New land registration law coming

Coming into force on 12 November 2018 is the new Land Transfer Act 2017. It replaces the Land Transfer Act 1952 as the statutory framework for land title registration in New Zealand.

The changes the new Act brings to the law on land registration are significant.  The new Act will impact most on the day to day working lives of lawyers and others involved in registration of property instruments and land transactions.

However, we anticipate little change to the negotiation, documentation and processes for property transactions (aside from discrete aspects specific to registration at Land Information New Zealand).

New terminology

The new Act introduces some new terms, which replace the older, and in many cases more dated, terms used previously. A few terms, which will become common following the commencement of the new Act, are:

Old TermNew Term
Registered ProprietorRegistered Owner
Computer register and certificate of titleRecord of title
Servient Tenement and Dominant Tenement*Burdened Land and Benefited Land*

*(these terms are used in the context of easements and covenants).

The introduction of covenants in gross

One of the more significant changes implemented by the new Act is to introduce ‘covenants in gross’.  These covenants benefit a person or entity, rather than other land They will be a useful tool in a variety of situations – for example, to oblige property owners to contribute to the upkeep of commonly own infrastructure, or to oblige property owners to join residents’ associations. The provisions for the creation and operation of covenants in gross will be contained in the new section 307A of the Property Law Act 2007 (PLA).

Until the commencement of the new Act, it has only been possible to create and register covenants on burdened land where those covenants benefit other land.  As a workaround, it has become common practice to use encumbrances to achieve the desired result.

What does this mean in practice?

Bank mortgages

The use of encumbrances as a workaround can make it more difficult than it needs to be for banks to obtain good security over land.  For example, encumbrances are mortgages at law, and the PLA implies a power of sale into all encumbrances (unless expressly excluded).   Encumbrances also rank in priority to other mortgages where the date of their registration pre-dates those other mortgages.

Both of these features can hinder a bank seeking to obtain a first ranking legal mortgage, and can result in the need for variations and/or priority deeds to achieve good security for a bank.  This has a time and cost implication for both the bank and the borrower.

The use of covenants in gross is likely to make financing transactions easier in this regard, because covenants in gross are not mortgages and contain no power of sale.

Landowner liability

The benefit of using a covenant in gross for a landowner is that its liability under the covenant ceases when it sells the land (except for liability for prior breaches).

This contrasts with an encumbrance, where the landowner has ongoing liability after it sells the land.  To help mitigate that liability, the PLA implies an indemnity into the terms of all encumbrances.  The landowner would hope to be able to call upon that indemnity, if, and when it became necessary, in the event of a breach by a successor, but that is not always possible (for example, where its successor is insolvent or bankrupt).

There is no need for an indemnity in respect of covenants in gross, because a landowner has no liability for the acts or omissions of its successors.

Modifying terms or ending the rights

Encumbrances are very difficult to change or remove (without the mutual agreement of the parties) once registered.  The relevant persons can be difficult to trace due to passage of time and where the land has been subdivided, the number of persons needing to consent can be many,  Further, there is no legislation specific to redundant encumbrances that assists. In contrast, there is a mechanism in the new Act providing for covenants in gross to be modified or extinguished in certain circumstances (where, in essence, they have become redundant, or for other reasons it is just and equitable).

The future for encumbrance

While use of covenants in gross (instead of the encumbrance workaround) is being encouraged, encumbrances will still be available for use in the same manner as they have been before the commencement of the new Act.  It remains to be seen whether covenants in gross will become the instrument of choice over encumbrances.

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