Dechert: Lawful Owners vs Good Faith Purchasers

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associate Irakli Sokolovski and associates Ana Kostava and Tamar Jikia, is partnering with GEORGIA TODAY on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

On 17 October, the Constitutional Court of Georgia rendered an important judgement regarding good faith purchasers of immovable properties in Georgia (the “Judgement”). Before the Judgement, the Civil Code of Georgia (the “Civil Code”) used to be interpreted in an inconsistent way and the Judgement is supposed to clarify the balance between good faith purchasers and lawful owners.

The present OnPoint provides an overview of reasoning of the Court underlying the Judgment and further discusses its potential impact on the process of acquisition of property in Georgia.

ARTICLES IN QUESTION

The Judgement relates to two Articles of the Civil Code: Article 185 and Part 2 of Article 312 (the “Challenged Articles”). Article 185 of the Civil Code states that a purchaser of property is acting in good faith if he/she relies on the information provided by the LEPL National Agency of Public Registry (the “Registry”) unless the purchaser knows that the seller, i.e. alienator, is not the lawful owner of the property in question. In such cases, the purchaser shall be considered as acting in bad faith.

In addition, part 2 of Article 312 of the Civil Code provides the principle of completeness and accuracy (the “Accuracy Principle”) of the Registry and states that the information contained in the Registry shall always be deemed as complete and accurate except for the cases when: (a) there is a complaint against such information; and (b) upon purchasing the property the purchaser knew about the inaccuracy of the information of the Registry. Other than that, the Accuracy Principle along with Article 185 of the Civil Code protects the interests of the purchaser.

The courts of common jurisdiction of Georgia, including the Supreme Court of Georgia have interpreted the Challenged Articles in different ways. On the one hand, the courts tend to favor the interests of the purchaser and stress the importance of the Accuracy Principle thus leaving the property with the purchaser and granting only the right to compensation to the lawful owners. On the other hand, in several cases the Supreme Court of Georgia has reasoned that the purchaser cannot be considered as acting in good faith when there is a complaint against the information provided by the Registry in which case, the purchaser ought to know about such inaccuracy upon purchasing the property. Importantly, the case law does not answer the question whether existence of inaccuracy as such is already an obstacle for the purchaser or whether the purchaser has to know of such inaccuracy as well.

DECISION OF THE COURT

A plaintiff in a case before the Constitutional Court initially requested to recognize the Challenged Articles wholly unconstitutional since, in his view, the Challenged Articles deprived the lawful owners of their ownership right. However, the court differentiated between the issues presented and stated that the Accuracy Principle provided under the Civil Code is constitutional and important to promote the stable commercial turnover and trust of the Registry records. On the other hand the court stated that in many cases the interpretation of the Challenged Articles unreasonably limits the rights of the lawful owners.

Accordingly, the court found that the interpretation of Article 185 which prioritizes the interests of the purchases in cases when: (i) there is a complaint lodged against the records of the Registry; and (ii) the purchaser knows about such complaint, is unconstitutional. In other words, if the above conditions are present and the complaint of the lawful owner is satisfied at a later stage, the purchaser cannot be considered as a good faith purchaser and he runs the risk of losing ownership rights over the property.

POTENTIAL IMPACT OF THE JUDGEMENT

The main legal effect of the Judgement is that where there is a complaint lodged against the records of the Registry and such complaint is satisfied, the purchaser will bear the risk of losing the ownership title over the property if the purchaser knew about such complaint upon acquisition of property. Thus, the property will be returned to its lawful owners. Such reasoning is based on the assumption, that the purchaser, having knowledge about possible inaccuracy of the property, ignored such information and did not demonstrate due care towards the interests of the parties involved (mainly that of the lawful owners).

With respect to the practical impact of the Judgement, it should be noted that, generally, the courts of common jurisdiction are bound by the decisions of the Constitutional Court and have to uphold the same approach to the matter established by the court. Thus, the impact of the Judgement may be assessed positively in terms of establishing a foreseeable test which gives guidance on how the courts interpret the issue and how they balance the interests of the purchaser and the lawful owners.

On the other hand, the Judgement gives rise to several concerns.

Firstly, there can be seen a risk to the stability of commercial turnover of the country as the decrease of safeguards granted to the purchaser may diminish the value and the purpose of the Registry, at the same time unreasonably prolonging the property acquisition process.

Furthermore, it is expected that the costs of acquisition process will increase due to the fact that the purchasers will have to do a due diligence with respect to the property and investigate and assess the complaints lodged to the Registry. As of today, the Registry extracts do not indicate the existence of complaints. In addition, it is not entirely clear what a “complaint” means.

Finally, some also see a threat of so called “nuisance claims” which means that such regulation may be a tool in the hands of those people who wish to impede the process of alienation of property by filing groundless complaints to the Registry.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist Law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 28 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.