Property week case - No Guarantee

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The Message:

Registration at the Land Registry does not always guarantee a person's title.

The Case:

Gold Harp Properties Ltd v Macleod [29 July 2014] concerned the impact on the priority of registration of competing interests at the Land Registry where one interest was removed by mistake from the title.
 
The roofspace in a building was divided into two parts, each let on a 135 year lease. The leases were each registered and both were entered on the schedule of notices of leases relating to the freehold title ("schedule"). The roofspace was unoccupied and a developer of the lower floors sought to develop it. The developer's son held the freehold.
 
Ground rent of £50 due on 25 March was not paid by the tenants and on 4 June bailiffs were instructed to re-enter or forfeit.  The lease allowed forfeiture only when the rent was more than 3 months in arrears and the tenants had sent a cheque for the rent to the developer on 11 June, but this was not forwarded to the freehold owner.
 
The freeholder applied to the Land Registry to close the leasehold titles on the basis that they had been forfeited.  The application was granted and the titles were closed and the leases were removed from the schedule. A lease of the entire roofspace was granted to Gold Harp (owned by the developer), which was registered and entered on the schedule.

The owners of the closed titles brought proceedings claiming their leases had been improperly forfeited. The county court judge held that no re-entry was effected and in any event the tenants had paid the rent within the 3 month period.  Since the leases were incorrectly closed, the court ordered that the register be rectified to reinstate the titles as if neither had ever been closed and the schedule be rectified so that those titles ranked in priority to Gold Harp's title. Gold Harp appealed, but lost in the Court of Appeal. Its interest will be practically valueless, having paid £150,000 for it.
 
The Land Registration Act 2002 provides for the court to order rectification of the register so as to change, for the future, the priority of any interest affecting the registered estate. This enabled the two closed titles to be given the priority which they should have had but for the Land Registry's mistake of removing them. The effect was that the tenants could occupy the roofspace to Gold Harp's exclusion as from the time of the court order, but not before.
 
Concerns have been expressed by many authoritative sources that altering priority in this way undermines the integrity of the register. Gold Harp may have assumed that it had priority over other competing interests, which would be guaranteed by the Land Registry.
The Court, however, stated that the guarantee of title conferred by registration is well understood not to be absolute. Rectification has the potential to prejudice the interests of third parties, who have relied in good faith on the register. The loser will, however, be entitled to compensation.
 
The lesson is that an interest, created during the period when competing interests have been deregistered by mistake, may be prejudiced by the reinstatement of those interests, to which it would have been subject but for the mistake.