Land Law- Indefeasibility

Yours, Mine and Ours- A Tale of Indefeasibility

Owning a piece of property does not necessarily guarantee that you’re the only person holding ‘title’ to it. Real estate fraud, or scams in real estate, are a real threat in recent times, what with the development of case law illustrating the severity of this legal pandemic. Such scams in real estate usually encompass duplicated title deeds being sold to innocent buyers, only for the innocent buyers to find out that the land titles are not legitimate.

Understanding the Concept of Indefeasibility

Indefeasibility of a land title means that the title is immune from attack by any adverse claim to the land, which a registered proprietor enjoys. Conferred by section 340(1) National Land Code (NLC), it governs that a registered title is indefeasible and therefore, safe from third party claims to the land. However, an interesting spectacle of section 340 NLC, being the proviso to section 340(3) provides for indefeasibility of title to purchasers in good faith and for valuable consideration; in other words, indefeasibility of title for bona fide purchasers for valuable consideration.

Understanding ‘Bona Fide’

‘Bona fide’ in general terms refers to the absence of fraudulent intent or deceit. In the context of land transactions, a bona fide purchaser is an individual seeking to purchase a land title without any fraudulent intention. A bona fide purchaser innocently purchases a piece of property without prior knowledge that separate claims to the land title may be made.

For example, a party may fraudulently transfer a land title to this purchaser although the title has already been conveyed to someone else- but if this purchaser has no knowledge of this transfer being of a fraudulent nature, he is considered a bona fide purchaser. It is important to note that to qualify as a bona fide purchaser, the innocent purchaser must have actually paid for the land title.

Fraudulent Conveyance of Land Title in Malaysia

With the general scope of indefeasibility and the meaning of ‘bona fide’ in tow, it would be useful to examine the illustration of case law that demonstrates real-life real estate scams that have taken place in Malaysia. The following landmark case law have mapped out our current position in Malaysia with regards to real estate scams, which decides which parties’ interests will be protected.

The Old Law- Adorna Properties Sdn Bhd v Boonsom Boonyanit

In 2001, the Federal Court held in Adorna Properties Sdn Bhd v Boonsom Boonyanit that section 340 NLC conferred immediate indefeasibility. In other words, where a fraudulent transfer of title has taken place, section 340(3) NLC even applies to the transaction where the vitiating circumstance took place.

This can be illustrated where a registered land title is transferred fraudulently to a person. He passes off the title as his own. The fraudster then transfers the title to an innocent third party. During the era of Boonsom Boonyanit, the innocent third party would have obtained an indefeasible title.

The Current Position in Malaysia- Deferred Indefeasibility (Tan Ying Hong v Tan Sian San)

Does this sound fair to you? A welcome change occurred in 2010 when the Federal Court overruled Boonsom Boonyanit in the case of Tan Ying Hong v Tan Sian San. Here, the new law conferred that Malaysia would practice deferred indefeasibility.

Deferred Indefeasibility Explained

Deferred indefeasibility provides that only the title of an innocent (bona fide) third party purchaser is immune from external claims to the land title. Therefore, the proviso to section 340(3) NLC will only apply to transactions subsequent to the one in which the vitiating circumstance took place. As such, if a fraudulent transfer of land title takes place, a subsequent purchaser who innocently purchases the land will nevertheless have a title protected from external claims.

While it is unfortunate for the original registered land owner to have to part with his title, the balance of convenience also tempts us to place ourselves in the shoes of the bona fide purchaser. This purchaser could have spent a long time saving up to purchase the property, and after the tedious process of transferring the title to himself, it would also be unfair for him to not attain title to the intended property.

Therefore, while it is agreed that the original land owner has suffered a great injustice through the fraud, once a subsequent transaction has been led to take place, the reality faced by all persons involved must be taken care of by the courts.

The Current Criteria to Qualify as ‘Bona Fide’

While deferred indefeasibility stands as the current law, and since the interest of the bona fide purchaser is by default taken care of, the law has introduced some new criteria to ensure this bona fide purchaser does indeed deserve such protection.

In 2018, it was decided in T. Sivam Tharamalingam v Public Bank Bhd that ‘bona fide’ should have some clarification. There are now 2 requirements to satisfy the ‘bona fide’ status. Firstly, the purchaser must be in the absence of deceit. Secondly, the purchaser must have taken proper care in making the purchase of the property,that is, taking all steps possible to ensure the title was free of encumbrances and to his knowledge, not transferred by void or insufficient instrument.

A Recent Case Study of Fraudulent Transfer in Malaysia: CIMB Bank Bhd v AmBank Bhd

Such can be demonstrated with regard to charged land titles as well. In CIMB Bank Bhd v AmBank Bhd, the land title was held by the Chins and was charged to CIMB Bank. One Mr Wong fraudulently transferred the title to himself and charged the fraudulent title to AmBank Bhd. The Federal Court held that AmBank was the subsequent purchaser, as their interest was protected by deferred indefeasibility.

This was, of course, the majority view. The Federal Court by majority held that CIMB’s interest was extinguished by the forged discharge, making Mr Wong the immediate purchaser and AmBank the subsequent purchaser. It was further introduced in this case that a chargee is also considered a ‘purchaser’ (T. Damodaran v Choe Kuan Him).

It would, however, be interesting to note the minority view in this decision. This view conferred that both immediate and subsequent purchasers must be bona fide purchasers for valuable consideration. The minority was of the view that AmBank was not bona fide as it did not investigate thoroughly the charge’s creation. Therefore, AmBank would be considered the immediate purchaser, making their interest defeasible.

How much weight should the courts place on the new definition and importance placed on the meaning of ‘bona fide’?

AmBank is a large corporation and it can be considered that they indeed should have known that the charge was not created legally. On the other hand, how much is a purchaser expected to spot with regard to the legality of a transfer, especially if the purchaser is a layman? Does this responsibility lie with the purchaser, or the solicitor?

In Pushpaleela Selvarajah v Rajamani Meyappa Chettiar, it was held that the solicitor of the fraudster does not owe the victim a duty of care. It was further held in Low Huat Cheng v Rozdenil Toni that the immediate purchaser is also not liable for damages to the victim.

Case law such as this allows for a discharge of duty. However, the law is still not clear on just how much amounts to ‘taking proper care’, and whether ‘taking proper care’ amounts to an act or omission by the purchaser. How much does this consideration of bona fide contribute to the administration of justice? Should the solicitor of the purchaser also be drawn into this debate?

Conclusion- Innocent Purchasers Will Keep Their Property

One must not forget that ultimately, the original land owner has lost his property by no fault of his. While deferred indefeasibility is here to stay for a long time to come, it merely protects the original landowner for a period of time before yet another subsequent purchaser comes along. To say that fraudulent transfers should be eradicated would be a far-fetched idea; therefore Tan Ying Hong should do for now.