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Principles of Land Law

money in ‘compensation’ for the loss of their right to the land. However, as became clear in the case of State Bank of India v Sood (1997), many trustees will take out a mortgage of registered land (that is, sell an interest to a purchaser) not in order to receive immediate monies, but to guarantee future borrowings from the bank: perhaps to finance a business venture. In these cases, no money is actually paid over even though there is an overreaching transaction by two or more trustees. Consequently, the question which arose in Sood, apparently for the first time, was whether this type of transaction is an overreaching transaction so as to give the bank priority over any equitable rights? The answer from Sood is that it is. The Court of Appeal decided that, under s 2(1)(ii) of the LPA 1925, if capital monies were to be paid as a result of a conveyance by the trustees, those monies actually have to be paid to two trustees to overreach. However, if capital monies did not arise on a transaction (as in the case of a mortgage to secure future borrowings), a conveyance by two trustees would overreach the equitable owners by mere execution of the conveyance. The court reached this conclusion through a generous interpretation of s 2(1)(ii) of the LPA 1925—the overreaching section. Effectively, the court decided that, if money is payable on the transaction, it must be paid to two trustees; but, if money is not payable, overreaching occurs so long as the mortgage is properly executed. This interpretation was bolstered by two policy considerations. First, that the aim of the overreaching machinery is to encourage the free alienability of co-owned land and this should be protected. Secondly, that although the point in this case had not been decided before, many lenders had agreed to these types of mortgage and to have held in this case that they did not overreach because no capital monies changed hands would be most unfortunate. These are compelling reasons. The argument that existing commercial practice assumes the law to be as the court in Sood decided is not an attractive one, but it is realistic. On the other hand, apart from the absence of any authority for this decision, there are two real difficulties: first, that the words of s 2(1) of the LPA 1925 really do seem to contemplate the actual payment of money as a precondition for overreaching (even if they did not mean to); secondly, and more importantly, that overreaching can be justified as a matter of principle because the equitable owners’ interests take effect in the money paid to the trustees. That is why the equitable interests can so easily be swept off the land. If overreaching can occur without the payment of such monies—because two trustees have charged the land for future debts—what protection/benefit is there for the equitable owners? Where do they get their quid pro quo for suffering overreaching? There is no capital money for them to take a share of, or if it was represented as credit at the bank it is likely to have been spent by the time the case comes to trial. In other words, Sood is almost certainly correct, but for reasons of practice not principle.

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(2)The second circumstance where overreaching can occur is where the transaction is made under the provisions of the Settled Land Act 1925 relating to the operation of strict settlements (Chapter 5). As we shall see, a strict settlement is, in simple terms, a device for ensuring that land is given to X for life, thence to Y. There are ‘trustees of the settlement’ who will not be X or Y, but X (the life tenant) or the trustees may have power to deal with the land (for example, sell it) and this transaction can be an overreaching transaction, sweeping the interests of Y into the proceeds of sale. Settlements will become increasingly rare due to the inability to create new strict settlements after 31 December 1996 (s 2 of the TOLATA 1996).

(3)Thirdly, overreaching is possible if the transaction is made by a mortgagee (for example, bank, building society) or personal representative in exercise of their paramount powers to deal with the land.

(4)Fourthly, overreaching may occur if the transaction is made under order of the court, for example, s 14 of the TOLATA 1996. The court has wide powers to deal with land, particularly land subject to a trust. Any order of the court transferring the land to a third party, or directing that it should be sold, necessarily effects an overreaching transaction for the benefit of the transferee or purchaser.

2.8.3The consequences of failing to overreach

It is only if both of the above conditions are satisfied that an overreaching transaction occurs. The existence of an overreachable right is simply a question of fact and rarely gives rise to problems. However, what is more common is failure to ensure that a proper overreaching transaction has occurred, thereby denyingthepurchaserthetrumpcardandpreventingtheoverreachableequitable interests from being swept off the title into the purchase money. Usually, this is a result of a failure to pay the purchase money to two trustees as required by the most common type of overreaching transaction, as in Boland. Should there be a failure to overreach, there are two possibilities to consider:

(1)if the equitable interest has been registered as a minor interest under the LRA 1925 (or equivalent under the LRA 2002) or if it constitutes an overriding interest (as most do because the equitable owner is usually in actual occupation, s 70(1)(g)—Boland and similarly under Scheds 1 and 3 to the LRA 2002), the purchaser will be bound by the interest and their use of land restricted accordingly; or

(2)if the equitable interest is not protected as either a minor interest or an overriding interest (or equivalent under the LRA2002), the purchaser who registers his title takes the land free of that interest. This is not surprising, being simply an example of the voidness rule referred to above. Note here that equitable rights under existing strict settlements (for example, life

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interests) are explicitly excluded from the category of overriding interests and must be registered as minor interests in such circumstances.

It sometimes causes surprise that even if a purchaser fails to overreach he may still take free of the relevant equitable interest. It is understood more clearly if it is remembered that overreaching is an exceptional process—like a trump card—that releases the purchaser from the normal rules of registered (or unregistered) conveyancing by providing an automatic release from some equitable interests. If the trump card fails, the normal rules of registered conveyancing come back into play. Hence, the equitable interest may still be void if not protected as an overriding or registered minor interest.

Tosumup,overreachingisaspecialprocedureanditcannullifytheproprietary status of certain equitable interests in certain specified circumstances. When it works, these equitable interests are transferred to the purchase price of the land and cannot affect a purchaser. When it fails, the rules of registered land take effect in the normal way.

2.9Rectification of the Register

It is a central tenet of the land registration system that the Register should be as accurate as possible so that it can be relied upon by all persons intending to deal with the land. Thus, the registration of persons as registered proprietors and the due entry of minor interests should be free from error. Of course, this is the ideal, but in practice faults in the registration process and registrations based on incomplete or inaccurate evidence do occur. Consequently, under s 82 of the LRA 1925, the Registrar (with an appeal to the court), or the court itself, has the power to order rectification of the Register in eight specified circumstances. The power is discretionary and rectification may be refused even if one of the statutory grounds are made out although it is not clear whether rectification when ordered is retrospective or merely regularises the title from the moment of the court order (Kingsalton v Thames Water (2001); and see the disagreement in Malory v Cheshire Homes (2002)). The statutory grounds are necessary for rectification, but they are not always sufficient. The Registrar or court may decide, for example, that the injury requiring rectification is de minimus, or that the harm caused by agreeing to rectification would far outweigh the harm caused by denying it. The specified grounds are:

•s 82(1)(a), where a court has decided that a person is entitled to an estate or interest in land and in consequence the Register is ordered or required to be rectified to reflect this, as in Calgary and Edmonton Land Co Ltd v Discount Bank Overseas Ltd (1971). For example, if there is a dispute, subsequently resolved by the court, as to the proper distribution of real property on death,

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perhaps because the will is contested. Likewise, the Register may be rectified under this head in order to place on the Register what is currently an overriding interest, as in Chowood v Lyall (No 2) (1930);

•s 82(1)(b), where a court orders rectification in order to place on the Register, or remove from it, an interest that was wrongly excluded or included as the case may be;

•s82(1)(c),wheretheRegistrarorthecourtordersrectificationwiththeconsent of all interested persons;

•s 82(1)(d), where the court or Registrar is satisfied that an entry has been obtained by fraud. This is a reasonably narrow ground for registration as it allows rectification where the entry on the Register has been obtained by fraud, rather than where the interest which is sought to be registered is obtained by fraud, as explained in Norwich & Peterborough Building Society v Steed (1992). So, if A obtains B’s fee simple by falsifying B’s signature to a conveyance, and then sells the estate to the innocent C, the Register cannot be rectified on this ground against C, because C’s registration as proprietor was not obtained by fraud, even though the interest C purchased from A was obtained fraudulently by A. Similarly, this head is concerned with fraud perpetrated on the Register by the registered proprietor, so that if that person has not participated in the fraud, s 82(1)(d) is inappropriate;

•s 82(1)(e), where by mistake, two or more persons are registered as proprietors of either the estate or registered charge (mortgage). Note, this is not meant to imply that two or more people cannot own jointly such an interest, rather that ‘double registrations’ in error can be rectified;

•s 82(1)(f), where a mortgagee has been registered as proprietor of the land instead of the mortgage itself (the charge). This is applicable in those cases where the mortgagor (the borrower) still retains some interest in the property by way of the ‘equity of redemption’, and is thus holder of the paramount title to the land: that is, the freehold or leasehold over which the mortgage exists;

•s 82(1)(g), where a person has been registered as proprietor of a legal estate in circumstances that if the land had been of unregistered title, that person would have had no legal estate. This is an important ground of rectification in cases of adverse possession. So, if Asells registered land to B, who is then registered as proprietor, B would seem to have a valid title under the LRA 1925. If, however, X has successfully adversely possessed for 12 years prior to the sale to B, no title would have passed to B in unregistered land having been extinguished by adverse possession. Consequently, the Register can be rectified to reflect the ‘true’ owner, X (Chowood v Lyall (No 2) (1930)). The point is simply that the initial registration of B as proprietor gives title under the LRA 1925 (registration being everything), so provision must be made enabling rectification where title would not actually have passed to the new registered proprietor under substantive law. The same result would occur

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if A had sold to B under a conveyance whose validity was subsequently challenged successfully by A on the grounds of undue influence or fraud;

•s 82(1)(h), ‘in any other case’ where, because of ‘any error or omission in the Register’ or ‘any entry made under a mistake’, it is ‘deemed just’ to rectify the Register. This appears to be a very broad ground for rectification and in the past this residual power was interpreted very widely, as in Argyle Building Society v Hammond (1984). Not surprisingly, this generated fears that too liberal a use of s 82(1)(h) would undermine the integrity of the Register as the wider the power of rectification, the less certain the Register is as a reflection of title to land. However, in

Norwich & Peterborough Building Society v Steed (1992), the Court of Appeal held that although there was a discretion to rectify the Register under s 82(1) of the LRA 1925, there was no general power to rectify merely because it was thought just and equitable to do so. Any particular claim for rectification had to fall squarely within one of the eight statutory grounds set out in the section. Moreover, as a general principle, s 82 was held not to create new grounds for challenging property rights that would not have existed prior to the advent of the land registration system. Rather, it was interpreted as a mechanism whereby the court could rectify the Register in order to recognise preexisting proprietary rights or to remedy errors or omissions. In other words, no new substantive powers to challenge proprietary rights were created by the section. That does not mean that the court will always refuse rectification where nothing could be done in unregistered land, or that they will grant it where the dispute would have been settled differently in unregistered land (as in London Borough of Hounslow v Hare (1992) where the Register was not rectified against a registered proprietor even though the transfer to her would have been void in unregistered land), but it is a welcome statement of principle that upholds one of the central tenets of the land registration system.

Finally, we should note that although there is a discretionary power to rectify the Register if one of the statutory conditions is satisfied, it is not permissible rectification where this would affect the title of a registered proprietor in possession of the land, except in order to give effect to an overriding interest or an order of the court (Kingsalton v Thames Water (2001)), or where the proprietor has contributed to the error or mistake, or where it would be unjust not to do so, s 82(3) of the LRA1925. This last provision has been considered in London Borough of Hounslow v Hare (1992). The plaintiffs were seeking rectification against a registered proprietor in possession who had purchased the property by virtue of a sale that was statutorily void. Rectification was refused because (following the normal rule) being registered as proprietor gave the defendant a title and it would have been ‘unjust’ to deny that title in the circumstances, even though in unregistered land the defendant would have no grounds for remaining an owner. The importance attached to a

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person in possession of land is a theme of the land registration system (see, for example, s 70(1)(g) of the LRA 1925) and it is appropriate that a registered proprietor should not be deprived of his interest when in possession save in exceptional cases. Rectification was ordered against such a person in Chowood v Lyall (No 2) (1930) (to give effect to an overriding interest), but refused in Kingsalton v Thames Water (2001). Likewise, although rectification may be ordered where this would affect the interests of innocent third parties (s 82(3), as applied in Hammond, to rectify against an innocent mortgagee and rectification ordered against an innocent party in Malory), the court appears to be reluctant to do so if another course of action is available. So, in Freer v Unwins (1976), an assignee of a lease (A) had taken the lease aware that certain restrictive covenants had been mistakenly omitted from registration as minor interests against the superior title and so were not binding on him. On an application for rectification to register these covenants, the court decided that A had to be treated as if a disposition had been made to him under s 20(1) of the LRA1925 and so acquired his lease free from unregistered minor interests. This was despite the fact that the Register was rectified against the superior title and so would affect future assignees of the lease: in essence, s 82(3), which gave the court authority to rectify to the discomfort of the innocent assignee, was ignored.

2.10Indemnity under the Land Registration Act 1925

The authoritative status of the Register means that there will always be cases where a person suffers loss because of the workings of the registered land system. The power to rectify the Register is one response to this, although as we have seen there is no general discretion to rectify just because it is fair or just to do so. The power of the court to order an indemnity (that is, compensation) for a person who suffers loss by reason of some error or omission in the Register is another response. As originally conceived in the LRA 1925 (s 83), the entitlement to an indemnity was tied to the power to order rectification and they remain mutually supportive aspects of the system. However, s 2 of the LRA 1997 has substituted a new s 83 which more clearly identifies the payment of indemnity as a stand alone remedy for a person prejudiced by the land registration system.

The amended s 83 of the LRA1925 provides that an indemnity shall be paid:

•to a person suffering loss by reason of the rectification of the Register (s 83(1)(a)). Usually, this will be the person who has ‘lost’ some estate or interest when the Register is rectified against them; for example, a landowner whose duly registered equitable easement is removed from the Register through rectification;

•to a person in whose favour the Register is rectified, but who still suffers loss (s 83(1)(b)). This is a change to the old law, recognising as it does that

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rectification in one’s favour might not always be a sufficient compensation, as in Freer v Unwins. As the Law Commission has noted (Transfer of Land: Land Registration, Report No 235, para 4.2), it was never the intention to deny indemnity in such cases, rather, it was assumed that rectification would always compensate fully;

•to a person who suffers loss by reason of an error or omission in the Register, but the Register is not rectified (s 83(2)). This provision (also found in the original LRA) is in recognition that the power to order rectification is discretionary and that it may not be appropriate to rectify in all cases, even though loss will be caused. Such a person, for example, a person who fails to persuade the court or Registrar to rectify by entering a minor interest to protect their otherwise valid restrictive covenant, will receive an indemnity.

This is the basic indemnity scheme and a person falling within the above categories shall ‘be entitled’ to an indemnity subject to two further conditions. First, no indemnity is payable if the claimant has caused the loss wholly or partly by his or her own fraud or wholly by lack of proper care (s 83(5)(a) of the LRA 1925), although a partial indemnity is payable if the loss was caused partly by the claimant’s lack of care (s 83(6) of the LRA 1925). Secondly, the person claiming indemnity must make a claim within the normal limitation period for the enforcement of contractual debts, usually being six years from the time he knew, or might have known but for his own default, of the existence of the claim (s 83(12)). A recent example of a successful claim for an indemnity in Prestige Properties v Scottish Provident (2002) where the claimant obtained indemnity for loss incurred as a result of relying on search certificates issued by the Registry.

Finally, however, despite the changes to s 83 of the LRA1997, some difficulties remain with the indemnity provisions:

•no indemnity is payable for any costs or expenses incurred (for example, legal costs of fighting for the estate or interest in the land), without the consent of the Registrar, save where they are incurred as a matter of urgency and the Registrar approves them subsequently (s 83(5)(c));

•Re Chowood’s Registered Land decides that no indemnity is payable if rectification is ordered to give effect to a pre-existing overriding interest, because the loss to the registered proprietor is not caused ‘by reason of the rectification’ within s 83(1)(a), but by the existence of the pre-existing right. The rectification merely recognises a loss that has already occurred.Although the Law Commission recommended previously the reversal of this rule (Report No 158, para 2.11), the current proposals recommend that the Chowood principle be retained;

•the amount of compensation may not always reflect the real loss to the person prejudiced. Thus, if indemnity is payable because of a refusal to rectify the Register even though an error has been made, the amount of

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compensation is assessed by reference to the value of the estate, interest or charge at the time the error was made, not the time rectification is refused. This may have been many years earlier and may seriously prejudice an estate owner, although the Registrar’s willingness to pay interest on the sum assessed may alleviate this. The Law Commission originally proposed amending this provision, but this was rejected in Law Commission Report No 235 and no change was made by the 1997 Act;

•no indemnity is payable on account of mines or minerals or the existence of any right to work such mines or minerals, unless it is noted on the title that mines or minerals are included in the estate (s 83(5)(b) of the LRA 1925);

•no amount of monetary compensation can compensate for some loses, for example, loss of a right of way, loss of title to a family home. This may be a ground for refusing rectification in the first place, for example, Hare.

Under the LRA 2002 as to rectification and indemnity

The provisions relating to rectification and indemnity have been recast by the LRA2002, although it is only in relation to rectification that significant changes are made. Section 65 of the LRA2002 contains new provisions relating to when ‘alterations’ may be made to the Register and these are detailed in Sched 4 to the Act. The key concept is to be one of ‘alteration’, with ‘rectification’ referring to a specific type of ‘alteration’.

According to Sched 4, para 1, the register may be ‘rectified’ (using that term in its new sense) when an alteration involves correcting a mistake that prejudicially affects the title of a registered proprietor. This type of rectification may lead to an indemnity. Under para 2, the court (but not the Registrar) may order alteration of the Register to correct a mistake, to bring the Register up to date and to give effect to any estate or interest otherwise excepted from the effect of registration. Importantly, no rectification (in its new narrow sense) shall be ordered by the court against a proprietor in possession unless he consents or has by fraud of lack of proper care caused or substantially contributed to the mistake, or it would be unjust not to rectify. This is similar to (but not identical with) the existing law. The Registrar’s powers to alter the Register for mistake are contained in para 5 (to correct a mistake, bring the Register up to date, give effect to a right etc, excepted from the effect of registration and to remove superfluous entries), but by para 6 any alteration which amounts to a rectification (that is, corrects a mistake that prejudicially affects the title of a registered proprietor) is subject to the same provisions as apply to the court under para 2.

The indemnity provisions are now triggered by s 103 of the LRA 2002 but the detail is found in Sched 8. As noted, they do not differ markedly form the current position under the LRA 1925. Thus, para 1 sets out the eight circumstances in which a person who suffers loss may be indemnified: rectification of the register; a mistake which would involve rectification; a

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mistake in an official search; a mistake in an official copy of a document; a mistake in a document kept by the Registry which is not original but which is referred to in the register; the loss or destruction of a document kept at the Registry; a mistake in the cautions register (cautions against first registration); and a failure by the Registrar to perform his duty. As currently, no indemnity is payable for any loss that is wholly or partly the result of the claimant’s fraud or lack of proper care (para 5).

2.11An overview of the Land Registration Act 2002

It will be apparent from the summary of the 2002 Act given in this chapter that it represents a fundamental shift in the way we think about registered land. It has been said many times, but the aim is to move to title by registration instead of registration of title. The introduction of electronic conveyancing is the driving force behind this and is the motivation for many of the reforms of the Act. The significant features of the 2002 Act are:

•The reclassification of overriding interests in to rights that override a first registration (Sched 1) and rights that override a subsequent registered disposition (Sched 3). The former is more extensive than the latter. The role of rights binding by actual occupation and easements is severely restricted for Sched 3 rights. Undiscoverable overriding interests will be eliminated in respect of Sched 3 rights.

•The new system of adverse possession as it applies to registered land. In essence, rarely will a registered proprietor lose title through adverse possession if he is prepared to take action to evict the adverse possessor. There will be no ‘limitation period’ per se for registered land.

•The provisions relating to the introduction of electronic conveyancing. Thus at first, it will be possible to create and transfer property rights by electronic ‘written contracts’ and ‘deeds’ (the intended s 2A of the LP (Misc Prov) A 1989 and s 91 of the LRA 2002 respectively). More importantly, in due course, the creation or transfer of most rights in or over registered land will be ineffective unless completed by registration. Rights not so electronically registered will not exist. Registration and creation will be simultaneous, the registration gap will disappear and the register will be a truer mirror. In time, and subject only to the limited rights in Scheds 1 and 3, rights not entered on the register will not exist at all.

•Rights arising by proprietary estoppel and ‘mere equities’ will be treated as proprietary (s 116 of the LRA 2002).

•Legal leases of over seven years’ duration will be substantively registered with their own title number.

•The way in which so called ‘minor interests’ are protected will be rationalised.

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•Mortgages of registered land may be created only by the ‘charge’ and the charge certificate will be abolished.

•The circumstances in which the register may be altered are clarified and the indemnity provisions are recast.

•The Crown will be able to register its land for the first time.

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