Regular updates on relevant case law and legislation - October 2008

CHAPTER 4 REGISTERED LAND

The following is an article written by Ken Gerber, Partner at the law firm Anderson Strathern LLP - http://www.andersonstrathern.co.uk/. It gives you an excellent and informative account of how defects in title are dealt with. Such defects affect unregistered land and when property is registered for the first time. Whilst the article refers to title in Scotland, what it says is equally applicable to England.

United Kingdom: Problems With A Property Title? Insurance Could Offer The Answer

When the economy and the property markets are strong, buyers tend to accept many problems that exist in the title deeds. However, when times are harder, even the smallest wart in a title can stop a property sale. Titles that are registered in the Land Register of Scotland carry a UK Government backed indemnity, but this only protects against some title problems, and many properties have not yet been registered. Solicitors acting for purchasers are even more wary of title problems in the case of a property that is going to be registered for the first time.

The problems that can get in the way of the completion of a property transaction include doubt as to the extent of ownership, confusion about the boundaries of a property, a previous deed that may not have been properly signed, the lack of, or doubtful, rights of access, and the continued existence and enforceability of conditions. Some old title deeds have hopelessly vague descriptions of the property, so that nobody really knows what and how much is owned. There may be issues about the right to lead electricity cables and water pipes etc into the property, and drainage and sewerage from the property. The title may contain a right in favour of someone else to carry out mineral operations underground and to remove support for buildings, without having to pay compensation to the owner of the property. Defective title indemnity policies can help in all of these situations. While they do not cure the problem in question, they do give financial indemnity so as to allow people to accept the risk involved. The premium is a single payment and the policy will pay out if loss is suffered due to the defect. The policy is issued for the benefit not only of the owners of the property, but also their lenders and their tenants. In fact, many lenders will only proceed with their loan if a defective title policy is obtained.

It may not always be possible to find out who can solve the title problem or to locate them. Likewise, it may not be possible to establish who is entitled to enforce a continuing title restriction. Making an educated guess as to who can solve the title problem may present a solution, but it is not always desirable to approach that person, as their price for co-operation may be astronomical. It could even be harmful to the prospects of getting insurance cover to approach this person, or whoever owns the area in question.

Policies for residential property with cover of up to £250,000 and an element of inflation-proofing are generally available at a single premium, paid only once, of just over £250. For cover of over £250,000, the premium is usually 0.1% of the insured amount.

For commercial properties, the one-off premium payment is approximately 0.2% of the insured amount if planning permission has been granted for its use or for works carried out. This goes up to approximately 0.3% if planning permission has not been applied for or granted. Each policy is priced according to the risk and circumstances. Inflation-proofing for commercial property policies can be bought at the outset, but this will usually involve some form of annual top-up premium payment. Solicitors will usually arrange cover and there are various providers of defective title insurance. It is necessary to explain to the insurance company the risk that is to be covered and to give information on what searches and other investigative work has been carried out.

The policy covers specified risks but does not cover marketability of the property itself. If the policy holder tries to sell the property, but is unable to do so because purchasers are not willing to accept the title problem, even with the benefit of the insurance cover - the insurance company will not pay out. The policy is an indemnity against loss. If the actual loss is lower than the amount insured, the insurance company will only pay out the amount of loss. The 'principle of average' applies to defective title policies in the same way as it applies to many other insurance policies; so that if the risk has been under-insured, the pay-out by the insurers will be reduced accordingly. Therefore, if for example there is insurance cover in place for £300,000 and the insured amount should have been £600,000, and there is a loss of £200,000, the insurance company will only pay out £100,000, being half of the loss. This is because only half of the value of the loss has been insured.

With these factors in mind, defective title policies are a valuable aid in enabling residential and commercial property deals to go ahead and can transform what 'can't be done' in transactions into what can.

Alteration and rectification of the register (page 72)

In Barclays Bank Plc v Guy [2008] EWCA Civ 452; [2008] 25 EG 174, Guy claimed that a transfer of land from him to the company Ten Acre Ltd had been obtained by fraud. The company had then created a legal mortgage over the land in favour of Barclays Bank. Having received the mortgage money Ten Acre then defaulted on the repayments. Barclays Bank wanted to sell the land to recoup its mortgage money. Guy wanted to have the land transferred back to him and he wanted it transferred back free from the mortgage.

Schedule 4 of the Land Registration Act 2004 (page 72-3) covers alteration of the Register. When an alteration involves the correction of a mistake and the alteration prejudicially affects the title of the registered proprietor the alteration is called a rectification. If the registered proprietor doesn’t consent to the rectification, the Register can still be rectified if the registered proprietor in possession has caused or contributed to the mistake through fraud. Assuming Guy’s allegation of fraud was correct, the Register could be rectified against Ten Acre because it had contributed to the fraud and Guy could claim compensation from the Land Registry. No problem. The next concern was Guy’s request that the land was transferred back without the mortgage. The question here was whether the registration of the mortgage was a mistake. It was held that the registration of the mortgage was not a mistake because the Register showed that Ten Acre was the registered proprietor of the land. This is the effect of section 58 of the Land Registration Act 2002 (page 53) which states that even if a person isn’t entitled to be registered as the proprietor of the legal estate, the legal estate becomes vested in him as a result of registration and third parties are entitled to rely on the Register as shown. When the mortgage had been created, Ten Acre was registered as proprietor and Barclays had every right to rely on the register which showed Ten Acre as proprietor of the land. The registration of the mortgage was not a mistake. Only if Barclays Bank had actual notice of the fraud and knew that the title of Ten Acre was defective, or had turned a blind eye to it, would the court consider rectifying the Register. Barclays had no such knowledge. It could therefore keep its charge and sell the land to recoup its outstanding mortgage money. The purchaser who bought the land would take it free from any claim by Guy. Guy could have protected himself by entering a unilateral notice on the Register (page 69) warning of the dispute. He had asked his solicitor to do this but unfortunately (!) his solicitor only did so the day AFTER Barclays had registered its charge so Barclays’ mortgage came first in line. No case can rival Sainsbury’s Supermarkets Ltd v Olympia Homes Ltd (2005) but this one does come a pretty close second. And, just to wrap things up, Guy did not have an overriding interest which might have been binding on Barclays because he was not in actual occupation at the time the mortgage was created. Further tightening up of proof of identity to prevent fraudsters becoming registered has been incorporated into the Land Registration (Amendment) Rules 2008.

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