Amanda Eilledge examines the recent High Court decision of John Patrick Murphy v Lambeth London Borough Council (2016) Ch D (Murray Rosen QC sitting as Deputy High Court Judge) 19/02/2016

Real Property - Landlord and Tenant – Construction of Contracts – Cherrytree Investments v Landmain – Rectification Under Land Registration Act 2002 Sch.4 Paras.3 & 6

Summary

This case will be of interest to property litigation lawyers for two reasons:

  1. It involved the application of the Cherry Tree Investments v Landmain principle in the context of an ambiguous lease. The court had to decide whether an extrinsic document, namely, a right to buy notice under section 125 of the Housing Act 1985 (“the s125 Notice”), could be relied upon as an aid to construction of a long lease registered at the Land Registry.
  2. The court found that there were “exceptional circumstances” for the purposes of Sch.4 para.3(3) Land Registration Act 2002 (“LRA 2002”) but ordered rectification of the property register in any event.

The Claim

The claimant property developer sought a declaration that he was the registered proprietor in possession of both the ground floor and the basement of a property. The defendant local authority, who had sold the property to the claimant’s predecessor in title under the right to buy provisions of the Housing Act 1985, argued that on its true construction, the lease did not demise the basement and that the inclusion of the basement within the title was a mistake. It claimed that the property register should be rectified to delete the reference to the basement.

The Decision 

The judge found that the lease, on its proper construction, demised only the ground floor of the flat and not the basement. The claimant was not in possession of the basement for the purposes of Sch.4 para.3(2) and he rectified the register in favour of the defendant, having concluded that there were no exceptional circumstances justifying a refusal to amend the register. 

In construing the lease, he accepted the claimant’s argument that the s.125 notice, which described the property as a ground floor flat, was not determinative as it was not a publicly accessible document: Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] Ch. 305 followed. The judge went onto hold that in any event the demise did not include the basement.  

Having found that the claimant was not in possession of the basement, he had to consider whether the facts relied upon by the claimant were capable of amounting to exceptional circumstances for the purposes of Sch.4 para 3(3). He accepted that there were exceptional circumstances (applying the definition of exceptional circumstances set out by Morgan J inPaton v Todd [2012] EWHC 1248 (Ch), [2012] 2 E.G.L.R. 19 at para.67). When evaluating these facts together with other matters relied upon by the defendant, however, he concluded that the property register should be rectified.

Comment

  1. Construction 

Whilst the Cherry Tree Investments v Landmain principle has been applied to the construction of a company’s articles of association (see Cosmetic Warriors Ltd v Gerrie[2015] EWHC 3718(Ch.)), this case appears to be the first in which the High Court has concluded that the rule applies when considering the construction of a long lease registered at the Land Registry where the lease itself is ambiguous. Landmain was concerned with the construction of a charge where the claimant sought to introduce an entirely new clause into the agreement by relying upon a collateral document. In Murphy, the defendant tried to draw a distinction between Landmain and this case on the basis that there was an ambiguity in the lease and that in those circumstances reference could be made to the s125 notice to resolve that ambiguity. The judge accepted that the case before him was different in that the s.125 notice was a part of the process which lead to the creation of the lease and it was apparent on its face that it had been granted under the right to buy provisions. He still found, however, that the notice could not be relied upon to resolve the ambiguity. 

In approaching the question of construction in respect of a document registered at the Land Registry, extrinsic material, whilst admissible (see Landmain at para 104), will not have any influence on the construction of the document unless reasonably accessible to a third party contemplating dealing with the land. It should be remembered that since there can only be one construction, even if the dispute as to construction is between the original parties to the contract, the extrinsic material should still be excluded (see Landmain at para 99).

Whilst this principle seems settled, there is still likely to be disagreement about whether a particular document is “reasonably accessible” to a third party. In Murphy, it was conceded that a purchaser had no right as a matter of law, to obtain the right to buy documents which had preceded the grant of the lease, although the defendant may have been prepared to provide them if asked. The judge considered the question of accessibility by reference to the claimant’s legal rights rather than by reference to what information he might have obtained had he asked and the defendant local authority had cooperated. 

  1. Exceptional Circumstances

Rectification is dealt with in Sch.4 LRA 2002. Sch.4 para. 2(1)(a) and 5(a) provide that the court and the registrar respectively have the power to alter the register for the purposes of correcting a mistake. 

The combined effect of paras. 3(2)(3) and 6(2)(3) is that:

  1. Neither the court nor the registrar may make an order rectifying the register if the land in respect of which rectification is sought, is in the possession of the registered proprietor, unless the party seeking rectification can establish either that:
    1. (a) the proprietor has by fraud or lack of proper care caused or substantially contributed to the mistake; or
    2. (b) it would for any other reason be unjust for the alteration not to be made.
  2. If the land is not in the registered proprietor’s possession, the court or registrar must make an order rectifying the register unless there are exceptional circumstances which justify its not doing so. 

The approach the court/registrar should adopt when considering exceptional circumstances was considered by Morgan J in Paton v Todd [2012] 2 EGLR 19 at para. 66. There are 2 questions: 

  1. Are there exceptional circumstances in the case? 
  2. Do those exceptional circumstances justify not making the alteration? 

At para. 67. Morgan J stated  

’Exceptional’ is an ordinary, familiar English adjective. It describes a circumstance which is such as to form an exception, which is out of the ordinary course, or unusual or special, or uncommon; to be exceptional a circumstance need not be unique or unprecedented, or very rare but it cannot be one that is regularly, or routinely, or normally encountered: see R v Kelly [2000] 1 QB 198 at 208 C-D (a decision from a very different context but nonetheless helpful as to the ordinary meaning of "exceptional circumstances"). Further, the search is not for exceptional circumstances in the abstract but those which have a bearing on the ultimate question whether such circumstances justify not rectifying the register.

Morgan J sets out the kind of matters that will be relevant at paras.79-80 of his judgment. These included: 

  1. The effect on both parties of an alteration of the title.
  2. The effect on both parties of a refusal to alter that title.
  3. Whether the registered proprietor purchased the land believing he was acquiring an indefeasible title or whether he was aware that there was likely to be a dispute about title.

In Murphy, the claimant purchased the flat in October 2013 with the intention of developing the basement into a separate dwelling. In April 2014, the defendant had granted conditional permission to permission to split the property into 2 separate dwellings. The claimant had spent approximately £8,000 and a significant amount of his own time on the development, having been encouraged by the defendant to believe that unconditional permission would be granted once he had obtained planning permission (which he had) and the parties had agreed a premium (which they had). 

The judge accepted that these were exceptional circumstances, but that they did not justify a refusal to rectify the property register, once other factors had been taken into account. These included: 

  1. It was unlikely that the defendant was solely responsible for the mistake in the land register.
  2. It had also been accessing the basement continuously over a very long period.
  3. The agreement to split the flat into 2 was subject to contract, it was a commercial project and the claimant acted at his own risk pending a final agreement.
  4. The court was not satisfied that the claimant had suffered disproportionate financial loss. The claimant had a claim for an indemnity from the Land Registry under Sch.8 which would compensate him for the majority of his losses.
  5. Any development opportunities were limited by a covenant in the lease.
  6. The claimant would be entitled to an indemnity under Sch.8 LRA 2002.

Each case will depend on its own facts, but it is clear that a number of matters need to be ascertained at an early stage in a case that involves a mistake on the registered title. Such cases are becoming more common with the rise in identity fraud in recent years. Particular consideration needs to be given to whether the registered owner is in possession. If the registered owner is in possession then in most cases rectification will not be ordered.  

If the registered owner is not in possession, then one needs to consider whether there are any factors which make the circumstances of the case exceptional and the guidance given in Paton v Todd set out above should be followed. One important question will be whether the client is entitled to an indemnity under Sch.8. and whether that will adequately compensate him for his loss. Finally, one should not overlook the possibility of potential claims against a client’s former legal advisers relating to any purchase or, in the case of identity fraud at least, breach of an undertaking or warranty of authority given by the seller’s solicitors.