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Ros Monk and Peter Sibley analyse Malory 2 in Solicitors Journal

Posted on 16 March 2020. Source: Solicitors Journal

Property Litigation Managing Associate Ros Monk and Paralegal Peter Sibley analyse Malory 2 and the unsatisfactory state of the law governing the right to seek rectification for Solicitors Journal.

With increasingly sophisticated criminal methods, property fraud is on the increase. The likely consequence is that claims for rectification at HM Land Registry, and subsequent claims for indemnities, following rectification are also likely to rise.

Two recent High Court decisions confirm the unsatisfactory state of the law in respect of the right to seek rectification (alteration under the Land Registration Act 2002) of the register of title.

Where X is the registered proprietor of property which is then mistakenly registered in the name of Y, X can recover the property by alteration of the register. However, unless the mistake involves a forgery, where X is in actual occupation Y cannot claim an indemnity from the Land Registry. This is unsatisfactory where both X and Y are innocent parties.

This situation arises because X’s right to seek rectification enjoys the status of a proprietary right capable of taking effect as an overriding interest, aka Malory 2 (named after the significant judgment outlined below).

This blocks indemnification of Y (in all but forgery cases) as Y suffers loss not by reason of rectification of the register – the trigger for indemnity – but by reason of recognition of a pre-existing interest. Such non-forgery cases include, for example, fraudulent completion of an incomplete but genuinely signed transfer or instances of undue influence.

The Law Commission has recommended removing the block by denying the proprietary status of the right but, despite this, with other more pressing concerns occupying legislative time, this state of affairs looks set to persist in the absence of the Supreme Court’s intervention.

What the law says

The register of title is conclusive but may be altered to correct a mistake. The register is rectified where an alteration “prejudicially affects the title of a registered proprietor”. If the court has power to make an alteration, it must do so unless there are exceptional circumstances. If the register is rectified causing an individual to suffer loss, that individual is entitled to be indemnified by the Land Registry.

Importantly, paragraph 1(2)(b) of Schedule 8 of the LRA 2002 deems a registered proprietor “claiming in good faith under a forged disposition” to have suffered loss.

In Malory Enterprises Ltd v Cheshire Homes (UK) Ltd and others [2002] EWCA Civ 151, F fraudulently sold and transferred property owned by X to Y who was registered as proprietor. X discovered the fraud and sought rectification of the register.

The two significant legal findings in Malory, referred to as Malory 1 and Malory 2, are:

  1. On registration, Y obtained legal title only. X retained beneficial title.
  2. X’s right to seek rectification was proprietary and enjoyed overriding status, as it;
    1. cannot be exercised in isolation” from X’s Malory 1 interest “and… is a right in reference to land” and
    2. arises “at the same time” as, not after, Y’s registration.

In Swift 1st Ltd v Chief Land Registrar [2015] EWCA Civ 330, a forged charge was removed from the charges register of property in the actual occupation of X. Y, the former chargee bank, sought an indemnity.

In the course of the decision, Malory 1 was declared per incuriam and wrongly decided.

Y could not establish loss resulting from the alteration. This was because, pursuant to Malory 2 which was not challenged, the alteration merely gave effect to the right to seek rectification, which took effect as an overriding interest. Under the Chowood principle ([1933] 1 Ch 574), this does not constitute loss for the purposes of indemnity because the rectification of the register merely recognises the existing position and does not put the applicant in any worse position than they were in before.

However, the Court of Appeal construed paragraph 1(2)(b) to deem Y as having suffered loss and thus enabled Y to claim an indemnity. However, this provision only applies in cases of forgery. The court admitted that it did not find this an easy issue and said the issue deserved to be considered by the Law Commission.

Recent Interpretations

In Simer Kaur Dhillon v Barclays Bank plc, Chief Land Registrar [2019] EWHC 475 (Ch), X was the registered proprietor, in actual occupation, of property fraudulently charged in favour of Barclays. X sought the removal of the charge from the charges register.

Barclays argued, on the basis of Malory 2 and Chowood, that it would be unable to claim an indemnity if alteration was ordered; and that this was an ‘exceptional circumstance’ such that no alteration should be made. HHJ Pelling QC dismissed this argument by referring to Swift, which applies unless the Supreme Court overrules it. In cases involving forgery, paragraph 1(2)(b) excludes the operation of Chowood. Barclays would be deemed to suffer loss and could be indemnified.

In Bakrania v Shah [2019] EWHC 949 (Ch), X was one of three registered proprietors and brought a negligence claim against solicitors acting on a fraudulent transaction under which X’s interest was transferred to Y. The solicitors successfully applied to strike out this part of the claim on the basis that X suffered no loss, as X retained his beneficial interest under an express trust.

The judge also noted that X could apply to alter the register, however “[X’s] entitlement to seek rectification did not give him a proprietary interest. He was not in possession and therefore did not have an overriding interest”.

Where does this leave us?

Dhillon and Bakrania confirm the Swift analysis and Malory 2. This state of the law is unsatisfactory for a number of reasons:

  1. The impact on Malory 2 of the death of Malory 1 was not considered in Swift. In Malory itself, the right under Malory 2 could not be exercised “in isolation” of Malory 1. Therefore, it’s unclear that Malory 2 is an independent or freestand­ing right. Furthermore, Malory 2 was conceded at first instance and obiter; and conceded in Swift. Accordingly, its juris­prudential basis is weak.
  2. The right to seek rectification is not vested in any particular person. No interest in the title sought to be rectified is needed for the right to arise (Walker v Burton [2013] EWCA Civ 1228). This right therefore cannot in any real sense be said to be a right “in reference to land” and thus truly be a proprietary right.
  3. To only permit an indemnity in cases of forgery is arbitrary; often results in un­fairness to Y who can do little to protect themselves; and involves a strained in­terpretation of paragraph 1(2)(b). It was common ground in Swift that the provi­sion was intended to reverse the decision in Attorney General v Odell [1906] 2 Ch 47 and not disapply Chowood. Indeed, it is unclear the Chowood principle was ever intended to apply to the right to seek rectification (that case concerned a right by virtue of adverse possession).
  4. An overriding interest must affect the estate immediately before the dispo­sition. Often, this is not the case in respect of the right to seek rectification, which at best arises “at the same time as” the disposition.

Law Commission

In its final report in July 2018, Updating the Land Registration Act 2002, the Law Commission recommended that it should be made explicit that the right to seek rectification “should not be capable of being a property right”, thereby reversing Malory 2 and Swift. The Law Commission is awaiting the government’s final response.

This recommendation, if enacted, would correct the state of the law.

Final Thought

The right to seek rectification is a sui generis statutory right which should not be considered a private law property right capable of engaging the Chowood principle or the priority rules.

Unfortunately, the headache of Malory 2 persists until the recommendation of the Law Commission is acted on either by the legislature or the Supreme Court.

This article was originally published by Solicitors Journal.

 

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