RISK WATCH
The Risk Watch Column: By Dr Alan Waring
Part 1 of this article summarised the huge problem of withheld title deeds and various kinds of fraud (e.g. ‘double selling’) for thousands of property buyers in Cyprus. Part 2 focussed on those who have a key role in the debacle. Part 3 looks in more detail at some of the issues relevant to a lasting solution.
The New Legislation
Anyone genuinely seeking to improve Cyprus’s lot in this world (and that includes me) wants the new legislation on title deeds to work, assuming that it overcomes current opposition and delays in parliament and ever gets enacted. However, the problem is that the new legislation will neither correct the problem per se nor all its inter-related problems because it cannot do so, owing to its limited scope and inherent defects. It is, in effect, simply another planning amnesty designed to protect developers who have failed to obtain proper planning permission. In particular, the new legislation as announced so far will not address the following critical factors:
1. The developer mortgage debt bubble hanging over Cyprus, estimated from Central Bank data at EUR 5.9 bln in March 2009 and now probably EUR 7 bln which, under the present flat market conditions and at least one-third drop in property prices, will deter the authorities, banks and developers from closing existing mortgages and issuing long overdue title deeds.
2. Compliance by developers will be essentially voluntary with no enforcement mechanism and minimal or no penalties for non-compliance i.e. the legislation will be unenforceable.
3. Banks will not be barred from continuing their practices of issuing or extending developer mortgages against properties that have already been sold; buyers without a bank guarantee will still be expected to indemnify the bank if the developer goes bust; there is no automatic protection against errant banks that collude and connive with errant developers and their lawyers.
4. The issue of rogue and negligent lawyers and the ineffectiveness of the Cyprus Bar Association in (a) setting and policing strict property conveyance standards and (b) disciplining and removing errant members.
5. Perversities in the justice system, with the police generally barred by the Attorney General from investigating and treating as criminal allegations of property fraud (a recent rare exception reported by the police being the K&M Famagusta case where Cypriot rather than foreign buyers were the alleged victims).
6. The tardy and ineffective justice system in which alleged property fraud victims are forced to take long-winded and costly civil cases against alleged perpetrators.
7. The long-standing gross inefficiency of the numerous government departments and municipal functions involved in the processing of all the many stages required before title deeds are issued; a system clogged with new applications and a huge pre-existing backlog may prove to be the main practical downfall of the new legislation.
8. No obvious anti-corruption mechanisms are included.
9. The legislation will not be retrospective; therefore the current backlog of buyers of 130,000+ properties (including some 40,000 foreigners) still awaiting their title deeds typically for 5-15 years, will receive no protection; if a developer mortgage exists on the land and the developer goes bust or is unable to service his mortgage debt, the buyer could be subject to bank repossession.
10. The new proposed tiered system of title deeds is doomed to failure; for example, since only a fool would buy a property that did not have full, clean and unconditional title deeds, how will developers be able to sell their properties including their huge glut of unsold properties? This will put extra pressure on their borrowings and liquidity and in turn the banks’ position. Also, many buyers who bought in good faith some years ago may suddenly find that their property has been devalued owing to the issue of an imperfect title deed. Who would want to buy a re-sale property with such a curse on it?
Thus, any buyer protection will still be virtual, not real. Regardless of the new legislation, there are also a number of relevant EU Directives where compliance is minimal. What is needed so desperately is the restoration of buyer trust and confidence in the Cyprus market and the new legislation will do little on that score.
Perhaps the crucial reason why so many property buyers in Cyprus have bought properties only to find out later that the land was already mortgaged is that developers, agents and lawyers fail to mention this material fact prior to contract signature (and often for a long time after, if at all; it usually comes to light when the buyer wants to sell on at a later date and/or investigates why his title deeds have not been issued). A recent on-line poll by www.news.cyprus-property-buyers.com found that 1,012 (98%) of the 1,036 people who voted would not have bought a property in Cyprus had they known that the land on which it was built was still mortgaged.
Standards and Enforcement
A vital missing element in the protection system in Cyprus, for both the individual buyer and the market itself, is the public declaration of standards of conduct and their rigorous enforcement by the relevant bodies. Codes of conduct full of motherhood-and-apple-pie platitudes and insincerity are worthless. Transparency, openness and commitment to standards are essential, both to deter corruption and raise public trust and confidence.
In the wake of the Beaumont & Sims case, the Cyprus Bar Association has apparently instructed its members to advise clients buying property of the risks if the developer goes bust. However, ‘the risks’ of the conveyance are open to very wide interpretation. Is the advice simply ‘Be on your guard’ or does it include, for example, anything about the financial stability, probity and integrity of the developer? Who, indeed, would be responsible for obtaining such a due diligence report and at what cost? Reliance on credit reference agency reports and banker references is unlikely to be sufficient. Should the CBA also instruct its members to insist on bank guarantees for client purchases or a bank waiver where mortgaged property has been purchased?
The CBA Disciplinary Board does not appear to actively pursue allegations of member misconduct unless provoked by media attention. Even then, it’s all very softly, softly. Public trust and confidence in Cyprus lawyers and the courts would be improved if, for example, the Bar Association openly published statements on its property conveyance standards and on its response to all allegations of misconduct against named members. A published summary of disciplinary cases and disbarment statistics would be both illuminating and a sign of the CBA’s integrity.
The Cyprus Land and Developers Association represents only some 100 companies out of 3,500 developers. However, it could take a lead to act more like a professional body rather than just a trade association. It would be a significant advance if there were a compulsory national code of conduct covering all developers with a set of principles, such as:
• A developer must not sell and/or continue to sell properties where the land is mortgaged unless he supplies a bank guarantee to each buyer; any relevant mortgages must be openly declared in writing in advance to prospective buyers;
• A developer must not at any time engage in ‘double selling’;
• A developer must not at any time inflate IPT or other charges;
• A developer must neither insist on nor recommend a single joint lawyer for conveyancing.
Of course, it would have to be backed by disciplinary measures against transgressors, including expulsion where appropriate. Realistically, therefore, an independent government body should regulate them according to the code.
The first developer to publicly warrant in his brochures, advertisements and websites that ‘all his properties are sold completely free of mortgages/encumbrances’ and include such a warranty in the sales contract will probably sell more properties in the first year than all the other developers put together. Beyond that, we need to see the first developer to publicly warrant that title deeds will be issued immediately on completion of contract but with the present title deed issuance shambles that could be years away, if ever.
High Profile Cases – An Update
As a recent Financial Mirror editorial noted, the authorities suddenly and belatedly bringing to the fore a handful of alleged property fraud cases does not make the source problem go away. Most of the high profile cases have in fact only become so as a result of publicity raised by the alleged victims, civil actions taken by them and ensuing media attention e.g. the Conor O’Dwyer cases, the Beaumont & Sims case, the Froiber collapse, the Lane Homes case and the S&J Penney case.
A more ominous development for errant developers is the recent emergence of significant numbers of individual property investors collaborating in taking legal action. One group of 30 foreign investors (not retirees but younger professional persons) allege that they have been bilked by Cyprus developers. Another two groups involve around 40 buyers in each. Clearly, if such large groups of plaintiffs each take individual actions of a similar or identical nature against developers and/or the banks or others involved, the defendants are going to find it hard if not impossible to fight off. Of course, the publicity that will surround all this would compound the existing PR disaster for Cyprus and more so if other investor groups follow suit.
Conclusion
Civil compensation after many years of court battles should not be the only ‘answer’ available to tackling criminal elements in the Cyprus property market. The continuing laisser-faire of the authorities, developers and Bar Association on the title deeds-cum-fraud issues continues to kill the market and invites clichés such as ‘fiddling while Rome burns’. Others liken it to the officers of a doomed Cyprus Titanic rearranging the deckchairs, tuning the orchestra and trying to appease a mutinous crew of MPs, developers and lawyers.
Dr Alan Waring is an international risk management consultant with extensive experience in Europe, Asia and the Middle East with industrial, commercial and governmental clients. Contact [email protected] .
©2010 Alan Waring
