Leases restored to register took priority over lease of same space (Gold Harp)

In what circumstances will the court order rectification of the register and what is the position with the priority of competing interests? The Court of Appeal confirmed that two leasehold titles should be restored to the register and that they took priority over a subsequent lease of the same space.

Gold Harp Properties v Macleod [2014] EWCA Civ 1084 involved an appeal against a county court decision, requiring the alteration of Land Registry titles relating to a property with a ground and first floor and roofspace.

The judge decided that:

  • bailiffs had not effected a physical entry and even if they had on the relevant date, it would not have given rise to a forfeiture because the claimants' previous tender of the rent had been effective
  • the register should be rectified so that:
    • the claimants’ two leasehold titles of the roofspace were reinstated and re-opened as if neither had ever been closed
    • Gold Harp’s leasehold title (a new lease of the roofspace granted following the purported forfeiture of the claimants’ leases) be altered or rectified so that the tenants’ titles were entered in the schedule of notices of leases, both to rank in priority to Gold Harp’s leasehold title

The Court of Appeal dismissed Gold Harp’s appeal on the rectification issue.

What were the facts of the case?

The property was acquired in 1988 by a group of teachers with a view to its redevelopment into four flats – one each on the ground and first floors and two in the roofspace – which would provide teaching and accommodation facilities for autistic children. Four 135-year leases were created, the two claimants each becoming tenant of half of the roofspace.

The two lower floors were acquired in 1999 by a company owned and controlled by a property developer. Those floors were converted into four flats. The claimants retained title to their respective parts of the roofspace. Fresh leases were entered into in 2000 in respect of those flats, with terms of 135 years running from 1988. Both leases were entered on the schedule of notices of leases relating to the freehold title.

The roofspace continued unoccupied and unconverted. The property developer coveted the opportunity to develop the top floor. He orchestrated a sequence of events which he hoped would enable him to acquire the roofspace without having to make any payment to the claimants. On 13 February 2009 his son acquired the freehold of the property - whether or not technically a nominee for his father, he operated entirely at his behest. The next payment of ground rent in respect of the roofspace, £50 for each flat, was payable on 25 March 2009. Payment was not made on the due date and on 4 June the property developer instructed a firm of bailiffs to effect a formal re-entry (though since the lease provided for re-entry only when the rent was more than three months in arrears any lawful re-entry could not be before 26 June). On the same date he made an application for planning permission in respect of the roofspace.

Unaware of these developments the claimants belatedly paid the ground rent, by cheque payable to the property developer’s son, which was sent to him by post at his father’s address (the only address of which they had notice) on 11 June. The property developer was aware of the receipt of the cheque, but took no steps to forward it to his son.

On 27 July 2009, the son made a statutory declaration that the claimants’ leases had been determined by peaceable re-entry following non-payment of rent. The Judge found that no re-entry had taken place. On 30 July an application was made to the Land Registry for the closure of the claimant’s leasehold titles on the basis of the forfeiture of the leases to which they related. The application was granted and the register was amended on 5 August. At the same time, the Registrar amended the schedule of notices of leases by removing reference to the leases.

In the meantime, a long lease of the whole of the roofspace had been granted by the son to a company, the sole director of which was a business associate of the property developer. The leasehold title was registered with effect from 2 September 2009 and the new lease was entered on the schedule of notices of leases. The lease was subsequently assigned to another company and, on the same day, to Gold Harp. Gold Harp was also the intermediary lessee of the property. Both the first assignee and Gold Harp were owned and controlled by the property developer.

There were ‘apparent’ premiums for each transaction, but no money had, in fact, changed hands.

What were the issues involved?

The effect of judge’s order was that the claimants, and their successors in title, would enjoy the right to occupy the roofspace under their respective leases in priority to Gold Harp, whose interest would be reversionary only and practically valueless save in the unlikely event of a future termination of the claimants’ leases before their contractual expiry date.

Gold Harp and the property developer argued that the judge should have found that:

  • there were exceptional circumstances, within the meaning of the legislation, which justified him in not ordering rectification
  • even if he was entitled to order the reinstatement of the claimants’ leases on the register, he was wrong to order that they should appear on the schedule of notices of leases in such a way that they had priority over Gold Harp’s new lease

What is the law in this area?

Land Registration Act 2002 (LRA 2002), Schedule 4 deals with alteration of the register.

The court can order that the register is rectified or altered to correct a mistake even if it prejudicially affects the title of a registered proprietor. If the proprietor is in possession, then there is a presumption against rectification, at least without his consent, but it is rebuttable if:

  • he has by fraud or lack of proper care caused or substantially contributed to the mistake, or
  • it would be unjust for any other reason for the alteration not to be made

Otherwise, there is a presumption in favour of rectification unless there are exceptional circumstances which justify the court not ordering rectification.

The powers to rectify the register, extend to ‘changing for the future’ the priority of any interest affecting the registered estate or charge concerned.

LRA 2002, Schedule 8 provides for the payment of an indemnity by the Registrar where a person suffers loss by reason of various specified circumstances, including rectification of the register.

What did the Court of Appeal decide on the priority issue?

The Court of Appeal decided the judge was entitled to make the order he did.

The effect of the legislation was that the power of the court or Registrar is not limited to restoring an interest to the register, but ‘extends’ to changing what would otherwise be the priority as between it and another interest – in other words, to giving it the priority which it should have had but for the mistake.

Schedule 4 is concerned with ‘correcting’ mistakes in the Register and case law confirms the power to do so extends to correcting the consequences of such mistakes.

If an interest has priority, the owner can exercise the rights he enjoys by virtue of that interest to the exclusion of any inconsistent rights of the owner of the competing interest – so the concept of priority bites at the moment those rights are sought to be enjoyed.

Therefore, the reference in the legislation to changing the priority of an interest ‘for the future’ was straightforward. The beneficiary of the change in priority – the person whose interest has been restored to the register – can exercise his rights as owner of that interest, to the exclusion of the rights of the owner of the competing interest, from the moment that the order is made, but he is not entitled to do so up to that point. Here, from the time of the judge’s order, the claimants were entitled to exercise their rights as leaseholders – primarily their rights to occupy the roofspace – to the exclusion of Gold Harp. However, until that point they had no such right - they could not, for example, claim mesne profits from Gold Harp or its predecessors in respect of any occupation (though in fact there was none) up to that date.

There was no difficulty with this construction on policy grounds. The Act was not intended to provide for absolute indefeasibility of the register. Schedule 4 explicitly recognises that rectification has the potential to prejudice the interests of third parties who have relied in good faith on the register. The carefully structured provisions of the legislation, with the special protection given to a proprietor in possession, allowed a fair balance between the competing interests to be struck in any particular case - and Schedule 8 gives the loser the right to an indemnity.

Were there exceptional circumstances?

The Court of Appeal agreed with the judge below that there were no exceptional circumstances justifying a departure from the presumption in favour of rectification.

Gold Harp and the property developer argued there were on the basis that:

  • the Claimants had first learnt of the cancellation of their leases in October 2009, but it was not until the conclusion of the first hearing in March 2013 that they had sought an order for rectification. The judge should have treated that delay as an exceptional circumstance
  • the expert evidence showed that if each of the claimants sought to develop his part of the roofspace as a separate flat, they would be unlikely to obtain planning permission because the units were too small - whereas Gold Harp should have no difficulty in converting it as one flat. It followed that the loss to Gold Harp if rectification was granted would be much greater than the loss to the claimants if it were refused

The Court of Appeal disagreed with both arguments:

  • the claimants had only very belatedly pleaded a claim for rectification of the register. However, it was not a given that this delay was an exceptional circumstance. – it was unlikely to be unless it had given rise to some substantial identifiable prejudice. No such prejudice was alleged
  • even if Gold Harp’s loss if rectification was ordered would clearly have been greater than the claimants’ if it was not, it was doubtful that would be a sufficient reason for withholding rectification. It was not definitively established that planning permission would be unavailable and in any event, the claimants could have come to a deal which enabled someone else to realise the development value (if necessary by putting the two flats together). Judgments of this kind were matters for the trial judge which only in a clear case colud be said on an appeal to be wrong. This was far from being such a case.

What are the lessons for lawyers?

The decision clarifies the meaning of the reference in LRA 2002 to changing the priority of interests ‘for the future’.

However, the court confirmed it was concerned that its interpretation appeared to run contrary to that in Ruoff & Roper and Megarry and Wade and accepted in some decisions by deputy Land Registry adjudicators – particularly given the involvement of Charles Harpum (a barrister expert in the field of land registration and former Law Commissioner for England and Wales) in one of the works and one of the decisions.

It was, however, some comfort, that Emmet and Farrand appeared to be (to put it no higher) doubtful about the meaning of the provision. In addition, the views of Ruoff & Roper in this area had failed to attract judicial favour in the past.

The Court of Appeal maintained that the reasoning against its interpretation was unconvincing. The essential points relied on were:

  • the need to preserve ‘the integrity of the register’ – however, the guarantee of title conferred by registration was well understood not to be absolute
  • the authorities on the meaning of Land Registration Act 1925 – but they were not binding and in any event did not address the issue in this case

So this is certainly an answer for now, but it will be interesting to see if the decision is appealed.

 

Filed Under: Property

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