Charles Romney outlines the changes to implied covenants for title proposed by the Law of Property (Miscellaneous Provisions) Bill now before Parliament.
Sellers are sometimes puzzled why, in contracts and transfers, it is stated that they sell as beneficial owner or mortgagee or trustee. Their solicitors explain that the use of such terms implies into the relevant document various covenants for title, which are full in the case of a person selling as beneficial owner, but limited in the other cases. If the Law of Property (Miscellaneous Provisions) Bill at present before Parliament becomes law, these sellers will be asking what a transfer “with full title guarantee” or with “limited title guarantee” means.The Bill
The Bill implements, with changes, the Law Commission report, Transfer of Land: Implied Covenants for Title (LAW COM 199), which looked at ways of simplifying, clarifying and updating the present law, which is more than 100 years old. The report mentioned the lack of clarity in some of the existing statutory wording (contained in the Law of Property Act 1925 and the Land Registration Act 1925) and took into account the fact that nowadays registered conveyancing is the norm, whereas a century ago few titles were registered or registrable.
Some of the anomalies of the present system are also considered. For instance, the person giving the implied covenant is responsible only for the effect on title of the acts and omissions of certain specified people. In certain cases the seller can be liable for matters to which the implied covenant was not expressly made subject, but which are nevertheless known to the transferee at the time of the sale. The beneficial owner (full) covenants apply only to conveyances on sale and none of the covenants can be implied on the grant, as opposed to the transfer, of a lease.
All these issues are addressed in the Bill, which sweeps away the old covenants for title and replaces them with statutory guarantees which will be implied into the transfer document by use of the key phrases “with full title guarantee” or “with limited title guarantee” or their Welsh equivalents. The imposition of these guarantees is not compulsory. If the key words are omitted, no guarantee will be implied. In addition, the extent of the guarantee, if implied, may be reduced or extended by agreement.
By use of the key words, the guarantees may be implied on the transfer of land, on the grant or transfer of a lease and on the transfer of personal property, including intangible interests in intellectual property, rights in shares and so forth.
Once the Bill becomes law, the old covenants for title will be superseded by the new guarantees, although there will be saving provisions for agreements entered into before the Act comes into force, where the relevant disposition occurs afterwards.
The Bill has been considered by the House of Lords and received its formal second reading in the House of Commons in July. It is due to be considered in committee on October 19.Limited title guarantees
The guarantee implied by the key words “with limited title guarantee” is that the person making the disposition:
- has the right to dispose of the property as he purports to;
- will at his own cost do all he reasonably can to give his transferee the title he purports to give. This includes, in the case of registered land, doing all he reasonably can to ensure that the transferee is registered with the same class of title and, in the case of land which is not yet registered, giving all reasonable assistance to the Land Registry to establish the transferee’s right to be registered as proprietor;
- disposes of the whole interest where that interest is registered;
- disposes of the whole term of the lease where the interest is leasehold;
- disposes of a freehold where the subject of the disposition is land and it is not clear from the face of the document whether the interest being disposed of is leasehold or freehold;
- covenants, in the case of leasehold land, that the lease (or superior lease on the grant of a sublease) is subsisting at the date of the transfer and that there is no subsisting breach which could result in forfeiture;
- covenants, in the case of a mortgage of property subject to a rent charge or lease, that the mortgagor will observe and perform the obligations under the rent charge or lease;
- covenants that he has not charged or encumbered the property by a charge or encumbrance which still subsists, that he has not granted any third party rights which still subsist and that he is not aware that anyone else has done so since the last disposition for value.Full title guarantees
Where the key words imply a full title guarantee, all the foregoing guarantees or covenants are implied with the exception of the last. That is replaced by an implied guarantee that the person making the disposition is disposing of the property free from all charges and encumbrances (whether monetary or not) and from all other rights exercisable by third parties, not being charges, encumbrances or rights which the transferor does not and could not reasonably be expected to know about.
This guarantee extends to liabilities and rights created by statute unless at the time of transfer such liabilities and rights are potential rather than actual or of general effect and do not constitute defects in title. Here, the wording originally proposed by the Law Commission has been watered down by Parliament, partly because of the fear that if the obligation were too onerous full guarantees would never be used. Even in its amended form, the obligation is onerous extending, as it does, to matters predating the transferor’s ownership of the property. This may result in the limited guarantee being that which is more commonly used.Knowledge of the transferee
The Bill provides that the person making the disposition is not liable under the guarantees for anything:
- to which the disposition is expressly made subject;
- which at the time of the disposition is within the actual knowledge of the transferee or which is a necessary consequence of facts then within the actual knowledge of the transferee.
This wording, which has been changed by Parliament from that originally proposed by the Law Commission, fails to overcome a particular problem. Where, as is usual, the purchaser has seen the title and is aware of an existing mortgage, he will expect the seller to procure its removal at or before completion. Because the existence of that mortgage is in the purchaser’s actual knowledge, the implied guarantees will not make the seller liable if he fails to remove it. The purchaser will therefore need to limit the effect of the seller’s statutory exclusion of liability by incorporating wording in the transfer which makes clear those aspects within the knowledge of the purchaser from which the property is to be free.Duty on transferor
Where a full title guarantee is implied the transferor is, in effect, saying that, unless they are otherwise disclosed, “there are no charges, encumbrances or third party rights of which I am aware which affect the property”. This poses a heavy onus on the transferor, particularly where there are several owners with different knowledge of the property, where the property has been owned for a very long period of time or where the property is owned by a company where there has been a turnover of staff or different divisions of the company are involved in dealing with the property.
In those cases a prudent transferor will probably wish to give a limited title guarantee. In fact it is hard to see why any transferor should wish to give a full title guarantee and it will be interesting to see whether certain areas of the market will adopt guidelines in dealing with the problem. For instance, will building societies invariably require a full title guarantee for lending on the security of residential properties? Will institutional investors apply different yields to the different covenants? Will transferors giving properties to family, friends or charities or will banks selling as mortgagees refuse to give any implied guarantees at all?
Although it is doubtful whether there are any statistics available, it is suspected that, at present, the majority of transfers on sale imply beneficial owner covenants, which are the strongest covenants under the present regime. If the change in the law results in most covenants being limited rather than full covenants, it is hard to see how the change will have been beneficial, save possibly in clarifying the law.
The Law Commission originally proposed that the benefit of the covenants would not generally pass to a successor in title to the person in whose favour the covenants were originally given, although they would have been transferable by specific assignment. The intention was a simplification of the procedure, bearing in mind the ever-increasing relevance of registered land. However, following amendment by the House of Lords, the Bill now provides that the benefit of the covenants will automatically run with the land. This change was apparently made because it was feared that the original provision might result in transferees invariably requiring express assignment of the benefit of past covenants, thereby making the conveyancing procedure more, and not less, complicated.Conclusion
A number of individual proposals mentioned in the Law Commission’s report have now dropped out of the Bill. Other aspects of the Bill raise new problems. This is an area of the law of such low profile that one is left wondering why this reform is being pushed through while more important candidates for reform wait impatiently in the wings.
Charles Romney is a senior property partner with leading City solicitor Cameron Markby Hewitt.
