News
Rectification of the Land Register
The Court of Appeal in Dhillon v Barclays Bank Plc and the Chief Land Registrar [2020] EWCA Civ 619 has recently given judgment in an important case involving the rectification of the Land Register. It has given new guidance on the test of 'exceptional circumstances' in Schedule 4 of the Land Registration Act 2002. It has also repeated a warning to practitioners that pleadings should clearly identify the issues to be resolved.
David Sawtell has written about the test that the Court of Appeal has endorsed, the importance of rectification to land registration, and the Court of Appeal's comments on the Law Commission's 2018 report for reforming the Land Registration Act 2002:
Rectification of the Land Register, mortgages and the exceptional circumstances test: Dhillon v Barclays Bank Plc and the Chief Land Registrar [2020] EWCA Civ 619
The recent Court of Appeal decision in Dhillon v Barclays Bank Plc and the Chief Land Registrar [2020] EWCA Civ 619 examines the definition of 'exceptional circumstances' in the context of rectification of the Land Register. The case provides important guidance on this test, which goes to the heart of the system of land registration. It also provided the Court of Appeal (consisting of Coulson LJ, who gave the only substantive judgment, together with Patten and Rose LJJ) with an opportunity to comment on the Law Commission's 2018 report on the Land Registration Act 2002.
At the outset, however, it should be noted that there were two unusual features to the facts of the case. Both the registered proprietor of the property, Mrs Dhillon, and the mortgagee, Barclays Bank plc, were uninvolved in a fraud conducted by another party. Secondly, if Mrs Dhillon's application had succeeded, she would have acquired a valuable property free of a mortgage that she would not have been able to purchase herself. While the clarification of the approach to be adopted in applying the exceptional circumstances test is welcome, the facts of the case may well provide little practical guidance as to how it is to be applied in the future.
The background facts
Mrs Dhillon lived at 47 Moresby Road. By 1999, she had acquired the opportunity to buy the property under the Right to Buy scheme, but did not have the means to pay the purchase price. In 2002, however, someone forged her signature and paid the purchase price for the property, which was put into her name (the first transfer). Eleven days later, the property was transferred again, with a forged signature, to a company (Crayford Estates Limited) which charged the property to a lender (the second transfer). The trial judge treated both of those conveyances as void, a determination that was not challenged by the parties (NRAM v Evans [2017] EWCA Civ 2013; [2018] 1 WLR 639).
Crayford Estates Limited was registered as the legal proprietor and the charge was registered. A few days afterwards, the mortgage loan was re-financed with a mortgage from Woolwich Plc, now Barclays Bank Plc, which was granted a first legal charge over the property.
Crayford Estates was struck off the Register of Companies and the property vested in the Crown as bona vacantia. The Crown disclaimed the property and it was escheated.
Mrs Dhillon applied to the court to have the property vested in her name. On 15 November 2010, pursuant to an Order of Master Moncaster, she was registered as proprietor of the property, but subject to the Barclays charge.
In 2016, Mrs Dhillon issued proceedings seeking rectification of the Land Register so as to remove the Barclays charge. The Chief Land Registrar filed a Defence asserting that, because there were 'exceptional circumstances' within the meaning of paragraph 3(3) of Schedule 4 of the Land Registration Act 2002, there should be no rectification of the Register. This was the central issue at trial and on appeal.
The matter came before His Honour Judge Pelling QC, sitting as a Judge of the High Court ([2019] EWHC 475 (Ch)). In the Court of Appeal, Coulson LJ noted that the two most significant findings of the first instance judge were that (i) Mrs Dhillon could not have afforded to buy the property; and (ii) the signatures on the two transfers were forged and not put there with her authority.
The trial judge rejected her claim for rectification. At [68]-[72], he held that Mrs Dhillon ought not to be in a better position than Crayford Estates; she could not have been able to acquire the property herself in the first place.
It was an important point on appeal that Mrs Dhillon was "seeking to wind the clock back to a point in time between the two fraudulent transfers" ([34]); she wanted to rely on the first fraudulent transfer (into her name), escaping the consequences of the second fraudulent transfer (into the name of the company, secured by mortgage lending). Coulson LJ noted that, "it would be contrary to common sense, and any notion of justice, to consider the question of exceptional circumstances, and perhaps more particularly whether or not the non-rectification of the Register was justified, without having regard to that fact."
The Land Registration Act 2002 and the policy of rectification
Cheshire and Burn's Modern Law of Real Property (18th edition, OUP, 2011) states that, "The fundamental principle of the system of registration of title is that the register is conclusive as to the legal title of the registered proprietor to the estate that is registered in his name." (p.1079). Both the (now repealed) Land Registration Act 1925 and the Land Registration Act 2002 have a mechanism to cure defects on the Land Register, along with provisions for a right of indemnity (i.e. compensation) if anyone suffers loss as a consequence of its rectification. As Rimer LJ noted in Chief Land Registrar v Franks [2011] EWCA Civ 772, [2012] 1 WLR 2428 at [25], "The essential purpose of the scheme created by the Act is to provide a system of state-guaranteed registered title." The case of Dhillon engaged two of the three basic principles of the system of land registration: (1) the mirror principle, namely that the Register provides an accurate and complete reflection of property rights in relation to a piece of land; and (2) the insurance principle, that if the register is shown to be incorrect, then those who suffer loss as a result are compensated. (The third principle, the curtain principle, that the Register does not record beneficial ownership of land, was not in play in this case).
Alteration and rectification of the Land Register therefore comprise an important part of the system of land registration. Section 58(1) of the Land Registration Act 2002 states that, "If, on the entry of a person in the register as the proprietor of a legal estate, the legal estate would not otherwise be vested in him, it shall be deemed to be vested in him as a result of the registration." This is the title promise. Title guarantee is, however, qualified: the Land Register may be altered in certain circumstances. The extent to which a registered proprietor's title to land may be challenge (the 'indefeasibility' question) and any resulting compensation, or indemnity, if the Register turns out to be wrong go to central aspects of a land registration system.
Schedule 4 of the Land Registration Act 2002 sets out a regime for the alteration of the Register. It distinguishes between alteration and rectification. The latter is a subset of alteration which involves the correction of a mistake, where the alteration prejudicially affects the title of a registered proprietor (paragraph 1). The distinction between alteration and rectification is important as rectification of the Register, or a decision by the Registrar or the court not to exercise the power to rectify it, triggers a right to an indemnity,
Paragraph 2(1)(a) of Schedule 4 gives the court the power to make an order for alteration to correct a mistake. Paragraph 3 applies to the court's powers under paragraph 2 "so far as relating to rectification". The relevant parts state:
(2) If alteration affects the title of the proprietor of a registered estate in land, no order may be made under paragraph 2 without the proprietor's consent in relation to land in his possession unless—
(a) he has by fraud or lack of proper care caused or substantially contributed to the mistake, or
(b) it would for any other reason be unjust for the alteration not to be made.
(3) If in any proceedings the court has power to make an order under paragraph 2, it must do so, unless there are exceptional circumstances which justify its not doing so.
Schedule 4, therefore, imposes a higher test to rectify the Register, which is applicable where the correct of a mistake prejudicially affects the registered proprietor's title. It then raises the bar still higher if that proprietor is in possession of the land and he or she does not give consent: in those cases, that proprietor must have either contributed to the mistake by fraud or lack of proper care, or it would be 'unjust' for the alteration not to be made. If the proprietor is not in possession, then paragraph 3(3) requires the court to make an order under paragraph 2 unless exceptional circumstances justify not doing so.
This gradated response to alterations to the Register, with a different test being applied depending on the level of prejudice to the registered proprietor and an examination of his or her culpability if they are in possession, has resulted in a number of decided cases. The system of alteration and rectification was also the subject of Chapter 13 of the Law Commission's recent report, Updating the Land Registration Act 2002 (Law Com No 380), published in July 2018. Coulson LJ noted at [51] that there are difficulties with the current wording of the test, highlighting in particular the "fine" distinction between 'unjust' and 'exceptional circumstances', noting that the former is a higher hurdle to surmount (see, in particular, M Dixon, 'Updating the Land Registration Act 2002: Title Guarantee, Rectification and Indefeasibility' [2016] Conveyancer and Property Lawyer 6, 423 at 425). The Law Commission's draft Bill would make significant changes to Schedule 4, making it more prescriptive with added length and detail.
The nature of Mrs Dhillon's title
Coulson LJ briefly considered what the nature of Mrs Dhillon's title was. When the company, Crayford Estates, was registered as proprietor, it acquired the title of the vendor (Hackney). When the mortgage was granted to Barclays, the bank acquired the registered charge and the company was left with the equity of redemption. When the company was struck off, the company's title escheated to the Crown. When the Moncaster vesting order pursuant to section 181 of the Insolvency Act 1986 was made, the freehold title, subject to the bank's charge, was vested in Mrs Dhillon. What was vested was the equity of redemption: no new freehold was created. The escheat had no effect on the registered charged.
Exceptional circumstances
The appeal was principally concerned with the question of 'exceptional circumstances' within the meaning of paragraph 3(3) of Schedule 4 of the Land Registration Act 2002. Coulson LJ endorsed the test given by Morgan J in Paton and another v Todd [2012] EWHC 1248 (Ch); [2012] 2 EGLR 19, at [66]-[67]. That case was concerned with the almost identically worded provision in paragraph 6 of Schedule 4 (which deals with the Registrar's power to alter the Register). In that case, the registered proprietor was not in possession; pursuant to paragraph 6(3), the application for rectification had to be approved unless there were exceptional circumstances that justified a contrary decision. Morgan J stated the following.
- As with section 82(1) of the Land Registration Act 1925, a residual discretion as to rectification was conferred on the court.
- In a rectification case, the court must adopt a structured approach. Firstly, the paragraph imposes a duty to rectify the Register. Secondly, it does not apply in a case where there are exceptional circumstances which justify not rectifying the Register.
- The court must ask itself two questions: "(1) are there exceptional circumstances in this case? and (2) do those exceptional circumstances justify not making the alteration?"
- 'Exceptional' is an ordinary English word. It describes a circumstance which is such as to form an exception, which is out of the ordinary course. To be exceptional a circumstance need not be unique or unprecedented, or very rare but it cannot be one that is regularly, or routinely, or normally encountered.
The Law Commission report was considered by Coulson LJ. He noted, however, that the judge had to apply the law as it stands. He also observed that the Law Commission's principal concern was to protect those who have been deprived of a title by fraud, which was "emphatically" different to the instant case. Coulson LJ then went on to criticise the proposal that the whole concept of 'exceptional circumstances' should be done away with. His remarks at [59] on the Law Commission's suggestion that the right to an indemnity should assuage concerns about injustice is worth considering:
"More significantly, when applied to the facts of this case, it would mean that the Law Commission would endorse Mrs Dhillon's right to acquire the freehold of the property unencumbered (without ever having paid a penny piece for it), and that BB [Barclays Bank] should not worry themselves about that result, because they will be indemnified for their loss by the tax-paying public. Such a conclusion might be said to raise eyebrows, not least amongst that same tax-paying public."
Coulson LJ held that the judge was correct to focus on Mrs Dhillon's position: after all, the exceptional circumstances arose from her position ([63]). On the other hand, Barclays' position was unexceptional.
Coulson LJ adopted the two-stage test in Paton and applied them. There were exceptional circumstances which were not routinely or normally encountered. Secondly, they justified non-rectification of the Register, not least because it would create a "windfall" for Mrs Dhillon, giving her "the unencumbered freehold of a million-pound property she had never owned and could never have afforded."
The importance of statements of case
The Court of Appeal issued a reminder to parties that statements of case are still an important part of civil procedure. Coulson LJ noted at [19] that if the "pleadings become forgotten as time goes on", this can lead to the trial becoming "something of a free-for-all", a result that is "not appropriate". He cited the warning given by David Richards LJ in UK Learning Academy Ltd v Secretary of State for Education [2020] EWCA Civ 370 at [47], where he stated that, "the statements of case play a critical role in civil litigation which should not be diminished.". David Richards LJ made the following points in that case.
- Statements of case should identify the issues to be determined. This allows parties to direct their evidence and their submissions accordingly.
- They allow the court to keep the trial within "manageable bounds". Court time is not wasted, and the judge knows which issues to concentrate on.
- Technical points should not stand in the way of a just disposal of a case. A judge may allow a departure from a pleaded case, although it is good practice to amend the pleading itself, even at trial.
In the Dhillon case, counsel for the Chief Land Registrar attempted to argue that the claim was not a claim for rectification, but was merely a claim for alteration of the Register under rule 126 of the Land Registration Rules 2003. Coulson LJ held at [18] that this submission was not open to the Chief Land Registrar. At [19] he noted that "The question of the relief being claimed by Mrs Dhillon was central to this case. If the CLR had wanted to say that this was not a case of rectification at all, then it was required to plead such a contention."
Both Dhillon and the UK Learning Academy Case Ltd case, therefore, stand as clear reminders of the need to identify the issues to be determined in the pleadings. Failure to do so could lead to problems both at trial and on appeal.
Conclusion
As the law currently stands, the test for rectification and exceptional circumstances is open textured. Dhillon gives us welcome new clarity on the application of the Paton v Todd test. Dhillon also encourages an approach that does not simply look to the indemnity provisions of the Land Registration Act 2002 so as to avoid injustice. Coulson LJ's comments on the Law Commission's proposals should also give some pause for thought. Given the unusual facts of Dhillon, however, the authors of their draft Bill may well not be too discouraged. It is likely that the question of rectification of the Register will continue to exercise practitioners, academics, the Registrar and the courts for some considerable time to come, whether or not Parliament choose to legislate.
DAVID SAWTELL
