Lack of land registration = very real risk for the buyer

On 5 January 2017, the Supreme Court handed down a judgment (HR-2017-33-A) in a case between Forusstranda Næringspark AS and Sønnichsen AS, its bankruptcy estate.

The central fact in the case concerned property transfers from Sønnichsen AS (seller) to Forusstranda Næringspark AS (buyer) in 2003. In the years prior to the property transfers, structural changes had taken place on the seller's side. In connection with the property transfers, the titles to the properties in question remained with the seller. In 2012, the seller went bankrupt. At that time, the buyer was the real owner of the properties in question, while the seller still had registered title to the properties. The bankruptcy estate then argued on the basis of Section 23 of the Land Registration Act that the properties transferred from the seller to the buyer in 2003 were part of the estate. This was disputed by the buyer.

The provision in section 23 of the Land Registration Act states that;

«In order for a right created by agreement to stand up to bankruptcy, the creation of the right must be entered in the diary no later than the day before the bankruptcy is opened, except in the cases mentioned in section 21, third paragraph and section 22...»

The Supreme Court has previously ruled that there is no room for reasonableness assessments under the provision in question. The key issue is whether the transfer has been secured by registration at the latest the day before the bankruptcy is opened. The main legal question in the case was whether the provision in Section 23 of the Land Registration Act also applies to property transfers through demergers under company law.

Like both the District Court and the Court of Appeal, the Supreme Court found that section 23 of the Land Registration Act applied to the transfer of real estate to a new legal entity that takes place through a demerger, and consequently that the properties were included in the estate.

In the alternative, the buyer argued that the lack of registration was of no significance in the case, as it was claimed that there was an independent legal defence in a previous merger that included the seller. This plea was also unsuccessful.

The consequence of the lack of registration was that the properties were subject to the seizure rights of the seller's bankruptcy estate.

The Supreme Court's judgement makes it clear that failure to register the transfer of title to real estate entails a very real risk for the buyer if the seller goes bankrupt. In our opinion, players in the property industry should be very aware of whether registration should be omitted or not.