Land registration and fraudulent dispositions

Introduction

The Land Registration Act 2002 (“the LRA 2002”) came into force 11 years ago. After

152 years of “the land registration project” over 80% of the land in England and Wales is registered. The Law Commissioner responsible for property projects, Professor Elizabeth Cooke, recently said:

“the purpose of title registration is to guarantee title”.

That statement focuses on only one of the several purposes of land registration. The highlighting of that aspect may reflect the impact of ever increasing property values and fraud which put the “guarantee” and associated indemnity into sharper focus than previously.

The way the system of land registration addresses fraud and the competing interest of the “innocents” affected has become very complex and confusing. Prior to January 2013 there were several authorities which enabled practitioners to develop an understanding of how the consequences of fraud could be worked through using the various provisions of Schedule 4. However, in January 2013 the Fitzwilliam decision gave support for a very different approach, which harks back to the much criticised decision in Malory. The result is that currently we have a very confused and uncertain situation. That is always unhelpful for practitioners and their clients. In that context it is unsurprising that, after wide consultation, the Law Commission’s 12th programme of law reform will include a review of the LRA 2002 particularly the provisions for alteration (including rectification) and the indemnity scheme.

The Conventional Approach

Schedule 4 of the LRA 2002 details the power of the Court and the Registrar (sometime pursuant to a direction from the FFT Property Chambers, Land Registration) to alter the register to “correct a mistake”, bring the register up to date and to give effect to any interest excepted from the effect of registration, for instance, an overriding interest. Where the register is altered to “correct a mistake” and that alteration “prejudicially affects the title of the registered proprietor” the alteration is categorised as rectification. The indemnity scheme detailed in Schedule 8 of LRA 2002 only applies to an alteration if it amounts to rectification. This paper focuses on rectification i.e. the correction of mistakes which prejudice the current registered proprietor.

Since the introduction of the LRA the meaning of “mistake” for the purpose of Schedule 4 has been the subject of much debate and consideration by the Courts often in the context of fraudulent transactions. The Court of Appeal in Baxter v Mannion [2011] 1 WLR 1594 considered the meaning of “mistake” (approved in Balevents Ltd v Sartori [2014] EWHC 1164). It concluded “mistake” for this purpose was not confined to mistakes made by land registry officials in the course of examining or processing an application. Instead, “mistake” extends to the mistake on the register produced by the procedurally correct handling of an application wrongly made including a fraudulent application. So the mistake is the registration of an application that should not have been allowed regardless of whether that was due to the way it was dealt with or its substance.

Major difficulties have arisen in cases where, following a fraudulent transfer but prior to rectification, the fraudster or those deriving an interest from him have affected further transactions e.g. where the property has been sold on, leases or charges granted. Under the heading “Rectification and derivative interests” paragraph 8 of Schedule 4 provides that the power to rectify is expressly stated to “extend to changing for the future the priority of any interest affecting the registered estate … concerned.” The meaning of the words “for the future” has been a feature of the inevitable debates about whether rectification is retrospective or purely prospective and what that actually means.

In Barclays Bank v Guy [2008] EWCA Civ 452 the Court of Appeal confirmed a refusal of summary judgment in relation to a claim to rectify the register by the removal of a legal charge which was granted by an innocent registered proprietor who was registered following a fraudulent transfer. The fraudster was long gone having received funds from the newly registered proprietor who had raised those funds from the bank in exchange for a mortgage he granted. At first instance the Judge had concluded there was no mistake in the registration of the charge because it was executed properly by the registered proprietor and it could not be said to be intrinsically flawed. The Judge had depended heavily on authorities that related to the position under the Land Registration Act 1925 which drew a distinction between void and voidable transactions. The Court of Appeal refused permission to appeal that decision twice. There were various obiter comments from the Court of Appeal that appeared to adopt the first instance court’s analysis. However, it was acknowledged by the Court of Appeal itself, in related litigation, that its comments on that aspect were not binding authority. The construction put forward in Barclays v Guy was characterised as a narrow construction of the words “correcting a mistake” and it was acknowledged that a wider construction could be advanced.

This wider construction can be more easily understood if expressed as “correcting the mistaken removal of the original owner’s name from the register” rather than simply correcting the mistaken introduction of the new registered proprietor. Expressing it in that way makes it clear that correcting the mistake includes correcting/removing the interests derived from the registered proprietor who, but for the mistake, would never have been registered. An alternative way of expressing the wider construction is that the correction of the mistake involves the correction of the consequences of the mistake as well as of the mistake itself. The proper meaning of “correcting a mistake” was fully explored, with the Land Registry intervening, before a Deputy Adjudicator in Knights Constructions (March) Limited v Roberto Mac Limited, The Chief Land Registrar 2011 WL 6329290. The Deputy Adjudicator decided that the wider construction was correct. The Land Registry then accepted the wider definition as correct and changed its practice in dealing with alterations accordingly. The decision has now been expressly approved by the Court of Appeal in Gold Harp Properties Limited v MacLeod & ors [2014] EWCA @ 80-1.

The law as described in that line of authorities had reached point where it is clear that Schedule 4 can be used to unravel the consequences both the immediate and subsequent consequences of a fraudulent transaction even though it does not purport to turn back the clock. Further the manner in which the indemnity operated as a consequent was accepted by Land Registry and academic commentator as representing what was intended by Parliament in the LRA 2002.

The Malory Approach

In Fitzwilliam v Richall Holdings Services Limited [2013] EWHC 86 and in Park Associate Developments v Kinnear (unreported) Newey J approved a very different approach to the situations created by forgery/fraud and their solution. He concluded the registration of a fraudulent transfer would result in a deemed transfer of the legal title alone so that the true owner’s beneficial interest simply did not change hands i.e. the new legal owner held the property subject to the original owner’s beneficial interest. The original owner was therefore entitled to alteration of the register.

Newey J concluded he was bound to follow the much criticised Court of Appeal decision in Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] Ch 216. Malory dealt with the LRA 1925 and Newey J was dealing with the position under LRA 2002 and the equivalent provisions. In Malory the Court of Appeal decided that:

• s69 LRA 1925 (the equivalent of s58 LRA) dealt with the legal estate only, not the beneficial estate and,
• a forged transfer was not a disposition for the purpose of s20 LRA 1925 (the equivalent of s29 of the LRA).

Malory has been heavily criticised on the basis that it

• “…undermines … the essential structure of land registration without any compensating gains…” (C Harpum and the “architect” of the LRA 2002)
• Would have the effect of importing “principles of unregistered conveyancing into registered land and this would wholly contradict the system of registration of title and the move to e-conveyancing that the LRA 2002 is designed to facilitate” (Dr Martin Dixon)
• Is a “heresy” and “untenable” (Professor E Cooke, current Law Commissioner)

Assuming the Malory approach to fraud and land registration under the LRA continues to be good law it would seem some victims of fraud could secure their reinstatement on the register without resorting to Schedule 4 at all. If, as a result of the registration of a forged transfer the legal estate alone has transferred, the new registered proprietor holding the legal title of the property alone must do so as a bare trustee for the original beneficial owner, often the original registered proprietor. Accordingly, the original beneficial owner would be entitled to simply call for the legal title to be transferred to him provided he is entitled to the whole of the beneficial interest and are not a minor (Stephenson v Barclays Bank Trust Co Ltd [1975] 1 All ER 625).

That approach to what flows from a fraudulent transaction could avoid any application to alter the title in many cases. In those cases it would also avoid the limitations placed on rectification against a registered proprietor in possession. An application to alter may be necessary in the common situation where other transactions have taken place. However, if the original owner’s beneficial interest was at all times an overriding interest he will be able to establish that his interest takes priority. In those circumstances he could seek an alteration by way of updating of the register to reflect that fact rather than correcting a mistake/rectification.

On that analysis the original owner in almost every fraud case could simply demand the transfer of the legal title and seek declarations as to the priority of interests. Any alteration of the register would not be a rectification but an updating alteration to reflect the true existing position.

And then Swift and the Indemnity

In Swift 1st Limited v the Chief Land Registrar the approach in Malory was again applied to the LRA 2002, following Fitzwilliam. The appeal is due to be heard in the Court of Appeal in January 2015. It is anticipated that as appellant the Land Registry will maintain the challenge to the application of Malory to the LRA 2002 it advanced at first instance. The Law Commission 12th review including a focus on rectification provides an alternative route for the removal of the effects of Malory.

Swift was the registered proprietor of a charge acquired in good faith for value. Its charge had been removed from the register, it was deemed to have suffered loss by reason of rectification as if the disposition had not been forged (pursuant to paragraph 1(2)(a)(b) and 11(2) of Schedule 8). It argued it was therefore entitled to an indemnity.

Land Registry argued the alteration of the register was not a rectification because it was not prejudicial to Swift’s charge. It was not prejudicial because the charge was always subject to the true beneficial owner’s interest which was an overriding interest, that had priority. In those circumstances it was argued that Schedule 8 was not engaged because an alteration which was not rectification was insufficient.

Since if there was no rectification the question of an indemnity simply did not arise it may be thought to be surprising that Land Registry challenged the application of Malory. Clearly, if the aim was simply to reduce the cost of the indemnity by arguing Malory was correctly applied to LRA 2002, seems like a good starting point. However, since paragraph 1(2)(b) of Schedule 8 expressly addresses the effect of a “forged disposition” and would be unnecessary and meaningless on the simple application of Malory without more, it would appear all parties recognised Malory could not be a complete answer.

In Swift Land Registry argued that the conclusions of Malory do not apply to LRA 2002. Instead it argued the correct analysis was that the correction of the register was an alteration to give effect to an overriding interest something that does not (and never had – Re Chowood’s Registered Land [1933] Ch 574) resulted in a right to the indemnity. There is logic and consistency in that argument and indeed, the use of the expression “forged disposition” in paragraph 1(2)(b), might be said to be a strong indication that for the purpose of the LRA 2002 a forged transfer or charge is a disposition.

Land Registry’s approach was consistent with the fact it has an interest in the whole system of Land Registration functioning as was intended. Land Registry believes and has proceeded on the basis that the conclusiveness that flows from registration is not confined to the legal title, there is no room for the principles applicable to unregistered land and the indemnity is not there to pay for losses incurred as a consequence of an overriding interest. The court concluded that Malory applied so that the charge was always subject to the true owner’s interest but that paragraph 1(2)(b) was a wide deeming provision going to the incidence of the “forged disposition” not just the loss. So the Court concluded that paragraph required a legal fiction which meant the fact of the forgery had to be ignored in other words Malory applied so that the forged transfer was not a disposition but under paragraph 1(2)(b) it was deemed to be a disposition because the forgery could be ignored.

The decision is unfortunate as it relies again on the questionable reasoning of Malory and Fitzwilliam when it would not seem at all necessary to do so. It maintains that if there is fraud there is no disposition when Schedule 4 expressing refers to “fraudulent dispositions”. It would also seem to ignore that when someone is registered as proprietor under the LRA deemed by s58 to be the proprietor of the legal estate pursuant to ss 23 and 24 LRA they are entitled to make a disposal of any kind that a legal owner is permitted by law to make. It may also have distorted the meaning of paragraph 1(2)(b) which many commentators believe relates only to the process of assessing loss/quantum. It also clearly commits the heresy of opening a door in the registered land system to the principle of unregistered land and fraudulent transactions.

And the Answer…is probably “Time”

It is very unfortunate that Malory has returned to undermine the notion of Land

Registration under the LRA. Its revival and the confusion it has caused are very likely to be short lived. It may be resolved by the Land Registry being successful on that point in the Court of Appeal in January 2015. However, it appears that it would be equally possible for Land Registry to succeed on other grounds with that aspect left hanging. The alternative route to resolution is further statutory provisions devised by the Law Commission to put the system of Land Registration back to where the Land Registry, the Law Commission and the architect of the LRA clearly believe it should be. Given the criticism of the approach that flows from Malory, the quarters it comes from and the manner in which it disrupts the intended impact of the LRA provisions (and at the same time restricts the remedies for some victims of fraudulent transactions in possession), such recommendations would have a good prospect of making it onto the statute book.

In the meantime all decisions about how to assist clients to undo or seek compensation for the consequences of a fraudulent transaction must be taken with an appreciation of the benefits and risks associated with the Malory / Fitzwilliam approach.

Brie Stevens-Hoare QC
Hardwicke