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Professional negligence/title rectification/mortgage fraud

Professional negligence/title rectification/mortgage fraud

  • United Kingdom
  • Financial institutions

31-08-2017

Case law updates

NRAM Ltd v Evans [2017] EWCA Civ 1013

Summary

The borrowers applied for an advance from the Bank in 2004 in order to purchase the property. The purchase completed and the borrowers were registered as the proprietors of the property. The loan was secured by means of a registered legal charge in favour of the Bank dated 26 November 2004 (the 2004 charge).

In September 2005 the borrowers contacted the Bank to enquire whether the four accounts they had with the Bank could be consolidated. The Bank issued an offer and on 15 December 2005 the advance was made (the 2005 loan). The 2004 loan was redeemed with the proceeds of the 2005 loan and a new account number was allocated. No application was made to the Land Registry as it was the intention of the Bank to rely on the existing 2004 charge as its security.

In the years following the making of the 2005 loan, correspondence showed that the borrowers treated the 2005 loan as being a secured mortgage.

In 2014, solicitors instructed to act for the borrowers wrote to the Bank stating that the 2004 loan had been redeemed and the 2004 charge should be removed from the registered title. The letter did not refer to the 2005 loan. As a result of this letter the Bank, by mistake, removed its charge by submitting an e-DS1 to the Land Registry.

The mistake subsequently came to light, the Bank informed the borrowers of the mistake and applied to register a unilateral notice against the title to the property.

Held

The High Court found that the Bank had made a mistake, that this mistake had been induced by the customer solicitors’ letter and that in all the circumstances it would be unconscionable to leave the mistake uncorrected. It followed that the Bank’s claim to rescind the e-DS1 on the grounds of mistake succeeded and the Court ordered that the e-DS1 was provided by mistake, that the discharge of the Bank’s charge was rescinded and set aside and that the Land Register be altered and/or brought up to date by re-registration of the Bank’s charge against the property as if it had never been removed and with the priority originally held.

The appeal

The borrowers sought permission to appeal on three issues. This update focuses on the second of those issues namely the assertion that the Judged erred in ordering the rectification of the register to reinstate the registration of the 2004 mortgage deed because (a) there was no mistake which required correction or (b) if there was such a mistake, it was one for which the Claimant was wholly responsible and the borrowers did not in any relevant way contribute to it.

The borrowers also applied to the Court in November 2016 for an indemnity from the Land Registry under Schedule 8 of the Land Registration Act 2002 (‘the Act’) stating that if, contrary to their primary submission the Bank was entitled to rectification, they were entitled to be indemnified for all losses suffered.

Held on appeal

The Court of Appeal, in dismissing the substantive appeal, determined that:-

1. the registration of a voidable disposition before it is rescinded is not a mistake for the purposes of Schedule 4 of the Act. A voidable disposition is valid until it is rescinded and the entry in the register of such a disposition before it is rescinded cannot properly be characterised as a mistake;

2. Once the voidable disposition has been rescinded, the register can be brought up to date;

3. The alteration of the register to reflect the setting aside of the e-DS1 constituted not the correction of a mistake in the register within the meaning of Schedule 4 paragraph 2(1) but rather the bringing of the register up to date. It follows that the alteration could not constitute rectification within the meaning of Schedule 4, paragraph 1 (which states ‘In this Schedule, references to rectification, in relation to alteration of the register, are to alterations which (a) involves the correction of a mistake, and (b) prejudicially affects the title of a registered proprietor.)

4. It follows that it was not necessary for the lender to establish that the borrowers by fraud or lack of proper care caused or substantially contributed to the mistake or that it would for any reason have been unjust for the alteration not to be made.

5. The borrowers application for an indemnity was dismissed as the case involved neither rectification of the register nor a mistake whose correction would involve rectification of the register.

Relevance for secured lenders

This case is helpful to lenders who have removed a charge in error since it confirms that a lender is entitled to rescind an e-DS1 and be re-registered without having to establish that the borrowers by fraud or lack of proper care caused or substantially contributed to the mistake.

Russell v Stone [2017] EWHC 1555

Background

In December 2016, the Claimants issued a £2.2 million professional negligence claim against the Defendant in respect of the Defendant’s services as Quantity Surveyors and Project Managers of a project to demolish the Claimants’ existing property in Highgate and the construction of a modern house in its place. The Claimants instructed the Defendant in 2008. The project ran into difficulties and the Defendant’s appointment was terminated in May 2012. 

The claim against the Defendant included claims for preparation of inadequate tender documentation, deficient analysis of a particular tender and preparation of a deficient letter of intent. In 2017 the Defendant issued an application to strike out three of these claims on the basis that under Section 2 of the Limitation Act 1980 (“the Act”) the six year limitation period had elapsed.

Prior to issuing proceedings, the Claimants and Defendant, with a view to preserving limitation and avoiding the need to issue proceedings, had entered into standstill agreements on 5 November 2015, 18 February 2016, and 28 April 2016. The Claimants argued that the provisions of the Standstill Agreements operated so that their claims were not time barred.

The Standstill Agreements’ operative provisions referred at Clause 2.3 to “the suspension of time”. However, the third Standstill Agreement had been extended by letter dated 30 June 2016 so that limitation was “extended” to 30 November 2016.

Based on the fact that limitation was “extended” to 30 November 2016, the Defendants argued that by issuing on 1 December 2016, the Claimants were a day late issuing and thus the claim was statute barred. The Claimants argued that because Clause 2.4 of the Standstill Agreements provided that the parties would not issue or serve proceedings during the standstill period, limitation was “suspended” and they could only issue on 1 December 2016 as otherwise they would have breached the terms of the Standstill Agreements.

Held

The Court had to decide whether the Standstill Agreements operated to suspend or extend time and whether or not the Claimants were a day late issuing their claim. In reaching his decision that the Claimants’ claim was not time barred HHJ Coulson found that the Standstill Agreements were clear that “neither party would issue proceedings during the currency of the standstill period” and thus “the Claimants could not legitimately commence proceedings until the standstill came to an end on 30 November 2016”. HHJ Coulson also found based on the wording of the Standstill Agreements, they operated to suspend time.

Referring to Standstill Agreements generally HHJ Coulson commented that “their underlying purpose is to allow claims and defences to be researched properly before proceedings are commenced and thereby to encourage settlement” but that the present dispute had left him “with the overwhelming feeling that they are just another self-inflicted complication”. He also referred to the Technology and Construction Guide paragraph 2.3.2 which states that a Claimant can issue proceedings and then seek a stay of up to 6 months on the basis that he felt that this would have been the “safer option” in the present dispute.

The implications for Lenders:

Standstills are a useful device for preserving limitation but in order to be effective they need to be properly drafted and “suspend” rather than “extend” time. The effect of suspension means that the clock stops running for limitation purposes, and only starts up again after the agreement has expired. This means that the parties’ positions in respect of limitation are preserved as if time has literally stood still. If there is a week left before limitation expires prior to entering into a Standstill Agreement then there will be a week following its expiry to issue proceedings.

To avoid confusion and ambiguity it is always better to have a provision which enables a party to issue but not serve proceedings during the life time of the agreement. As an alternative to entering into a standstill agreement it is usually possible to issue a protective claim to preserve limitation and then agree a stay for service of the claim form and particulars. Although this will incur an issue fee, the lender will have the certainty that limitation has not been missed.

If you require advice on a standstill or on the merits of issuing protectively to preserve limitation, please contact Alison Poole at Eversheds Sutherland (International) LLP.

Bakrania v Lloyds Bank Plc (unreported) First Tier Tribunal 13 April 2017

Summary

In 2010 Mr and Mrs S purchased the subject-property (which was situated in Southgate, London) and were registered as proprietors, subject to a mortgage in favour of the Bank.

In 2012 Mr and Ms B, a brother and sister (the former owners of the property with a third sibling who died in 2010), applied to alter the register to remove Mr and Mrs S and the Bank’s charge, and to reinstate themselves as proprietors.

The brother and sister’s case was that there had been two fraudulent transfers:

  • in 2009 the property was transferred from the three siblings to the fraudsters, a married couple with near identical names to the brother and sister (the only difference being in their middle names);
  •  in 2010 the fraudsters transferred the property to Mr and Mrs S.

Held

It was accepted that the brother and sister had not executed the transfers and Mr and Mrs S had been registered by ‘mistake’.

However, for reasons which are set out below, the Judge ordered the Chief Land Registrar to cancel the application by the brother and sister leaving Mr and Mrs S registered as proprietors and leaving the Bank’s charge registered against the property.

The Legal Principles

Alteration of the register

The registration of Mr and Mrs S as proprietors pursuant to fraudulently executed transfers was a ‘mistake’. The Registrar is empowered to alter a register for the purposes of correcting a mistake and correcting the consequences of such a mistake. However, the Judge considered that this power “is not intended to provide absolute indefeasibility”. The Judge considered the distinction between alteration (broadly to bring a register up to date) and rectification (where the correction prejudicially affects the title of a registered proprietor).

There are special rules concerning rectification: rectification cannot be carried out if the registered proprietor is in possession, unless the proprietor consents, or they have, by fraud or lack of proper care, caused or substantially contributed to the mistake, or it would for any other reason be unjust for the alteration not to be made (“the exceptions”). This protection for proprietors in possession reflects the “special loss which he would suffer if rectification was ordered against him”.

It was for the brother and sister to show that the exceptions applied (i.e. enabling rectification to be effected). On the evidence, they did not.

Prior and Overriding interests

The brother and sister argued, following a number of authorities, that where a transfer is fraudulent the beneficial interest remains vested in the original owner. Therefore alteration would not prejudicially affect the title as it would merely give effect to their pre-existing beneficial interests. This argument failed as following the Court of Appeal’s 2015 decision in Swift 1st Limited v The Chief Land Registrar (which post-dated the brother and sister’s statement of case) it is now well-established that a fraudulent transfer carries with it the beneficial as well as the legal interest.

But this was not the end of the matter. The brother and sister were granted permission to amend their statement of case to allege that at the time of the first and second transfers they were in actual occupation of the property giving rise an overriding right to rectify the register on the grounds of fraud (an” overriding interest”).

An overriding interest is an interest of a person in actual occupation of the property at the time of the disposition, provided that he or she has not failed to disclose the right upon any enquiry by the intended purchaser and provided the occupation would have been obvious on a reasonably careful inspection.

These overriding interests of persons in actual occupation at the time of a disposition override the disposition and bind the purchaser, even though they do not appear in the register. Therefore, it was argued the overriding interest would take priority over any subsequent interest obtained by Mr and Mrs S meaning that what was proposed was alteration of the register, not rectification.

In a reasoned judgment the Judge found that the interests of the brother and sister (even if overriding) would have been overreached. Interests are overreached where a disposition is made by two trustees. In this case the effect of the first transfer was to vest the legal and equitable interest in the property to the fraudsters so as to allow them to sell the property and retain the proceeds of sale. Once the fraudsters were registered they were able to convey the property to Mr and Mrs S. An overriding interest does not defeat overreaching. Once an interest is overreached, there is no longer any interest in the land to which the occupation can attach or which it can protect.

Further, the Judge found that, in any event, the brother and sister were not in actual occupation of the property at the time of the first and second transfers and that, even if the Judge was wrong and they were in occupation, their occupation would not have been obvious on a reasonably careful inspection.

Comment

This is a useful decision which considers the issues which often arise on applications for alteration/rectification of the register, including the removal of a registered charge. The Judge reaffirmed that the ‘general policy’ is that it is unjust to rectify a register without the consent of the proprietor save in limited circumstances.

It is an interesting feature of the case that, whichever way the Judge determined the case, one of the two sides may be entitled to an indemnity from the Land Registry. If the register was rectified Mr and Mrs S would be entitled to an indemnity to reflect the value of the property immediately before the rectification (i.e. effectively at today’s value). If, as was the case, the register was not rectified, the brother and sister’s indemnity will reflect the value at the time when the mistake was made (i.e. the date of the first transfer, 2009).

Kotak v Power Plane Limited [2017] UK First Tier Tribunal 0127 (PC)

Summary

The subject-property (“the Land”) was formerly an asset of a partnership carried on between the Applicant (“K”) and his brother (“D”). K and D charged the Land to a bank by a legal charge dated 10 April 2010 (“the April Charge”).

The Bank appointed receivers (“the Receivers”) under powers contained in the April Charge. On 19 November 2015 the Receivers transferred the Land to the Respondent (“PPL”) by a contract made by a sealed bid process. In fact, K had been the highest bidder, but K failed to meet the conditions of the sealed bid process and therefore the Receivers sold the Land to PPL as under-bidder.

PPL applied to the Land Registry to register the transfer of the Land. K objected. The matter was referred to the First-tier Tribunal (Property Chamber) under s. 73(5)-(7) of the Land Registration Act 2002 - where an objection is not “groundless” and cannot be resolved by agreement.

PPL pleaded:

a) the April Charge was valid;

b) the Bank was entitled to appoint Receivers; and

c) the Receivers were entitled to sell the Land to PPL.

K pleaded, in response: 

1) that the April Charge was voidable as a result of misrepresentation and that K had given notice of an intention to rescind the April Charge;

2) that K signed the April Charge as a result of actual undue influence; and

3) that the appointment of Receivers was invalid because “some or all” of the Loan Agreements, which were secured by the April Charge, were forged. 

K also alleged, by a witness statement, that the April Charge “amalgamated” eight earlier charges, a number of which were forged “which to my understanding reduces the balance of the [April] Charge to nil”.

Pausing here, the Tribunal Judge was critical of the decision to refer the matter to the Tribunal, stating “On any robust view, this objection should have been regarded as groundless”. However, the case before the Tribunal raised and determined a number of issues worthy of note.

The Judge’s decision

Misrepresentation and undue influence

The Judge considered that K’s statement of case, as to (1) and (2), was defective as it failed to allege that the Bank had actual notice of the claimed misrepresentation or undue influence. Further, the Judge confirmed that a bank is not put on enquiry in any case where a loan is made both to the person making the alleged misrepresentation (here D) and the person relying on the misrepresentation (K).

K claimed that “As a result of the said misrepresentation, the [April] Charge was voidable and [K] became entitled to rescind the same. [K] gave notice of his intention to do so… in extensive correspondence with the Bank … from at least mid-2014…”.

The April Charge was executed in 2010. K did not produce any authority that notice after the date of a charge could affect its enforceability. Additionally, the Judge made the obiter observation that a charge, unlike a contract, cannot be “rescinded” because a charge creates an interest in land which can only be removed by means of an action to set aside the charge coupled with an application to rectify the register.

The allegation of undue influence could not succeed as there was no evidence that K’s will was overborne by improper pressure or coercion.

Forgery of “some or all” of the Loan Agreements

K’s argument, that the April Charge “amalgamated” eight earlier charges executed between 2004 and 2007, of which “some or all” were forged, was found to be irrelevant to the validity and effect of the April Charge [2010]. The Judge stated: “whether or not other, earlier documents were forged that cannot in any way affect the validity of the April Charge, which is a free-standing document, creating a new charge over the affected titles, executed by [D and K], and creating security over the title numbers identified in the document”.

Estoppel, ostensible authority and estoppel by representation

K was estopped from contending that the Receivers were not entitled to sell the Land because K was a willing participant in the sale of the Land having submitted a bid for the Land (which failed only because K failed to pay the 10% deposit in time). K did nothing to challenge the Receivers’ right to sell the Land until after the completion of the sale to PPL.

Further, and in any event, K clothed the Receivers with ostensible authority to sell the Land (even if their appointment was unlawful).

The Receivers were agents of K and D. As agents, and holding themselves out as such, the Receivers offered to sell the Land. K knew that he, and other potential bidders, relied on the Receivers’ title. K took no steps to repudiate the appointment or to challenge the Receivers’ right to sell the Land.

Following Freeman and Lockyer –v- Buckhurst Park Properties where a party (“X”) knew of and acquiesced in the agent’s professing to act on X’s behalf, and thereby impliedly representing that it had such authority, X was considered to have made the representation, or caused it to be made, or at any rate be responsible for it. Accordingly, as against another party, who has altered their position in reliance on the representation, X is estopped from denying the truth of the representation.

It was ordered that PPL be registered as proprietor of the Land as if no objection had been received.

Comment 

This is a useful decision which considers the issues which may arise in the context of challenges to the validity of charges: misrepresentation, undue influence and forgery.

 

 

 

 

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