A New Age

By PETER ROSIER

Peter Rosier is the principal of Rosier Partners Lawyers and a member of the Law Society's Property Law Committee. He is also an accredited specialist in property law and on the specialist accreditation property law advisory committee. This article was written on the material available to the author at the time of writing and is subject to change as the new system gets bedded down. Readers should see NECDL's website at www.necd.com.au for progress.

In NSW, on 8 October 2013, a discharge of mortgage was settled electronically, lodged electronically and registered electronically - the age of electronic conveyancing has begun.

A few months earlier in Victoria, financial institutions had entered this new age, settling releases of mortgage and withdrawals of caveats electronically. Refinances will soon also be undertaken electronically.

There is still some way to go, but it can now be confidently said that NSW solicitors and conveyancers will be able to conduct significant aspects of most conveyancing transactions electronically by late 2014 - a prospect that some said would never occur.

Not a new idea

Electronic conveyancing has been a dream of property lawyers for many years: older practitioners will remember the Law Society's own efforts - ESCROD and SEISIN, document exchange systems and electronic settlement that fell foul of the financial institutions.

Governments in other jurisdictions have seen the benefits: places as diverse as South Africa, Ireland, the Canadian Province of Ontario, Germany, Singapore and our near neighbour, New Zealand, all have versions of electronic conveyancing systems. None, however, is as comprehensive as the National Electronic Conveyancing System (NECS) that is now operating in NSW and Victoria and is soon to spread to the other states and at least one of the territories.

What NECS covers

NECS (which the land registries refer to as 'NEC') is not a complete conveyancing system - far from it. The involvement of practitioners in the conveyancing system is in many ways more important under NECS than it is in the paper environment. However, it is still reasonable to say that, compared to other systems, NECS is pretty comprehensive because it covers the process from document creation to registration and notification to parties. In NECS there will be no paper transfers, mortgages, caveats, discharges of mortgage and withdrawals of caveat - all are dealt with using a single, simple commercial platform called the Property Exchange Australia (PEXA).¹

The development of NECS proceeded on the basis that the system should, so far as is possible, mimic the paper environment, and this aim has, by-and-large, been achieved.

The immediate advantage to practitioners

The obvious and most significant beneficiaries of an electronic conveyancing system are financial institutions and land registries. However, there are some significant advantages for the legal profession. Document preparation will be simpler and more accurate, and the time taken in communications will be reduced. There will no longer be (in the normal case, at least) lengthy phone calls to banks or to the solicitor acting for another party to arrange settlement and no more attendances at the Land and Property Information (LPI) to lodge documents for registration.

The time and date of settlement is fixed at the outset: if all is well, settlement will occur as agreed. Settlement times and dates can, however, be changed by the parties.

Moreover, the system provides for messaging between parties. Both lodgement and payment will be (in most cases) simultaneous. The system may later result (it does not yet do so in NSW) in cheaper registration fees than those payable for the equivalent paper-based transaction.²

Who's who in NECS?

In the acronymically fecund world of NECS it's handy to know who the main players are and their functions. The participants in the system itself are the electronic lodgement network operator (ELNO), subscribers, users and signers, the land registries and, in the future, the Office of State Revenue (OSR). Others outside the system are the platform owner and the committee of land registrars - the Australian Registrars' National Electronic Conveyancing Council (ARNECC). ³

The only ELNO (platform provider) at this time is PEXA which is established, owned and operated by National Electronic Conveyancing Development Limited (NECDL), a company owned by the participating states, financial institutions and service providers.

PEXA operates an electronic lodgement network (ELN) and is a commercial enterprise with a profit motive that is probably tempered by the need to persuade practitioners that they should use the system.

The legislative framework, comprised of the Electronic Conveyancing National Law (ECNL), the Model Participation Rules (MPR) and Model Operating Requirements (MOR) are developed and coordinated by ARNECC and implemented by the land registry in each jurisdiction.

The land registries work with PEXA in each state and territory to develop the electronic standard which will allow for electronic documents prepared in PEXA to be lodged in each of the registries, registered and for the parties to be notified.

PEXA works nationally with the financial institutions and, early in the development, with LIXI⁴ to develop standards for the financial settlement. The Reserve Bank has also been involved in the process.

Subscribers, subscriber administrators, users and signers

In order to use NECS, you must be a subscriber. There are two types of subscribers: principal and representative subscribers.⁵ There is no cost to become a subscriber.

Principal subscribers can only represent themselves in the system; and representative subscribers must be able, in the paper environment, to undertake conveyancing transactions on behalf of others in the jurisdiction in which the land to be transacted is located.

Users are those who can use the system on behalf of a subscriber, and a signer is a user who can sign documents on behalf of the client of a subscriber.

Each subscriber must appoint a subscriber administrator with the obligation to ensure that the subscriber sticks to the MPR, the participation agreement and the ECNL. For each transaction, there must be a responsible subscriber.

A participation agreement must be signed to be a subscriber. This will be a standard form contract.⁶ The PEXA participation agreement has yet to be finalised.

Legal framework

Participation in the system by subscribers is governed by the ECNL, an appendix to an Act of the NSW parliament. The ECNL has now been adopted by the parliaments of Victoria, Queensland, South Australia, Western Australia and Tasmania. Subsidiary to the ECNL are the MPR, which set out the requirements for participation, and MOR which set out the requirements to be observed in the operation of the system by an ELNO.

How it works in practice - an overview

At the beginning of a transaction, the client's identity must be verified and the client must enter into a client authorisation (CA). The CA is, as the name suggests, the way in which a client authorises a practitioner to deal in land on their behalf. It also deals with liability issues, fees and sets out the warranties which the client makes when engaging the subscriber/practitioner.⁷

The workspace is the central part of the PEXA platform - it is the space in the system where transactions occur. Each subscriber will have a homepage called a dashboard from which they will create new workspaces, observe progress on current matters, communicate with other subscribers, receive notifications and navigate between workspaces.

A workspace will be created by a party - probably the vendor - who will populate it with land registry information. This service is provided in NSW by the LPI and is all of the current title information necessary to prepare documents for registration. Being the actual information from the relevant folio of the register, it is accurate and up-to-date. If a subscriber attempts to create a new workspace where one dealing with the same property already exists, the subscriber will be advised. The cost of this, and other services provided by the land registry - not including lodgement fees - is part of the total fee charged by PEXA for the transaction.

Invitations are made for others to join the workspace and electronic documents are prepared. Transfers can only be created by purchasers and vendors. Chain settlements are called 'linked settlements' in PEXA. For these to proceed, the representatives of all parties in the chain must be subscribers; if the chain is broken, not all transactions can settle simultaneously because the funds for transactions later in the chain come from those at the beginning.

Once documents are prepared, invitations are issued for other parties to digitally sign the documents. Each time a document is prepared, or amended, a lodgement verification advice check is automatically performed and the result (a lodgement acceptability advice or LAA) notified in the workspace. After activity is performed in relation to a document, a notification appears in each parties' dashboard.

When a document is signed by all necessary parties, and the LAA performed satisfactorily, the check will show "Approved". This is an indication that if lodged, there is a high level of confidence (but not certainty) that the document will be registered. In NSW, registration will not at first be automatic as the Registrar-General still retains the right to refuse registration in appropriate cases. However, it is likely (as it is now) that there will be very few cases where an electronic document which has been approved following a LAA will not be registered. If a party has a problem with a transaction, documents can be 'unsigned' and when this happens a transaction will not proceed.

As the transaction proceeds and parties prepare for settlement, settlement adjustments (at the moment) will be done manually (or by way of practice software) and the results entered into the workspace. In time, the workspace may provide a calculator. A party required to pay money provides details of source accounts (from which money will be drawn) and the recipient the details of the destination accounts (to which funds will be paid).

At the outset, source funds can be debited from a solicitor's or conveyancer's trust account, a financial institution account or what is somewhat misleadingly referred to as the PEXA trust account (which is an account to which any subscriber or their client can deposit money for a property transaction). Destination accounts can be any account within the Reserve Bank's settlement system. The amounts need to balance. Payment of stamp duty is verified by the provision of a stamping ID, and payments are directed to the LPI (for registration fees) and PEXA (for providing the platform). The current advice is that PEXA's fee is to be success-based - they only accrue if the transaction settles. As a result, there is no penalty if a party commences using PEXA but completes the transaction in the paper environment.

The PEXA settlement model is one of the aspects of the system where it varies from paper conveyancing. The variation is probably for the better. As we know, in the paper environment, documents are exchanged for cheques, the cheques taken away and banked and the documents taken away and lodged for registration. The cheques take some days to clear and the documents sometimes months to register.

In NECS, the aim is to ensure that the same party is never in possession of both the documents and the cash (called the 'delivery versus payment model'). So at a time fixed for the settlement, the workspace is 'locked', the funds in the source accounts are, in effect, frozen and, at the same time, the documents are lodged. When notification of lodgement is received from the LPI, the cash is transferred from the source accounts to the destination accounts with funds immediately available. In practice, in the large majority of transactions, the financial settlement and lodgement will be instantaneous. Registration may take a few hours to a day. Practitioners will appreciate that this is a definite improvement on the present system.

Some key concepts

Practitioners will have to come to grips with some key concepts. The detail is of course to be found in the legislation but below is a short summary:

• Verification of identity (VOI) - at the heart of risk minimisation

The issue of verifying the identities of the parties is dealt with by a sturdy verification of identity (VOI) standard to be found as a Schedule to the MPRs. The development of this standard was one of the major tasks in developing NECS. The standard adopts a tick-a-box approach: if a practitioner ticks all the boxes, there will be no liability from a failure to properly identify a client.

It requires a practitioner to take reasonable steps, by way of a face-to-face identification of each client, each signer, every mortgagor and any person who seeks the delivery of a duplicate certificate of title. Photographic evidence is required and this should be compared for likeness with the person being identified. A range of secondary documents can also be used.

Companies are identified by the verification of the identity of those authorised to sign; attorneys are similarly identified with the additional verification of the power.

There is provision for VOI by a subscriber's agent. This is likely to be a facility used widely by smaller practitioners and those in remote locations. However, the subscriber remains liable for any difficulties which arise from the agent's failure to properly verify identity. The Law Society's Property Law Committee has been pressing for the licensing of agents for client verification purposes. It is important to note that, however a client is verified, it is for the subscriber to be satisfied that the verification standard has been met - neither PEXA nor the land registry are concerned until there is actual fraud.

Australia Post already has a sophisticated system for verifying identity. Private parties are examining the possibility of providing a service. For the moment, however, the subscriber will still hold ultimate liability for the accuracy of a VOI by an agent of that subscriber.

• Digital signing

Central to the notion of representation in the digital environment is digital signing by subscribers for the client of transfers (generally these won't be signed by representative subscribers) and withdrawals of caveat. Confidence in a digital signature, it will be readily appreciated, is therefore extremely important for users. The usual system of verification in the paper environment - witnessing by a reputable known witness - is not available in the electronic world.

Signers will need to be identified in accordance with the verification standard before they can be issued with a digital signature. An organisation digital signature certificate (DSC) (a certificate that the person using the signature is who they purport to be) is issued to the subscriber - typically, for the legal profession, a law firm. Signers will have 'child' DSCs associated with the parent signature. The MPRs require that subscribers take steps to ensure that only those entitled to do so can access the system and that the digital keys (which take the form of either a 'dongle' or a key loaded into a computer) are kept securely. The subscriber has an obligation to report anything which may jeopardise the security of digital signatures. Close control of the digital signature is not only mandated, it is essential for practice risk minimisation.

As source accounts will be trust accounts for the purposes of the Legal Profession Act 2004, only those authorised to sign trust account cheques or effect electronic transfers of funds from a trust account should digitally sign the authority to transfer funds from trust for the purpose of a settlement.

• The attribution rule

The effect of the attribution rule is to bind a subscriber - and anyone on whose behalf the subscriber acts - absolutely to any document which is signed using the subscriber's digital signature in a conveyancing transaction. It also binds the subscriber's client. This is so even if the subscriber did not sign the document - that is, the subscriber's DSC was used by someone other than the subscriber - unless the subscriber is able to repudiate the signature. This cannot be done except in the circumstances set out in s.12(4) of ENCL. Practitioners should, of course, closely read the circumstances in which they can repudiate a digital signature, which are few, and require very 'clean hands' on the part of the subscriber in the handling of the digital signature.

• Client authorisation

Each client must sign a client authorisation to enable the subscriber to enter into transactions in that client's name. The client authorisation is to be in a mandatory form.

• The contract for sale

When NECS is introduced it will be necessary in some ways, and helpful in others, if the contract for sale reflects the possibility that the transaction may be completed in NECS. To that end, the contract subcommittee of the Property Law Committee is working on a first draft of the additional condition. At the moment it is anticipated that some of the conditions will be advisory in nature (for instance whose obligation it is to open the workspace), while others will cover important contractual matters where, by reason of NECS, there is a significant difference in the way the matter is to be conducted (for example, notices between parties and the manner and timing of submission of the transfer). It is probable that a new edition of the contract for sale will be published in early 2014 - the committee's hope is that the new NECS provisions will be ready in time for the new edition.

ENDNOTES

1. Mortgages will be signed in the usual way, but the document registered electronically is not 'wet' signed. Instead the wet-signed document is to be retained by the lending institution which certifies - electronically of course - that it holds it such that it is readily available.
2. This is the case in Victoria under Electronic Conveyancing Victoria known as ECV but, unfortunately, not in NSW at this time.
3. The ARNECC website is at www.arnecc.gov.au and practitioners can access the MPR and MOR at www.arnecc.gov.au/publications.
4. LIXI describes itself as "an Australian, member-based not-for-profit company that develops data message transaction standards for the Australian mortgage processing industry, and promotes improvements in efficiency in mortgage processing. Owned by the members of the initiative, LIXI represents participants in the residential mortgage lending industry. Founded in 2001, LIXI has developed and released standards for such transactions as mortgage applications, property valuations, broker commissions and several others" (see the organisation's website at lixi.org.au)
5. Rules 5.2 and 5.3 of the MPR published by the Registrar-General (in accordance with s.23 of the ECNL at tinyurl.com/l7h99s9).
6. The question remains whether the participation agreement could be subject to challenge undert Part 2.3 of the Australian Consumer Law.
7. The current form of CA is to be found at Schedule 4 to the MPR at tinyurl.com/pzmnzrv. However LPI have advised that this form of the CA is likely to be amended further, see tinyurl.com/l5dlh2l.