Rectification of the title register and ‘exceptional circumstances’, in the light of Dhillon v Barclays Bank Plc [2019] EWHC 475 (Ch)

Introduction

This article aims to explain the criteria for rectification of the title register at the Land Registry under Schedule 4 Land Registration Act 2002, and in what circumstances the Court may refuse, on the grounds of exceptional circumstances, to order such rectification – in particular by reference to the recent and unusual (indeed, exceptional) case of Dhillon v Barclays Bank plc.  A hypothetical scenario will then be considered in that context.

Rectification of the title register: key principles

Pursuant to s65 Land Registration Act 2002, Schedule 4 has effect: and Schedule 4 provides the rules applicable to alteration of the title register generally. The key parts of Schedule 4 are:

• Paragraph 1 – which provides that in Schedule 4 “references to rectification, in relation to alteration of the register, are to alteration which— (a) involves the correction of a mistake, and (b) prejudicially affects the title of a registered proprietor.”
• Paragraph 2 – alteration pursuant to a court order – which provides that “(1) The court may make an order for alteration of the register for the purpose of— (a) correcting a mistake, (b) bringing the register up to date, or (c) giving effect to any estate, right or interest excepted from the effect of registration.”
• Paragraph 3 – which provides that “(1) This paragraph applies to the power under paragraph 2, so far as relating to rectification. (2) If alteration affects the title of the proprietor of a registered estate in land, no order may be made under paragraph 2 without the proprietor’s consent in relation to land in his possession unless— (a) he has by fraud or lack of proper care caused or substantially contributed to the mistake, or (b) it would for any other reason be unjust for the alteration not to be made. (3) If in any proceedings the court has power to make an order under paragraph 2, it must do so, unless there are exceptional circumstances which justify its not doing so.”
• Paragraphs 5 and 6, which provide an equivalent set of rules to those above for rectification resulting from simple application to the Land Registry (as opposed to an application to the Court for an order).

It will be noted from the foregoing that rectification is the correction of a mistake which correction prejudicially affects the title of a registered proprietor (e.g. changing/removing a registered proprietor of the land itself or removing a registered charge). Unless they are in possession, a lender facing an application for an order to remove a registered charge will not, however, benefit from the provisos in paragraph 3(2)(a) or (b) (or their equivalent in paragraph 6(2)(a) or (b) if the matter is being dealt with in an application to the Land Registry); but in such circumstances, the proviso at paragraph 3(3) (see also paragraph 6(3)) nevertheless does apply, namely that the Court (or the Registrar) must order correction of a mistake where it amounts to rectification unless there are exceptional circumstances which justify not doing so.

Most of these provisions have been the subject of some judicial scrutiny in reported cases, but this article is particularly concerned with the meaning of ‘exceptional circumstances’.

Dhillon v Barclays Bank plc

The facts and the decision

The circumstances of Dhillon v Barclays Bank plc were highly unusual: the claimant was a woman who was originally the secure tenant of a property in London E5 (“the Property”).  She had apparently been the victim of fraud by her then husband who, in September 2002, had impersonated her in exercising her statutory right to buy the Property from Hackney Council before transferring (again impersonating her) the Property to a company called Crayford Estates Limited (“CEL”); CEL charged the Property to Woolwich plc which the first defendant, Barclays Bank plc (“BB”) was successor in title to (thus, “the BB Charge”).  The Chief Land Registrar was the second defendant.  The claimant sought alteration of the title register to remove the BB Charge on the basis that it derived from the forged transfer to CEL.  HHJ Pelling QC heard the case, sitting as a Judge of the High Court.

Whilst the claimant gave a number of conflicting accounts as to what had happened, over several years and in both criminal and more than one set of civil proceedings, having dealt at length with whether and to what extent the claimant’s account could be believed (largely, it largely could not) HHJ Pelling QC made the following key findings of fact:

• The claimant had not executed or authorised either the transfer to her (Transfer 1) or the transfer to CEL (Transfer 2). Both Transfer 1 and Transfer 2 were therefore void dispositions;
• However, without the funding provided by CEL/Woolwich plc (later, BB), neither Transfer 1 nor Transfer 2 would have occurred as the claimant had no funds in order to take advantage of her statutory right to buy;
• CEL later became insolvent and was dissolved. The Claimant later applied for a vesting order in relation to the Property, which order was made by Master Moncaster in October 2010 (“the Moncaster Order”) which ordered that “the land specified in the Attached Schedule do vest in [the claimant] for all the estate and interest which immediately prior to its dissolution was vested in [CEL] …”;
• The claimant had therefore become the registered proprietor again pursuant to the Moncaster Order but, HHJ Pelling QC concluded, subject to the BB Charge.

In deciding that he would not order alteration/rectification of the register to remove the BB Charge, the learned Judge’s analysis (in terms of the points relevant to this article) was as follows:

• Transfer 1 and Transfer 2 were both ‘mistakes’ for the purposes of Schedule 4 LRA 2002;
• The registration of the BB Charge was part of those mistakes, being a ‘derivative’ mistake (see Macleod v Gold Harp Properties [2014] EWCA Civ 1084);
• As to whether there were ‘exceptional circumstances’ under Schedule 4 paragraph 3(3):
  • What constitutes ‘exceptional’ in this context is to be tested by applying the definition set out in Paton v Todd [2012] 2 EGLR 19 at para. 67 – that to be exceptional the fact or matter relied on has to be “ … out of the ordinary course, or unusual or special, or uncommon … it cannot be one that is regularly or routinely or normally encountered … which have a bearing on the ultimate question whether such circumstances justify not rectifying the register”;
  • In each case it is a question of fact whether in the particular circumstances there are exceptional circumstances as to why the alteration sought should not be made – by analogy, see Walker v Burton [2013] EWCA Civ 1228 at para.100;
  • The central submissions made by BB and the Chief Land Registrar were correct and amounted to ‘exceptional circumstances’, namely that the claimant would, if rectification was ordered, be left with an unencumbered property for which she has never paid a penny, could not afford to acquire at the time she purported to exercise her right to buy down to the date of purported transfer first to her then CEL and in respect of which (prior to Transfer 1) she was only ever a tenant. But for the Moncaster Order, the claimant was never entitled to and could never have hoped to acquire the unencumbered freehold of the Property:
    • If and to the extent that the claimant relied on the Moncaster Order then she ought to be in no better position than CEL would have been in had it still been the registered proprietor. CEL had borrowed money in order to finance the acquisition of the Property and had charged the Property as security for its borrowings from BB. As between CEL and BB, those facts would constitute exceptional circumstances that would justify a court not making the order sought. To the extent that the claimant relied on her position as registered proprietor by virtue of the Moncaster Order, any alteration that had the effect of placing her in a better position than CEL would have been in would not be just and would provide an exceptional reason why the register should not be altered;
    • The only basis on which the claimant could say that she was entitled to be placed in a better position than CEL would have been in was if she was entitled to adopt and rely on Transfer 1. However, that was a void disposition which she had not signed, seen or been a party to and one which had also never been registered.

Commentary

There can be little doubt that HHJ Pelling QC was faced with somewhat of a quandary: on the face of it, the claimant was the victim of fraud by her then husband and had not signed up to the BB Charge; on the other hand, the effect of the Moncaster Order was that, if successful in her claim for removal of the BB Charge, she would become the owner of the unencumbered Property notwithstanding that, on HHJ Pelling QC’s findings of fact, she could never have afforded to buy it. It seems (from paragraphs 34, 68 and 72 in the judgment) that the learned Judge was particularly guided by the fact that the Moncaster Order was, in the Judge’s view, never intended to put the claimant in a position better than that of CEL.  However, that is not, it seems, what the Moncaster Order expressly provided (see quote above) and nor was it clearly implied in the Moncaster Order.  The Moncaster Order was, it seems, a simple vesting order of the freehold estate in the Property in the claimant.

Nevertheless, HHJ Pelling QC’s reliance on the Moncaster Order provided a neat way of determining (or at least to a great extent assisting to determine) why the circumstances genuinely were, in his view, exceptional. However, it was, with the very greatest of respect to the learned Judge, in reality somewhat of a ‘gloss’ on the real exceptional circumstances which were the claimant’s impecuniosity and the inherent unfairness of the proposed alteration/rectification i.e. that she should become entitled to the Property free from the BB Charge.

This case shows that the question of whether ‘exceptional circumstances’ exist remains dependent on the facts of individual cases and is resolved, ultimately, in an impressionistic manner. That creates uncertainty and inherent difficulty for litigators advising their clients on either (or any) side of such disputes.

A hypothetical scenario

Scenario: commercial shop tenant under a 20-year lease (of which say 5 years have run already) registered with absolute title despite (impersonator) landlord not having good title to grant same; real landlord applying to Court cancel leasehold title

In this scenario, the tenant is (unlike BB in Dhillon v Barclays Bank plc) likely to be ‘in possession’ of the property and thus also entitled to the benefit of the Schedule 4 paragraph 3(2)(b) proviso (would it be ‘unjust for the alteration not to be made’?) but also the potential detriment of the paragraph 3(2)(a) proviso (did the tenant through ‘lack of proper care cause or substantially contribute to the mistake’?), as well as the potential protection of paragraph 3(3) (exceptional circumstances to justify not altering the register).  Assuming the latter does not apply (let us assume that the tenant had no obvious reason to question the ‘landlord’s’ title) then the questions of ‘unjustness’ and ‘exceptional circumstances’ are, in some ways, merely flip sides of the same coin.

Key factual points might include:

1. Why should the real landlord be saddled with a tenant with whom it has no relationship? And one which prima facie has security of tenure under Part II of the Landlord and Tenant Act 1954?
2. What if the tenant has a weak covenant and no guarantor?
3. On the other hand, if the tenant has been trading successfully for 10 years and has a business dependent on using those premises, and is paying the rent, should they not be allowed to remain?
4. What if the ‘tenant’ has effected improvements to the premises, the value of which they will lose if their lease is cancelled?
5. What impact does any difference between the rent under the ‘lease’ and a market rent have? E.g. if the tenant is significantly under- or over-paying vis-à-vis a market rent? What are the other terms of the lease (repairing, insuring, break clauses etc)?
6. Why was the landlord unaware of the tenant? Did it believe the premises to be unoccupied, perhaps pending a redevelopment? Should it have a kept a closer eye on the premises?

It can be seen from the list of issues above that whether or not there are exceptional circumstances is (a) intensely fact-dependent and (b) not an easy question to answer in this hypothetical scenario. However, are any or all of the issues highlighted above actually ‘exceptional’ matters within the meaning of Paton v Todd?  It might well be thought that point 1 and point 6 above are the only truly ‘exceptional’ matters, as the rest are really just commercial matters that might well exist more commonly as a result of a bad bargain (from either or both parties’ point of view) when a commercial lease is entered into.

However, if the fake landlord has charged (and made off with) a high premium but set a very low annual rent; or if the ‘tenant’ is merely a shell company with no assets other than the ‘lease’; or if the improvements made by the ‘tenant’ really are very substantial and they have no real prospect of recompense against the fake landlord, then one can see how even ostensibly commercial matters could come within the remit of ‘exceptional circumstances’. Indeed, in Dhillon v Barclays Bank plc, the ‘exceptional circumstances’ found were really, ultimately, commercial points about whether the claimant could have afforded it buy the Property, weren’t they?

Conclusion

In summary, Dhillon v Barclays Bank plc is an interesting recent example of the application of the ‘exceptional circumstances’ test in paragraphs 3 and 6 of Schedule 4 LRA 2002; and in the author’s view shows just how fact-dependent, impressionistic (and, thus, perhaps inherently unpredictable) an exercise the application of that test is.  Whilst in Dhillon the overall fairness of the situation may have led to a conclusion which most would tend to agree with, the hypothetical scenario above regarding a commercial ‘tenant’ under a forged lease is an example of a scenario where the test is rather less easy to apply with a satisfactory conclusion.  It will be interesting to see what further examples of ‘exceptional circumstances’ materialise as the number of reported cases relating to Schedule 4 LRA 2002 increases, over time.

This article was first published in Thomson Reuters Practical Law Property Litigation Column.