Light at the end of the indemnity tunnel
7th April 2015
The recent Court of Appeal decision in the case of Swift 1st Limited v The Chief Land Registrar [1] has reinforced the good news of the first instance decision, which should make life easier for lenders and claimants seeking an indemnity from the Land Registry under Schedule 8 of the Land Registration Act 2002 (the Act). Such indemnities have previously been difficult to obtain, making the state guarantee a somewhat empty promise, but it is hoped that this authoritative case may put an end to, or even reverse, that trend.
The issue on appeal was whether the proprietor of a registered charge, which turns out to have been a forged disposition, is entitled to payment by way of indemnity in circumstances where the registered proprietor and rightful owner of the property was in actual occupation at the date of the disposition.
Facts
Swift 1st Limited (Swift) had provided an advance of £66,750 by way of remortgage of 15 Elmstead Road, Ilford, Essex, purportedly upon the application of Mrs Rani, the registered proprietor, and purportedly signed by Mrs Rani. Swift’s charge was registered at the Land Registry on 2 June 2006.
The borrower defaulted almost immediately and Swift issued possession proceedings. These were defended by Mrs Rani on the basis that the charge had been forged, as had an earlier charge to GE Money. As a result of Mrs Rani’s counterclaim, Swift’s charge was set aside and was removed from the register. Following cancellation of its charge, Swift claimed an indemnity from the Land Registry under Schedule 8 of the Act.
In accordance with section 1(1)(a) of Schedule 8 a person is entitled to be indemnified if he suffers loss by reason of rectification of the register. Section 1(2)(b) provides that the proprietor of a registered estate or charge claiming in good faith under a forged disposition is, where the register is rectified, to be regarded as having suffered loss by reason of such rectification as if the disposition had not been forged.
The Land Registry refused Swift an indemnity in on the basis that rectification did not prejudicially affect Swift’s title as Swift’s title was always subject to Mrs Rani’s overriding interest, which had priority under section 29 of the Act.
At first instance, the court held that the overriding interest argument was not open to the Land Registry because the wording of Schedule 8 meant that the disposition was regarded as genuine, and Swift was therefore entitled to an indemnity.
Appeal
On appeal, the Chief Land Registrar contended that alteration by removal of Swift’s charge did not amount to rectification of the register in this case because it did not prejudicially affect Swift’s title to the registered charge so as to cause loss under 1(1)(a) of the Act. The registration was always subject to Mrs Rani’s right, as a person in actual occupation of the property (and as such a person with an overriding interest), to apply for rectification by removal of Swift’s charge. Swift’s response was to rely upon the provisions of 1(2)(b) that it was deemed to have suffered loss by reference to an assumption that the charge had been validly executed, as it had acted in good faith.
The Law
The Court of Appeal considered the decision in Re Chowood’s Registered Land [2] which was decided under section 83 of the Land Registration Act 1925 (LRA 1925). In Chowood it was held that no loss had been suffered for the purposes of section 83 where the register had been rectified in order to give effect to an overriding interest binding on the registered title. The Court of Appeal did not doubt that Chowood was correct. Both sides accepted that there was no material difference between the provisions of section 83 and those of paragraph 1(1)(a) of Schedule 8 of the Act. Swift therefore accepted that it could not establish loss and prejudice for the purposes of its indemnity claim unless either Mrs Rani’s right to set aside the forged charge did not take effect as an overriding interest, or loss was established by reason of the deeming provisions of paragraph 1(2)(b) of Schedule 8.
The Court of Appeal went on to consider: how the Chowood principle operates, if at all, in a case involving a forged disposition; the legislative history of the indemnity provisions; the controversial decision in Malory Enterprises Limited v Cheshire Homes (UK) Ltd [2002] [3] (in which it concluded there was a lack of due regard to the law or facts in that case); and The Law Commission’s report of 2001 on “Land Registration for the Twenty-First Century”.
Decision
It decided that the history of section 83 and now of paragraph 1(2)(b) was not sufficient in itself to enable one to treat those provisions as being of no application where the overriding interest enforced against the registered title consists of a right to seek rectification (now alteration) of the register on the ground that the disposition was forged. That a right to seek rectification in these circumstances is capable of subsisting as an overriding interest does not alter the fact that the registered proprietor seeking the indemnity is claiming in good faith under a forged disposition and is to be regarded as having suffered loss by reason of the rectification of the register as if the disposition had not been forged.
The application of the Chowood principle in this case would lead to the conclusion that there has been no loss, which is directly contrary to the statutory presumption under 1(2)(b). In cases of forgery, the fact that the right to have the forged disposition set aside exists as an overriding interest, adds nothing. The circumstances in which the overriding interest is enforced are precisely those contemplated by what is now 1(2)(b). If the Act or the LRA 1925 intended the deemed loss provisions to provide a limited exception for cases involving the enforcement of an overriding interest, some much clearer indication would be necessary in the language of the legislation and the court would have expected it to have been flagged up in the Law Commission report.
The appeal was therefore dismissed.
WM Comment
The potential for alteration means that the register is not wholly indefeasible. A proprietor’s title is always subject to the overriding power to alter the register under Schedule 4 of the Act, although this is subject to limitations. Previously, technical and interpretation arguments have enabled the Land Registry to avoid indemnity claims in cases involving overriding interests and forged documents (of which there have been, of course, very many). However, the Court of Appeal’s analysis and decision in Swift should mean that, from now on, it will be easier for lender and claimants to obtain compensation.
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[1] [2015] EWCA Civ 330
[2] [1933] 1 Ch. 574
[3] [2002] EWCA Civ 151
