FITZWILLIAM v Richall Holdings Services Ltd. [2013] EWHC 86 (Ch) is the latest English case to address the consequences of a void transaction that was plausible enough to persuade Land Registry to register it. Under section 58 of the Land Registration Act 2002 (‘LRA 2002’), registration vests the registered estate in the new registered proprietor even where the underlying transaction is void. However, this does not mean a fraudster can permanently deprive a landowner of his title to land merely because he succeeds in deceiving Land Registry as well as others. Registration under a void transaction is a ‘mistake’ under schedule 4 of the statute, which gives the court (sch. 4, para. 2) and the registrar (sch. 4, para. 5) the discretion to alter the register and so “break the statutory spell” of registration, as H.H.J. Robert Reid Q.C. described it in Commercial Acceptances Ltd. v Shaikh (Ch., 22 June 2001).
In Malory Enterprises Ltd. v Cheshire Homes (UK) Ltd. [2002] EWCA Civ 616, the Court of Appeal decided that, under the Land Registration Act 1925, the statutory spell did not have to be broken for the original proprietor to get his legal title back. Arden L.J. held that section 69 of the 1925 Act, the equivalent to section 58 of the LRA 2002, vested the legal estate in the new registered proprietor only as trustee for the former registered proprietor. This statutory vesting was not a “disposition” for the purposes of section 20 of the 1925 Act, so the equitable interest of the original proprietor bound the new proprietor whether or not he had given valuable consideration. If the same is true of the equivalent provisions of the LRA 2002 (s. 58 and s. 29), the original proprietor can ask for an alteration of the register as of right under Saunders v Vautier (1841) Cr. & Ph. 240, without recourse to schedule 4. Fitzwilliam v Richall Holdings Services Ltd. is the first case to apply this analysis to the interpretation of the LRA 2002.
The case concerned title to 100 Richmond Avenue in Islington. The claimant registered proprietor had been arrested in Dubai and remained in prison from June 2008 to April 2011. During this time, as a result of the fraud of a third party, the defendant company became registered proprietor of 100 Richmond Avenue. The person responsible was a Mr George, to whom another prison inmate had introduced the claimant. Mr George agreed, purportedly on the claimant's behalf and in reliance on a forged power of attorney, to sell 100 Richmond Avenue to the trustees of a family trust. The trustees acquired the defendant company for this purpose and it became registered proprietor in 2010.
On his acquittal and release from prison in 2011, the claimant sought an order for alteration of the register. He argued that, following Malory, the defendant company held its registered title on trust for him. Newey J. accepted this argument. He said that, although some criticisms of Malory had considerable force, he was bound by the decision as a matter of authority: unless there were relevant differences in the statutory language, he was bound to interpret the 2002 provisions consistently with it. He found that there were no such differences.
The case brings both the analytical and the practical problems posed by the decision in Malory v Cheshire Homes into focus. The practical problem is demonstrated by the events that took place after registration. Having discovered the fraud, one of the beneficiaries under the trust said that “none of this was our concern, we lent the money in good faith and ensured that all the I's were dotted and T's crossed.” The premises were occupied by tenants who paid the final instalment of their rent to the defendant. After the tenants left, the claimant's wife changed the locks and obtained a limited injunction that ordered the defendant not to enter the premises or “do any other act whereby [it] would be or become a proprietor in possession as defined in [the LRA 2002].” Morritt C. refused to renew this injunction, doubting whether “such an act of self-help” could be relied on under the LRA 2002.
These events should be important not only to litigation under schedule 4, but also to the remedies available under schedule 8. Under schedule 4, rectification against a registered proprietor in possession is available only if he has caused the mistake by his own fraud or lack of proper care or to avoid some other injustice. The position is different if the registered proprietor is not in possession. However, whether the defendant had obtained possession by receiving rent (LRA 2002, s. 131), and had subsequently lost it, made no difference in Fitzwilliam; Newey J's discussion of these points in the case was obiter. This demonstrates how the Malory reasoning circumvents schedule 4, by rendering irrelevant a fact that is crucial to the statutory scheme.
Further, under schedule 8, a party is prima facie entitled to an indemnity for loss caused “by reason of a rectification of the register” (sch. 8, para. 1). A rectification is an alteration for the purpose of correcting a mistake that prejudicially affects the registered proprietor (sch. 4, para. 1). An alteration to give effect to a trust does not meet this definition. The defendant in Fitzwilliam, therefore, would not be entitled to compensation from the Land Registry even if it had “ensured that all the I's were dotted and T's crossed”. This seems to clash with the policy of the statute.
The analytical problem is demonstrated by one of the differences between the LRA 2002 and the 1925 Act relied on by counsel for the defendant. Where section 69 of the 1925 Act referred to the “fee simple in possession” and “the legal term”, section 58(1) of the LRA 2002 refers to “a legal estate”. Under section 132 of the LRA 2002, the term “legal estate” is not limited to leasehold and freehold, but includes all “estates, interests, and charges” that exist at law (Law of Property Act 1925, ss. 1(4), 205(1)(x)). Counsel argued that “the legal estate” in section 58 cannot mean “the bare legal estate”, as the Malory interpretation would suggest, because this makes no sense when applied to the creation of derivative legal interests like charges. He argued that it is not plausible to say that the registered proprietor of a charge obtained by forgery holds it on bare trust for the person affected. Newey J. rejected this as “neither here nor there”, because the Malory construction “would not imply that such a charge was subject to a trust. It would mean that section 58 did no more than render the charge effective at law” (at [82]).
This raises the question of what it means to say that a charge is “no more than … effective at law”. There are two possibilities. One is that the charge takes effect at law and no other rights, legal or equitable, arise. If so, section 58 treats a void transfer of an existing estate in land very differently from the void grant of a derivative interest in the same land. The holder of the derivative interest can be deprived of it only by the exercise of the statutory discretion, while the transferee will be automatically obliged to give up his estate under Malory. It is implausible that Parliament could have intended such an inconsistency.
The other possibility is that, when the charge arises at law, an equitable entitlement to have it removed from the register does arise in the person bound. This interpretation removes the inconsistency noted above, but increases the strain on the Malory account of how the equitable interest arises.
Malory depends on the theory that a trust can arise by virtue of the legal owner's retention of his equitable title. Applied to the creation of derivative estates and interest in land, this implies that every landowner holds legal and equitable versions of all possible rights that could exist in his land: section 58 applies only to the legal versions, leaving the equitable versions vested in the original proprietor. Where there has been a statutory transfer of the registered proprietor's title, the retention model might be a metaphor for expressing the conclusion that a trust of the registered title has arisen. However, where the section operates to create a new interest in land, such as a charge or an easement, the sense of the metaphor becomes obscure. It is not plausible to say that, if A forges a grant of an easement over B's land and becomes registered proprietor of that easement, B “retains” an equitable easement over his own land. Nor is it clear what it means to say that A holds his easement over B's land on bare trust for B. Fitzwilliam, in adopting the Malory interpretation of section 58, extends the metaphor of “retention of equitable title” beyond its usual context and renders it even more problematic.
