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09 February 2018
In its recent decision in Nodar Dvali v the Parliament of Georgia, the Constitutional Court considered issues raised in the decision of a lower court in which the legal presumption of accuracy and completeness of entries in the Public Register in relation to real estate was declared in part unconstitutional.
Under the presumption an entry in the Public Register is deemed accurate until proven otherwise. On this basis, a transferor is deemed to be the rightful owner of the relevant real estate except when the transferee was aware that the entry was inaccurate.
The decision has modified the presumption so that now an acquirer of real estate will not be treated as a bona fide transferee if the acquirer is aware of any legal challenge to the ownership entry in the Public Register and will not acquire good title until the challenge is conclusively dismissed.
On March 7 2002 the claimant, Mr Nodar Dvali, purchased a plot of land in Tbilisi, Georgia. The claimant was registered as the owner of the land in the Public Register. On March 7 2011 ownership of the land was registered by fraud in the Public Register in the name of another person. The land was subsequently transferred twice to other persons.
The claimant filed a claim with Tbilisi City Court for return of the land and a declaration that subsequent transactions with the land were void. The court rejected his claim, stating that the current owner had acquired the land in good faith and the land could not therefore be restored to the claimant.
The claimant then filed a claim with the Constitutional Court, arguing that several articles of the Civil Code contradicted the right to property guaranteed by Article 21 of the Constitution.
This update examines only the judgment delivered by the Constitutional Court in relation to Article 185 of the Civil Code regarding the presumption of the accuracy and completeness of entries in the Public Register for real estate.
In summary the points of the law in question were as follows:
Article 185 of the Civil Code, which for the benefit of a transferee deems a transferor to be the owner of a property if so registered in the Public Register, except where the transferee knew that the transferor was not the owner.
Article 21 of the Constitution, which recognises the right to own and inherit property and states it to be inviolable. Provided that the essence of the right to property is not violated, this right may, where the law permits, be restricted on the grounds of pressing social needs.
The Constitutional Court considered whether Article 185 of the Civil Code was constitutional in the light of Article 21 of the Constitution, noting that Article 185 would be of relevance only in exceptional cases where real estate was transferred by a person who was not the true owner, but was registered as such in the Public Register. The court noted as follows:
Article 185, insofar as it deprived owners of their property rights against their will, restricted the right to property guaranteed by the Constitution.
Any restriction imposed by the state on property ownership rights should be for a pressing social need and should not breach the essence of right to property. Such a need would be one where there was an intention to benefit the whole or part of society.
Any restriction can be justified only if it is proportionate, being useful and a necessary means to reach a legitimate purpose.
In the view of the court, the Article 185 presumption was capable of causing rightful owners to lose their title to real estate in more cases than was necessary to reach the legitimate purpose of a stable, liquid property market. The demands of the market had to be balanced against the claims of rightful owners, which was not served by not excluding knowledge of claims against entries in the Public Register from the scope of transferee's knowledge as to the rightful owner.
The presumption was therefore unconstitutional, among other things, to the extent that it allowed a transferee who was aware of any challenge to the registered ownership of a property to acquire good title to it.
The decision may have a significant, adverse impact on the real estate market in Georgia and will be relevant to any real estate transaction, including taking mortgage security.
From a seller's perspective, even if the seller holds good title, frivolous or baseless challenges filed against the seller's title could result in serious delay in the transfer of the property.
Purchasers of real estate will no longer be able to rely on an extract from the Public Register alone to determine the legal title of the transferor. In order to purchase with good title, purchasers will need to satisfy the knowledge test as to the absence of challenges to the transferor's title. In its decision, the Constitutional Court did not set the standard of the test and existing court decisions have set very different standards for a purchaser to satisfy. In one case, a purchaser would satisfy the test if it had no passive knowledge of a challenge, while in another a purchaser would satisfy it only if it had made thorough inquiries.
Prudent purchasers will therefore need to conduct further investigation as to whether there is any dispute relating to a property, whether filed in the Public Register or the courts. A major hindrance will be the availability of relevant information in that, according to recent court practice, information on disputes involving individuals is not disclosed on the grounds of data protection.
Clear judicial guidance is now required to ensure that the Georgian real estate market is not unduly fettered.
For further information on this topic please contact Benjamin Paine or Mary Kopaleishvili at Paine Stevens by telephone (+995 32 290 3211) or email (firstname.lastname@example.org or email@example.com). The Paine Stevens website can be accessed at www.painestevens.com.
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