HM Land Registry Practice Guide 19 - Registration of legal charges and deeds of variation of charge
In January 2014 HM Land Registry published a new edition of Practice Guide 19, replacing the October 2012 edition. The changes reflect the Land Registry’s policy to accept an RX1 (Application to enter a Restriction) or CH2 (Application to enter an obligation to make further advances) without a further fee provided these are lodged before the principal application to which they relate is completed.
HM Land Registry Privatisation consultation
The Land Registry and The Department for Business, Innovation & Skills has launched a consultation on proposals to create a new service delivery company to take over responsibility for processing land and property registration from HM Land Registry. The Government’s paper states: “We think the new company will serve the property market more effectively as it will have a greater flexibility to operate.”
In essence, this consultation will result in the privatisation of Land Registry services. The proposal, which would require amendments to the Land Registration Act 2002, would retain a separate Office of the Chief Land Registrar within Government whose role would be to perform regulatory and fee-setting functions. However, day to day processing of registration applications and information provision would be the responsibility of the new service delivery company. Of greatest note for solicitors and their clients, is that the state guarantee of title would continue to apply since indemnity arrangements would fall within the responsibility of Office of the Chief Land Registrar and would therefore be state-backed. The consultation closes on 20 March 2014.
Case law update
In Bank of Scotland plc v Joseph, Lyons and others  EWCA Civ 28 heard in January 2014, the Court of Appeal ruled that even if a unilateral notice does not accurately state the interest which it seeks to protect, the notice holder is still entitled to a priority interest (provided it held an interest capable of protection). A UN1 could protect a different, but connected right.
The Defendant appealed against summary judgment for the Lender in a claim for possession of a Docklands flat. A lessee under a long lease was registered as the proprietor in 2005. On the same day in 2005, the lease was assigned to the first defendant (Joseph) and the Lender took a charge over the property as a mortgagee. The Lender did not register its charge until 2011 when Joseph became registered as the proprietor, but protected it from 2006 by a unilateral notice on the title register.
In the meantime, the lessee granted a charge over the property to a company, Wingfield Financial Heritage Limited (“WFHL”). WFHL registered its charge in 2010 and the lessee acquired the flat on a sale as mortgagee by WFHL, of which he was a director, but was not registered as proprietor. In 2012, the Lender sought possession of the flat from Joseph for failure to pay any instalments on the mortgage. Joseph denied having executed the mortgage, or any contract to purchase the flat, asserting the transaction to have been a forgery, but did not dispute the Lender’s claim to possession.
Subsequently, the lessee was added as a defendant. The lessee’s defence was that WFHL’s 2005 legal charge ranked in priority to the Lender’s 2011 legal charge because, until 2011, the Lender had, at most, an equitable interest, which could not take priority. The lessee, therefore, had acquired a clear title and the Lender’s loan was unsecured. It was held that the Lender’s unilateral notice in respect of the mortgage was effective to secure the priority of its subrogated right to rely on the unpaid vendor's lien, notwithstanding the lessee’s assertion that Joseph’s charge was ineffective because of forgery. The lessee contended that the Lender’s notice protected an equitable charge under a mortgage, not a different type of interest, namely that based on an unpaid vendor's lien.
The Appeal was dismissed. In accordance with the Land Registration Act 2002 s.77, a unilateral notice had to specify the interest which it sought to protect as accurately as possible. However, a failure to accurately identify the interest did not mean that such a notice was ineffective to preserve priority.
There was no doubt that WFHL could have challenged the Lender’s entry by applying to the registrar for cancellation of the notice as invalid under s.36 if the Lender had no other form of security which was entitled to protection under the notice. The adjudicator would have required the registrar either to amend the unilateral notice, or to replace it with an agreed notice based on the actual interest, but in either case it would still have conferred priority on the Lender (see paragraphs 27-30 of the judgment).
The question to be determined by the Court of Appeal was whether a subrogated claim of the Lender to an unpaid vendor's lien took priority over a registered charge in favour of the company WFHL. WFHL sought to exercise a power of sale in favour of Lyons. If WFHL’s charge had taken effect subject to the Lender’s prior equity (the subrogated claim to a lien), then the Lender was entitled to enforce the lien against Lyons. If WFHL’s charge had priority over the Lender’s equity, then Lyons would have acquired the title free from the lien.
At the heart of the case was that the Lender had lodged a unilateral notice (UN1) against the title in respect of a mortgage yet was seeking to rely on the UN1 to protect a different right: a subrogated right to a vendor’s lien, to which the Lender was entitled in its position as a secured Lender. Could the UN1 protect a different, but connected right? The Court of Appeal held that it could.
By the time Wingfield’s charge was registered in 2010, the Lender had the protection of a UN1. However, the UN1 referred to a mortgage, yet because the charge had been forged, the Lender wished to rely on its subrogated right to a lien. Could the UN1 extend that far? The Court of Appeal held that it could. It saw nothing in the Land Registration Act or Rules that required an applicant for a unilateral notice to specify the details of its interest beyond what the Registrar required. The UN1 was therefore capable of protecting rights and interests derived from, or connected with, the interest claimed to have been protected.
Although a unilateral notice on the title register ought to specify as accurately as possible the interest which it sought to protect, failure to do so would not necessarily make it ineffective to preserve priority, provided that the notice holder possessed an interest which was entitled to protection.
Land Registry indemnity - for loss from rectification of the register
In Swift 1ST Ltd v Chief Land Registrar  EWHC (ChD) (unreported), the High Court considered whether a registered chargee in good faith of a forged charge was entitled to a Land Registry indemnity for losses arising from rectification of the register to cancel the charge. It was held that they did.
The statutory deeming provision in paragraph 1(2)(b) of Schedule 8 to the Land Registration Act 2002 means that the registered chargee is deemed to have suffered loss, as a result of a rectification, as if the charge had not been forged. This means that, for the purposes of an indemnity claim, the registered proprietor is deemed to have taken subject to the charge and any overriding interest of the registered proprietor could not defeat or reduce the chargee's indemnity claim.
In 1983, Mrs Rani (R) was registered as the sole proprietor of a residential property. She had lived at the property at all material times since that date.
In May 2006, Swift 1st Ltd (S) received a mortgage application purportedly signed by R. A legal charge over the property was purportedly executed by R in favor of S and S released the mortgage advance. R never received the funds.
In June 2006, the charge was registered in the charges register of the title to the Property. From late June 2006, there were defaults in the repayment of the loan. S issued proceedings for possession of the Property.
In June 2009, S accepted that R had been the victim of a fraud. S discontinued its possession claim and, by consent, the court ordered that S’s charge be “set aside” and “HM Land Registry shall amend the title to [the Property] by deleting any and all interest of [S] therein”.
In August 2009, the entry for the charge on the register of the Property was cancelled. S then wrote to the Land Registry claiming an indemnity. The Chief Land Registrar responded that there had been no rectification of the register as a result of the court order "setting aside". The register had simply been brought "up to date".
In September 2011, the court order was amended with the consent of S and R to read that the charge “be agreed to be void” rather than set aside in order to counter the Chief Land Registrar's argument that there had been no rectification.
The Chief Land Registrar opposed S's indemnity claim on the following basis:
- A person claiming under a forged disposition can claim an indemnity under Schedule 8 of the LRA 2002 unless the rightful owner's rights are an overriding interest.
- Paragraph 1(2)(b) of Schedule 8 is only engaged for limited purposes under paragraph 1(1)(a) and has no independent or wider effect. It is a precondition to the application of these provisions that first there has been a rectification within the meaning of paragraph 11(2).
- In this case, there had been an alteration of the register which involved a correction of a mistake. However, the alteration did not prejudicially affect S's title. S's title was always subject to R's overriding interest which had priority under section 29 of the LRA 2002. R's overriding interest arose because: as a victim of fraud, R had the absolute right to the unencumbered freehold interest in the Property because the charge was void; R was at all material times in actual occupation of the Property; and R's right to rectification was itself capable of being an overriding interest.
The High Court held that S was entitled to an indemnity on the following basis:
- S was the proprietor of a registered charge claiming in good faith under a forged disposition.
- The register was rectified by cancellation of that forged disposition pursuant to the consent order.
- That rectification was a rectification under paragraph 1(1)(a) and paragraph 11(2) of Schedule 8 to the LRA 2002 which must be read together, not separately. For the purpose of paragraph 11(2): there had been an alteration of the register which involved the correction of a mistake; and the alteration prejudicially affected S's title.
- To establish whether S's title had been prejudicially affected by the alteration of the register under paragraph 11(2), it must be considered whether there had been a "rectification" under paragraph 1(1)(a). For the purpose of paragraph 1(1)(a), paragraph 1(2)(b) requires that S was to be regarded as having suffered loss by reason of the rectification "as if the disposition had not been forged".
- It requires a hypothetical assumption that the charge had actually been executed by R. On that assumption, R was to be regarded as having been bound by S's charge for the purpose of paragraph 1(1)(a).
- This statutory deeming provision meant that R would not have been able to set up any overriding interest against S. R would only have been able to do so if more than the bare legal estate passed to S on registration of S's charge. However, the decisions in Malory and Fitzwilliam have confirmed that this is not the case (See Richall Holdings v Fitzwilliam and Malory v Cheshire Homes).
It should be noted that the judge reached this decision with some reluctance but considered that he was bound by the decisions in Malory and Fitzwilliam.
This is an interesting decision which will be welcomed by chargees whose charges are removed from the register as a result of fraud.
It confirms that they will still be able to seek a Land Registry indemnity for their loss and their claim will not be defeated by any overriding interest of the registered proprietor. However, the decision does add to the criticism of the decisions in Malory and Fitzwilliam and it will be interesting to see whether this decision is appealed.
The Court of Appeal has handed down its judgment in Santander v RA Legal  EWCA Civ 183
This decision suggests that for the purposes of Section 61, a trustee's departure from best practice may be said to be sufficiently connected with a beneficiary's loss if there is some element of causative connection (short of “but for” causation), whereby something about the trustee's behavior materially contributes to the beneficiary's loss, in a wider sense.
The appellant Lender (S) appealed against a decision ( EWHC 1380 (QB),  P.N.L.R. 24) relieving the respondent firm of solicitors (R) of liability after it had acted in breach of trust.
The Lender had agreed to lend £150,000 to an individual (V) for the purpose of purchasing a property. R conducted the conveyancing, acting for both V and the Lender. A second firm of solicitors (X) fraudulently presented itself as acting for the vendor. However, the vendor, who was not involved in the fraud, had never agreed to sell the property. As a result of the fraud, R released the Lender's money to X on the day before completion was due in the belief that it was completing the sale. Completion did not take place, and the Lender did not obtain a charge over the property. The money was not recovered. The Lender brought a claim against R for breach of trust on the basis that it had released the advance without completion ever taking place.
Due to the fraud the transaction did not complete because purchase monies were paid away without receiving genuine documents in return. Following the earlier decisions in Lloyds Bank v Markandan & Uddin and Davisons, the High Court held that in releasing the purchase monies to persons who purported to be acting for the vendor (but who in fact were not), R acted in breach of trust.
The judge nevertheless went on to relieve R of liability by applying Section 61 of the Trustee Act 1925, holding that although R had departed from best practice it had nevertheless acted "reasonably" for the purposes of the Section because its departures from best practice were not sufficiently connected with, in the sense that they were not directly causative of the Claimant's loss. Nothing R could have done would have prevented the fraud.
On appeal, the Lender submitted that the Judge:
- failed to recognise R's transfer of the funds to X's client account on the day before completion as being a separate and distinct breach of trust;
- erred in construing s.61 by reference to the Companies Act 1985 s.727(1).
The Court of Appeal held in favour of the Lender and the appeal was allowed.
A purchaser's solicitors did not have a Lender's implied authority to transfer trust money pending completion to the client account of any other solicitor than the firm which was in fact acting for the owner and intending vendor of the property on which the Lender was to obtain a charge on completion. X was not acting for the owner, had no instructions either to contract for or complete the sale to V, and had not the slightest intention of using any part of the money transferred for the purpose of discharging the existing mortgage. For that reason, the transfer of the money on the day prior to completion was a breach of trust (see paragraphs 10, and 14-16 of the judgment).
The question of whether a trustee had acted reasonably in respect of matters connected with the beneficiary's loss was not to be resolved by considering each specific complaint separately. The judge had taken too lenient a view of the seriousness of R's numerous departures from best practice in the period between requesting the funds from the Lender until it was misappropriated from X's account weeks later. The part of the picture that was connected with the Lender's loss began with R's making of inadequate requisitions, the receipt of inadequate replies, the failure to obtain X's written commitment to follow the completion code before transferring the completion moneys, and the failure to appreciate that completion had gone seriously wrong when no confirmation that the previous mortgage had been discharged was received. Those failings were wholly unreasonable and sufficiently connected with the Lender's loss.
In the wholly exceptional circumstances that the fraudster was a solicitor, rather than a mere imposter, it could be assumed that the fraud would probably have been successfully achieved even if R had acted reasonably in all those respects. However, that assumption did not lead to the result that its conduct was not connected with the Lender's loss.
The failings represented a significant departure from a sophisticated regime whereby risks of loss to lenders and clients were minimised, even if not wholly eradicated. Where solicitors failed, in serious respects, to play their part in that structure, and at the same time were swindled into transferring and releasing trust money to a fraudster without authority, they could not expect to persuade the court that it was fair to excuse them from liability on the basis that they had demonstrated that they had in all respects connected with that loss, acted reasonably. In any event, R formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish, which left the instant court in no doubt that it would be unfair to excuse the firm from liability, in whole or in part.
The judge had adopted an over-lenient view about the requirement to show reasonable conduct, attributable to an incorrect attempt to construe s.61 by reference to the similar, but by no means identical, provisions in the 1985 Act. His exercise of discretion could not stand. R had not shown that it acted reasonably in all respects connected with S's loss, therefore the discretion did not strictly arise at all. Even had R done so, and the matter fell to be considered afresh before the instant court, it would not have been regarded as fair to grant R any relief from liability for breach of trust (see paragraphs 96-102 of the judgement).
The decision clarifies the position that for the purposes of Section 61, a trustee's departure from best practice may be said to be sufficiently connected with a beneficiary's loss if there is an element of causative connection, which materially contributes to the beneficiary's loss in a wider sense. Here there was a sufficient causal connection between the loss and that unreasonable behaviour, for reasons including inter alia, the absence of an express undertaking from X and R’s failure to get proper replies to requisitions (see paragraphs 113, 114 and 115 of the judgement). It was found that the requisitions on title and replies thereto did not provide any adequate undertakings regarding completion (see paragraphs 93, 94 and 97 of the judgement).
The departures from best practice in the Nationwide v Davidsons case were considered “far less serious and of no consequence in achieving for the Lender the protection against risks of loss which the Completion Code is intended to provide” (see paragraph 100 of the judgement). The Judge also considered that R’s negligence was relevant and the identified failings “formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish” (see paragraph 101 of the judgement) and so it would not be fair to excuse R from liability in whole or part.
It will be sufficient to preclude relief under section 61, if, for example, the trustee fails to satisfy the court that his or her unreasonable conduct did not materially contribute to the opportunity for the loss or did not materially increase the risk of such loss (see paragraph 110 of the judgement).