THE TEN OLD SQUARE SEMINAR SEASON 2011/12
SEX, LIES AND LAND REGISTRATION.
Thursday 9th February 2012 from 6.00pm The Chancery Court Hotel, Holborn, London.
Thank you for attending this evening’s seminar, which is the third in this season’s series of four seminars centred on our core areas of practice. Our chairman this evening is full-time Deputy Land Registration Adjudicator Owen Rhys. Owen was a member of Ten Old Square from 1998 until his appointment in 2006. He is one of the three DLRAs who are former members of Ten Old Square (Michael Michell and Michael Mark being the others). Included with these notes are details of LexisNexis’ new guide to cases before the Land Registration Adjudicators which is co-written by Michael Michell and due out in March this year. Tonight’s panel of speakers will be:-
Jonathan Gavaghan Jonathan was called to the Bar in 1992, having obtained a first from Oxford University (winning the prize for best performance in Land Law in his year) and a BCL. Jonathan has great experience in property matters including notable cases in the House of Lords and the Court of Appeal. He was Counsel for the landlord in 2010 in Clarence House v Nat West - the Court of Appeal’s decision on virtual assignments which received substantial press coverage. He also appeared for the successful Defendant in late 2010 in Pitcher v Sautter, a High Court trial between two multi-millionaires arguing over the building of a polo pitch. In addition to being recommended by the Legal 500 for Property work, he is also recognised as a leading Junior in both Commercial and Partnership Litigation. He is recognised as a leading Junior in Chambers UK 2012 which says: "Enormously talented" Jonathan Gavaghan has "a sharp intellect and is a man who shows a deft touch in court." He has impressed recently both with his effective courtroom manner and his excellent client-handling skills.
Paul Stafford Paul Stafford is an equity lawyer with a chancery and commercial practice which has an emphasis on litigation and includes a substantial amount of advisory and drafting work. He appears mostly in the High Court and in the Court of Appeal, although he has frequently represented clients before other courts, arbitrators, tribunals and jurisdictions, including the Supreme Court and Court of Appeal of the Falkland Islands, disciplinary committees of various professional bodies such as the RICS, and the Adjudicator to the Land Registry. His practice includes real property, the regulation, negligence and dishonesty of professionals (especially solicitors), partnership, trusts and the administration of estates, and building and civil engineering disputes. Examples of his recent cases include advising and acting in relation to disputes arising from joint venture agreements to acquire land; manorial rights; infrastructure development in the Falkland Islands; refurbishment of a large London hotel; fitting-out works at London Westfield; investigations by regulatory bodies of the conduct of solicitors, surveyors, and independent financial advisers. He has extensive experience of acting for government nationally and overseas in major litigation. In non-contentious work, examples include the drafting of management buy-out and shareholders' agreements for a major professional services company; advising on the duties of trustees in relation to building contracts; advising on sensitive pre-merger issues following the merger of two large firms of solicitors.
Sam Laughton Samuel Laughton was called to the Bar in 1993, and his practice encompasses a broad range of Chancery and commercial litigation and advisory work. He specialises in all aspects of property litigation, including residential, business and agricultural tenancies, mortgages, restrictive covenants, easements and boundary disputes; personal and corporate insolvency; commercial disputes and company law, including directors' disqualification; wills probate and administration of estates; charities; and professional negligence arising out of these fields.
Julia Beer Julia joined Ten Old Square at the beginning of 2010 and has a busy Chancery practice encompassing property, trusts and family work. She divides her time between London and the North-East of England and she is one of the few London Chancery practitioners with a major court presence in Manchester, Leeds and Bradford. She undertakes a wide range of contentious and non-contentious work with an emphasis on real property and co-ownership disputes including trust of land claims (TOLATA).
We hold our seminars not only to showcase the talent at Ten Old Square, but also to say thank you to those who continue to support our Chambers through valued instructions. Following immediately after the talks will be a reception in The Lounge with wine and hot canapĂŠs. You will earn 2 (SRA) CPD points for attending this seminar so please fill out the questionnaire at the back of this folder and let me have it back, at your convenience.
Keith Plowman, Senior Clerk – February 2012.
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LIES, DAMNED LIES & LAND REGISTRATION The consequences of the registration of fraudulent dispositions Samuel Laughton
Ten Old Square, Lincoln’s Inn Introduction
There is currently a lack of judicial consensus … (Atkin’s Court Forms, Vol.25 Land Registration at [95] n.2)
1. The above appears to be an understatement, dealing as it does with the
consequence of an entry in the register arising from a void disposition (such as a forgery). In theory, this confers protection on the forger and those
claiming through him, by what has long been termed a kind of ‘statutory
magic’. But registration in these circumstances is, although valid on its face, characterised as a ‘mistake’.
2. The million-dollar question is whether, following the fraud, a further
disposition by the newly-registered proprietor (who might or might not be
the forger himself) is a further mistake, or part of the original mistake, or
simply a consequence of the original mistake. (Such a disposition might be a second outright transfer, or perhaps more commonly, a charge to a bank.) After all, this further disposition is (because of the statutory magic) a perfectly valid transaction on its face, and may be registered as such.
3. The reason for this question lies derives from the apparent, and beguiling,
simplicity of Schedule 4 of the Land Registration Act 2002, which provides that the court may make an order for alteration of the register for the
purpose of ‘correcting a mistake’. (There are similar provisions by which the registrar may himself alter the register, but for simplicity this paper will assume all such alterations are being made by the court.) The answer
depends on an extraordinarily tangled web of inconsistent judicial authority, and a most unfortunate guy called Mr Guy. In particular, it will be suggested that it is not always necessary to pay attention to everything the Court of Appeal says.
4. It will immediately be seen that cases of this sort involve an invidious
decision as to which of two innocent parties should lose their interest in the
land, owing to the actions of a fraudster. If ‘mistake’ is given a wide meaning, it is more likely that the third party (such as a bank) will lose out on
rectification. If on the other hand ‘mistake’ is given a narrow meaning, this
would appear to protect the bank as against the initial proprietor. (However the consequence of either result is ordinarily mitigated by the fact that the losing party may well be entitled to an indemnity from the Chief Land Registrar: which will be the subject of the next talk by Paul Stafford.)
5. (It must be emphasised that the question under consideration only arises where the fraudulent disposition can be characterised as void. If (for
whatever reason) it can only be characterised as voidable, then quite
different arguments arise, which can only be the subject of a future talk.) Land Registration Act 1925
6. Before considering the case-law arising under the 2002 Act, it is important to inspect the state of the law as it stood immediately before October 2003.
Under the previous Land Registration Act 1925, discretionary rectification of the register by the court was provided for under s.82. In particular:
(1) The register may be rectified pursuant to an order of the court … in any of the following cases, but subject to the provisions of this section: (a) … where a court … has decided that any person is entitled to any estate right or interest in or to any registered land …, and as a consequence of such decision such court is of opinion that a rectification of the register is required, and makes an order to that effect;
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(b) … where the court, on the application … of any person who is aggrieved by any entry made in, or by the omission of any entry from, the register, or by default being made … in the making of any entry in the register, makes an order for the rectification of the register; … (d) Where the court … is satisfied that any entry in the register has been obtained by fraud; … (g) Where a legal estate has been registered in the name of a person who if the land had not been registered would not have been the estate owner; and (h) In any other case where, by reason of any error or omission in the register, or by reason of any entry made under a mistake, it may be deemed just to rectify the register. (2) The register may be rectified under this section, notwithstanding that the rectification may affect any estates, rights, charges, or interests acquired or protected by registration, or by any entry on the register, or otherwise. 7. There are essentially four relevant authorities on the operation of s.82 for
present purposes. Argyle Building Society v Hammond (1985) 49 P&CR 148 appeared initially to be a classic case of the sort under discussion. Mr Steed
was registered as proprietor of a house, but signed a power of attorney that empowered his mother to sell the house on his behalf. He alleged that a
transfer of the property took place by way of a forged deed in favour of his
sister and her husband (‘the fraudsters’): namely that his mother’s signature on the deed was forged. The fraudsters were subsequently registered at the
Land Registry as joint proprietors of the property. On the same date as the
transfer the building society, who it was common ground acted throughout in good faith, advanced money to the fraudsters on the security of a legal charge of the property. That legal charge was also registered at the Land Registry. The preliminary issue taken to the Court of Appeal was formulated as follows:
on the assumptions (a) that the purported signature on the transfer of the house to [the fraudsters] was a forgery but (b) that the [building society] took [its charge] in good faith and for value, without actual knowledge of the forgery, was there in law any possibility of Mr Steed obtaining rectification of the charges register relating to the house against the [building society]? 3
The Court of Appeal held that the court indeed had power in a proper case to
rectify the charges register even as against a bona fide chargee. In doing so, it made it clear (at 156) that ‘any protection enjoyed by a proprietor or
mortgagee under the 1925 Act is conferred subject to the provisions for rectification of the Register contained in section 82’.
8. In fact, Mr Steed later abandoned the forgery allegation, and following the trial proper the matter again went to the Court of Appeal (reported as
Norwich & Peterborough Building Society v Steed [1993] Ch 116). Mr Steed
was represented by Timothy Lloyd QC (as he then was), who argued that the court’s discretion to rectify the register could be exercised against an
innocent party not only in respect of a void transaction but also in respect of
a voidable transaction. The Court of Appeal however held that as between Mr Steed and the fraudsters the transfer was merely voidable (and had not been avoided when the money was advanced), and therefore the court had no
discretion under s.82(1) to order rectification of the register of charges. However, Scott LJ (with whom the other members of the Court agreed) commented, albeit obiter, at 132:
There is no doubt but that, if [the mother’s] signature had been forged … the case would have fallen squarely within paragraph (g) [of s.82(1)]. … I cannot see any reasonable basis on which an order of rectification could have been withheld.
9. Hayes v Nwajiaku [1994] EGCS 106, on the other hand, was an actual forgery case. Mr and Mrs Hayes were joint registered proprietors of a house. By forging Mr Hayes’ signature, his wife purported to transfer the house to innocent purchasers, who themselves created first charges in favour of
equally innocent banks. In due course, one of the banks repossessed the house as against the purchasers and sold it on the basis that half the net
proceeds of sale were put on deposit pending the result of the proceedings. A deputy judge of the Chancery Division held that if the recent sale by the bank had not taken place, the court would have rectified the register in Mr Hayes’
favour so as to delete the charges of which the banks were proprietors.
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10. Finally, Pinto v Lim [2005] EWHC 630 (Ch) was (despite its date) also
decided on the basis of the 1925 Act (at least as regards rectification). As in the Hayes case, one of the joint proprietors of property (the ex-wife)
transferred the property by forging the claimant’s signature on the transfer. On this occasion the property was transferred into the forger’s own name. She later transferred it to her brother who purchased it in good faith.
Blackburne J held that the court had a discretion to rectify against the brother under s.82, although on the facts the discretion was to be exercised against ordering rectification.
11. It therefore appears that, in all four of the reported decisions considering
void transactions under the 1925 Act, the higher courts proceeded on the
basis that there was jurisdiction to rectify the register under s.82 as against an innocent third party who had taken an interest under a transaction
subsequent to the original void transaction. It follows that a registered
proprietor was regarded as having only ‘qualified indefeasibility’: in other words, even though a forged transfer (with or without the addition of
subsequent apparently valid transactions) could give rise to actual
proprietorship, it was always subject to the possibility of rectification in the future.
The Reports of the Law Commission and the Land Registry
12. In July 2001, the Law Commission and the Land Registry produced a
Consultative Document entitled ‘Land Registration for the Twenty-First
Century’ (Law Com No 254). Having mentioned the Argyle and Steed cases discussed above, the Document contained the following observations as to rectification:
2.39 The present law governing rectification works well in practice and gives rise to few difficulties. Nevertheless, this review of land registration offers an opportunity to simplify and clarify the legislation … 8.1 We conclude that the existing law and practice in relation rectification are largely sound, and that the main deficiencies lie in the way 5
in which the legislation is drafted. In the light of this, we make recommendations for reform which are primarily clarificatory rather than substantive. 8.41(3) There would be no need to have a list of grounds upon which rectification might be ordered as there are at present in section 82(1) of the Land Registration Act 1925. They would all be encompassed within the one general principle that the register could be rectified, as a matter of discretion, where there was an error or omission in it. 8.58(10) … the register might be rectified even though this might affect any estate, rights, charges, or interests acquired or protected by registration, or by an entry on the register, or any overriding interest. 13. Following the consultation procedure, the draft bill was laid before
Parliament with the commentary of the Law Commission and the Land Registry in Law Com No 271:
2.38 This Bill does not make major changes to the present law and practice on the alteration of the register. What it does do is to codify that present practice in a way that makes its working apparent. 10.8 … rectification of the register … can (as now) affect derivative interests …
14. It is therefore ‘clear that there is nothing in these reports to suggest that it
was the intention of the Law Commission, or the Land Registry that the law should be altered so as to remove from a former owner of land the right to
have the register rectified just because, following a mistake, a third party had
acquired an interest in it for valuable consideration. Rather, it was clearly the intention that the law should not be changed in that respect’ (per Michael Mark in the the Knights case discussed below). The Land Registration Act 2002
15. The 2002 Act duly came into force broadly as per the draft bill, in October
2003, and the 1925 Act was repealed. As regards rectification of the register, s.82 of the 1925 Act was replaced by Schedule 4 to the 2002 Act. As already noted, one basis upon which the court may make an order for alteration of
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the register is ‘for the purpose of correcting a mistake’. Rectification is then defined as alteration of the register which: (a)
(b)
involves the correction of a mistake, and
prejudicially affects the title of a registered proprietor.
16. The first relevant decision under the 2002 Act is also the first appearance of a most unfortunate litigant named Trevor Guy. Mr Guy claimed that his land
had been transferred to a Gibraltar company by fraud or forgery, and later charged by that company to Barclays Bank. At first instance, (reported at
Barclays Bank plc v Guy [2008] All ER (D) 47 (Jan)) Terence Mowschenson
QC, sitting as a Deputy High Court Judge, granted summary judgment to Barclays against Mr Guy on his counterclaim to have the property
reregistered in his name free of the charge, since the deputy judge decided
that the original transaction was at best voidable, not void. It is important to note therefore that this does not constitute binding authority as to the
position where the original transaction is void, as the Deputy Judge himself made clear at [27].
17. The first ‘void transaction’ case under the 2002 Act was therefore Ajibade v Bank of Scotland plc (2008) Ref 2006/0163/0174, where the Applicant
alleged that a power of attorney in favour of her sister had been forged, and
thus that the transfer of his property by the sister, in her purported capacity as his attorney, to the sister’s husband, was void. On the same day, the
husband charged the property to Halifax plc, and later created a second
charge in favour of Endeavour Personal Finance Ltd. The applicant claimed
that the register should be altered to reinstate herself as proprietor, and that the two charges should be removed from the charges register. In a decision made on 10 March 2008, Owen Rhys sitting as Deputy Adjudicator to HM Land Registry found that the power of attorney was indeed forged, and
therefore that the transfer was void. In these circumstances, the first chargee (now Bank of Scotland plc) did not further resist the removal of its charge.
But the Deputy Adjudicator went on to hold that the charges register could
and should be rectified so as to remove Endeavour’s second charge, saying at 7
[12] in relation to Schedule 4: ‘it would be perverse to limit the … power to
rectify the register to the correction of only one consequence of the mistake, leaving uncorrected the other direct consequences of the original mistake’.
18. However, less than a month later, on 9 April 2008, a two-judge panel of the
Court of Appeal expressed a quite different view in Barclays Bank plc v Guy
[2008] 2 EGLR 74. Mr Guy’s application for permission to appeal had been
refused on paper by Timothy Lloyd LJ (as he now was), but was renewed in
front of Lloyd LJ (again) and Carnwath LJ. The Court of Appeal were prepared to proceed on the footing that Mr Guy had shown a good arguable case for saying that the transfer was a forgery and therefore void. Nonetheless,
permission to appeal was still refused on the basis [23] that, in the words of Lloyd LJ:
‘I cannot see that it is arguable that the registration of the charge can be said to have been a mistake, or the result of a mistake, unless, at the least, Mr Guy can go so far as to show that the bank, the mortgagee, had either actual notice, or what amounts to the same, what is referred to as “Nelsonian” or “blind eye notice”, of the defect in the title of the mortgagor … I simply cannot see how it could be argued that if the purchaser or chargee knows nothing of the problem underlying the intermediate owner’s title, that the registration of the charge or sale to the ultimate purchaser or chargee can be said to be a mistake.
19. Since there was no evidence that Barclays such notice, permission to appeal was refused. However, it is notable that the point now characterised by
Timothy Lloyd LJ as ‘unarguable’ in the context of a void transaction appears to be strikingly similar to the very point actually argued for some 15 years
earlier by Timothy Lloyd QC in Steed. In any event, it was unfortunate for Mr
Guy (a) that he was acting in person on the application and (b) that
presumably neither he, nor his solicitor-advocate opponent, were aware of
the decision in Ajibade. Given the strength of the view expressed by Lloyd LJ, however, it may or may not have made any difference.
20. Luckily for later litigants, but of no assistance to Mr Guy, the above decision may probably be safely ignored. Practice Direction (Citation of authorities) (2001) Times, 1 May, directs that a judgment on an application for
permission to appeal cannot be cited before any court unless it clearly 8
indicates that it purports to establish a new principle or to extend the present law. In respect of judgments delivered after the date of the direction, that
indication has to take the form of an express statement to that effect. Thus
the judgment of the Court of Appeal in Guy (which contains no such express statement) cannot be cited in any future proceedings.
21. In Odogwu v Vastguide Ltd [2009] EWHC 3565 (Ch), a fraudster had forged
the claimant’s signature on a legal charge in favour of Credit & Mercantile plc (C&M), which was then registered as proprietor of the charge. In due course C&M sold the property to Vastguide. Despite having been referred to the decision in Ajibade, Sir Donald Rattee said that ‘it does not seem to me
obvious that the reference to “correcting a mistake” in para 2(1)(a) of Sch 4 to the [2002] Act can properly be construed as including a reference to
correcting the consequences of the mistake’. However, having decided the case on different points, he did not express any conclusion on the point.
22. (Meanwhile, if somewhat irrelevantly for present purposes, poor Mr Guy had his third and fourth bites of the cherry in 2009 when, having unsuccessfully sued his former solicitors for negligence, he had his appeal to the Court of Appeal dismissed. Lloyd LJ (now on his 3rd dealing with Mr Guy) again
delivered the leading judgment, in which, accurately if bizarrely, he
confirmed that the previous Court of Appeal decision in Barclays v Guy could not be cited, even before the very judge who delivered it.)
23. Stewart v Lancashire Mortgage Corporation Ltd (2010) Ref 2009/1459 once
again concerned a forged transfer which was then registered together with a registered charge in favour of a bank. A second charge was later granted to
Lancashire MC, who knew nothing of the forgery. David Holland sitting as a
Deputy Adjudicator appears to have misunderstood the decision of Terence
Mowschenson QC at first instance in Barclays Bank v Guy, suggesting at [54]
that it constituted binding authority on the position where the original
transaction was void. (As noted above, the deputy judge had expressed no concluded view on the position of a void transfer, having found it was
voidable only in that case.) Unfortunately, Mr Holland therefore felt that 9
there were effectively two conflicting first instance decisions, and indeed decided to follow what he considered to be the decision of Guy at first instance, in preference to Ajibade.
24. Extraordinarily, Mr Guy then experienced his 5th disappointment on another visit to the Court of Appeal, reported as Barclays Bank v Guy (No 2) [2011] 1 WLR 681. He was attempting to seek a reconsideration of the earlier refusal of the Court of Appeal to grant him permission to appeal the decision of
Terence Mowschenson QC, under CPR 52.17 (often known as the Taylor v
Lawrence jurisdiction). This application was initially refused on paper by … Lloyd LJ! But it was renewed before three new Court of Appeal judges,
including Lord Neuberger MR , who delivered the leading judgment. Mr Guy
asserted that the decision of Carnwath and Lloyd LJJ to refuse his permission to appeal in 2008 was so plainly wrong in principle and unjust in its
consequences that it should be reconsidered. However, the Court of Appeal
concluded that, as a matter of procedural law and in the interests of finality,
Mr Guy’s application must fail. Ironically, and tragically for Mr Guy, however, Lord Neuberger LJ suggested at [35] that there might have been other ways of arguing his original application before Carnwath and Lloyd LJJ, namely:
(a) that the removal of Mr Guy’s name from the proprietorship register was a mistake, and, in order to correct that mistake, the charge would have to be removed from the charges register; or
(b) that the registration of the charge flowed from the mistake of registering the transfer, and therefore should be treated as part and parcel of that mistake.
But Mr Guy’s previous failure to advance such points could not justify
reopening the previous decision, even if ‘the worst that can be said about that decision is that the court should have concluded that the point was arguable’. That appears to have been the end of the road for the unfortunate Mr Guy: but not for the development of the law.
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Knights v Roberto Mac
25. The most recent judgment on the issue is that of Michael Mark sitting as a
Deputy Adjudicator in Knights Construction (March) Ltd v Roberto Mac Ltd (2011) Ref 2009/1459, a case in which the Chief Registrar was also
represented as an interested party. It is important to note at the outset that this was not a case of fraud or forgery. Rather, it was a case where land
belonging to the Applicant was mistakenly included in the first registration of adjoining land. That land was then purchased by the Respondent in good
faith and for valuable consideration. However, Mr Mark considered that for
present purposes the position was the same as if a fraudster had forged the name of a proprietor and then transferred the land to the Respondent: see [81].
26. In a magisterial analysis of all the relevant authorities, giving much-need clarity to the construction of paragraph 2(1)(a) of Schedule 4, Mr Mark
concluded that none of the various approaches taken in previous decisions
were binding on him, and that he should construe the provision in a manner which gave effect to the intention of the Law Commission in its draft Bill. In
other words the remedy of rectification against the innocent third party was indeed available to the Applicant and therefore others in a similar position (including the case of a forged transfer).
27. In so doing he therefore endorsed Owen Rhys’s approach as accurately
reflecting the intended effect of Schedule 4 to the 2002 Act, and adopted the two possible interpretations suggested by Lord Neuberger MR in Barclays Bank v Guy (No.2) (but too late for Mr Guy). By contrast, he criticised the
reasoning of Sir Donald Rattee in Vastguide as involving a substantial change from the law under the 1925 or disagreement with the decision in Pinto v Lim. And Mr Mark disagreed wholeheartedly with his colleague David
Holland’s decision in Stewart, and in particular lamented the fact that he had: (a) ignored the analysis of Scott LJ in Steed;
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(b) ignored the relevant provisions of the Law Commission and Land Registry Reports; and
(c) misconstrued the first instance decision in Guy. Conclusion
28. It is submitted that the decision of Michael Mark in Knights is correct in
principle: and it should be noted that the current edition of Ruoff and Roper
now endorses his approach (in a change to previous editions, which Mr Mark criticised as containing wrong statements of law). However, it remains the case that certain decisions of higher courts, whether binding or otherwise,
have pointed in a quite different direction, and therefore there must remain
some uncertainty as to what the High Court or Court of Appeal might decide
in the future, should the matter come before it. It may therefore be necessary to deploy much of Michael Mark’s comprehensive critique in such future litigation, in order to make the point good. After all, as he said at [89]:
It is plain that [the Law Commission and the Land Registry] did not intend to alter the law as set out in [Argyle and Steed] except in the relatively minor respects identified by them. It is equally plain that their efforts to achieve clarity by the redrafting of the provisions has had the opposite effect.
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Ten Old Square Property Seminar 2012
INDEMNITY CLAIMS AGAINST THE LAND REGISTRY and The duty of solicitors in connection with applications for registration
Paul Stafford
1. The relevant statutory material is contained in Schedule 8 of the Land Registration Act 2002 (‘the LRA’). There have been few case law developments since the commencement of the Act on 13.10.03, and 1925 LRA case law remains relevant due to the similarity of its provisions. But all solicitors involved with registration applications to the Land Registry need to be aware of Schedule 8, as well as the related Schedule 4 (Alteration of the Register), in the light of potential negligence claims against them following the discovery of mistakes on the register.
2. The following paragraphs give a general overview of Schedule 8. A copy of the schedule, from Halsbury’s Statutes volume 23, is attached – and should be consulted for the detailed provisions.
Entitlement to indemnity (para 1) 3. A person is entitled to be indemnified by the registrar if he suffers loss by reason of (a) rectification of the register; or (b) a mistake whose correction would involve rectification of the register: Sch 8, para 1(1)(a) and (b).
4. The grounds in para 1(1)(a) and (b) are the converse of each other. They both refer to cases where there is a mistake in the register whose correction would amount to rectification if the mistake is corrected. In case (a), the registrar rectifies the mistake. 1
In (b), he generally does not. The person who suffers from the non-rectification of the mistake can then claim indemnity: see Ruoff and Roper, The Law and Practice of Registered Conveyancing at 47.005.
5. Rectification means an alteration to the register which (i) involves the correction of a mistake and (ii) prejudicially affects the title of a registered proprietor: Sch 4, para 1. This is the only kind of alteration in the register which triggers indemnity.
What is a mistake? 6. Mistake is not defined in the LRA. That said, for the purposes of Schedule 8, references to a mistake in something include anything mistakenly omitted from it as well as anything mistakenly included in it: para 11.
7. Ruoff and Roper suggest (at 47.003) that there will be a mistake whenever the Registrar, had he known the true state of affairs at the time of the relevant entry or deletion, either (i) makes an entry on the register that he would not have made; (ii) makes an entry in the register that would not have been made in the form it was made; (iii) deletes an entry that he would not have deleted.
8. The Ruoff and Roper reference above appears in the April 2011 update and it is not clear whether it took account of the decision handed down on 22.2.11 in Baxter v Mannion [2011] 2 All ER 574, where the CA held (at [25]) that there was ‘no reason for limiting correction of a mistake [within Sch 4, para 1] to a mistake through some official error in the course of examination of the application’. So if an applicant is registered as a proprietor under Sch 6 having been an adverse possessor but it then transpired he had not been in adverse possession for 10 years, his registration would be a mistake which could be corrected: see [35-36].
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Other mistakes and grounds of entitlement 9. These are set out at para 1(1)(c) to (h) and are for: •
Mistake in an official search, or in an official copy, or in a document kept by the registrar which is not an original and is referred to in the register, or in the cautions register
•
Loss or destruction of a document lodged at the registry for inspection or safe custody
•
Failure by the registrar to perform his duty under s.50, which gives better protection to existing chargees. Where the registrar enters a statutory charge in the register which has the effect of postponing a pre-existing charge which is either entered on the register or is the basis for entry in the register, he has a duty to give notice to persons affected.
Mines and minerals (para 2) 10. No indemnity is payable under Schedule 8 on account of any mines or minerals or the existence of any right to work or get mines or minerals unless it is noted in the register that the registered estate includes mines or minerals. Although the s.205(ix) LPA 1925 definition of ‘land’ includes mines and minerals, it is not uncommon for the mines and minerals to have been severed from the land. Hence the Registrar will not generally guarantee that a registered proprietor has title to them unless this has been proved and is explicitly noted on the register.
Valuing the loss for the purpose of the indemnity (para 6) 11. Where an indemnity is payable for loss of an estate, interest or charge, the value of the estate, interest or charge is to be regarded as not exceeding: (1) Where the register is rectified: its value immediately before rectification of the register (for a para 1(1)(a) indemnity); and
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(2) Where the register is not rectified: its value at the time when the mistake which caused the loss was made (for a para 1(1)(b) indemnity).
12. This is the prima facie loss. It may be reduced or eliminated by the fault of the claimant. In many cases (e.g. loss of documents or mistake in official search), most losses will be consequential. There are no rules of remoteness under the LRA, but Ruoff and Roper suggest that liability should be limited to kinds of loss that were reasonably foreseeable at the time of the mistake or failure.
Time limits (para 8) 13. A claim for an indemnity should be made within 6 years of the date the claimant is aware or ought to have been aware of the existence of the claim. For the purpose of the Limitation Act 1980, a liability to pay an indemnity is a simple contract debt and the cause of action arises ‘when the claimant knows or but for his own default might have known, of the existence of the claim’.
Application to court (para 7) 14. A person may apply to court for the determination of any question about entitlement or quantum of the indemnity.
Costs and interest (paras 3 and 9) 15. Where a person claiming indemnity incurs costs and expenses in relation to the matter, any indemnity payable will only be for costs and expenses reasonably incurred. The Registrar has power to approve costs either prospectively or retrospectively. Where a claim for indemnity was brought successfully under the LRA 1925, Lightman J held in Prestige Properties Ltd v Scottish Provident Institution [2003] Ch 1 at 25-26 that the claimant was entitled to indemnity costs.
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Recovery of indemnity by the Registrar (para 10) 16. Where an indemnity is paid, the Registrar can recover the amount paid from any person who caused or substantially contributed to the loss by his fraud; or he can enforce any rights of action the claimant would have been entitled to enforce had the indemnity not been paid. Where the register has been rectified, the Registrar can enforce any right of action which the person in whose favour the register has been rectified would have been entitled to enforce had it not been rectified.
Claimant’s fraud or lack of care (para 5) 17. This will arise if the Land Registry takes the view that the mistake was not its responsibility, or not wholly its responsibility. The paragraph enshrines the principle that no-one should benefit from their own wrong, whether that wrong is fraud or lack of proper care. Where lack of proper care is in issue, the Land Registry will in effect be claiming contributory negligence.
18. Paragraph 5 provides (1)
No indemnity is payable under this Schedule on account of any loss suffered by a claimant—
(a)
wholly or partly as a result of his own fraud, or
(b)
wholly as a result of his own lack of proper care.
(2)
Where any loss is suffered by a claimant partly as a result of his own lack of proper care, any
indemnity payable to him is to be reduced to such extent as is fair having regard to his share in the responsibility for the loss. (3)
For the purposes of this paragraph any fraud or lack of care on the part of a person from whom
the claimant derives title (otherwise than under a disposition for valuable consideration which is registered or protected by an entry in the register) is to be treated as if it were fraud or lack of care on the part of the claimant.
19. The Law Society’s Property and Registration Fraud Practice Note of 11 October 2010 contains this passage:
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Lack of proper care by a conveyancer will be attributable to their client, and may therefore lead to a reduction in any indemnity payable to the client. An example of a case in which delayed notification by a conveyancer to Land Registry led to such a reduction is Prestige Properties Ltd v Scottish Provident Institution [2003] Ch 1; [2002] EWHC 330 (Ch) .
20. On any application to register an estate, interest or charge at the Land Registry, the solicitor will be the client’s agent, and within the Schedule 8 context any lack of care by the solicitor will be attributable to the client. If the client suffers loss by reason of a mistake and cannot obtain a 100% indemnity from the Land Registry, he may ask whether his solicitor has been responsible for lack of care in connection with the registration and may have a claim against the solicitor for professional negligence.
21. This raises the question: what is the standard and scope of the duty of care owed by a solicitor in connection with applications for registration?
22. In Sainsbury’s Supermarkets Ltd v Olympia Homes Ltd [2005] EWHC 1235 (Ch) Mann J had to deal with this question on an application by Sainsbury’s for rectification under Schedule 4. He said [at 87]:
Mr Tager made various submissions as to the duty of a solicitor in connection with applications for registration. The topic is curiously void of discussion or consideration in the authorities and text books (or at least I was not shown any). However, it is still clear to me that Mr O'Hara [Olympia’s solicitor dealing with the registration application] cannot be accused of any relevant lack of care. I am not convinced that on the facts of this case Mr O'Hara should have been expected to do anything more than submit the title documents with which he had been supplied so that the Land Registry could make up its own mind on what sort of title they entitled his client to, but in any event he did more than that in his discussions with [the Land Registry’s solicitor] Mrs Gibson [which] …. had the effect of drawing the problem to the Registry's attention. I do not think that anything more could be expected of Mr O'Hara. If anyone could be expected or required to point up defects in title on the facts of this case, it would have been Sainsbury's who were duly warned of the proposal to register. Sainsbury's had an opportunity to have these points clearly ventilated, and it was from their own (or their solicitors') failure to make submissions in time that the Registry was not aware of whatever submissions it was that they would have wanted to make at the time. [emphasis added]
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23. It is clear from this passage that Mann J thought, on the particular facts, that there was no more that the solicitor need do than submit the title documents he had to the Land Registry. In fact the solicitor had gone further and had therefore properly discharged his duty of care.
24. It is also clear that the judge was not referred to Prestige Properties, where the duty was held by Lightman J (at [42] to [46]) to be the same as that on a conveyancing transaction relating to registered land. 45. I must begin by making two general observations on the ordinary duties of a solicitor on a conveyancing transaction. First a solicitor should not be judged by the standard of “a particularly meticulous and conscientious practitioner. The test is what the reasonable competent practitioner would do having regard to the standards normally adopted in the profession”: per Oliver J in Midland Bank v. Hett Stubbs & Kemp [1979] Ch 384 at 402-3. Second in determining whether a solicitor has exercised reasonable skill and care, he should be judged in the light of the circumstances at the time. His actions and advice may with the benefit of hindsight be shown to have been utterly wrong, “but hindsight is no touchstone of negligence”: Duchess of Argyll v. Bueselinck [1972] 2 Lloyds Rep 172 at 185.
46. I turn now to the more specific duties of a conveyancing solicitor in case of transactions relating to registered land. The Registrar in this regard has referred me to the 1996 Edition of the Law Society’s Conveyancing Handbook by Frances Silverman whose aim (as is stated in the Preface to the 1992 Edition) is to present a ready reference handbook of the practice of registered conveyancing. Subject to one critical qualification, there is and cannot be any real dispute as to the nature or extent of the duty of the conveyancing solicitor. The seller’s solicitor should obtain office copies of the register of title and investigate the title before drafting the contract for sale. He should take precautionary measures to ensure that the seller is entitled to sell the whole of the estate which he is to contract to sell, and seek to spot and rectify any defects in title. The purchaser’s solicitor in his investigation of title should examine the office copy entries supplied by the seller, and in particular check that the contract description of the property being sold accords with the description in the property register and is included within the title shown on the filed plan. Wherever a transfer is by reference to a plan, the plan must be of sufficient size and scale to enable the boundaries and other features of the property to be readily identified. For this purpose it is necessary to bear in mind that boundaries shown in plans prepared by the Land Registry (unless “fixed”) are general boundaries only and may not show the precise line of the boundaries. If on an investigation the solicitor is put on notice that there arises a serious question whether good title is being shown in any material respect or as to the precise boundaries, alarm bells should ring and the solicitor is obliged to come to grips with and resolve that question. An inspection on the ground may be and often is called for.
What should the solicitor do? Some practical guidance in the light of the authorities 25. First, when dealing with a registration application, the solicitor should proceed with the same care as would be appropriate on the preceding transaction which gives rise to the application. 7
26. Second, the practice to be followed is to be found in the main practitioners’ guides to conveyancing: Ruoff and Roper; Emmett on Title; The Law Society’s Conveyancing Handbook. These should be available in the office and should be followed. The courts will assess whether proper care has been shown by reference to these works. 27. Third, where alarm bells ring it is not enough to submit the documents to the Land Registry and await the outcome. The solicitor cannot rely on the Land Registry to identify a problem he ought to have identified himself. 28. Fourth, if alarm bells do not ring but a point arises that is not dealt with in the books, it is safest to be cautious: (1) make further enquiries; (2) bring the problem to the attention of the Land Registry; (3) seek specialist advice.
A postscript and a warning 29. In Burton v Walker (Mr Simon Brilliant sitting as a Deputy Adjudicator to the Land Registry (Ref 2007/1124), 10 Dec 2010), solicitors applied for first registration of title to the lordship of a manor. The manor was a reputed manor, which meant that it had no court baron and no court records, and the documents in support of the application did not pre-date 1892. The statute of Quia Emptores of 1289 prevented the creation of new manors after 1290. The Land Registry entered the title on the register. Less than a year later, the applicant applied as lord of the manor to register 360 acres of land he had not purchased but said was manorial waste – relying on the earlier registration and a document of 1836 which was not a document of title. This second application too was registered. After a 10 day hearing before the Adjudicator, an application to close the lordship title succeeded on the basis that the lordship had been extinguished by or soon after 1600. The decision about the 360 acres, to which title was left open, has gone to appeal in the Chancery Division. The appeal decision may provide further guidance on the duties of solicitors on registration applications. PAUL STAFFORD 6 February 2010
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UK Parliament Acts/L/LA-LG/Land Registration Act 2002 (2002 c 9)/SCHEDULE 4 Alteration of the Register SCHEDULE 4 ALTERATION OF THE REGISTER Section 65 1 Introductory In this Schedule, references to rectification, in relation to alteration of the register, are to alteration which-(a)
involves the correction of a mistake, and
(b)
prejudicially affects the title of a registered proprietor.
2 Alteration pursuant to a court order (1)
The court may make an order for alteration of the register for the purpose of--
(a)
correcting a mistake,
(b)
bringing the register up to date, or
(c)
giving effect to any estate, right or interest excepted from the effect of registration.
(2) An order under this paragraph has effect when served on the registrar to impose a duty on him to give effect to it. 3 (1)
This paragraph applies to the power under paragraph 2, so far as relating to rectification.
(2) If alteration affects the title of the proprietor of a registered estate in land, no order may be made under paragraph 2 without the proprietor's consent in relation to land in his possession unless-(a)
he has by fraud or lack of proper care caused or substantially contributed to the mistake, or
(b)
it would for any other reason be unjust for the alteration not to be made.
(3) If in any proceedings the court has power to make an order under paragraph 2, it must do so, unless there are exceptional circumstances which justify its not doing so. (4) In sub-paragraph (2), the reference to the title of the proprietor of a registered estate in land includes his title to any registered estate which subsists for the benefit of the estate in land. 4 Rules may-(a) make provision about the circumstances in which there is a duty to exercise the power under paragraph 2, so far as not relating to rectification; (b)
make provision about the form of an order under paragraph 2;
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(c)
make provision about service of such an order.
5 Alteration otherwise than pursuant to a court order The registrar may alter the register for the purpose of-(a)
correcting a mistake,
(b)
bringing the register up to date,
(c)
giving effect to any estate, right or interest excepted from the effect of registration, or
(d)
removing a superfluous entry.
6 (1)
This paragraph applies to the power under paragraph 5, so far as relating to rectification.
(2) No alteration affecting the title of the proprietor of a registered estate in land may be made under paragraph 5 without the proprietor's consent in relation to land in his possession unless-(a)
he has by fraud or lack of proper care caused or substantially contributed to the mistake, or
(b)
it would for any other reason be unjust for the alteration not to be made.
(3) If on an application for alteration under paragraph 5 the registrar has power to make the alteration, the application must be approved, unless there are exceptional circumstances which justify not making the alteration. (4) In sub-paragraph (2), the reference to the title of the proprietor of a registered estate in land includes his title to any registered estate which subsists for the benefit of the estate in land. 7 Rules may-(a) make provision about the circumstances in which there is a duty to exercise the power under paragraph 5, so far as not relating to rectification; (b)
make provision about how the register is to be altered in exercise of that power;
(c) make provision about applications for alteration under that paragraph, including provision requiring the making of such applications; (d) make provision about procedure in relation to the exercise of that power, whether on application or otherwise. 8 Rectification and derivative interests The powers under this Schedule to alter the register, so far as relating to rectification, extend to changing for the future the priority of any interest affecting the registered estate or charge concerned. 9 Costs in non-rectification cases
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(1) If the register is altered under this Schedule in a case not involving rectification, the registrar may pay such amount as he thinks fit in respect of any costs or expenses reasonably incurred by a person in connection with the alteration which have been incurred with the consent of the registrar. (2) The registrar may make a payment under sub-paragraph (1) notwithstanding the absence of consent if-(a)
it appears to him--
(i)
that the costs or expenses had to be incurred urgently, and
(ii)
that it was not reasonably practicable to apply for his consent, or
(b)
he has subsequently approved the incurring of the costs or expenses.
NOTES To be appointed
To be appointed: see s 136(2). Appointment: 13 October 2003: see SI 2003/1725, art 2(1). This Schedule does not extend to Scotland: see s 136(3). Land Registration Rules 2003, SI 2003/1417 (made under paras 4, 7). Land Registration (Amendment) Rules 2008, SI 2008/1919 (made under para 7(b)-(d)).
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UK Parliament Acts/L/LA-LG/Land Registration Act 2002 (2002 c 9)/SCHEDULE 8 Indemnities SCHEDULE 8 INDEMNITIES Section 103 1 Entitlement (1)
A person is entitled to be indemnified by the registrar if he suffers loss by reason of--
(a)
rectification of the register,
(b)
a mistake whose correction would involve rectification of the register,
(c)
a mistake in an official search,
(d)
a mistake in an official copy,
(e) a mistake in a document kept by the registrar which is not an original and is referred to in the register, (f)
the loss or destruction of a document lodged at the registry for inspection or safe custody,
(g)
a mistake in the cautions register, or
(h)
failure by the registrar to perform his duty under section 50.
(2)
For the purposes of sub-paragraph (1)(a)--
(a) any person who suffers loss by reason of the change of title under section 62 is to be regarded as having suffered loss by reason of rectification of the register, and (b) the proprietor of a registered estate or charge claiming in good faith under a forged disposition is, where the register is rectified, to be regarded as having suffered loss by reason of such rectification as if the disposition had not been forged. (3) No indemnity under sub-paragraph (1)(b) is payable until a decision has been made about whether to alter the register for the purpose of correcting the mistake; and the loss suffered by reason of the mistake is to be determined in the light of that decision. 2 Mines and minerals No indemnity is payable under this Schedule on account of-(a)
any mines or minerals, or
(b)
the existence of any right to work or get mines or minerals,
unless it is noted in the register that the title to the registered estate concerned includes the mines or minerals. 3
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Costs (1) In respect of loss consisting of costs or expenses incurred by the claimant in relation to the matter, an indemnity under this Schedule is payable only on account of costs or expenses reasonably incurred by the claimant with the consent of the registrar. (2)
The requirement of consent does not apply where--
(a)
the costs or expenses must be incurred by the claimant urgently, and
(b)
it is not reasonably practicable to apply for the registrar's consent.
(3) If the registrar approves the incurring of costs or expenses after they have been incurred, they shall be treated for the purposes of this paragraph as having been incurred with his consent. 4 (1) If no indemnity is payable to a claimant under this Schedule, the registrar may pay such amount as he thinks fit in respect of any costs or expenses reasonably incurred by the claimant in connection with the claim which have been incurred with the consent of the registrar. (2) The registrar may make a payment under sub-paragraph (1) notwithstanding the absence of consent if-(a)
it appears to him--
(i)
that the costs or expenses had to be incurred urgently, and
(ii)
that it was not reasonably practicable to apply for his consent, or
(b)
he has subsequently approved the incurring of the costs or expenses.
5 Claimant's fraud or lack of care (1)
No indemnity is payable under this Schedule on account of any loss suffered by a claimant--
(a)
wholly or partly as a result of his own fraud, or
(b)
wholly as a result of his own lack of proper care.
(2) Where any loss is suffered by a claimant partly as a result of his own lack of proper care, any indemnity payable to him is to be reduced to such extent as is fair having regard to his share in the responsibility for the loss. (3) For the purposes of this paragraph any fraud or lack of care on the part of a person from whom the claimant derives title (otherwise than under a disposition for valuable consideration which is registered or protected by an entry in the register) is to be treated as if it were fraud or lack of care on the part of the claimant. 6 Valuation of estates etc Where an indemnity is payable in respect of the loss of an estate, interest or charge, the value of the estate, interest or charge for the purposes of the indemnity is to be regarded as not exceeding-(a) in the case of an indemnity under paragraph 1(1)(a), its value immediately before rectification of the register (but as if there were to be no rectification), and
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(b) in the case of an indemnity under paragraph 1(1)(b), its value at the time when the mistake which caused the loss was made. 7 Determination of indemnity by court (1)
A person may apply to the court for the determination of any question as to--
(a)
whether he is entitled to an indemnity under this Schedule, or
(b)
the amount of such an indemnity.
(2) Paragraph 3(1) does not apply to the costs of an application to the court under this paragraph or of any legal proceedings arising out of such an application. 8 Time limits For the purposes of the Limitation Act 1980 (c 58)-(a)
a liability to pay an indemnity under this Schedule is a simple contract debt, and
(b) the cause of action arises at the time when the claimant knows, or but for his own default might have known, of the existence of his claim. 9 Interest Rules may make provision about the payment of interest on an indemnity under this Schedule, including-(a)
the circumstances in which interest is payable, and
(b)
the periods for and rates at which it is payable.
10 Recovery of indemnity by registrar (1) Where an indemnity under this Schedule is paid to a claimant in respect of any loss, the registrar is entitled (without prejudice to any other rights he may have)-(a) to recover the amount paid from any person who caused or substantially contributed to the loss by his fraud, or (b) for the purpose of recovering the amount paid, to enforce the rights of action referred to in sub-paragraph (2). (2)
Those rights of action are--
(a) any right of action (of whatever nature and however arising) which the claimant would have been entitled to enforce had the indemnity not been paid, and (b) where the register has been rectified, any right of action (of whatever nature and however arising) which the person in whose favour the register has been rectified would have been entitled to enforce had it not been rectified.
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(3) References in this paragraph to an indemnity include interest paid on an indemnity under rules under paragraph 9. 11 Interpretation (1) For the purposes of this Schedule, references to a mistake in something include anything mistakenly omitted from it as well as anything mistakenly included in it. (2)
In this Schedule, references to rectification of the register are to alteration of the register which--
(a)
involves the correction of a mistake, and
(b)
prejudicially affects the title of a registered proprietor.
NOTES To be appointed
To be appointed: see s 136(2). Appointment: 13 October 2003: see SI 2003/1725, art 2(1). This Schedule does not extend to Scotland: see s 136(3). Land Registration Rules 2003, SI 2003/1417 (made under para 9). Land Registration (Amendment) Rules 2008, SI 2008/1919 (made under para 9).
YOUR PLACE OR MINE? CONSTRUCTIVE TRUSTS AND OVERRIDING INTERESTS IN REGISTERED LAND
By Jonathan Gavaghan, Ten Old Square
INTRODUCTION
1. There is an inherent tension in any system of land registration between on the one hand the need for certainty and on the other a need for fairness in terms of protecting informal rights which are not registered.
2. There has been a steady creep away from the virtue of fairness towards that of certainty. Indeed, the Land Registration Act 2002 itself can obviously be seen as being intended as a significant step towards increasing certainty, not least with its restriction of the original categories of overriding interests.
3. The trend continues. When dealing with the issue of constructive trusts and overriding interests, the Court of Appeal have come done firmly in favour of certainty over perceived fairness in respect of registered land in the recent case of Chaudhary v Yavuz [2011] EWCA Civ 1314 (The Times 29/12/11). In so doing the Court of Appeal in particular curtailed the possible application of Lyus v Prowsa Developments Limited [1982] 1 WLR 1044.
4. This paper will discuss the ruling itself and also the ramifications of the case for the future.
CHAUDHARY v YAVUZ: THE FACTS
5. The case related to two neighbouring properties on Balaam Street London E13. Mr Chaudhary owned No. 37, and No. 35 was initially owned by a Mr Vijayan.
1
Both properties were Victorian in construction and consisted of a shop with flats above.
6. Originally the flats above the shop in No. 37 were accessed through an internal staircase.
On part of No. 35’s land was an alleyway which ran along the flank
wall of No. 37. In it was an old rickety wooden staircase which gave access to the flats above No. 35, there being no internal access in No. 35 to the flats above.
7. In 2006 Mr Chaudhary (or rather his developer son on his behalf) reached an oral agreement with Mr Vijayan who was at that point still the owner of No. 35. They agreed that Mr Chaudhary would pay for and install a brand new metal staircase in the alleyway serving the flats in No. 35, in return for which he would be able to extend a balcony off the new staircase which would allow access to the flats above No. 37. He would then remove the internal staircase in No. 37, thus freeing up more room for the shop with his flats now being accessed from the alleyway via the stairs and balcony. The new staircase and balcony were installed and the alterations to No. 37 carried out in 2006/7.
8. Nothing was in writing however and no interest was registered in respect of the staircase or the right of way by Mr Chaudhary against the title of No. 35.
9. Mr Chaudhary let out the upstairs flats to short term tenants who then thereafter crossed the alleyway and used the stairs and balcony to access their flats.
10. Mr Yavuz subsequently bought No. 35 in late 2007. The transfer incorporated the Law Society’s Standard Terms and Conditions which included the following: “3.1.2 The incumbrances subject to which the property is sold are: …(b) those discoverable by inspection of the property before contract.”
11. As the Judge found it would have been obvious to him had he inspected the property he was purchasing that there was a staircase over his land serving the neighbouring property’s flats.
2
12. A few months after, Mr Yavuz started to complain about the use of the staircase by tenants of No. 37 on his land. As the trial Judge found he took matters into his own hands with some affirmative action: one morning when the tenants of the flats above No. 37 had all left their flats for the day, he had the balcony ripped down preventing access to the flats above No. 37.
13. The question for the Courts in the inevitable proceedings which followed, was whether Mr Yavuz having bought No. 35 without any of Mr Chaudhary’s rights being protected on the register, was bound by those rights.
14. Before considering the outcome of the case, this paper will set out the relevant law and policy behind the 2002 Act.
THE POLICY BEHIND THE LAND REGISTRATION ACT 2002
15. According to the Law Commission's report, Land Registration in the Twenty-First Century - a Conveyancing Revolution (2001) Law Com 271 (at para 1.5): "The fundamental objective of the [Act] is that, under the system of electronic dealing with land that it seeks to create, the register should be a complete and accurate reflection of the state of the title to the land at any given time, so that it is possible to investigate title to the land on line, with the absolute minimum of additional enquiries and inspections."
16. However, the Law Commission also recognised that there was a limit to the rights of third parties being determined purely by whether they were registered. This is reflected in Land Registration for the Twenty–First Century: A Conveyancing Revolution (supra) at 8.16 which explains that the retention of the overriding status of occupiers’ rights as being for the reasons set out in Land Registration for the Twenty-First Century: A Consultative Document (Law Com. 254) at 5.61: “[W]e consider that it is unreasonable to expect all encumbrances to register their rights, particularly where those rights arise informally, under (say) a constructive or resulting trust or by estoppel. The law pragmatically recognises that some rights can be created informally, and to require their registration would defeat the sound policy that underlies that recognition. Furthermore, when people occupy land they are often unlikely to appreciate the need to take the formal step of registering any rights that they have in it. They will probably regard their occupation as the only necessary protection. The retention of this category of overriding interest is, we believe, justified not only by the fundamental principles that we have identified in part I of this Report, but also because this is a very clear case where protection against purchasers is needed, but where it is not reasonable to expect or not sensible to require any entry on the register.”
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17. The facts of Chaudhary v Yavuz therefore highlighted the tension between these two aims.
RELEVANT PROVISIONS OF THE ACT
18. The basic rule under the Land Registration Act 2002 is that if a right is not registered, it does not bind a subsequent purchaser whether or not they had actual notice of the right. This basic rule is set out in section 28 of the Act: “28 Basic rule (1) Except as provided by sections 29 and 30, the priority of an interest affecting a registered estate or charge is not affected by a disposition of the estate or charge.”
19. The Act then goes on to say what happens if a property is sold: for current purposes effectively any existing rights do not bind a purchaser for valuable consideration unless registered or falling within one of the exceptions contained in Schedule 3 to the Act: “29 Effect of registered dispositions: estates (1) If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration. (2) For the purposes of subsection (1), the priority of an interest is protected— (a) in any case, if the interest— (i) is a registered charge or the subject of a notice in the register, (ii) falls within any of the paragraphs of Schedule 3, or (iii) appears from the register to be excepted from the effect of registration, and (b) in the case of a disposition of a leasehold estate, if the burden of the interest is incident to the estate. (3) Subsection (2)(a)(ii) does not apply to an interest which has been the subject of a notice in the register at any time since the coming into force of this section. (4) Where the grant of a leasehold estate in land out of a registered estate does not involve a registrable disposition, this section has effect as if— (a) the grant involved such a disposition, and (b) the disposition were registered at the time of the grant.”
20. Schedule 3 deals with a number of unregistered interest which override registered dispositions. These overriding interests include certain lease with a term of less than a seven years (see para 1 of Schedule 3) and, customary and public rights, local land charges, certain interests in mines and minerals ad other miscellaneous interests such as manorial rights.
4
21. The key exceptions for the case of Chuadhary v Yavuz were however in paragraphs 3 and 4 of the Schedule to do with persons in actual occupation and easements:
“Interests of persons in actual occupation 2 An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for— (a) an interest under a settlement under the Settled Land Act 1925; (b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so; (c) an interest— (i) which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition, and (ii) of which the person to whom the disposition is made does not have actual knowledge at that time; (d) a leasehold estate in land granted to take effect in possession after the end of the period of three months beginning with the date of the grant and which has not taken effect in possession at the time of the disposition. 2A (1) An interest which, immediately before the coming into force of this Schedule, was an overriding interest under section 70(1)(g) of the Land Registration Act 1925 by virtue of a person's receipt of rents and profits, except for an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so. (2) Sub-paragraph (1) does not apply to an interest if at any time since the coming into force of this Schedule it has been an interest which, had the Land Registration Act 1925 continued in force, would not have been an overriding interest under section 70(1)(g) of that Act by virtue of a person's receipt of rents and profits. Easements and profits a prendre 3(1) A legal easement or profit a prendre, except for an easement, or a profit a prendre which is not registered under the Commons Registration Act 1965 (c 64) Part 1 of the Commons Act 2006, which at the time of the disposition— (a) is not within the actual knowledge of the person to whom the disposition is made, and (b) would not have been obvious on a reasonably careful inspection of the land over which the easement or profit is exercisable. (2) The exception in sub-paragraph (1) does not apply if the person entitled to the easement or profit proves that it has been exercised in the period of one year ending with the day of the disposition.”
CONSTRUCTIVE TRUSTS
22. In addition to overriding interest under the Act, the Courts have for a long time recognised that the constructive trust principle can be applicable in land registration. Thus a Court will impose a constructive trust if it is satisfied that the conscience of the estate owner is affected so that it would be inequitable for him to deny the relevant party an interest in the property (see e.g. Ashburn Anstalt v Arnold [1989] 1 Ch 1 at 22E-F). 5
23. There are a number of well-known cases which clearly established the application of constructive trusts in this area.
24. One such is the case of Bannister v Bannister [1948] 2 All ER 133. There Mrs Bannister had sold her two cottages to her brother in law in return for an oral promise that she would be entitled to remain for life in one of them: the promise not being recorded in the conveyance to Mr Bannister (the brother in law). Subsequently, Mr Bannister gave his mother in law a notice to quit stating that she was a tenant at will only. The Court refused his claim for possession on the ground that he held the property on constructive trust for Mrs Bannister during her life to permit her to occupy it.
25. Another is Binions v Evans [1972] 1 Ch 359 where Mrs Evans the Defendant was the 76 year-old widow of a chauffeur who had (like his father and grandfather before him) loyally served the Tredegar Estate. On Mr Evans’ death, the Estate granted Mrs Evans what was entitled a tenancy at will but the terms of which were said to be that she would be a tenant at will “free of rent for the remainder of her life”. The Estate subsequently sold the cottage to Mr and Mrs Binions expressly subject to Mrs Evans’ tenancy. The Binions’ claim for possession was dismissed. Lord Denning MR held that Mrs Evan had a licence under which she was entitled to live in the cottage for the rest of her life, and that the Binions had bought by a contract expressly subject to her rights: thus they were precluded, by virtue of a constructive trust imposed by conscience, from acting inconsistently with Mrs Evans rights under her licence.
26. These cases formed the foundation for Lyus v Prowsa Developments Limited [1982] 1 WLR 1044, a decision of Dillon J. which as will be seen became the basis of the trial judge’s decision in Chaudhary v Yavuz. Mr and Mrs Lyus had agreed to purchase a property in Suffolk which consisted of a plot of land on an estate which was to be developed by the vendor. Mr and Mrs Lyus paid a deposit, but the vendor developer went insolvent. The estate had already been mortgaged and the Bank exercised their right of sale as mortgagee. However when the Bank sold the estate to Prowsa Developments Ltd they did so expressly subject to and 6
with the benefit of the contract with Mr and Mrs Lyus. The Lyus’ interest however was not registered.
27. Dillon J. held that by reason of the Prowsa Developments buying the property subject to the rights of Mr and Mrs Lyus, they held the property on constructive trust subject to the Lyus’ rights, and that the Defendants were obliged to honour the contract. He dismissed the suggestion that the failure to register the interest meant that the Lyus’ interest was defeated by the transfer. While accepting that it was not a fraud to rely on legal rights conferred by an Act of Parliament (in Lyus the Land Registration Act 1925), he went on to say at 1054H: “It seems to me that the fraud on the part of the defendants in the present case lies not just in relying on the legal rights conferred by an Act of Parliament, but in the first defendant reneging on a positive stipulation in favour of the plaintiffs under which the first defendant acquired the land. That makes, as it seems to me, all the difference.”
28. In Ashburn Anstalt v Arnold [1989] Ch 1, the Court of Appeal confirmed that the imposition of a constructive trust was permissible in the circumstances of the case of Lyus v Prowsa.
29. This approach was followed prior to the 2002 Act in both IDC Group Ltd v Clark [1992] 1 EGLR 187 (Sir Nicholas Browne-Wilkinson V-C) and Lloyd v Dugdale [2002] 2 P&CR 167 (Court of Appeal), although these later cases sought to emphasise that it was necessary to show that there was some new obligation adopted by the purchaser before a constructive trust would be found.
CHAUDHARY v YAVUZ: THE FIRST INSTANCE DECISION
30. The trial was held before His Honour Judge Cowell sitting in the Chancery List of the Central London County Court. He held in favour of Mr Chaudhary, holding that Mr Yavuz was bound by the rights of way despite the fact that they were not registered.
31. The initial part of his reasoning (which was not challenged on appeal) was that as between Mr Chaudhary and Mr Vijayan (i.e. Mr Yavuz’s predecessor in title) there was a proprietary estoppel which would have prevented Mr Vijayan from denying Mr Chaudhary’s rights of way. The Judge rejected the arguments that Mr 7
Vijayan had meant the permission to be temporary only, and that the parties had agreed that the rights would terminate whenever Mr Vijayan sold No. 35.
32. It was also not challenged on appeal that a proprietary estoppel was capable of binding a successor purchaser - see section 116 of the Act which states: “116 Proprietary estoppel and mere equities It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following— (a) an equity by estoppel, and (b) a mere equity, has effect from the time the equity arises as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority).”
33. Thus the Judge found that there was an interest which had the potential to bind Mr Yavuz when he bought the Property. The main question in the case became however, whether that right bound Mr Yavuz.
34. The fact that there was no written agreement meant that Mr Chaudhary could not rely upon an equitable easement alone. Paragraph 3 of Schedule 3 only applied to make legal easements which were apparent on reasonably careful inspection binding as overriding interests. Thus the fact that Mr Chaudhary might have had an equitable easement was not enough for him to win his case. Nor it should be added was there any question of prescriptive rights of way having arisen: the staircase only having been used by the occupants of the flats above No. 37 since 2007.
35. Thus the issues were whether the rights could constitute an overriding interest (because of actual occupation) under Schedule 3 or whether the facts justified a constructive trust so as to actually bind Mr Yavuz.
36. The Judge held in favour of Mr Chaudhary on both issues: a. Firstly, he held that Mr Chaudhary was in actual occupation of the alleyway in particular by the existence and use of the balcony and staircase. b. Secondly, in the light of the fact that Mr Yavuz had bought the property subject to the existing rights which would be determinable on reasonable inspection, and given that the staircase and balcony were there for all to 8
see, he held that Mr Yavuz was bound by a constructive trust to honour the arrangement. The judge applied by analogy the case of Lyus v Prowsa. He was clearly swayed by the obvious nature of the staircase and arrangement for access to the flats above No. 37 which existed at the time that Mr Yavuz bought the property.
THE COURT OF APPEAL
37. Permission to be appeal was granted by Lloyd L.J., who then went on to be part of the panel who heard the appeal and gave the leading judgement with which the others agreed).
38. The Court of Appeal allowed the appeal on both issues.
(a) ACTUAL OCCUPATION
39. Lloyd L.J. concluded that there was no actual occupation of any part of the staircase or balcony which could give Mr Chaudhary’s rights the status of an overriding interest.
40. He held that mere use of an easement, did not constitute actual occupation of a piece of land (para 31 of the Judgment): “There was no indication that it was used otherwise than for passing and repassing between the street and the relevant flat or flats. In my judgement such use does not amount to actual occupation.”
41. He went to say as follows (again at para 31 of the Judgment): “I dare say that no-one else was in occupation of the metal structure either, but not every piece of land is occupied by someone, let alone in someone’s actual occupation (as distinct from possession).”
42. He went to rule that occupation required physical activity on the land – so that the presence of the balcony and/or staircase, even if it belonged to Mr Chaudhary, did not constitute actual occupation. At para 32 he said: “Occupation must be, or be referable to, personal physical activity by some one or more individuals: see Lord Wilberforce in Williams & Glynn’s Bank v Boland [1981] AC 487 at 505B-C – “physical presence, not some entitlement in law””.
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43. He also considered that once the staircase and balcony had been built it became part of the land owned by Mr Vijayan (and subsequently Mr Yavuz) and was not part of No. 37. Therefore he did not express a view as to the correctness of cases which suggest that it is possible to occupy a piece of land by leaving a large object belonging to you on it (e.g. a car as in the case of Kling v Keston Properties Ltd (1983) 49 P&CR 212.)
44. One area which was left unanswered was the question of what the correct application of the wording in paragraph 2 of Schedule 3 which restricts the protection of the overriding interest so that it applies only to the interest “so far as relating to the land of which he [the holder of the right] is in actual occupation”.
45. These words were a new addition to the application of overriding interests, introduced by the 2002 Act. This had followed on from the Court of Appeal decision in Ferrishurst Ltd v Wallcite [1999] Ch 355 which had ruled that if a person was in actual occupation of part of the land comprised in a registered disposition, then a right or interest in relation to any part of that land was protected as an overriding interest. The Court of Appeal thus controversially in Ferrishurst had declined to follow Fox L.J. in Ashburn Anstalt v Arnold [1989] 1 at 28F who had said “the overriding interest will relate to the land occupied but to nothing else.”
46. The addition of the words “so far as relating to the land of which he is in an actual occupation” into the 2002 Act therefore meant that Parliament effectively revoked Ferrishurst. The question remains however as to what exactly “relating to” means.
47. Mr Yavuz tried to argue that the phrase should be narrowly construed so as to mean effectively that the right had to be co-extensive with the area occupied. His counsel pointed out that even if Mr Chaudhary had been in occupation of that part of the alleyway where the balcony and staircase was situated it was still necessary to walk to and from the staircase over the rest of the (unoccupied) alleyway and through the gate to the street beyond. He therefore argued that the interest of Mr Chaudhary would have to extend beyond the area he was occupying (the 10
balcony/staircase) and therefore could not be protected as an overriding interest. Mr Chaudhary might have had a right to use the balcony itself but not the alleyway.
48. Mr Chaudhary’s arguments were that such an argument placed an unnaturally restrictive interpretation on the words “relating to” and that the right of way related to the staircase and balcony and therefore that was all that was needed.
49. Lloyd L.J. in Chaudhary v Yavuz did not resolve the issue as it was unnecessary for him to decide it given his previous ruling that there had been no actual occupation. He did however give a hint that he was in favour of Mr Chaudhary’s less restrictive interpretation saying at para 35: “Since, in my judgment, there was no relevant actual occupation, the point does not arise, I can see force in Mr Gavaghan’s argument [for Mr Chaudhary], but I need say no more about this”.
(b) CONSTRUCTIVE TRUST
50. The Court of Appeal took a restrictive interpretation of Lyus v Prowsa and made clear that it was a case which should not be widely applied.
51. Lloyd L.J. stated at para 61 that “Lyus v Prowsa is a very unusual case, and is not likely to be followed in more than a few others”. He went on to state at para 64 “In my judgment Lyus is an exceptional case, and it is right that it should be.”
52. Taking a restrictive approach to Lyus meant that the failure in the transfer to Mr Yavuz to identify expressly the nature of Mr Chaudhary’s right, resulted in the case being distinguishable and that the Judge had erred by finding a constructive trust.
53. Lloyd L.J. held that: “No such conclusion [i.e. that there was a constructive trust] would be justified in the present case, nor, in my judgment, in any case where the third party right is only identified by way of general words in the contract, whether those of Standard Condition 3.1 of otherwise. In such a case the reference to the class of rights is accounted for by the vendor’s obligation to disclose rights and by his interest in ensuring that, if there are rights not otherwise disclosed, subject to which the sale will take effect, it is not open to the purchaser to object to completion or to claim any form of compensation.”
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54. Thus it was not enough that the rights could be adequately identifiable, as they were in the present case by inspection of the land. This was despite what was said in Bannister v Bannister [1948] 2 All ER 133 at 136 where Scott L.J. stated: “Nor is it, in our opinion, necessary that the bargain on which the absolute conveyance is made should include any express stipulation that the grantee is in so may words to hold as trustee. It is enough that the bargain should have included a stipulation under which some sufficiently identified beneficial interest in the property was to be taken by another.”
55. Perhaps the most telling explanation for the Court of Appeal’s rejection of the constructive trust reasoning of the trial judge was contained earlier in paragraph 58, where the Court considered the overall effect of the trial Judge’s conclusion that there was a constructive trust: “If this conclusion is right it would have potentially very wide ramifications. The incorporation in a contract for the sale of land of the Standard Conditions of Sale must be a very widespread practice. Thus, most, or at least many, contracts for the sale of land are, by this means, expressed to be subject to incumbrances discoverable by inspection of the property before the contract. If the relevant incumbrance is protected by actual occupation, within the terms of Sch 3, para 2, to the Act, then it will being the purchaser in any event, as it would also if it is a legal easement or profit a prendre within Sch 3 para 3. But if it is any other form of right, such as an equitable easement or other proprietary estoppel right (as here), the judge’s reasoning would make it binding on the purchaser despite the fact that it could, and in terms of the 2002 Act should, be protected by registration or a notice on the register, and despite the fact that, unlike in Lyus, there is nothing in the contract to draw specific attention to it.”
56. The Court of Appeal thus had a genuine concern as to the opening of the floodgates if Lyus v Prowsa could apply to standard term conditions.
CONCLUSIONS
57. The Court of Appeal can therefore be seen to be keen to avoid allowing Lyus v Prowsa to be used as a means to undermine certainty in the land registration system. Unless a contract expressly identifies specific rights in it to which the purchaser takes subject, then there is no real room for an argument that they are protected by a constructive trust, no matter how clear their existence is on the ground. This is perhaps a sacrifice of the individual justice of a situation on the altar of overall certainty. Unless a Schedule 3 right can be shown, holders of rights will have problems enforcing their unregistered rights.
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58. The case also shows that in respect of Schedule 3 overriding interests there is little room for extending actual occupation beyond the paradigm case of an occupier of a house or flat seeking to enforce their rights against a subsequent purchaser.
59. The one key piece of advice to clients is simple. If in doubt: register!
JONATHAN GAVAGHAN Ten Old Square th
7 February 2012
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THE TEN OLD SQUARE SEMINAR SEASON 2012
After the breakup - filling the evidential void with lies or with ‘fairness’?
BY JULIA BEER
1. The Supreme Court deliberated over Jones v Kernott [2011] UKSC 53 for a staggering 6 months. Although the appeal was unanimously allowed there was not unanimity of reasoning. Hale LJ and Walker LJ gave the joint lead judgment a bonafide Chancery/Family judgment! Was it worth the wait? Key Points 2. Jones v Kernott clarifies the law in relation to common intention constructive trusts but does it radically change the legal landscape? In my view it does not. In short Jones v Kernott: 2.1 Confirms that there is now in reality one law of property/constructive trust for the jointly owned family home and another for all other contexts; 2.2 Confirms that there is no presumption of resulting trust in a matrimonial or quasimatrimonial home even if there has been unequal contributions between parties towards the purchase price; 2.3 Does deal with the issue of imputation and concludes that the court will impute an intention to the parties which they may never have had, where it is clear that the beneficial interest is to be shared but impossible to divine a common intention as to the proportions (in the narrow circumstances of the matrimonial or quasi-matrimonial home); 2.4 And that the court will continue to impute an intention in the rare circumstances that a resulting trust presumption continues to apply i.e. if the domestic partners are also business partners.
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The Break Up 3.
Applying Jones v Kernott to the following scenario: -
A and B purchase a home together in 1996. The property is purchased in joint names with the benefit of a mortgage (Property 1). Contributions towards the deposit are unequal A contributing £100,000 and B £5,000. There are no express declarations of beneficial interest. Both contributed towards the mortgage monthly repayments equally
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In 2006 A’s mother dies and A uses her inheritance to repay the outstanding mortgage secured against the home in the sum of £50,000.
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During the course of the relationship the parties invest in a buy to let commercial investment property in joint names. It is subject to a commercial mortgage B puts £30,000 towards the deposit A £10,000. Rental income is used to discharges the mortgage (Property 2). There are no express declarations of beneficial interests.
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A and B have now separated A claims that there was always an agreement that she would have her deposit monies back if Property 1 was sold and after she discharged the mortgage with her inheritance monies it was agreed that she would have a greater beneficial interest although her share was never quantified. B says A is lying and that it was always agreed and understood both properties were a joint venture and they were equal beneficial owners of both.
Property 1 – The Quasi-Matrimonial home i)
Identifying the type of property
4. The fact that Property 1 was intended to be the family home is significant, the property will be considered in the ‘domestic consumer context’ and as such the presumption is raised that the beneficial interests coincide with the legal estate. Both have been responsible for the mortgage and there is no presumption of a resulting trust arising from their respective contributions to the deposit. B should therefore succeed in establishing beneficial joint tenants at the outset.
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ii) A change in intentions? 5. Can A establish an ‘ambulatory’ common intention constructive trust such that beneficial joint tenants can be displaced? Is there evidence of a change of intention? What is sufficient evidence? On the facts of Jones v Kernott the Court of Appeal found insufficient evidence (at odds with the Supreme Court). The Facts 6. The salient facts of Jones v Kernott: The property was purchased in joint names with the benefit of an endowment mortgage; there was an unequal contribution towards the mortgage; after 8 years the parties separated and Mr. Kernott moved out of the property and thereafter made no further contribution towards the mortgage. Two years later the parties put the property on the market for sale but it did not sell. The parties moved to plan B and agreed to cash in a joint lives policy agreeing an equal division. Mr. Kernott was able to use his share to put down a deposit to purchase his own property. At the date of trial Ms. Jones had contributed towards the mortgage exclusively for 14 and a half years.
7. At first instance and on appeal to the High Court Ms. Jones successfully argued that the parties’ intention towards the property had changed once the joint policy had been split. She had conceded that prior to that (notably at the time of the original attempt to sell the property) she would have had no argument that it was anything other than held equally. At first instance the beneficial shares were apportioned 90/10 in Ms. Jones’ favour. The judge accepted the parties’ intentions had changed and then went on to consider what was just and fair between them. On appeal the High Court considered that a change in intention could be readily inferred or imputed from the parties conduct post separation. 8. The Court of Appeal however allowed Mr. Kernott’s appeal stating that the parties were tenants in common in equal shares finding that there was nothing to indicate that the parties’ intentions had changed after separation. Critically they did not find that Stack v Dowden [2007] UKHL 17 enabled the court ‘to find by way of the imputation route an intention, where none was expressly uttered or inferentially formed’. The Court of Appeal concluded that it could not therefore infer an intention to change the beneficial interests from the parties conduct. 3
9. While all the justices of the Supreme Court dealt with the issue of imputation there was not unity of agreement. In Stack Neuberger LJ in the minority had expressed his view that intention could be inferred but should not be imputed. He defined inferred intention as being intention ‘which is objectively deduced to be the subjective intention of the parties in the light of their actions and statements’. Kerr LJ endorsed Neuberger LJ’s description of imputed intention as stated in Stack ‘an imputed intention was one which was attributed to the parties even though no such actual intention could be deduced from their actions and statements and even though they had no such intention’. 10. Some commentators have claimed that Jones v Kernott has ‘legitimized’ imputation. The fact that imputation is not a new concept is something which the Supreme Court was at pains to point out. Forty years earlier in Pettitt v Pettitt [1970] AC 777 Diplock LJ then in the minority said "Unless it is possible to infer from the conduct of the spouses at the time of their concerted action in relation to acquisition or improvement of the family asset that they did form an actual common intention as to the legal consequences of their acts upon the proprietary rights in the asset the court must impute to them a constructive common intention which is that which in the court's opinion would have been formed by reasonable spouses." 11. In Gissing v Gissing [1971] AC 886 Diplock LJ (accepting he had been in the minority in Pettitt), went on to analyse the case on the basis of whether the necessary intention could be inferred. It was not lost upon Wilson LJ in Jones v Kernott however that he had also stated that it might be possible to infer a common intention on the part of the spouses that their interests in the property should be in such proportions as might ultimately be seen to be fair. 12. The application of imputation in a common intention constructive trust can be found in the Court of Appeal prior to Jones v Kernott in the form of Chadwick LJ’s judgment in Oxley v Hiscock [2004] EWCA Civ 546. Chadwick LJ had concluded that "what the court is doing, in cases of this nature, is to supply or impute a common intention as to the parties' respective shares (in
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circumstances in which there was, in fact, no common intention) on the basis of that which . . . is shown to be fair". 13. The problem with Stack and imputation was conveniently set out in detail by Rimmer LJ in the Court of Appeal in paragraphs [76] and [77] when he submitted the words “actual, inferred or imputed” to a detailed analysis. He said this of “imputed” intention at paragraph [77]: “As for Baroness Hale’s statement in [60] that the court must or can also look for the parties’ imputed intention, I do not, with the greatest respect, understand what she meant. It is possible that she was using it as a synonym for inferred (cf such use by Lord Pearson in Gissing –v- Gissing [1971] AC 886 at 902G – H), in which case it adds nothing. If not, it is possible that she was suggesting that the facts in any case might enable the court to ascribe to the parties an intention that they neither expressed nor inferentially had: in other words, that the court can invent an intention for them. That, however, appears unlikely, since it is inconsistent with Baroness Hale’s repeated reference to the fact that the goal is to find the parties’ intentions, which must mean their real intentions. Further, the court could and would presumably only consider so imputing an intention to them if it had drawn a blank in its search for an express or an inferred intention but wanted to impose upon the parties its own assessment of what would be a fair resolution of their differences. But Baroness Hale’s rejection of that as an option at paragraph [61] must logically exclude that explanation. In his dissenting speech, Lord Neuberger at [125] to [127] advanced an apparently comprehensive demolition of the “imputation” theory. I recognise that those paragraphs cannot be invoked as support for the view that Baroness Hale’s unexplained use of the word “imputed” was not intended to mean what it might be read as meaning. But if she was using the word in its ordinary meaning, it is in my view also difficult to see how the imputing to the parties of a non-existent intention can stand with her emphasis that the burden of rebutting the presumed joint beneficial interest is heavy and that, only in very unusual cases, will it be discharged. That is because, if the “imputing” of an intention is open to trial judges, they could in principle do it in every case in which an assessment of the relevant history reflects an unequal contribution to the purchase. I accordingly do not myself interpret Stack as having intended to enable the courts to find, by way of the imputation route, an intention where none was expressly uttered nor inferentially inferred.” (emphasis added).
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14. In the Supreme Court Wilson LJ pin pointed the problem in Stack as being in simple terms the interpretation of Hale LJ’s third sentence of paragraph [61]. He says this: [85] In para 61 of her ground-breaking speech in Stack v Dowden Lady Hale quoted, with emphasis, the words of Chadwick LJ in para 69 of Oxley v Hiscock, which I have quoted in para 71 above. Then she quoted a passage from a Discussion Paper published by the Law Commission in July 2002 and entitled "Sharing Homes" about the proper approach to identifying the proportions which "were intended" . Finally she added four sentences to each of which, in quoting them as follows, I take the liberty of attributing a number: "[1] That may be the preferable way of expressing what is essentially the same thought, for two reasons. [2] First, it emphasises that the search is still for the result which reflects what the parties must, in the light of their conduct, be taken to have intended. [3] Second, therefore, it does not enable the court to abandon that search in favour of the result which the court itself considers fair. [4] For the court to impose its own view of what is fair upon the situation in which the parties find themselves would be to return to the days before Pettitt v Pettitt . . . without even the fig leaf of section 17 of the 1882 Act."
[86] I leave on one side Lady Hale's first sentence although, whereas Chadwick LJ was identifying the criterion for imputing the common intention, the context of the passage in the Discussion Paper suggests that the Law Commission was postulating a criterion for inferring it. On any view Lady Hale's second sentence is helpful; and, by her reference to what the parties must, in the light of their conduct, be taken to have intended (as opposed to what they did intend), Lady Hale made clear that, by then, she was addressing the power to resort to imputation. Lady Hale's fourth sentence has been neatly explained - by Mr Nicholas Strauss QC, deputy judge of the Chancery Division, who determined the first appeal in these proceedings, at para 30 - as being that, in the event that the evidence were to suggest that, whether by expression or by inference, 6
the parties intended that the beneficial interests in the home should be held in certain proportions, equity would not "impose" different proportions upon them; and, at para 47 above, Lord Walker and Lady Hale endorse Mr Strauss's explanation. [87] The problem has lain in Lady Hale's third sentence. Where equity is driven to impute the common intention, how can it do so other than by search for the result which the court itself considers fair? The sentence was not obiter dictum so rightly, under our system, judges below the level of this court have been unable to ignore it. Even in these proceedings judges in the courts below have wrestled with it. Mr Strauss observed, at para 31, that it was difficult to see how - at that final stage of the inquiry - the process could work without the court's supply of what it considered to be fair. In his judgment on the second appeal Rimer LJ went so far as to suggest, at para 77, that Lady Hale's third sentence must have meant that, contrary to appearances, she had not intended to recognise a power to impute a common intention at all. [88] I respectfully disagree with Lady Hale's third sentence. 15. As stated above consensus broke down between their lordships on the issue of imputation and the distinction which should be drawn between impute and infer. It is Wilson LJ’s opinion that it is impossible to infer that the parties intended the shares to be 90/10 instead the court would have to impute the intention that it should be held on a basis which equates to these proportions. Collins LJ’s view on the other hand is that in this context the difference between inference and imputation ‘will hardly ever matter..and..what is one person’s inference will be another person’s imputation’ [65]. Walker LJ and Hale LJ state that ‘the difference in practice may not be so great’. 16. Conceptual distinctions aside, post Jones v Kernott what is the position in relation to imputation? -
The preference is always to collect the evidence from an expressed or inferred intention common to the parties about the proportions in which their shares are to be held
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Equity will if collection of it proves impossible impute to them the requisite intention
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It is not open to the court to impose a solution upon the parties in contradiction to any intentions but if it cannot deduce exactly what shares were intended it may have no alternative but to ask what their intentions as reasonable and just people would have been had they thought about it at the time.
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The court has a duty to come to a conclusion on the dispute put before it.
Conclusion – Property 1 17. So reverting back to the problem can A establish an ‘ambulatory’ common intention constructive trust to displace beneficial joint tenants? The first duty of the court is to determine whether there is evidence of an actual change in intention, in the absence of an agreement the court will look to the conduct of the parties as it did in Jones v Kernott. In 1996 A applied her inheritance to discharge the mortgage is that sufficient? It is a question of fact. If on the facts the court is unable to find an actual intention or infer an intention then it would (if it needed to) be able to impute the requisite intention. It could for example impute an intention that A was to have her inheritance back and thereafter the beneficial interest held equally. 18. For completeness it must be noted that this is only possible in the context of there being no express beneficial trust. Post Jones v Kernott some commentators have raised the proposition that an express written declaration of trust could be altered by establishing an ambulatory common intention constructive trust. In my view Kernott does not open the door to this sort of challenge. If there is an express declaration of trust then Goodman v Gallant remains good law. 19. Jones v Kernott does not alter the Court of Appeal’s confirmation in James v Thomas [2008] 1 FLR 1212 for example that a constructive trust can form at any time before, during or after the acquisition of a property. Nor in my view does it alter the position that in the absence of an
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express post-acquisition agreement the court will be slow to infer from conduct alone that the parties intended to vary existing beneficial interests established at the time of acquisition 1. Property 2 – the Investment Property 20. What about the investment property? It is still possible for the classic resulting trust presumption to apply to Property 2 as it was not purchased as a family home[31] which would give rise to the second circumstance in which the court could impute intention 21. To understand the distinction between the common intention constructive trust and the two properties it is necessary to briefly consider why the presumption of resulting trust is now not applicable to a matrimonial or quasi-matrimonial home. Pre- Stack there had been a tendency for the courts to gravitate towards a resulting trust analysis in joint name (no express declaration of trust) cases. Post Stack there cannot be two starting points; namely the starting point that there is a presumption of joint beneficial interests and the starting point that there is a presumption that the parties beneficial interests are in proportion to their respective financial contributions. The justification for the starting point being joint beneficial interest and not a resulting trust is found at [23] and [24] of Jones v Kernott. Essentially time has moved on and the presumption of resulting trust in relation to the acquisition of the family home was said by the Supreme Court to have made a great deal more sense ‘when social and economic conditions were different and when it was tempered with the presumption of advancement’. 22. In essence there are special features of policy, facts and law which attach themselves to domestic common intention constructive trusts which require then to be treated differently. The Stack and Jones line of cases are arguably a specific jurisprudential response to the problem of a presumption of resulting trust and the absence of resolving disputes over property ownership where a married or unmarried could have purchased property for their joint occupation as a family home. 23. In Crossco No. 4 Unlimited and others v Jolan Ltd and other [EWCA] Civ 1619 the Court of Appeal applied Jones v Kernott and further considered the distinction between constructive 1
Also see Morris v Morris [2008] EWCA Civ 257
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trusts in the commercial and domestic context and the reasons behind the distinction. Etherton LJ said this at [85]: The jurisprudence in that distinctive area is driven by policy considerations and the special facts that normally apply in the dealings between those living in an intimate relationship. They include the fact that such parties do not normally take legal advice about, or expect to reduce to a formal or indeed any written agreement, their mutual property rights and interests in the family home. Further, those rights and interests must be seen in the context of an enduring but oftenchanging relationship of inter-dependency, mutual co-operation, compromise and joint contributions. Those special features are why, as the jurisprudence has now clearly established, the usual presumption of a resulting trust does not apply in such a situation, and the parties' respective property rights in the family home are to be ascertained by having regard to their intentions as disclosed by what they have said and done over the entire course of their ownership or, where it is clear that the beneficial interests are to be shared but it is impossible to divine a common intention as to the proportions in which they are to be shared, by imputing to them the intentions which they would have had as reasonable and just people if they had thought about it: Stack, Kernott. Since the parties' actual, inferred or imputed intentions might change over time, the common intention constructive trust has been described as an "ambulatory" trust. 24. For completeness Etherton LJ went on to conclude that [87] The passage of time and developments in the law have, in my judgment, shown the connection between the common intention constructive trust and the Pallant v Morgan equity as explained and applied in Banner Homes to be untenable. In a commercial context, it is to be expected that the parties will normally take legal advice about their respective rights and interests and will normally reduce their agreements to writing and will not expect to be bound until a contract has been made: see, for example, Lord Walker in Cobbe at 68 and 81. They do not expect their rights to be determined in an "ambulatory" manner by retrospective examination of their conduct and words over the entire period of their relationship. They do not expect the court to determine their respective property rights and interests by the imputation of intentions which they did not have but which the court considers they would have had if they had acted justly and reasonably and thought about the point.
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Conclusion – Property 2 25. Thus in the worked example the presumption of resulting trust would still be applicable to Property 2 because it is a commercial property. The court could impute an agreement that B would have a 75% interest in the property based upon contributions. Sole Name Cases 26. Jones v Kernott emphases that a common intention trust is of central importance to both joint and single name cases where the property is matrimonial or quasi - matrimonial. The starting point of the analysis is obviously different. In a sole name cases the starting point is the burden which the non-legal owner has of establishing a common intention constructive trust; in a joint names case the starting point is a presumption of beneficial joint tenancy (in the absence of an express declaration). Thereafter once the claimant has established that there was an intention that the beneficial ownership should be shared the court will go on and search in the same way for actual or inferred intentions and impute an intention in the absence of finding an intention in the same way as a joint owner. Conclusion 27. Context is everything and Jones v Kernott has firmly identified that if a property has the characteristics of being a matrimonial or quasi-matrimonial home then it will be treated differently to a property purchased by a couple for investment purpose. While there is clearly not one law for the family division and one law for the other divisions of the High Court, there is however one analysis of a common intention constructive trust in the context of a matrimonial or quasi-matrimonial home and one analysis for all other property. By analogy the House of Lords distinguished its decision in Yeoman’s Row v Cobbe [2008] 1 WLR 1752 in its judgment in Thorner v Majors [2009] 2 FLR 405 on the basis that the relationship between the parties was different, the former being a commercial arms length transaction and the later being familial and personal. 28. Jones v Kernott gives much sought guidance on when the court should impute an intention. It does not as some commentators have suggested in my view ‘legitimise’ imputation. Arguably imputing is a device to fill an evidential vacuum, however the Supreme Court is clear that ultimately the court has a duty to come to a conclusion on the dispute before it and as part of 11
this process a court may simply have no alternative but to ask what their intentions as reasonable and just people would have been had they thought about it. JULIA BEER TEN OLD SQUARE juliabeer@tenoldsquare.com
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