Sale of land — Contract Rescission — Land Registration Act 2002 — Contract for sale of registered freehold land on full title basis under general condition 4.3(a) — Special condition requiring purchaser to accept leasehold interest shown in schedule to freehold title previously determined by surrender — Notice and restriction in respect of bankruptcy of lessee shown against leasehold title in land register and bankruptcy petition and order registered in land charges register — Section 86 of 2002 Act Whether surrender void by reason of bankruptcy — Whether vendor having notice of bankruptcy — Whether purchaser entitled to rescind on ground that freehold title encumbered by lease
In January 2008, the claimant bid successfully at auction to purchase registered freehold land from the defendant for £400,000. A deposit of £40,000 was paid. The sale contract included the full title guarantee contained in condition 4.3(a) of the general conditions of sale. Further special conditions provided for vacant possession to be given on completion and, by special condition 7, declared the purchaser’s acceptance that a certain leasehold interest in the property had determined by operation of law in August 2006 and barred him from requiring further proof or raising any objection or requisition with regard to that interest.
The leasehold interest in question continued to be shown in a schedule to the freehold title, notwithstanding that the lessee had purported to surrender the lease and the defendant had purported to accept that surrender in August 2006. At the time of the surrender, a bankruptcy petition had been pending against the lessee. Both the petition and the bankruptcy order had been registered in the land charges register. Entries had also been made against the leasehold title in the land register, namely a notice of pending bankruptcy proceedings, entered under section 86(2) of the Land Registration Act 2002 prior to the purported surrender, and a later restriction, under section 86(4), in respect of the bankruptcy order.
The sale did not proceed on the contractual completion date. The claimant purported to rescind the contract and brought a claim for the return of his deposit, on the ground that the freehold title continued to be encumbered by the lease, the surrender of which had been ineffective, under section 284 of the Insolvency Act 1986, as a void disposition of property by a bankrupt to a person who had notice of the bankruptcy petition. He argued that the registration of the bankruptcy petition on the land charges register was deemed to give such notice by virtue of section 198 of the Law of Property Act 1925. The defendant argued that section 198 was not relevant since section 86 of the 2002 Act provided a comprehensive code for dealing with the registration of bankruptcies in respect of registered land and, by virtue of subsection (7), did not require a person to whom a registrable disposition was made to make any search under the Land Charges Act 1972. Meanwhile, in May 2008, the defendant secured a disclaimer of the lease from the lessee’s trustee in bankruptcy.
Held: The claim was allowed. (1) The leasehold title of the lessee’s trustee in bankruptcy would become void as against the defendant from the date of the purported surrender only if, at that date, no notice or restriction had been entered in respect of the bankruptcy proceedings and the defendant had had no notice of the bankruptcy petition or adjudication: see section 86(5)(c)(i) of the 2002 Act. Since a notice had been entered on the land register under section 86, the title of the trustee in bankruptcy was not void against the defendant and the purported surrender was ineffective. That position was reached without requiring the defendant to make a search of the Land Charges Register under the 1972 Act. Section 86(7) does not “trump” subsection 86(5)(c)(i). It is concerned solely with whether a search must be made under the 1972 Act and, thus, whether a person is affected by entries on the land charges register, whereas section 86(5)(c)(i) is concerned with the land register, and specifically with entries made under section 86(2) and (4). In the instant case, the entries in the land register were sufficient to determine the question of notice against the defendant. (2) Although special condition 7 contractually bound the claimant to accept that the lease had been determined and disentitled him from requiring any further proof of the determination, it had not been intended as an exception to the full title guarantee basis of the sale under general condition 4.3(a). At the date set for completion, the defendant had not been in a position to convey the unencumbered title that it had contracted to convey and the claimant was accordingly entitled to rescind and to claim the return of his deposit with interest. The defect in title was not merely technical because there was a subsisting leasehold interest, which would continue unless there were either a successful application to the court for ratification of the surrender or a successful request to the lessee’s trustee in bankruptcy to disclaim, and the outcome of neither had been a foregone conclusion at the relevant time. In order to save the sale contract, the disclaimer of the lease would have had to occur prior to the contractual completion date. |page:78|
The following cases are referred to in this report.
Darvell v Basildon Development Corporation (1969) 211 EG 33
Heavsman’s and Tweedy’s Contract, Re (1893) 69 LT 89
MEPC Ltd v Christian-Edwards [1981] AC 205; [1979] 3 WLR 713; [1979] 3 All ER 752, HL
This was the hearing of a claim by the claimant, Graham Weir, against the defendant, Area Estates Ltd, for the return of a deposit paid under a contract for the sale and purchase of land.
Jane Evans-Gordon (instructed by Tarbox Robinson & Partners) appeared for the claimant; Mark Loveday (instructed by Romain Coleman) represented the defendant.
Giving judgment, Mr Robin Knowles CBE QC said:
Introduction and facts
[1] The claimant (Mr Graham Weir) seeks summary judgment against the defendant (Area Estates) under CPR 24. Mr Weir’s case is that Area Estates has no defence in law, and that that is as apparent now as it would be at trial.
[2] Mr Weir bid successfully at auction for registered freehold land at 22-24 St Andrew Street, Hertford (the property), owned by Area Estates. A contract of sale was entered into on 29 January 2008 (the contract of sale).
[3] A leasehold interest had been granted in respect of the property to a Mr Airey by a lease dated 20 April 2004 for a term of nine years (the lease). This was shown in a schedule to the freehold title.
[4] On 8 August 2006, a bankruptcy petition was presented against Mr Airey. The bankruptcy petition was registered as a pending action in the land charges register and, on 11 August 2006, a notice was entered against the leasehold title under section 86(2) of the Land Registration Act 2002 (the 2002 Act) in respect of that petition.
[5] On 31 August 2006, Mr Airey moved out of the property. He purported to surrender the lease, and Area Estates purported to accept that surrender. For the purpose of this application, the purported surrender is to be assumed to have been for valuable consideration. The bankruptcy petition was, however, still pending and, on 11 October 2006, a bankruptcy order was made against Mr Airey. The bankruptcy order was registered in the land charges register and, on 2 November 2006, a restriction under section 86(4) of the 2002 Act was entered against the leasehold title in respect of that order.
[6] By the time of the auction, more than a year later in January 2008, the freehold title still scheduled the lease, and the leasehold title still showed the notice and the restriction relating to Mr Airey’s bankruptcy. The property was knocked down to Mr Weir for £400,000, of which £40,000 was paid by way of deposit.
[7] Although notice to complete was served by Area Estates on 7 March 2008, the sale did not complete. Rather, Mr Weir claimed to be entitled to rescind the contract of sale. He contended that the title was still encumbered by the lease because the surrender was ineffective by reason of the then pending bankruptcy. On 16 May 2008, Area Estates secured a disclaimer of the lease from the trustee in bankruptcy of Mr Weir, but that was too late to save the contract of sale.
[8] In this litigation, Mr Weir sues for the return of his deposit and interest. Area Estates has since sold the property to a third party. It achieved less in this sale and wants to counter-claim for damages against Mr Weir.
Section 284 of the Insolvency Act 1986
[9] Section 284 of the Insolvency Act 1986 (the 1986 Act) provides, so far as material:
(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.
…
(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting, under Chapter IV of this Part, of the bankrupt’s estate in a trustee.
(4) The preceding provisions of this section do not give a remedy against any person
(a) in respect of any property… which he received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented…
[10] Area Estates accepts that a surrender of the lease is a disposition of property for the purposes of section 284(1) of the 1986 Act (and section 86 of the 2002 Act, below). As to the reference in section 284(4)(a) to the commencement of bankruptcy, under section 278 of the 1986 Act the bankruptcy of an individual against whom a bankruptcy order has been made commences with the date on which the order is made.
[11] Applying section 284 of the 1986 Act to the facts of the case:
(1) The surrender was within the period to which section 284 applies.
(2) The surrender is void, not having been made with the consent of the court or subsequently ratified by the court.
(3) The above conclusions would not give a remedy against any person “in respect of any property… which he received before [11 October 2006] in good faith, for value and without notice that the petition had been presented”.
Section 198 of Law of Property Act 1925
[12] Mr Weir, by Ms Jane Evans-Gordon of counsel, referred to section 198 of the Law of Property Act 1925 (the 1925 Act). This provides, so far as material:
(1) The registration of any instrument or matter in any register kept under the Land Charges Act 1972 or any local land charges register shall be deemed to constitute actual notice of such instrument or matter, and of the fact of such registration, to all persons and for all purposes connected with the land affected, as from the date of registration or other prescribed date and so long as the registration continues in force.
(2) This section… applies only to instruments and matters required or authorized to be registered in any such register.
[13] If section 198 of the 1925 Act were applicable to the facts of the case, the registration of the bankruptcy petition in the land charges register would be deemed to constitute actual notice of that matter, and of the fact of that registration, to all persons and for all purposes connected with the land affected, as from 11 August 2006.
[14] However, Mr Mark Loveday of counsel, for Area Estates, argued that section 198 of the 1925 Act is not relevant. This is because, he submitted, section 86 of the 2002 Act is “a comprehensive code for dealing with the registration of bankruptcy petitions and bankruptcy orders in relation to registered land”, and subsection (7) of section 86 indicates that a person to whom a registrable disposition is made is not required to make any search under the Land Charges Act 1972 (the 1972 Act). In light of this submission, I turn to section 86 of the 2002 Act in order to see whether it produces an outcome that makes a material difference on the facts of the present case.
Section 86 of the 2002 Act
[15] Section 86 of the 2002 Act provides, so far as material:
(1) In this Act, references to an interest affecting an estate or charge do not include a petition in bankruptcy or bankruptcy order.
(2) As soon as practicable after registration of a petition in bankruptcy as a pending action under the Land Charges Act 1972, the registrar must enter in the register in relation to any registered estate or charge which appears to him to be affected a notice in respect of the pending action.
(3) Unless cancelled by the registrar in such manner as rules may provide, a notice entered under subsection (2) continues in force until
(a) a restriction is entered in the register under subsection (4), or
(b) the trustee in bankruptcy is registered as proprietor.
(4) As soon as practicable after registration of a bankruptcy order under the Land Charges Act 1972, the registrar must, in relation to any registered estate or charge which appears to him to be affected by the order, enter in the register a restriction reflecting the effect of the Insolvency Act 1986.
(5) Where the proprietor of a registered estate or charge is adjudged bankrupt, the title of his trustee in bankruptcy is void as against a person to whom a registrable disposition of the estate or charge is made if
(a) the disposition is made for valuable consideration,
(b) the person to whom the disposition is made acts in good faith, and
(c) at the time of the disposition |page:79|
(i) no notice or restriction is entered under this section in relation to the registered estate or charge, and
(ii) the person to whom the disposition is made has no notice of the bankruptcy petition or the adjudication.
(6) Subsection (5) only applies if the relevant registration requirements are met in relation to the disposition, but, when they are met, has effect as from the date of the disposition.
(7) Nothing in this section requires a person to whom a registrable disposition is made to make any search under the Land Charges Act 1972.
[16] Applying section 86 to the facts of the case:
(1) The notice of the bankruptcy petition entered on the Land Register in respect of the property continued in force from 11 August 2006 until 2 November 2006, when the restriction was entered after the making of the bankruptcy order.
(2) As from 31 August 2006, the title of Mr Airey’s trustee in bankruptcy would have been void as against Area Estates if (the registration requirements were met in respect of the surrender and) at 31 August no notice or restriction was entered under section 86 in respect of the registered estate or charge, and Area Estates had no notice of the bankruptcy petition or the adjudication.
(3) In fact, at 31 August 2006, a notice was entered on the land registry under section 86, with the consequence that the title of Mr Airey’s trustee in bankruptcy was not void as against Area Estates.
(4) This is the position without requiring Area Estates to make a search under the 1972 Act.
[17] In oral argument, at times, the submissions were distilled into asking whether subsection (7) of section 86 “trumps” subsection (5)(c)(i). In my judgment, it is not a question of one provision “trumping” the other. Subsection (7) is addressing the question of whether a search needs to be made under the 1972 Act. Subsection (5)(c)(i) concerns instead the land register and specifically what has, pursuant to subsections (2) and (4), been entered in that register by the registrar after there has been registration of a petition in bankruptcy as a pending action, and of a bankruptcy order, under the 1972 Act.
[18] This scheme appears to be reflected in the narrative description given by the Law Commission in its 2001 paper (LC 271). Paragraphs 11.40 and 11.41 are in these terms (the italics are in the original):
11.40 When a petition in bankruptcy is filed against a debtor, the relevant court official must apply to register the petition as a land charge in the register of pending actions. Where the debtor is the registered proprietor of any land or charge, this can have no direct effect, because registration of a land charge does not affect registered land. However, this registration serves to trigger a procedure for ensuring that an appropriate entry is made on the register of title. The Chief Land Registrar maintains both the land charges register and the register of title. Using the index of proprietor’s names, he will attempt to ascertain whether the debtor is the registered proprietor of any land or charge on the register. If he thinks that he is, he must then register a creditor’s notice against the title of any land or charge that appears to him to be affected. Clause 86(2) of the Bill replicates this procedure. The registrar must enter a notice of the pending action. That entry must remain in the register until either a restriction is entered in the manner explained below in paragraph 11.41, or the trustee in bankruptcy is registered as proprietor.
Procedure in relation to bankruptcy orders
11.41 A similar procedure applies when a person is adjudicated bankrupt and a bankruptcy order is made against him or her…
There are further helpful explanations of the scheme in Ruoff & Roper Law and Practice of Registered Conveyancing, in paras 13.005.03, 20.021, 34.003, 34.005, 34.011 and 34.012 and in Muir Hunter Personal Insolvency, in para 3-700.3.
[19] Mr Loveday further submitted that the presence of subsection (7) of section 86 indicates that constructive notice is not sufficient notice for the purpose of section 284 of the 1986 Act. Again, in my judgment, all that subsection (7) does is to deal in the case of registered land with the question of whether a search needs to be made under the 1972 Act, and thus of whether a person is affected by entries on the land charges register. In the present case, it is the entries on the land register that suffice to answer the question of notice against Area Estates.
Conditions under the contract of sale
[20] The contract of sale was subject to general conditions, including general condition 4.3(a) in these terms:
Unless otherwise stated in the special conditions the seller sells with full title guarantee except that:
(a) all matters recorded in registers open to public inspection are to be treated as within the actual knowledge of the buyer…
[21] In addition, the contract of sale was subject to special conditions, including special conditions 1 and 7 in these terms:
1. Vacant possession will be given on completion…
…
7. The Lease dated 28 April 2004 and referred to on Title Number HD431124 determined by operation of law on 31 August 2006. The Buyer shall accept the position and shall not be entitled to require any further proof of the determination or raise any objection or requisition with regards thereto.
[22] In my judgment:
(1) On its true construction, special condition 7 required Mr Weir to accept as factually accurate the proposition that the lease had determined by operation of law on 31 August 2006.
(2) This requirement was not an exception to the “full title guarantee” basis of the sale, under general condition 4.3(a). Rather, it was an affirmation of it in this particular.
(3) Consistently with the requirement, special condition 7 ruled out Mr Weir’s being entitled to require any further proof of the determination, or to raise any objection or requisition with regard to it.
(4) Although the land register and the land charges register (both registers under general condition 4.3(a)) revealed the lease and the bankruptcy petition, and did not mention any determination of the lease, the position remained that Mr Weir was contractually required to accept that there had been a determination. It transpired that there had not.
[23] Area Estates urges that during the sale process it “was quite open that the [L]ease was still registered against the freehold title”. Indeed, Mr Weir could see the registration for himself, and it is expressly referred to in the first sentence of special condition 7. However, what is involved is not simply an entry on the land register; the full position was that in law and in fact there was a subsisting lease until disclaimed by Mr Airey’s trustee in bankruptcy, however easy it might be to persuade the trustee in bankruptcy to disclaim. Special condition 7 said that the lease had been determined by operation of law on 31 August 2006, but in law and fact it had not.
[24] Mr Loveday submitted that Mr Weir was as much fixed with notice of the bankruptcy petition as was Area Estates, and, therefore, as well able to work out the true position. Whether that is correct or not (I do not see how Mr Weir would know whether the trustee had disclaimed, for example, and special condition 7 would stand in the way of his enquiry in that regard) I do not see that it helps Area Estates on the question of whether it was able to convey at completion the unencumbered title it had contracted to convey.
A “technical conveyancing defect”?
[25] Area Estates submits that the defect in title constituted by the subsisting lease is a technical defect insufficient to allow Mr Weir to rescind the contract of sale.
[26] In my judgment, this submission is unsustainable. Either a successful application to the court seeking ratification of the surrender would be required or a successful request to Mr Airey’s trustee in bankruptcy to disclaim. The outcome of neither can have been a foregone conclusion at the time. Neither was in Area Estates’ sole power, control or grant. Area Estates had no right that would enable it to insist on ratification or disclaimer.
[27] Indeed, it is hard to see why the court would have ratified a surrender by Mr Airey when a bankruptcy petition was pending. As for disclaimer, the outcome of the request would depend on the trustee’s assessment at the time whether, in one form or another, there was value to be had for the bankrupt estate from the lease.
[28] Of course, a trustee’s assessment will vary from case to case. Even if it is impossible that an assessment by the trustee in the present |page:80| case would have concluded that there was value, the property was still subject to a lease and Area Estates had no right to remove it. I cannot treat the presence of a subsisting lease encumbering freehold property sold with vacant possession as a “technical conveyancing defect”.
[29] The present case cannot be characterised, as it was at points in the argument for Area Estates, as equivalent to a failure to remove from the face of the registered title a redundant entry. As at the date for completion, there was a subsisting leasehold interest vested in the trustee in bankruptcy of Mr Airey.
[30] In the course of argument, Ms Evans-Gordon, for Mr Weir, withdrew, for the purposes of this application for summary judgment, an argument that had the purported surrender been valid Area Estates was still unable to give good title because the entries on the land register did not reflect a surrender of the lease. Mr Loveday urged that the argument that remained, based on an invalid surrender, was just a gloss on the argument that had been withdrawn. It will be clear from what I have said above that, whatever may be the position on the argument that Ms Evans-Gordon withdrew, I regard the combination of a void surrender and an undisclaimed lease as quite different.
[31] Understandably, Mr Loveday, for Area Estates, submitted that one should stand back and look at the facts (assuming these in his favour for the purpose of the application). More than a year before completion, there had been the purported surrender. The premises were standing empty; no rent had been paid; the first time the trustee was approached to disclaim (in May 2008), he agreed. There is no evidence, urged Mr Loveday, that anyone was going to assert that the lease continued.
[32] These points paint a powerful picture, and perhaps a commercially persuasive one. However, the answer to them lies in remembering that had anyone asserted that the lease continued he or she would have been correct, subject perhaps to arguments about waiver or abandonment. That is not a risk that Mr Weir agreed to take.
[33] The underlying principle was laid down by the House of Lords in MEPC Ltd v Christian-Edwards [1981] AC 205 in these terms (per Lord Russell of Killowen, at p220C-D, with whom the rest of the House agreed):
[I]f the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown.
[34] There is no prospect in the present case of such a conclusion being appropriate. For all the argument about degree of risk, on which views will differ, Area Estates simply cannot show that as at the date for completion there was no risk of the trustee in bankruptcy asserting successfully that the lease subsisted. The present case is a far cry from that before the House of Lords, where it was concluded that there was no risk of a claim for specific performance being upheld on the basis of a contract some 70 years old that had been abandoned some 50 years before.
[35] The authorities contain other illustrations of the effect of the presence of the risk of a claim being made that, if successful, would adversely affect title: see, for example, Darvell v Basildon Development Corporation (1969) 211 EG 33 (“mere conjecture of an attack by what would be idle litigation”, per Megarry J, at p39) and Re Heavsman’s and Tweedy’s Contract (1893) 69 LT 89: “a claim [that] would now be ridiculous; he would be laughed out of court”, per Lindley LJ, at p91. The distinction is that, in the present case, the adverse claim was good. The trustee in bankruptcy was a lessee, and Area Estates’ own later action in approaching the trustee for a disclaimer is consistent with that.
Conclusion
[36] In the circumstances, I am satisfied that the claimant must succeed. He was entitled to rescind the contract for sale. Area Estates has no defence to his claim for the return of the deposit and interest. Had Area Estates wanted to avoid these consequences, it should have secured the disclaimer before, on any view, the date for completion under the contract for sale.
[37] I will hear further argument as necessary as to the rate of interest.
Claim allowed.
