Key points:

  • A buyer of registered land for valuable consideration will take subject to any third party rights which are noted on the register, and to overriding interests
  • In certain, very narrow, circumstances where the buyer's conscience is affected, the buyer may be bound by a third party right which has not been properly protected by registration
  • This will only be the case where the buyer has specifically undertaken a new obligation to give effect to the right

Background

A buyer of registered land who pays "valuable consideration" will normally acquire the property subject to any third party rights which are noted on the title at the Land Registry, and to "overriding interests". Overriding interests can include (for example) certain types of easement, short leases and the rights of those who are in actual occupation of the land.

If a third party has a right which does not constitute an overriding interest, and which they have not protected by registration, normally the buyer will take the land free from it. However, in rare cases it is possible for a buyer to be found to be subject to the right, notwithstanding its non-registration, if the buyer's "conscience" is affected. The case often cited in support of this is Lyus v Prowsa Developments Ltd.

Constructive trusts and Lyus v Prowsa Developments Ltd

Lyus v Prowsa Developments Ltd (1982) illustrates that, in certain circumstances, it is possible that a "constructive trust" may be imposed on a buyer of land to give effect to third party rights, notwithstanding their non-registration.

This may be the case where the sale contract specifically provides that the sale is subject to the third party right. However, the court will not impose a constructive trust unless it is satisfied that the buyer's conscience is affected, so that it would be inequitable to deny the third party the right claimed.

The crucial question is whether the buyer has undertaken a new obligation, not otherwise existing, to give effect to the right. Mere knowledge of the existence of the right is not enough.

In Lyus v Prowsa, a purchaser from a mortgagee exercising its power of sale agreed in the contract that the property was sold subject to and with the benefit of a prior contract for the sale of a plot of land on the property. The clause could not have been included in order to protect the mortgagee from any claims, because the plot contract was not binding on the bank (whose mortgage had priority to it).

As such, there was nothing the plot purchaser could have done by way of registration to ensure that a buyer from the bank was affected by their rights. In these circumstances, the court found that the buyer was subject to a constructive trust to give effect to the plot sale contract.

It is against that background that we consider the most recent case of Groveholt Limited v Hughes.

Groveholt Limited v Hughes

In Groveholt Limited v Hughes, H sold part of a site to a supermarket for development. The remaining part of the development was subsequently sold to C Ltd.

The agreement with C Ltd envisaged that the site would be the subject of later development. The agreement provided a long stop date of ten years within which planning permission had to be obtained, which would then trigger an overage payment from C Ltd to H.

In the event that planning was not obtained by that date then C Ltd was obliged to re-transfer the land to H for nominal consideration. The obligation to re-transfer was not noted against the title to the property at the Land Registry.

The site was subsequently transferred by C Ltd to G. Ten years passed without planning consent being obtained, and H sought to enforce against G the provision in the agreement with C Ltd for the re-transfer of the land to him.

The agreement between C Ltd and G did not contain any specific reference to H's right to a re-transfer of the land. G did undertake to perform in general terms the obligations of C Ltd under a number of documents, which included the contract between C Ltd and H.

However, on the facts, the court found that this was directed towards obligations that C Ltd had undertaken in favour of the new supermarket next door, rather than the obligation to H to re-transfer the property.

The court therefore found that G had not assumed an obligation to re-transfer the land to H in accordance with the terms of the agreement between H and C Ltd. Since the contract to re-transfer had not been noted at the Land Registry prior to the transfer by C Ltd to G, it was not binding on G.

Things to consider

Because the principle in Lyus v Prowsa cuts across the underlying premise of the land registration system that purchasers should acquire good title free of any interests which do not appear on the register (subject to overriding interests), the circumstances in which a constructive trust will arise are - fortunately - narrowly confined.

In the case of Chaudhary v Yavuz, the court refused to apply the principle in Lyus v Prowsa to find that a buyer was subject to an easement in favour of a neighbour. In Groveholt Limited v Hughes the court thought that the decision in Lyus v Prowsa "must be regarded as being on the outer edge of the circumstances in which a constructive trust will be found to exist".

There would appear to be no reported cases in which the precedent of Lyus has been successfully relied upon to make binding on a purchaser an interest which could be, but was not, protected by registration. Third parties benefiting from interests in land should therefore ensure that they register their rights promptly at the Land Registry.