Matt Stokes and Bhavini Patel offer their advice on how to unearth the third-party rights not recorded on the land register
In a perfect world, overriding interests would not exist. Developers, lenders and investors could simply review the registered title to a property safe in the knowledge that it contained a comprehensive record of all third-party rights. This would increase confidence in the register, promote certainty in the conveyancing process and reduce legal costs of advising on this complex area of the law.
The register risk
One of the aims of the Land Registration Act 2002 (the “2002 Act”) was to make the register as complete a record of title as possible. The benefits are obvious. A buyer (or lender) will know, following a review of the register, the interests to which it will take subject when it completes its purchase.
Although the register plays a critical role in revealing the rights to which a property is subject, it is not comprehensive. Overriding interests comprise two groups of statutorily defined third-party rights that do not appear on the register. The majority are proprietary in character. Despite not appearing on the register, if the statutory requirements are satisfied, a buyer will acquire subject to such an interest, even where it has no prior knowledge of it. This is what is meant when it is said that an interest “overrides” a particular disposition.
This presents a risk that, without further steps, a buyer might acquire property in ignorance of a right that, at worst, inhibits development, prevents intended use or depresses value.
Overriding interests
The two groups of overriding interests are (i) those that override when a previously unregistered title is first registered at the Land Registry (usually following a transaction that triggers compulsory registration); and (ii) those that override on the sale of a property that is already registered. This article focuses on the second category.
The distinction is important when trying to determine whether an overriding interest exists, because, although there is overlap, the rules are different for each category.
Broadly (although not exclusively), overriding interests include short leases, interests of persons in actual occupation, easements and the right to take something from someone else’s land (profits à prendre). There are also other specific interests that can override, for instance, social housing tenancies, customary and public rights, local land charges, interests in coal mines and public-private partnership leases.
The spectrum of interests covered by the 2002 Act is broad. Some of the interests are difficult to discover – for example, a longstanding drainage easement running underground. Some of the concepts applied in the 2002 Act (what amounts to “actual knowledge” or “obvious on a reasonably careful inspection”, for instance) have been described as “inherently fluid” and “likely to cause litigation” (see Ruoff & Roper: Registered Conveyancing, Sweet & Maxwell). Some common overriding interests are explored below.
Short leases
Subject to some exceptions, legal leases granted for a term not exceeding seven years do not require completion by registration and so do not appear on the register. However, this class of lease requires protection against things like the risk presented by the sale of a reversionary interest. This is achieved by conferring on it status as an overriding interest. This means that a buyer of the reversion will take subject to such a lease even if it does not have notice of it.
Actual occupation
“Actual occupation” by a third party operates as an overriding interest. There are differences depending on whether the right arises on a first registration or following a sale of a registered title.
In the case of a sale of registered land, the extent of the right claimed must equate with the extent of occupation. What that means is if an occupier is only occupying part of a title then this is the extent to which the right applies.
Actual occupation by a third party can be challenged on the sale of a registered title in two ways:
- If it is not obvious, on a reasonably careful inspection of the land, that the person claiming the overriding interest is occupying the land (note that if the buyer actually knows about the claimant’s interest then this exception will not apply).
- If an enquiry was made of the occupier before completion of the transaction and they failed to disclose the interest when they could reasonably have been expected to do so.
If either exception can be shown, then the interest claimed will not override.
The requirement for a “reasonably careful inspection” is not onerous and should not trigger a “frenzied search” of the property. A purchaser will discharge the requirement if it carries out an inspection aimed at identifying “visible signs of occupation” and “to discover the facts on the ground” (rather than whether the occupier has the right to occupy). It’s worth noting it is not “protection for the indolent or incompetent” that have “failed to take routine precautions” before purchasing.
Unregistered easements and profits
Up until 12 October 2006, all impliedly created legal easements and profits overrode a registered sale. From this date there is a different test; namely is the easement (or profit):
- Obvious on a reasonably careful inspection of the land?
- Known to the person that is acquiring the property?
- Exercised within the year before its disposition?
If any one of these conditions is satisfied, then the easement or profit will override the sale of a registered property.
Ruoff & Roper comment that, as the test is so broad, the statutory provisions will, in practice, mean that many easements will be caught (for instance, few will not have been exercised within one year of the disposition).
Duty to disclose
Following a registrable disposition, if an overriding interest is within the “actual knowledge” of the person making an application to the Land Registry (eg revealed during due diligence) then it must be disclosed as part of the registration process. However, remember that failure to disclose does not render the interest unenforceable; special investigations do not need to be carried out to identify an overriding interest; and there is no sanction for failure to disclose.
Obviously, from the point of view of the Land Registry, any incentive to disclose interests that could be shown on the register is to be encouraged.
How to identify?
Overriding interests cannot be discovered by reviewing the register so what should be done? Here are some practical steps.
- Site inspections: These are imperative. Many of the commonly encountered overriding interests should be apparent at this stage. If this is undertaken well before exchange of contracts, it should enable the issue to be dealt with prior to the parties becoming contractually committed. Another inspection immediately before completion is also prudent.
- Photographic record of inspection: This might be useful to address factual issues that arise (eg is the claimed overriding easement “obvious” from a careful inspection?).
- Commercial property standard enquiries: Replies to pre-contract enquiries should be scrutinised for information regarding possible overriding interests. Any affirmative or ambiguous response should be followed up carefully. Replies to CPSEs should be verified by a site inspection.
- Statutory declarations: These serve the same purpose as a photographic record of condition and can help resolve critical evidential issues that might arise.
- Direct enquires of the occupier: If there is a third party in occupation that is not explained through a title investigation then remember to make enquires of that party. Enquiries directed at the seller will be insufficient to afford protection.
- Insurance: This is often a last resort to solve title issues. Nonetheless, a balancing act must be struck between identifying an insurable risk and compromising the possibility of obtaining insurance by “over-investigating” the matter.
The future of the register
Will it ever be possible to eliminate overriding interests and for the register to be truly complete? Although inroads have been made to reduce the interests that qualify as “overriding”, some of the consequent legal issues have still not been satisfactorily resolved. What’s more, the statutory definition of overriding interests will be expanded to accommodate telecommunication operators’ code rights if the revised proposals contained in the recent consultation on the Electronic Communications Code ever come to pass. That perfect world may be some way off.
Why this matters: an example
You act for a developer acquiring a site for residential development. The density of the planned residential plots is particularly tight and makes use of all the available land within the title. The registered title to the site is “clean” (so does not reveal any adverse entries in favour of third parties). Replies given by the seller in CPSEs do not reveal the existence of any third-party rights across the site. Careful site inspections before exchange and completion do not reveal physical evidence of any obvious easements. Photographs of the site are taken during the inspections.
After completion, an adjoining landowner argues that they are entitled to a right of way over part of the site, the proposed location of several residential units. Consequently, this right could potentially constitute an overriding interest which would bind your client – this is a problem which was not foreseen when carrying out the title due diligence.
In response to the landowner you argue that not only did your client not know about the right but that the existence of the track was not “obvious” on the numerous site inspections undertaken prior to completion. This right, therefore, could not constitute an overriding interest.
Undeterred, the landowner asserts that they have used the right of way at least once or twice within the last year. Fortunately, the photographs taken from the site inspections were more than a year old and evidenced that the site had been fenced and access had been blocked from the adjoining landowner’s property during this timeframe. You reassert your position and provide copies of the photos taken during the site inspection, which clearly demonstrate the test for an overriding easement could not be established in this instance.
Matt Stokes and Bhavini Patel are solicitors in the real estate team at DAC Beachcroft LLP