10Main issues and rules

Priorities

10 Main issues and rules

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Legal and equitable priority rules

Although our main concern is with registered land, this section deals with the old rules relating to unregistered land. Though modified by statute, these rules still apply to un-registered land.

First in time

The time order of interests plays a significant role. As between two legal interests or two equitable interests, the first in time will generally have priority: this may be seen as the default position. Even in these cases, however, it is not an immutable rule. If the first interest holder does something that creates a trap for purchasers, then the first interest may be postponed. A good example is found in the law of mortgages. The first lender invariably takes possession of the title deeds. This is very important because any pur-chaser expects the seller to possess the title deeds: their absence is a very strong indication that there has been a mortgage. If the seller has the title deeds, this indicates that there is no mortgage. It is unsurprising that a lender who fails to obtain the title deeds will be postponed to a later purchaser who is unaware of the mortgage.¹

The doctrine of notice

The Court of Chancery developed the doctrine of notice in order to avoid uncon-scionable conduct on the part of purchasers. A purchaser from a trustee should be bound if, but only if, his or her conscience is affected. Over the centuries, this flexible approach hardened into the doctrine of notice: a purchaser in good faith of a legal estate for value and without notice of the trusts will not be affected by the trusts. Notice may be actual or constructive. There will be constructive notice if a reasonable purchaser would have discovered the existence of the trust, whether by careful reading of the title deeds or by inspecting the land.

The inspection of title deeds is the purchaser’s central task. The purchaser has to estab-lish that the seller does indeed own the land and that there are no existing interests (such as leases and easements) that may be binding on purchasers. To enable this, the seller has to provide the purchaser with the title deeds (principally, transfers of the land from one person to another) for a set period. That period has been substantially reduced over the years. Since 1969,²the seller has to produce the first document older than 15 years and all the more recent ones. The choice of a relatively short period is assisted because adverse possession for 12 years will cure many defects in titles. A century ago, inspecting title was a long and difficult task. The period was much longer (40 years) and con-veyances were frequently lengthy and complex. Today, there are likely to be two or three quite short and simple documents. In any event, those documents have to be read very carefully. The purchaser will have notice of all interests discoverable from them.

1 Jones v Rhind (1869) 17 WR 1091; Walker v Linom [1907] 2 Ch 104.

2 Law of Property Act 1969, s 23, amending Law of Property Act 1925 (hereafter LPA), s 44.

Main issues and rules

In addition, the purchaser must inspect the land: this guards against notice of the rights of occupiers. Usually, of course, the seller will be the occupier. But if somebody different is there (possibly a tenant under an equitable lease) or another person shares occupation with the seller (most likely a partner of the seller, sharing ownership under a trust), then the purchaser must make enquiries of them in order to be safe.

Although these duties might seem reasonable, by the end of the nineteenth century it was generally agreed that purchasers faced great burdens. This meant that purchasing land was a time-consuming and costly exercise, with no certainty that all adverse interests would be discovered.

History tells us why notice rules were applied to equitable interests, rather than the normal first in time principle. Can we justify the different rules in terms of their modern operation? The only convincing response is that legal interests tend to be the older and most important rights, thereby deserving greater protection against purchasers. In addi-tion, equitable interests are less likely to appear from the deeds or occupation and so present more of a trap for purchasers. Giving purchasers some greater protection against equitable interests can be justified, though it is difficult to rationalise all the rules.

Exceptional cases

Dealings with equitable interests

Such dealings are illustrated by this example. Gordon holds land on trust for Harriet.

Harriet transfers her interest first to Imelda and then (inconsistent with that) to Janet.

Who of Imelda and Janet succeeds? The priority rule (applicable to all assignments) is that the first to give notice to the trustee has priority.³The logic of requiring notice is that the trustee needs to know to whom the trust obligations are owed.

Equities

Some rights, generally those based on the exercise of an equitable remedy such as rescission or rectification, are accorded the status of equities. Equities are weaker than equitable interests in two respects. The first relates to the holder of an equity who is in occupation. Contrary to the normal rule for equitable interests, occupation does not provide notice. This is because occupation may well not indicate anything out of the ordinary. If a tenant has a right to rectify the lease (perhaps to reduce the rent), then the occupation of the tenant provides no warning as to the right to rectify – one expects any tenant to occupy. The second concerns the type of purchaser who can defeat an equity.

A bona fide purchaser without notice of an equitable estate will not defeat a prior equit-able interest (a legal estate is required), but will defeat an equity.

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The need for reform

Criticism of these old rules concentrates on two points. First, selling and buying land is complex and expensive. In particular, each purchaser has to look carefully at all the old deeds. This involves repetition and a danger of missing interests or misreading deeds.

3 Dearle v Hall (1828) 3 Russ 1 (38 ER 475). This rule applies only to transfers of equitable interests under trusts, not to transfers of other equitable interests in land: LPA, s 137(10).

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Next, there will always be uncertainty. If there is an earlier legal interest or the purchaser is held to have notice of an equitable interest, then the title may be badly affected and, in the worst cases, the purchase money thrown away. Meanwhile, the holder of an equit-able interest is also at risk: it may be lost if somebody purchases the land without notice.

It has been apparent for centuries that registration is the best way to deal with these issues. Purchasers can discover registered rights by the simple act of looking at the register.

Suppose Carla contracts to sell her land to Davina. Carla subsequently transfers the land to Edwina. If Davina registers her interest (an estate contract), Edwina can readily discover it and will be bound by it (whether or not she checks the register). Usually, registration systems protect purchasers (such as Edwina) against unregistered interests.

In England, there have been three forms of registration. Registration of deeds is the oldest. It identifies the sort of document that must be registered. Despite being the oldest, it was never widely applied and has been dropped. Next there is registration of land charges. This is designed to replace the doctrine of notice: listed interests (mainly equitable interests such as Davina’s estate contract) have to be registered. Finally, there is registration of title. This requires ownership to be registered, with adverse rights (such as estate contracts) also requiring entry on the register. It is often called land registration and, once registered, land within the scheme is called registered land. This is the most ambitious form of registration. Introduced in the 1860s, it has been slowly expanded so that over 90 per cent of titles are today registered, with close to 100 per cent registration expected within the next decade. Where title is registered, neither the doctrine of notice nor land charges applies. Though notice and land charges both still apply to the remain-ing 10 per cent of titles, they are obsolescent and not worthy of prolonged analysis.

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Land charges

The system of land charges is governed today by the Land Charges Act 1972, though it has been little changed since 1925. It is a limited system, focused on registering equitable interests. In particular, legal fees simple and leases cannot be registered. It follows that registration is a warning of the existence of equitable rights, but it does not prove ownership and cannot begin to take the place of the title deeds. The purchase of land is made no easier, though it is made more certain.

What rights can be registered? The wording ‘land charges’ conjures up mortgages, but the list of registrable interests is much wider than that. In particular, equitable mort-gages,⁴estate contracts and restrictive covenants are included. Interests under trusts of land are deliberately omitted. Two trustees can overreach these interests on a sale or mortgage, so that the interests take effect against the money proceeds of the transaction rather than against the land.⁵Because interests under trusts will not normally bind pur-chasers, there is no reason to bring them within the registration system. There are some non-listed equitable interests and these remain subject to the doctrine of notice.

Equitable proprietary estoppel provides one example.

4 More technically, it is mortgages (legal or equitable) not protected by the deposit of title deeds which have to be registered. The deposit of deeds provides its own warning to purchasers.

5 For overreaching, see p. 16, above and pp. 160–3, below.

Main issues and rules

How does the system work? As there is no register of ownership, we cannot use a regis-ter relating to the land. The solution is to regisregis-ter against the name of the legal owner.

When the land is later sold, the purchaser will request a search against the names of the owners over the years. The land registry conducts the search and gives the purchaser a search certificate containing the results. If an interest is registered, it automatically binds purchasers. If a registrable interest has not been registered, then it will fail against a pur-chaser. Indeed, a purchaser who obtains a clear search certificate (one not identifying a registration) will be protected even if an interest has been entered on the register.⁶ This system of registering and searching is administratively simple and has long been computerised.

Unfortunately, the system is fundamentally flawed, even leaving aside the limited range of interests covered. As the cases show, it is common to get the name wrong. This may be simply a typing error, but more problematic are cases where an individual’s name may not be known accurately by the parties. Is Andy Smith really Andy Smith, or is it Andrew Smith? Problems often occur because the full names of the individual are not always used. Thus in Diligent Finance Ltd v Alleyne⁷a wife registered a claim against her husband as Erskine Alleyne, unaware that his full name was Erskine Owen Alleyne. A search by a mortgagee against the full name failed to identify the registration against the shorter version. Because the holder of a clear search certificate succeeds, the mortgagee defeated her claim. Even worse problems were feared because purchasers may not be aware of the names of owners of the land prior to the 15-year title period. It is not feasible to update registrations when land is sold: neither the interest holder nor the registry may be aware of the sale. In practice, this unknown names problem has not proved serious so far, though the land registry pays compensation to purchasers who are bound by undiscoverable land charges.⁸

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Land registration Introduction

Land registration sets out to record both ownership and other interests (legal and equit-able) in the land, the register being based on a map of the relevant plot. This makes it far more comprehensive than the land charges scheme. The task facing the purchaser of registered land is quite straightforward. Instead of going through lengthy and possibly opaque deeds, the purchaser discovers from the register who owns the land and what adverse rights there are affecting it. Significantly, this information is guaranteed to be accurate.

That is the aspiration, though the reality is a little different. For a start, purchasers are concerned about more than the state of title, so registration doesn’t answer all a purchaser’s questions. For example, purchasers will be interested in the physical state of the premises (this requires a survey), and whether there is planning permission for the

6 Land Charges Act 1972, s 10(4).

7 (1972) 23 P&CR 346.

8 Law of Property Act 1969, s 25.

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intended use. These issues lie entirely outside the registration system. Even as regards interests in land, we shall see that some enjoy overriding interest status and bind pur-chasers despite not being entered on the register.

Registration of title involves a complex statutory scheme. It was recently updated by the Land Registration Act 2002 (LRA or 2002 Act), which introduced significant changes.

Though most of the basic ideas pre-date the 2002 Act, the earlier cases have to be viewed with caution. The present survey can do no more than sketch the principal attri-butes of the system: no attempt is made to deal with all the details and statutory pro-visions. We should also remember that the system is as much about the procedures involved in purchases and other dealings with land as it is with priorities. We are not especially interested in that element of it, though in Chapter 7 we investigated the significance of e-conveyancing introduced by the 2002 Act.

The development of registration of title

Although land registration dates back to 1862, it became significant only after compul-sory registration was introduced in London in 1897. Compulcompul-sory registration then, as now, means compulsory registration on sale or other triggering events. Over a century later, there is still some unregistered land in London. Compulsory registration gradually expanded beyond London, until all of England and Wales became covered in 1990. The

‘triggers’ for first registration have been expanded over the decades, so that any transfer of the legal title (including gifts and on death) has to be registered. The outcome is that just over 90 per cent of titles are registered, that percentage increasing by around 1 per cent each year. However, only about 69 per cent of the land area was registered by 2009.

This is because, until 1990, compulsory registration concentrated on urban areas where plots were smaller and more easily mapped. The land registry is now attempting (with some success) to encourage large landowners to register their titles on a voluntary basis.

The 69 per cent figure is growing by around 4 to 5 per cent a year.

Categories of interest

There are three categories of interest, around which the priority rules are constructed.

They are: registered interests, protected interests (we will call them ‘minor interests’, as did the 1925 legislation) and overriding interests. Overriding interests are especially signi-ficant and controversial because they are effective without any entry on the register.

Both registered and minor interests should be entered on the register. We refer to registering registrable interests and protecting minor interests. As will be seen in more detail later, the provisions relating to registering and protecting are different. The most important difference is that the system guarantees that registered interests exist, whereas there is no such guarantee for minor interests. Suppose land belongs to Sheila, but Timothy (unaware of this) is registered as proprietor. Timothy’s registration is guaran-teed and will, subject to any overriding interest, defeat Sheila’s original ownership, though we shall see later that she may well be able to claim compensation (‘indemnity’

in the language of the legislation).

This is to be contrasted with protecting minor interests. Suppose that Ursula, the registered proprietor, has contracted to sell the land to Vanya, but the contract is void

Main issues and rules

because it does not satisfy writing requirements. Vanya’s protecting this estate contract (a minor interest) on the register attracts no guarantee: it has no effect on Ursula’s right to deny its invalidity. The only effect of protection is that future dealings with the land would have been bound by the estate contract, had it been valid. Accordingly, we can say that both registered interests and protected minor interests give protection as regards future dealings, but only registered interests confer protection as regards past defects (such as Timothy’s not owning the land before he was registered).

Registered interests

Land registration is a misleading term. What is registered is a freehold or leasehold estate, not the land itself as a geographical area. This is why ‘title registration’ is a more accur-ate term than ‘land registration’. It follows that there can be two or more registered titles in relation to the same plot of land: a freehold title and a leasehold title. There can be good sense in this because the freehold and leasehold titles may be separately sold and mortgaged. It also aided the growth of registration by permitting the registration of long leases despite the freehold not being registered.

The upshot is that both legal fees simple absolute in possession and legal leases over seven years can be registered. Indeed, on creation or transfer they must be registered – whether or not the relevant freehold was previously registered. If the freehold is already registered, then the purchaser or tenant will obtain a legal estate only on the registration of the transfer or lease.⁹If the freehold is not registered, then the ‘first registration’ rules apply. The new fee simple owner or tenant has two months in which to register. The logic here is that there is a normal sale or lease under unregistered land procedures (there is no registered title to consult); registration is required only after the freehold or lease has been acquired.

The lease deserves a little more attention. The seven-year requirement (reduced from 21 years by the 2002 Act) has been chosen to distinguish between two categories of leases. Short leases are likely to be created informally and without legal advice: requiring registration would be unrealistic and unduly burdensome. As well as being more formal, longer leases are more likely to be assigned or charged, for which the benefits of regis-tration are most significant. The choice of the seven-year period is necessarily somewhat arbitrary; the reduction to seven years by the 2002 Act was one of the more controver-sial aspects of the reforms. It is anticipated that when electronic conveyancing is fully in force, the period will be further reduced to three years.¹⁰The thinking behind this is that leases over three years already require a deed and that electronic registration will be no more burdensome.

Exceptionally, two types of shorter lease must be registered. These are discontinuous leases (such as a lease for the first week in May for the next four years) and leases taking effect in more than three months’ time (future leases). They require registration because otherwise they are likely to be undiscoverable by purchasers.¹¹

9 LRA, s 27.

10 This is authorised by LRA, s 118.

11 LRA, s 27(2)(b)(ii) and (iii). There is no compulsory first registration (i.e., where the landlord is not registered) of discontinuous leases: s 4.

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When land is registered, a somewhat confusing complication is that there are three alternative forms of title. Virtually always, absolute title is approved by the land registry.

The effect of this is that there is the normal full guarantee of the new title on first regis-tration – subject only to entries on the register and overriding interests. Occasionally, some or all of the deeds relating to the property are missing on first registration, so that nobody knows what adverse claims might exist. To cover this type of problem, the land registry may give either qualified title (no guarantee as regards an identified defect, such as a missing deed) or possessory title (no guarantee – designed for titles based on adverse possession).

Leases can have the same three titles, but there is also good leasehold title. This is designed for cases where the landlord’s title is unregistered and accordingly unknown to the register. The lease is guaranteed, but not as regards any problems with the landlord’s title. Good leasehold title is becoming redundant now that nearly all landlords are regis-tered. Qualified, possessory and good leasehold titles are all designed to be interim; they may be converted to absolute titles later.

Freehold and the leasehold estates are registered with their own titles (or files). Other interests can also be registered, though only as part of an existing freehold or leasehold title. They are listed by LRA section 27. In addition to transfers and leases, section 27 includes other legal interests in land. The most important examples are legal charges and express legal easements. It might be thought rather odd that we continue to distinguish legal and equitable interests within the registration system.

What is the effect of making an interest registrable? First, it must comply with regis-tration requirements before it can take effect as a legal interest.¹² This means that an entry must be placed on the title of the land affected. Where separate land is benefited, a further entry may be required on that land’s title. Thus an easement requires an entry on the title of both the burdened and (if registered) the benefited land. Next a registered interest is guaranteed and so enjoys enhanced priority status (as mentioned above). This guarantee is most important for transfers, leases and charges. These are common and important transactions in which the assurance of getting a good title is vital. It is less clear that the other registrable interests deserve that status.

Minor interests

All other interests should be protected by way of a notice or restriction on the relevant registered title. Without such an entry, the interest will fail against a later registered dis-position (unless it constitutes an overriding interest). The notice is the normal method of protection: it ensures that the protected interest can bind a purchaser. As we have seen, it carries no guarantee that the interest exists. Any interest in land can be protected by notice, subject to three main exceptions.¹³First, interests under trusts cannot be so protected. This is because a restriction is the more appropriate entry, as discussed below.

Second, leases not exceeding three years cannot usually be protected. There are good reasons for not requiring entry of short leases, given that they are often entered into

12 When e-conveyancing is compulsory, it will have no effect at all without registration.

13 LRA, s 33.