Purchaser and Beneficial Co-Owner

Introduction

In order to answer this question the paper will critically discuss the protection given to purchasers and the protection given to beneficial co-owners of property. The context of this discussion will refer to actual occupation. This paper will first begin by critically discussing how conveyancing has been made easier, through registration. Second, this paper will critically discuss how purchasers are offered protection. Third, this paper will critically discuss the importance of protecting beneficial interest. Fourth, this paper will discuss actual occupation and overriding interest. Fifth, this paper will analyse whether the current system is satisfactory and highlight the shortcomings. Lastly, this paper will conclude its findings.

Making Conveyancing Easier – Through Registration

The traditional custom for conveyancing did not sufficiently describe the ownership of land that exists outside of title deeds. The Land Registry Act was created in 1862, with the Land Transfer Act 1875 following after. These Acts were complete failures, because the regulations were voluntary in nature.[1] In 1897, the area of London County Council mandated compulsory land registration.  In 1925, The Land Registration Act reaffirmed previous legislation with new terminology and a new structure, but it did not extend its outside of London. It has been gradually expanded.[2] In 1950, compulsory registration was proposed to extend to Surrey. In 1956, an audit was taken of the Land Charges Registry. This registry was a names-based registry and established in 1925. The Land Charges Registry was in operation well before computers became applied in daily business practices; as such, the Land Charges Registry dealt with physical paper files.[3] The sheer amount of material that the Land Charges Registry held made it a very large, slow department. The Roxburgh Report, written well before computers were commonly used, concluded the Land Charges Registry was inefficient because it lacked organisation.[4] The Roxburgh Report concluded that the future was with a title-registration system.[5] Thus a patchwork developed, and conveyances had to be aware of whether the land was registered and whether it was in an area where it would have to register.

In December 1990, the whole all of England and Wales came under compulsory registration.[6] The Land Registration Act 2002, which replaced the Land Registration Act 1925 Act, has been described as "the most revolutionary reform to the conveyancing system in England and Wales that has yet taken place".[7] Its objective was to create a comprehensive and precise register of land title which could facilitate accurate and efficient investigations of registered properties. It changed the entire conveyance system and fully grasped ‘Electronic conveyancing’, when it came into effect in 2006. The simplicity and certainty that that system brings is undoubtable.  As a result, unregistered land is now being phased out with only 5% of transactions being unregistered. At some point unregistered land will be forcefully phased out to bring all land under the registration system.[8]

Protecting purchasers

After 1925 in all concurrent interest (where there is beneficial interest behind a trust), a trust for sale was imposed.[9] This trust was an investment notion, where trustees were obliged to sell the property unless all were in agreement that the sale should be postponed. The trustees were the legal owners[10] and were managers of the property, they managed it for themselves and any number of other beneficially entitled[11] in equity, behind the trust.[12] This way of doing things provided the purchaser with the protection that was required. The purchaser should be able to buy property rest assured that they are getting a protected legal title[13] irrespective of any beneficial entitlement in equity, provided that the purchase monies was paid to two legal owners. This practice came to be known as overreaching[14]. Overreaching favours the purchaser and places equitable interests in a vulnerable position; the purchaser could acquire the land free from acknowledging or respecting the beneficiaries’ equitable interest. The burden was switched onto equitable owners that had concurrent interests.

They now faced the risk in overreaching[15] transactions. Essentially the beneficial owner’s rights were converted from an interest in land, into an interest of a notional sum from the proceeds of sale. This however allowed the trustees to simply defraud the equitable owners.[16] This operated through the curtain principle, which places a curtain in front of equitable interest which frees the purchaser from concerning themselves with it. Therefore, the ‘effect of overreaching is to make notice irrelevant’[17]. In State Bank of India v Sood [18] the Court of Appeal harshly held that it was not necessary that overreaching ensured that the interest was replaced with the purchase price. Overreaching successfully operated in City of London Building Society v Flegg[19] where the purchase price could only be recoverable if this was left over after the mortgage had been paid and the sale of the property. The case of Midland Bank Trust Co v Green (No.1)[20] demonstrates how overreaching does not require adequate consideration to paid[21]. A beneficial interest can only be protected by entering a restriction under section 40(1) of the LRA 2002. This restricts the owner from creating a registerable disposition. However, overreaching can overcome this. The impact of overreaching is that the interest will revert back to the trustees through a resulting trust. This ensures that those who made contributions to the purchase price of a piece of land ‘should hold a proprietary right proportionate to their contribution’[22]. The equitable interest is converted back into the purchase money which was paid in.

Protecting beneficial interest

The trust for sale operated for seventy years, until prompted by Law Commission Report[23] the trust of sale was replaced by the  trust of land as in introduced by the Trusts of Land and Appointment of Trustees Act 1996 (“ToLATA”). The aim of ToLATA was to re-shift the protection back to beneficiaries. In turn it gave trustees of land more powers to deal with the land. These wider powers were however balanced through the trustees having to have regard “…to the rights of the beneficiaries.”[24] Nevertheless, s.6(5) ToLATA is ambiguous in telling us what type of rights the trustees should  have regard to. It does not describe the rights of beneficiaries outside of trust law. ToLATA also mandates that the trustees should consult all beneficiaries of full age before taking decisions that relate to the land.[25] This provision extends to all new trusts, however, a trust deeds can exclude this.[26] The ideal way in which a beneficiary should protect their interest is by placing a restriction on the register, stating that overreaching cannot take effect without the beneficiaries consent. One criticism of this regime is that the consultation procedure in not so different to its revoked predecessor s.26(3)[27] which the Law Commission considered to be weak.[28] These changes do not extend to protecting unsuspecting beneficiaries that are not aware of a prospective sale, through the legal owner. Moreover it does not protect their interest through the restriction as outlined above. This would mean the property is sold from under their feet and they are left with the new owner who will battle them in court and most likely have prevailing rights.

Actual occupation

The actual occupation doctrine has been used to protect beneficiaries behind a trust. The doctrine becomes an overriding interest to provide protection to beneficiaries that are in actual occupation of the property. In Hodgson v Mark[29] an elderly lady had an equitable interest in a house and was an actual occupier. At first instance it was held actual occupation should be construed to mean an actual, apparent occupation but because she shared her occupation, it was not apparent. On appeal, the court gave the words literal meaning from the Act and whether it was one of fact. As a fact, she was in actual occupation of the house and therefore held an overriding interest.

In Williams & Glyn’s Bank Ltd v Boland[30] the court held there was an overriding interest of actual occupation.[31] This case is often cited as a comparator to Flegg. A person in actual occupation can have their rights overreached, if the purchase money is paid to two trustees. In Boland money was paid to only one trustee and thus overreaching failed to operate. Mrs Boland was allowed to remain in the property over the bank’s interest. This established that occupiers of property could establish an overriding interest which in effect undermined the register. This case also suggests that occupation ‘extends to undiscovered and undiscoverable occupation’.[32]

Another case which relied on the trigger of actual occupation was Kingsnorth Finance Co Ltd v Tizard[33]. This case involved a wife that did not live with the husband, but returned to the house from time to time to collect her clothes from her wardrobe. The husband wanted to borrow on a second mortgage, the lender sent a surveyor to see the house and inspect for other interests. The husband arranged for the surveyor to come around when the wife would not be there, the only evidence of the wife’s interest was the wardrobe in the house. Under the old doctrine of notice it was held the lender was bound by the wife’s interest, he should have rummaged around the drawers and wardrobes. The court said a constructive trust arose where, the husband attempted to conceal occupation so that a prospective purchaser would not receive imputed notice of the wife’s interest.[34] This demonstrates the importance of occupation and how it “serves to put a purchaser on notice that the occupier might have rights over the property”[35].

How is it acquired?

Actual occupation was previous found under s.70(1)(g) LRA 1925, it has now been recast under Schedules 1 and 3 of the LRA 2002. There two categories of overriding interests including, an interest which overrides first registration and then an interest which overrides subsequent registerable dispositions respectively. There are three ingredients that are needed to establish an overriding interest, under paragraph 2, Schedule 3 LRA 2002. Firstly, the claimant has to show they have a relevant ‘interest’ i.e. a propriety right in the land.  Secondly, the occupier will have to show they fall within the excepted paragraph 2. Third they will have to show they are in actual occupation.

What is an interest?

The beneficiary claiming actual occupation will have to prove that they have a relevant ‘interest’. What is a relevant ‘interest’? In the case of Link Lending Ltd v Bustard[36] the claimant was the registered proprietor of a house and suffered from Alzheimer’s. Her friend persuaded her to transfer the title of her house to him at a gross under value. The friend then mortgaged the house to the lender. When the lender tried to assert their right on the property the claimant/beneficiary applied to set aside the transaction for undue influence and get the property back. The court held that the claimant had an interest in property and her right to set aside is an interest. Second she was in actual occupation of the property at time of the mortgage. Although she was in a mental hospital, she was there involuntarily and continued to visit the house as well as intending to return.

Paragraph 2, Schedule 3 LRA 2002

The recent change that has been brought about has come through Paragraph 2, Schedule 3 LRA 2002. This provision restricts how actual occupation is obtained by, denying the occupier actual occupation when the purchaser had did not have “actual knowledge”[37] of the occupation. This provision introduces a notice-based test,[38] which drastically alter the nature of this right. Again this is an attempt to shift the protection in favour of the purchaser.[39] The doctrine of notice operated to protect purchaser of unregistered land. In the case of Boland Lord Wilberforce equated notice to actual occupation but disallowed that it be applied equally. Indeed this is not the doctrine of notice at work but rather the inspirational force behind the drafting of Paragraph 2, Schedule 3 LRA 2002. The second limitation the paragraph arises where occupation “would not have been obvious on a reasonably careful inspection of the land”.[40] This is controversial because it appears to removes the presumption laid down in Boland that actual occupation ‘extends to undiscovered and undiscoverable occupation’.[41] This section certainly designed to prevent the overriding status of undiscoverable rights and introduces the constructive based notice into actual occupation. As a result of this section, solicitors for lenders and buyers are now extremely vigilant in finding out exactly who lives in the relevant property and what their interests are.

A person in actual occupation must register their interest but without registration, a purchaser must make similar enquiries as in constructive notice to take precedence. This is comparable to its predecessor s.70(1)(g) LRA 1925 where actual occupation was an overriding interest, except, where there was a failure to divulge such interests after making enquiries[42]. Even so, a notice-based examination of occupation is what exists by virtue of Schedule 3, paragraph 2, the effect of which is to burden both occupier and purchaser. The burden for purchasers is inquiry about persons in actual occupation and “what rights he or she has in the land.” This duty cannot be discharged through a superficial inquiry of the vendor, as “reliance on the untrue ipse dixit of the [vendor] will not suffice”. [43] The investigation that is conducted must be made of actual occupiers in order to take free of any interests. The occupiers are also burdened through the notice approach. A failure to disclose when a purchaser inquires rescinds the right to receive overriding status. Although this equalizes the balance between beneficiary and purchaser rights, it may be illogical to bind occupiers to yield benefits in that eventuality as Dixon states, “the right-holder knows that the consequences of disclosure will be the loss of the family home”.[44] It is clear that the present-day approach towards actual occupation under the LRA 2002 is making a explicit policy preference in support of purchasers.

What is actual occupation?

The element of actual occupation is essential in order to gain priority.[45] In Chhokar v Chhokar[46] it was held that the wife was in actual occupation and had an overriding interest even during her temporary absence at the hospital. She had an equitable interest in the house and some of her belongings were still there. The court held that there must be some element of continuity. Therefore a temporary absence will not hinder a claim under paragraph 2 of Schedule 3. Similarly, In Hodgson v Marks[47], the meaning of section 70(1)(g)  was not applied as failure to make enquiries as to Mrs Hodgson’s identity was immaterial and she was held to have an overriding interest.  The court took the view the expression “actual occupation” should be read literally meaning “mere physical presence.” Also, in National Provincial Bank v Ainsworth[48], an equitable interest was held to be an overriding interest as the court had to ‘substitute occupation for notice’[49] in order to protect the interest. These interests are however, difficult to discover by making inquiries as they are not registered. In Abbey National Building Society v Cann[50] Lord Oliver clarified the meaning of actual occupation. 

“It does not necessarily, I think, involve the personal presence of the person claiming to occupy. A caretaker or the representative of a company can occupy…..on behalf of his employer. On the other hand, it does in my judgement; involve some degree or permanence and continuity which would rule out mere fleeting presence.”

Judicial attitudes have been different in respect of individuals that attempt to claim actual occupation through an agent. In Strand Securities v Caswell[51] a stepfather was prevented from claiming the right through his stepdaughter who was staying in the property as his agent. In the case of Lloyds Bank v Rosset[52] the fact that builders were engaged and working on the house on Mrs Rosset’s request gave her actual occupation. Quite the opposite in Lloyd v Dugdale[53] an individual was not given an overriding interest because occupation was effected through a corporation that was controlled by that individual. This appears to suggest that it is a prerequisite that the interest holder be the same person in occupation.

Acts of the occupier before taking up of occupation are not going to satisfy the requirement of obtaining actual occupation. For example if the occupier prior to moving in lays carpets and installs furniture this will not technically be regarded as living there. This is what happened in the case of Abbey National Building Society v Cann[54]. The court held there was no actual occupation, because occupation had to have some degree of “permanence or continuity”. Preparatory acts were not enough.  This has now been put on statutory footing where the LRA 2002 states that interest and occupation must exist “at the time of the disposition”.[55] This stops beneficially entitled from occupying the property after purchase but before registration and claiming overriding interests against purchasers.

In the case of Boland the idea that the wife is a “shadow” of her husband’s occupation was rejected. Lord Wilberforce said: “It somewhat faded from the arguments in the present case and appears to me to be heavily obsolete.” This notion of the shadow was embraced in Hypo-Mortgage Services Ltd v Robinson.[56] In this case minor children are “shadows of occupation of their parent”.[57]  Children will not be considered to be in actual occupation independently of their parents. Why the difference with Boland? It can be argued this was another attempt to favour the interests of purchasers in completely rejecting to acknowledge a potentially category of actual occupation.

Under the LRA of 1925, the claimant did not have to have been in occupation of the whole of the land of which they were claiming actual occupation. The case of Ferrishurst Ltd v Wallcite Ltd[58] concerned an option to purchase the lease of land and actual occupation was held to be overriding which related to land greater than what was occupied. This was a harsh decision for purchasers and extending rights for occupiers. This was reversed by the LRA 2002 which states the interest is only available “so far as relating to land of which he is in actual occupation”.[59] Therefore, the interest which overrides will only do so in relation to the land actually occupied by the claimant.

Is the protection satisfactory?

The LRA 2002 has introduced obligatory e-conveyancing, under section 91. This enables prospective purchasers to have access to the register in order to view titles. The conveyances will be made and recorded electronically. These are to “be treated as if it were in writing”[60]. In the Law Commission Report entitled “Land Registration for the Twenty-First Century: A Conveyancing Revolution”[61], it stated that the main objective is to facilitate a means by which titles and interests to land are better protected. This would mean that equitable interest of occupiers will remain unprotected (unless registered) despite being overriding upon actual occupation. The new paragraph 2 in Schedule 3 restricts actual occupation from arising unless there is actual and constructive notice. This means that actual occupation that will have overriding effect will only arise through law, such as resulting or constructive trusts or through estoppel. This is a narrowing of the right. The object of the LRA 2002 seems to be to move to a system where positive registration is now required. We can see a gradual attempt to phase out of the occupiers’ unregistered (overriding interests) of actual occupation to safeguard purchasers.

Conclusion

The development of overriding interests on the subject of actual occupation has created a tense relationship between purchaser and occupier. In the face of such relations, the law has laboured to balance the hardships in the relationship. Statutory and common law, as they matured, have eased the burden of “intermediate, or hybrid, class” of overriding interests advanced by occupiers.[62] The two opposing interests are by no means of legal equivalence. What seems to be at play here is judges making policy decisions to protect the housing market. No purchaser of property should be discouraged to find an old couple living in the basement on move-in day, which will ultimately lead to an overriding interest of actual occupation. This is not a satisfactory position because compensation cannot be awarded to the purchaser trapped by such an interest. Instead they face an uphill court battle to have their interests recognised. 

Bibliography

Bogusz, B, “Bringing Land Registration into the Twenty-First Century – The Land Registration Act 2002” MLR 2002, 65(4), 556-567

Boone, K (2004), Actual Occupation. Retrieved on 19th November 2005 from the World Wide Web:
http://law.web-tomorrow.com/twiki/bin/view/Main/ActualOccupation

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Green & Cursley, Land Law (5th edn, 2004, Palgrave Macmillan)

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Hogg, J. E, Breakdown of the Land Transfer Acts System in England, 20 L. Q. Rev. 74 -80 (1904)

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Kenny, P H, “Children Are Spare Ribs” Conv. 1997, Mar/Apr, 84-85

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Mayer, P. (1996). Ten Chief Land Registrars. London

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Pascoe, S, “Triumph for Overriding Interests” Conv. 1999, Mar/Apr, 144-149

Pemberton, A. (1992). HM Land Registry – An Historical Perspective. London: HM Land Registry

Smith, R J, “Overriding Interests and Wives” (1979) 95 LQR 501

Smith, R, Property Law: Cases and Materials (2nd edn, 2003, Longman)

Sparkes, P, “The Discoverability of Occupiers of Registered Land” Conv. 1989, Sep/Oct, 342-35

Tee, L, “The Rights of Every Person in Actual Occupation: An Enquiry into section 70(1)(g) of the Land Registration Act 1925” (1998) 57 CLJ 328

Law Commission, Land Registration for the Twenty-First Century (1998) Law Com No 254

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Footnotes

[1] Hogg, J. E, Breakdown of the Land Transfer Acts System in England, 20 L. Q. Rev. 74 -80 (1904)

[2] Pemberton, A. (1992). HM Land Registry – An Historical Perspective. London: HM Land Registry

[3] Joint Law Commission and HM Land Registry Report (2001) Law Com 271, para 1.1

[4] Mayer, P. (1996). Ten Chief Land Registrars. London

[5] H. W. R. Wade (1956). Land Charge Registration Reviewed. The Cambridge Law Journal, 14, pp 216-234

[6] Joint Law Commission and HM Land Registry Report (2001) Law Com 271

[7] Paragraph 1.2 Law commission report 254

[8] s.6 Land Registration Act 2002

[9] s.34(2) and 36(1) Law of Property Act 1925

[10] The legal title of land is statutorily conveyed to co-owners as joint-tenants, s 34 and 36 Law of Property Act 1925

[11] Equitable owners are tenants in common, each tenant is regarded as separate owners having ‘an undivided share in land’

[12] Law of Property Act 1925, s.34 (2)

[13] Fee simple absolute in possession

[14] This is a means by which a prospective purchaser of a legal estate can overreach unregistered or registered equitable interests, irrespective of notice.

[15] s.2 Law of Property Act 1925, and illustrated by City of London Building Society v. Flegg [1988] A.C. 54

[16] City of London Building Society v. Flegg [1988] A.C. 54

[17] Howell. J., ‘The doctrine of notice: an historical perspective’, [1997], Conv. 441, 432

[18] [1997] 2 W.L.R. 421

[19] [1988] A.C. 54

[20] [1981] A.C. 513

[21] However, if no money is left the third party can seek relief in the equity of redemption. 

[22] Haley. M & McMurtry. L, ‘Equity & Trusts’ 2nd edn,  [2009], London: Sweet & Maxwell Limited, p258

[23] Transferring Land: Trust of Land, (H.C. 391) Law Com. No. 181 (1989)

[24] s.6(5) ToLATA 1996

[25] s.11 ToLATA 1996

[26] s.11(2) ToLATA 1996

[27] Law of Property Act 1925

[28] Law Commission Consultation Paper No.94, para 3.12

[29] [1971] Civ 8

[30] [1981] A.C. 487

[31] However, it must be noted that occupation in itself is not enough to assert a right; this is merely a trigger which alerts the purchaser to make inquiries as to their rights.

[32] Sparkes. P., ‘The discoverability of occupiers of registered land’, [1989], Conv. 342

[33]  [1986] 1W.L.R. 783

[34] Equitable interests can now be protected under section 31(1) of the LRA 2002 by entering a notice.

[35] Thompson M.P., ‘The purchaser as private detective’, [1986], Conv. 283

[36] [2010] EWCA Civ 424

[37] Para 2(c)(ii), Schedule 3, LRA 2002

[38] Chhokar v Chhokar [1984] FLR 313

[39] McFarlane. B, Hopkins. N and Nield. S, ‘Land law: Text, Cases and Materials’, [2009], Oxford: Oxford University Press, p 543

[40] Para 2(c)(i), Schedule 3, LRA 2002

[41] Sparkes. P., ‘The discoverability of occupiers of registered land’, [1989], Conv. 342

[42] Actual occupation is essential in order to prove an overriding interest has priority.

[43] Hodgson v Marks [1971] Ch. 892 at 932, per Russell L.J

[44] Dixon, The reform of property law and the Land Registration Act 2002: a risk assessment, [2003] Conveyancer and Property Lawyer 135

[45] Actual occupation is difficult to ascertain and section 70(1)(g) of the LRA 1925 suggests that inquiries should be made to discover this.

[46] [1984] FLR 313

[47] [1971] Ch 892

[48] [1965] AC 1175

[49] Tee., L., ‘The rights of every person in actual occupation: an enquiry into section 70(1)(g) of the Land Registration Act 1925’, [1998], CLJUK 382

[50] [1990] 1 All ER 1085

[51] [1965] Ch 958 

[52] [1989] Ch 350

[53] [2001] EWCA Civ. 1754

[54] [1990] UKHL 3

[55] Para 2, Schedule 3 LRA 2002

[56] [1997] 2 FLR 71

[57] Norse LJ cited Templeman J in Bird v Syme-Thomson [1979] 1 WLR 440 . . “they are there as shadows of occupation of their parent”

[58] [1999] Ch 355

[59] Para 2, Schedule 3 LRA 2002

[60] McKendrick. E, ‘Contract Law: Text, Cases and Materials’, 3rd edn, [2008], Oxford : Oxford University Press., p 272

[61]Law Commission Report No 271 [2001],  http://www.lawcom.gov.uk/docs/lc271.pdf

[62] Gray & Gray, Core Texts: Land Law (5th edn, 2005, OUP), p.387