Public maladministration and land markets

Read the article in the Cayman Financial Review Magazine 

The fallout of the improper disposals of Crown lands in the Turks & Caicos Islands has led to all manner of legal actions to unravel the past illegal transfers, as well as transparency and governance reforms designed to minimise the risks of similar events occurring again. 

There is certainly plenty of salutary guidance which Cayman could take from these events. Cayman has had a similar Crown land regime and a virtually identical legal framework for land registration. Because of this similarity in the legal and administrative structures for land administration and property rights, it is clear that the points raised in response to the Turks & Caicos fiasco will also be important for Cayman.

Corruption and recovery

One of the most significant features of the Turks & Caicos intervention by the UK is the vigour with which the Special Investigation & Prosecution Team and the Civil Recovery Team have pursued legal redress for the illegal Crown land disposals. Dozens of cases have been actioned where former ministers made land grants at undervalue that were not regarded as in the best interests of the public.

The recovery team has invoked many different legal bases for claiming recovery of the land itself, or compensatory damages for its value, from those directly and indirectly involved. Techniques have been applied which range from traditional recovery processes to obscure and innovative actions. This is as it should be.

It sends the strongest message to the domestic and the international community that corruption and maladministration will not be tolerated. In the long term, that approach can only enhance the prospects of a small island which is reliant on external sources of capital for development.

Land investors

We should generally applaud an approach which demonstrates a robust legal response that helps to facilitate recovery of the misappropriated land or its value. But there is one area where that well-intentioned pursuit of recovery can run into collision with another ideal. Every instance of property recovery requires that somebody loses land which they believed they owned. That may not be a problem where the person from whom the land is recovered had been a knowing participant in the wrongful grant of Crown land – we may have no qualms about ordering him or her to transfer the land back to government.

But for people who cannot be quite so clearly stigmatised as a knowing participant, there is a difficult grey area. When should the law strip them of their ill gotten gain, and when should the law say that they were innocent enough to retain the land? That is the big question for integrating the anti-corruption regime with the land title system.

The protection of ‘innocent’ owners is critical to the security of land titles. One of the concerns for international investors in Caribbean property – whether it is an oceanfront condo or a loan secured against a hotel’s business assets – is the strength and quality of titles to land. Anyone would think twice before buying land, or lending on land, if that property is liable to be taken back because some past transaction could be labelled as improper.

The registration system that operates in the Cayman Islands and the Turks & Caicos Islands was certainly designed to allay fears of this type which might deter buyers. It has very effectively fulfilled its original aims of offering a reliable assurance of title to property investors. This was perceived as a significant advantage over rival islands, such as Bermuda and the Bahamas, where no registration system operated (although they are now underway in those islands).

The simplicity of the register for Cayman land titles, backed up with the government’s financial guarantee, has been crucial in maintaining confidence in the international market and in avoiding the necessity for arranging private title insurance each time land is sold or mortgaged.

We end up with a difficult tension. We want laws that will support the recovery of land if it has been corruptly distributed by a government official. But equally we want laws that will uphold land rights and ensure that the land register is a reliable indicator of ownership. It is these two desires which come into conflict. As we try to push the boundaries of the law allowing the clawback of land in the corruption cases, it is inevitable that we cause a corresponding weakening of the protection of owners.

The latest court decision

These issues were investigated in the latest judgement on the Crown land recovery saga in Turks & Caicos. The case of Arthur v Attorney-General of the Turks and Caicos Islands has clarified the legal rules which set the dividing line between allowing recovery and protecting land owners.

The case dealt with the potential claims to recovery that the government would have against the direct recipient of an illegal Crown land transfer, and whether those claims could be resisted by relying on the statutory provisions about land titles which protect anyone who has become registered as an owner. The same issue would arise if similar events were ever to happen in the Cayman Islands.

What happened

The Turks & Caicos minister had authorised the issue of Crown land lease to Mr Arthur. The lease contained a standard clause that allowed Arthur to buy the full ownership of the land. He exercised this right to buy the ownership from the Crown at the agreed price of $50,000 and within a few months he flipped the land to a developer for $1,350,000.

The new Turks & Caicos government subsequently alleged that the sale by the former minister to Arthur was tainted by fraud, corruption and breach of the minister’s duty to act in the best interests of the government; and that Arthur himself was aware of this. In the light of these allegations, the government asked for two alternative types of remedy: an order that it could claim the land back from Arthur, and an order that Arthur pay compensation.

The first of those remedies was no longer appropriate once Arthur had transferred the land on to the developer, but the court judgement still gave a helpful explanation of what would have been the position before that onward transfer.

When faced with these allegations, Arthur argued that he was protected by the registered land law. He said that once he was recorded as owner at the Land Registry, his land ownership should not be challenged and he should not be required to pay damages. He asked for a preliminary ruling to summarily strike out the government’s claims without allowing the matter to go to a full trial. This point was eventually appealed to the Privy Council.

The decision

The Privy Council ruling confirmed that in principle the owner could be challenged in two separate ways, one being a claim to recover the land itself and the other being a claim to recover its value in damages. But each type of claim could be successful only if the government could show that the owner was in a sense ‘not innocent’ because he had a degree of knowledge about the improper nature of the ministerial decision.

The two permitted types of claim can be summarised like this:
Where the Crown claims that is entitled to the property, then the key concept is whether the owner had acted in good faith at the time of acquiring the land. If so, he is protected against this type of claim. If not, the court will declare that the owner holds his registered title on trust for the Crown and must retransfer the land to the Crown.

Where the Crown claims that the owner should pay damages to the Crown, then the key concept is whether the owner would be acting in good conscience to retain the land, taking account of his degree of knowledge of impropriety at the time he acquired the land. If so, he is absolved.

If not, the owner must pay up and the amount payable will be calculated as the value of the overall financial benefit that he received by getting ownership of the land, after deducting the price he initially paid the Crown.

The importance of the ruling is that it gives a broad scope to recovery of the land or compensation, and gives a narrow scope to the protection of land owners. It is now clear that the fact of being registered at the Land Registry will not give land owners any comfort if they were not acting in good faith or good conscience at the time of buying the land.

Confidence in buying land

It is clear that being entered in the land register is certainly not an absolute guarantee of unchallengeable title. And that conclusion is absolutely right. To take an extreme example, it would be a disgrace to the law if a fraudster could dupe the land registry and get himself registered as owner of my land and then rebuff my attempt to recover the land simply because he had become registered as owner. Just that simple example by itself demonstrates that the register alone should not always be final and conclusive.

But to continue to attract investment in land and support the market confidence in land titles, the potential liability of land buyers has to be applied with sensitivity. The legal test given by the Privy Council tends to offer this. The two concepts of good faith and good conscience are seemingly based on the actual awareness of the individual in question.

That is far better than some alternative test based on what conclusions should have been drawn by some other person standing in his position. It tends not to undermine the land market, because the prospective buyer need only ask himself one question: Am I genuinely suspicious of impropriety behind this dealing?

If the answer is no, then his ownership will be upheld.

One of the advantages of the test given by the Arthur case is that it is unlikely to have any significant indications for normal land transactions in the future. One of the original justifications for the registered land system was that the register was supposed to provide a cheap source of information for buyers. They could rely on most of the information contained in it and they need not make any inquiries to check into its validity. That continues to be the position after the Arthur case.

Buyers today need not be worried that the land register can be overcome by matters of which they are completely unaware, and so there is no need for them to pursue extra inquiries about the validity of the title they are acquiring. The only occasion when prospective buyers must stop and think occurs when they have the actual suspicion of impropriety. This concept will be already well known to anybody who is conversant with anti-money laundering rules.

Implications for Cayman

Bearing in mind the similarity between the text of the statutes in Turks & Caicos and the Cayman Islands, it seems inevitable that the same legal principle will be applied in Cayman. But there is good reason to think that there is little to fear from this development and something to be gained. The judgement offers one way of getting round the land register by showing lack of good faith or good conscience.

This makes it possible for recovery after improper dealings. In that way it helps advertise to the international community that corruption will not be tolerated. But because the test depends on having actual suspicion, it achieves this without significantly deterring land investors or forcing extensive inquiries in cases when they have no suspicions.

Questions to follow up

There are several points coming out of the decision in Arthur which could be contentious. The first two points relate to the test:

  • Are good faith and good conscience the same?
  • Do they both really require the owner to have, at a minimum, an actual suspicion?

There are some other points which hint at broader reforms to the law – I will highlight the potential issues and leave the reader to decide:

  • Apart from corruption in Crown land grants, what other types of improper land dealings should the principle extend to?
  • Should the public importance of Crown land justify a rule that a buyer of it must take extra care in comparison to a buyer of private land?
  • Would an application for recovery under the Proceeds of Crime Law have sent a clearer message about the substance of the government’s claim in the case?