is subject to solemn rites aimed at letting know all community members that a new proprietor for that land exists. Stricto sensu, this would be the only transactional cost.

In this ideal context none of the typical uncertainties of impersonal transactions apply, as it is usual in Market Economies. Among such uncertainties I will focus on three: a) who is the owner, b) whether privileged liens/burdens exist and c) whether the property is correctly described.

Impersonal Transactions. Uncertainties. Institutions.

Modern Market Economy, largely responsible for the spectacular betterment of the life standards of humanity in the last two centuries is, at its core, an economy of impersonal transactions.

Unlike what happens with its personal counterparts, impersonal transactions are characterised by a high density or, if you will, a high frequency of transactions, to the point of establishing a network of linked interdependent dealings. In this world, according to the roman system of titulus, it can be stated that whoever negotiates with someone the acquisition of a certain good, or more precisely a real right on certain good, it’s not only dealing with the transferor but whit all the indiviuals that, before him, acquired and transferred the property of that good, as those previous dealings may affect the present acquisition via a real action, conceived as a protective instrument of the owner’s ius disponendi.

This intercontractual link implies, as a consequence of the roman system of titulus, an inter tertios interdependence, that is: amongst individuals who dealt with the same good, but not among themselves, but with other individuals in the successive contracts regarding the same good, not knowing each other.

In this scheme all the risks befall on the buyer side. Indeed, on one hand he cannot know for sure who the owner is, and the owner has at his disposal the reivindicatory action, and actio in rem.

On the other hand, the buyer cannot know what vicissitudes may affect the preceding contracts on the same good which may be protected by an actio in rem which, as a consequence, may cause the loss of the acquired right.

Under these circumstances, whoever acquires a good- be it movable, immovable or a credit- is actually acquiring a «surprise box» as Ascarelli pointed out in relation with the Civil regime governing the Cession of Credits. The roman doctrine of titulus constitutes, from this perspective, a formidable obstacle for the development of Commerce and Credit.

Merchants in the middle ages solved this inconveniences by means of the so called «Lex Mercatoria», although limited to the circulation of credit and goods, establishing a causal disconnection inter tertios, under certain circumstances. So, the Lex Mercatoria (Merchant Law) defined (1) a marked separation between the legal regimes applicable to movable and immovable properties, (2) the acknowledgment to the bona fide buyer of movable goods, of a superior set of rights to those attributed to the verus dominus. This way the person acquiring a right by onerous title and in good faith, was disconnected and, accordingly, immune to the cusal vicissitudes potentially affecting the prior contracts regarding the same good, which in application of the roman system of titulus could affect him.

In any case, for this Rule to fully operate it was necessary that the good had been acquired from a Merchant.

This, along with the introduction of the bill of exchange, which somehow brought the civil regime of the credit cession to the circulation of commodities, strongly contributed to the bloom of Commerce and Fairs across the European Continent.

As we see, all these measures were based upon the attribution of a special legitimizing efficacy to possession, something that when dealing with movable property can be done without, de facto, increasing the risks of the owner considering the special nature of such goods.

When the Old Regime ends in most Western European countries in the course of the XIX century, a process of Land Liberalisation starts with the establishment of real estate and mortgage markets, the roman system of justus titulus becomes the biggest hindrance to these efforts, as once the land was freed from its feudal shackles, this system places all the risks on the buyer’s side and the mortgagee side, preventing the development of such markets.

Risks are the same as those pointed out in the field of movable property, and on top of those we need to add those caused by the special characteristics of real estate. Indeed, real estate allows the simultaneous concurrence of several iura in rem, which may not only not imply possession but even exclude it, which means that possession is not a trustworthy sign of ownership and, as a consequence, it cannot have the same legitimizing effect when dealing with real estate, than in the sphere of movable property.

To solve these issues, several European States adopted different strategies which, in essence, boil down to two: Registries of Documents and Registries or Rights, both to a bigger or lesser extent. Due to time constraints for this presentation I will focus on the latter.

As it is well known, its defining feature is what its called: Registry Legal Authority, which – I’d like to stress sufficiently- implies in any case a transactional disconnection inter tertios: so, for the market the registered owner is the true owner and no other liens and burdens, other than those registered, exist. Exception made of certain strictly limited legal privileges.

It can be stated, following the above, that in a Registry of Rights, whoever acquires a right, by onerous title and with good faith, from the registered owner protected by the legal authority of the Registry, enjoys the same level of indefeasibility regarding his acquired right, than that of the buyer of chattel by onerous title and in good faith from a merchant, or the person who acquires by endorsement a credit attached to a Bill of Exchange, as long as such acquisition is made in good faith.

With all this i want to stress that, of the three main uncertainties that affect impersonal transactions, which I mentioned earlier – who is the owner, whether preferred liens to the potential acquirer exist, and whether the description of the property is exact- economic agents have traditionally been interested, and for good reason, specially in the first two, and not so much in the third.

That is why, all the legal engineering that has been developed in the course of history has aimed at replying those two first questions, not the third. This requires a brief explanation.

In the real estate field, the only of interest for the sake of this analysis, the first two questions are not answered by means of the possession, unlike with the third: when, regardless of who is the owner, the neighbouring proprietors agree with the abuttal, such consensus serves as delimitation for the property. In other words, the identification of a property, as an object for the legal traffic, does not require anything different from the consensus of the neighbouring owners regarding the abutting of the respective properties, and that is made evident by the peaceful and undisputed possession of the land in relation with the neighbouring plots of land.

Who has shown a bigger deal of interest in the geometrical depiction of the plots of land – depiction which not always matches the concept of registered property- has been the Public Administration, and essentially for the exaction of taxes. That is, as it is widely known, the origin of cadastres in the roman world.

This fact allows me to make an observation which, in my opinion, can be useful to properly put on focus some of the issues we need to address today: the registry is, essentially, an institution of the State for the sake of the Market, in particular so in an impersonal environment, real estate transactions can be agile and secure, two requisites essential for the establishment of a mortgage market.

The Cadastre, on the contrary, is born as an Institution of the State for the State, in particular to enable territorial taxation, of utmost importance prior to the Industrial Revolution, and the development of modern fiscal systems.

In today’s world, things have gotten even more complex. The State still keeps its essence: being an institutional arrangement that attributes, acknowledges and protects property rights, in exchange for taxes. But, public law has strongly permeated the property rights over real estate, especially for urban planning and environmental reasons. On the other hand, taxes over the property of land have lost its historical importance: today those are not the biggest source of tax income for the State, on the contrary, resulting in the relative importance of the cadastre, from a fiscal point of view. Ultimately, in recent times physical technologies for faithfully reproducing and depicting the Earth’s surface, have been developed with ever decreasing explicit and implicit costs. All this has opened new necessities and organisational possibilities.

Musings about matters of interest ( Graphical databases, Urban and Environmental constraints)

For the sake of brevity, I will briefly cover only two of them:

1.- If, provided the current technical development, it would be justified to make the use of Graphical Databases compulsory in the Registration Procedures. From a theoretical perspective, the answer is simple: Yes, if that brings desired utilities to the market at a cost the market is willing to pay. In actuality, however, things are more complicated, due to the existence of Special Groups of Interest, where one should include those of the State itself, or some of its Institutions, with demands which may prevail over those of the market, hindering the development of the latter and, as history can attest to, proving to be a hurdle for the development of real estate and mortgage markets. On the other hand, mapping is also costly and slow, so that, above a certain frequency of transactions, even in developed economies, it becomes impossible to keep the physical representation of the land universally updated at the speed required for today’s economic activity.

That is why; perhaps this feature should be reserved for the first entry of a property at the Registry, and depending on the nature of the property, or those physical alterations which also imply modification of rights.

In close relation with this, it is the question of whether the only admissible graphic depictions of land to be used by the registry, are those of the cadastre or, on the contrary, the legislator must stick to only establishing certain standards, so the registry will admit any graphic depiction of the territory which complies with such standards and has been carried out by entities, legal bodies or professionals who meet the legally established requisites. At this point I do not find any reason, for the time being, to justify a monopoly in this field. Besides, in some countries the high quality of the cadastre’s graphic information does not contribute to improving the identification of the properties.

Finally, in relation with this matter we need to bear in mind that in certain international institutional scoreboards, like the World’s Bank Doing Business Report, this kind of requisites, in countries where they exist, are computed as procedures, which negatively affect the relative position of the registries in the scoreboard. From a theoretical point of view, that has a relative importance, due to the methodological flaws of the Doing Business report, which only computes the costs but not the benefits, in case they exist, of the considered procedures.

2.- A second question is whether, considering the high level of technological development achieved at the registry offices, as well as the high number of constraints applicable to real estate, specially due to urban planning and environmental reasons, the Registry should have among its functions that of disclosing information about such constraints and how they apply to a particular property.

This is a more complex matter, as the previous one, which belongs to an even bigger matter, such as abutting the perimeter of the Functions of the Registry as clearly and neatly as possible. Maybe it would be useful to devote a monographic ELRA session to this important and complex matter.

In my opinion, in a first approach, we need to bear in mind that a Registry of Rights allows to know information that the Registry produces itself: Who is the owner, what are the preferred liens, what vicissitudes of previous contracts on the same real estate may affect an acquirer and what not. It is indeed a complex function, especially in systems of causal transmission without formal systems of numerus clausus, which allow for a bigger adaptability of the system and a smaller taxonomy of Iura in rem.

Urban Planning and environmental constraints have a legal origin, or are caused by other institutions and not by the registry. That is why it is advisable that the registry limits its intervention to providing a link to such institutions,  so the users can access that information, without the registry being responsible of such data.

However, from another perspective, the Registry of Rights, is a very powerful tool as a means of enforcing Urban Planning and Environmental legislation, among other regulations – also in the field of taxation- as on top of the functions described earlier in this document, the legislator can use the registrar as a gatekeeper, that is like a controller of the fulfilment of the public laws governing private transactions, which, besides, bears no additional costs in the administration of such laws.

I think these examples, as well as many others, provide clear evidence of the existence of complex issues, open to debate, on which our Association may not have yet built the necessary consensus, as to define its policy regarding projects, in course and prospective, as well as its position in relation with other Institutions of the so called “Land Administration”.

Thank you very much for your kind attention.