Property Rights, boundaries and legal transactions: musings on the Land Registry and some of the challenges it faces

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January 1, 2015 /

XIX General Assembly of the European Land Registry Asociation –ELRA-.  Barcelona, Spain, may 16th 2014.

I. Framing the Issue

First and foremost, I would like to express my gratitude to the Organisation of this nineteenth General Assembly for giving me the opportunity to address this Audience with a presentation with a title that, in other circumstances, could be surprising, but not in the present state of things.

Indeed, it would be expected to address the topics of property rights and legal transactions, although not so much to include the issue of Boundaries. Just by making that explicit reference to this matter the focus is placed on it, in particular if we consider the challenges the Land Registry is currently facing.

It is necessary to admit, however, that there is -or may there be- a relation between the issue of the determination of boundaries and location of registered property and the future evolution of Registry related organisations.

Leaving aside, for the time being, the different interests at stake, the reasons for the above are, among other, the following:

First, the expansion on the field of “cartography” thanks to the emergence of geolocation new technologies, which enabled increasingly powerful GIS tools at more affordable prices. This has often been utilised by Cadastres and all kinds of Cartography related Associations to try to take on functions reserved to Land Registries, be it by (1) making cartography compulsory in every instance – or, particularly that of the Cadastre-as part of the registration procedure, as a necessary and indispensable tool for identifying properties; (2) by directly assuming some functions of the Land Registry –e.g.: the demand for the iuris tantum presumption in relation to the description of properties to only operate if such properties are graphically described and, in its most cadastre-oriented version, only if they have been graphically described by the Cadastre’s cartography- and (3) by trying to take over the Land Registry in a sort of Merger by Absortion, becoming a single institution.

Second, Land Registry have traditionally lacked- and still do in many instances, a Graphical database serving as a tool to identify the location and boundaries of registered properties, which has been portrayed as a serious weakness of Registration Systems.
This fact has indeed been presented as a practically invalidating feature of Registration systems lacking graphical databases, considering that it causes legal uncertainty and- therefore, it is a source for litigation- incompatible with the demands of an efficient market. Cartographic Technology – especially that brought in by the Cadastre- would present itself as a “saviour” to compensate the Registry’s shortcomings in this field.

Third, the classical function of the Cadastre – related with the collection of taxes on land tenure- has been progressively reduced, not because territorial taxes do not generate income for the State, but because new taxes have been introduced: e.g.: tax on personal income, on company profits, on added value, etc- with a much higher weight in the overall fiscal revenue of the State, leaving territorial taxation, and therefore the cadastre, in a second level of importance.

This has forced the Cadastre to find new functions, which is in the origin of the so-called multifunctional cadastre and, ultimately, in the desire to absorb some of the characteristic functions of the Land Registry. Consistent with this Strategy, the opportunities created by the advance in GIS Technology are focused in the direction already pointed out, and the alleged graphical weakness of the Land Registry are exaggerated, as we will see.

Fourth, and last, we should not forget that the State, especially the Modern State, is an Institutional Arrangement that defines and attributes Property Rights in exchange for taxes. The State is the only capable of clearing the market of legal certainty issues, and does it only in exchange for taxes.

This points out at a “trade off” that, when properly resolved, is key to facilitate (hinder or even prevent) the development of the market – in this case the real estate and mortgage markets- . One of the keys to increase fiscal revenue for the State is to generate an “efficient legal framework” that allows the efficient development of real estate and mortgage markets, which require strong and easily transmittable property rights.

But the “fiscal urges” of the State can lead to situations where organisational paradigms that focus on short term fiscal return prevail at the expense of the development of the markets and, ultimately, the collection of taxes.

Several examples of this situation exist throughout European History. Every governing politician will always feel tempted by this approach, and the current advance of GIS technology, along with the intense lobbying of Cadastres and Surveyors, and the insufficient understanding of the functions of the Land Registry and the complex legal engineering required for the efficient operation of such functions, may lead the politicians to adopt organisational approaches where – either consciously or unadvertedly- the fiscal aspect prevails, even at the expense of the market’s efficiency and, ultimately, of the general advance of the Economy.

II. Aim of this presentation

Each of these questions are complex enough on their own and would require a separate analysis. However, considering the limited time allocated for this presentation I will focus on the assessment of the determination of boundaries in real estate related legal transactions and the effective contribution new technologies can make to properly solving a set of implied issues.

I will now try to cover both matters in certain detail. That will require laying down a set of basic concepts that should be kept in sight at all times, in order to prevent secondary matters from devouring a painstakingly built Institutional Engineering, such as that of the Land Registry.

III.  Reference to some basic concepts

All humans are bound to share the earth’s surface. While the size of that surface remains relatively stable, the number of humans it hosts grows incessantly.

As a consequence, the earth’s surface becomes an increasingly scarce commodity and our survival as a species –as well as individuals- demands that we take advantage of that scarce resource in an increasingly efficient manner.

Economic Analysis proves that the most efficient way to exploit scarce resources is private property, but, also, that the establishment of such property is not always possible as its implementation has a series of associated costs that not always can be afforded. In those cases, the alternatives are communal property and, in the last scenario, free access, the most inefficient way of resource exploitation.

The concept of private property is linked to the idea of Exclusion, that is, with the ability to exclude others from taking advantage of valuable and scarce resources.

All forms of private property have, therefore, a generic associated cost, such as it is the necessity for a State. Taking, of course, this generic cost for granted, each resource has specific associated costs, which may eventually prevent the existence of private property.

When dealing with private property of the land, we face specific problems, with specific costs to solve them, different –and bigger- that those of, for instance, present when dealing with movable property.

In societies like ours, where transactions are impersonal and the ordinary form of access to property is derivative, we find that the main obstacles for the private property over real estate are the following:

  1. Knowing whether the person appearing to be the owner really is who he claims. It so happens that, in the real estate sphere, possession, even undisputed, it’s not a reliable signal to identify the proprietor, and therefore possession cannot produce the same legitimizing effect as in the sphere of movable property.The reasons for this are clear: not all iura in rem imply possession, many do not imply it and, in addition, iura in rem implying or not possession may coexist at once over a real estate asset; conversely, possession may not be representative of any ius in rem at all.All this, is especially real in societies with high transactional frequency in the real estate market and, especially, when that high frequency of transactions happens among unknown parties.
  2. Knowing whether the apparent owner has the power of disposition.
    As it happens with the previous uncertainty, appearance dos not usually reveal the lack of such power, situation that may lead to losing the right you thought you had just acquired.
  3. Knowing whether there are circumstances affecting previous contracts related to the same property, that may lead to the loss of the supposedly acquired right. This uncertainty happens not just in Causal transmissive systems but also in the so-called abstract transmissive systems, regardless of appearances.
  4. Knowing whether there are burdens charging the property, set by previous owners, which may be preferred to the acquired right and even imply, in case of execution, the loss of that right.
  5. Considering the growing penetration of Public Law in the sphere of Private Law, and in particular regarding property rights, in case a person is interested in purchasing a plot of land, the buyer needs to find out what uses are allowed by urban planning and environmental legislation and, given the statutory nature of urban property in some jurisdictions, the obligations associated to the acquisition of such property.
  6. Knowing, whether the physical portion of land the buyer is interested in acquiring, as described by the seller, corresponds to the physical boundaries of the property right the owner is about to transfer.

In absence of specific institutions to address these issues, the costs of acquiring, and protecting, real estate, could be so high that ownership of the land would only be affordable for the most powerful.

In addition, certain types of land could not be privately owned, as we will discuss.

The more physical, legal and institutional technologies allow to decrease such costs, the more the exploitation of resources under a private property scheme will expand, with all the aforementioned consequences.

The first uncertainty, has been historically resolved by establishing Registries of Rights, implying a direct intervention of the State in the transmissive system.

It is the only institution which allows to know ex ante, that is, leaving usucapio aside, who is the holder of a ius in rem, and the buyer to become also the holder of a ius in rem.
In absence of a Registry of Rights only obligational rights are possible.

The next three issues, previously listed, are also resolved by the Registry of Rights, but not by the Registry of Documents. In order to address the first four obstacles it is therefore necessary to set up the appropriate legal and institutional technology.

As for the fifth issue, Town Halls and other public institutions usually rely on specific information systems. For that purpose it is mandatory to rely on cartographic and geolocation techniques.

IV. The necessary delimitation of boundaries

IV. 1. The need for the delimitation of boundaries: an exclusive cost of real estate property

Now we face the sixth issue that needs to be dealt with, the delimitation of boundaries, a characteristic feature of real estate property.

We do not have this concern in relation to movable goods: their own shape defines them. Strictly speaking, is should not be a concern either with immovable property as the only immovable is planet earth. The so-called immovable properties are nothing but pieces of the earth’s crust –including all man-made constructions- with its use allocated exclusively to one person or several people “pro indiviso” , and all those pieces of land are contiguous to one another, so a delimitation of boundaries is necessary. That delimitation bears some costs, which vary according to the nature and use of the land and the technology available. If those costs are very high, they may prevent the exploitation of the land under a private property scheme.

When dealing with natural resources, boundaries not only should be established, but also guarded in order to prevent unauthorized third parties from taking advantage from them.

Private property on land generates some characteristic costs related to the existence of boundaries among the surrounding plots of land.

The Efficiency Thesis predicts that the technological innovations to signal, guard and document the boundaries of the different parcels of land will produce a higher level of parcellation as such innovations reduce the costs related to private property. In absence of that innovations it is usually cheaper to employ handwork and materials to close an open range that dividing it into several private parcels.

So appears to be case in the real world. The invention of the barbed-wire in 1874 by Mr. Glidden, drove the subdivision of land into parcels in the US West.

In Shasta County, California, innovations in the building of fences and irrigation impacted the cost-benefit balance of closing pasture land and served as an stimulus for parcellation.
This is not, however, the most relevant aspect in this presentation regarding the concept of boundaries, but that related to the establishment and documentation of those, a fundamental issue in any real estate transaction.

IV. 2. Delimitation of boundaries as part of the Delimitation of Rights

The ideas covered so far serve as evidence that establishing the boundaries of a property, is part of the delimitation of the right one buyer wishes to acquire, and, therefore, the concept of boundary is a legal concept.

While the resolution of the problems I mentioned earlier – who is the owner, whether he has the power of disposition, whether there are causes for resolving the transaction due to previous contracts regarding the same property, what preferred liens and burdens have been established on the property by the previous owners, etc- required the development of a complex legal infrastructure, slowly built in the course of centuries, however the matter of the delimitation of boundaries has not required the development of that complex legal technology.

Indeed, in every derivative acquisition, a pre-existent property is acquired; this property has already defined boundaries. Existing boundaries are the result of an initial consensus among the original owners and, in its case, among the successive owners of all neighbouring properties, as private property is just a consensus about the attribution and use of things, in this case, contiguous parcels of the earth’s crust.

Such consensus is usually signalled on the ground by means of physical signs, agreed by the neighbouring proprietors, precisely to make visible the limits of the different properties. These signals are referred to as landmarks

The buyer needs, in the first place, that the seller describes the boundaries with the biggest possible accuracy and, in the second place, he needs to make sure that such boundaries correspond to the seller’s right.

When a property is transmitted it is necessary to describe its boundaries as clearly as possible. The traditional method for this has been the ancient system known in England as “Metes and Bounds”, an approach followed by most countries. It is a descriptive literary method, usually carried out without resorting to plans, maps or graphical descriptions.

To enjoy a reasonable certainty that the described boundaries correspond to the right one person wishes to acquire, the buyer can use several procedures. One of them is resorting to the evidence of public and undisputed possession. Indeed, eve if possession itself is not a reliable sign of ownership, for the previously explained and well known reasons, peaceful and undisputed possession is a reliable sign when it comes to boundaries.

Neighbouring proprietors may not know whether their neighbour is the “verus dominus” but if they accept the boundaries of the property he, or she, is in possession of, that should provide the potential buyer enough assurance that the boundaries are those that define his right.

For this reason, the answer to this uncertainty has not, historically, required any elaborate and complex legal technology. Disputes between neighbouring proprietors are resolved by a Demarcation Lawsuit -the actio finium regundorum of Roman Law-, if as a result it was declared that the acquired property was of a lesser value, the actio cuanti minoris was available and, in any event, responsibility by eviction was always at hand.
All these reasons support the fact that most modern registration systems use in their procedures the common descriptive methods found in transactions, in order to identify the different parcels of land where iura in rem rely.

V. Cartographic techniques as a method for describing boundaries

Over the last years the technologies of cartography, imagery and geolocation have experienced a great leap forward. It may suffice to browse the planet using Google Earth to realise to what extent this is true.

We are now able to virtually visit whole cities in 3d, rendered with an extraordinary level of detail.

Companies involved in cartographic projects, most of them large multinationals, have released immensely powerful toots at ever decreasing prices, as the technologies used are now standard and widely adopted worldwide, adding to the appeal of their products.
This has produced a new industry, focused on producing geospatial data, aiming at covering every field and aspect related to the territory by using imagery, cartography and geolocation.

In this context, there are some reforms that aim at introducing this techniques as a compulsory way to describe the pieces of the earth’s crust where real estate iura in rem rely, overlooking the old literary technique of “metes and bounds”.
The matter to be assessed now is whether such compulsion is justified, or not.
Yesterday we had the opportunity to listen to Prof. Arruñada’s cost/benefit assessment on the use of these techniques, during the meeting held to discuss project CROBECO–Cross Border Electronic Conveyancing-, an assessment I pretty much subscribe in its fundamental points.

From that Analysis it can be inferred that in EU countries, with usually documented real estate property, including the delimitation of boundaries, it would not be justified to impose those techniques as mandatory, as in principle, no externalities would be present but maybe in the events of first registration and modification of registered properties- and even in those cases such externalities would be very dubious.

For this reason, it should be up to the citizens –not the legislator- to decide what techniques of identification they should use, unless and in its case, in the two events mentioned earlier.

The hypothesis of rational behaviour implies that citizens will only resort to the new identification techniques if they produce a higher added value than the explicit and implicit costs they bear.

Explicit costs are not negligible. According to the 2007 ZERP report from the Bremen University, that costs would range from 38,08% in England, to 50,78% in the Netherlands. In Spain, in a case study involving six online checks, Arruñada describes an extra cost per transaction of 455 Euros, as he presented yesterday.

Implicit costs, measured in terms of delay of the whole registration procedures, are not to be dismissed either, and would be hardly lower to the explicit costs.

In exchange for these costs, interested parties should expect a benefit in terms of lower litigation based on disputes regarding boundaries. In this regard, it has to be pointed out that, in principle, that will depend greatly on the type of real estate asset. Usually, apartment blocks, do not suffer from boundary related disputes, as well as semi-detached or single family homes.

This can arise, more likely, in the case of Rural Properties with lower comparative value, where due to their physical features it may be difficult to signal the boundaries , or where the previous owners have neglected this matter.

Despite all the insistence about the serious problem of legal certainty that, allegedly, causes the lack of cartographic and geolocation procedures in the Land Registry offices, however it may be observed how low the level of boundary related litigation is.

What’s more, it is not clear that the utilization of such techniques would produce a reduction in the litigation level, but, most likely in the short term, a rise in litigations, due to the hypothetical increase of accuracy in the description of the boundaries, at least in the case of rural property, as we already explained.

In addition, it may be observed from the reports drafted by W. Wyman for the European Mortgage Federation, that those countries that scored the highest are: UK, the Netherlands, Germany and Spain, which follow in this particular field very different policies.

Of these four countries, the one with better overall results is Spain, which debunks the statement that the non-utilization of graphical databases in the registration process causes legal uncertainty, as Spain does not use such databases except for the first registration. In a recent draft law it appears that this requirement will be extended to subsequent physical modification of registered properties.

The mandatory use of these techniques in all real estate transactions would also cause a transitional problem that should be addressed. Indeed, if an already registered property, with a literary description, should incorporate a graphical description in successive transactions for them to be registered, such description should be agreed upon by the neighbouring proprietors through some new procedure, and that alone would imply highly variable, but potentially high, added costs which may lead to conflicts, without a clear benefit in sight.

VI. The demand that the Cadastre should be the supplier of graphical data to the Land Registry

This demand of compulsory graphical description of the properties in the Registration procedure, is usually accompanied by the additional demand that such representation should be supplied by the Cadastre. In other words, provided the mandatory use of cartographic and geolocation techniques in the description, and most exactly, in the identification of the properties, it would be the Cadastre’s function to supply such graphical identification, while the Land Registry should in this matter stick to such data, banning any other graphical description form the Land Registry. That graphical description, alone, would enjoy the iuris tantum presumption of accuracy.

In my opinion, this demand is not justified. I will now try to illustrate the reasons that back up this position.

It appears as if there is some sort of mental automatism, where every time someone pops the words “graphical description of land” such concept is automatically associated to the Cadastre. The reason can be found in the fact that, unlike many registration systems, cadastres have resorted from very early times to graphical representations of the territory, and, besides, have aimed at covering with their self-produced cartography, all the territory of the Country.

The reason is clear: The identifying function of the Cadastre is linked to Territorial Taxation. For that purpose the cadastre needed an inventory of the so-called territorial wealth of the country. The best way to identify it, preventing occultation, was the elaboration of plans, and when possible, maps of the whole country.

Once the territorial wealth was inventoried, in order to collect taxes on it, it was necessary to find out who the owners were, and what the portions of land where their rights relied were.

To resolve these problems the Land Registry was of no use, as historically proprietors have opted to own their lands “privately” without registering their properties unless highly beneficial or inevitable. Throughout history, the main reason to not register a property has always been a fiscal one.

In Spain, to address these issues, the Cadastres performed a campaign on the ground, house by house, municipality by municipality, taking as owners those who being in possession of the land presented themselves as such or, in case of absence, those their neighbours signalled to. As for the boundaries, they took as valid those stated by the person in possession of the land, or even by the neighbours without proving they were owners themselves.

For this reason, neither the delimitation of boundaries nor the identification of the owners offered the least reliability and did not produce any effect other than in the fiscal field.

Land Registries, conversely, do not have a fiscal function. Their function is to resolve or, at least, mitigate the legal certainty issues of the market, and the use of the registry by the citizens is usually voluntary. They will only use the Registry if they wish they documents to enjoy formal priority and opposability, in countries with Document Registries, or if they want to be owners “in rem” in countries with Registries of Rights, instead of merely obligational owners.

A different question is that governments usually take advantage of the citizens’ need for legal certainty to obtain fiscal revenue and, as a consequence, use the Land Registry also for that purpose, something that could denaturalize its true function, as it already warned the Spanish Mortgage Law of 1861.

Due to this different function, a significant number of registration systems have not required, nor do they require today, a graphical representation of properties. They are registered with a literary description, as provided by the interested parties, based on the metes and bounds or similar methods.

There are two reasons to support this:

  1. The description supplied by the interested parties is quite likely very close to reality, in their own interest, especially considering the interest of the buyer, something that is empirically confirmed by the very limited litigation in relation to the overall number of transactions, any professional of the Registry can attest to.
  2.  Cartography and georeferencing technologies were not, until very recently, an affordable option for citizens.

All this has caused cadastral and Land Registry descriptions to not match in many instances, something that has been further accentuated as time passed, considering the great increase in legal transactions that the Cadastre has not been able to keep up with.

Since the dawn of modern registration systems in Europe, around the XIXth Century, to present day, things have changed considerably. Indeed, real estate property is registered, which means that very few buyers act outside the Registry. In addition, the coordination mechanisms between Cadastres and Registries operate, establishing an agile communication of changes in ownership so the Cadastre can fulfil its fiscal function.

In relation to the properties, however, the Cadastre has not evolved at the same rate. Real Estate legal transactions have considerably increased. Real Estate and Mortgage Markets have experienced spectacular growth. We find not only purchases or inheritance of real estate, but many transactions implying division, seggregation, aggregation, grouping, new constructions, etc. Ultimately, substantial alterations on the registered properties. In many ocasions, the Cadastres have not been, neither they are now, capable of keeping up with the market’s pace, something the Land Registry on the other hand is obliged to.

This causes that, while the Registry includes current descriptions of the properties, cadastres, at best, include outdated descriptions. Regardless of the amounts of money used to map the nation’s territory, as such mapping requires constant updates.

To address this problem – one that exclusively affects the Cadastre and its fiscal function- several approaches can be taken:

1. Force the interested parties to use in their transactions the graphical description from the cadastre, which may or may not match the legal reality, which is to all purposes: the reality. If there is no match, the cadastral description should be updated and until this operation is not performed, the Registry cannot carry out its work.

This approach has the drawback that it hinders, delays and makes real estate transactions more expensive for strictly fiscal reasons. So, if we pay attention to different Doing Business reports, we can observe that the biggest number of procedural steps in the registration process are linked to the involvement of the Cadastre.

There’s an even bigger drawback. As we have already discussed, boundaries are a legal concept, as its establishmente belongs to the delimitation of the contents of the right. And this is a function that strictly corresponds to the Registry.

Indeed, when the Registrar assesses the description of the property provided by the interested parties in each new transaction, he checks whether any variation exists in relation to the description already registered, in particular if there are any changes in boundaries or area, as it may affect the rights of third parties, especially neighbouring properties, and will only accept the description included in the contractual document, after makin sure that the description contained therein does not harm the rights of neighbouring proprietors or, in case of including modifications – e.g: new constrction- which are subjet to supplementary legal requirements, such requisites have been met. All these functions are alien to the Cadastre.

2. The same previous approach, but not subjecting the Registry Procedures to the effective adaptation of the Cadastre.

It has the same drawbacks as before, although the delay will be less.

3. The interested parties will describe the properties with enough accuracy, either by means of graphical or geolocation techniques, by means of literary description, or both. The Land Registry, once performed de required operations, will submit the new description of the property, graphical or literary, to the Cadastre, without imposing any related obligation to the parties.

This approach implies a lesser interference in legal traffic for fiscal reasons, a lesser cost in time and money than the previous ones, and it allows the same fiscal efficacy.

To optimize this approach, in case the description is a graphical one – alone, or in conjunction with the literary description-, it should be performed according to standardized and commonly accepted parameters , so the submission of such data to the cadastre will inmediately allow the location of the property/parce. If the description in the Land Registry is merely literary, and at certain point it is deemed necessary to include a graphical descripion –alone, or in conjunction with the literary description-, certain mechanisms should be established so the graphical description binds the neighbouring proprietors, without hindering or interfering with the legal traffic.

In all cases, for first registration and physical modifications of registered properties, it could be justified, for the already discussed reasons, the requirement of graphical descriptions.

All the above, makes evident that Land Registries can incorporate property descriptions by using cartographic and geolocation techniques, as these are not exclusive to any public or private institution or body.

It also makes evident the caution that should be applied when using these techniques in registration systems which have been working for long with literary descriptions, so they contribute to improve the service instead of creating more trouble than those they could help to prevent.

It is also clear why the delimitation of boundaries, or even better, the acceptance of the description of the boundaries as supplied by the interested parties, corresponds to the Land Registry. And how the Land Registry should interact with the Cadastre so this can fulfill its fiscal function without imposing additional costs, both explicit -money- or implicit –time-, to citizens.

Thank you very much for your attention.

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