4.2.5 The golden mean

An intermediary solution might be the following. It is submitted that, for the reasons listed above, approach A – giving the purchaser a proprietary interest from the moment of sale onwards, made public by a priority notice – is the most desirable one in the context of assets that have a register to keep track of their legal status anyway, such as immovable property. In order to reduce transaction costs further, I argue that the current form of the priority notice could be simplified. Many jurisdictions provide an extensive set of rules of what must and must not be registered, in order for a priority notice to be effective.1 However, in order to fulfill its function, the Scots law commission is of the opinion that the scheme for priority notices could be simplified considerably without impairing its overall effectiveness. I would like to take this argument one step further and argue that it suffices to merely register the fact that a contractual obligation to transfer the asset itself, or that there is an obligation to vest/transfer/cancel a limited real right in relation to the property. Current schemes are probably often complicated because the priority notice does confer some sort of proprietary interest and is therefore – in terms of requirements for eligibility – treated like a real right. However, the German term for the origin of this doctrine – ‘Vormerkung’ – roughly translates to ‘ear tag’ or ‘caveat’. It should merely be considered as a signal to the parties or, in practice, the legal practitioner involved with the transfer, that there is something going on, and that further investigation/inquiry is necessary before proceeding with the transfer itself. The arguments in favour of the priority notice also apply to other assets of which the legal status is tracked by a register such as company shares, but it is not self-evident that all of these registers have a similar quality as the public land records. Hence, they are in legal doctrine deemed less trustworthy as an indication for proprietary interests.

For other types of assets – assets with low quality registers or assets that lack such a register at all – approach B would be the most suitable. As mentioned above, approach A is in general preferable, but approach A cannot be applied if there is no register keeping track of legal status. The benefits of approach B are still seized: the performance interest of buyers is protected at the cost of creditors, which is justified because of the difference between market value and forced-sale value. Buyers are not protected against double grants, but ‘default’ private law provides a degree of protection by instruments such as ‘the rule against offside goals’ or the bona fide purchaser doctrine. If this protection is considered insufficient, an insurance system can be set up to compensate the unlucky few that encounter a fraudulent and/or bankrupt seller. On one hand, one could argue that the risk that one party performs whilst the other does not, is impermissible, and that a simultaneous transfer is more desirable. On the other hand, assets that lack a register are in general of less value, which means that some incidents could be considered acceptable if transaction costs in general are lowered by adopting approach B.