Allyson Colby looks at the limits of protection provided under the Land Registration Act 2002
Key points
- A lender was found to have suffered a loss when the Land Registry deleted a forged legal charge from the register
- A person claiming in good faith under a forged disposition can rely on the indemnity provisions in the Land Registration Act 2002, despite suggestions to the contrary
The effect of registration under the Land Registration Act 2002 (“the 2002 Act”) is that title is deemed to be vested in the registered proprietor and, once registered, title is guaranteed. However, the protection is not absolute. Registered titles may be affected by overriding interests. In addition, the legislation contains provisions enabling the Land Registry to bring the register up to date and to correct mistakes. What is the position if a mistake is corrected and someone loses out?
The 2002 Act differentiates between “alterations” to the register and “rectification”. The term “rectification” refers exclusively to alterations to the register to correct mistakes that have a prejudicial effect on the proprietor’s title, and the 2002 Act enables those who suffer loss as a result of rectification to claim an indemnity from the Land Registry.
Swift 1st Ltd v Chief Land Registrar [2015] EWCA Civ 330; [2015] PLSCS 112 concerned a legal charge that was removed from the register following the discovery that it had been forged by an unknown third party. The Land Registry claimed that it had done nothing more than alter the register to bring it up to date and rejected the lender’s claim for an indemnity for the loss caused by the cancellation of the charge.
Overriding interest
The Land Registry referred the court to Re Chowood’s Registered Land [1933] Ch 574. In that case, the court held that no loss had been suffered where the register was changed to give effect to an overriding interest. The change reflected reality and put the registered proprietor in no worse a position than it was before. The Land Registry also cited Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2001] EWCA Civ 151; [2002] PLSCS 46. In that case, the court held that a right to seek rectification of the register to reflect a proprietary interest in land is capable of constituting an overriding interest.
In Swift, the registered proprietor had been in possession of the land when the charge was created. So the Land Registry argued that the registered proprietor’s right to seek rectification of the register constituted an overriding interest as against the lender. As a result, so the argument went, the charge was always liable to be defeated by an attack by the rightful owner and the lender had not been prejudiced by its cancellation.
Forged dispositions
Does Chowood apply in cases involving forgeries? If so, it would seem to render paragraph 1(2)(b) of Schedule 8 of the 2002 Act nugatory. Paragraph 1(2)(b) deals specifically with the position where the register is “rectified” and the proprietor of a registered estate or charge claims in good faith under a forged disposition. In such cases, the proprietor is treated as having suffered loss as if the disposition had not been forged. However, the paragraph applies where the register is “rectified”, and the Land Registry’s case was that the change to the register constituted nothing more than an alteration.
Beneficial ownership
The twists and turns of the legal argument meant that the Court of Appeal had to consider another more controversial aspect of the decision in Malory, which threatened the success of the lender’s claim. In Malory, the court held that, where a disposition has been forged, the disponee never receives more than the bare legal estate, which it holds on trust for the original registered proprietor, who retains beneficial ownership of the property.
If this was correct, and the original proprietor retains beneficial ownership of the property despite registration of a forged disposition, the alteration of the register by the cancellation of the new entry would not constitute prejudice for the purposes of the rectification and indemnity provisions in the 2002 Act, and the new proprietor could not claim to have suffered loss because it never became the beneficial owner of the property. Had Malory, which was followed in Fitzwilliam v Richall Holdings Services Ltd [2013] [2013] EWHC 86 (Ch); [2013] 02 EGLR 183, been wrongly decided?
Both decisions have been heavily criticised. Critics have argued that the idea that, where a document is forged, the disponee receives only the bare legal estate, wholly contradicts and fatally undermines our land registration system. The Court of Appeal hesitated, but was persuaded that this aspect of the decision in Malory ignored an earlier decision and was incorrect.
Statutory hypothesis
Having overcome this hurdle, the court decided that the circumstances in which the overriding interest was being enforced were precisely those contemplated in paragraph 1(2)(b). The statutory hypothesis requires the loss suffered by a registered proprietor claiming in good faith under a forged disposition to be determined as if the disposition had been genuine. On that basis, the “disponor” did not have any interest that she could assert to defeat the claim. Therefore, the lender was entitled to an indemnity from the Land Registry following the loss of its charge.
The Court of Appeal has done its best to untangle the rules that apply to rectification and indemnity under the LRA 2002 by reading paragraph 1(2)(b) neutrally.
Meanwhile, the Law Commission is reviewing aspects of the 2002 Act and has indicated that it plans to address how the rectification and indemnity provisions operate, with the intention of publishing a report and a draft bill incorporating recommendations for reform.
Allyson Colby is a property law consultant
