The Law Commission recently published its consultation paper on updating the Land Registration Act 2002 (the Paper). Among the numerous proposals is one that will be of particular interest to mortgagees: views are invited on limiting the circumstances in which a mortgagee can claim against the Land Registry's indemnity. The effect would be to treat mortgagees as a special category of applicant but not necessarily to their advantage.
The Paper runs to almost 500 pages and covers a wide range of land registration issues. However, one theme running throughout is the concern that property fraud is on the increase.
The Paper sets out statistics from the Land Registry's annual reports and accounts showing that in 2014 - 2015 70 per cent (£5.9 million) of indemnity payments made by the Land Registry arose out of fraudulent transactions. Whilst the Paper acknowledges that the cost of those payments has so far been met by the fees charged by the Land Registry it questions whether "there are any circumstances in which the Land Registry's liability should be limited or even removed".
It is against this backdrop that the Law Commission has suggested that the availability of indemnity payments to mortgagees could be restricted given that "for an institutional lender, risk management is an integral aspect of business".
At the present time, Schedule 8 of the Land Registration Act 2002 provides for payment of an indemnity by the Land Registry where (amongst other things) a party suffers loss as a result of:
- rectification of the register; or
- a mistake whose correction would involve rectification of the register.
Rectification in this context means the alteration of the register to correct a mistake which prejudicially affects the title of a registered proprietor.
It is worth noting that where a claimant has suffered loss either wholly or partially as a result of his own fraud or as a result of his own lack of proper care, paragraph 5 of Schedule 8 of the Land Registration Act 2002 makes provision for either no indemnity to be paid or for a reduced indemnity to be paid.
Currently, no distinction is made between the different categories of applicant claiming against the indemnity.
Drawing inspiration from other jurisdictions the Law Commission has put forward the following proposals:
- a mortgagee's ability to claim an indemnity should be restricted to cases where there is an existing mistake on the register at the time when the mortgage is granted. So, following the examples given by the Law Commission:
- if A is the registered proprietor but a fraudster impersonating A grants a mortgage over the land to B bank which is then registered, B bank would have no recourse to the indemnity in the event the fraud was discovered and the charge removed from title. This is because the register correctly identified A as the registered proprietor at the time the mortgage was granted; the mistake arises from the mortgage transaction itself and the mortgagee was arguably best placed to detect the fraud.
- if A's interest is fraudulently transferred to C and that transfer is registered at the Land Registry before the mortgage is granted by C to B bank, B bank would have a claim (as there would be a pre-existing mistake on the register at the time of the grant of mortgage insofar as C is mistakenly identified as registered proprietor).
- placing mortgagees under a statutory duty to verify the identity of mortgagors so that in the event of a breach of duty "where the registration of the charge is found to be a mistake the register would be rectified against the mortgagee without payment of an indemnity".
If carried through these proposals could leave mortgagees in a less advantageous position to claim against the Land Registry indemnity compared to other applicants. That gives rise to a number of questions:
- are mortgagees, as the Law Commission implies, in a better position that most to detect fraud and to manage the associated risks?
- how, if at all, would a distinction be drawn between institutional and non-institutional lenders?
- is the Land Registry already sufficiently protected by the provisions of paragraph 5 of Schedule 8 of the Land Registration Act 2002?
- if the proposals are carried forward, how would mortgagees seek to rebalance the risk – would this result in higher fees and more reliance on indemnity insurance thereby pushing up the cost of lending for consumers?
- ultimately, how could this affect the lending market?
In Section 13 of the Paper the Law Commission has put forward a separate proposal restricting the right of mortgagees to object to the removal of their charges where the register is being rectified to correct a mistake (another area where it is suggested that mortgagees could be treated differently). If this proposal were combined with a restriction on the ability for mortgagees to claim an indemnity for rectification it could, as acknowledged by the Law Commission, lead to "circumstances in which a mortgagee could not oppose rectification but would not be entitled to an indemnity". This is one illustration of how mortgagees could be left worse off than at present.
Going forward – do you feel special?
Those mortgagees who have not yet reviewed the Paper are strongly advised to do so. In addition to the above there are also sections dealing with sub-charges and tacking as well as an invitation for views as to whether there should be a separate general review of the law of mortgages as it applies to land.
The consultation closes on 30 June 2016 therefore any mortgagees who don't wish to receive special treatment are encouraged to submit their responses to the Law Commission before this closing date.